<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. 106 [ X ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [ X ]
ACT OF 1940
Amendment No. 40 [ 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 18, 1997 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, 1997 the Rule
24f-2 Notice for the Registrant's fiscal year ended December 31, 1996.
<PAGE>
CALCULATION OF REGISTRATION FEE
UNDER THE SECURITIES ACT OF 1933
================================================================================
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING OFFERED REGISTERED PER UNIT* OFFERING PRICE FEE**
- --------------------------------------------------------------------------------
Shares of
beneficial
interest 52,351,644 shares $11.003 $576,025,138.93 $0.00
================================================================================
* 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:
Total amount of securities redeemed
or repurchased during the previous
year: 52,351,644 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: 52,351,644 shares
Amount being registered hereby in
excess of amount of redeemed or
repurchased securities being used
for reduction in this amendment:
--0-- shares
Total amount being registered: 52,351,644 shares
<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> <C>
1 . . . . . . . . . Cover page
2 . . . . . . . . . Schedule of Fees
3 . . . . . . . . . Financial Highlights
4 . . . . . . . . . Cover page; Additional Facts About the Fund;
Investment Objectives; How the Fund Pursues Its
Investment Objective; 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 Fund; 6 Ways to
Buy Fund Shares; Owning Fund Shares; Dividends; Income Tax
Considerations; Back cover page
7 . . . . . . . . . Cover page; Schedule of Fees; 6 Ways to Buy Fund
Shares; Owning Fund Shares; Selling Fund Shares; How Fund Share Price
is Determined; Sales Charges; Reduced Sales Charges; The Funds' Expenses;
Back cover page
8 . . . . . . . . . 4 Ways to Sell Fund Shares; Repurchase Option;
Exchanging Among New England Funds
9 . . . . . . . . . None
<PAGE>
<CAPTION>
Item No. of Caption in Statement of
Form N-1A Additional Information
--------- ----------------------
<S> <C> <C>
10 . . . . . . . . . Cover page
11 . . . . . . . . . Table of Contents
12 . . . . . . . . . Description of the Trust and Ownership of Shares
13 . . . . . . . . . Miscellaneous Investment Practices; Investment
Restrictions
14 . . . . . . . . . Management of the Trusts
15 . . . . . . . . . Fund Charges and Expenses; Management of the Trust
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>
[SAIL LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- ------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1997
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund and New England Value Fund, each a
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."
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.
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 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 and Class B shares, but
may at a later date offer Class C shares to the general public and/or 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, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
T A B L E O F C O N T E N T S
<CAPTION>
Page
FUND EXPENSES AND FINANCIAL INFORMATION
<S> <C> <C>
1 Schedule of Fees Sales charges, yearly operating expenses.
3 Financial Highlights Historical information on the Funds' performance.
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
12 Investment Objectives The investment goal for each Fund.
12 New England Investment Companies and the
Funds' Advisers and Subadvisers
13 How the Funds Pursue Their Objectives
13 Fund Investments
- ----------------------------------------------------------------------------------------------------------------
15 INVESTMENT RISKS It is important to understand the risks
inherent in a Fund before you invest.
- ----------------------------------------------------------------------------------------------------------------
21 FUND MANAGEMENT
- ----------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
23 Minimum Investment Everything you need to know to open and add to
23 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
24 Sales Charges
27 Reduced Sales Charges (Class A Shares Only)
- ----------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
29 Exchanging Among New England Funds New England Funds offers three convenient ways to
exchange Fund shares.
30 Fund Dividend Payments
- ----------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
31 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
32 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- ----------------------------------------------------------------------------------------------------------------
FUND DETAILS
33 How Fund Share Price is Determined Additional information you may find important.
34 Income Tax Considerations
34 The Funds' Expenses
35 Performance Criteria
36 Additional Facts About the Funds
38 Glossary of Terms
</TABLE>
<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 A, B and C shares of the Funds and estimated annual expenses for the
Funds' Class A, B and C shares. The Example on the following page shows the
cumulative expenses attributable to a hypothetical $1,000 investment in Class A,
B and C shares of the Funds for the periods specified.
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
ALL FUNDS
--------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Initial Sales Charge Imposed on a Purchase
<S> <C> <C> <C>
(as a percentage of offering price)(1)(2) ..................... 5.75% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or redemption
proceeds, as applicable)(2) ................................... (3) 5.00% None
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying Fund Shares --
Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any portion of certain
purchases of Class A shares greater than $1,000,000 redeemed within 1 year after purchase, but
not to any other purchases or redemptions of Class A shares. See "Buying Fund Shares -- Sales
Charges."
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND INTERNATIONAL EQUITY FUND
------------------------------ -------------------------- -----------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees
(in the case of New
England International
Equity Fund, after
voluntary fee waiver and
expense reduction) ..... 0.75% 0.75% 0.75% 0.73% 0.73% 0.73% 0.85%** 0.85%** 0.85%**
12b-1 Fees ............... 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25 1.00* 1.00*
Other Expenses ........... 0.50 0.50 0.50 0.35 0.35 0.35 0.65 0.65 0.65
Total Fund Operating
Expenses
(in the case of New
England International
Equity Fund, after
voluntary fee waiver and
expense reduction) ..... 1.50 2.25 2.25 1.33 2.08 2.08 1.75** 2.50** 2.50**
<CAPTION>
NEW ENGLAND NEW ENGLAND GROWTH NEW ENGLAND
VALUE FUND OPPORTUNITIES FUND GROWTH FUND
------------------------------------ -------------------------------- --------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .......... 0.73% 0.73% 0.73% 0.70% 0.70% 0.70% 0.68% 0.68%
12b-1 Fees ............... 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25 1.00*
Other Expenses ........... 0.33 0.33 0.33 0.35 0.35 0.35 0.25 0.25
Total Fund Operating
Expenses ............... 1.31 2.06 2.06 1.30 2.05 2.05 1.18 1.93
* 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 0.89% for all classes
and Total Fund Operating Expenses would be 1.79% for Class A shares, 2.54% for Class B shares and 2.54% for Class C shares.
These voluntary limitations can be terminated by the Fund's adviser at any time. See "Fund Management."
</TABLE>
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
CAPITAL GROWTH FUND BALANCED FUND INTERNATIONAL EQUITY FUND
---------------------------------- ---------------------------------- -------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------- ------------ --------- --------- ------------ --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2)
1 year ................... $ 72 $ 73 $ 23 $ 23 $ 70 $ 71 $ 21 $ 21 $ 74 $ 75 $ 25 $ 25
3 years .................. $102 $100 $ 70 $ 70 $ 97 $ 95 $ 65 $ 65 $109 $108 $ 78 $ 78
5 years .................. $135 $141 $120 $120 $126 $132 $112 $112 $147 $153 $133 $133
10 years* ................ $226 $240 $240 $258 $208 $222 $222 $241 $252 $265 $265 $284
<CAPTION>
NEW ENGLAND NEW ENGLAND GROWTH NEW ENGLAND
VALUE FUND OPPORTUNITIES FUND GROWTH FUND
---------------------------------------- ---------------------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B
----------- -------------- ----------- ----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2)
1 year ........ $ 70 $ 71 $ 21 $ 21 $ 70 $ 71 $ 21 $ 21 $ 69 $ 70 $ 20
3 years ....... $ 97 $ 95 $ 65 $ 65 $ 96 $ 94 $ 64 $ 64 $ 93 $ 91 $ 61
5 years ....... $125 $131 $111 $111 $125 $130 $110 $110 $119 $124 $104
10 years* ..... $206 $220 $220 $239 $205 $219 $219 $238 $192 $206 $206
(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.
</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," "The Funds' Expenses" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A, B and C shares of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 3 through 11 have been included in
financial statements for the Funds. The financial statements for the Class A, B
and C shares of New England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund and New England Value Fund and the financial
statements for the Class A shares of New England Growth Fund (which had only one
class of shares outstanding through 1996) 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 reports of Price Waterhouse LLP and
Coopers & Lybrand LLP are incorporated by reference in Part II of the Statement
and may be obtained by shareholders. 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 available upon request and without
charge.
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------------- ---------------------------------------- -----------------
AUG. 3(a) SEPT. 13(a) YEAR ENDED YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31,
DEC. 31, -------------------------------------- DEC. 31, -------------------------- -----------------
1992 1993 1994 1995 1996 1993 1994 1995 1996 1995(a) 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.50 $14.23 $15.27 $15.02 $18.41 $14.79 $15.24 $14.89 $18.09 $14.89 $18.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income (loss) 0.02 0.00 (0.08) (0.11)(e) (0.14)(f) 0.00 (0.08) (0.16)(e) (0.28)(f) (0.09)(e) (0.28)(f)
Net gain or
(loss) on
investments
(both
realized and
unrealized) 1.84 1.12 (0.17) 4.74 3.22 0.53 (0.27) 4.60 3.15 4.52 3.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 1.86 1.12 (0.25) 4.63 3.08 0.53 (0.35) 4.44 2.87 4.43 2.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.02) 0.00 0.00 0.00 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) (2.22) (0.08) 0.00 (1.24) (2.22) (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions (0.13) (0.08) 0.00 (1.24) (2.22) (0.08) 0.00 (1.24) (2.22) (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $14.23 $15.27 $15.02 $18.41 $19.27 $15.24 $14.89 $18.09 $18.74 $18.08 $18.74
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return
(%)(c) 14.9 7.9 (1.6) 30.7 17.1 3.6 (2.3) 29.7 16.2 29.7 16.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $34,772 $98,735 $95,803 $123,504 $141,326 $6,748 $15,390 $26,234 $37,439 $ 354 $ 504
Ratio of
operating
expenses to
average net
assets (%)(d) 1.00(b) 1.23 1.63 1.61 1.50 2.29(b) 2.38 2.36 2.25 2.36 2.25
Ratio of net
investment
income (loss)
to average net
assets (%) 0.74(b) (0.03) (0.45) (0.67) (0.71) (1.15)(b) (1.20) (1.42) (1.46) (1.42) (1.46)
Portfolio
turnover rate(%) 15 77 82 69 74 77 82 69 74 69 74
Average
commission rate
paid (g) -- -- -- -- $0.0509 -- -- -- $0.0509 -- $0.0509
(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 CDSC 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: (%)
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 net investment income (loss) does not reflect current period's reclassification of permanent differences between book
and tax basis net investment income (loss).
(f) Per share net investment loss has been calculated using the average shares outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND (a)
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $10.30 $8.94 $9.50 $9.47 $ 8.11 $10.15 $11.16 $12.13 $11.27 $13.14
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income 0.23 0.39 0.34 0.35 0.30 0.30 0.31 0.33 0.42 0.38
Net gains or
losses on
investments
(both
realized and
unrealized) (0.11) 0.50 0.65 (1.34) 2.05 1.10 1.26 (0.65) 2.49 1.76
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 0.12 0.89 0.99 (0.99) 2.35 1.40 1.57 (0.32) 2.91 2.14
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.39) (0.33) (0.41) (0.35) (0.30) (0.30) (0.31) (0.33) (0.40) (0.39)
Distributions
(from net realized
capital gains) (1.09) 0.00 (0.61) 0.00 0.00 (0.09) (0.29) (0.21) (0.64) (0.95)
Distributions
(from paid-in
capital) 0.00 0.00 0.00 (0.02) (0.01) 0.00 0.00 0.00 0.00 0.00
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
Total
distributions (1.48) (0.33) (1.02) (0.37) (0.31) (0.39) (0.60) (0.54) (1.04) (1.34)
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
Net asset value,
end of period $ 8.94 $9.50 $9.47 $8.11 $10.15 $11.16 $12.13 $11.27 $13.14 $13.94
====== ===== ===== ===== ====== ====== ====== ====== ====== ======
Total return
(%)(d) 0.8 10.0 10.4 (10.6) 29.2 13.9 14.2 (2.7) 26.3 17.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $46,632 $51,902 $59,405 $52,134 $67,467 $90,527 $158,308 $158,332 $196,514 $219,626
Ratio of operating
expenses to
average
net assets (%) 1.52(e) 1.52 1.52 1.58 1.53 1.48 1.40 1.40 1.36 1.33
Ratio of net
investment
income to
average
net assets (%) 2.33 4.19 3.35 4.00 3.18 2.84 2.66 2.91 3.37 2.79
Portfolio turnover
rate (%) 63 58 111 68 51 38 50 36 54 70
Average commission
rate paid (f) -- -- -- -- -- -- -- -- -- $0.0577
(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) Class B shares were first offered on September 13, 1993. 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 CDSC 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%.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND (a) CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------------- --------------------------
SEPT. 13(b)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------- --------------------------
1993 1994 1995 1996 1995(b) 1996
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.16 $12.11 $11.24 $13.08 $11.24 $13.05
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.26 0.34 0.29 0.35 0.29
Net gains or losses on
investments (both realized
and unrealized) 0.24 (0.66) 2.46 1.74 2.44 1.73
------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 0.40 (0.40) 2.80 2.03 2.79 2.02
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net
investment income) (0.16) (0.26) (0.32) (0.30) (0.34) (0.30)
Distributions (from net
realized capital gains) (0.29) (0.21) (0.64) (0.95) (0.64) (0.95)
Distributions (from paid-in
capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.45) (0.47) (0.96) (1.25) (0.98) (1.25)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.11 $11.24 $13.08 $13.86 $13.05 $13.82
====== ====== ====== ====== ====== ======
Total return (%)(d) 3.3 (3.4) 25.3 16.3 25.2 16.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $4,691 $21,607 $40,361 $58,367 $718 $2,538
Ratio of operating expenses to
average net assets (%) 2.36(c) 2.15 2.11 2.08 2.11 2.08
Ratio of net investment income
to average net assets (%) 1.92(c) 2.16 2.62 2.04 2.62 2.04
Portfolio turnover rate (%) 50 36 54 70 54 70
Average commission rate paid (f) -- -- -- $0.0577 -- $0.0577
(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) Class B shares were first offered on September 13, 1993. 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 CDSC 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%.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $8.88 $7.59 $7.46 $8.49 $ 8.85 $11.19 $10.08 $10.44 $ 8.87 $10.55
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income (loss) (0.01)(a) 0.28 0.09 0.07 0.10 0.09 0.02 0.11 0.05 0.04
Net gains or
losses on
investments
(both realized
and unrealized) 1.62 (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84) 3.30 2.07
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 1.61 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73) 3.35 2.11
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.05) (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11) (0.05) (0.04)
Distributions
(from net
realized
capital
gains) (2.85) 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73) (1.62) (0.99)
Distributions
(from paid-in
capital) 0.00 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Total
distributions (2.90) (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84) (1.67) (1.03)
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Net asset value,
end of period $7.59 $7.46 $8.49 $8.85 $11.19 $10.08 $10.44 $ 8.87 $10.55 $11.63
===== ===== ===== ===== ====== ====== ====== ====== ====== ======
Total return
(%)(b) 18.5 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1) 38.1 20.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $440,851 $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430 $1,201,110 $1,296,542
Ratio of
operating
expenses to
average
net assets (%) 1.29 1.26 1.22 1.23 1.14 1.15 1.18 1.19 1.20 1.18
Ratio of net
investment
income (loss)
to average net
assets (%) (0.06) 3.64 1.19 0.77 0.89 0.89 0.16 1.05 0.42 0.33
Portfolio
turnover rate (%) 154 283 203 185 186 218 145 141 235 199
Average
commission rate
paid (c) -- -- -- -- -- -- -- -- -- $0.0668
(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.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------- ------------------------------------- ----------------
MAY 21(a) SEPT. 13(a) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DEC. 31, ------------------------------------- DEC. 31, -------------------------- ----------------
1992 1993 1994 1995 1996 1993 1994 1995 1996 1995(a) 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.50 $11.80 $14.85 $15.50 $16.13 $15.19 $14.81 $15.35 $15.93 $15.35 $15.96
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income (loss) 0.01 0.11 0.00 0.27 0.02(e) 0.12 0.00 0.19 (0.10)(e) 0.19 (0.10)(e)
Net gains or
losses on
investments
(both
realized and
unrealized) (0.63) 3.37 1.19 0.63 0.51 (0.06) 1.08 0.58 0.50 0.61 0.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations (0.62) 3.48 1.19 0.90 0.53 0.06 1.08 0.77 0.40 0.80 0.40
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.01) (0.11) 0.00 (0.27) (0.02) (0.12) 0.00 (0.19) 0.00 (0.19) 0.00
Distributions
(from net
realized
capital gains) 0.00 (0.32) (0.53) 0.00 (0.33) (0.32) (0.53) 0.00 (0.33) 0.00 (0.33)
Distributions
(from paid-in
capital) (0.07) 0.00 (0.01) 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions (0.08) (0.43) (0.54) (0.27) (0.35) (0.44) (0.54) (0.19) (0.33) (0.19) (0.33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $11.80 $14.85 $15.50 $16.13 $16.31 $14.81 $15.35 $15.93 $16.00 $15.96 $16.03
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return
(%)(c) (5.0) 29.4 8.1 5.8 3.3 0.3 7.3 5.0 2.5 5.2 2.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $21,731 $80,937 $142,917 $136,848 $109,773 $9,176 $41,601 $52,895 $45,974 $1,066 $850
Ratio of
operating
expenses to
average net
assets (%)(d) 1.50(b) 1.60 1.75 1.75 1.75 2.50(b) 2.50 2.50 2.50 2.50 2.50
Ratio of net
investment
income (loss)
to average net
assets (%) 0.10(b) 0.24 0.01 1.24 0.14 (1.69)(b) (0.74) 0.49 (0.61) 0.49 (0.61)
Portfolio
turnover rate (%) 62 101 123 119 59 101 123 119 59 119 59
Average
commission rate
paid (f) -- -- -- -- $0.0180 -- -- -- $0.0180 -- $0.0180
(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 CDSC 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: (%)
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------- ------------------------------------- ----------------
MAY 21 SEPT. 13 YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DEC. 31, --------------------------------------- DEC. 31, -------------------------- ----------------
1992 1993 1994 1995 1996 1994 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2.89(b) 2.16 1.79 1.83 1.79 3.36(b) 2.54 2.58 2.54 2.58 2.54
(e) Per share net investment loss has been calculated using the average shares outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 14, 1997. These financial highlights reflect results achieved by the
previous subadviser under different investment policies.
</TABLE>
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $8.73 $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27 $8.78
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment
income 0.04 0.20 0.12 0.16 0.13 0.09 0.07 0.08 0.10 0.06
Net gains or
losses on
investments
(both realized
and unrealized) 0.90 (0.34) 1.25 (1.04) 1.35 1.02 1.16 (0.19) 2.21 2.12
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income
(loss) from
investment
operations 0.94 (0.14) 1.37 (0.88) 1.48 1.11 1.23 (0.11) 2.31 2.18
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions
(from net
investment income) (0.14) (0.21) (0.12) (0.16) (0.13) (0.09) (0.07) (0.08) (0.09) (0.06)
Distributions
(from net realized
capital gains) (3.11) 0.00 (0.80) 0.00 (0.10) (0.43) (0.57) (0.41) (0.71) (1.30)
Distributions
(from paid-in
capital) 0.00 0.00 (0.01) (0.03) 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total
distributions (3.25) (0.21) (0.93) (0.19) (0.23) (0.52) (0.64) (0.49) (0.80) (1.36)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27 $8.78 $9.60
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(c) 11.6 (2.2) 22.6 (13.6) 27.1 16.6 17.0 (1.4) 32.3 26.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $141,775 $136,443 $146,831 $139,248 $145,790 $156,240 $189,779 $190,869 $241,038 $297,581
Ratio of operating
expenses to
average net
assets (%) 1.29 1.29 1.29 1.31 1.28 1.32 1.34 1.37 1.37 1.31
Ratio of net
investment
income to
average net
assets (%) 0.55 3.13 1.69 2.87 1.84 1.26 0.83 1.00 1.22 0.78
Portfolio turnover
rate (%) 202 243 298 8 33 38 40 29 52 64
Average commission
rate paid (d) -- -- -- -- -- -- -- -- -- $0.0574
(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 CDSC 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) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND VALUE FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------------- --------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ------------------------------------ ------------------------
1993 1994 1995 1996 1995(a) 1996
---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.97 $7.85 $7.23 $8.70 $7.23 $8.70
----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.11 0.04 0.05 0.01 0.05 0.01
Net gains or losses on
investments (both
realized and unrealized) 0.39 (0.20) 2.18 2.07 2.18 2.06
----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.50 (0.16) 2.23 2.08 2.23 2.07
----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from net
investment income) (0.05) (0.05) (0.05) (0.01) (0.05) (0.01)
Distributions (from net
realized capital gains) (0.57) (0.41) (0.71) (1.30) (0.71) (1.30)
Distributions (from paid-in
capital) 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Total distributions (0.62) (0.46) (0.76) (1.31) (0.76) (1.31)
----- ----- ----- ----- ----- -----
Net asset value, end of
period $7.85 $7.23 $8.70 $9.47 $8.70 $9.46
===== ===== ===== ===== ===== =====
Total return (%)(c) 6.5 (2.0) 31.3 25.4 31.3 25.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $2,182 $13,830 $27,941 $48,210 $1,224 $3,735
Ratio of operating expenses
to average net assets (%) 2.16(b) 2.12 2.12 2.06 2.12 2.06
Ratio of net investment
income to average net
assets (%) 0.05(b) 0.25 0.47 0.03 0.47 0.03
Portfolio turnover rate (%) 40 29 52 64 52 64
Average commission rate paid (d) -- -- -- $0.0574 -- $0.0574
(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 CDSC 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) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------------
SEVEN
YEAR ENDED MONTHS
MAY 31, ENDED YEAR ENDED DECEMBER 31,
----------------- DECEMBER 31, ---------------------------------------------------------------------------------
1987 1988(b) 1988(b) 1989 1990 1991 1992 1993(a) 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.70 $11.92 $10.37 $ 9.55 $10.88 $ 9.54 $11.79 $12.20 $12.67 $12.41 $14.39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18 0.13
Net gains or
losses on
investments
(both realized
and unrealized) 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01 2.07
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19 2.20
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18) (0.13)
Distributions
(in excess of
net investment
income) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00
Distributions
(from net
realized
capital gains) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03) (2.59)
Distributions
(from paid-in
capital) 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21) (2.72)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $11.92 $10.37 $ 9.55 $10.88 $ 9.54 $11.79 $12.20 $12.67 $12.41 $14.39 $13.87
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return
(%)(f) 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1 17.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693 $166,963
Ratio of
operating
expenses to
average net
assets (%) 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38 1.30
Ratio of net
investment
income to
average net
assets (%) 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31 0.92
Portfolio
turnover rate (%) 25 8 83(e) 17 6 12 10 4 6 69 127
Average
commission rate
paid (g) -- -- -- -- -- -- -- -- -- -- $0.0348
(a) As of January 1, 1993, the Fund discontinued the use of equalization accounting.
(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, the ratio of operating expenses to average net assets for
the year ended May 31, 1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC 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.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1, 1995. These financial highlights prior to that date
reflect results achieved by earlier advisers under investment policies that are no longer in effect.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------------------- ----------------------------------
SEPT. 13(c) MAY 1(c) YEAR
THROUGH YEAR ENDED DECEMBER 31, THROUGH ENDED
DEC. 31, ---------------------------------------- DEC. 31, DEC. 31,
1993(a) 1994 1995 1996 1995 1996
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.95 $12.66 $12.42 $14.40 $13.84 $14.39
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment
income 0.06 0.16 0.10 0.03 0.06 0.04
Net gains or
losses on
investments
(both realized
and unrealized) 0.01 (0.09) 4.01 2.07 2.58 2.05
------ ------ ------ ------ ------ ------
Total income from
investment
operations 0.07 0.07 4.11 2.10 2.64 2.09
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions
(from net
investment
income) (0.03) (0.14) (0.10) (0.04) (0.06) (0.04)
Distributions (in
excess of net
investment
income) (0.06) 0.00 0.00 0.00 0.00 0.00
Distributions
(from net realized
capital gains) (0.27) (0.17) (2.03) (2.59) (2.03) (2.59)
Distributions
(from paid-in
capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total
distributions (0.36) (0.31) (2.13) (2.63) (2.09) (2.63)
------ ------ ------ ------ ------ ------
Net asset value,
end of period $12.66 $12.42 $14.40 $13.87 $14.39 $13.85
====== ====== ====== ====== ====== ======
Total return (%)(f) 0.6 0.6 34.3 16.3 20.2 16.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $1,498 $5,185 $29,026 $46,856 $4,707 $3,912
Ratio of operating
expenses to
average net
assets (%) 2.08(e) 1.93 2.11 2.05 2.11(e) 2.05
Ratio of net
investment
income to
average net
assets (%) 0.71(e) 1.10 0.56 0.17 0.56(e) 0.17
Portfolio turnover
rate (%) 4 6 69 127 69 127
Average commission
rate paid (g) -- -- -- $0.0348 -- $0.0348
(a) As of January 1, 1993, the Fund discontinued the use of equalization accounting.
(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, the ratio of operating expenses to average net assets for
the year ended May 31, 1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC 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.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1, 1995. These financial highlights prior to that date
reflect results achieved by earlier advisers under investment policies that are no longer in effect.
</TABLE>
<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 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.
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: Loomis Sayles, Boston, MA
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, 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 are independently operated subsidiaries of
New England Investment Companies, L.P. ("NEIC"), one of the largest publicly
traded investment management firms in the United States. New England Funds
Management, L.P. ("NEFM"), the adviser to each of the Funds except the Growth
Fund, is also an independently operated subsidiary of NEIC. NEIC is listed on
the New York Stock Exchange and through its subsidiaries or an affiliate manages
over $100 billion in assets for individuals and institutions. Each subadviser
operates independently and is staffed by experienced investment professionals.
All the subadvisers apply specialized knowledge and careful analysis to the
pursuit of each Fund's objectives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. is the adviser to each of the Funds except
the Growth Fund, as well as most of the other New England Funds.
LOOMIS, SAYLES & COMPANY, L.P. with over $50 billion of assets under
management, manages portfolios for mutual funds and other institutional
investors and individuals. Loomis Sayles serves as the subadviser to the
International Equity, Capital Growth, Balanced and Value Funds.
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP ("CGM"), adviser of the Growth
Fund, has $6.6 billion of assets under management. CGM specializes in managing
aggressive growth-oriented equity portfolios for mutual funds and other
institutions.
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 Life
Insurance Company ("NELICO").
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.
FUND INVESTMENTS
[] CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing
substantially all of its assets in equity securities. Investments are
selected based on their growth potential; current income is not a
consideration. The Fund normally will invest primarily in equity securities
of companies with medium or large market capitalization (capitalization of
$1 billion to $5 billion and over $5 billion, respectively), but will also
invest a portion of its assets in equity securities of companies with
relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research
and analysis of individual companies and industries. The subadviser selects
investments for the Fund based on qualitative and quantitative criteria
including, among others, industry dominance and competitive position,
consistent earnings growth, a history of high profitability, the
subadviser's expectation of continued high profitability and overall
financial strength, although not every investment will have all of these
characteristics. The Fund may invest in foreign securities.
[] GROWTH FUND
Most of the Growth Fund's investments are normally in common stocks,
although the Fund may invest in any type of equity securities. The Fund does
not consider current income as a factor in selecting its investments. The
Fund may invest in foreign securities.
[] VALUE FUND
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is
ordinarily placed on undervalued securities.
Although long-term market appreciation is ordinarily the basis for security
selection, current income may be a significant consideration when yields
appear to be favorable compared to overall opportunities for capital
appreciation. The Fund may invest in foreign securities.
[] BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its 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 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 or 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 invest in closed-end
investment companies domiciled in the United States that invest primarily in
securities issued by foreign companies. In addition, the Fund may invest up
to 20% of its assets in bonds issued or guaranteed by foreign governments
(including their political subdivisions, agencies, authorities and/or
instrumentalities), supranational agencies or foreign companies, including
but not limited to convertible debt and below investment grade or unrated
debt. 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 selecting a group of attractively valued countries and then selecting
securities within such countries that are expected to offer the best value
based on its valuation and earnings growth expectations.
[] 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.
[] ADDITIONAL INFORMATION
The Capital Growth, Growth, Growth Opportunities, International Equity and
Value Funds seek to attain their objectives by normally investing in equity
securities. When the particular Fund's subadviser deems it appropriate,
however, the International Equity, Capital Growth, Growth, Growth
Opportunities and Value 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. 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.
<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.
[] EQUITY SECURITIES
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). 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 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 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.
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 Funds 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, the 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 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 Fund's investments in foreign securities may
include investments in emerging or developing countries, whose economies or
securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations
regarding foreign investments generally) may include, among others, greater
political uncertainties, an economy's dependence on revenues from particular
commodities or on international aid or development assistance, currency
transfer restrictions, highly limited numbers of potential buyers for such
securities and delays and disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored depository receipts are arranged without involvement
by the issuer of the underlying equity securities. Less information about
the issuer of the underlying equity securities may be available in the case
of unsponsored depository receipts.
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 or subadviser 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.
[] FOREIGN CURRENCY
Most foreign securities in the 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 Funds may incur costs in connection with conversions between various
currencies. In addition, the 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 International Equity and Balanced 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
(INTERNATIONAL EQUITY AND BALANCED FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities. Lower quality fixed-income securities are
considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. Achievement of the
investment objective of a mutual fund investing in lower quality
fixed-income securities may be more dependent on the fund's 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, 1996, the International Equity and
Balanced Funds had on average 0% and 2.3% 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."
[] 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 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 7
days are illiquid securities.
[] INVESTMENTS IN OTHER INVESTMENT COMPANIES
(INTERNATIONAL EQUITY FUND)
The International Equity Fund may invest up to 10% of its total assets in
securities of other investment companies. Because of restrictions on direct
investment by U.S. entities in certain countries, investing indirectly in
such countries (by purchasing shares of another fund that is permitted to
invest in such countries) may be the most practical or efficient way for the
Fund to invest in such countries. In other cases, where the Fund's
subadviser desires to make only a relatively small investment in a
particular country, investing through another fund that holds a diversified
portfolio in that country may be more effective than investing directly in
issuers in that country. As an investor in another investment company, the
Fund will indirectly bear its share of the expenses of that investment
company. These expenses are in addition to the Fund's own costs of
operations. In some cases, investing in an investment company may involve
the payment of a premium over the value of the assets held in that
investment company's portfolio.
[] SHORT-TERM TRADING
Although each Fund seeks long-term growth or return, each Fund may,
consistent with its investment objective, engage in portfolio trading in
anticipation of, or in response to, changing economic or market conditions
and trends. These policies may result in higher turnover rates in the Fund's
portfolio, which may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will not limit any
adviser's or subadviser's investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (INTERNATIONAL
EQUITY AND GROWTH OPPORTUNITIES FUNDS)
The International Equity Fund may buy, sell or write options on securities,
securities indexes, currencies or futures contracts. The Fund may buy and
sell futures contracts on securities, securities indexes or currencies. The
Fund may also enter into swap contracts. The 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 the Fund owns or
intends to acquire. The 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. The Fund may enter into interest rate,
currency and securities index swaps. The Fund 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). 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 risks 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 the risk that
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 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 a Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange
cash flows on a notional amount based on changes in the relative values of
the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as the
Standard & Poor's Composite Index of 500 Stocks [the "S&P 500"]) or in some
other investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve the
possible risk of loss to the Fund of all or a significant part of the value
of its investment. In some cases, the risk of loss may exceed the amount of
the Fund's investment. The Fund will be required, however, to set aside with
its custodian bank certain assets in amounts sufficient at all times to
satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse
changes in the value of securities held in its portfolio through options,
futures and swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap positions and
changes in the values of the portfolio securities. The successful use of
futures and exchange-traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a
timely basis. There can be no assurance that such a market will exist at any
particular time. In the case of swap contracts and of options that are not
traded on an exchange ("over-the-counter" options), the Fund is at risk that
the other party to the transaction will default on its obligations, or will
not permit the Fund to terminate the transaction before its scheduled
maturity. As a result of these characteristics, the Fund will treat most
swap contracts and over-the-counter options (and the assets it segregates to
cover its obligations thereunder) as illiquid. Certain provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and certain
regulatory requirements may limit a Fund's 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 Funds 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 "Miscellaneous Investment Practices -- Futures,
Options and Swap Contracts" in Part II of the Statement.
[] CURRENCY HEDGING TRANSACTIONS
(INTERNATIONAL EQUITY FUND)
The International Equity Fund may, at the discretion of its subadviser,
engage in foreign currency exchange transactions, in connection with the
purchase and sale of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative values of
currencies in which current or future 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 and International Equity Funds may purchase Rule 144A
securities. These are privately offered securities that can be resold only
to certain qualified institutional buyers. Rule 144A securities are treated
as illiquid, unless a subadviser has determined, under guidelines
established by New England Funds Trust I's trustees, that the particular
issue of Rule 144A securities 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 Fund may purchase securities on a "when-issued" or
"delayed-delivery" basis. This means that the 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 the 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.
<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. NEFM does not determine what investments will
be purchased by the Funds.
The subadviser of the International Equity Fund, 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. Paul Drexler, Vice
President of Loomis Sayles, has served as the portfolio manager of the
International Equity Fund since February 14, 1997. Scott S. Pape, Vice President
of Loomis Sayles, has served as co-portfolio manager of the Capital Growth Fund
since its inception in 1992. Since June 30, 1996, Bruce A. Ebel, Vice President
of Loomis Sayles, has also served 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 at least five years,
except Mr. Drexler and Mr. Ebel who, prior to the time they joined Loomis
Sayles, were Deputy Manager, Brown Brothers Harriman & Co., 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 controlled equally by Robert L. Kemp and G. Kenneth
Heebner. 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 1996, the Growth Fund paid 0.68% of its average net assets
in advisory fees to CGM. The Distributor has agreed to provide certain
administrative services to the Growth Fund at CGM's expense.
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
and has been portfolio manager of the Growth Opportunities Fund since May
1995.
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table:
MANAGEMENT FEE PAID BY FUND TO NEFM
(AS A PERCENTAGE OF AVERAGE DAILY
FUND NET ASSETS OF THE FUND)
---- -------------------------------------------
Balanced Fund, .............. 0.75% of the first $200 million
Capital Growth Fund, and 0.70% of the next $300 million
Value Fund 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
The management fee rates payable by the Balanced, Capital Growth, International
Equity 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.
Subject to the supervision of NEFM, each subadviser manages the portfolio(s) of
each Fund to which it serves 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 to
the Fund. The Funds pay no direct fees to their subadvisers.
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
FUND SUBADVISER AVERAGE DAILY NET ASSETS OF THE FUND)
- ---- ------------- ---------------------------------------------------
<S> <C> <C>
Balanced Fund and .......................................... Loomis Sayles 0.535% of the first $200 million
Value Fund 0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund ........................................ Loomis Sayles 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund .................................. Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund .................................. Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 million
</TABLE>
Prior to January 2, 1996, the current subadvisers to the Balanced, Capital
Growth and Value Funds served as those Funds' respective advisers. From December
29, 1995 to February 14, 1997, Draycott Partners, Ltd. ("Draycott") served as
subadviser to the International Equity Fund. Prior to December 29, 1995,
Draycott served as the International Equity Fund's adviser.
Loomis Sayles, as subadviser to the International Equity Fund, has voluntarily
agreed to waive the entire subadvisory fee payable to Loomis Sayles by NEFM
through February 14, 1998. This waiver by Loomis Sayles will not reduce the
management fee payable by the Fund to NEFM. In addition, 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%, 2.50% and 2.50% annually
of the average daily net assets of the Fund's Class A, B and C shares,
respectively. NEFM and the Distributor may terminate these voluntary limitations
at any time. In such event, the Fund would supplement its prospectus.
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., is a wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife").
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers and 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, in the case of the Growth Fund, CGM provide 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 the Funds' advisers and
subadvisers.
The Funds (excepting the Growth Fund) have applied for an exemptive order from
the SEC to permit NEFM, subject to certain conditions, to enter into subadvisory
agreements with subadvisers other than the existing subadvisers of the Funds
when approved by the relevant Trust's Board of Trustees, without obtaining
shareholder approval. The exemptive request also seeks to permit, without
shareholder approval, the terms of an existing subadvisory agreement to be
changed or the employment of an existing subadviser to be continued after events
that would otherwise cause an automatic termination of a subadvisory agreement,
when such changes or continuation are approved by the relevant Trust's Board of
Trustees. Shareholders would be notified of any subadviser changes.
<PAGE>
B U Y I N G F U N D S H A R E S
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
RECENT TRANSACTIONS, FUND PRICES AND
RECENT PERFORMANCE INFORMATION. YOU CAN
ALSO PURCHASE, SELL OR EXCHANGE CLASS A
OR CLASS C 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.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in any Fund and $100 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, SEP, SIMPLE Plans, 403(b)(7)
retirement plans and certain other retirement plans.
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $250 on initial and $100 on subsequent investments for retirement plans with
tax benefits such as corporate pension and profit sharing plans and Keogh
plans.
[] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors
Act.
[] $500 on initial and $100 on subsequent investments for IRAs.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and Class C shares of the Funds in the
following ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
[Graphic Omitted] 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.
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).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under certain
circumstances approved by the Distributor. When purchases are made by check or
periodic account investment, redemptions may not be allowed until the investment
being redeemed has been in the account for a minimum of ten calendar days.
[Graphic Omitted] 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) on a day when the
Funds are open for business. Your bank may charge a fee for this service.
[Graphic Omitted] BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an
automatic investment plan through Investment Builder on the enclosed
application. Indicate the amount of the monthly investment and enclose a check
marked "Void" or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at
1-800-225-5478 for a Service Options Form.
[Graphic Omitted] 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) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders accepted through
ACH or Tele#Facts will be complete only upon the receipt by New England Funds of
funds from your bank and, on the day that funds are received, will be processed
at the net asset value next determined at the close of regular trading on the
Exchange on days 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.
[Graphic Omitted] 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 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.
TO MAKE INVESTING EVEN EASIER, YOU CAN
ALSO ORDER PERSONALIZED INVESTMENT SLIPS
BY CALLING 1-800-225-5478 BETWEEN 8:00
A.M. AND 7:00 P.M. (EASTERN TIME).
SALES CHARGES
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:
SALES CHARGE AS A % OF DEALER'S
--------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $50,000+ 5.75% 6.10% 5.00%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
+[Growth Fund Only.] For accounts established prior to February 28, 1997 having
a total investment value of between (and including) $25,000 and $49,999, a
reduced sales charge of 5.50% as a percentage of offering price (or 5.82% of
the net amount invested), with a dealer's concession of 4.25% as a percentage
of offering price, will be charged on the sale of additional Class A shares of
the Growth Fund if the total investment value of the Growth Fund account after
such sale is between (and including) $25,000 and $49,999.
*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 investments 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. 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. These commissions
are not payable if the purchase represents the reinvestment of a redemption
made during the previous 12 calendar months. Section 401(a), 401(k), 457 and
403(b) plans that have total investment assets of at least $10 million are
eligible to purchase Class Y shares of certain Funds, which are described in a
separate prospectus.
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,
and are 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 6 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 a 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 a series of the Trusts, then a CDSC
applies to the redemption, at the same rate as if the Class B shares of the Fund
had been redeemed at the time they were exchanged for Money Market Fund shares.
For the purpose of the CDSC it is assumed that the shares held the longest are
the first to be redeemed.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. The CDSC equals the following percentages of the
dollar amounts subject to the charge:
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE*
- ------------------- -------------------------
1st ........................................... 5%
2nd ........................................... 4%
3rd ........................................... 3%
4th ........................................... 3%
5th ........................................... 2%
6th ........................................... 1%
thereafter .................................... 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
*For any Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the 1st year, 3% if
redemption occurs within the 2nd or 3rd year, 2% if redemption occurs within
the 4th year, 1% if redemption occurs within the 5th year and no CDSC for
redemptions after the 5th year. For the purpose of the CDSC, it is assumed that
the shares held the longest are the first to be redeemed.
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% and advances the first year's service
fee (up to 0.25%) on purchases of Class B shares.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales charge
or CDSC, are subject to a 0.25% annual service fee and a 0.75% annual
distribution fee and do not convert to another class.
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 six 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 six 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 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.
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.
Each 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
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 of each Fund 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 0.025% of the average daily net assets of an account at
the end of each calendar quarter for up to one year. These commissions are not
payable if the purchase represents the reinvestment of redemption proceeds from
any 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 (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who have sold or
may sell significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A, B and C shares; or (iii)
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 Sections 401(a), 403(b), 401 (k) and 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 by
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, NELICO or MetLife or
any other company affiliated with NELICO or MetLife; current and former
directors and trustees of the Trusts, NELICO or MetLife or their predecessor
companies; agents and general agents of NELICO or MetLife and their
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; any
trust, pension, profit sharing or other benefit plan for any of the
foregoing persons; and any separate account of NELICO or MetLife or of any
insurance company affiliated with NELICO or MetLife.
[] Shareholders of Reich and Tang Government Securities Trust may exchange
their shares of that fund for Class A shares of the Funds at net asset value
and without imposition of a sales charge.
[] Shares of the Funds are available at net asset value to investors purchasing
shares of the Funds with redemption proceeds from other mutual fund
complexes on which the investor has paid a front-end sales charge or was
subject to a deferred sales charge, whether or not paid, if such redemption
occurred no more than 30 days prior to such purchase. The Distributor will
require satisfactory evidence of your qualification for this waiver. Please
call the Distributor for more information.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
O W N I N G F U N D S H A R E S
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. THE MINIMUM
MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. 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.
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 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 (the "California and New
York Funds") (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 the California or New York Fund shares
for at least six months; otherwise, you will pay the difference between any
sales charge you have already paid on your California or New York Fund shares
and the higher sales charge of the series into which you are exchanging. If you
exchange Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) 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 series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. 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.
CLASS C SHARES
You may exchange Class C shares of any 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.
CLASS Y SHARES
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection with
deferred compensation plans offered by NELICO for Class Y shares of any series
of the Trusts which offers Class Y shares. To obtain a prospectus and more
information about Class Y shares, please call the Distributor toll free at
1-800-225-5478.
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 $1,000 (or the total net asset value
of your account, whichever is less), except that under the Automatic Exchange
Plan the minimum is $100. All exchanges are subject to the eligibility
requirements of the series into which you are exchanging. In connection with any
exchange, you must obtain and carefully read 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.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
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 and the
Value Fund pay dividends annually, the Growth Opportunities Fund pays dividends
semi-annually and the Balanced Fund pays 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- and short-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 capital gain distribution, you should be aware that a
portion of the purchase price may be returned to you as a taxable distribution.
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 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, which 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 and carefully read a copy of that fund's
prospectus.
- ------------------------------------------------------------------------------
<PAGE>
S E L L I N G F U N D S H A R E S
4 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted] 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. Class A and Class C shares only may also be
redeemed 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) on a day when the
Funds are open for business 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 your address of record
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) on a day when the Funds are open for business or, for Class A and C shares
only, 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.
[Graphic Omitted] BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by New England Funds, L.P. Signature guarantees by
notaries public are not acceptable.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
[Graphic Omitted] 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 (based on the day you establish
your plan). 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.
If a Fund's adviser or subadviser determines, 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 "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by the
Fund's subadviser 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, as amended (the "1940 Act"). See "Redemptions"
in Part II of the Statement.
REPURCHASE OPTION
(CLASS A SHARES ONLY)
You may apply your proceeds from the redemption of Class A shares of the Funds
(without a sales charge) to the repurchase of Class A shares of any series of
the Trusts. To qualify, you must reinvest some or all of the proceeds within 120
days after your redemption and notify New England Funds or your investment
dealer at the time of reinvestment that you are taking advantage of this
privilege. You may reinvest the proceeds either by returning the redemption
check or by sending your check for some or all of the redemption amount. Please
note: For federal income tax purposes, a redemption is a sale that involves tax
consequences (even if the proceeds are later reinvested). Please consult your
tax adviser.
<PAGE>
F U N D D E T A I L S
HOW FUND SHARE PRICE IS DETERMINED
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
determined by or under the direction of each Fund's Board of Trustees 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. A futures contract will be valued at 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 are valued at their fair market value as determined in
good faith by the adviser or subadviser of that Fund (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 Other Any
Portfolio Securities + Assets - 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.
- --------------------------------------------------------------------------------
<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 earned during that calendar
year, and virtually all of the capital gain net income the Fund realized during
the twelve months ending October 31 but has not previously distributed. If
declared in December to shareholders of record in that month, and paid the
following January, these distributions will be considered for federal income tax
purposes to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if 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 or subadviser 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 NELICO
or MetLife or their affiliates, other than affiliated registered investment
companies. In the case of Funds that offer Class Y shares, certain expenses may
be allocated differently between the Fund's Class A, Class B and Class C shares,
on the one hand, and its Class Y shares, on the other hand. (See "Additional
Facts about the Funds" below.)
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund
pays the Distributor a monthly service fee at an annual rate not to exceed 0.25%
of the Fund's average daily net assets attributable to the Class A, Class B and
Class C shares. 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 1997 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 which have such classes of 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.
In addition, the Distributor performs certain accounting and administrative
services for the Growth Fund, Balanced Fund, Value Fund and International Equity
Fund. For those services, each Fund reimburses the Distributor for all or part
of its expenses of providing these services to the Fund, which includes the
following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing, financial reporting and clerical functions relating to the
Funds, (ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices, proxy
solicitation materials furnished to shareholders of the Funds or regulatory
authorities and reports and questionaires for SEC compliance, and (iii)
registration, filing and other fees in connection with requirements of
regulatory authorities.
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, from
July 27, 1988, when there was a change 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 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. 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, an open-end management investment company, 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.
[] New England Funds Trust II, an open-end management investment company, 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 by the relevant Trust's trustees 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 and International Equity 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 objective of the
Capital Growth, International Equity or Growth Opportunities Fund,
shareholders should consider whether these Funds remain appropriate
investments in light of their current financial position and needs.
[] Each Fund (except the Growth Fund) also offers Class Y shares to certain
qualified investors. 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 may bear its own transfer agency and prospectus
printing costs and does not bear any portion of those costs relating to
other classes of shares.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees
of that Trust from office by votes cast at a shareholder meeting or by
written consent.
[] The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has
subcontracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
[] If the balance in your account with a Fund is less than a minimum amount set
by the trustees of the Trusts from time to time (currently $1,000 for all
accounts, except for those indicated below), 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
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.
[] The Trust's trustees have the authority without shareholder approval to
issue other classes of shares of a Fund that represent interest in the
Fund's portfolio but that have different sales load and fee arrangements.
<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 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 SEC.
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.
[recycle symbol] Printed on Recycled Paper XS51-0597
<PAGE>
[GRAPHIC OMITTED] (R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
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, 1997
New England Capital Growth Fund, New England Balanced Fund, New England
International Equity Fund, New England Star Advisers Fund and New England Value
Fund, each a 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 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, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
T A B L E O F C O N T E N T S
PAGE
3 FUND EXPENSES AND FINANCIAL INFORMATION
3 Schedule of Fees
5 Financial Highlights
- --------------------------------------------------------------------------------
14 INVESTMENT STRATEGY
14 Investment Objectives
14 How the Funds Pursue Their Objectives
14 Fund Investments
- --------------------------------------------------------------------------------
18 INVESTMENT RISKS
- --------------------------------------------------------------------------------
25 FUND MANAGEMENT
- --------------------------------------------------------------------------------
28 BUYING FUND SHARES
28 Minimum Investment
29 Ways to Buy Fund Shares
29 [] By wire transfer
29 [] By mail
- --------------------------------------------------------------------------------
31 OWNING FUND SHARES
31 Exchanging Among New England Funds
31 Fund Dividend Payments
- --------------------------------------------------------------------------------
33 SELLING FUND SHARES
33 Ways to Sell Fund Shares
33 [] By telephone
33 [] By mail
- --------------------------------------------------------------------------------
35 FUND DETAILS
35 How Fund Share Price Is Determined
35 Income Tax Considerations
36 Performance Criteria
38 Additional Facts About the Funds
<PAGE>
F U N D E X P E N S E S A N D F I N A N C I A L I N F O R M A T I O N
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class Y shares of the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y shares of the Funds
for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
ALL FUNDS
---------
Class Y
-------
Maximum Initial Sales Charge Imposed on a 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 expense reduction) 0.85%*
12b-1 Fees None
Other Expenses 0.30%
Total Fund Operating Expenses
(after voluntary fee waiver and expense reduction) 1.15%*
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH BALANCED VALUE
FUND FUND FUND
-------------- ----------- -----------
Class Y Class Y Class Y
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.75% 0.73% 0.73%
12b-1 Fees None None None
Other Expenses 0.50% 0.19%** 0.33%
Total Fund Operating Expenses 1.25% 0.92% 1.06%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STAR ADVISERS GROWTH OPPORTUNITIES
FUND FUND
------------- --------------------
Class Y Class Y
------- -------
<S> <C> <C>
Management Fees 1.05% 0.70%
12b-1 Fees None None
Other Expenses 0.38% 0.35%
Total Fund Operating Expenses 1.43% 1.05%
</TABLE>
* Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.89% and Total Fund Operating Expenses
would be 1.19%. These voluntary limitations can be terminated by the Fund's
adviser at any time. See "Fund Management."
** Pursuant to an administration and accounting service agreement among New
England Funds Management, L.P., Loomis, Sayles & Company, L.P., TNE
Advisers, Inc. and the Balanced Fund, TNE Advisers, Inc. will be paid up to
0.25% of the value of the Class Y shares of the Balanced Fund held by TNE
Advisers' clients. A maximum fee of 0.05% of the value of the Class Y
shares will be paid by the Balanced Fund and the remaining fee payable to
TNE Advisers, Inc. under this arrangement will be shared equally between
New England Funds Management, L.P. and Loomis, Sayles & Company, L.P.
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 $13 $9
3 years $40 $29
5 years $69 $51
10 years $151 $113
NEW ENGLAND NEW ENGLAND
INTERNATIONAL EQUITY FUND STAR ADVISERS FUND
------------------------- ------------------
Class Y Class Y
------- -------
1 year $12 $15
3 years $37 $45
5 years $63 $78
10 years $140 $171
NEW ENGLAND NEW ENGLAND
VALUE FUND GROWTH OPPORTUNITIES FUND
----------- -------------------------
Class Y Class Y
------- -------
1 year $11 $11
3 years $34 $33
5 years $58 $58
10 years $129 $128
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of each Fund, except New England Capital Growth Fund and
New England Growth Opportunities Fund, outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 6 through 13 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 have been
examined by Price Waterhouse LLP, independent accountants. The financial
statements for the Growth Opportunities Fund have been examined by Coopers &
Lybrand LLP, independent accountants. The reports of Price Waterhouse LLP and
Coopers & Lybrand LLP are incorporated by reference in Part II of the Statement
and may be obtained by shareholders. 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 available upon request and without
charge.
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- ------------------------------------------
AUG. 3(A) SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31, THROUGH YEAR ENDED DEC. 31,
DEC. 31, ------------------------------------------ DEC. 31, ------------------------------
1992 1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.50 $14.23 $15.27 $15.02 $18.41 $14.79 $15.24 $14.89 $18.09
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income (loss) 0.02 0.00 (0.08) (0.11)(e) (0.14)(f) 0.00 (0.08) (0.16)(e) (0.28)(f)
Net gain (loss) on
investments (both realized
and unrealized) 1.84 1.12 (0.17) 4.74 3.22 0.53 (0.27) 4.60 3.15
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 1.86 1.12 (0.25) 4.63 3.08 0.53 (0.35) 4.44 2.87
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net
investment income) (0.02) 0.00 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) (2.22) (0.08) 0.00 (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.13) (0.08) 0.00 (1.24) (2.22) (0.08) 0.00 (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $14.23 $15.27 $15.02 $18.41 $19.27 $15.24 $14.89 $18.09 $18.74
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 14.9 7.9 (1.6) 30.7 17.1 3.6 (2.3) 29.7 16.2
Ratios/Supplemental data
Net assets, end of period
(000) $34,772 $98,735 $95,803 $123,504 $141,326 $6,748 $15,390 $26,234 $37,439
Ratio of operating expenses
to average net assets (%)(d) 1.00(b) 1.23 1.63 1.61 1.50 2.29(b) 2.38 2.36 2.25
Ratio of net investment
income (loss) to average
net assets (%) 0.74(b) (0.03) (0.45) (0.67) (0.71) (1.15)(b) (1.20) (1.42) (1.46)
Portfolio turnover rate (%) 15 77 82 69 74 77 82 69 74
Average commission rate paid(g) --- --- --- --- $0.0509 --- --- --- $0.0509
</TABLE>
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
-----------------------------
YEAR ENDED DECEMBER 31,
1995(A) 1996
------- ----
<S> <C> <C>
Net asset value, beginning of period $14.89 $18.08
Income from investment operations
Net investment income (loss) (0.09)(e) (0.28)(f)
Net gain (loss) on investments (both realized and unrealized) 4.52 3.16
------ ------
Total income (loss) from investment operations 4.43 2.88
------ ------
Less distributions
Distributions (from net investment income) 0.00 0.00
Distributions (from net realized capital gains) (1.24) (2.22)
------ ------
Total distributions (1.24) (2.22)
------ ------
Net asset value, end of period $18.08 $18.74
====== ======
Total return (%)(c) 29.7 16.2
Ratios/Supplemental data
Net assets, end of period (000) $354 $504
Ratio of operating expenses to average net assets (%)(d) 2.36 2.25
Ratio of net investment income (loss) to average net
assets (%) (1.42) (1.46)
Portfolio turnover rate (%) 69 74
Average commission rate paid(g) --- $0.0509
(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 CDSC 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: (%)
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 net investment income (loss) does not reflect current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
(f) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS Y
---------------------------------------------
MARCH 31(A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
----------- --------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $7.57 $7.24 $8.75
----- ----- -----
Income from investment operations
Net investment income 0.10 0.12 0.08
Net gains or losses on investments (both realized and unrealized) 0.08 2.21 2.10
----- ----- -----
Total income from investment operations 0.18 2.33 2.18
----- ----- -----
Less distributions
Distributions (from net investment income) (0.10) (0.11) (0.08)
Distributions (from capital gains) (0.41) (0.71) (1.30)
----- ----- -----
Total distributions (0.51) (0.82) (1.38)
----- ----- -----
Net asset value, end of period $7.24 $8.75 $9.55
===== ===== =====
Total return (%) 2.4 (c) 32.8 26.4
Ratios/Supplemental data
Net assets, end of period (000) $4,001 $6,738 $12,716
Ratio of operating expenses to average net assets (%) 1.54 (b) 1.12 1.06
Ratio of net investment income to average net assets (%) 1.05 (b) 1.47 1.03
Portfolio turnover rate (%) 29 52 64
Average commission rate paid(d) --- --- $0.0574
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate paid per share for trades
on which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND
<TABLE>
<CAPTION>
CLASS Y
--------------------------------------------------
MAR. 8(A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------- ---------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $12.20 $11.27 $13.15
------ ------ ------
Income from investment operations
Net investment income 0.38 0.46 0.44
Net gains or losses on investments (both realized and unrealized) (0.72) 2.51 1.76
------ ------ ------
Total income (loss) from investment operations (0.34) 2.97 2.20
------ ------ ------
Less distributions
Distributions (from net investment income) (0.38) (0.45) (0.45)
Distributions (from net realized capital gains) (0.21) (0.64) (0.95)
------ ------ ------
Total distributions (0.59) (1.09) (1.40)
------ ------ ------
Net asset value, end of period $11.27 $13.15 $13.95
====== ====== ======
Total return (%) (2.8)(c) 26.8 17.6
Ratios/Supplemental data
Net assets, end of period (000) $39,183 $59,411 $77,665
Ratio of operating expenses to average net assets (%) 0.99 (b) 1.11 0.88
Ratio of net investment income to average net assets (%) 3.69 (b) 3.62 3.24
Portfolio turnover rate (%) 36 54 70
Average commission rate paid(d) --- --- $0.0577
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------------
SEPT. 9(A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
---------- -------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $15.19 $14.86 $15.64 $16.25
------ ------ ------ ------
Income from investment operations
Net investment income 0.13 0.00 0.42 0.11(e)
Net gains or losses on investments (both realized
and unrealized) (0.01) 1.32 0.60 0.54
------ ------ ------ ------
Total income from investment operations 0.12 1.32 1.02 0.65
------ ------ ------ ------
Less distributions
Distributions (from net investment income) (0.13) 0.00 (0.41) (0.09)
Distributions (from net realized capital gains) (0.32) (0.53) 0.00 (0.33)
Distributions (from paid in capital) 0.00 (0.01) 0.00 0.00
------ ------ ------ ------
Total distributions (0.45) (0.54) (0.41) (0.42)
------ ------ ------ ------
Net asset value, end of period $14.86 $15.64 $16.25 $16.48
====== ====== ====== ======
Total return (%) 0.7 (c) 8.9 6.6 4.0
Ratios/Supplemental data
Net assets, end of period (000) $7,006 $56,561 $83,119 $52,161
Ratio of operating expenses to average net
assets (%) (d) 1.00 (b) 1.00 1.00 1.00
Ratio of net investment income to average net
assets (%) 0.33 (b) 0.76 1.99 0.89
Portfolio turnover rate (%) 101 123 119 59
Average commission rate paid(f) --- --- --- $0.0180
</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 without giving
effect to the voluntary expense limitations would have been 1.35%(b),
1.04%, 1.21% and 1.19%, respectively.
(e) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 14, 1997. These
financial highlights reflect results achieved by the previous subadviser under
different investment policies.
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------------
YEAR ENDED SEVEN
MAY 31, MONTHS YEAR ENDED DECEMBER 31,
------------------ ENDED ---------------------------------------------------------------------------
1987 1988(B) 12/31/88(B) 1989 1990 1991 1992 1993(a) 1994 1995 1996
---- ------- ----------- ---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.70 $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Income from investment
operations
Net investment
income 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18 0.13
Net gains or
losses on
investments
(both realized
and unrealized) 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01 2.07
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19 2.20
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Less distributions
Distributions
(from net
investment
income) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18) (0.13)
Distributions (in
excess of net
investment
income) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00
Distributions
(from net
realized capital
gains) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03) (2.59)
Distributions
(from paid-in
capital) 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Total
distributions (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21) (2.72)
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Net asset value,
end of period $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39 $13.87
====== ====== ===== ====== ===== ====== ====== ====== ====== ====== ======
Total return(%)(f) 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1 17.2
Ratios/Supplemental
data
Net assets, end
of period (000) $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693 $166,963
Ratio of
operating
expenses to
average net
assets(%) 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38 1.30
Ratio of net
investment
income to
average net
assets(%) 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31 0.92
Portfolio
turnover rate(%) 25 8 83 17 6 12 10 4 6 69 127
Average
commission rate
paid(g) --- --- --- --- --- --- --- --- --- --- $0.0348
</TABLE>
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND [CONTINUED]
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------- ----------------------
SEPT. 13(C) MAY 1(C) YEAR
THROUGH YEAR ENDED DEC. 31, THROUGH ENDED
DEC. 31, ------------------------------------- DEC. 31, DEC. 31,
1993(a) 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.95 $12.66 $12.42 $14.40 $13.84 $14.39
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income 0.06 0.16 0.10 0.03 0.06 0.04
Net gains or losses on investments (both
realized and unrealized) 0.01 (0.09) 4.01 2.07 2.58 2.05
------ ------ ------ ------ ------ ------
Total income from investment operations 0.07 0.07 4.11 2.10 2.64 2.09
------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net investment income) (0.03) (0.14) (0.10) (0.04) (0.06) (0.04)
Distributions (in excess of net investment
income) (0.06) 0.00 0.00 0.00 0.00 0.00
Distributions (from net realized capital
gains) (0.27) (0.17) (2.03) (2.59) (2.03) (2.59)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.36) (0.31) (2.13) (2.63) (2.09) (2.63)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.66 $12.42 $14.40 $13.87 $14.39 $13.85
====== ====== ====== ====== ====== ======
Total return (%)(f) 0.60 0.60 34.3 16.3 20.2 16.3
Ratios/Supplemental data
Net assets, end of period (000) $1,498 $5,185 $29,026 $46,856 $4,707 $3,912
Ratio of operating expenses to average net
assets (%) 2.08(e) 1.93 2.11 2.05 2.11(e) 2.05
Ratio of net investment income to average
net assets (%) 0.71(e) 1.10 0.56 0.17 0.56(e) 0.17
Portfolio turnover rate (%) 4 6 69 127 69 127
Average commission rate paid(g) --- --- --- $0.0348 --- $0.0348
</TABLE>
(a) As of January 1, 1993, the Fund discontinued the use of equalization
accounting.
(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, the ratio of operating
expenses to average net assets for the year ended May 31, 1988 would have
been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC 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.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS Y
--------------------------------------------
NOV. 15(A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------------- -------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $13.59 $13.24 $16.83
------ ------ ------
Income from investment operations
Net investment income (loss) 0.06 0.00 (0.02)(e)
Net gains or losses on investments (both realized and
unrealized) (0.35) 4.58 3.23
------ ------ ------
Total income from investment operations (0.29) 4.58 3.21
------ ------ ------
Less distributions
Distributions (from net investment income) (0.06) 0.00 0.00
Distributions (from realized capital gains) 0.00 (0.99) (1.71)
------ ------ ------
Total distributions (0.06) (0.99) (1.71)
------ ------ ------
Net asset value, end of period $13.24 $16.83 $18.33
====== ====== ======
Total return (%) (2.1) (c) 34.8 19.6
Ratios/Supplemental data
Net assets, end of period (000) $196 $5,569 $18,649
Ratio of operating expenses to average net assets (%) (d) 1.79 (b) 1.57 1.43
Ratio of net investment income to average net assets (%) 2.26 (b) (0.08) (0.11)
Portfolio turnover rate (%) 100 142 127
Average Commission Rate(f) --- --- $0.0595
</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.
(e) Per share net investment loss has been calculated using the average shares
outstanding during the year. (f) For the fiscal years beginning on or after
September 1, 1995, a fund is required to disclose its average commission
rate per share for trades on which commissions are charged. This rate
generally does not reflect mark-ups, mark-downs or spreads on shares traded
on a principal basis.
<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: Loomis Sayles, Boston, MA
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, 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. ("Westpeak")
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund,
except for the Star Advisers Fund.
FUND INVESTMENTS
[] CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing substantially
all of its assets in equity securities. Investments are selected based on their
growth potential; current income is not a consideration. The Fund normally will
invest primarily in equity securities of companies with medium or large market
capitalization (capitalization of $1 billion to $5 billion and over $5 billion,
respectively), but will also invest a portion of its assets in equity securities
of companies with relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research and
analysis of individual companies and industries. The subadviser selects
investments for the Fund based on qualitative and quantitative criteria
including, among others, industry dominance and competitive position, consistent
earnings growth, a history of high profitability, the subadviser's expectation
of continued high profitability and overall financial strength, although not
every investment will have all of these characteristics. The Fund may invest in
foreign securities.
[] VALUE FUND
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is ordinarily
placed on undervalued securities. Although long-term market appreciation is
ordinarily the basis for security selection, current income may be a significant
consideration when yields appear to be favorable compared to overall
opportunities for capital appreciation. The Fund may invest in foreign
securities.
[] BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its 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 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 or 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 invest in closed-end investment companies domiciled in
the United States that invest primarily in securities issued by foreign
companies. In addition, the Fund may invest up to 20% of its assets in bonds
issued or guaranteed by foreign governments (including their political
subdivisions, agencies, authorities and/or instrumentalities), supranational
agencies or foreign companies, including but not limited to convertible debt and
below investment grade or unrated debt. 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
selecting a group of attractively valued countries and then selecting securities
within such countries that are expected to offer the best value based on its
valuation and earnings growth expectations.
[] 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.
New England Funds Management, L.P. ("NEFM"), the manager 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. 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 $1.0 billion and $5.0 billion of
market capitalization) may produce returns comparable to those of smaller-cap
companies, but with less risk because of their generally 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 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 macroeconomic and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds, debentures and other
corporate obligations when Founders believes that these investments offer
opportunity for growth of capital. This segment of the portfolio may also invest
in Rule 144A securities and may enter into futures contracts or options thereon
for hedging purposes.
JANUS CAPITAL pursues the Fund's investment objective by investing substantially
all of Janus Capital's segment of the portfolio in common stocks when its
portfolio manager believes that the relevant market environment favors
profitable investing in such securities. Janus Capital manages its segment of
the portfolio to seek long-term capital growth primarily from investing in
common stocks of companies of any size, including large, well-established
companies and smaller, emerging growth companies. Janus Capital's analysis and
selection process focus on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also invest in
preferred stocks, warrants, government securities, corporate bonds and
debentures or other debt securities or repurchase agreements when its portfolio
manager perceives an opportunity for capital growth from such securities or to
receive a return on idle cash. Janus Capital's segment may also invest in Rule
144A securities and may enter into options, futures and forward contracts.
LOOMIS SAYLES manages its segment of the portfolio by investing primarily in
stocks of small cap companies with good earnings growth potential that Loomis
Sayles believes are undervalued by the market. Such companies typically have
market capitalization (shares outstanding times market price price per share) of
less than $1 billion, 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
The Capital Growth, Growth Opportunities, International Equity, Star Advisers
and Value Funds seek to attain their objectives by normally investing in equity
securities. When the particular Fund's subadviser deems it appropriate, however,
the International Equity, Capital Growth, Growth Opportunities and Value 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. 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.
<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.
[] EQUITY SECURITIES
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). 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 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
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.
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 Funds 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, the 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
governmental issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities custody
costs are often higher than those in the United States, and judgments against
foreign entities may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental expropriation
of assets, confiscatory taxation, political or financial instability and
diplomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may depend
on the availability of tax or other revenues to satisfy the issuer's
obligations.
The International Equity and Star Advisers Funds' investments in foreign
securities may include investments in emerging or developing countries, whose
economies or securities markets are not yet highly developed. Special
considerations associated with these investments (in addition to the
considerations regarding foreign investments generally) may include, among
others, greater political uncertainties, an economy's dependence on revenues
from particular commodities or on international aid or development assistance,
currency transfer restrictions, highly limited numbers of potential buyers for
such securities and delays and disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository receipts
are instruments issued by a bank that represent an interest in equity securities
held by arrangement with the bank. Depository receipts can be either "sponsored"
or "unsponsored." Sponsored depository receipts are issued by banks in
cooperation with the issuer of the underlying equity securities. Unsponsored
depository receipts are arranged without involvement by the issuer of the
underlying equity securities. Less information about the issuer of the
underlying equity securities may be available in the case of unsponsored
depository receipts.
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
or subadviser 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.
[] FOREIGN CURRENCY
Most foreign securities in the 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 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.
[] PRIVATIZATIONS (STAR ADVISERS FUND)
In a number of countries around the world, governments have undertaken to sell
to investors interests in enterprises that the government has historically owned
or controlled. These transactions are known as "privatizations" and may in some
cases represent opportunities for significant capital appreciation. In some
cases, the ability of U.S. investors, such as the Funds, to participate in
privatizations may be limited by local law, or the terms of participation may be
less advantageous than for local investors. Also, there is no assurance that
privatized enterprises will be successful, or that an investment in such an
enterprise will retain its value or appreciate in value.
[] 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 International Equity, 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 (INTERNATIONAL EQUITY, 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 below "investment
grade" quality. Lower quality fixed-income securities generally provide higher
yields, but are subject to greater credit and market risk, than higher quality
fixed-income securities. Lower quality fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. Achievement of the investment objective of a
mutual fund investing in lower quality fixed-income securities may be more
dependent on the fund's 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, 1996, the International Equity, Balanced and Star
Advisers Funds had on average 0%, 2.3% 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 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 7 days are illiquid securities.
[] INVESTMENTS IN OTHER INVESTMENT COMPANIES (INTERNATIONAL EQUITY FUND)
The International Equity Fund may invest up to 10% of its total assets in
securities of other investment companies. Because of restrictions on direct
investment by U.S. entities in certain countries, investing indirectly in such
countries (by purchasing shares of another fund that is permitted to invest in
such countries) may be the most practical or efficient way for the Fund to
invest in such countries. In other cases, where the Fund's subadviser desires to
make only a relatively small investment in a particular country, investing
through another fund that holds a diversified portfolio in that country may be
more effective than investing directly in issuers in that country. As an
investor in another investment company, the Fund will indirectly bear its share
of the expenses of that investment company. These expenses are in addition to
the Fund's own costs of operations. In some cases, investing in an investment
company may involve the payment of a premium over the value of the assets held
in that investment company's portfolio.
[] SHORT-TERM TRADING
Although each Fund seeks long-term growth or return, each Fund may, consistent
with its investment objective, engage in portfolio trading in anticipation of,
or in response to, changing economic or market conditions and trends. These
policies may result in higher turnover rates in the Fund's portfolio, which may
produce higher transaction costs and a higher level of taxable capital gains.
Portfolio turnover considerations will not limit any adviser's or subadviser's
investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
(INTERNATIONAL EQUITY, STAR ADVISERS AND GROWTH OPPORTUNITIES FUNDS)
The International Equity and Star Advisers Funds 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). 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 risks 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 the
risk that 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 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 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 costs and the possible
risk of loss to the Fund of all or a significant part of the value of its
investment. In some cases, the risk of loss may exceed the amount of the Fund's
investment. The Fund will be required, however, to set aside with its custodian
bank certain assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse changes in
the value of securities held in its portfolio through options, futures and swap
transactions also depends on the degree of correlation between the changes in
the value of futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and exchange-traded options
also depends on the availability of a liquid secondary market to enable the Fund
to close its positions on a timely basis. There can be no assurance that such a
market will exist at any particular time. In the case of swap contracts and of
options that are not traded on an exchange ("over-the-counter" options), the
Fund is at risk that the other party to the transaction will default on its
obligations, or will not permit the Fund to terminate the transaction before its
scheduled maturity. As a result of these characteristics, the Fund will treat
most swap contracts and over-the-counter options (and the assets it segregates
to cover its obligations thereunder) as illiquid. Certain provisions of the
Internal Revenue Code of 1986, as amended, (the "Code"), and certain regulatory
requirements may limit a Fund's 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 Funds 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
"Miscellaneous Investment Practices -- Futures, Options and Swap Contracts" in
Part II of the Statement.
[] 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.
[] SECURITIES LENDING (STAR ADVISERS FUND)
The 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 33 1/3% 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.
[] 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, as amended. 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, as amended (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 manager of the Star Advisers Fund, oversees the portfolio management
services provided to the Fund by each of the four subadvisers. Subject to the
review of the Trust's trustees, NEFM monitors each subadviser to assure that the
subadviser is managing its segment of the Fund consistently with the Fund's
investment objective and restrictions and applicable laws and guidelines,
including, but not limited to, compliance with the diversification requirements
set forth in the 1940 Act and Subchapter M of the Code. In addition, NEFM also
provides the Fund with administrative services which include, among other
things, day-to-day administration of matters related to the Fund's existence,
maintenance of its records, preparation of reports and assistance in the
preparation of the Fund's registration statement under federal and state laws.
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, 1996, the percentages of the Fund's net assets held
in the segments of the Fund managed by Berger, Founders, Janus Capital and
Loomis Sayles were 24%, 26%, 24% and 26%, 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.
<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. NEFM oversees, evaluates and monitors the subadvisory services
provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
The subadviser of the International Equity Fund, 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. Paul Drexler, Vice
President of Loomis Sayles, has served as the portfolio manager of the
International Equity Fund since February 14, 1997. Scott S. Pape, Vice President
of Loomis Sayles, has served as co-portfolio manager of the Capital Growth Fund
since its inception in 1992. Since June 30, 1996, Bruce A. Ebel, Vice President
of Loomis Sayles, has also served 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 at least five years,
except Mr. Drexler and Mr. Ebel who, prior to the time they joined Loomis
Sayles, were Deputy Manager, Brown Brothers Harriman & Co., and Senior Vice
President of 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 and has been
portfolio manager of the Growth Opportunities Fund since May 1995.
Each Fund pays NEFM a managment fee at the annual rate set forth in the
following table:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID BY FUND TO NEFM (AS A PERCENTAGE OF
FUND AVERAGE DAILY NET ASSETS OF THE FUND)
---- -------------------------------------
<S> <C>
Balanced Fund, 0.75% of the first $200 million
Value Fund, and 0.70% of the next $300 million
Capital Growth Fund 0.65% of amounts in excess of $500 million
Growth Opportunites Fund 0.70% of the first $200 million
0.65% of the next $300 million
0.60% of amount 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
</TABLE>
The management 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
each Fund 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 the Fund or
segment, places orders to purchase and sell securities for the Fund or segment,
and employs professional advisers and securities analysts who provide research
services to the Fund or segment. The Funds pays no direct fees to their
subadvisers.
Below is a brief description of the subadvisers of the Star Advisers Fund.
BERGER, 210 University Boulevard, Suite 900, Denver, Colorado 80206. Patrick S.
Adams, Senior Vice President of Berger, has had day-to-day responsibility for
the management of the segment of the Fund managed by Berger since February 1997.
Mr. Adams previously served as Senior Vice President with Zurich Kemper
Investments, Inc. from June 1996 to January 1997, where he was Portfolio Manager
of the Kemper Growth Fund. Mr. Adams served as Portfolio Manager with Founders
Asset Management, Inc. for two of their mutual funds from March 1993 to May
1996. For three years prior to that, Mr. Adams served First of America
Investment Corp. in various positions, including that of Senior Portfolio
Manager/Senior Analyst, and manager of the Parkstone Equity Fund. Kansas City
Southern Industries, Inc. ("KCSI"), a publicly traded holding company, owns
approximately 87% 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, 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. Daily decisions on portfolio
selection rest with the lead portfolio manager, who, through participation in
the team process, utilizes the input, research and advice of other team members
in making purchase and sale determinations. Edward F. Keely has been lead
portfolio manager for the segment of the Fund that is managed by Founders since
the Fund's inception in 1994. Mr. Keely is a Vice President of Investments at
Founders, where he has been employed since 1989. 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 had day-to-day management responsibility for those assets of the Fund
allocated to Janus Capital since the Fund's inception in 1994, 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 and Loomis Sayles 0.535% of the first $200 million
Value Fund 0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Loomis Sayles 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 million
</TABLE>
Prior to January 2, 1996, the current subadvisers to the Balanced, Capital
Growth 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. From December 29, 1995 to February 14, 1997, Draycott Partners,
Ltd. ("Draycott") served as subadviser to the International Equity Fund. Prior
to December 29, 1995, Draycott served as the International Equity Fund's
adviser.
Loomis Sayles, as subadviser to the International Equity Fund, has voluntarily
agreed to waive the entire subadvisory fee payable to Loomis Sayles by NEFM
through February 14, 1998. This waiver by Loomis Sayles will not reduce the
management fee payable by the Fund to NEFM. In addition, 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 1.15% annually 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. In such event, the Fund would
supplement its prospectus.
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., is a wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife").
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers and subadvisers may consider sales of
shares of the Funds and other mutual funds they manage as a factor in the
selection of broker-dealers to effect portfolio transactions for the Funds.
Subject to procedures adopted by the trustees of the Trusts, Fund brokerage
transactions may be executed by brokers that are affiliated with NEIC, NEFM or
any subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM provides executive and other personnel for the management of the Trusts.
Each Trust's Board of Trustees supervises the affairs of that Trust as conducted
by NEFM and the Funds' subadvisers.
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 may be 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.)
The Funds have applied for an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers other than the existing subadvisers of the Funds when approved by
the relevant Trust's Board of Trustees, without obtaining shareholder approval.
The exemptive request also seeks to permit, without shareholder approval, the
terms of an existing subadvisory agreement to be changed or the employment of an
existing subadviser to be continued after events that would otherwise cause an
automatic termination of a subadvisory agreement, when such changes or
continuation are approved by the relevant Trust's Board of Trustees.
Shareholders would be notified of any subadviser changes.
<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 of at least $10 million, and by New England Life Insurance Company
("NELICO") or MetLife and any other insurance company affiliated with NELICO or
MetLife 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 NELICO or MetLife, any other insurance company affiliated
with NELICO or MetLife ("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"). Class Y shares may also be
purchased by wrap fee programs of certain broker-dealers as to which no service
or marketing fees are paid to broker-dealers by the Fund, NEFM or the
Distributor ("Wrap Fee Programs"). There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Special Accounts,
Insurance Company Accounts or Wrap Fee Programs. 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 Retirement 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.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through wrap fee programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the same Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from that
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Special Accounts,
Insurance Company Accounts, Wrap Fee Programs or Service Accounts.
<PAGE>
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) on a day when the Funds are open for business. 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, simply complete the attached application and
return it with a check payable to New England Funds and mailed to New England
Funds, P O. Box 8551, Boston, MA 02266-8551. All purchases made by check should
be in U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
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 a Fund 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 "Fund Details -- How Fund Share Price Is Determined," 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 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, as amended, or otherwise; (3) the securities are
eligible to be acquired under the Fund's investment policies and restrictions;
and (4) the securities have a value which is readily ascertainable (not
established by evaluation procedures alone) as evidenced by a listing on the New
York Stock Exchange, the American Stock Exchange, NASDAQ or the principal
securities exchange of countries in which the Fund may invest. No investor
owning 5% or more of the Fund's shares may purchase additional Fund shares by
exchange of securities (other than shares of other New England Funds).
GENERAL
The purchase price of shares of each Fund is the net asset value next determined
after a purchase order is received in good order by New England Funds. For
purposes of calculating the purchase price of Fund shares, a purchase order is
considered received by the Fund on the day that it is "in good order" unless it
is rejected by the Fund. For a purchase order to be in "good order" on a
particular day, in the case of a purchase of Fund shares in exchange for
securities, the investor's securities must be placed on deposit at a depository
acceptable to the Fund's subadviser by 4:00 p.m. (Eastern time) and, in the case
of a cash investment, Federal funds must be wired to the Fund between 9:00 a.m.
and 4:00 p.m. (Eastern time) or a check for the purchase price of the shares,
accompanied by a completed application, must have been received by New England
Funds before 4:00 p.m. (Eastern time) on that day. Orders received after 4:00
p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to three
decimal places. The shareholder will receive a statement of Fund shares owned
following each transaction. Investors will not receive certificates representing
Class Y shares. The Funds and the Distributor reserve the right at any time to
reject a purchase order.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<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 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"). Agents, general agents, directors and senior officers of
NELICO and its insurance company subsidiaries may, at the discretion of NELICO,
elect to exchange Class Y shares of any series of the Trusts in a NELICO
Deferred Compensation Plan Account for Class A shares of any other series of the
Trusts which do not offer Class Y shares. Class A shares of any series of the
Trusts in a NELICO Deferred Compensation Plan Account may also be exchanged for
Class Y shares of any series of the Trusts. To obtain a prospectus and more
information about Class A shares, please call the Distributor toll free at
1-800-225-5478.
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 eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read 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 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 your instructions. For federal tax purposes, an
exchange of shares of one series of the Trusts for shares of another series is
considered to be a redemption and purchase and, therefore, is considered to be a
taxable event on which you may recognize a gain or loss.
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, the Growth Opportunities Fund pays
dividends semi-annually and the Balanced Fund pays 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- and short-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 capital gain distribution, you should be aware
that a portion of the purchase price may be returned to you as a taxable
distribution.
You 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 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.
<PAGE>
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 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 and carefully read a copy of
that fund's prospectus.
<PAGE>
S E L L I N G F U N D S H A R E S
WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[] BY TELEPHONE:
You may redeem (sell) shares by telephone 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) on a day when the
Funds are open for business 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 your address of record 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 or wired to your bank account or transmitted through ACH. All owners
of the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by New England Funds, L.P. Signature guarantees by
notaries public are not acceptable.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
GENERAL. Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by State
Street Bank and Trust Company ("State Street Bank"). Redemption proceeds will
normally be mailed to you within seven days after State Street Bank or the
Distributor receives your request in good order. However, in those cases where
you have recently purchased your shares by check or an electronic funds transfer
through the ACH system and you make a redemption request within 10 days after
such purchase or transfer, the Fund may withhold redemption proceeds until the
Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above.
Requests are processed at the net asset value next determined after the request
is received.
Special rules apply 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 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 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 NEFM and 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 "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by
NEFM and 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.
<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
determined by or under the direction of the Trust's Board of Trustees 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. A futures contract will be valued at 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 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 earned during that calendar year,
and virtually all of the capital gain net income the Fund realized during the
twelve months ending October 31 but has not previously distributed. If declared
in December to shareholders of record in that month, and paid the following
January, these distributions will be considered for federal income tax purposes
to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if 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.
In addition, the Distributor performs certain accounting and administrative
services for the Balanced Fund, Value Fund, International Equity Fund and Star
Advisers Fund. For those services, each Fund reimburses the Distributor for all
or part of its expenses of providing these services to the Fund, which includes
the following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing, financial reporting and clerical functions relating to the
Funds, (ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices, proxy
solicitation materials furnished to shareholders of the Funds or regulatory
authorities and reports and questionnaires for SEC compliance, and (iii)
registration, filing and other fees in connection with requirements of
regulatory authorities.
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, from
July 27, 1988, when there was a change 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 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 each Fund 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.
<PAGE>
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, 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, an open-end management investment company, 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. 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 may bear its own transfer agency and prospectus
printing costs. The minimum initial investment in Class A, Class B and Class C
shares is generally $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 by the relevant Trust's trustees 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 objectives of the Capital Growth,
International Equity, Star Advisers or Growth Opportunities Funds, 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
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.
[] 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.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of the Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] Class Y Shares of the Funds may be purchased through certain broker-dealers
and/or financial services organizations. Such organizations may receive
compensation, in an amount of up to 0.25% annually of the value of the Fund
shares held by their clients. The compensation may be paid by New England Funds
Management, L.P. and/or a Fund's subadviser out of their own assets, or may be
paid by the Fund in the form of accounting, servicing, distribution or transfer
agent fees.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- ------------------------------------------------------------------------------
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
PROSPECTUS AND APPLICATION -- MAY 1, 1997
New England Government Securities Fund, New England Strategic Income Fund, New
England Bond Income Fund and New England Municipal Income Fund, each a 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."
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.
Each Fund offers two classes of shares to the general public (Classes A and B)
except New England Limited Term U.S. Government Fund, 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, 1997 has been filed with the Securities and Exchange Commission (the "SEC")
and is available free of charge. Write to New England Funds, L.P., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at
1-800-225-5478. The Statement contains more detailed information about the Funds
and is incorporated into this prospectus by reference.
NEW ENGLAND HIGH INCOME FUND INVESTS PRIMARILY IN, AND NEW ENGLAND STRATEGIC
INCOME FUND MAY INVEST UP TO ALL OF ITS ASSETS IN, LOWER RATED BONDS COMMONLY
KNOWN AS "JUNK BONDS." THIS TYPE OF INVESTMENT IS SUBJECT TO GREATER RISK THAN
HIGHER RATED BONDS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS, INCLUDING
THE RISK OF DEFAULT. INVESTORS SHOULD ASSESS CAREFULLY THE RISKS ASSOCIATED WITH
INVESTMENT IN THESE FUNDS. SEE "INVESTMENT RISKS -- LOWER RATED FIXED-INCOME
SECURITIES."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
Page
FUND EXPENSES AND FINANCIAL INFORMATION
<S> <C>
1 Schedule of Fees Sales charges, yearly operating expenses.
3 Financial Highlights Historical information on the Funds' performance.
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
14 Investment Objectives The investment goal for each Fund.
14 New England Investment Companies and the The Funds' adviser and subadvisers are affiliates
Funds' Adviser and Subadvisers of NEIC.
15 How the Funds Pursue Their Objectives
15 Fund Investments
- -------------------------------------------------------------------------------------------------------------------
22 INVESTMENT RISKS It is important to understand the risks
inherent in a Fund before you invest.
- -------------------------------------------------------------------------------------------------------------------
29 FUND MANAGEMENT
- -------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
31 Minimum Investment Everything you need to know to open and add to
31 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
32 Sales Charges
35 Reduced Sales Charges (Class A Shares Only)
- -------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
38 Exchanging Among New England Funds New England Funds offers three convenient ways to
exchange Fund shares.
39 Fund Dividend Payments
- -------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
40 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal Plan
42 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- -------------------------------------------------------------------------------------------------------------------
FUND DETAILS
43 How Fund Share Price is Determined Additional information you may find important.
43 Income Tax Considerations
45 The Funds' Expenses
46 Performance Criteria
47 Additional Facts About the Funds
49 Appendix A Ratings of Securities.
50 Appendix B Portfolio Composition of the High Income and
Strategic Income Funds.
</TABLE>
<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 A, B and C shares of the Funds and estimated annual expenses for the
Funds' Class A, B and C shares. The Example on the following page shows the
cumulative expenses attributable to a hypothetical $1,000 investment in Class A,
B and C 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(4)
------- ------- ----------
<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 redemption
proceeds, as applicable)(2) ....................................... (3) 5.00% None
<CAPTION>
NEW ENGLAND
ADJUSTABLE RATE
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT
U.S. GOVERNMENT FUND 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) 5.00% None (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying Fund Shares --
Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any portion of certain
purchases of Class A shares greater than $1,000,000 redeemed within 1 year after purchase, but
not to any other purchases or redemptions of Class A shares. See "Buying Fund Shares -- Sales
Charges."
(4) Applies to New England Bond Income Fund and New England Strategic Income fund only.
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
GOVERNMENT NEW ENGLAND LIMITED TERM MUNICIPAL NEW ENGLAND BOND
SECURITIES FUND U.S. GOVERNMENT FUND INCOME FUND INCOME FUND
------------------ --------------------------- ------------------ ---------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees ....... 0.65% 0.65% 0.64% 0.64% 0.64% 0.44% 0.44% 0.43% 0.43% 0.43%
12b-1 Fees ............ 0.25 1.00* 0.35 1.00* 1.00* 0.25 1.00* 0.25 1.00* 1.00*
Other Expenses ........ 0.42 0.42 0.26 0.26 0.26 0.23 0.23 0.37 0.37 0.37
Total Fund Operating
Expenses ............ 1.32 2.07 1.25 1.90 1.90 0.92 1.67 1.05 1.80 1.80
<CAPTION>
NEW ENGLAND
ADJUSTABLE RATE NEW ENGLAND HIGH NEW ENGLAND STRATEGIC
U.S. GOVERNMENT FUND INCOME FUND**** INCOME FUND****
---------------------- ------------------------ --------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees
(in the case of New England
Adjustable Rate U.S.
Government Fund and New
England High Income Fund,
after voluntary fee waiver
and expense reduction) . 0.30%** 0.30%** 0.45%*** 0.45%*** 0.65% 0.65% 0.65%
12b-1 Fees ............... 0.25 1.00* 0.25 1.00* 0.25 1.00* 1.00*
Other Expenses ........... 0.15 0.15 0.70 0.70 0.38 0.38 0.38
Total Fund Operating Expenses
(in the case of New
England Adjustable Rate
U.S. Government Fund and
New England High Income
Fund, after voluntary fee
waiver and expense
reduction) ............. 0.70** 1.45** 1.40*** 2.15*** 1.28 2.03 2.03
* 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 0.54% for both
classes and Total Fund Operating Expenses would be 0.94% for Class A shares and 1.69% 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, Management Fees would be 0.74% for both
classes and Total Fund Operating Expenses would be 1.69% for Class A shares and 2.44% for Class B 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 Strategic Income Fund and New England High
Income Fund has been restated to reflect fees and expenses currently in effect for those Funds.
</TABLE>
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 GOVERNMENT NEW ENGLAND LIMITED NEW ENGLAND ADJUSTABLE
SECURITIES FUND TERM U.S. GOVERNMENT FUND RATE U.S. GOVERNMENT FUND
----------------------------- ----------------------------------------- ---------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
------- ------- ------- ------- ------- ------- -------
(1) (2) (1) (2) (1) (2)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ..................... $ 58 $ 71 $ 21 $ 42 $ 69 $ 19 $ 19 $ 17 $ 65 $ 15
3 years .................... $ 85 $ 95 $ 65 $ 68 $ 90 $ 60 $ 60 $ 32 $ 76 $ 46
5 years .................... $114 $131 $111 $ 97 $123 $103 $103 $ 49 $ 99 $ 79
10 years* .................. $197 $221 $221 $177 $205 $205 $222 $ 96 $153 $153
<CAPTION>
NEW ENGLAND
NEW ENGLAND STRATEGIC NEW ENGLAND BOND NEW ENGLAND HIGH MUNICIPAL
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------------------------- ------------------------------- -------------------- -------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(1) (2) (1) (2) (1) (2) (1) (2)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ............... $ 57 $ 71 $ 21 $ 21 $ 55 $ 68 $ 18 $ 18 $ 59 $ 72 $ 22 $ 54 $ 67 $ 17
3 years .............. $ 84 $ 94 $ 64 $ 64 $ 77 $ 87 $ 57 $ 57 $ 87 $ 97 $ 67 $ 73 $ 83 $ 53
5 years .............. $112 $129 $109 $109 $100 $117 $ 97 $ 97 $118 $135 $115 $ 94 $111 $ 91
10 years* ............ $193 $217 $217 $236 $167 $192 $192 $212 $205 $229 $229 $153 $178 $178
(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.
</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," "The Funds" Expenses" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(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 3 through 13 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 whose report
thereon is incorporated in Part II of the Statement and can be obtained by
shareholders, 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, whose report thereon is incorporated by reference in
Part II of the Statement and can be obtained by shareholders. 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 available upon
request and without charge.
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.48 $12.10 $11.85 $11.99 $11.38 $11.92 $11.73 $11.75 $10.43 $11.73
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.89 0.93 0.90 0.86 0.82 0.70 0.72 0.69 0.74 0.71
Net gains (losses) on
investments (both
realized and
unrealized) (0.93) (0.18) 0.52 (0.27) 0.75 0.07 0.32 (1.32) 1.29 (0.64)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (Loss)
from investment
operations (0.04) 0.75 1.42 0.59 1.57 0.77 1.04 (0.63) 2.03 0.07
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from
net investment
income) (0.89) (0.85) (0.95) (0.89) (0.82) (0.68) (0.72) (0.69) (0.73) (0.72)
Distributions (from
net realized capital
gains) (0.45) (0.15) 0.00 0.00 (0.21) (0.28) (0.30) 0.00 0.00 0.00
Distributions (from
paid-in capital) 0.00 0.00 (0.33) (0.31) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.34) (1.00) (1.28) (1.20) (1.03) (0.96) (1.02) (0.69) (0.73) (0.72)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period $12.10 $11.85 $11.99 $11.38 $11.92 $11.73 $11.75 $10.43 $11.73 $11.08
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(a) (0.1) 6.8 12.6 5.7 14.9 6.8 9.0 (5.5) 20.0 0.80
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $192,250 $179,130 $183,669 $181,343 $180,198 $178,030 $182,436 $147,986 $147,503 $120,607
Ratio of operating
expenses to average
net assets (%) 1.30 1.24 1.21 1.21 1.21 1.23 1.22 1.29 1.35 1.32
Ratio of net
investment income to
average net assets (%) 7.20 7.69 7.50 7.63 7.28 5.92 5.70 6.66 6.69 6.45
Portfolio turnover
rate (%) 178 150 389 737 305 730 276 809 559 462
(a) A sales charge is not reflected in total return calculations.
</TABLE>
NEW ENGLAND GOVERNMENT SECURITIES FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------
SEPT. 23(A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ------------------------------
1993 1994 1995 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.26 $11.75 $10.43 $11.74
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.60 0.65 0.63
Net gains (losses) on investments (both
realized and unrealized) (0.30) (1.32) 1.30 (0.65)
------ ------ ------ ------
Total income (loss) from investment operations (0.14) (0.72) 1.95 (0.02)
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment income) (0.16) (0.60) (0.64) (0.64)
Distributions (from net realized capital gains) (0.21) 0.00 0.00 0.00
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
------ ------ ------ ------
Total distributions (0.37) (0.60) (0.64) (0.64)
------ ------ ------ ------
Net asset value, end of period $11.75 $10.43 $11.74 $11.08
====== ====== ====== ======
Total return (%)(c) (1.2) (6.2) 19.2 (0.10)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,255 $2,760 $4,858 $5,385
Ratio of operating expenses to average net
assets (%) 1.97(b) 2.04 2.10 2.07
Ratio of net investment income to average net
assets (%) 5.03(b) 5.91 5.94 5.70
Portfolio turnover rate (%) 276(b) 809 559 462
(a) Class B shares were first offered on September 23, 1993.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------------
JAN. 3(A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, -----------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <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 $12.10
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.97 0.94 0.93 0.80 0.71 0.82 0.86 0.81
Net gains or losses on
investments (both realized
and unrealized) 0.27 0.29 0.69 (0.11) 0.08 (1.10) 0.59 (0.54)
------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 1.24 1.23 1.62 0.69 0.79 (0.28) 1.45 0.27
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net
investment income) (0.96) (0.94) (0.94) (0.80) (0.71) (0.72) (0.84) (0.82)
Distributions (from net
realized capital gains) 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00
Distributions (from paid-
in capital) (0.25) (0.38) (0.26) (0.21) (0.12) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.21) (1.32) (1.20) (1.01) (0.84) (0.72) (0.84) (0.82)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $12.53 $12.44 $12.86 $12.54 $12.49 $11.49 $12.10 $11.55
====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(d) 10.4 10.5 13.8 5.7 6.4 (2.3) 13.0 2.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $8,430 $50,062 $271,966 $477,396 $562,164 $412,399 $361,520 $276,178
Ratio of operating
expenses to average net
assets (%) 1.31(b) 1.25(b) 1.25 1.16 1.14 1.18 1.22 1.25
Ratio of net investment
income to average net
assets (%) 7.92 7.95 7.24 6.24 5.64 6.80 7.18 7.13
Portfolio turnover rate (%) 731 55 277 323 124 244 247 327
(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 for Class A shares without giving effect to this expense limitation would have been
3.47% for t he 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 in the case of Class A shares and a CDSC in the case of Class B shares are not reflected in total return
calcul ations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- ------------------
SEPT. 27(A) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DEC. 31, ----------------------------- ------------------
1993 1994 1995 1996 1995(A) 1996
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.76 $12.49 $11.48 $12.09 $11.48 $12.10
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.17 0.71 0.76 0.73 0.64 0.75
Net gains or losses on investments (both
realized and unrealized) (0.24) (1.08) 0.61 (0.54) 0.64 (0.57)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations (0.07) (0.37) 1.37 0.19 1.28 0.18
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment
income) (0.16) (0.64) (0.76) (0.74) (0.65) (0.74)
Distributions (from net realized
capital gains) (0.01) 0.00 0.00 0.00 0.00 0.00
Distributions (in excess of net
investment income) (0.03) 0.00 0.00 0.00 (0.01) 0.00
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.20) (0.64) (0.76) (0.74) (0.66) (0.74)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.49 $11.48 $12.09 $11.54 $12.10 $11.54
====== ====== ====== ====== ====== ======
Total return (%)(d) (0.6) (2.9) 12.3 1.7 11.4 1.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $6,221 $11,891 $18,056 $18,503 $5,936 $14,903
Ratio of operating expenses to average
net assets (%) 1.96(c) 1.83 1.87 1.90 1.87 1.90
Ratio of net investment income to
average net assets (%) 4.30(c) 6.15 6.53 6.48 6.53 6.48
Portfolio turnover rate (%) 124 244 247 327 247 327
(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 for Class A shares without giving effect to this expense limitation would have been
3.47% for t he 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 in the case of Class A shares and a CDSC in the case of Class B shares are not reflected in total return
calcul ations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------------------- ---------------------------------------
OCT. 18(A) SEPT. 13(A)
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ------------------------------------------------- DEC. 31, -------------------------
1991 1992 1993 1994 1995 1996 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.50 $7.50 $7.46 $7.45 $7.20 $7.37 $7.52 $7.45 $7.20 $7.37
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM
INVESTMENT OPERATIONS
Net investment income 0.09 0.42 0.33 0.37 0.47 0.43 0.08 0.29 0.41 0.37
Net gains or losses
on investments
(both realized and
unrealized) 0.00 (0.06) (0.03) (0.31) 0.14 (0.01) (0.08) (0.29) 0.14 (0.02)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income from
investment operations 0.09 0.36 0.30 0.06 0.61 0.42 0.00 0.00 0.55 0.35
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from
net investment income) (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.07) (0.25) (0.38) (0.36)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.07) (0.25) (0.38) (0.36)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end
of period $7.50 $7.46 $7.45 $7.20 $7.37 $7.37 $7.45 $7.20 $7.37 $7.36
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(d) 1.2 4.9 4.0 0.8 8.6 5.8 0.0 0.1 7.8 4.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $60,684 $294,687 $734,251 $489,637 $331,112 $222,809 $855 $2,056 $2,368 $2,821
Ratio of operating
expenses to average net
assets (%)(b) 0.50(c) 0.57 0.60 0.60 0.66 0.70 1.35(c) 1.35 1.41 1.45
Ratio of net
investment income
to average net assets (%) 6.43(c) 5.39 4.39 4.85 6.29 6.39 3.50(c) 4.10 5.54 5.64
Portfolio turnover rate (%) 52 49 54 17 73 54 54 17 73 54
(a) The Fund commenced operations on October 18, 1991. Class B shares were first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class A average net assets. From May 1, 1995 through
June 1, 1995 expenses were voluntarily limited to 0.65% of Class A average net assets. The ratio of operating expenses to
average net assets without giving effect to this expense limitation would have been 0.89% for the year ended December 31,
1995 and 0.94% for the year end ed December 31, 1996. From April 1, 1992 through May 1, 1995 expenses were voluntarily
limited to 0.60% of Class A average net assets. The ratio of operating expenses to average net assets for Class A shares
without giving effect to this expense limitation would have been 0 .96%, 0.86% and 0.88% for the years ended December 31,
1992, 1993 and 1994, respectively. From October 19, 1991 through March 31, 1992, expenses were voluntarily limited to 0.50%
of average net assets. The ratio of operating expenses to average net assets without giving effect to this expense limitation
would have been 1.26% for the period ended December 31, 1991. Commencing June 1, 1995 expenses were voluntarily limited to
1.45% of Class B average net assets. From May 1, 1995 through June 1, 1995 expenses were voluntarily limited to 1.40% of
Class B average net assets. The ratio of operating expenses to average net assets without giving effect to this expense
limitation would have been 1.65% for the year ended December 31, 1995 and 1.69% for the year ended December 31, 1996. From
September 13, 1993 through May 1, 1995 expenses were voluntarily limited to 1.35% of Class B average net assets. The ratio of
operating expenses to average net assets for Class B shares without giving effect to this expense limitation would have been
1.61% for the period ended December 31, 1993 and 1.6 3% for the year ended December 31, 1994.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a CDSC in the case of Class B shares are not reflected in total return
calcul ations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.73 $10.98 $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $10.95 $12.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.90 0.85 0.91 0.89 0.88 0.85 0.77 0.72 0.81 0.84
Net gains or losses on
investments (both
realized and
unrealized) (0.75) (0.06) 0.34 (0.10) 1.04 0.01 0.66 (1.23) 1.40 (0.31)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss)
from investment
operations 0.15 0.79 1.25 0.79 1.92 0.86 1.43 (0.51) 2.21 0.53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from
net investment
income) (0.90) (0.88) (0.91) (0.90) (0.90) (0.86) (0.78) (0.72) (0.80) (0.84)
Distributions (from
net realized capital
gains) 0.00 0.00 0.00 0.00 0.00 (0.02) (0.59) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.90) (0.88) (0.91) (0.90) (0.90) (0.88) (1.37) (0.72) (0.80) (0.84)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period $10.98 $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $10.95 $12.36 $12.05
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 1.4 7.4 11.9 7.5 18.1 7.5 12.1 (4.2) 20.8 4.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $60,071 $67,548 $76,662 $85,372 $113,759 $145,184 $179,264 $155,362 $200,285 $189,685
Ratio of operating
expenses to average
net assets (%) 1.31 1.20 1.18 1.18 1.15 1.08 1.04 1.08 1.14 1.05
Ratio of net
investment income to
average net assets (%) 8.03 7.68 8.27 8.05 7.69 7.08 6.10 6.46 6.81 7.00
Portfolio turnover
rate (%) 307 88 77 126 218 89 202 77 81 104
(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 CDSC in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND BOND INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------- ------------------
SEPT. 13(A) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DEC. 31, ------------------------------- ------------------
1993 1994 1995 1996 1995(A) 1996
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.06 $12.18 $10.95 $12.36 $10.95 $12.36
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.20 0.63 0.72 0.75 0.56 0.75
Net gains or losses on investments
(both realized and unrealized) (0.30) (1.23) 1.40 (0.32) 1.40 (0.30)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations (0.10) (0.60) 2.12 0.43 1.96 0.45
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment
income) (0.19) (0.63) (0.71) (0.75) (0.55) (0.75)
Distributions (from net realized
capital gains) (0.59) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.78) (0.63) (0.71) (0.75) (0.55) (0.75)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.18 $10.95 $12.36 $12.04 $12.36 $12.06
------ ------ ------ ------ ------ ------
Total return (%)(c) (0.8) (4.9) 19.9 3.7 18.1 3.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $2,661 $9,435 $23,398 $31,191 $1,009 $2,391
Ratio of operating expenses to average
net assets (%) 1.81(b) 1.83 1.89 1.80 1.89 1.80
Ratio of net investment income to average
net assets (%) 4.79(b) 5.71 6.06 6.25 6.06 6.25
Portfolio turnover rate (%) 202 77 81 104 81 104
(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 CDSC in the case of Class B shares are not
reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR ENDED FOUR MONTHS
AUGUST 31, ENDED YEAR ENDED DECEMBER 31,
---------------- DEC. 31, ------------------------------------------------------------------------
1987 1988 1988(D) 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.52 $13.77 $11.69 $11.08 $10.07 $7.56 $9.07 $ 9.46 $10.06 $8.89 $8.98
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 1.50 1.53 0.43 1.31 1.30 1.02 0.94 0.90 0.88 0.88 0.84
Net gains or losses
on investments (both
realized and
unrealized) (0.26) (1.92) (0.56) (0.93) (2.49) 1.58 0.44 0.61 (1.19) 0.13 0.44
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
Total income (loss)
from investment
operations (1.24) (0.39) (0.13) (0.38) (1.19) 2.60 1.38 1.51 (0.31) 1.01 1.28
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
LESS DISTRIBUTIONS
Distributions (from net
investment income)(e) (1.56) (1.53) (0.43) (1.31) (1.30) (1.02) (0.94) (0.90) (0.86) (0.88) (0.83)
Distributions (in excess
of net investment
income) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 (0.04) (0.01)
Distributions (from
net realized
capital gains) (0.43) (0.13) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from
paid-in capital) 0.00 (0.03) (0.05) (0.08) (0.02) (0.07) (0.05) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
Total distributions (1.99) (1.69) (0.48) (1.39) (1.32) (1.09) (0.99) (0.91) (0.86) (0.92) (0.84)
------ ------ ------ ------ ------ ----- ----- ------ ------ ----- -----
Net asset value, end
of period $13.77 $11.69 $11.08 $10.07 $ 7.56 $9.07 $9.46 $10.06 $ 8.89 $8.98 $9.42
====== ====== ====== ====== ====== ===== ===== ====== ====== ===== =====
Total return (%)(g) 9.0 (2.6) (1.2) 3.3 (13.1) 36.3 15.8 16.5 (3.3) 11.8 14.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $ 20,439 $14,517 $11,870 $9,070 $6,814 12,280 $20,992 $31,176 $33,673 $39,148 $42,992
Ratio of operating
expenses to
average net
assets (%)(b) 1.50(f) 1.57 1.50(c) 1.50 1.50 1.50 1.50 1.54 1.60 1.601.53
Ratio of net
investment income
to average net
assets (%) 10.60 12.45 11.58(c) 12.28 14.00 11.56 9.74 9.17 9.18 9.719.32
Portfolio turnover
rate (%) 39 29 1 30 7 30 19 43 33 30 134
(a) Commencement of offering of Class B shares.
(b) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 1.40% of Class A average net assets and
2.15% of Class B average net assets. From October 1, 1993 through June 27, 1996 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% annually 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% annually 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%,
1.72% an d 1.69%, respectively, for the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996. 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%, 1.83%, 1.72% and 1.69% for Class A shares for the years ended August 31, 1987 and 1988, the four months ended
December 31, 1988 and the years ended Decem ber 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996, 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%, 2.37% and 2.35%, respectively, for the period September 20, 1993
through December 31, 1993 and the years ended December 31, 1994, 1995 and 1996.
(c) Computed on an annualized basis.
(d) Fiscal year end changed in 1988 from August 31 to December 31. Back Bay Advisors, L.P., the Fund's subadviser until June 30,
1996, became the Fund's adviser on July 27, 1988. Loomis, Sayles & Company, L.P., the Fund's current subadviser, assumed that
function on J uly 1, 1996. (e) Amounts distributed include tax basis distributions from paid in capital of approximately
$0.06 and $0.02 per share for the ye ar 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
opera ting 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 CDSC in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
------------------------------------------
SEPT. 20(A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ----------------------------
1993 1994 1995 1996
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.87 $10.06 $8.88 $8.98
------ ------ ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.79 0.83 0.79
Net gains or losses on investments (both realized and
unrealized) 0.20 (1.18) 0.13 0.42
------ ------ ----- -----
Total income (loss) from investment operations 0.43 (0.39) 0.96 1.21
------ ------ ----- -----
LESS DISTRIBUTIONS
Distributions (from net investment income)(e) (0.23) (0.78) (0.81) (0.76)
Distributions (in excess of net investment income) (0.01) (0.01) (0.05) (0.01)
Distributions (from net realized capital gains) 0.00 0.00 0.00 0.00
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
------ ------ ----- -----
Total distributions (0.24) (0.79) (0.86) (0.77)
------ ------ ----- -----
Net asset value, end of period $10.06 $ 8.88 $8.98 $9.42
====== ====== ===== =====
Total return (%)(g) 4.4 (4.0) 11.2 14.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,232 $5,233 $10,625 $17,767
Ratio of operating expenses to average net
assets (%)(b) 2.25(c) 2.25 2.25 2.19
Ratio of net investment income to average net
assets (%) 7.66(c) 8.53 8.96 8.33
Portfolio turnover rate (%) 43 33 30 134
(a) Commencement of offering of Class B shares.
(b) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 1.40% of
Class A average net assets and 2.15% of Class B average net assets. From October 1, 1993
through June 27, 1996 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% annually 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% annually 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%, 1.72% an d 1.69%, respectively, for the years ended December 31, 1989,
1990, 1991, 1992, 1993, 1994, 1995 and 1996. 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%, 1.83%, 1.72% and 1.69% for Class A shares for the years ended August 31, 1987
and 1988, the four months ended December 31, 1988 and the years ended Decem ber 31, 1989,
1990, 1991, 1992, 1993, 1994, 1995 and 1996, 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%, 2.37% and 2.35%,
respectively, for the period September 20, 1993 through December 31, 1993 and the years
ended December 31, 1994, 1995 and 1996.
(c) Computed on an annualized basis.
(d) Fiscal year end changed in 1988 from August 31 to December 31. Back Bay Advisors, L.P., the
Fund's subadviser until June 30, 1996, became the Fund's adviser on July 27, 1988. Loomis,
Sayles & Company, L.P., the Fund's current subadviser, assumed that function on J uly 1,
1996.
(e) Amounts distributed include tax basis distributions from paid in capital of approximately
$0.06 and $0.02 per share for the ye ar 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 CDSC in the case of the Class B
shares are not reflected in total return calculations. Periods of less than one year are
not annualized.
</TABLE>
NEW ENGLAND MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.74 $6.79 $7.10 $7.29 $7.21 $7.53 $7.54 $7.87 $6.85 $7.60
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.46 0.46 0.47 0.46 0.45 0.44 0.40 0.39 0.42 0.41
Net gains or losses on
investments (both
realized and
unrealized) (0.67) 0.29 0.20 (0.08) 0.35 0.21 0.53 (1.01) 0.74 (0.07)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss)
from investment
operations (0.21) 0.75 0.67 0.38 0.80 0.65 0.93 (0.62) 1.16 0.34
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from
net investment
income) (0.42) (0.44) (0.48) (0.46) (0.43) (0.46) (0.42) (0.40) (0.41) (0.41)
Distributions (from
net realized capital
gains) (0.32) 0.00 0.00 0.00 (0.01) (0.18) (0.18) 0.00 0.00 0.00
Distributions (from
paid-in capital) 0.00 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.74) (0.44) (0.48) (0.46) (0.48) (0.64) (0.60) (0.40) (0.41) (0.41)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end
of period $6.79 $7.10 $7.29 $7.21 $7.53 $7.54 $7.87 $6.85 $7.60 $7.53
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total return (%)(c) (2.9) 11.5 9.8 5.5 11.6 8.9 12.7 (8.0) 17.2 4.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $125,661 $131,776 $142,976 $146,232 $162,991 $183,276 $226,881 $184,202 $195,301 $180,983
Ratio of operating
expenses to average
net assets (%)(b) 1.04 0.98 0.96 0.97 0.95 0.95 0.91 0.92 0.93 0.92
Ratio of net
investments income
to average net
assets (%) 6.56 6.67 6.58 6.46 6.18 5.80 5.27 5.44 5.52 5.46
Portfolio turnover
rate (%) 196 97 89 85 126 85 86 88 93 24
(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 CDSC in the case of Class B shares are
not reflected in total return calcul ations. Periods of less than one year are not
annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.03 $7.86 $6.85 $7.60
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07 0.34 0.36 0.35
Net gains or losses on investments (both realized and unrealized) 0.01 (1.01) 0.74 (0.07)
----- ----- ----- -----
Total income (loss) from investment operations 0.08 (0.67) 1.10 0.28
----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from net investment income) (0.07) (0.34) (0.35) (0.35)
Distributions (from net realized capital gains) (0.18) 0.00 0.00 0.00
----- ----- ----- -----
Total distributions (0.25) (0.34) (0.35) (0.35)
----- ----- ----- -----
Net asset value, end of period $7.86 $6.85 $7.60 $7.53
----- ----- ----- -----
Total return (%)(c) 1.0 (8.6) 16.3 3.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $3,395 $7,997 $12,069 $12,568
Ratio of operating expenses to average net assets (%) 1.65(b) 1.67 1.68 1.67
Ratio of net investment income to average net assets (%) 3.91(b) 4.69 4.77 4.71
Portfolio turnover rate (%) 86 88 93 24
(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 CDSC in the case of Class B shares are not reflected in total return
calcul ations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------- ------------------ ----------------
MAY 1(A) YEAR MAY 1(A) YEAR MAY 1(A) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31 DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1995 1996 1995 1996 1995 1996
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $12.99 $12.50 $12.99 $12.50 $12.99
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.74 1.05 0.68 0.95 0.67 0.95
Net gains or losses on investments (both
realized and unrealized) 0.49 0.73 0.49 0.73 0.49 0.72
------ ------ ------ ------ ------ ------
Total income from investment operations 1.23 1.78 1.17 1.68 1.16 1.67
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment
income) (0.73) (1.05) (0.67) (0.95) (0.66) (0.95)
Distributions (from net realized
capital gains) 0.00 (0.36) (0.00) (0.36) (0.00) (0.36)
Distributions (in excess of net
investment income) (0.01) 0.00 (0.01) 0.00 (0.01) 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.74) (1.41) (0.68) (1.31) (0.67) (1.31)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.99 $13.36 $12.99 $13.36 $12.99 $13.35
====== ====== ====== ====== ====== ======
Total return (%)(c) 10.3 14.5 9.7 13.7 9.7 13.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $36,939 $90,729 $38,767 $93,408 $12,252 $31,746
Ratio of operating expenses to average
net assets (%)(d) 0.93(b) 0.96 1.68(b) 1.71 1.68(b) 1.71
Ratio of net investment income to average
net assets (%) 8.75(b) 8.23 8.00 7.48 8.00 7.48
Portfolio turnover rate (%) 22 52 22 52 22 52
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a CDSC in the case of Class B shares are not
reflected in total return calcul ations. 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 be en (%):
1.58(b) 1.31 2.33(b) 2.06 2.33(b) 2.06
</TABLE>
<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: Loomis, Sayles & Company, L.P.
NEW ENGLAND MUNICIPAL 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"). 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"), one of
the largest publicly traded investment management firms in the United States.
NEIC is listed on the New York Stock Exchange and through its subsidiaries or an
affiliate manages over $100 billion in assets for individuals and institutions.
Each adviser and subadviser operates independently and is staffed by experienced
investment professionals. All the advisers and subadvisers apply specialized
knowledge and careful analysis to the pursuit of each Fund's objectives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. ("NEFM") is investment adviser of each of
the Funds, as well as most of the other New England Funds.
BACK BAY ADVISORS(R), L.P. ("Back Bay Advisors"), subadviser to all the Funds
except the Strategic Income Fund and the High Income Fund, manages over $7
billion in assets, primarily mutual fund and institutional fixed-income
portfolios.
LOOMIS, SAYLES & COMPANY, L.P. ("Loomis Sayles"), subadviser to the Strategic
Income Fund and the High Income Fund, has over $50 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 it will invest primarily in U.S.
Government securities, including U.S. Treasury bills (maturity of one year or
less), U.S. Treasury notes (maturity of one to ten years), and U.S. Treasury
bonds (generally maturities greater than ten years), and mortgage-backed
securities issued or guaranteed by U.S. Government agencies, including but
not limited to the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Under normal market conditions, the Fund intends to
maintain a dollar-weighted average duration of between seven and eight years.
The Fund may hold individual securities with duration longer or shorter than
seven or eight years (e.g., a security with a duration of seven years will
typically have a maturity of approximately 10 years, given the current
interest rate environment) as long as the average duration remains within
these limits. See "Duration" below.
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 may also engage in securities lending.
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.
[] 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. 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 securities of emerging markets. 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 rated in the rating categories of B (by Moody's or S&P)
or higher 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 and in Rule 144A 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, Swap Contracts 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, Loomis Sayles, provides the Fund with an investment
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. Loomis Sayles performs its own credit analyses and does
not rely primarily on the ratings assigned by rating services. Loomis Sayles'
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
Loomis Sayles, 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 20% of the value of its total assets in fixed-income
securities issued by foreign governments or by companies organized in foreign
countries. However, investments in both of these types of securities on a
combined basis generally will not exceed 20% of the value of the Fund's
assets. See "Investment Risks -- Foreign Securities" below.
If Loomis Sayles 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 by Moody's or
S&P; short-term fixed-income securities that are rated within the three
highest categories by Moody's or S&P; and repurchase agreements with
financial institutions deemed creditworthy by Loomis Sayles. Investment in
such instruments may result in a lower current yield and would tend to limit
appreciation possibilities. The Fund may also invest in Rule 144A securities.
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, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
[] MUNICIPAL INCOME FUND
The Fund will normally invest at least 80% of its net 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 or 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 $40,000 filing a joint return would have to
earn a taxable yield of 7.06% to equal a tax-free yield of 6.0%. This example
and the following table do not take into account the effect of state or local
income taxes, if any, or federal income taxes on social security benefits
which may arise as a result of receiving tax-exempt income, or the federal
alternative minimum tax that may be payable to the extent that Fund dividends
are derived from interest on "private activity" bonds (see below). Also, a
portion of the Fund's distributions may consist of ordinary income or
short-term or long-term capital gains and will be taxable to you as such.
TAX FREE INVESTING
<TABLE>
<CAPTION>
Taxable Equivalent Yields
TAXABLE INCOME IF TAX EXEMPT YIELD IS
FEDERAL --------------------------------------------
SINGLE JOINT MARGINAL 4.0% 4.5% 5.0% 5.5% 6.0%
RETURN ($) RETURN ($) TAX RATE THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 24,650 0 - 41,200 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
24,651 - 59,750 41,201 - 99,600 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
59,751 - 124,650 99,601 - 151,750 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
124,651 - 271,050 151,751 - 271,050 36.00% 6.25% 7.03% 7.81% 8.59% 9.38%
271,051 and over 271,051 and over 39.60% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
Under the Internal Revenue Code of 1986, as amended (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 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, High Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward contract is a
contract that obligates parties to the contract to exchange specified amounts
of different currencies at a specified future date. For example, a party 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, High 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 the Bond Income, High Income and Strategic Income 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.
[] DURATION
"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 Government Securities, Limited Term U.S.
Government and Bond Income Funds will seek to maintain an average portfolio
duration within specified limits as set forth in the "Fund Investments"
section for each Fund; however, each Fund's portfolio may include
fixed-income securities with durations longer or shorter than the stated
duration limits, so long as the Fund maintains an average portfolio duration
that is consistent with its investment strategy.
The values of securities having shorter durations generally fluctuate less
than securities with longer durations. In general, investments in short and
intermediate term debt securities are less sensitive to interest rate changes
and provide more stability than longer term investments. For example, based
on yields of 6.60% for a five-year U.S. Treasury security and 6.95% for a
30-year U.S. Treasury security, a 1% increase in interest rates would be
expected to result in approximately a 4.16% reduction in the value of the
five-year security (duration 4.16) as compared to approximately a 12.5%
reduction in the value of the 30-year security (duration 12.5). 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.
[] 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.
<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 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, 1996, 19.5% and 12% 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 portfolio compositions of
the High Income Fund and the Strategic Income Fund during the fiscal year
ended December 31, 1996 are 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, the 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 may 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.
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.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution
to shareholders.
[] MORTGAGE-RELATED SECURITIES (ALL FUNDS EXCEPT MUNICIPAL INCOME FUND)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund purchases these
assets at a premium, a faster-than-expected prepayment rate will reduce yield
to maturity, and a slower-than-expected prepayment rate will have the
opposite effect of increasing yield to maturity. If a Fund purchases
mortgage-related securities at a discount, faster-than-expected prepayments
will increase, and slower-than- expected prepayments will reduce, yield to
maturity. Prepayments, and resulting amounts available for reinvestment by
the Fund, are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest rates.
Accelerated prepayments on securities purchased at a premium may result in a
loss of principal if the premium has not been fully amortized at the time of
prepayment. Although these securities will decrease in value as a result of
increases in interest rates generally, they are likely to appreciate less
than other fixed-income securities when interest rates decline because of the
risk of prepayments. In addition, an increase in interest rates would also
increase the inherent volatility of the Fund by increasing the average life
of the Fund's portfolio securities.
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 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 EXCEPT MUNICIPAL INCOME FUND)
A CMO is a security backed by a portfolio of mortgages or mortgage securities
held under an indenture. The underlying mortgages or mortgage securities are
issued or guaranteed by the U.S. Government or an agency or instrumentality
thereof. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage securities. CMOs
are issued with a number of classes or series which have different maturities
and which may represent interests in some or all of the interest or principal
on the underlying collateral or a combination thereof. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. In the event of sufficient early prepayments on
such mortgages, the class or series of CMO first to mature generally will be
retired prior to its maturity. Thus, the early retirement of a particular
class or series of CMO held by the Fund would have the same effect as the
prepayment of mortgages underlying a mortgage pass-through security. CMOs may
be considered derivative securities.
[] "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that
receive different proportions of the interest and principal distribution on a
pool of U.S. or Foreign Government Securities or mortgage assets. In some
cases, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have greater
market volatility than other types of fixed-income securities. In the case of
stripped mortgage securities, if the underlying mortgage assets experience
greater than anticipated payments of principal, a Fund may fail to recoup
fully its investments in IOs. The staff of the SEC has indicated that it
views stripped mortgage securities as illiquid unless the securities are
issued by the U.S. Government or its agencies and are backed by fixed-rate
mortgages. The Funds intend to abide by the staff's position. Stripped
securities may be considered derivative securities.
[] ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND)
PAY-IN-KIND SECURITIES (HIGH INCOME AND STRATEGIC INCOME FUNDS)
Zero coupon securities are issued at a significant discount from face value
and pay interest only at maturity, rather than at intervals during the life
of the security. Pay-in-kind securities pay dividends or interest in the form
of additional securities of the issuer, rather than in cash. The prices of
pay-in-kind or zero coupon securities may react more strongly to changes in
interest rates than the prices of many other securities. The Funds are
required to accrue and distribute income from pay-in-kind and zero coupon
securities on a current basis, even though the Funds will not receive the
income currently in cash. Thus a Fund may have to sell other investments to
obtain cash needed to make income distributions.
[] WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the
time a Fund commits to buy it and the payment date, the Fund may sustain a
loss. The risk of this loss is in addition to the Fund's risk of loss on the
securities actually in its portfolio at the time. In addition, when a Fund
buys a security on a when-issued basis, it is subject to the risk that market
rates of interest will increase before the time the security is delivered,
with the result that the yield on the security delivered to the Fund may be
lower than the yield available on other, comparable securities at the time of
delivery. Each Fund will set aside with its custodian certain assets to
provide for satisfaction of its obligations under when-issued transactions.
[] 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, corporate fixed-income securities (in the case
of the Strategic Income Fund) or municipal bonds or indices thereof (in the
case of the Municipal Income Fund) for purposes of hedging against changes in
interest rates.
A Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. A Fund may buy and sell futures contracts on
securities, securities indexes or currencies. A Fund may also enter into swap
contracts. A Fund may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the value of
other assets that a Fund owns or intends to acquire. A Fund may also conduct
foreign currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be considered a
speculative activity, involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an option pays a
premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results in
a loss if the option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of an option is
unable to close out an unexpired option, it must continue to hold the
underlying security or other asset until the option expires, to "cover" its
obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract by
the Fund exceeds (or is less than) the price of the offsetting purchase, the
Fund will realize a gain (or loss). A Fund may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of
the amount of deposits for initial margin or premiums on the existing futures
and related options positions would exceed 5% of the market value of the
Fund's net assets. Transactions in futures and related options involve the
risks 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 the risk that
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 costs
and 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 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 Bond Income, High Income
and Strategic Income Funds 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
"Miscellaneous Investment Practices -- Futures, Options and Swap Contracts"
in Part II of the Statement.
[] RULE 144A SECURITIES (STRATEGIC INCOME, HIGH INCOME AND BOND INCOME FUNDS)
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 the Trusts, 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 securities 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.
<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 of the Funds. NEFM oversees, evaluates and monitors the subadvisory
services provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
Loomis Sayles, One Financial Center, Boston, Massachusetts 02111, is the
subadviser of the Strategic Income and High Income Funds. Founded in 1926,
Loomis Sayles, 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. Kathleen
C. Gaffney, Vice President of Loomis Sayles, has been assisting Mr. Fuss as a
portfolio manager of the Fund since April 1996. Ms. Gaffney joined Loomis
Sayles in 1984. Gary L. Goodenough and Madeline E. Glick, Vice Presidents of
Loomis Sayles, have served as the High Income Fund's portfolio managers since
July 1, 1996. Mr. Goodenough served as a Managing Director at Bear Stearns and
Salomon Brothers prior to joining Loomis Sayles in 1993. Ms. Glick is the
founder of MEG Asset Management and served as its President prior to joining
Loomis Sayles in 1991.
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. Nathan R. Wentworth, Vice President
of Back Bay Advisors, has served as the Municipal Income Fund's portfolio
manager since 1983. Each of the foregoing persons has been employed by Back Bay
Advisors for at least five years.
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it acts as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide research services
relating to the Fund. The Funds pay no direct fees to any of the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate set forth in the
following table:
MANAGEMENT FEE PAID BY FUND TO NEFM
(AS A PERCENTAGE OF AVERAGE DAILY
FUND NET ASSETS OF THE FUND)
---- ------------------------------------
Adjustable Rate
Fund ............................. 0.550% of the first $200 million
0.510% of the next $300 million
0.470% of amounts in excess of
$500 million
Bond Income Fund and ............. 0.500% of the first $100 million
Municipal Income Fund 0.375% of amounts in excess of
$100 million
Government Securities ............ 0.650% of the first $200 million
Fund and Limited Term 0.625% of the next $300 million
U.S. Government Fund 0.600% of amounts in excess of
$500 million
High Income Fund ................. 0.700% of the first $200 million
0.650% of amounts in excess of
$200 million
Strategic Income
Fund ............................. 0.650% of the first $200 million
0.600% of amounts in excess of
$200 million
NEFM pays each Fund's subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
SUBADVISORY FEE PAYABLE TO NEFM
TO SUBADVISER
(AS A PERCENTAGE OF
FUND SUBADVISER AVERAGE DAILY NET ASSETS OF THE FUND)
---- ---------- --------------------------------------------------
<S> <C> <C>
Adjustable Rate Fund ........................... Back Bay 0.2750% of the first $200 million
Advisors 0.2550% of the next $300 million
0.2350% of amounts in excess of $500 million
Bond Income Fund and Municipal Income Fund ..... Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of $100 million
Government Securities Fund and Limited Term .... Back Bay 0.3250% of the first $200 million
U.S. Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund and Strategic Income Fund ...... Loomis Sayles 0.3500% of the first $200 million
0.3000% 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. From January 2, 1996 to June 30, 1996 Back Bay
Advisors served as subadviser to the High Income Fund.
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 1.40% of the average daily net assets of the Fund's Class A shares and 2.15%
of the Fund's Class B shares. In addition, Loomis Sayles, as subadviser to the
High Income Fund, has agreed to waive 50% of the subadvisory fees payable to
Loomis Sayles by NEFM through June 30, 1997. This waiver by Loomis Sayles does
not reduce the Fund's expenses.
NEFM and Back Bay Advisors have voluntarily agreed, until further notice to the
Adjustable Rate Fund, to reduce their fees and, if necessary, to bear certain
expenses associated with operating the Fund, in order to limit the Fund's
expenses to the annual rate of 0.70% of the Fund's average daily net assets for
Class A shares and 1.45% for Class B shares.
If any of the voluntary fee reductions described above are terminated, the
prospectus of the affected Fund will be supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM and the
Distributor are special purpose corporations that are indirect, wholly-owned
subsidiaries of NEIC. NEIC's sole general partner, New England Investment
Companies, Inc., is a wholly-owned subsidiary of Metropolitan Life Insurance
Company ("MetLife").
In placing portfolio transactions for the Funds, Back Bay Advisors and 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 and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Funds. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with NEIC, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
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.
The Funds have applied for an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers other than the existing subadvisers of the Funds when approved by
the relevant Trust's Board of Trustees, without obtaining shareholder approval.
The exemptive request also seeks to permit, without shareholder approval, the
terms of an existing subadvisory agreement to be changed or the employment of an
existing subadviser to be continued after events that would otherwise cause an
automatic termination of a subadvisory agreement, when such changes or
continuation are approved by the relevant Trust's Board of Trustees.
Shareholders would be notified of any subadviser changes.
<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 $100 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, SEP, SIMPLE Plans, 403(b)(7) retirement plans
and certain other retirement plans.
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $250 on initial and $100 on subsequent investments for retirement plans with
tax benefits such as corporate pension and profit sharing plans and Keogh
plans.
[] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
[] $500 on initial and $100 on subsequent investments for IRAs.
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 RECENT 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.
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:
[GRAPHIC OMITTED] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
[GRAPHIC OMITTED] 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.
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).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under certain
circumstances approved by the Distributor. When purchases are made by check or
periodic account investment, redemptions may not be allowed until the investment
being redeemed has been in the account for a minimum of ten calendar days.
[GRAPHIC OMITTED] 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) on a day when the
Funds are open for business. Your bank may charge a fee for this service.
[GRAPHIC OMITTED] BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 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.
[GRAPHIC OMITTED] 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) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders accepted through
ACH or Tele#Facts will be complete only upon the receipt by New England Funds of
funds from your bank and, on the day that funds are received, will be processed
at the net asset value determined at the close of regular trading on the
Exchange on days 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.
[GRAPHIC OMITTED] BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for complete details.
GENERAL
All purchase orders are subject to acceptance by the Funds and will be effected
at the net asset value next determined after the order is received in proper
form by State Street Bank and Trust Company ("State Street Bank") (except orders
received by your investment dealer before the close of trading on the Exchange
and transmitted to the Distributor by 5:00 p.m. [Eastern time] on the same day,
which will be effected at the net asset value determined on that day). Although
the Funds do not anticipate doing so, they reserve the right to suspend or
change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to persons
whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you request
them in writing from the Distributor. The Funds' "open account" system for
recording your investment eliminates the problems and expense of handling and
safekeeping certificates. Certificates will not be issued for Class B or Class C
shares. If you wish transactions in your account to be effected by another
person under a power of attorney from you, special rules apply. Please contact
your investment dealer or the Distributor for details.
SALES CHARGES
Each Fund offers two (or, in the case of the Limited Term U.S. Government Fund,
Strategic Income Fund and Bond Income Fund, three) classes of shares to the
general public:
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).
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 and, in the case of the Limited Term U.S. Government Fund,
a 0.10% annual distribution fee. Class A shares are offered subject to the
following sales charges:
GOVERNMENT SECURITIES FUND
STRATEGIC INCOME FUND
BOND INCOME FUND
MUNICIPAL INCOME FUND
HIGH INCOME FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $100,000 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
LIMITED TERM U.S. GOVERNMENT FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $100,000 3.00% 3.09% 2.70%
$100,000 - $249,999 2.50% 2.56% 2.15%
$250,000 - $499,999 2.00% 2.04% 1.70%
$500,000 - $999,999 1.25% 1.27% 1.00%
$1,000,000 or more None None *
ADJUSTABLE RATE FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Up to $999,999 1.00% 1.01% 0.85%
$1,000,000 or more None None *
*The Distributor may, at its discretion, pay investment dealers who initiate and
are responsible for such purchases of the Funds (except the Adjustable Rate
Fund and investments by plans under Section 401(a) or 401(k) of the Code whose
total investments 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, including purchases by Retirement Plans, 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 in Funds other than the Adjustable Rate Fund, 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. 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. Section 401(a), 401 (k), 457 and 403(b) plans that have total
investment assets of at least $10 million are eligible to purchase Class Y
shares of certain Funds, which are described in a separate prospectus.
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
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,
and are 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 six 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 a series of 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 charge will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. The CDSC equals the following percentages of the
dollar amounts subject to the charge:
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE*
- ------------------- -------------------------
1st ............................................... 5%
2nd ............................................... 4%
3rd ............................................... 3%
4th ............................................... 3%
5th ............................................... 2%
6th ............................................... 1%
thereafter ........................................ 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
*For any Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the 1st year, 3% if
redemption occurs within the 2nd or 3rd year, 2% if redemption occurs within
the 4th year, 1% if redemption occurs within the 5th year and no CDSC for
redemptions after the 5th year. For the purpose of the CDSC, it is assumed that
the shares held the longest are the first to be redeemed.
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.
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 six 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 six 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.
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.
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 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.
Each 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
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 of each Fund 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 0.025% 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 (Class A Shares Only)." 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
registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares. Such compensation may include (i) full reallowance of the
sales charge on the Class A shares; (ii) additional compensation with respect to
the sale of Class A, B and C shares; (iii) 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 any Fund at a reduced
sales charge of 1.50% of the public offering price (or 1.52% of the net
amount invested).
[] SHARES OF THE ADJUSTABLE RATE FUND AND LIMITED TERM U.S. GOVERNMENT FUND MAY
BE PURCHASED AT NET ASSET VALUE, without payment of sales charge or CDSC, by
trust companies and bank trust departments for funds over which they exercise
discretionary investment authority and which they hold in a fiduciary,
agency, custodial or similar capacity, by corporations that purchase shares
for their own account and by credit unions, provided that the amount invested
is $250,000 or more in the case of the Adjustable Rate Fund and $5 million or
more in the case of the Limited Term U.S. Government Fund.
[] ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to
investments by any state, county or city or any instrumentality, department,
authority or agency thereof that has determined that a Fund is a legally
permissible investment and that is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of any registered investment company.
[] CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to
investments of $25,000 or more in the Funds by (1) clients of an adviser or
subadviser to any series of the Trusts, any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts and the
parents, spouses and children of the foregoing; (2) any individual who is a
participant in a Keogh or IRA Plan under a prototype Plan document of an
adviser or 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 Sections 401(a), 403(b), 401 (k) and 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 by
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,
subadvisers, the Distributor, New England Life Insurance Company ("NELICO")
or MetLife or any other company affiliated with NELICO or MetLife; current
and former directors and trustees of the Trusts, NELICO or MetLife or their
predecessor companies; agents and general agents of NELICO or MetLife and
their 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 NELICO or MetLife or
of any insurance company affiliated with NELICO or MetLife.
[] Shareholders of Reich and Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Funds at net asset value and
without the imposition of a sales charge.
[] Shares of the Funds are available at net asset value to investors purchasing
shares of the Funds with redemption proceeds from other mutual fund complexes
on which the investor has paid a front-end sales charge or was subject to a
deferred sales charge, whether or not paid, if such redemption occurred no
more than 30 days prior to such purchase. The Distributor will require
satisfactory evidence of your qualification for this waiver. Please call the
Distributor for more information.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
O W N I N G F U N D S H A R E S
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts 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 (the "California and New
York Funds") (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 the California or New York Fund shares
for at least six months; otherwise, you will pay the difference between any
sales charge you have already paid on your California or New York Fund shares
and the higher sales charge of the series into which you are exchanging. If you
exchange Class A shares of the Adjustable Rate Fund (and shares of the Money
Market Funds acquired through exchanges of such shares) 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 series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. 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.
CLASS C SHARES
You may exchange Class C shares of any 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.
CLASS Y SHARES
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection with
deferred compensation plans offered by NELICO for Class Y shares of any series
of the Trusts which offers Class Y shares. To obtain a prospectus and more
information about Class Y shares, please call the Distributor toll free at
1-800-225-5478.
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALL Y EXCHANGED EACH MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS. THE MINIMUM MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. 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.
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, 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 $1,000 (or the total net asset value
of your account, whichever is less), except that under the Automatic Exchange
Plan, the minimum is $100. All exchanges are subject to the eligibility
requirements of the series into which you are exchanging. In connection with any
exchange, you must obtain and carefully read 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.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
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 distributes net realized 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 capital gain distribution, you should be aware that
a portion of the purchase price may be returned to you as a taxable
distribution.
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, which 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 and carefully read a copy of that fund's
prospectus.
- -------------------------------------------------------------------------------
<PAGE>
S E L L I N G F U N D S H A R E S
5 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
[GRAPHIC OMITTED] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[GRAPHIC OMITTED] 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. Class A and Class C shares
only may also be redeemed 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) on a day when the Funds
are open for business 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 your address of record
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) on a day when the Funds are open for business, or for Class A and Class C
shares 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.
[GRAPHIC OMITTED] BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by New England Funds, L.P. Signature guarantees by
notaries public are not acceptable.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
[GRAPHIC OMITTED] 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 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.
[GRAPHIC OMITTED] 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 (based on the day you establish
your plan). 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 sent to you within seven days after State Street Bank or
the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10 days
after such purchase or transfer, the Fund may withhold redemption proceeds until
the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax-qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency that makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income Fund,
determines, in its sole discretion, that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of readily marketable securities held by the Fund in lieu
of cash. Securities used to redeem Fund shares in kind will be valued in
accordance with the Funds' procedures for valuation described under "Fund
Details -- How Fund Share Price Is Determined." Securities distributed by a Fund
in kind will be selected by Back Bay Advisors, or Loomis Sayles in the case of
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 Fund's 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, as amended (the "1940 Act"). See "Redemptions"
in Part II of the Statement.
REPURCHASE OPTION
(CLASS A SHARES ONLY)
You may apply your proceeds from the redemption of Class A shares of the Funds
(without a sales charge) to the repurchase of Class A shares of any series of
the Trusts. To qualify, you must reinvest some or all of the proceeds within 120
days after your redemption and notify New England Funds or your investment
dealer at the time of reinvestment that you are taking advantage of this
privilege. You may reinvest the proceeds either by returning the redemption
check or by sending your check for some or all of the redemption amount. Please
note: for federal income tax purposes, a redemption is a sale that involves tax
consequences (even if the proceeds are later reinvested). Please consult your
tax adviser.
<PAGE>
F U N D D E T A I L S
HOW FUND SHARE PRICE IS DETERMINED
Each Fund's subadviser, 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 and High Income Funds, 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 and futures 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. Debt securities with remaining maturities of 60 days or
less are valued at 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 and High
Income Funds, 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.
- --------------------------------------------------------------------------------
CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets - Liabilities
- ------------------------------------------------- = Net Asset Value (NAV)
Total Number of Outstanding Shares in a Class
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS THE APPLICABLE
SALES CHARGE. THE PUBLIC OFFERING PRICE FOR CLASS B AND CLASS C SHARES IS THE
NAV.
- --------------------------------------------------------------------------------
INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to 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 INCOME TAXES. The Funds 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 under 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 during
the twelve months ending October 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 for shareholders who are U.S. citizens or corporations. 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, 17.9% of the distributions of the Adjustable Rate Fund
during the current fiscal year are expected to qualify for such tax-free
treatment (due to the Fund's holdings in U.S. Treasury Notes). 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 municipal securities 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 "Investment Strategy -- 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. 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 under
your local and state tax laws. The Fund will report annually on a state-by-state
basis the source of income the Fund receives on tax-exempt bonds that was paid
out as dividends during the preceding year.
THE FUNDS' EXPENSES
In addition to the management fee paid to NEFM, each Fund pays all expenses not
borne by its 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, 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 NELICO
or MetLife, NEFM, Back Bay Advisors, Loomis Sayles or their affiliates, other
than affiliated registered investment companies. In the case of Funds that offer
Class Y shares, certain expenses may be 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 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 Limited Term U.S. Government Fund pays
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 1997 from previous plan years with respect to the
Class A shares are as follows: $1,583,658 for the Government Securities Fund;
$2,272,723 for the Limited Term U.S. Government Fund; $1,929,283 for the
Adjustable Rate Fund; $1,919,349 for the Bond Income Fund; $0 for the Strategic
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.
In addition, the Distributor performs certain accounting and administrative
services for the Bond Income Fund, Municipal Income Fund, and Government
Securities Fund. For those services, each such Fund reimburses the Distributor
for all or part of its expenses of providing these services to the Fund, which
includes the following: (i) expenses for personnel performing bookkeeping,
accounting, internal auditing, financial reporting and clerical functions
relating to the Funds, (ii) expenses for services required in connection with
the preparation of registration statements and prospectuses, shareholder reports
and notices, proxy solicitation materials furnished to shareholders of the Funds
or regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities.
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 will be 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 those Funds' Class A, Class
B or (in the case of the Limited Term, Strategic Income and Bond Income Funds)
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, an open-end management investment company, 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, an open-end management investment company, 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
investment operations in 1991.
[] When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive dividends as determined by
the respective Trust's trustees and to cast a vote for each share you own at
shareholder meetings. Shares of each Fund vote separately from shares of
other series of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters relating to a
class's Rule 12b-1 plan, for which only shares of that class are entitled to
vote.
[] Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Government
Securities, Bond Income and Municipal Income Funds are fundamental. The
investment objectives of the Adjustable Rate and Strategic Income Funds 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.
[] 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 Class Y shares to qualified investors. 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 may bear 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 $1,000
for all accounts, except for those indicated below), that Fund may close your
account and send the proceeds to you. Shareholders who are affected by this
policy will be notified of the Fund's intention to close the account and will
have 60 days immediately following the notice to bring the account up to the
minimum. The minimum does not apply to Keogh, pension and profit sharing
plans, automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in net asset value per share.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is
possible that a Trust might become liable for any misstatements in this
prospectus that relate to the other Trust. The trustees of each Trust have
considered this possible liability and approved the use of this combined
prospectus for Funds of both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance information and is
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.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of a Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
<PAGE>
A P P E N D I X A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa are
rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
A P P E N D I X B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
SECURITY OF NET ASSETS
-------- -------------
Common Stock ................................................... 1%
Preferred Stock ................................................ 6%
Short-term Obligations and Other Assets ........................ 3%
Debt -- Unrated ................................................ 0%
Debt -- Standard and Poor's Rating
AAA ........................................................ 0%
BBB ........................................................ 0%
BB ......................................................... 11%
B .......................................................... 69%
CCC ........................................................ 10%
The chart above indicates the composition of the High Income Fund for the fiscal
year ended December 31, 1996, 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. 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.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
SECURITY OF NET ASSETS
-------- -------------
Preferred Stock ................................................ 0%
Short-term Obligations and Other Assets ........................ 0%
Common Stock ................................................... 0%
Debt -- Unrated ................................................ 7%
Debt -- Standard and Poor's Rating
AAA ........................................................ 8%
AA ......................................................... 8%
A .......................................................... 11%
BBB ........................................................ 35%
BB ......................................................... 13%
B .......................................................... 14%
CCC and lower .............................................. 4%
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1996, 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.
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER Xb51-0597
<PAGE>
[GRAPHIC OMITTED]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -----------------------------------------------------------------------------
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, 1997
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, each 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 Class Y shares to 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, 1997 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, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
3 FUND EXPENSES AND FINANCIAL INFORMATION
3 Schedule of Fees
5 Financial Highlights
- ---------------------------------------------------------------------
12 INVESTMENT STRATEGY
12 Investment Objectives
12 How the Funds Pursue Their Objectives
12 Fund Investments
- ---------------------------------------------------------------------
17 INVESTMENT RISKS
- ---------------------------------------------------------------------
23 FUND MANAGEMENT
- ---------------------------------------------------------------------
25 BUYING FUND SHARES
25 Minimum Investment
25 Ways to Buy Fund Shares
25 [] By wire transfer
26 [] By mail
- ---------------------------------------------------------------------
27 OWNING FUND SHARES
27 Exchanging Among New England Funds
27 Fund Dividend Payments
- ---------------------------------------------------------------------
29 SELLING FUND SHARES
29 Ways to Sell Fund Shares
29 [] By telephone
29 [] By mail
- ---------------------------------------------------------------------
31 FUND DETAILS
31 How Fund Share Price Is Determined
31 Income Tax Considerations
32 Performance Criteria
33 Additional Facts About the Funds
35 Appendix A
36 Appendix B
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
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 NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. BOND INCOME
SECURITIES FUND GOVERNMENT FUND FUND
----------------- ----------------- ------------
Class Y Class Y Class Y
------- ------- -------
Management Fees 0.65% 0.64% 0.43%
12b-1 Fees None None None
Other Expenses 0.42% 0.26% 0.37%
Total Fund Operating Expenses 1.07% 0.90% 0.80%
NEW ENGLAND ADJUSTABLE
RATE U.S. GOVERNMENT FUND
-------------------------
Class Y
-------
Management Fees
(after voluntary fee waiver and expense reduction) 0.30%*
12b-1 Fees None
Other Expenses 0.15%
Total Fund Operating Expenses
(after voluntary fee waiver and expense reduction) 0.45%*
NEW ENGLAND
STRATEGIC INCOME FUND
------------------------
Class Y
-------
Management Fees 0.65%
12b-1 Fees None
Other Expenses 0.38%
Total Fund Operating Expenses 1.03%
* Without the voluntary fee waiver and expense reduction by the Fund's adviser
Management Fees would be 0.54% and Total Fund Operating Expenses would be
0.69%. These voluntary limitations can be terminated by the Fund's adviser
at any time. See "Fund Management."
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at period end. The 5% return and expenses in
the Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which may be more or less than those shown.
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. ADJUSTABLE RATE U.S.
SECURITIES FUND GOVERNMENT FUND GOVERNMENT FUND
-------------------- ------------------- ---------------------
Class Y Class Y Class Y
------- ------- -------
1 year $ 11 $ 9 $ 5
3 years $ 34 $ 29 $14
5 years $ 59 $ 50 $25
10 years $131 $111 $57
NEW ENGLAND STRATEGIC NEW ENGLAND
INCOME FUND BOND INCOME FUND
--------------------- -------------------
Class Y Class Y
------- -------
1 year $ 11 $ 8
3 years $ 33 $26
5 years $ 57 $44
10 years $126 $99
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(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 periods. 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 1996, 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 periods.)
The Financial Highlights presented on pages 6 through 11 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 reports of Price
Waterhouse LLP and Coopers & Lybrand LLP are incorporated by reference in Part
II of the Statement and may be obtained by shareholders. 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.
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS Y
---------------------------------------------------------------------
MAR. 31 (A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------------------- ------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $11.20 $10.44 $11.71
------ ------ ------
Income from investment operations
Net investment income 0.54 0.80 0.74
Net gains (losses) on investments (both realized
and unrealized) (0.77) 1.26 (0.63)
------ ------ ------
Total income (loss) from investment operations (0.23) 2.06 0.11
------ ------ ------
Less distributions
Distributions (from net investment income) (0.53) (0.79) (0.75)
Total distributions (0.53) (0.79) (0.75)
------ ------ ------
Net asset value, end of period $10.44 $11.71 $11.07
====== ====== ======
Total return (%) (2.0)(c) 20.3 1.1
Ratios/Supplemental data
Net assets, end of period (000) $4,104 $7,364 $6,384
Ratio of operating expenses to average net assets (%) 0.93(b) 1.10 1.07
Ratio of net investment income to average net assets (%) 7.25(b) 6.94 6.70
Portfolio turnover rate (%) 809 559 462
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
</TABLE>
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------------------
MAR. 31 (A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------------------- ------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $12.11 $11.51 $12.13
------ ------ ------
Income from investment operations
Net investment income 0.71 0.86 0.85
Net gains (losses) on investments
(both realized and unrealized) (0.74) 0.63 (0.54)
------ ------ ------
Total income (loss) from investment operations (0.03) 1.49 0.31
------ ------ ------
Less distributions
Distributions (from net investment income) (0.57) (0.87) (0.86)
------ ------ ------
Total distributions (0.57) (0.87) (0.86)
------ ------ ------
Net asset value, end of period $11.51 $12.13 $11.58
====== ====== ======
Total return (%) (c) (0.80) 13.3 2.8
Ratios/Supplemental data
Net assets, end of period (000) $1,822 $5,723 $5,313
Ratio of operating expenses to average net assets (%) 0.83(b) 0.87 0.90
Ratio of net investment income to average net assets (%) 7.15(b) 7.53 7.48
Portfolio turnover rate (%) 244 247 327
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------
YEAR ENDED
DEC. 31,
-------------------------------------------
1995 1996
---- ----
<S> <C> <C>
Net asset value, beginning of period $10.95 $12.40
------ ------
Income from investment operations
Net investment income 0.80 0.87
Net gains or losses on investments (both realized and unrealized) 1.44 (0.34)
------ ------
Total income from investment operations 2.24 0.53
------ ------
Less distributions
Distributions (from net investment income) (0.79) (0.87)
------ ------
Total distributions (0.79) (0.87)
------ ------
Net asset value, end of period $12.40 $12.06
====== ======
Total return (%) 21.0 4.6
Ratios/Supplemental data
Net assets, end of period (000) $2,241 $1,844
Ratio of operating expenses to average net assets (%) 0.89 0.80
Ratio of net investment income to average net assets (%) 7.06 7.25
Portfolio turnover rate (%) 81 104
</TABLE>
<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 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.50 $7.50 $7.46 $7.45 $7.20 $7.37
----- ----- ----- ----- ----- -----
Income from investment operations
Net investment income 0.09 0.42 0.33 0.37 0.47 0.43
Net gains or losses on
investments (both
realized and unrealized)
0.00 (0.06) (0.03) (0.31) 0.14 (0.01)
----- ----- ----- ----- ----- -----
Total income from
investment operations
0.09 0.36 0.30 0.06 0.61 0.42
----- ----- ----- ----- ----- -----
Less distributions
Distributions (from net
investment income) (0.09) (0.40) (0.31) (0.31) (0.44) (0.42)
----- ----- ----- ----- ----- -----
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44) (0.42)
----- ----- ----- ----- ----- -----
Net asset value, end of
period $7.50 $7.46 $7.45 $7.20 $7.37 $7.37
===== ===== ===== ===== ===== =====
Total return (%)(d) 1.2 4.9 4.0 0.8 8.6 5.8
Ratios/Supplemental data
Net assets, end of period
(000) $60,684 $294,687 $734,251 $489,637 $331,112 $222,809
Ratio of operating
expenses to average net
assets (%)(b) 0.50(c) 0.57 0.60 0.60 0.66 0.70
Ratio of net investment
income to average net
assets (%) 6.43(c) 5.39 4.39 4.85 6.29 6.39
Portfolio turnover rate (%)
52 49 54 17 73 54
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ------------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.52 $7.45 $7.20 $7.37
----- ----- ----- -----
Income from investment operations
Net investment income 0.08 0.29 0.41 0.37
Net gains (losses) on investments (both realized and
unrealized) (0.08) (0.29) 0.14 (0.02)
----- ----- ----- -----
Total income from investment operations 0.00 0.00 0.55 0.35
----- ----- ----- -----
Less distributions
Distributions (from net investment income) (0.07) (0.25) (0.38) (0.36)
----- ----- ----- -----
Total distributions (0.07) (0.25) (0.38) (0.36)
----- ----- ----- -----
Net asset value, end of period $7.45 $7.20 $7.37 $7.36
===== ===== ===== =====
Total return (%)(d) 0.0 0.1 7.8 4.9
Ratios/Supplemental data
Net assets, end of period (000) $855 $2,056 $2,368 $2,821
Ratio of operating expenses to average net assets (%)(b)
1.35(c) 1.35 1.41 1.45
Ratio of net investment income to average net assets (%)
3.50(c) 4.10 5.54 5.64
Portfolio turnover rate (%) 54 17 73 54
(a) The Fund commenced operations on October 18, 1991. Class B shares were first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class A average net assets. From May 1, 1995
through June 1, 1995 expenses were voluntarily limited to 0.65% of Class A average net assets. The ratio of operating
expenses to average net assets without giving effect to this expense limitation would have been 0.89% for the year ended
December 31, 1995 and 0.94% for the year ended December 31, 1996. From April 1, 1992 through May 1, 1995 expenses were
voluntarily limited to 0.60% of Class A average net assets. The ratio of operating expenses to average net assets for
Class A shares without giving effect to this expense limitation would have been 0.96%, 0.86% and 0.88% for the years
ended December 31, 1992, 1993 and 1994, respectively. From October 19, 1991 through March 31, 1992, expenses were
voluntarily limited to 0.50% of average net assets. The ratio of operating expenses to average net assets without giving
effect to this expense limitation would have been 1.26% for the period ended December 31,
1991.
Commencing June 1, 1995 expenses were voluntarily limited to 1.45% of Class B average net assets. From May 1, 1995
through June 1, 1995 expenses were voluntarily limited to 1.40% of Class B average net assets. The ratio of operating
expenses to average net assets without giving effect to this expense limitation would have been 1.65% for the year ended
December 31, 1995 and 1.69% for the year ended December 31, 1996. From September 13, 1993 through May 1, 1995 expenses
were voluntarily limited to 1.35% of Class B average net assets. The ratio of operating expenses to average net assets
for Class B shares without giving effect to this expense limitation would have been 1.61% for the period ended December
31, 1993 and 1.63% for the year ended December 31, 1994.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a CDSC in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------ -------------------------------- ---------------------------
MAY 1 (A) YEAR MAY 1 (A) YEAR MAY 1 (A) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1995 1996 1995 1996 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.50 $12.99 $12.50 $12.99 $12.50 $12.99
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income 0.74 1.05 0.68 0.95 0.67 0.95
Net gains or losses on
investments (both realized
and unrealized) 0.49 0.73 0.49 0.73 0.49 0.72
------ ------ ------ ------ ------ ------
Total income from investment
operations 1.23 1.78 1.17 1.68 1.16 1.67
------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net
investment income) (0.73) (1.05) (0.67) (0.95) (0.66) (0.95)
Distributions (from net
realized capital gains) 0.00 (0.36) 0.00 (0.36) 0.00 (0.36)
Distributions (in excess of net
investment income) (0.01) 0.00 (0.01) 0.00 (0.01) 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.74) (1.41) (0.68) (1.31) (0.67) (1.31)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.99 $13.36 $12.99 $13.36 $12.99 $13.35
====== ====== ====== ====== ====== ======
Total return (%)(c) 10.3 14.5 9.7 13.7 9.7 13.6
Ratios/Supplemental data
Net assets, end of period (000)
$36,939 $90,729 $38,767 $93,408 $12,252 $31,746
Ratio of operating expenses to
average net assets (%) 0.93(b) 0.96 1.68(b) 1.71 1.68(b) 1.71
Ratio of net investment income
to average net assets (%)
8.75(b) 8.23 8.00(b) 7.48 8.00(b) 7.48
Portfolio turnover rate (%) 22 52 22 52 22 52
(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 no
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 (%):
1.58(b) 1.31 2.33(b) 2.06 2.33(b) 2.06
</TABLE>
<PAGE>
INVESTMENT STRATEGY
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.(R) ("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 it will invest primarily in U.S.
Government securities, including U.S. Treasury bills (maturity of one year or
less), U.S. Treasury notes (maturity of one to ten years), and U.S. Treasury
bonds) generally maturities greater than ten years), and mortgage-backed
securities issued or guaranteed by U.S. Government agencies, including but not
limited to the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Under normal market conditions, the Fund intends to
maintain a dollar-weighted average duration of between seven and eight years.
The Fund may hold individual securities with duration longer or shorter than
seven or eight years (e.g., a security with a duration of seven years will
typically have a maturity of approximately 10 years, given the current interest
rate environment) as long as the average duration remains within these limits.
See "Duration" below.
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 may also
engage in securities lending.
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.
[] 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. 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 securities of emerging
markets. 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 rated in the
rating categories of B (by Moody's or S&P) or higher 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 and in Rule 144A 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, Swap Contracts 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, High Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward contract is a
contract that obligates parties to the contract to exchange specified amounts of
different currencies at a specified future date. For example, a party 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, High 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 the Bond Income, High Income and Strategic Income 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.
[] DURATION
"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
Government Securities, Limited Term U.S. Government and Bond Income Funds will
seek to maintain an average portfolio duration within specified limits as set
forth in the "Fund Investments" section for each Fund; however, each Fund's
portfolio may include fixed-income securities with durations longer or shorter
than the stated duration limits, so long as the Fund maintains an average
portfolio duration that is consistent with its investment strategy.
The values of securities having shorter durations generally fluctuate less than
securities with longer durations. In general, investments in short and
intermediate term debt securities are less sensitive to interest rate changes
and provide more stability than longer term investments. For example, based on
yields of 6.60% for a five-year U.S. Treasury security and 6.95% for a 30-year
U.S. Treasury security, a 1% increase in interest rates would be expected to
result in approximately a 4.16% reduction in the value of the five-year security
(duration 4.16) as compared to approximately a 12.5% reduction in the value of
the 30-year security (duration 12.5). 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.
[] 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.
<PAGE>
INVESTMENT RISKS
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 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 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 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, 1996, 19.5% of the average month-end
net assets of the Bond Income Fund were invested in fixed-income securities
rated in the rating category just below investment grade (BBB/Baa). The
portfolio composition of the Strategic Income Fund during the fiscal year ended
December 31, 1996 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, the 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.
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.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign taxes on the
net yield available to the Fund and its shareholders. Compliance with foreign
tax law may reduce the Fund's net income available for distribution to
shareholders.
[] MORTGAGE-RELATED SECURITIES (ALL FUNDS)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans generally may
be prepaid at any time. As a result, if a Fund purchases these assets at a
premium, a faster-than-expected prepayment rate will reduce yield to maturity,
and a slower-than- expected prepayment rate will have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-related securities at
a discount, faster-than-expected prepayments will increase, and
slower-than-expected prepayments will reduce, yield to maturity. Prepayments,
and resulting amounts available for reinvestment by the Fund, are likely to be
greater during a period of declining interest rates and, as a result, are likely
to be reinvested at lower interest rates. Accelerated prepayments on securities
purchased at a premium may result in a loss of principal if the premium has not
been fully amortized at the time of prepayment. Although these securities will
decrease in value as a result of increases in interest rates generally, they are
likely to appreciate less than other fixed-income securities when interest rates
decline because of the risk of prepayments. In addition, an increase in interest
rates would also increase the inherent volatility of the Fund by increasing the
average life of the Fund's portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market interest
rate. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag changes in prevailing
market interest rates. Also, some ARMs (or the underlying mortgages) are subject
to caps or floors that limit the maximum change in interest rate during a
specified period or over the life of the security. As a result, changes in the
interest rate on an ARM may not fully reflect changes in prevailing market
interest rates during certain periods. Because of the resetting of interest
rates, ARMs are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
[] ASSET-BACKED SECURITIES (LIMITED TERM U.S. GOVERNMENT FUND)
The securitization techniques used to develop mortgage securities are also being
applied to a broad range of other assets. Through the use of trusts and special
purpose corporations, assets such as automobile and credit card receivables are
being securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to a CMO structure. Generally
the issuers of asset-backed bonds, notes or pass-through certificates are
special purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans. Instruments
backed by pools of receivables are similar to mortgage-backed securities in that
they are subject to unscheduled prepayments of principal prior to maturity. When
the obligations are prepaid, the Fund will ordinarily reinvest the prepaid
amounts in securities the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
that prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss.
[] COLLATERALIZED MORTGAGE OBLIGATIONS (ALL FUNDS)
A CMO is a security backed by a portfolio of mortgages or mortgage securities
held under an indenture. The underlying mortgages or mortgage securities are
issued or guaranteed by the U.S. Government or an agency or instrumentality
thereof. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage securities. CMOs
are issued with a number of classes or series which have different maturities
and which may represent interests in some or all of the interest or principal on
the underlying collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally will be retired
prior to its maturity. Thus, the early retirement of a particular class or
series of CMO held by the Fund would have the same effect as the prepayment of
mortgages underlying a mortgage pass-through security. CMOs may be considered
derivative securities.
[] "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that receive
different proportions of the interest and principal distribution on a pool of
U.S. or Foreign Government Securities or mortgage assets. In some cases, one
class will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). Stripped securities commonly have greater market volatility than other
types of fixed-income securities. In the case of stripped mortgage securities,
if the underlying mortgage assets experience greater than anticipated payments
of principal, a Fund may fail to recoup fully its investments in IOs. The staff
of the SEC has indicated that it views stripped mortgage securities as illiquid
unless the securities are issued by the U.S. Government or its agencies and are
backed by fixed-rate mortgages. The Funds intend to abide by the staff's
position. Stripped securities may be considered derivative securities.
[] ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND)
PAY-IN-KIND SECURITIES (STRATEGIC INCOME FUND)
Zero coupon securities are issued at a significant discount from face value and
pay interest only at maturity, rather than at intervals during the life of the
security. Pay-in-kind securities pay dividends or interest in the form of
additional securities of the issuer, rather than in cash. The prices of
pay-in-kind or zero coupon securities may react more strongly to changes in
interest rates than the prices of many other securities. The Funds are required
to accrue and distribute income from pay-in-kind and zero coupon securities on a
current basis, even though the Funds will not receive the income currently in
cash. Thus a Fund may have to sell other investments to obtain cash needed to
make income distributions.
[] WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the time
a Fund commits to buy it and the payment date, the Fund may sustain a loss. The
risk of this loss is in addition to the Fund's risk of loss on the securities
actually in its portfolio at the time. In addition, when a Fund buys a security
on a when-issued basis, it is subject to the risk that market rates of interest
will increase before the time the security is delivered, with the result that
the yield on the security delivered to the Fund may be lower than the yield
available on other, comparable securities at the time of delivery. Each Fund
will set aside with its custodian certain assets to provide for satisfaction of
its obligations under when-issued transactions.
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
(ALL FUNDS EXCEPT ADJUSTABLE RATE FUND)
Except as otherwise noted, the following discussion applies to all Funds except
the Adjustable Rate Fund. The Funds may engage in a variety of transactions
involving the use of options and futures with respect to U.S. or Foreign
Government Securities or corporate fixed-income securities (in the case of the
Strategic Income Fund) for purposes of hedging against changes in interest
rates.
A Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. A Fund may buy and sell futures contracts on
securities, securities indexes or currencies. A Fund may also enter into swap
contracts. A Fund may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the value of other
assets that a Fund owns or intends to acquire. A Fund may also conduct foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. Options, futures and swap
contracts fall into the broad category of financial instruments known as
"derivatives" and involve special risks. Use of options, futures or swaps for
other than hedging purposes may be considered a speculative activity, involving
greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There are
two parties to a typical options transaction: the "writer" and the "buyer." A
call option gives the buyer the right to buy a security or other asset (such as
an amount of currency or a futures contract) from, and a put option the right to
sell a security or other asset to, the option writer at a specified price, on or
before a specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or other asset
if the option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from writing an option,
which may increase its return if the option expires or is closed out at a
profit. If a Fund as the writer of an option is unable to close out an unexpired
option, it must continue to hold the underlying security or other asset until
the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or acceptance) of the specified instrument, futures are usually closed out
before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Fund will realize a
gain (or loss). A Fund may not purchase or sell futures contracts or purchase
related options if immediately thereafter the sum of the amount of deposits for
initial margin or premiums on the existing futures and related options positions
would exceed 5% of the market value of the Fund's net assets. Transactions in
futures and related options involve the risks 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 the risk that 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 costs and 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 of 1986, as amended (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 and High Income Funds
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 "Miscellaneous Investment Practices -- Futures, Options
and Swap Contracts" in Part II of the Statement.
[] RULE 144A SECURITIES (STRATEGIC INCOME AND BOND INCOME FUNDS)
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 securities 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.
<PAGE>
FUND MANAGEMENT
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street, Boston,
Massachusetts 02116, serves as the adviser to each of the Funds. NEFM oversees,
evaluates and monitors the subadvisory services provided to each Fund and
furnishes general business management and administration to each Fund. NEFM does
not determine what investments will be purchased by 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 lead portfolio manager since the Fund's inception in May
1995. Mr. Fuss joined Loomis Sayles in 1976. Kathleen C. Gaffney, Vice President
of Loomis Sayles, has been assisting Mr. Fuss as a portfolio manager of the Fund
since April 1996. Ms. Gaffney joined Loomis Sayles in 1984.
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>
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 0.550% of the first $200 million
0.510% of the next $300 million
0.470% 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 and 0.650% of the first $200 million
Limited Term U.S. Government Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500 million
Strategic Income Fund 0.650% of the first $200 million
0.600% of amounts in excess of $200 million
</TABLE>
NEFM pays each Fund's 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> <C>
Adjustable Rate Fund Back Bay Advisors 0.2750% of the first $200 million
0.2550% of the next $300 million
0.2350% of amounts in excess of $500 million
Bond Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund and Back Bay Advisors 0.3250% of the first $200 million
Limited Term U.S. 0.3125% of the next $300 million
Government Fund 0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.3500% of the first $200 million
0.3000% 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.
NEFM and Back Bay Advisors 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 the voluntary fee reduction described above is terminated, the prospectus of
the Adjustable Rate 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., is a wholly-owned
subsidiary of Metropolitan Life Insurance Company ("MetLife").
In placing portfolio transactions for the Funds, Back Bay Advisors and 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 and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Fund. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with NEIC, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM provides executive and other personnel for the management of the Trusts.
Each Trust's Board of Trustees supervises the affairs of that Trust as conducted
by NEFM and the Funds' subadvisers.
In addition to the management fee paid to NEFM, each Fund pays all expenses not
borne by its adviser, 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 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, NEFM,
Back Bay Advisors, Loomis Sayles or their affiliates, other than affiliated
registered investment companies. Certain expenses may be 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.)
The Funds have applied for an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers other than the existing subadvisers of the Funds when approved by
the relevant Trust's Board of Trustees, without obtaining shareholder approval.
The exemptive request also seeks to permit, without shareholder approval, the
terms of an existing subadvisory agreement to be changed or the employment of an
existing subadviser to be continued after events that would otherwise cause an
automatic termination of a subadvisory agreement, when such changes or
continuation are approved by the relevant Trust's Board of Trustees.
Shareholders would be notified of any subadviser changes.
<PAGE>
BUYING FUND SHARES
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 of at least $10 million, and by New England Life Insurance Company
("NELICO") or MetLife and any other insurance company affiliated with NELICO or
MetLife 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 NELICO or MetLife or of any other insurance company
affiliated with NELICO or MetLife ("Separate Accounts"). Class Y shares may also
be purchased by wrap fee programs of certain broker-dealers as to which no
service or marketing fees are paid to such broker-dealers by the Fund, NEFM or
the Distributor ("Wrap Fee Programs"). There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Insurance Company
Accounts or Wrap Fee Programs. 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 Retirement 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.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through Wrap Fee Programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the same Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from that
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Special Accounts,
Insurance Company Accounts, Wrap Fee Programs or Service Accounts.
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) on a day when the Funds are open for business. 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, simply complete the attached application and return
it, with a check payable to New England Funds and mailed to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551. All purchases made by check should be in
U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not be accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
Class Y shares of a Fund may also be purchased by exchanging securities on
deposit with a custodian acceptable to the Fund's subadviser or by a combination
of such securities and cash. Purchase of shares of a Fund 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 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 "Fund Details -- How Fund Share Price Is
Determined," as of the time of the Fund's next determination of net asset value
after such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund upon receipt
by the investor from the issuer. A gain or loss for federal income tax purposes
would be realized upon the exchange by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in exchange
for shares of a Fund it advises unless (1) the Fund's subadviser, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933 or otherwise; (3) the securities are eligible to be
acquired under the Fund's investment policies and restrictions; and (4) the
securities have a value which is readily ascertainable (not established by
evaluation procedures alone) as evidenced by a listing on the New York Stock
Exchange, the American Stock Exchange, NASDAQ or the principal securities
exchange of countries in which the Fund may invest. No investor owning 5% or
more of the Fund's shares may purchase additional Fund shares by exchange of
securities (other than shares of other 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 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 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.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<PAGE>
OWNING FUND SHARES
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"). Agents, general agents, directors and senior
officers of NELICO and its insurance company subsidiaries may, at the discretion
of NELICO, elect to exchange Class Y shares of a series of the Trusts in a
NELICO Deferred Compensation Account for Class A shares of any other series of
the Trusts which do not offer Class Y shares. Class A shares of any series of
the Trusts in a NELICO Deferred Compensation Account may also be exchanged for
Class Y shares of any series of the Trusts. To obtain a prospectus and more
information about Class A shares, please call the Distributor toll free at
1-800-225-5478.
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 eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read 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 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 your instructions. For federal tax purposes, an
exchange of shares of one series of the Trusts for shares of another series is
considered to be a redemption and purchase and, therefore, is considered to be a
taxable event on which you may recognize a gain or a loss.
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- and short-term capital gains) each year and distributes
annually all net realized long- and short-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 capital gain distribution you should be aware that
a portion of the purchase price may be returned to you as a taxable
distribution.
You 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.
<PAGE>
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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 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 and carefully read a copy of
that fund's prospectus.
- --------------------------------------------------------------------------------
<PAGE>
SELLING FUND SHARES
WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[] BY TELEPHONE:
You may redeem (sell) shares by telephone 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) on a day when the
Funds are open for business 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 your address of record on the business
day after your redemption request is received.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that the
Exchange is open.
[] BY MAIL:
You may redeem your shares at their net asset value next determined after
receipt of your request in good order by sending a written request (including
any necessary special documentation) to New England Funds, P.O. Box 8551,
Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by New England Funds, L.P.
Signature guarantees by notaries public are not acceptable.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor for details.
GENERAL
Redemption requests will be effected at the net asset value next determined
after the redemption request is received in proper form by State Street Bank and
Trust Company ("State Street Bank"). Redemption proceeds will normally be mailed
to you within seven days after State Street Bank or the Distributor receives
your request in good order. However, in those cases where you have recently
purchased your shares by check or an electronic funds transfer through the ACH
system and you make a redemption request within 10 days after such purchase or
transfer, the Fund may withhold redemption proceeds until the Fund knows that
the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency that makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income Fund,
determines, in its sole discretion, that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of readily marketable securities held by the Fund in lieu
of cash. Securities used to redeem Fund shares in kind will be valued in
accordance with the Funds' procedures for valuation described under "Fund
Details - How Fund Share Price Is Determined." 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, as amended. See "Redemptions" in Part
II of the Statement.
<PAGE>
FUND DETAILS
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 and
futures 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 during the
twelve months ending October 31 but has not previously distributed. If declared
in December to shareholders of record in that month, and paid the following
January, these distributions will be considered for federal income tax purposes
to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if the Fund is notified that you have underreported
income in the past or if you fail to certify to the Fund that you are not
subject to such withholding. In addition, each Fund will be required to withhold
31% of the gross proceeds of Fund shares you redeem if you have not provided a
correct, certified taxpayer identification number. If you are a tax-exempt
institution, however, these back-up withholding rules will not apply so long as
you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations .
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.
In addition, the Distributor performs certain accounting and administrative
services for the Bond Income Fund and Government Securities Fund. For those
services, each Fund reimburses the Distributor for all or part of its expenses
of providing these services to the Fund, which includes the following: (i)
expenses for personnel performing bookkeeping, accounting, internal auditing,
financial reporting and clerical functions relating to the Funds, (ii) expenses
for services required in connection with the preparation of registration
statements and prospectuses, shareholder reports and notices, proxy solicitation
materials furnished to shareholders of the Funds or regulatory authorities and
reports and questionnaires for SEC compliance, and (iii) registration, filing
and other fees in connection with requirements of regulatory authorities.
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 will be higher.
Each Fund may also include the yield, accompanied by the total return, for each
class of shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's standardized formula by dividing the
adjusted net investment income per share earned during a recent 30-day period by
the maximum offering price of a share of the relevant class (reduced by any
earned income expected to be declared shortly as a dividend) on the last day of
the period. Yield calculations will reflect any voluntary expense limitations in
effect for the Fund during the relevant period.
Each Fund may also present one or more distribution rates for each class in its
sales literature. These rates will be determined by annualizing the class's
distributions from net investment income and net short-term capital gains over a
recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value rather than the maximum offering price is used to calculate
the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of the Funds can be
expected to achieve a higher investment return than the Funds' Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, 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, an open-end management investment company, 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 may bear its own
transfer agency and prospectus printing costs. The minimum initial investment in
Class A, Class B and Class C shares is generally $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 by the relevant Trust's trustees without shareholder approval or
prior notice. The investment objectives of the Government Securities and Bond
Income Funds are fundamental. The investment objectives of the Adjustable Rate
Fund and Strategic Income Fund are not fundamental. The investment objectives of
the Limited Term U.S. Government Fund is not fundamental but, as a matter of
policy, the trustees would not change that objective without shareholder
approval. If there is a change in the investment objective of the Adjustable
Rate or Strategic Income Fund, you should consider whether the Fund remains an
appropriate investment in light of your then current financial position and
needs.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
[] The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has
subcontracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is possible
that a Trust might become liable for any misstatements in this prospectus that
relate to the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined prospectus for Funds of
both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance information and is
made available upon request and without charge. 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.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of the Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
<PAGE>
APPENDIX A: RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa are
rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
APPENDIX B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock...................................... 0%
Short-term Obligations and Other Assets ............. 0%
Common Stock....................................... 0%
Debt-- Unrated...................................... 7%
Debt-- Standard and Poor's Rating
AAA ....................................... 8%
AA......................................... 8%
A.......................................... 11%
BBB........................................ 35%
BB......................................... 13%
B.......................................... 14%
CCC and lower............................... 4%
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1996, 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.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- ------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
PROSPECTUS AND APPLICATION -- MAY 1, 1997
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 New England Funds Trust II (the "Trust"), a registered
open-end management investment company. The 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."
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.
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 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, 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, 1997 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
Page
<S> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
3 Financial Highlights Historical information on the Funds' performance.
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
5 How the Funds Pursue Their Objectives
- ---------------------------------------------------------------------------------------------------------------------
9 INVESTMENT RISKS It is important to understand the risks inherent
in a Fund before you invest.
- ---------------------------------------------------------------------------------------------------------------------
12 FUND MANAGEMENT
- ---------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
13 Minimum Investment Everything you need to know to open and add to
13 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By Exchange from Another New England Fund
14 Sales Charges
16 Reduced Sales Charges (Class A Shares Only)
- ---------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
18 Exchanging Among New England Funds New England Funds offers three convenient ways to
18 Fund Dividend Payments exchange Fund shares.
- ---------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
20 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal Plan
21 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- ---------------------------------------------------------------------------------------------------------------------
FUND DETAILS
23 How Fund Share Price is Determined Additional information you may find important.
23 Income Tax Considerations
24 The Funds' Expenses
25 Performance Criteria
26 Additional Facts About the Funds
</TABLE>
<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 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
CALIFORNIA FUND NEW YORK FUND
-------------- -------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
Maximum Initial Sales Charge Imposed on a
Purchase
(as a percentage of offering price)(1)(2) 2.50% None 2.50% None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable)(2) .......................... (3) 5.00% (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See
"Buying Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any
portion of certain purchases of Class A shares greater than $1,000,000
redeemed within one year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
CALIFORNIA FUND NEW YORK FUND
------------------------ ----------------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
Management Fees
(after voluntary
fee waiver and
expense reduction) 0.03%*** 0.03%*** 0.00%**** 0.00%****
12b-1 Fees ......... 0.25 1.00** 0.25 1.00**
Other Expenses
(after voluntary
fee waiver and
expense reduction
for the New
York Fund) ........ 0.57 0.57 0.60**** 0.60****
Total Fund Operating
Expenses (after
voluntary fee waiver
and expense
reduction) ........ 0.85*** 1.60*** 0.85**** 1.60****
* 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 would be 0.52% for both classes, and Total Fund
Operating Expenses would be 1.34% for Class A shares and 2.09% 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, Management Fees and Other Expenses would be 0.52% and 1.16%,
respectively, for both classes, and Total Fund Operating Expenses would
be 1.93% for Class A shares and 2.68% for Class B shares. These voluntary
limitations can be terminated by the Fund's adviser at any time. See
"Fund Management."
<PAGE>
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 the end of each time
period. The 5% return and expenses in the Example should not be considered
indicative of actual or expected Fund performance or expenses, both of which may
be more or less than those shown.
CALIFORNIA FUND NEW YORK FUND
---------------------- ----------------------
CLASS A CLASS B CLASS A CLASS B
-------- ------------ -------- ------------
(1) (2) (1) (2)
1 year ....................... $ 33 $ 66 $ 16 $ 33 $ 66 $ 16
3 years ...................... $ 51 $ 80 $ 50 $ 51 $ 80 $ 50
5 years ...................... $ 71 $107 $ 87 $ 71 $107 $ 87
10 years* .................... $127 $170 $170 $127 $170 $170
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in
years 9 and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management," and "The Funds" Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(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, which have been examined by Coopers & Lybrand LLP,
independent accountants, whose report thereon is incorporated by reference in
Part II of the Statement and may be obtained by shareholders. 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. The Funds'
annual reports contain additional performance information and are available upon
request and without charge.
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------- -----------------------------------------------
APRIL 23(a) SEPT. 13(a) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31,
DEC. 31, ----------------------------------- DEC. 31, -----------------------------
1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.50 $7.84 $7.08 $7.65 $7.92 $7.84 $7.07 $7.63
----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.26 0.38 0.39 0.39 0.10 0.32 0.33 0.33
Net gains or losses on
investments (both
realized and unrealized) 0.38 (0.76) 0.57 0.00 (0.04) (0.77) 0.56 0.01
----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.64 (0.38) 0.96 0.39 0.06 (0.45) 0.89 0.34
----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from net
investment income) (0.26) (0.38) (0.39) (0.38) (0.10) (0.32) (0.33) (0.33)
Distributions (in excess
of net investment income) (0.04) 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.30) (0.38) (0.39) (0.38) (0.14) (0.32) (0.33) (0.33)
----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period $7.84 $7.08 $7.65 $7.66 $7.84 $7.07 $7.63 $7.64
===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(d) 8.6 (4.9) 13.9 5.3 0.8 (5.8) 12.9 4.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $28,938 $30,293 $32,707 $35,972 $1,849 $5,713 $5,617 $7,590
Ratio of operating
expenses to average net
assets (%)(b) 0.70(c) 0.70 0.70 0.75 1.45(c) 1.45 1.45 1.50
Ratio of net investment
income to average net
assets (%) 4.88(c) 5.07 5.24 5.18 3.68(c) 4.32 4.49 4.43
Portfolio turnover rate (%) 121 212 167 161 121 212 167 161
(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 1
3, 1993, 1.45% of Class B average net assets. Effective September 1, 1996 expenses were voluntarily limited to 0.85% of Class
A average net assets and 1.60% 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 the year
ended December 31, 1994, 1.31% for the year ended December 31, 1995 and 1.34% for the year ended December 31, 1996; the ratio
of operating expenses to average net assets 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, 2.06% for the year ended December 31, 1995 and
2.09% for the year ended December 31, 1996. 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,
1.88% for the year ended December 31, 1995 and 1.93% for the year ended December 31, 1996. The ratio of operating expenses to
average net assets 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, 2.63% for the year ended December 31, 1995 and 2.68% for the year ended
December 31, 1996.
(c) Computed on an annualized basis.
(d) A sales charge of 2.50% (maximum) in the case of the Class A shares and a contingent deferred sales charge in the case of the
Class B shares are not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------- -----------------------------------------------
APRIL 23(a) SEPT. 13(a) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31,
DEC. 31, ----------------------------------- DEC. 31, ------------------------------
1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.50 $7.76 $7.07 $7.68 $7.85 $7.76 $7.06 $7.67
----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.26 0.37 0.38 0.39 0.10 0.32 0.33 0.34
Net gains or losses on
investments (both
realized and unrealized) 0.29 (0.68) 0.62 (0.05) (0.05) (0.69) 0.62 (0.06)
----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.55 (0.31) 1.00 0.34 0.05 (0.37) 0.95 0.28
----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions (from net
investment income) (0.25) (0.38) (0.39) (0.38) (0.10) (0.33) (0.34) (0.33)
Distributions (in excess
of net investment
income) (0.04) 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS (0.29) (0.38) (0.39) (0.38) (0.14) (0.33) (0.34) (0.33)
----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period $7.76 $7.07 $7.68 $7.64 $7.76 $7.06 $7.67 $7.62
===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(d) 7.4 (4.1) 14.5 4.6 0.5 (4.9) 13.7 3.7
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $21,122 $15,875 $16,388 $18,854 $555 $1,152 $1,718 $2,154
Ratio of operating
expenses to average net
assets (%)(b) 0.70(c) 0.70 0.70 0.75 1.45(c) 1.45 1.45 1.50
Ratio of net investment
income to average net
assets (%) 4.88(c) 5.13 5.18 5.15 3.68(c) 4.38 4.43 4.40
Portfolio turnover rate (%) 121 219 155 99 121 219 155 99
(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. Effective September 1, 1996 expenses were voluntarily limited to 0.85% of Class
A average net assets and 1.60% 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 the year
ended December 31, 1994, 1.31% for the year ended December 31, 1995 and 1.34% for the year ended December 31, 1996; the ratio
of operating expenses to average net assets 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, 2.06% for the year ended December 31, 1995 and
2.09% for the year ended December 31, 1996. 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,
1.88% for the year ended December 31, 1995 and 1.93% for the year ended December 31, 1996. The ratio of operating expenses to
average net assets 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, 2.63% for the year ended December 31, 1995 and 2.68% for the year ended
December 31, 1996.
(c) Computed on an annualized basis.
(d) A sales charge of 2.50% (maximum) in the case of the Class A shares and a contingent deferred sales charge in the case of the
Class B shares are not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
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 Fund's 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") or Fitch Investor Services, Inc. ("Fitch") or Aaa, Aa, A or Baa by
Moody's Investors Service, Inc. ("Moody's"), or that are not rated by S&P, Fitch
or Moody's but that are determined by Back Bay Advisors(R), 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 Fitch 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 values of the Funds' shares will fluctuate based on changes in
prevailing market rates and other factors.
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an interest
rate change (i.e., the change in price one can expect from a given change in
yield). Many investors and investment analysts consider duration to be a more
useful measure of price sensitivity than "maturity." The prices (i.e., values)
of securities having shorter durations generally fluctuate less than those of
securities with longer durations. The Funds will seek to maintain an average
portfolio duration of six years or less. The Funds' portfolios may include
fixed-income securities with durations of more than six years, so long as the
average duration of the portfolio is six years or less. A portfolio with an
average duration of six years or less should provide investors with a reduced
risk of loss due to rising interest rates. For example, a 1% increase in
interest rates would be expected to result in a price decrease of approximately
6% for a portfolio with an average duration of six years and a price decrease of
8% for a portfolio with an average duration of eight years. Conversely, a 1%
decrease in interest rates would be expected to result in similar increases in
value. These expectations represent Back Bay Advisors' estimate of portfolio
volatility based upon historic data collected under a wide variety of market
conditions, but there is no assurance that actual volatility will be consistent
with such expectations. By maintaining an average portfolio duration of six
years or less, the Funds seek to achieve a lower level of fluctuations of the
Funds' per share net asset value than funds with longer durations, although this
result cannot be assured.
For temporary purposes (such as pending new investments), for liquidity purposes
(such as to meet repurchase or redemption obligations, or to pay expenses), or
for temporary defensive purposes, a Fund may invest in taxable obligations such
as obligations of the U.S. Government, its agencies or instrumentalities, other
debt securities rated within the four highest grades by either Moody's, S&P or
Fitch, commercial paper rated in the two highest grades by either of such rating
services, certificates of deposit, bankers acceptances and repurchase
agreements. A Fund may also hold its assets in other cash equivalents or in
cash.
The Funds may also purchase and sell interest rate futures contracts and
tax-exempt bond index futures contracts and may write and purchase related
options. The Funds expect that transactions involving futures and options on
futures will help to reduce the volatility of the Funds' net asset values,
although these results cannot be assured.
Although the yield of a tax-exempt fund generally will be lower than that of a
taxable income fund, the net after-tax return to investors may be greater. The
following table illustrates what tax-free investing can mean for you.
The following table does not take into account the effect of income taxes on
social security benefits which may arise as a result of receiving tax-exempt
income, or any alternative minimum tax. Also, a portion of the Funds'
distributions may consist of ordinary income or short-term or long-term capital
gain and will be taxable to you as such.
The following table shows, for different assumed levels of taxable income and
marginal tax rates, the equivalent taxable yield that would be required to
achieve certain levels of tax-exempt yield. Yields shown do not represent actual
yields achieved by the Funds and are not intended as a prediction of future
yields.
TAX FREE INVESTING
CALIFORNIA FUND
<TABLE>
<CAPTION>
1997
COMBINED
FEDERAL
AND
TAXABLE INCOME* CALIFORNIA IF TAX EXEMPT YIELD IS
-------------------------------------- MARGINAL -------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11,633 - 18,357 23,265 - 36,714 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
18,358 - 24,650 36,715 - 41,200 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
24,651 - 25,484 41,201 - 50,968 32.32% 5.91% 7.39% 8.87% 10.34% 11.82%
25,485 - 32,207 50,969 - 64,414 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
32,208 - 59,750 64,415 - 99,600 34.70% 6.13% 7.66% 9.19% 10.72% 12.25%
59,751 - 111,695 99,601 - 151,750 37.42% 6.39% 7.99% 9.59% 11.19% 12.78%
111,696 - 124,650 37.90% 6.44% 8.05% 9.66% 11.27% 12.88%
151,751 - 223,390 41.95% 6.89% 8.61% 10.34% 12.06% 13.78%
124,651 - 223,390 223,391 - 271,050 42.40% 6.94% 8.68% 10.42% 12.15% 13.89%
223,391 - 271,050 43.04% 7.02% 8.78% 10.53% 12.29% 14.04%
271,051 - 446,780 45.64% 7.36% 9.20% 11.04% 12.88% 14.72%
over - 271,050 over - 446,780 46.24% 7.44% 9.30% 11.16% 13.02% 14.88%
NEW YORK FUND
<CAPTION>
1997
COMBINED
FEDERAL
AND
TAXABLE INCOME* NEW YORK IF TAX EXEMPT YIELD IS
-------------------------------------- MARGINAL ------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8,001 - 11,000 16,001 - 22,000 18.83% 4.93% 6.16% 7.39% 8.62% 9.86%
11,001 - 13,000 22,001 - 26,000 19.46% 4.97% 6.21% 7.45% 8.69% 9.93%
13,001 - 20,000 26,001 - 40,000 20.02% 5.00% 6.25% 7.50% 8.75% 10.00%
20,001 - 24,650 40,001 - 41,200 20.82% 5.05% 6.31% 7.58% 8.84% 10.10%
24,651 - 59,750 41,201 - 99,600 32.93% 5.96% 7.46% 8.95% 10.44% 11.93%
59,751 - 124,650 99,601 - 151,750 35.73% 6.22% 7.78% 9.34% 10.89% 12.45%
124,651 - 271,050 151,751 - 271,050 40.38% 6.71% 8.39% 10.06% 11.74% 13.42%
over - 271,050 over - 271,050 43.74% 7.11% 8.89% 10.66% 12.44% 14.22%
<CAPTION>
1997
COMBINED
FEDERAL
AND
NEW YORK
TAXABLE INCOME* STATE AND IF TAX EXEMPT YIELD IS****
------------------------------------------ CITY ------------------------------------------
SINGLE JOINT MARGINAL 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8,001 - 11,000 16,001 - 21,600 21.81% 5.12% 6.39% 7.67% 8.95% 10.23%
11,001 - 12,000 21,601 - 22,000 22.45%+ 5.16% 6.45% 7.74% 9.03% 10.32%
12,001 - 13,000 22,001 - 26,000 23.11% 5.20% 6.50% 7.80% 9.10% 10.40%
13,001 - 20,000 26,001 - 40,000 23.66% 5.24% 6.55% 7.86% 9.17% 10.48%
20,001 - 24,650 40,001 - 41,200 24.47% 5.30% 6.62% 7.94% 9.27% 10.59%
24,651 - 25,000 41,201 - 45,000 36.02% 6.25% 7.81% 9.38% 10.94% 12.50%
25,001 - 50,000 45,001 - 90,000 36.07% 6.26% 7.82% 9.38% 10.95% 12.51%
50,001 - 59,750 90,001 - 99,600 36.12% 6.26% 7.83% 9.39% 10.96% 12.52%
59,751 - 124,650 99,601 - 151,750 38.78% 6.53% 8.17% 9.80% 11.43% 13.07%
124,651 - 271,050 151,751 - 271,050 43.21% 7.04% 8.81% 10.57% 12.33% 14.09%
over - 271,050 over - 271,050 46.41% 7.46% 9.33% 11.20% 13.06% 14.93%
* This amount represents taxable income as defined in the Internal Revenue Code of 1986, as
amended. It is assumed that taxable income as defined in the Internal Revenue Code of 1986, as
amended, 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 1997,
indexing for inflation. These rates include the effect of deducting state taxes on your Federal
return.
*** For federal tax purposes, these combined rates reflect the applicable marginal rates for 1997,
including indexing for inflation. 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 1997.
**** These represent New York State, City and Federal tax equivalent yields.
+ For a joint return the rate is 22.47%.
</TABLE>
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. 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.
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 "Fund Details --
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 credit-worthiness of issuers of State
Tax Exempt Bonds may be more difficult than with corporate bonds.
INVESTING IN NEW YORK. New York suffered significant adverse effects from
the disruption of financial markets in the late 1980s and the most recent
recession. These effects included the loss of substantial numbers of jobs,
declining real estate values and reduced tax receipts. Future weakness in
the economy generally, or in those sectors that are especially important to
the New York economy (such as financial services), could adversely affect
the credit ratings and creditworthiness of State Tax Exempt Securities of
New York issuers, which in turn could adversely affect the value of an
investment in the New York Fund.
INVESTING IN CALIFORNIA. Although California has the largest and one of the
most diversified economies of any state, it has suffered significant adverse
effects from the most recent recession and from the continuing weakness of
certain key industries, such as the defense and aerospace industries. Among
these effects are significant job losses, declining real estate values and
reduced tax receipts. Continued or future weakness in the economy generally
or in those sectors that are especially important to the California economy
could adversely affect the credit ratings and creditworthiness of State Tax
Exempt Securities of California issuers, which in turn could adversely
affect the value of an investment in the California Fund.
Back Bay Advisors believes that, in general, the secondary market for State
Tax Exempt Securities is less liquid than that for many other fixed-income
securities. Accordingly, the ability of a Fund to buy and sell securities
may be limited.
[ ] OPTIONS AND FUTURES
The Funds may purchase and sell financial futures contracts and options for
hedging purposes. Futures contracts on a Municipal Bond Index are traded on
the Chicago Board of Trade. This index is intended to represent a numerical
measure of market performance for long-term tax exempt bonds. An "index
future" is a contract to buy or sell units of a particular securities index
at an agreed price on a specified future date. Depending on the change in
value of the index between the time when a Fund enters into and terminates
an index futures contract, 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 of 1986, as
amended (the "Code"), and certain regulatory requirements may limit a Fund's
ability to engage in futures and options transactions.
A Fund will not purchase or sell futures contracts or related options if, as
a result, the sum of initial margin deposits on a Fund's existing futures
contracts and options plus premiums paid for outstanding options on futures
contracts would exceed 5% of the Fund's net assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
A more detailed explanation of futures and options transactions and the
risks associated with them is included in Part II of the Statement.
[ ] LOWER QUALITY FIXED-INCOME SECURITIES
Lower quality fixed-income securities generally provide higher yields than
higher quality securities, but are subject to greater credit and market
risk. Lower quality fixed-income securities are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Achievement of the investment objective of a fund
investing in lower quality fixed-income securities may be more dependent on
the fund's 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
known as "junk bonds." During the fiscal year ended December 31, 1996, 10%
and 5% of the average month-end net assets of the California Fund and the
New York Fund, respectively, were invested in fixed-income securities rated
in the rating categories below investment grade (BBB/Baa). For more
information, including a detailed description of the ratings assigned by
S&P, Fitch 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. Under a
repurchase agreement, 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. 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. 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, as
amended (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 rates may
exceed 100% annually. Recent portfolio turnover rates for the Funds are set
forth above under "Financial Highlights."
<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 New England Funds. NEFM does not
determine what investments will be purchased by the 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 by each Fund.
Back Bay Advisors provides discretionary investment management services to
mutual funds and other institutional investors. Formed in 1986, Back Bay
Advisors now manages 14 mutual fund portfolios and over $7 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 its 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 0.85% of the average daily net assets of the
Fund's Class A shares and 1.60% of the average daily 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 special
purpose corporations that are indirect wholly-owned subsidiaries of New England
Investment Companies, L.P. ("NEIC"). NEIC is listed on the New York Stock
Exchange, and manages over $100 billion in assets for individuals and
institutions. NEIC's sole general partner, New England Investment Companies,
Inc., is a wholly-owned subsidiary of Metropolitan Life Insurance Company
("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 shares of the other
mutual funds it manages as a factor in the selection of broker-dealers to effect
portfolio transactions for the Funds. See "Portfolio Transactions and Brokerage"
in Part II of the Statement.
The Trust's Board of Trustees supervises the affairs of the Funds as conducted
by NEFM and Back Bay Advisors.
The Funds have applied for an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers other than the existing subadvisers of the Funds when approved by
the Trust's Board of Trustees, without obtaining shareholder approval. The
exemptive request also seeks to permit, without shareholder approval, the terms
of an existing subadvisory agreement to be changed or the employment of an
existing subadviser to be continued after events that would otherwise cause an
automatic termination of a subadvisory agreement, when such changes or
continuation are approved by the Trust's Board of Trustees. Shareholders would
be notified of any subadviser changes.
<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 $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
[ ] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[ ] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors
Act.
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 RECENT 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.
6 WAYS TO BUY FUND SHARES
You may purchase shares of the Funds in the following ways:
[GRAPHIC OMITTED] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
[GRAPHIC OMITTED] 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.
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). All purchases made by check should be in
U.S. dollars and made payable to New England Funds. Third party checks will
generally not be accepted except under certain circumstances approved by the
Distributor. When purchases are made by check or periodic account investment,
redemptions may not be allowed until the investment being redeemed has been in
the account for a minimum of ten calendar days.
[GRAPHIC OMITTED] 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) 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) on a day when the
Funds are open for business. Your bank may charge a fee for this service.
[GRAPHIC OMITTED] BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 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.
[GRAPHIC OMITTED] BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clearing
House ("ACH") system as long as your bank or credit union is a member of the ACH
system and you have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders through ACH or
Tele#Facts will be complete only upon the receipt by New England Funds of funds
from your bank and, on the day that funds are received, will be processed at the
net asset value next determined at the close of regular trading on the Exchange
on days 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.
[GRAPHIC OMITTED] BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of the Funds 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 shares.
If you wish transactions in your account to be effected by another person under
a power of attorney from you, special rules apply. Please contact your
investment dealer or the Distributor for details.
SALES CHARGES
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 initial sales
charges:
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE**
Less than $100,000 2.50% 2.56% 2.15%
$100,000 - $249,999 2.00% 2.04% 1.70%
$250,000 - $499,999 1.50% 1.52% 1.25%
$500,000 - $999,999 1.25% 1.27% 1.00%
$1,000,000 or more None None *
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases a commission of up to the following
amounts: 1% on the first $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.
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 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 a series of 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 redemption.
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 YOUR PURCHASING DOLLARS ARE INVESTED
IMMEDIATELY AND THE AMOUNT OF YOUR DEFERRED SALES CHARGE DIMINISHES OVER TIME.
CONSULT YOUR FINANCIAL REPRESENTATIVE FOR HELP IN DECIDING WHICH CLASS IS
APPROPRIATE FOR YOU.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
and are 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 six 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 another series of
the Trusts. 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 a series of 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 charge will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. The CDSC equals the following percentages of the
dollar amounts subject to the charge.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE*
- ------------------- -------------------------
1st ............................................................ 5%
2nd ............................................................ 4%
3rd ............................................................ 3%
4th ............................................................ 3%
5th ............................................................ 2%
6th ............................................................ 1%
thereafter ..................................................... 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
* For any Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the 1st year, 3% if
redemption occurs within the 2nd or 3rd year, 2% if redemption occurs within
the 4th year, 1% if redemption occurs within the 5th year and no CDSC for
redemptions after the 5th year. For the purpose of the CDSC, it is assumed
that the shares held the longest are the first to be redeemed.
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 smaller 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.
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 of each Fund 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 (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who may sell
significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A and B shares; or (iii)
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 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 less than $500,000 may be invested in shares of either Fund
at a sales charge of 1.50% of the public offering price (or 1.52% of the net
amount invested). The dealer concession (as a percentage of the public
offering price) is 1.5% on these sales.
[ ] 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
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 Trusts'
investment advisers or subadvisers, the Distributor, New England Life
Insurance Company ("NELICO"), MetLife or any other company affiliated with
NELICO or MetLife; current and former directors and trustees of the Trusts,
NELICO or MetLife or their predecessor companies; agents and general agents
of NELICO or MetLife and their 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; any trust for any of the
foregoing persons; and any separate account of NELICO or MetLife or of any
insurance company affiliated with NELICO or MetLife.
[ ] Shareholders of Reich & Tang Government Securities Trust may exchange
their shares of that fund for Class A shares of the Funds at net asset value
and without the imposition of a sales charge.
[ ] Shares of the Funds are available at net asset value to investors
purchasing shares of the Funds with redemption proceeds from other mutual
fund complexes on which the investor has paid a front-end sales charge or
was subject to a deferred sales charge, whether or not paid, if such
redemption occurred no more than 90 days prior to such purchase. The
Distributor will require satisfactory evidence of your qualification for
this waiver. Please call the Distributor for more information.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
O W N I N G F U N D S H A R E S
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES.
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts 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 Funds (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 Class A
shares of New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate
Fund") (and shares of the Money Market Funds acquired through exchanges of such
shares) 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 series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for the Class B shares of any other
series of the Trusts. 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, write 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 $1,000 (or the total net asset value
of the account, whichever is less) except that under the Automatic Exchange Plan
the minimum is $100. All exchanges are subject to the eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read 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, will provide you with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
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 OF THE TRUSTS. THE MINIMUM MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. 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.
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). Each Fund distributes net realized short-term capital gains
annually. 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 a Fund
shortly before it declares a capital gain distribution you should be aware that
a portion of the purchase price may be returned to you as a taxable
distribution.
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 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 Fund 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 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 and carefully read a copy of that fund's
prospectus.
- -------------------------------------------------------------------------------
<PAGE>
S E L L I N G F U N D S H A R E S
5 WAYS TO SELL FUND SHARES
You may sell shares of the Funds in the following ways:
[GRAPHIC OMITTED] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[GRAPHIC OMITTED] 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. Class A shares only may also be redeemed 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) on a day when the Funds
are open for business 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 your address of record
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) on a day when the Funds are open for business or, for Class A shares only,
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.
[GRAPHIC OMITTED] 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.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
[GRAPHIC OMITTED] 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 Fund
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 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.
[GRAPHIC OMITTED] 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 (based on the day you establish
your plan). 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 sent 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, a 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 to New
England Funds, L.P. 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 proceeds from the redemption of Class A shares of the Funds
(without a 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.
<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 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) 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 of the Trust.
The net asset value per share of each class 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
"Buying Fund Shares -- 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 Distributor. 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 Other Any
Portfolio Securities + Assets _ 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 qualify each year as a regulated investment company for
federal income tax purposes. The Funds also 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 gain 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 one year, and otherwise as a short-term gain or loss, assuming the
shares are held as capital assets. Losses incurred on the taxable disposition of
shares of a Fund held for six months or less will be disallowed as deductions
for federal income tax purposes to the extent of exempt-interest dividends
received with respect to such shares and thereafter treated as long-term capital
losses to the extent of long-term capital gain distributions received with
respect to such shares.
If you receive social security or railroad retirement benefits, you may be taxed
on a portion of those benefits as a result of receiving tax-exempt income. Also,
interest on 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 during the twelve
months ending October 31 but has not previously distributed.
Distributions declared and payable 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 each Fund's dividends are "exempt-interest dividends,"
federal back-up withholding rules do not apply. However, if the percentage for a
Fund should ever drop below 95%, the Fund will be required to withhold 31% of
all income dividends and 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 Funds 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 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 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, 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 Funds 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, 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
MetLife, NELICO, 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 its Class A and Class B shares. The
Distributor may pay up to the entire amount of this fee to securities dealers
who are dealers of record with respect to the Fund's shares, for providing
personal services to investors in shares of the Fund and/or maintenance of
shareholder accounts. In the case of the Class A shares, the Distributor may
also use all or any portion of the fee to pay its expenses in connection with
the provision of personal services to investors and/or the maintenance of
shareholder accounts. In the case of the Class B shares, the Distributor retains
the balance of the service fee as compensation for providing personal services
to investors and/or the maintenance of shareholder accounts. In the case of the
Class B shares, the Distributor currently pays investment dealers at the time of
sale the first year's service fee in the amount of up to 0.25% of the amount
invested.
Both Funds' Class B shares pay the Distributor a monthly distribution fee at an
annual rate not to exceed 0.75% of the average net assets of such 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 taxable-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, and 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 or CDSC. If a sales charge or
CDSC is not deducted in calculating total return, the class's total return will
be higher.
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.
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.
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.
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 Funds 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, 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.
[ ] 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 by the trustees of the Trust 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 Trust's trustees from time to time (currently $1,000 for all accounts,
except for those indicated below), 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 reports contain additional performance information and
are 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 both 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.
[logo] Printed on Recycled Paper XT51-0597
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where the Best Minds Meet(R)
- ------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1997
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. The 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."
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.
The Fund seeks as high a level of current income exempt from federal income tax
and Massachusetts personal income taxes as Back Bay Advisors(R), 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. 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, 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, 1997 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 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 NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
T A B L E O F C O N T E N T S
<CAPTION>
Page
FUND EXPENSES AND FINANCIAL INFORMATION
<S> <C> <C>
1 Schedule of Fees Sales charges, yearly operating expenses.
2 Financial Highlights Historical information on the Funds' performance.
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
5 How the Fund Pursues Its Investment Objective
- ------------------------------------------------------------------------------------------------------------------
9 INVESTMENT RISKS It is important to understand the risks inherent
in a Fund before you invest.
- ------------------------------------------------------------------------------------------------------------------
12 FUND MANAGEMENT
- ------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
13 Minimum Investment Everything you need to know to open and add to
13 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
14 Sales Charges
16 Reduced Sales Charges (Class A Shares Only)
- ------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
18 Exchanging Among New England Funds New England Funds offers three convenient ways to
exchange Fund shares.
18 Fund Dividend Payments
- ------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
20 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic
Withdrawal Plan
22 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- ------------------------------------------------------------------------------------------------------------------
FUND DETAILS
23 How Fund Share Price is Determined Additional information you may find important.
23 Income Tax Considerations
24 The Fund's Expenses
25 Performance Criteria
26 Additional Facts About the Funds
</TABLE>
<PAGE>
F U N D E X P E N S E S A N D F I N A N C I A L I N F O R M A T I O N
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Fund. The
following tables summarize your maximum transaction costs from investing in the
Fund and estimated annual expenses for each class of the Fund's shares. The
Example shows the cumulative expenses attributable to a hypothetical $1,000
investment in each class of shares of the Fund for the periods specified.
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(1)(2) ................. 4.25% None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or redemption
proceeds, as applicable)(2) ............................... (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying Fund
Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any portion of
certain purchases of Class A shares greater than $1,000,000 redeemed within one year
after purchase, but not to any other purchases or redemptions of Class A shares. See
"Buying Fund Shares -- Sales Charges."
<CAPTION>
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
CLASS A CLASS B
------- -------
<S> <C> <C>
Management Fees
(after voluntary fee waiver and expense reduction) ........ 0.31%*** 0.31%***
12b-1 Fees .................................................. 0.35 1.00**
Other Expenses .............................................. 0.34 0.34
Total Fund Operating Expenses
(after voluntary fee waiver and expense reduction) ........ 1.00*** 1.65***
* 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 the voluntary fee waiver and expense reduction by the Fund's adviser,
Management Fees would be 0.58% for Class A and Class B Shares, and Total Fund
Operating Expenses would be 1.27% for Class A shares and 1.92% for Class B shares.
These voluntary limitations can be terminated by the Fund's adviser at any time. See
"Fund Management."
</TABLE>
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 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 ............................................................. $ 52 $ 67 $ 17
3 years ............................................................ $ 73 $ 82 $ 52
5 years ............................................................ $ 95 $110 $ 90
10 years* .......................................................... $160 $178 $178
(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.
</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 Fund. For additional information about the Fund's management fees, 12b-1
fees and other expenses, please see "Fund Management," and "The Fund's
Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(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, which have been examined by Coopers & Lybrand LLP,
independent accountants, whose report thereon is incorporated by reference in
Part II of the Statement and may be obtained by shareholders. 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. The Fund's
annual report contains additional performance information and is available upon
request and without charge.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
TEN
YEAR ENDED MONTHS
LAST DAY ENDED YEAR ENDED
OF FEBRUARY, DEC. 31, DECEMBER 31,
------------------------ ------------ ------------------------
1987 1988 1988(b) 1989 1990
---- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.62 $17.23 $16.37 $16.16 $16.27
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 1.15 1.11 0.90 1.06 1.04
Net gains or losses on investments (both
realized and unrealized) 0.66 (0.80) (0.20) 0.19 (0.24)
------ ------ ------ ------ ------
Total income (loss) from investment
operations 1.81 0.31 0.70 1.25 0.80
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment
income) (1.15) (1.11) (0.90) (1.06) (1.03)
Distributions (in excess of net
investment income) 0.00 0.00 0.00 0.00 0.00
Distributions (from net realized capital
gains) (0.05) (0.06) (0.01) (0.08) (0.03)
------ ------ ------ ------ ------
Total distributions (1.20) (1.17) (0.91) (1.14) (1.06)
------ ------ ------ ------ ------
Net asset value, end of period $17.23 $16.37 $16.16 $16.27 $16.01
====== ====== ====== ====== ======
Total return (%)(e) 11.4 2.0 4.6 8.0 5.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $50,734 $57,529 $50,770 $51,269 $55,903
Ratio of operating expenses to average
net assets (%)(c) 1.25 1.25 1.51(d) 1.41 1.35
Ratio of net investment income to
average net assets (%) 6.84 6.89 6.63(d) 6.54 6.48
Portfolio turnover rate (%) 36 28 18(d) 24 21
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $16.01 $16.37 $16.62 $17.27 $15.10 $16.85
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 1.08 1.03 0.97 0.89 0.88 0.87
Net gains or losses on
investments (both realized
and unrealized) 0.69 0.40 1.05 (2.15) 1.76 (0.35)
------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 1.77 1.43 2.02 (1.26) 2.64 0.52
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net
investment income) (1.07) (1.03) (0.97) (0.89) (0.89) (0.87)
Distributions (in excess of net
investment income) 0.00 0.00 0.00 (0.02) 0.00 0.00
Distributions (from net
realized capital gains) (0.34) (0.15) (0.40) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (1.41) (1.18) (1.37) (0.91) (0.89) (0.87)
------ ------ ------ ------ ------ ------
Net asset value, end of period $16.37 $16.62 $17.27 $15.10 $16.85 $16.50
====== ====== ====== ====== ====== ======
Total return (%)(e) 11.5 9.1 12.4 (7.4) 17.8 3.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $68,534 $91,932 $128,797 $107,565 $120,229 $112,934
Ratio of operating expenses to
average net assets (%)(c) 1.00 0.85 0.85 0.85 0.85 0.90
Ratio of net investment income
to average net assets (%) 6.62 6.25 5.58 5.63 5.46 5.31
Portfolio turnover rate (%) 86 29 42 48 127 140
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ----------------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $17.78 $17.26 $15.08 $16.82
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.25 0.77 0.78 0.75
Net gains or losses on investments (both
realized and unrealized) (0.15) (2.14) 1.74 (0.34)
------ ------ ------ ------
Total income (loss) from investment operations 0.10 (1.37) 2.52 0.41
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment income) (0.22) (0.79) (0.78) (0.76)
Distributions (in excess of net investment income) 0.00 (0.02) 0.00 0.00
Distributions (from net realized capital gains) (0.40) 0.00 0.00 0.00
------ ------ ------ ------
Total distributions (0.62) (0.81) (0.78) (0.76)
------ ------ ------ ------
Net asset value, end of period $17.26 $15.08 $16.82 $16.47
====== ====== ====== ======
Total return (%)(e) 0.4 (8.0) 17.0 2.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,289 $4,523 $6,697 $7,442
Ratio of operating expenses to average net
assets (%)(c) 1.50(d) 1.50 1.50 1.55
Ratio of net investment income to average net
assets (%) 4.26(d) 4.98 4.81 4.66
Portfolio turnover rate (%) 42 48 127 140
(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 of Class A
shares and commencing Sept ember 13, 1993, 1.50% of average net assets of Class B shares. Effective
September 1, 1996 expenses were voluntarily limited to 1.00% of average net assets of Class A shares
and 1.65% of Class B shares. The ratio of operating expenses to average net assets without giving eff
ect to this expense limitation would have been 1.34%, 1.26%, 1.21%, 1.24%, 1.24% and 1.27% for the
years ended December 31, 1991, 1992, 19 93, 1994, 1995 and 1996, 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, and 1.89%, 1.89% and 1.92% for the years ended December 31, 1994, 1995 and 1996,
respectively, 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 limit ed 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 e xpense limitation would have been
1.48%, 1.39% and 1.56% (annualized) for the years ended February 28, 1987 and 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 CDSC in the case of Class B shares are not
reflected in total return calcul ations. Periods of less than one year are not annualized.
</TABLE>
<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, 1996, 98% 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 17% 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") or Fitch Investor Services, Inc. ("Fitch") or Aaa, Aa, A
or Baa by Moody's Investor Service, Inc. ("Moody's"), or that are not rated by
S&P, Fitch 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 Fitch 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,
S&P or Fitch, commercial paper rated in the two highest grades by either of such
rating services, certificates of deposit, bankers acceptances and repurchase
agreements. The Fund may also hold its assets in other cash equivalents or in
cash.
The Fund may purchase and sell financial futures contracts and options for
hedging purposes. Futures contracts on a Municipal Bond Index are traded on the
Chicago Board of Trade. This index is intended to represent a numerical measure
of market performance for long-term tax-exempt bonds. An "index future" is a
contract to buy or sell units of a particular securities index at an agreed
price on a specified future date. Depending on the change in the value of the
index between the time when the Fund enters into and terminates an index future,
the Fund will realize a gain or loss. The Fund may purchase and sell futures
contracts on this index (or any other tax-exempt bond index approved for trading
by the Commodity Futures Trading Commission) to hedge against general changes in
market values of Massachusetts Tax Exempt Bonds which the Fund owns or expects
to purchase. The Fund may also purchase and sell put and call options on index
futures, or on an index directly, in addition to or as an alternative to
purchasing and selling financial futures contracts.
The Fund may also, for hedging purposes, purchase and sell futures contracts and
options with respect to U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. Treasury security futures and related options would be used in
a way similar to the Fund's use of index futures and related options. The Fund
will purchase or sell Treasury security futures or related options only when, in
the opinion of Back Bay Advisors, price movements in Treasury security futures
and related options are likely to correlate closely with price movements in the
Massachusetts Tax Exempt Bonds which are the subject of the hedge.
Except for policies of the Fund that are explicitly described in this prospectus
or in Part I of the Statement as fundamental, the investment policies of the
Fund, including the investment objective, may be changed by the trustees of the
Trust 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>
TAXABLE EQUIVALENT YIELDS
<CAPTION>
1997
COMBINED
TAXABLE INCOME* MA AND IF TAX EXEMPT YIELD IS
- -------------------------- FEDERAL ------------------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) BRACKET** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 24,650 0 - 41,200 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,651 - 59,750 41,201 - 99,600 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
59,751 - 124,650 99,601 - 151,750 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
124,651 - 271,050 151,751 - 271,050 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 271,050 over 271,050 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
*This amount represents taxable income as defined in the Internal Revenue Code of 1986, as amended. It is assumed
that taxable income as defined in the Internal Revenue Code of 1986, as amended 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 1997, including indexing
for inflation. These rates include the effect of deducting state taxes on your Federal return.
</TABLE>
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.
Massachusetts Tax Exempt Bonds may also include certain types of industrial
development bonds or private activity bonds issued by public authorities to
finance privately owned or operated facilities. Massachusetts Tax Exempt Bonds
also include debt obligations issued by other governmental entities (for
example, U.S. possessions such as Puerto Rico) if such debt obligations generate
interest income that is exempt from federal income taxes and Massachusetts
personal income taxes.
The two principal classifications of Massachusetts Tax Exempt Bonds are general
obligation and limited obligation (limited purpose or revenue) bonds. General
obligation bonds involve the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The characteristics
and methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities, or
a specific revenue source, and generally are not payable from the unlimited
revenues of the issuer. Industrial development and private activity bonds are in
most cases limited obligation bonds, the creditworthiness of which is directly
related to the user of the facilities.
Certain Massachusetts Tax Exempt Bonds which may be held by the Fund may permit
the issuer at its option to "call," or redeem, its securities. If an issuer were
to redeem Massachusetts Tax Exempt Bonds held by the Fund during a time of
declining interest rates, the Fund may not be able to reinvest the proceeds in
tax exempt securities providing as high a level of investment return as the
securities redeemed.
Also included within the general category of Massachusetts Tax Exempt Bonds 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 Fund's investments, if any, in these
securities will be subject to procedures adopted by the trustees of the Trust
from time to time.
Massachusetts Tax Exempt Bonds may have fixed or variable interest rates. The
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
Fund 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 Fund's investments in illiquid securities to 15% of net
assets.
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."
<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.
[] GENERAL
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 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." During the fiscal year ended December 31,
1996, 5% of the average month-end net assets of the Fund were invested in
fixed- income securities rated in the rating categories below investment
grade (BBB/Baa). For more information, including a detailed description of
the ratings assigned by S&P, Fitch 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 of 1986, as amended (the "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 "Fund Details -- 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. Under a
repurchase agreement, 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. 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. 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, as
amended (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.
<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. NEFM also
serves as adviser to most of the other New England Funds. NEFM does not
determine what investments will be purchased by the Funds.
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 by the Fund.
Back Bay Advisors provides discretionary investment management services to
mutual funds and other institutional investors. Formed in 1986, Back Bay
Advisors now manages 14 mutual fund portfolios and over $50 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 indirect wholly-owned subsidiaries of New England
Investment Companies, L.P. ("NEIC"). NEIC is listed on the New York Stock
Exchange, and manages over $100 billion in assets for individuals and
institutions. NEIC's sole general partner, New England Investment Companies,
Inc., is a wholly-owned subsidiary of Metropolitan Life Insurance Company
("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 1.00% of the average daily net assets of the
Fund's Class A shares and 1.65% 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.
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 Fund and shares of the other mutual
funds it manages 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.
The Fund has applied for an exemptive order from the SEC to permit NEFM, subject
to certain conditions, to enter into subadvisory agreements with subadvisers
other than the existing subadviser of the Fund when approved by the Trust's
Board of Trustees, without obtaining shareholder approval. The exemptive request
also seeks to permit, without shareholder approval, the terms of an existing
subadvisory agreement to be changed or the employment of an existing subadviser
to be continued after events that would otherwise cause an automatic termination
of a subadvisory agreement, when such changes or continuation are approved by
the Trust's Board of Trustees. Shareholders would be notified of any subadviser
changes.
<PAGE>
B U Y I N G F U N D S H A R E S
USING TELE#FACTS 1-800-346-5984
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 RECENT
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.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in the Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $2,000 on initial and $100 on subsequent investments 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 shares of the Fund in the following ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
[Graphic Omitted] 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.
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). All purchases made by check should be in
U.S. dollars and made payable to New England Funds. Third party checks will
generally not be accepted except under certain circumstances approved by the
Distributor. When purchases are made by check or periodic account investment,
redemptions may not be allowed until the investment being redeemed has been in
the account for a minimum of ten calendar days.
[Graphic Omitted] 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) on a day when the Fund is 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 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) on a day when the Fund is open for business. Your bank may
charge a fee for this service.
[Graphic Omitted] BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 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.
[Graphic Omitted] BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clearing
House ("ACH") system as long as your bank or credit union is a member of the ACH
system and you have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Fund is open for business. You may also
purchase shares through ACH by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders through ACH or
Tele#Facts will be complete only upon the receipt by New England Funds of funds
from your bank and, on the day that funds are received, will be processed at the
net asset value next determined at the close of regular trading on the Exchange
on days 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.
[Graphic Omitted] 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 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.
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 and a 0.10% annual distribution fee. Class A shares are offered
subject to the following sales charges:
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE**
Less than $50,000 4.25% 4.44% 3.75%
$50,000 - $99,999 4.00% 4.17% 3.50%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
*The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases a commission of up to the following
amounts: 1% on the first $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 up to $1 million of
distributions from unit investment trusts. The dealer concession is 1.5% on
these sales.
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, 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 any such 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 a series of 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.
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 HELP IN
DECIDING WHICH CLASS IS APPROPRIATE FOR YOU.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
and are 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 six 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 another 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 a series of 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
Fund purchased with reinvested dividends or capital gains distributions. The
amount of the CDSC, if any, will vary depending on the number of years from the
time of payment for the purchase of Class B shares until the time of redemption
of such shares. The CDSC equals the following percentages of the dollar amounts
subject to the charge.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE*
- ------------------- -------------------------
1st ........................................... 5%
2nd ........................................... 4%
3rd ........................................... 3%
4th ........................................... 3%
5th ........................................... 2%
6th ........................................... 1%
thereafter .................................... 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
*For any Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the 1st year, 3% if
redemption occurs within the 2nd or 3rd year, 2% if redemption occurs within
the 4th year, 1% if redemption occurs within the 5th year and no CDSC for
redemptions after the 5th year. For the purpose of the CDSC, it is assumed that
the shares held the longest are the first to be redeemed.
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% 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 smaller 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.
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 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 Fund's shares.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Fund (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who may sell
significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A and B shares; or (iii)
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). The dealer concession (as a percentage of the public
offering price) is 1.5% on such sales.
[] 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 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, New England Life
Insurance Company ("NELICO"), MetLife or any other company affiliated with
NELICO or MetLife; current and former directors and trustees of the Trusts,
NELICO or MetLife or their predecessor companies; agents and general agents
of NELICO or MetLife and their 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; any trust for any of the
foregoing persons; and any separate account of NELICO or MetLife or of any
insurance company affiliated with NELICO or MetLife.
[] Shareholders of Reich & Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Fund at net asset value and
without the imposition of a sales charge.
[] Shares of the Fund are available at net asset value to investors purchasing
shares of the Fund with redemption proceeds from other mutual fund complexes
on which the investor has paid a front-end sales charge or was subject to a
deferred sales charge, whether or not paid, if such redemption occurred no
more than 90 days prior to such purchase. The Distributor will require
satisfactory evidence of your qualification for this waiver. Please call the
Distributor for more information.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
O W N I N G F U N D S H A R E S
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES.
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts 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 (the "California and New
York Funds") (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 the California or New York Funds shares
for at least six months; otherwise, you will pay the difference between any
sales charge you have already paid on your California or New York Fund shares
and the higher sales charge of the series into which you are exchanging. If you
exchange Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) 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 series of the Trusts and Class B shares
of the Money Market Funds (or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. 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 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. THE MINIMUM MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. 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.
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 $1,000 (or the total net
asset value of your account, whichever is less) except that, under the Automatic
Exchange Plan, the minimum is $100. All exchanges are subject to the eligibility
requirements of the series into which you are exchanging. In connection with any
exchange, you must obtain and carefully read 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.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
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 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). Each Fund distributes net realized short-term capital gains
annually. 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 capital gain distribution you should be aware
that a portion of the purchase price may be returned to you as a taxable
distribution.
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 in shares of 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, which 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 and carefully read a copy of that fund's
prospectus.
- --------------------------------------------------------------------------------
<PAGE>
S E L L I N G F U N D S H A R E S
5 WAYS TO SELL FUND SHARES
You may sell shares of the Fund in the following ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted] 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
Fund is open for business. Class A shares only may also be redeemed 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) on a day when the
Fund is open for business 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 your address of record
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) on a day when the Fund is open for business or, for Class A shares only,
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.
[Graphic Omitted] 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.
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.
[Graphic Omitted] 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 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 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.
[Graphic Omitted] 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 (based on the day you establish
your plan). 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 sent to you within seven days after State Street Bank or
the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10 days
after such purchase or transfer, the Fund may withhold redemption proceeds until
the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please call your
investment dealer or the Distributor for more information.
Telephone redemptions are not available for Fund shares in certificate form. If
certificates have been issued for your investment, you must send them along with
your request to New England Funds, L.P. before a redemption request can be
honored. See the instructions for redemption by mail above.
The Fund may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Fund to
dispose of its securities or to determine fairly the value of its net assets, or
during any other period permitted by the SEC for the protection of investors.
REPURCHASE OPTION
(CLASS A SHARES ONLY)
You may apply your proceeds from the redemption of Class A shares of the Fund
(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.
<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 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 of the Trust.
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 "Buying Fund Shares --
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 Distributor. 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 Other Any
Portfolio Securities + Assets - 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 qualify each year as a regulated investment company for
federal income tax purposes. The Fund also 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 one year, and otherwise as a short-term gain or loss, assuming the
shares are held as capital assets. Losses incurred on the taxable disposition of
shares of the Fund held for six months or less will be disallowed as deductions
for federal income tax purposes to the extent of exempt-interest dividends
received with respect to such shares and thereafter treated as long-term capital
losses to the extent of long-term capital gain distributions received with
respect to such shares.
If you receive social security or railroad retirement benefits, you may be taxed
on a portion of those benefits as a result of receiving tax exempt income. Also,
interest on 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 AMT applicable to corporations. Seventy-five percent
of the excess of adjusted current earnings over the amount of income otherwise
subject to the AMT is added to the corporation's alternative minimum taxable
income, potentially giving rise to AMT 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 during
the twelve months ending October 31, but has not previously distributed.
Distributions declared and payable 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 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. 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, 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 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
MetLife, NELICO, NEFM, Back Bay Advisors or their affiliates, other than
affiliated registered investment companies.
Under plans adopted pursuant to Rule 12b-1 under the 1940 Act, each class of
shares of the Fund pays the Distributor a monthly service fee at an annual rate
not to exceed 0.25% of each class's average daily net assets. The Distributor
may pay up to the entire amount of the service fee to securities dealers who are
dealers of record with respect to Fund shares, for providing personal services
to investors in shares of the Fund and/or the maintenance of shareholder
accounts. The Distributor retains the balance of the fees as compensation for
providing personal service to investors in the Fund and/or the maintenance of
shareholder accounts. In the case of the Class B shares, the Distributor
currently pays investment dealers at the time of sale the first year's service
fee in the amount of up to 0.25% of the amount invested. The Distributor may
also use all or any portion of the fee to pay its expenses in connection with
the provision or personal services to investors and/or the maintenance of
shareholder accounts. The Fund's Class A shares also pay the Distributor a
distribution fee not to exceed an annual rate of 0.10% of the average daily net
assets of the Class A shares, and the Fund's Class B shares pay the Distributor
a distribution fee at an annual rate not to exceed 0.75% of the average net
assets of the Class B shares. The Distributor may pay up to the entire amount of
the distribution fee to securities dealers who are dealers of record with
respect to the Fund's shares, as distribution fees in connection with the sale
of Fund shares. The Distributor retains the balance of the fee as compensation
for its services as distributor of the Class B shares.
PERFORMANCE CRITERIA
Each class of the Fund may include taxable-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
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). 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 Massachusetts personal income taxes. Taxable-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.
<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 Trust's trustees have the authority without shareholder approval to
issue other classes of shares of the Fund that represent interests in the
Fund's portfolio but that have different sales load and fee arrangements.
[] 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.
[] Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of the Fund
may be changed by the trustees of the Trust without shareholder approval
and, in most cases, without prior notice. The investment objectives of the
Fund are not fundamental. If there is a change in the 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 Trust's trustees from time to time (currently $1,000 for all accounts,
except for those indicated below), 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 is
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 both 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.
[recycle symbol] Printed on Recycled Paper XF51-0597
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
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 VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
MAY 1, 1997
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, 1997 for Class A, Class B and Class C shares or the Prospectus of the
Funds dated May 1, 1997 for Class Y shares (the "Prospectus" or "Prospectuses").
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, 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
Balanced Fund, New England International Equity Fund and New England Value Fund
are series of New England Funds Trust I, a registered management investment
company that offers a total of twelve 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 seven 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
PART I Page
Investment Restrictions
Fund Charges and Expenses
Ownership of Fund Shares
Investment Performance of the Funds
PART II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain Fund Information
Appendix C - Advertising and Promotional Literature
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds
Appendix E - Growth Fund of Israel
<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 vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of restrictions marked with a
dagger (+) below, the percentages set forth below and the percentage limitations
set forth in the Prospectus will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
NEW ENGLAND GROWTH FUND, NEW ENGLAND VALUE FUND AND NEW ENGLAND BALANCED FUND
New England Growth Fund (the "Growth Fund"), New England Value Fund (the "Value
Fund") and New England Balanced Fund (the "Balanced Fund") each will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any one
industry;
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
New England Funds Trust I or of the investment adviser of the Fund who
individually own more than 1/2 of 1% of the shares or securities of that
issuer together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are a part
of an issue to the public or to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts. Also, the
Value Fund will not buy or sell real estate or interests in real estate
which are not readily marketable. (This restriction does not prevent
such Funds from purchasing securities of companies investing in the
foregoing);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Purchase options or warrants if, as a result, more than 1% of its total
assets (taken at current value) would be invested in such securities;
*(14) Write options or warrants;
*(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);
*(16) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (4) above; any pledge or other encumbrance of assets
permitted by restriction (5) above; any collateral arrangements with
respect to options, forward contracts, futures contracts, swap contracts
and other similar contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts and other
similar 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; or
+(17) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper.)
NEW ENGLAND CAPITAL GROWTH FUND
New England Capital Growth Fund (the "Capital Growth Fund") may not:
(1) With respect to 75% of its total assets, 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 with respect to 75% of its total assets, 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) 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;
*(8) 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);
*(9) 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;
(10) 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.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities or securities
indexes and (b) enter into currency forward contracts;
+(12) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities deemed to be liquid
under guidelines established by the Trust's Trustees and certain Section
4(2) commercial paper); or
*(13) 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.)
NEW ENGLAND INTERNATIONAL EQUITY FUND
New England International Equity Fund (the "International Equity Fund") may not:
(1) With respect to 75% of its total assets, 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 with respect to 75% of its total assets, 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) 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;
*(8) 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);
*(9) 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;
(10) 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 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.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities
indexes, currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(12) 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 (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper); or
*(13) 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 staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are subject to restriction (12)
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;
*(9) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security; any borrowing permitted
by restriction (8) above; any collateral arrangements with respect to
options, futures contracts, swap contracts and other similar contracts
and options on futures contracts and with respect to initial and
variation margin; the purchase or sale of options, forward contracts,
futures contracts, swap contracts and other similar 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
II's Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom;
+(10) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
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.
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
- --------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 1996, 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 August 30, 1996,
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 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> <C>
Balanced Fund, 0.750% of the first $200 million
Capital Growth Fund and 0.700% of the next $300 million
Value Fund 0.650% of amounts in excess of $500 million
Growth Opportunities Fund 0.700% of the first $200 million
0.650% of the next $300 million
0.600% of amounts in excess of $500 million
International Equity Fund 0.900% of the first $200 million
0.850% of the next $300 million
0.800% of amounts in excess of $500 million
</TABLE>
The advisory agreements for the Capital Growth, Value, Balanced,
International Equity and Growth Opportunities Funds each provide that NEFM may
delegate its responsibilities thereunder to other parties. Pursuant to separate
subadvisory agreements, each dated August 30, 1996 (February 14, 1997, 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 International
Equity, Balanced, Value and Capital Growth Funds; and Westpeak Investment
Advisors, L.P. ("Westpeak"), in the case of the Growth Opportunities 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> <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 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 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>
Loomis Sayles has voluntarily agreed to waive in its entirety its
subadvisory fee for the International Equity Fund through February 14, 1998.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Loomis Sayles served as subadviser to the Capital Growth, Balanced and Value
Funds pursuant to separate advisory and subadvisory agreements providing for the
same management and subadvisory fees as are currently in effect for these Funds.
Prior to August 30, 1996, CGM served as adviser to the Growth Fund pursuant to
an advisory agreement providing for an advisory fee at the same rate as
currently in effect for such Fund. 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 August 30, 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 management 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.
From December 29, 1995 until February 14, 1997, Draycott Partners, Ltd.
("Draycott") served as subadviser to the International Equity Fund pursuant to
subadvisory agreements providing for a subadvisory fee payable by NEFM to
Draycott at the annual rate of 0.54% of the first $200 million of the Fund's
average daily net assets, 0.49% of the next $300 million of such assets and
0.44% of such assets in excess of $500 million. From December 29, 1995 to August
30, 1996, NEFM served as adviser to the International Equity Fund pursuant to an
advisory agreement providing for a management fee at the same rate as is
currently in effect for such Fund.
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, as 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
1.15% of the average daily net assets of the Fund's Class Y shares. NEFM and the
Distributor may terminate this voluntary limitation at any time. Prior to
December 31, 1996, the limit was 1.00% for Class Y shares. From December 29,
1995 to February 14, 1997, the Distributor had also agreed to reduce its fees
and, if necessary, to bear certain expenses related to operating the Fund to
keep the Fund's expenses within these limits. 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 or management fees
payable by the Funds (before any voluntary fee reductions) were as follows:
FUND 1994 1995 1996**
--------------------------- ---- ---- ----
Growth Fund $7,572,051 $7,631,203 $8,300,884
Capital Growth Fund $ 834,943 $ 989,864 $1,245,009
Value Fund $1,543,333 $1,811,567 $2,241,498
Balanced Fund $1,498,050 $1,906,665 $2,355,084
International Equity Fund* $1,541,223 $2,025,005 $2,439,442
Growth Opportunities Fund $ 555,258 $ 856,469 $1,414,997
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $1,449,606, $1,756,405 and $2,183,655,
respectively, in advisory fees for the fiscal years ended December 31,
1994, 1995 and 1996.
** For the fiscal year ended December 31, 1996, NEFM paid subadvisory fees of
$1,497,544, $882,259 and $1,440,747 to Loomis Sayles for the Balanced,
Capital Growth and Value Funds, respectively. For the fiscal year ended
December 31, 1996, NEFM paid subadvisory fees of $1,296,747 to Draycott
(after the waiver) and $781,353 to Westpeak for the International Equity
and Growth Opportunities Funds, respectively.
For more information about the Funds' advisory and subadvisory
agreements, see "Management of the Trusts" in Part II of this Statement.
BROKERAGE COMMISSIONS
In 1994, 1995 and 1996, brokerage transactions for the Growth Fund
aggregating $3,048,679,127, $4,526,450,414 and $4,347,159,066, respectively,
were allotted to brokers providing research services, and $4,187,824, $5,685,876
and $4,946,073, respectively, in commissions were paid on these transactions in
such years. During 1994, 1995 and 1996 the Fund paid total brokerage commissions
of $4,305,999, $5,784,166 and $5,000,863, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Value Fund
aggregating $9,382,814, $14,560,184 and $27,447,729, respectively, were allotted
to brokers providing research services, and $14,664, $28,143 and $42,841,
respectively, in commissions were paid on these transactions in such years.
During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$342,577, $658,975 and $649,191, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Balanced Fund
aggregating $14,761,967, $12,187,184 and $17,564,632, respectively, were
allotted to brokers providing research services, and $28,267, $30,368 and
$26,139, respectively, in commissions were paid on these transactions in such
years. During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$159,243, $415,773 and $437,169, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Growth
Opportunities Fund aggregating $-0-, $________ and $___________, respectively,
were allotted to brokers providing research services and $-0-, $_____ and
$______, respectively, in commissions were paid on these transactions in such
years. During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$9,427, $138,878 and $_____, respectively.
For the fiscal year ended December 31, 1994, brokerage transactions for
the International Equity Fund aggregating $482,619,468 were allocated to brokers
providing research services, and $1,203,631 in commissions were paid on these
transactions. During 1994, the International Equity Fund paid total brokerage
commissions of $1,203,631. For the fiscal year ended December 31, 1995,
brokerage transactions for the International Equity Fund aggregating
$593,996,591 were allocated to brokers providing research services and
$1,522,463 in commissions were paid on these transactions. During 1995, the
International Equity Fund paid total brokerage commissions of approximately
$1,522,463. For the fiscal year ended December 31, 1996, brokerage transactions
for the International Equity Fund aggregating $375,687,256 were allocated to
brokers providing research services, and $836,718 in commissions were paid on
these transactions. During 1996, the International Equity Fund paid total
brokerage commissions of $836,718.
For the fiscal year ended December 31, 1994, brokerage transactions for
the Capital Growth Fund aggregating $135,445,676 were allocated to brokers
providing research services, and $10,615 in commissions were paid on these
transactions. During 1994, the Capital Growth Fund paid total brokerage
commissions of $191,861. For the fiscal year ended December 31, 1995, brokerage
transactions for the Capital Growth Fund aggregating $130,894,587 were allocated
to brokers providing research services and $157,512 in commissions were paid on
these transactions. During 1995, the Capital Growth Fund paid total brokerage
commissions of approximately $157,512. For the fiscal year ended December 31,
1996, brokerage transactions for the Capital Growth Fund aggregating
$____________ were allocated to brokers providing research services, and $4,500
in commissions were paid on these transactions. During 1996, the International
Equity Fund paid total brokerage commissions of $174,585.
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, 1994, 1995 and
1996:
FUND 1994 1995 1996
--------------------------- ---- ---- ----
Growth Fund*** $2,777,712 $2,800,465 $3,058,031 (Class A)
Value Fund $ 489,686 $ 545,439 $ 646,962 (Class A)
$ 81,490 $ 206,005 $ 359,799 (Class B)
--- $ 3,915 $ 21,301 (Class C)*
Balanced Fund $ 401,403 $ 445,951 $ 510,417 (Class A)
$ 141,331 $ 301,592 $ 486,789 (Class B)
--- $ 3,017 $ 15,702 (Class C)*
Growth Opportunities Fund $ 376,217 $ 340,216 $ 397,330 (Class A)
$ 35,609 $ 107,138 $ 389,526 (Class B)
--- $3,589 $ 45,844 (Class C)**
International Equity Fund $ 341,787 $ 346,710 $ 316,834 (Class A)
$ 262,144 $ 476,345 $ 513,700 (Class B)
--- $ 5,831 $ 10,445 (Class C)*
Capital Growth Fund $ 247,956 $ 277,682 $ 333,455 (Class A)
$ 121,432 $ 207,706 $ 321,106 (Class B)
--- $ 1,362 $ 5,079 (Class C)*
* Class C shares were first offered on January 3, 1995.
** Growth Opportunities Fund Class C shares were first offered on May 1,
1995.
*** The Growth Fund offered only Class A shares during 1994, 1995
and 1996.
During the fiscal year ended December 31, 1996, expenses relating to
each Fund's 12b-1 plans were as follows:
GROWTH FUND
Compensation to Investment Dealers $3,059,063
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 105,193
TOTAL $3,164,256
VALUE FUND
(Class A shares)
Compensation to Investment Dealers $ 648,010
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 97,539
TOTAL $ 745,549
(Class B shares)
Compensation to Investment Dealers $ 607,907
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 99,079
TOTAL $ 706,986
(Class C shares)
Compensation to Investment Dealers $ 21,301
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 96,553
TOTAL $ 117,854
BALANCED FUND
(Class A shares)
Compensation to Investment Dealers $ 510,832
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 97,681
TOTAL $ 608,513
(Class B shares)
Compensation to Investment Dealers $ 672,169
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 100,105
TOTAL $ 772,274
(Class C shares)
Compensation to Investment Dealers $ 15,702
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 96,195
TOTAL $ 111,897
GROWTH OPPORTUNITIES FUND
(Class A shares)
Compensation to Investment Dealers $ 397,435
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 105,193
TOTAL $ 502,628
(Class B shares)
Compensation to Investment Dealers $ 803,140
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 113,672
TOTAL $ 916,812
(Class C shares)
Compensation to Investment Dealers $ 45,845
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 104,535
TOTAL $ 150,380
INTERNATIONAL EQUITY FUND
(Class A shares)
Compensation to Investment Dealers $ 316,099
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 102,532
TOTAL $ 418,631
(Class B shares)
Compensation to Investment Dealers $ 362,592
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 100,047
Other Distribution Costs $ 47,862
TOTAL $ 510,501
(Class C shares)
Compensation to Investment Dealers $ 10,443
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 94,154
TOTAL $ 104,597
CAPITAL GROWTH FUND
(Class A shares)
Compensation to Investment Dealers $ 333,886
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 94,974
TOTAL $ 428,860
(Class B shares)
Compensation to Investment Dealers $ 408,220
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 94,970
TOTAL $ 503,190
(Class C shares)
Compensation to Investment Dealers $ 5,085
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 91,725
TOTAL $ 96,810
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: $2,361,916 relating to the Growth Fund; $546,493 relating to the
Class A shares, $479,576 relating to the Class B shares and $3,872 relating to
the Class C shares of the Value Fund; $433,083 relating to the Class A shares,
$550,220 relating to the Class B shares and $5,219 relating to the Class C
shares of the Balanced Fund; $150,001 relating to the Class A shares, $568,835
relating to the Class B shares and $4,202 relating to the Class C shares of the
Growth Opportunities Fund; $223,695 relating to the Class A shares, $228,727
relating to the Class B shares and $2,910 relating to the Class C shares of the
International Equity Fund; and $259,577 relating to the Class A shares, $344,989
relating to the Class B shares and $2,893 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.
<PAGE>
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of April 1, 1997, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the following Funds:
CAPITAL GROWTH FUND
Class C shares State Street Bank and Trust Co 5.23%
Cust for the IRA of
William J. Walker
11 Saddle Club Road
Lexington, MA 02173-2102
Larry A. Minnick 10.56%
8105 Bromlay Pl.
Indianapolis, IN 46219-2851
State Street Bank and Trust Co 11.18%
Cust of the IRA Rollover of
Fred Glenn McDaniel
4354 Chris Greene Lake Dr.
Charlottesville, VA 22911-5816
BALANCED FUND
Class C shares California Central Trust Bank Corp 15.42%
TTEE FBO Dimension One Spas Inc.
PSP dtd 1/13/87
Post Office Box 5024
Costa Mesa, CA 92628-5024
State Street Bank and Trust Co 5.12%
Custodian FBO Paula Holmberg IRA
3900 Miller Street
Wheat Ridge, CO 80033-4146
Class Y shares The New England 7.07%
Progress Profit Sharing Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
New England Mutual Life Ins Co 68.96%
Separate Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
The New England 7.95%
Agent's Retirement Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
The New England 5.50%
Agent's Retirement Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
New England Life Ins Co 7.52%
c/o GADC-Agency Operations
NELICO
501 Boylston Street
Boston, MA 02116-3706
GROWTH FUND
Class B shares State Street Bank & Trust Co 6.18%
Cust for the IRA of
Sally K. Tuller
1502 Fairway Green
Mamaronek, NY 15043
GROWTH OPPORTUNITIES FUND
Class C shares PaineWebber for the Benefit of 5.18%
Las Vegas Entertainment Network Inc
1801 Century Park East
23rd Floor
Los Angeles, CA 90067-2302
INTERNATIONAL EQUITY FUND
Class C shares FTC & Co 44.47%
Attn: Datalynx
PO Box 173736
Denver, CO 80217-3736
Class Y shares The New England 27.48%
Progress Profit Sharing Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02216-37069
The New England 27.53%
Agent's Retirement Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
The New England 17.10%
Agent's Deferred Comp Plan
c/o/ Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
NEIC Master Retirement Trust 12.86%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
New England Life Ins Co 15.02%
c/o GADC-Agency Operations
NELICO
501 Boylston Street
Boston, MA 02116-3706
<PAGE>
VALUE FUND
Class C shares PaineWebber for the Benefit of 6.62%
Las Vegas Entertainment Network Inc
1801 Century Park East
23rd Floor
Los Angeles, CA 90067-2302
Class Y shares New England Mutual Life Ins Co 93.73%
Separate Investment Accounting
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
New England Life Ins Co 6.27%
501 Boylston Street
Boston, MA 02116-3706
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE*
For The Periods Ended 12/31/96
<TABLE>
<CAPTION>
GROWTH 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 20.88 61.18 290.21 10.02 14.58
Maximum Offering Price 13.05 50.68 264.87 8.54 13.82
VALUE FUND
<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 26.31 124.84 230.34 17.59 12.69
Maximum Offering Price 18.99 111.86 211.44 16.20 12.03
<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 25.35 71.49 17.76
Redemption at End of Period 21.35 69.49 17.34
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
Net Asset Value 25.23 64.45 28.08
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since 3/31/94*** Since
Class Y shares: As a % of 1 Year 3/31/94***
- -------------------------------------------- ------ ----------
<S> <C> <C> <C>
Net Asset Value 26.43 71.83 21.67
BALANCED FUND
<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 17.12 87.31 164.76 13.37 10.23
Maximum Offering Price 10.40 76.52 149.49 12.04 9.57
<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 16.26 45.42 12.02
Redemption at End of Period 12.26 43.42 11.55
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
Net Asset Value 16.21 45.48 20.50
<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 17.63 45.01 14.08
GROWTH OPPORTUNITIES FUND****
<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 17.21 88.62 231.00 13.53 12.72
Maximum Offering Price 10.45 77.77 211.99 12.20 12.05
<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 16.34 58.10 14.89
Redemption at End of Period 12.48 56.10 14.45
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ --------------------------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95*** 5/1/95***
- -------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 16.27 39.70 22.19
<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
INTERNATIONAL EQUITY FUND*****
<CAPTION>
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 3.27 45.13 8.40
Maximum Offering Price -2.65 36.82 7.02
<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 2.48 15.88 4.57
Redemption at End of Period -1.52 13.88 4.02
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
Net Asset Value 2.48 7.83 3.82
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Since Since
Class Y shares: As a % of 1 Year 9/9/93*** 9/13/93***
- -------------------------------------------- ------ --------- ----------
<S> <C> <C> <C>
Net Asset Value 3.95 21.54 6.07
CAPITAL GROWTH FUND******
<CAPTION>
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 17.05 86.64 15.20
Maximum Offering Price 10.34 75.94 13.67
<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 16.11 52.48 13.64
Redemption at End of Period 12.11 50.48 13.18
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
Net Asset Value 16.24 50.73 22.64
<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
* 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.
** The numbers presented reflect the maximum initial sales charge currently in effect. Prior to March 3, 1997,
a higher maximum initial sales charge was in effect, so that the total returns achieved by investors may
have been lower than those shown above.
*** 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 12.05%, 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 211.93%. Based on net asset values, the Fund's Class A shares' ten-year average annual total return
would have been 12.71%, had this limitation not been in effect, and their ten-year aggregate total return
would have been 230.86%.
***** 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 6.67%, and their aggregate one-year and
since-inception total returns would have been -2.69% and 34.71%, 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 8.07%, and their one-year and since-inception aggregate total returns
would have been 3.23% and 43.03%, 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
2.85%, 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 -1.56% and 12.86%, respectively. Based on net asset
values, the Fund's Class B shares' average annual total return for the since-inception period would have
been 4.29%, and their aggregate total returns for the one-year and since-inception periods would have been
14.86% and 2.44%, 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 3.78% and 5.88%, respectively, and
their since-inception aggregate total returns would have been 7.70% and 20.75%, 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 13.44%, and their aggregate one-year and
since-inception total returns would have been 10.34% and 74.39%, 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 14.97%, and their since inception aggregate total return would have been 85.04% without the
voluntary limitation.
</TABLE>
The foregoing data represent past performance only and are not a
prediction as to the future returns of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than this original
cost.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet
- --------------------------------------------------------------------------------
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, 1997
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, 1997 for Class A, Class B or Class C shares, or the Prospectus of the
Funds dated May 1, 1997 for Class Y shares (the "Prospectus" or "Prospectuses").
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, 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
twelve 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 seven 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
PART I Page
Investment Restrictions
Fund Charges and Expenses
Ownership of Fund Shares
Investment Performance of the Funds
PART II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain Fund Information
Appendix C - Advertising and Promotional Literature
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds
Appendix E - Growth Fund of Israel
<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 vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of those restrictions marked with
a dagger (+) below, the percentages set forth below and the percentage
limitations set forth in the Prospectus will apply at the time of the purchase
of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security.
GOVERNMENT SECURITIES FUND
New England Government Securities Fund (the "Government Securities Fund") will
not:
*(1) Invest in any securities other than U.S. Government securities, put and
call options thereon, futures contracts, options on futures contracts
and repurchase agreements;
*(2) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related
options;
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(4) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the present
intention of management to make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes;
such sales would not be made with respect to securities subject to
outstanding options.);
*(5) Make loans to other persons (except as provided in restriction (6)
below); provided that for purposes of this restriction the investment in
repurchase agreements shall not be deemed to be the making of a loan;
*(6) Lend its portfolio securities in excess of 15% of its total assets,
taken at market value;
*(7) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate futures contracts, options on interest
rate futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures or related
options are deemed to be the issuance of a senior security.);
*(8) Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities;
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to U.S. Government Securities and with respect to
interest rate futures contracts; or
*(10) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.
+(11) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
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.
LIMITED TERM U.S. GOVERNMENT FUND
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government
Fund") will not:
*(1) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or options transactions is not considered the purchase
of a security on margin.);
*(2) Make short sales of securities unless at all times when a short position
is open it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount
to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at current value) is held as collateral for
such sales at any one time;
*(3) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the current value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, futures contracts and options on futures contracts,
and collateral arrangements with respect to initial and variation
margin, are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or options are deemed
to be the issuance of a senior security.);
*(4) Invest more than 25% of its total assets (taken at current value) in
securities of businesses in the same industry (for this purpose,
telephone, electric, water and gas utilities are considered separate
industries);
*(5) Make loans, except by the purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness that are a
part of an issue to the public or to financial institutions, or by
lending portfolio securities to the extent set forth in Part II of this
Statement of Additional Information under "Miscellaneous Investment
Practices -- Loans of Portfolio Securities" provided that for purposes
of this restriction, investment in repurchase agreements shall not be
deemed to be the making of a loan;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts. (This restriction does not prevent the Fund from purchasing
securities of companies investing or dealing in the foregoing.);
*(7) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(8) Make investments for the purpose of exercising control or management; or
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to financial instruments or indices thereof and
currencies and with respect to futures contracts on financial
instruments or indices thereof.
+(10) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
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.
ADJUSTABLE RATE FUND
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(3) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the current
intention of the Fund, which may change without shareholder approval, to
make such sales only for the purpose of deferring realization of gain or
loss for federal income tax purposes; such sales would not be made with
respect to securities covering outstanding options.);
*(4) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(5) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate future contracts, and options on
interest rate futures contracts, collateral arrangements with respect to
interest rate caps, floors or swap arrangements, and collateral
arrangements with respect to initial and variation margin are not deemed
to be a pledge of assets and neither (i) such arrangements, (ii) the
purchase or sale of futures or related options, (iii) interest rate caps
and floors nor (iv) interest rate swap agreements, where assets are
segregated to cover the Fund's obligations thereunder, are deemed to be
the issuance of a senior security.);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
the Trust or officers and directors of the investment adviser of the
Fund who individually own more than 1/2 of 1% of the shares or
securities of that issuer, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, that are a part
of an issue to the public or to financial institutions, or by lending
portfolio securities to the extent set forth under "Miscellaneous
Investment Practices - Loans of Portfolio Securities" in Part II of this
Statement. (This restriction 8 does not limit the Fund's ability to
engage in repurchase agreement transactions.);
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts, and may purchase interest rate caps and floors and enter into
interest rate swap agreements. (This restriction does not prevent the
Fund from purchasing securities of companies investing or dealing in the
foregoing.);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to fixed income securities and currencies and with
respect to futures contracts on fixed income securities or currencies;
*(14) Purchase any illiquid security, including securities that are not
readily marketable, if, as a result, more than 10% of the Fund's total
net assets (based on current value) would then be invested in such
securities. (The staff of the Securities and Exchange Commission (the
"SEC") is presently of the view that repurchase agreements maturing in
more than seven days are subject to this restriction. Until that
position is revised, modified or rescinded, the Fund will conduct its
operations in a manner consistent with this view); or
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets (taken at current value), or (c) own more
than 3% of the outstanding voting stock of any one investment company.
Although the Fund may loan its portfolio securities and issue senior
securities, borrow money, pledge its assets, and invest in the securities of
other investment companies to the extent permitted by investment restrictions
(5), (8) and (14) above, the Fund has no current intention of engaging in such
investment activities.
In addition, as a matter of current operating policy that may be
changed without shareholder approval, the Fund intends to limit certain of its
investments in accordance with the provisions of the Federal Credit Union Act
and Regulation 703 thereunder.
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) 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;
*(7) 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);
*(8) 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;
(9) 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.);
(10) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities
indexes, currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(11) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities deemed to be liquid
under guidelines established by the Trust's trustees and certain Section
4(2) commercial paper);
*(12) 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.)
BOND INCOME FUND
New England Bond Income Fund (the "Bond Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities); or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 10% of its total
assets (taken at cost) or 5% of its total assets (taken at current
value), whichever is lower;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any company if officers and trustees of
New England Funds Trust I or of any investment adviser or subadviser of
the Bond Income Fund who individually own more than 1/2 of 1% of the
shares or securities of that company, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are part of
an issue to the public, or by lending portfolio securities to the extent
set forth under "Miscellaneous Investment Practices -- Loans of
Portfolio Securities" in Part II of this Statement;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or commodity contracts or real estate (except
that the Bond Income Fund may buy and sell marketable securities of
companies, including real estate investment trusts, which may represent
indirect interests in real estate; may buy and sell futures contracts on
securities or on securities indexes and may write, purchase or sell put
or call options on such futures contracts or indexes; and may enter into
currency forward contracts);
*(10) Act as underwriter;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with Back Bay Advisors, L.P. ["Back Bay Advisors"]
or accounts under its management to reduce brokerage commissions, to
average prices among them, or to facilitate such transactions is not
considered participating in a trading account in securities.);
*(13) Write, purchase or sell options or warrants, except that the Fund may
(a) acquire warrants or rights to subscribe to securities of companies
issuing such warrants or rights or of parents or subsidiaries of such
companies, provided that such warrants or other rights to subscribe are
attached to, or part of a unit offering involving, other securities, and
(b) write, purchase or sell put or call options on securities,
securities indexes or futures contracts; or
*(14) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. (Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets [taken at current value] in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.)
*(15) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (4) above; any pledge or other encumbrance of assets
permitted by restriction (5) above; any collateral arrangements with
respect to options, forward contracts, futures contracts, swap contracts
and other similar contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts and other
similar 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.
+(16) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
HIGH INCOME FUND
New England High Income Fund (the "High Income Fund") will not:
*(1) Buy more than 10% of the voting securities or more than 10% of all of
the securities of any issuer, or invest to control or manage any
company;
*(2) Purchase securities on "margin," except for short-term credits as needed
to clear securities purchases;
*(3) Invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization,
or by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer commission or profit, other
than a customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of the value of its total
assets would be invested in such securities;
*(4) Purchase securities, other than shares of the Fund, from or sell
portfolio securities to its directors or officers, or firms they are
affiliated with as principals, except as permitted by the regulations of
the SEC;
*(5) Purchase or sell commodities or commodity contracts, or write, purchase
or sell options, except that the Fund may (a) buy or sell futures
contracts on securities or on securities indexes and (b) write, purchase
or sell put or call options on securities, on securities indexes or on
futures contracts of the type referred to in clause (a) of this
restriction;
*(6) Make loans, except loans of portfolio securities and except to the
extent that the purchase of notes, repurchase agreements, bonds, or
other evidences of indebtedness or deposits with banks or other
financial institutions may be considered loans;
*(7) Make short sales of securities or maintain a short position;
*(8) Purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or in securities
issued by companies which invest in real estate or interests therein;
*(9) Purchase or sell interests in oil and gas or other mineral exploration
or development programs, provided that the Fund may invest in securities
issued by companies which do invest in or sponsor such programs;
*(10) Underwrite the securities of other issuers; or
*(11) Invest more than 10% of the value of its total assets, in the aggregate,
in repurchase agreements maturing in more than seven days and restricted
securities.
*(12) 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);
*(13) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 33 1/3% of its
total assets; or
*(14) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (13) above; any collateral arrangements with respect to
options, forward contracts, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts, futures contracts, swap contracts or similar 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 II's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
+(15) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
MUNICIPAL INCOME FUND
New England Municipal Income Fund (the "Municipal Income Fund") will not:
*(1) Purchase any security if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in securities of
a single issuer. This limitation does not apply to U.S. Government
securities. (The Fund will treat each state and each separate political
subdivision, agency, authority or instrumentality of such state, each
multistate agency or authority, and each guarantor, if any, as a
separate issuer);
(2) Invest more than 25% of its total assets (taken at current value) in
industrial development revenue bonds that are based, directly or
indirectly, on the credit of private entities in any one industry or in
securities of private issuers in any one industry. (For the purpose of
this restriction, "private activity bonds" under the Internal Revenue
Code of 1986, as amended [the "Code"], will be treated as industrial
revenue bonds.) (In the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities, or make short sales. For this purpose, the
deposit or payment by the Fund of initial or variation margin in
connection with interest rate futures contracts or tax exempt bond index
futures contracts is not considered the purchase of a security on
margin;
*(4) Purchase more than 10% of the total value of the outstanding securities
of an issuer;
*(5) Borrow money, except as a temporary measure for extraordinary or
emergency purposes (but not for the purpose of investment) up to an
amount not in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower;
*(6) Pledge, mortgage or hypothecate more than 15% of its total assets (taken
at cost). In order to comply with certain state requirements, as a
matter of operating policy subject to change without shareholder
approval, the Fund will not pledge, mortgage or hypothecate more than 5%
of such assets;
*(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses less than three years old and industrial
development revenue bonds where the private entity on whose credit the
security is based, directly or indirectly, is less than three years old
(including predecessor businesses and entities);
*(8) Purchase or retain securities of any issuer if, to the knowledge of the
Fund, officers and trustees of New England Funds Trust I or of any
investment adviser or subadviser of the Fund who individually own
beneficially more than 1/2 of 1% of the securities of that issuer,
together own beneficially more than 5% of such securities;
*(9) Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies. This limitation does not
apply to repurchase agreements;
*(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or real estate (except that the Fund may buy tax
exempt bonds or other permitted investment secured by real estate or an
interest therein);
*(11) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(12) Purchase voting securities or make investments for the purpose of
exercising control or management;
*(13) Participate on a joint or joint and several basis in any trading account
in securities;
*(14) Write, purchase, or sell puts, calls or combinations thereof, except
that the Fund may write, purchase and sell puts, calls or combinations
thereof with regard to futures contracts;
*(15) Invest in the securities of other investment companies, except in
connection with a merger, consolidation or similar transaction. (Under
the 1940 Act, the Fund may not (a) invest more than 10% of its total
assets (taken at current value) in such securities, (b) own securities
of any one investment company having a value in excess of 5% of the
Fund's total assets (taken at current value), or (c) own more than 3% of
the outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (5) above; any collateral arrangements with respect to
forward contracts, options, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
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.
+(17) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
The Fund may invest more than 25% of its assets in industrial
development revenue bonds, subject to limitation (2) above.
- --------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- --------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to separate advisory agreements, each dated August 30, 1996,
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:
<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 0.550% of the first $200 million
0.510% of the next $300 million
0.470% of amounts in excess of $500 million
Bond Income Fund and 0.500% of the first $100 million
Municipal Income Fund 0.375% of amounts in excess of $100 million
Government Securities Fund and 0.650% of the first $200 million
Limited Term U.S. Government Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500 million
High Income Fund 0.700% of the first $200 million
0.650% of amounts in excess of $200 million
Strategic Income Fund 0.650% of the first $200 million
0.600% of amounts in excess of $200 million
</TABLE>
Each advisory agreement provides that NEFM may delegate its
responsibilities thereunder to another party. Pursuant to separate subadvisory
agreements, each dated August 30, 1996, NEFM has delegated responsibility for
managing the investment and reinvestment of the Strategic Income Fund's and the
High Income Fund's assets to Loomis Sayles & Company, L.P. ("Loomis Sayles"), as
subadviser. Pursuant to separate subadvisory agreements, each dated August 30,
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 by 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 Advisors 0.2750% of the first $200 million
0.2550% of the next $300 million
0.2350% of amounts in excess of $500 million
Bond Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund Loomis Sayles 0.3500% of the first $200 million
0.3000% of amounts in excess of $200 million
Limited Term U.S. Government Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.3500% of the first $200 million
0.3000% of amounts in excess of $200 million
Municipal Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
</TABLE>
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to the Adjustable Rate, Bond Income,
Government Securities, Limited Term U.S. Government and Municipal Income Funds
under separate advisory agreements and separate subadvisory agreements providing
for management and subadvisory fees at the same rates as are currently in effect
for these Funds.
From July 1, 1996 to August 30, 1996, NEFM served as adviser and Loomis
Sayles served as subadviser to the High Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund. From January 2, 1996 to June 30,
1996, NEFM served as adviser to the High Income Fund pursuant to an advisory
agreement which provided for a management fee payable by the Fund to NEFM at the
annual rate of 0.75% of the Fund's average daily net assets, and Back Bay
Advisors served as subadviser to the High Income Fund pursuant to a subadvisory
agreement which provided for a subadvisory fee payable by NEFM to Back Bay
Advisors at the annual rate of 0.375% of the Fund's average daily net assets.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the High Income
Fund pursuant to an advisory agreement providing for an advisory fee payable by
the Fund to Back Bay Advisors at the annual rate of 0.75% of the Fund's average
daily net assets. 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.
Prior to August 30, 1996, NEFM served as adviser and Loomis Sayles
served as subadviser to the Strategic Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the
Government Securities, Limited Term U.S. Government, Bond 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 an 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 $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, 1994 and 1995 and NEFM was paid $866,836 for
the fiscal year ended December 31, 1996, after reduction pursuant to the expense
limitation arrangements described below. For the fiscal year ended December 31,
1996, NEFM paid Back Bay Advisors $433,418 for subadvisory services it rendered
to the Adjustable Rate Fund. Had the voluntary expense limitation not been in
effect, Back Bay Advisors would have been paid $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, 1994 and 1995, and NEFM
would have been paid $1,572,103 for services rendered during the fiscal year
ended December 31, 1996.
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, 1994 and 1995, the Government
Securities Fund paid advisory fees to Back Bay Advisors of $1,102,880 and
$1,008,846, respectively. For the fiscal year ended December 31, 1996, the
Government Securities Fund paid management fees to NEFM of $933,063. For the
fiscal year ended December 31, 1996, NEFM paid subadvisory fees of $466,531 to
Back Bay Advisors for the Fund.
The Limited Term U.S. Government Fund paid Back Bay Advisors $3,163,619
and $2,560,201 in advisory fees for the fiscal years ended December 31, 1994 and
1995, respectively. For the fiscal year ended December 31, 1996, the Limited
Term U.S. Government Fund paid NEFM $2,230,443 in advisory fees. For the fiscal
year ended December 31, 1996, NEFM paid subadvisory fees of $1,115,221 to Back
Bay Advisors for the Fund.
For the fiscal years ended December 31, 1994 and 1995, the Bond Income
Fund paid advisory fees to Back Bay Advisors of $774,457 and $872,560,
respectively; and the Municipal Income Fund paid advisory fees to Back Bay
Advisors of $925,947 and $890,150, respectively. For the fiscal year ended
December 31, 1996, the Bond Income Fund paid management fees to NEFM of
$962,307, and the Municipal Income Fund paid management fees to NEFM of
$862,741. For the fiscal year ended December 31, 1996, NEFM paid subadvisory
fees of $481,153 and $431,370 to Back Bay Advisors for the Bond Income and
Municipal Income Funds, 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, 1994, and the period from January 1 to
June 30, 1995, the compensation from Back Bay Advisors to Loomis Sayles under
this agreement was $200,190 and $94,978, respectively.
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 in order to limit the Fund's expenses to an
annual rate of 1.40% of the average daily net assets attributable to its Class A
shares and 2.15% of such assets attributable to its Class B shares. Prior to
July 1, 1996, these expense limits were 1.60% for the Fund's Class A shares and
2.25% for the Fund's Class B shares. Prior to January 2, 1996, similar voluntary
limitations were in effect with respect to Back Bay Advisors and the Fund. In
addition, Loomis Sayles has agreed to waive 50% of the subadvisory fee payable
by NEFM to Loomis Sayles for the High Income Fund for the period from July 1,
1996 to June 30, 1997.
Back Bay Advisors was paid $190,955 and $288,711 in advisory fees by
the High Income Fund for the fiscal years ended December 31, 1994 and 1995,
respectively, and NEFM was paid $301,178 in management fees by the High Income
Fund for the fiscal year ended December 31, 1996, after reduction pursuant to
the foregoing voluntary expense limitations. Had the voluntary expense
limitations not been in effect, Back Bay Advisors would have been paid $273,994
and $342,554, respectively, in advisory fees by the High Income Fund for the
fiscal years ended December 31, 1994 and 1995, and NEFM would have been paid
$383,464 in management fees by the High Income Fund for the fiscal year ended
December 31, 1996. For the period from January 2, 1996 to June 30, 1996, NEFM
paid subadvisory fees of $75,941 to Back Bay Advisors for the Fund. For the
period from July 1, 1996 to December 31, 1996, NEFM paid subadvisory fees of
$48,636 to Loomis Sayles for the High Income Fund, after reduction pursuant to
the voluntary fee waiver by Loomis Sayles described above. Had this waiver not
been in effect, NEFM would have paid subadvisory fees of $97,272 to Loomis
Sayles for the Fund for this period.
Loomis Sayles voluntarily agreed, until December 31, 1996, to waive its
entire subadvisory fee for the Strategic Income Fund (which is paid by NEFM),
and NEFM has agreed to reduce its management fee (which is paid by the Fund) by
an equal amount. In addition, under an expense deferral arrangement, which NEFM
terminated as of December 31, 1996, NEFM agreed to defer its management fee (to
the extent not waived as provided in the preceding sentences) for the Strategic
Income Fund, 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.
For the period May 1, 1995 (commencement of operations) to December 31,
1995, the Strategic Income Fund paid no management fees to NEFM, and NEFM paid
no subadvisory fees to Loomis Sayles for the Fund. Had the voluntary waiver and
expense deferral arrangements described above not been in effect, the Fund would
have paid NEFM $241,019 in management fees for the period ended December 31,
1995, and NEFM would have paid $472,789 in subadvisory fees to Loomis Sayles for
the fiscal year ended December 31, 1996. In 1996, NEFM received $30,735 in
management fees deferred from 1995 and $399,473 in 1996 management fees.
BROKERAGE COMMISSIONS
In 1994, 1995 and 1996, 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, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
FUND 1994 1995 1996
- ------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Government Securities Fund $409,909 $366,630 $327,097 (Class A)
$23,270 $37,075 $53,314 (Class B)
Limited Term U.S. Government Fund $1,705,012 $1,332,412 $1,105,672 (Class A)
$98,717 $147,768 $182,790 (Class B)
--- $15,410 $93,928 (Class C)*
Adjustable Rate Fund $1,551,366 $1,040,897 $724,984 (Class A)
$14,092 $21,684 $25,756 (Class B)
Bond Income Fund $416,918 $453,844 $480,362 (Class A)
$30,717 $158,962 $273,249 (Class B)
--- $2,428 $16,367 (Class C)*
<CAPTION>
FUND 1994 1995 1996
- ------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
High Income Fund $117,107 $130,876 $118,046 (Class A)
$30,717 $82,798 $134,657 (Class B)
Municipal Income Fund $512,288 $483,317 $460,994 (Class A)
$66,711 $107,048 $123,404 (Class B)
Strategic Income Fund** --- $39,090 $143,965 (Class A)
--- $155,887 $598,801 (Class B)
--- $58,847 $184,185 (Class C)
* Class C shares were first offered on January 3, 1995.
** The Strategic Income Fund commenced operations on May 1, 1995.
</TABLE>
During the fiscal year ended December 31, 1996, the Distributor's
expenses relating to each Fund's 12b-1 plans were as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $326,632
Compensation to Distributor's Sales Personnel and Other Related Costs $139,363
TOTAL $465,995
(Class B shares)
Compensation to Investment Dealers $72,431
Compensation to Distributor's Sales Personnel and Other Related Costs $139,465
TOTAL $211,896
<CAPTION>
LIMITED TERM U.S. GOVERNMENT FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $788,494
Compensation to Distributor's Sales Personnel and Other Related Costs $125,946
Other Distribution Costs $160,082
TOTAL $1,074,522
(Class B shares)
Compensation to Investment Dealers $180,549
Compensation to Distributor's Sales Personnel and Other Related Costs $94,242
TOTAL $274,791
(Class C shares)
Compensation to Investment Dealers $93,928
Compensation to Distributor's Sales Personnel and Other Related Costs $174,894
TOTAL $268,822
<CAPTION>
ADJUSTABLE RATE FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $722,936
Compensation to Distributor's Sales Personnel and Other Related Costs $137,630
TOTAL $860,566
(Class B shares)
Compensation to Investment Dealers $26,586
Compensation to Distributor's Sales Personnel and Other Related Costs $132,695
TOTAL $159,281
<CAPTION>
STRATEGIC INCOME FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $144,143
Compensation to Distributor's Sales Personnel and Other Related Costs $147,902
TOTAL $292,045
(Class B shares)
Compensation to Investment Dealers $2,074,927
Compensation to Distributor's Sales Personnel and Other Related Costs $201,889
TOTAL $2,276,816
(Class C shares)
Compensation to Investment Dealers $184,187
Compensation to Distributor's Sales Personnel and Other Related Costs $176,885
TOTAL $361,072
<CAPTION>
BOND INCOME FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $480,275
Compensation to Distributor's Sales Personnel and Other Related Costs $99,362
TOTAL $579,637
(Class B shares)
Compensation to Investment Dealers $462,977
Compensation to Distributor's Sales Personnel and Other Related Costs $99,486
TOTAL $562,463
(Class C shares)
Compensation to Investment Dealers $16,367
Compensation to Distributor's Sales Personnel and Other Related Costs $97,795
TOTAL $114,162
<CAPTION>
HIGH INCOME FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $98,496
Compensation to Distributor's Sales Personnel and Other Related Costs $140,487
TOTAL $238,983
(Class B shares)
Compensation to Investment Dealers $313,434
Compensation to Distributor's Sales Personnel and Other Related Costs $150,885
TOTAL $464,319
<CAPTION>
MUNICIPAL INCOME FUND
<S> <C>
(Class A shares)
Compensation to Investment Dealers $460,750
Compensation to Distributor's Sales Personnel and Other Related Costs $142,250
TOTAL $603,000
(Class B shares)
Compensation to Investment Dealers $136,884
Compensation to Distributor's Sales Personnel and Other Related Costs $135,817
TOTAL $272,701
</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: $277,228 relating to the Class A shares and $45,689 relating to the
Class B shares of the Government Securities Fund; $176,564 relating to the Class
A shares and $23,735 relating to the Class B shares of the Adjustable Rate Fund;
$373,905 relating to the Class A shares and $355,116 relating to the Class B
shares and $8,545 relating to the Class C shares of the Bond Income Fund;
$57,463 relating to the Class A shares and $121,326 relating to the Class B
shares of the High Income Fund; $372,904 relating to the Class A shares and
$73,850 relating to the Class B shares of the Municipal Income Fund; $528,238
relating to the Class A shares, $126,396 relating to Class B shares and $11,289
relating to the Class C shares of the Limited Term U.S. Government Fund; and
$80,318 to the Class A shares, $866,396 relating to the Class B shares and
$16,800 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.
- --------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- --------------------------------------------------------------------------------
As of April 1, 1997, to the Trust's knowledge, the following persons
owned of record or beneficially 5% or more of the indicated classes of the
following Funds:
<TABLE>
GOVERNMENT SECURITIES FUND
<S> <C> <C>
Class B shares State Street Bank & Trust Co. 5.21%
Cust for the IRA Rollover of
Edith H. Crowson
Katy, TX 77450-1624
Class Y shares New England Mutual Life Ins Co 100%
Separate Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
LIMITED TERM U.S. GOVERNMENT FUND
Class Y shares New England Mutual Life Ins Co 44.76%
Separate Investment Accounting
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
NEIC Master Retirement Trust 55.24%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
ADJUSTABLE RATE U.S. GOVERNMENT FUND
Class A shares San Bernadino County 34.60%
Treasurer
172 W. 3rd Street
San Bernadino, CA 92415-1001
National Auto Dealers Association 5.20%
8400 Westpark Drive
McLean, VA 22102-3522
Class B shares Smith Barney 5.39%
388 Greenwich Street
New York, NY 10013-2375
STRATEGIC INCOME FUND
Class C shares Southtrust Bank of Georgia NA 9.02%
Attn Trust Dept
Atlanta Regional Commission Retirement Plan
79 W. Paces Ferry Road
Atlanta, GA 30305-1350
BOND INCOME FUND
Class C shares Resources Trust Co Tr 13.98%
FBO Barbara J. Scioscia
PO Box 5900
Denver, CO 80217-5900
California Central Trust Bank Corp 12.25%
TTEE FBO Dimension One Spas Inc
PO Box 5024
Costa Mesa, CA 92628-5024
PaineWebber For the Benefit of 7.69%
James L. Binsacca
440 Fulton Road
San Mateo, CA 94402-1120
Class Y shares NEIC Master Retirement Trust 73.12%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
New England Life Ins Co 26.87%
c/o Financial Admin
501 Boylston Street
Boston, MA 02116-3706
HIGH INCOME FUND
Class A shares Deferred Comp Plan for General Agents of The New England 9.90%
The New England
501 Boylston Street
Boston, MA 02116-3706
Class B shares MLPF&S for the Sole Benefit of its Customers 5.34%
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
MUNICIPAL INCOME FUND
Class B shares Smith Barney 5.33%
388 Greenwich Street
New York, NY 10013-2375
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- --------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/96*
<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 0.79 33.08 93.91 5.88 6.85
Maximum Offering Price -3.73 27.11 85.12 4.92 6.35
<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 -0.05 10.45 3.08
Redemption at End of Period -4.05 8.64 2.57
<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 1.13 19.16 6.56
<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 2.39 27.14 76.62 4.92 7.38
Maximum Offering Price -0.65 23.31 71.27 4.28 6.97
<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 1.73 10.45 3.09
Redemption at End of Period -2.09 8.64 2.57
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 9/27/93**
- ---------------------------------------------- ------ ---------- ---------
<S> <C> <C> <C>
Net Asset Value 1.64 13.18 6.35
<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 2.75 16.13 5.57
<CAPTION>
ADJUSTABLE RATE FUND***
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 10/18/91** 5 Years 10/18/91**
- ---------------------------------------------- ------ ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 5.83 26.45 27.97 4.80 4.85
Maximum Offering Price 4.83 25.11 26.62 4.58 4.63
<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 4.90 13.10 3.80
Redemption at End of Period 0.90 11.14 3.25
<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
<CAPTION>
STRATEGIC INCOME FUND*****
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5/1/95** 5/1/95**
- ---------------------------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 14.52 26.28 15.00
Maximum Offering Price 9.38 20.59 11.86
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 5/1/95** 5/1/95**
- ---------------------------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 13.68 24.74 14.15
Redemption at End of Period 9.68 21.74 12.50
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95** 5/1/95**
- ---------------------------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 13.59 24.56 14.05
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 5/1/95** 5/1/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value n/a n/a
<CAPTION>
BOND INCOME 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 4.60 45.62 125.23 7.81 8.46
Maximum Offering Price -0.09 39.10 115.15 6.82 7.96
<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 3.73 17.25 4.94
Redemption at End of Period -0.27 15.41 4.44
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 12/30/94**
- ---------------------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net Asset Value 3.90 22.61 10.78
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 12/30/94** 12/30/94**
- ---------------------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net Asset Value 4.59 26.54 12.49
<CAPTION>
HIGH INCOME 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 14.89 67.50 107.11 10.87 7.55
Maximum Offering Price 9.76 59.92 97.87 9.84 7.06
<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 14.12 27.09 7.58
Redemption at End of Period 10.12 25.18 7.09
<CAPTION>
MUNICIPAL INCOME 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 4.63 38.38 93.49 6.71 6.82
Maximum Offering Price -0.10 32.23 84.90 5.75 6.34
<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 3.85 11.41 3.33
Redemption at End of Period -0.15 9.53 2.80
* 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 4.83% and 4.58%, respectively, and their average annual
since-inception total return would have been 4.30% 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
5.59% and 25.79%, respectively, and their since-inception average annual total return would have been 4.51%, 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 0.66% and 10.12%, respectively, had a voluntary expense
limitation not been in effect, and their average annual total return for the since-inception period would have been
2.97%. 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 4.66% and 12.06%, respectively, and their average annual total returns for
the since-inception period would have been 3.51%, 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 9.60%, 57.82% and 90.43%, 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 9.56% and 6.65%, 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 14.89%, 67.50% and 107.06%, respectively,
without the voluntary limitation, and their five-year and ten-year average annual total returns would have been
10.59% and 7.16%, 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 9.96% and 24.39%, respectively, had a
voluntary expense limitation not been in effect, and their average annual total return for the since-inception period
would have been 6.88%. 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 14.12% and 27.09%, respectively, without the voluntary limitation, and
their average annual total return for the since-inception period would have been 7.38%.
***** Assuming deduction of the current maximum sales load, the Strategic Income Fund's Class A, Class B and Class C
shares' aggregate total returns for the since-inception period would have been 19.59%, 20.74% and 23.56%,
respectively, had a voluntary expense deferral arrangement not been in effect, and their annualized total returns for
the since-inception would have been 11.32%, 11.96% and 13.52%, respectively.
</TABLE>
YIELD FOR THE 30-DAY PERIOD
ENDED 12/31/96*
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Government Securities Fund............................. 5.06 4.55 --- 5.57
Limited Term U.S. Government Fund...................... 5.28 4.79 4.77 5.80
Adjustable Rate U.S. Government Fund................... 5.89 5.19 --- ---
Strategic Income Fund.................................. 7.61 7.20 7.23 ---
Bond Income Fund....................................... 6.76 6.31 6.25 7.35
High Income Fund....................................... 9.01 8.67 --- ---
Municipal Income Fund.................................. 5.19 4.68 --- ---
* 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.
</TABLE>
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 12/31/96
<TABLE>
<CAPTION>
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
- ------------------------------------------------------- ------ -------- ---------
<S> <C> <C> <C>
GOVERNMENT SECURITIES FUND
(Class A shares)
Net Asset Value........................................ 5.69 6.05 6.57
Maximum Offering Price................................. 5.43 5.77 6.27
(Class B shares)
Net Asset Value........................................ 4.93 5.30 5.81
(Class Y shares)
Net Asset Value........................................ 5.94 6.30 6.82
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Net Asset Value........................................ 6.23 6.58 7.15
Maximum Offering Price................................. 6.05 6.38 6.94
(Class B shares)
Net Asset Value........................................ 5.58 5.93 6.49
(Class C shares)
Net Asset Value........................................ 5.58 5.93 6.49
(Class Y shares)
Net Asset Value........................................ 6.57 6.92 7.49
ADJUSTABLE RATE FUND
(Class A shares)
Net Asset Value........................................ 5.75 5.53 5.73
Maximum Offering Price................................. 5.70 5.48 5.68
(Class B shares)
Net Asset Value........................................ 5.01 4.82 4.98
(Class Y shares)
Net Asset Value........................................ n/a n/a n/a
STRATEGIC INCOME FUND
(Class A shares)
Net Asset Value........................................ 7.54 7.54 7.93
Maximum Offering Price................................. 7.21 7.21 7.57
(Class B shares)
Net Asset Value........................................ 6.77 6.79 7.19
(Class C shares)
Net Asset Value........................................ 6.78 6.80 9.33
(Class Y shares)
Net Asset Value........................................ n/a n/a n/a
BOND INCOME FUND
(Class A shares)
Net Asset Value........................................ 6.97 6.97 7.03
Maximum Offering Price................................. 6.66 6.66 6.72
(Class B shares)
Net Asset Value........................................ 6.21 6.23 6.28
(Class C shares)
Net Asset Value........................................ 6.20 6.50 6.28
(Class Y shares)
Net Asset Value........................................ 7.21 7.21 7.28
HIGH INCOME FUND
(Class A shares)
Net Asset Value........................................ 8.92 8.92 8.94
Maximum Offering Price................................. 8.52 8.52 8.54
(Class B shares)
Net Asset Value........................................ 8.18 8.18 8.26
MUNICIPAL INCOME FUND
(Class A shares)
Net Asset Value........................................ 5.42 5.42 5.47
Maximum Offering Price................................. 5.17 5.17 5.22
(Class B shares)
Net Asset Value........................................ 4.67 4.67 4.71
</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.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
MAY 1, 1997
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, 1997 (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, 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 seven series.
T A B L E O F C O N T E N T S
Page
PART I
Investment Restrictions
Fund Charges and Expenses
Ownership of Fund Shares
Investment Performance of the Fund
PART II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions and Tax Status
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain Fund Information
Appendix C - Advertising and Promotional Literature
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds
Appendix E - Growth Fund of Israel
<PAGE>
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INVESTMENT RESTRICTIONS
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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 Company Act of 1940 [the "1940 Act"]), the Fund will not:
(1) Borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of its total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as
a temporary measure to facilitate the meeting of redemption requests
(not for leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or emergency
purposes. (Such borrowings will be repaid before any additional
investments are made);
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 10% of the value of its total assets (taken at the lower of cost or
current value) and then only to secure borrowings permitted by
restriction (1) above;
(3) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities;
(4) Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(5) Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;
(6) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate;
(7) Purchase or sell commodities or commodity contracts, or write or
purchase options, except that the Fund may (a) buy or sell futures
contracts on securities or on securities indexes and (b) write, purchase
or sell put or call options on securities, on securities indexes or on
futures contracts of the type referred to in clause (a) of this
restriction;
(8) Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, and through repurchase
agreements;
(9) Invest in securities of any issuer if, to the knowledge of the Fund,
officers and trustees of the Trust or officers and directors of Back Bay
Advisors, L.P. ("Back Bay Advisors"), the Fund's subadviser, who
beneficially own more than 1/2 of 1% of the securities of that issuer
together own more than 5%;
(10) Invest in the securities of any issuer if, immediately after such
investment, more than 5% of the value of the total assets of the Fund
taken at current value would be invested in the securities of such
issuer; provided that this limitation does not apply either to
obligations issued or guaranteed as to interest and principal by the U.
S. Government or its agencies or instrumentalities or to Massachusetts
Tax Exempt Bonds (as defined in the Prospectus);
(11) Purchase securities restricted as to resale, if, as a result, such
investments would exceed 5% of the value of the Fund's net assets;
(12) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities or Massachusetts Tax Exempt Bonds, except
obligations backed only by the assets and revenues of nongovernmental
users) if as a result of such purchases more than 25% of the value of
the Fund's total assets would be invested in any one industry.
Governmental issuers of Massachusetts Tax Exempt Bonds are not
considered part of any "industry." However, Massachusetts Tax Exempt
Bonds backed only by the assets and revenues of nongovernmental users
may for this purpose be deemed to be issued by such nongovernmental
users, and this 25% limitation would apply to such obligations. Thus, no
more than 25% of the Fund's assets will be invested in obligations
deemed to be issued by nongovernmental users in any one industry and in
taxable obligations of issuers in the same industry;
(13) Acquire more than 10% of the voting securities of any issuer; or
(14) Issue any class of securities which is senior to the Fund's shares of
beneficial interest except to the extent that borrowings permitted by
investment restriction (1) are deemed to involve the issuance of such
securities.
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.
It is contrary to the Fund's present policies, which may be changed
without shareholder approval to invest more than 15% of the Fund's total net
assets in illiquid securities (excluding Rule 144A securities deemed to be
liquid under guidelines established by the Trust's Trustees and certain Section
4(2) commercial paper).
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FUND CHARGES AND EXPENSES
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MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 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 August 30, 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.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadvisor to the Fund pursuant to advisory and
subadvisory agreements providing for the same management and subadvisory fees as
are currently in effect for the Fund. 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
1.00% of the Fund's average daily net assets attributable to its Class A shares
and 1.65% of such assets attributable to its Class B shares. Prior to September
1, 1996, these limits were 0.85% and 1.50% for Class A shares and Class B
shares, respectively. 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, 1994 and 1995, the Fund paid
advisory fees to Back Bay Advisors of $235,838 and $235,210, respectively and
for the fiscal year ended December 31, 1996, paid management fees of $251,461 to
NEFM (in each case after reductions pursuant to voluntary expense limitations in
effect). Had the voluntary expense limitations described above not been in
effect, the Fund's advisory or management fees for the fiscal years ended
December 1994, 1995 and 1996 would have been $709,536, $697,878 and $705,303,
respectively. For the fiscal year ended December 31, 1996, NEFM paid subadvisory
fees to Back Bay Advisors of $125,730 (after the voluntary limitation). Had the
voluntary limitations not been in effect, Back Bay Advisors' subadvisory fee
would have been $352,651.
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1994, 1995 and 1996, 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.
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, 1994, 1995 and 1996,
these fees amounted to $415,085, $399,216 and $399,198, respectively, for the
Fund's Class A shares; for the fiscal years ended December 31, 1994, 1995 and
1996, these fees amounted to $33,138, $55,139 and $70,055, respectively, for the
Fund's Class B shares.
During the fiscal year ended December 31, 1996, the Distributor paid
$284,227 as compensation to investment dealers and $121,634 as compensation to
its sales personnel and as other related costs for the Fund's Class A shares.
During the fiscal year ended December 31, 1996, the Distributor paid $57,687 as
compensation to investment dealers for the Fund's Class B shares and $112,897 as
compensation to sales personnel on Class B shares. Of the amount paid to
investment dealers, $58,415 and $30,963 was paid to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor, for the Fund's Class A shares and Class B shares, respectively. New
England Securities paid substantially all of the fees it received from the
Distributor (a) in commissions to its sales personnel and (b) to defray
sales-related overhead costs.
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OWNERSHIP OF FUND SHARES
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As of April 1, 1997, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding Class A shares or
Class B shares of the Fund:
Class B shares Trust Co. of America 6.57%
FBO Willie McGinest
PO Box 6580
Englewood, CO 80155-6580
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INVESTMENT PERFORMANCE OF THE FUND
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PERFORMANCE RESULTS - PERCENT CHANGE
FOR THE PERIODS ENDED 12/31/96*
<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 3.24 38.09 93.20 6.67 6.81
Maximum Offering Price -1.16 32.19 84.96 5.74 6.34
<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 2.58 10.96 3.20
Redemption at End of Period -1.33 9.10 2.68
* 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 5.43% and 6.21%, 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 -1.53%, 30.27% and 82.70%, respectively. Based on net asset
values, the Fund's Class A shares' five-year and ten-year average annual total returns would have been
6.37% and 6.68%, respectively, without the voluntary limitation, and their aggregate one-year,
five-year and ten-year total returns would have been 2.87%, 36.17% and 90.94%, 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 2.24%, 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
-1.70% and 7.59%, respectively. Based on net asset values, the Class B shares' average annual total
return for the since-inception period would have been 2.78%, without the voluntary limitation, and
their aggregate total returns for the one-year and since-inception periods would have been 2.21% and
9.45%, respectively.
</TABLE>
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.
<PAGE>
YIELD AND TAXABLE EQUIVALENT YIELDS
FOR THE 30-DAY PERIOD ENDED 12/31/96
30-day yield:
Class A 4.96%
Class B 4.55%
Taxable equivalent yields:
Combined Tax Rate** Taxable Equivalent Yield
Class A 46.85% Class A 9.33%
Class B 46.85% Class B 8.56%
* 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 1997:
TAXABLE EQUIVALENT YIELDS
<TABLE>
<CAPTION>
1997
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>
0 - 24,650 0 - 41,200 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,651 - 59,750 41,201 - 99,600 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
59,751 - 124,650 99,601 - 151,750 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
124,651 - 271,050 151,751 - 271,050 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 271,050 over 271,050 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
* This amount represents taxable income as defined in the Internal Revenue Code of 1986 (the "Code"). It is assumed that
taxable income as defined in the 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 1997, including indexing for
inflation. These rates include the effect of deducting state taxes on your Federal return.
</TABLE>
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 a 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.
<PAGE>
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/96
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
- ----------------------------------- ------ -------- ---------
(Class A shares)
Net Asset Value ................... 5.27 5.27 5.32
Maximum Offering Price ............ 5.05 5.05 5.09
(Class B shares)
Net Asset Value.................... 4.63 4.63 4.68
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
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, 1997
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, 1997 (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 seven series.
T A B L E O F C O N T E N T S
Page
----
PART I
Investment Restrictions
Fund Charges and Expenses
Ownership of Fund Shares
Investment Performance of the Funds
PART II
Miscellaneous Investment Practices
Management of the Trusts
Portfolio Transactions and Brokerage
Description of the Trusts and Ownership of
Shares How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services Redemptions Standard Performance
Measures
Income Dividends, Capital Gain Distributions and Tax Status
Financial Statements Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain Fund Information
Appendix
Appendix C - Advertising and Promotional Literature
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds
Appendix E - Growth Fund of Israel
<PAGE>
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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 vote 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 (12)
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) 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;
*(8) 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);
*(9) 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;
(10) 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);
(11) Write, purchase or sell options, except that the Funds may (a) write,
purchase and sell put and call options on securities, securities
indices or financial futures contracts and (b) enter into currency
forward contracts;
(12) Invest more than 15% of their respective net assets (taken at current
value) in illiquid securities (excluding Rule 144A securities deemed to
be liquid under guidelines established by the Trust's Trustees and
certain Section 4(2) commercial paper).
*(13) 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 (12)
above.
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FUND CHARGES AND EXPENSES
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to separate advisory agreements, each dated August 30, 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 August 30, 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.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to the Funds under separate advisory and
separate subadvisory agreements providing for management fees and subadvisory
fees at the same rates as are currently in effect for the Funds. 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 0.85% of the daily average net assets attributable to the Fund's
Class A shares and 1.60% of such assets attributable to the Fund's Class B
shares. Prior to September 1, 1996 these limits were 0.70% and 1.45% for Class A
shares and Class B shares, respectively. 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 and NEFM no advisory or management fees for the fiscal years
ended December 31, 1994, 1995 and 1996. Had the voluntary limitations for the
California Fund not been in effect, Back Bay Advisors would have been paid
$157,109 and $150,341, respectively, in advisory fees by the Fund for the fiscal
years ended December 31, 1994 and 1995 and NEFM would have been paid $210,469 in
management fees for the fiscal year ended December 31, 1996. Had the voluntary
limitations for the New York Fund not been in effect, Back Bay Advisors would
have been paid $82,155 and $70,795, respectively, in advisory fees by the Fund
for the fiscal years ended December 31, 1994 and 1995 and NEFM would have been
paid $100,284 in management fees for the fiscal year ended December 31, 1996.
For the fiscal year ended December 31, 1996, NEFM paid Back Bay Advisors $-0-
and $-0- in subadvisory fees for the New York and California Funds,
respectively, after voluntary expense limitations. Had the voluntary limitations
not been in effect, Back Bay Advisors' subadvisory fees for the New York and
California Funds would have been $50,142 and $105,234, respectively.
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1994, 1995 and 1996, the Funds
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.
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 fiscal years
ended December 31, 1994, 1995 and 1996, these fees amounted to $5,769, $79,473
and $84,706, respectively, for the California Fund's Class A shares, and
$49,694, $57,947 and $63,402, respectively, for the California Fund's Class B
shares. For the fiscal years ended December 31, 1994, 1995 and 1996, these fees
amounted to $48,644, $40,660 and $42,803, respectively, for the New York Fund's
Class A shares, and $10,811, $14,352 and $20,550, respectively, for the New York
Fund's Class B shares.
During the fiscal year ended December 31, 1996, on sales of the
California Fund's and the New York Funds' Class A shares, the Distributor paid
$84,726 and $42,687, respectively, as compensation to investment dealers and
$157,334 and $118,761, respectively, as compensation to its sales personnel and
other related costs. During the fiscal year ended December 31, 1996, on sales of
the California Fund's and the New York Fund's Class B shares, the Distributor
paid $100,449 and $27,100, respectively, as compensation to investment dealers
and $122,696 and $113,547, respectively, as compensation to sales personnel and
other related costs. Of the amounts paid to investment dealers, $17,437 and
$23,068 was paid to New England Securities Corporation ("New England
Securities"), a broker-dealer affiliate of the Distributor, for the California
Fund's Class A shares and Class B shares, respectively, and $22,966 and $19,453
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.
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of April 1, 1997, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding Class A shares or
Class B shares of the indicated Funds:
CALIFORNIA FUND
Class B shares MLPF&S for the Sole Benefit of its 7.25%
Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Allen Kelly & Margaret Kelly, TTEES 5.37%
Kelly Family Trust
19980 Angus Ct.
Saratoga, CA 95070-4406
NEW YORK FUND
Class A shares MLPF&S for the Sole Benefit of its 5.67%
Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
NFSC FEBO 7.36%
Good Earth Organics Corp.
5960 Broadway
Lancaster, NY 14086-9531
Class B shares PaineWebber for the Benefit of 6.25%
Nathan R. Lorman and Vivian Lorman
201 East 63rd Street
New York, NY 10021-7334
NFSC FEBO 8.30%
The Michael J. Cardito Personnel Tr.
400 East 56th Street
New York, NY 10022-4147
Prudential Securities Inc. 7.21%
FBO Dr. Jochanan M. Weisenfreund
201 W. 70th Street
New York, NY 10023-4338
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
FOR THE PERIODS ENDED 12/31/96*
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**
- ------------------------- ------ --------- ---------
Net Asset Value 5.32 23.82 5.96
Maximum Offering Price 2.64 20.75 5.24
Aggregate Average Annual
Total Return Total Return
-------------------- ------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ------------------------- ------ --------- ---------
Net Asset Value 4.55 12.02 3.50
Redemption at End of Period 0.55 10.09 2.96
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**
- ------------------------- ------ --------- ---------
Net Asset Value 4.64 23.46 5.88
Maximum Offering Price 1.98 20.41 5.16
Aggregate Average Annual
Total Return Total Return
-------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- -------------------------- ------ --------- ---------
Net Asset Value 3.73 12.75 3.70
Redemption at End of Period 0.55 10.81 2.96
* Federal regulations require this example to be calculated using a
$1,000 investment. The normal minimum 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
4.62% 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 2.05% and 18.13%, respectively. Based on net asset values,
the Fund's Class A shares' since-inception average annual total return
would have been 5.35%, and their aggregate one-year and since-inception
total returns would have been 4.73% and 21.20%, 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 2.21%, 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 -0.04% and 7.47%,
respectively. Based on net asset values, the Fund's Class B shares' average
annual total return for the since-inception period would have been 2.76%,
and their aggregate total returns for the one-year and since-inception
periods would have been 3.96% and 9.40%, 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
3.99% 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 0.80% and 15.55%, respectively. Based on net asset values,
the Fund's Class A shares' since-inception average annual total returns
would have been 4.73%, and their aggregate one-year and since-inception
total returns would have been 3.46% and 18.60%, 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 1.77% 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 -1.42% and 5.95%,
respectively. Based on net asset values, the Class B shares' average annual
total return for the since-inception period would have been 2.33%, and
their aggregate total returns for the one-year and since-inception periods
would have been 2.55% and 7.89%, respectively, without the voluntary
limitation.
DISTRIBUTION RATE OF RETURN
Each class of the Funds may include in their written sales material
rates of return based on that class's distributions from net investment income
and short-term capital gains for a recent 30-day, three-month or one-year
period. Distributions of less than one year are annualized by multiplying the
factor necessary to produce 12 months of distributions. The distribution rates
are determined by dividing the amount of a class's distributions per share over
the relevant period by either the maximum offering price in the case of Class A
shares or the price assuming redemption at the end of the period in the case of
Class B shares or the net asset value of a share of a class on the last day of
the period.
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/96
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
- ----------------------------------- ------ -------- ---------
CALIFORNIA FUND
(Class A shares)
Net Asset Value ................... 5.01 5.01 5.06
Maximum Offering Price ............ 4.89 4.89 4.93
(Class B shares)
Net Asset Value ................... 4.27 4.28 4.71
NEW YORK FUND
(Class A shares)
Net Asset Value.................... 5.03 5.03 5.07
Maximum Offering Price ............ 4.90 4.90 4.94
(Class B shares)
Net Asset Value ................... 4.28 4.29 3.97
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
STATEMENT OF ADDITIONAL INFORMATION -- PART II
MAY 1, 1997
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"). 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, 1997 (the "Prospectus" or
"Prospectuses"). The following Funds are described in this Statement:
<TABLE>
<CAPTION>
SERIES OF NEW ENGLAND FUNDS TRUST I
<C> <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 Star Worldwide Fund (the "Star Worldwide Fund")
New England Star Small Cap Fund (the "Star Small Cap 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 (the "Municipal Income Fund")
<CAPTION>
SERIES OF NEW ENGLAND FUNDS TRUST II
<C> <C>
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 Term Tax Free Fund of New York (the "New York Fund")
</TABLE>
<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
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
U.S. Government Securities All Funds
When-Issued Securities Star Advisers Fund
Star Worldwide Fund
Star Small Cap 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
International Equity 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
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Futures, Options and Swap Contracts Government Securities Fund
Municipal Income Fund
Limited Term U.S. Government Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
California Fund
New York Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Massachusetts Fund
Growth Opportunities Fund
Foreign Currency Hedging Transactions International Equity Fund
Balanced Fund
Capital Growth Fund
Value Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap 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 be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligation and the Fund is delayed in or prevented from recovering the
collateral.
U.S. Government Securities. The Fund may invest in some or all of the following
U.S. Government securities:
* U.S. Treasury Bills - Direct obligations of the United States Treasury
which are issued in maturities of one year or less. No interest is paid on
Treasury bills; instead, they are issued at a discount and repaid at full
face value when they mature. They are backed by the full faith and credit
of the United States Government.
* U.S. Treasury Notes and Bonds - Direct obligations of the United States
Treasury issued in maturities that vary between one and 40 years, with
interest normally payable every six months. These obligations are backed by
the full faith and credit of the United States Government.
* "Ginnie Maes" - Debt securities issued by a mortgage banker or other
mortgagee which represent an interest in a pool of mortgages insured by the
Federal Housing Administration or the Farmer's Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association ("GNMA") guarantees the timely payment of principal and
interest when such payments are due, whether or not these amounts are
collected by the issuer of these certificates on the underlying mortgages.
An assistant attorney general of the United States has rendered an opinion
that the guarantee by GNMA is a general obligation of the United States
backed by its full faith and credit. Mortgages included in single family or
multi-family residential mortgage pools backing an issue of Ginnie Maes
have a maximum maturity of up to 30 years. Scheduled payments of principal
and interest are made to the registered holders of Ginnie Maes (such as the
Fund) each month. Unscheduled prepayments may be made by homeowners, or as
a result of a default. Prepayments are passed through to the registered
holder (such as the Fund, which reinvests any prepayments) of Ginnie Maes
along with regular monthly payments of principal and interest.
* "Fannie Maes" - The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Fannie Maes are pass-through securities issued by FNMA
that are guaranteed as to timely payment of principal and interest by FNMA
but are not backed by the full faith and credit of the United States
Government.
* "Freddie Macs" - The Federal Home Loan Mortgage Corporation ("FHLMC") is a
corporate instrumentality of the United States Government. Freddie Macs are
participation certificates issued by FHLMC that represent an interest in
residential mortgages from FHLMC's National Portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but
Freddie Macs are not backed by the full faith and credit of the United
States Government.
U.S. Government securities generally do not involve the credit risks
associated with investments in other types of fixed-income securities, although,
as a result, the yields available from U.S. Government securities are generally
lower than the yields available from corporate fixed-income securities. Like
other fixed-income securities, however, the values of U.S. Government securities
change as interest rates fluctuate. Fluctuations in the value of portfolio
securities will not affect interest income on existing portfolio securities but
will be reflected in the Fund's net asset value. Since the magnitude of these
fluctuations will generally be greater at times when the Fund's average maturity
is longer, under certain market conditions the Fund may, for temporary defensive
purposes, accept lower current income from short-term investments rather than
investing in higher yielding long-term securities.
When-Issued Securities. The Fund may enter into agreements with banks or
broker-dealers for the purchase or sale of securities at an agreed-upon price on
a specified future date. Such agreements might be entered into, for example,
when the Fund anticipates a decline in interest rates and is able to obtain a
more advantageous yield by committing currently to purchase securities to be
issued later. When the Fund purchases securities in this manner (i.e., on a
when-issued or delayed-delivery basis), it is required to set aside with the
Trust's custodian cash or liquid securities eligible for purchase by the Fund in
an amount equal to or greater than, on a daily basis, the amount of the Fund's
when-issued or delayed-delivery commitments. The Fund will make commitments to
purchase on a when-issued or delayed-delivery basis only securities meeting the
Fund's investment criteria. The Fund may take delivery of these securities or,
if it is deemed advisable as a matter of investment strategy, the Fund may sell
these securities before the settlement date. When the time comes to pay for
when-issued or delayed-delivery securities, the Fund will meet its obligations
from the then available cash flow or the sale of securities, or from the sale of
the when-issued or delayed-delivery securities themselves (which may have a
value greater or less than the Fund's payment obligation).
Repurchase Agreements. The Fund may enter into repurchase agreements, by which
the Fund purchases a security and obtains a simultaneous commitment from the
seller to repurchase the security at an agreed-upon price and date. The resale
price is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
relatively low market risk. While the underlying security may be a bill,
certificate of indebtedness, note or bond issued by an agency, authority or
instrumentality of the United States Government, the obligation of the seller is
not guaranteed by the United States Government and there is a risk that the
seller may fail to repurchase the underlying security. In such event, the Fund
would attempt to exercise rights with respect to the underlying security,
including possible disposition in the market. However, the Fund may be subject
to various delays and risks of loss, including (a) possible declines in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and lack of
access to income during this period and (c) inability to enforce rights and the
expenses involved in the attempted enforcement.
Zero Coupon Securities. Zero coupon securities are debt obligations that do not
entitle the holder to any periodic payments of interest either for the entire
life of the obligation or for an initial period after the issuance of the
obligations. Such securities are issued and traded at a discount from their face
amounts. The amount of the discount varies depending on such factors as the time
remaining until maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
securities having similar maturities and credit quality. In order to satisfy a
requirement for qualification as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), the Fund must distribute
each year at least 90% of its net investment income, including the original
issue discount accrued on zero coupon securities. Because the Fund will not on a
current basis receive cash payments from the issuer of a zero coupon security in
respect of accrued original issue discount, in some years the Fund may have to
distribute cash obtained from other sources in order to satisfy the 90%
distribution requirement under the Code. Such cash might be obtained from
selling other portfolio holdings of the Fund. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Fund to sell such securities at such time.
Convertible Securities. The Fund may invest in convertible securities, including
corporate bonds, notes or preferred stocks of U.S. or foreign issuers that can
be converted into (that is, exchanged for) common stocks or other equity
securities. Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally vary in some proportion with those of the underlying equity
securities. Convertible securities usually provide a higher yield than the
underlying equity, however, so that the price decline of a convertible security
may sometimes be less substantial than that of the underlying equity security.
Tax Exempt Bonds. The Fund may invest in tax exempt bonds. Tax exempt bonds
include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as bridges,
highways, hospitals, housing, mass transportation, schools, streets, and water
and sewer works. Other public purposes for which tax exempt bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to lend to other public institutions and
facilities. In addition, prior to the Tax Reform Act of 1986, certain debt
obligations known as industrial development bonds could be issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Such obligations are included
within the term "tax exempt bonds" if the interest paid thereon is, in the
opinion of bond counsel, exempt from federal income tax. Interest on certain
industrial development bonds used to fund the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities may also
be exempt from federal income tax. The Tax Reform Act of 1986 eliminated some
types of tax exempt industrial revenues bonds but retains others under the
general category of "private activity bonds." The interest on so-called "private
activity bonds" is exempt from ordinary federal income taxation but is treated
as a tax preference item in computing a shareholder's alternative minimum tax
liability, as noted in the Prospectus.
The Fund may not be a desirable investment for "substantial users" of
facilities financed by industrial development bonds or for "related persons" of
substantial users.
The two principal classifications of tax exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon an appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities, or in some cases from
the proceeds of a special excise or other specific revenue source such as the
user of the facility. Tax exempt industrial development bonds and private
activity bonds are in most cases revenue bonds and generally are not payable
from the unrestricted revenues of the issuer. The credit and quality of such
bonds is usually directly related to the credit standing of the corporate user
of the facilities. Principal and interest on such bonds is the responsibility of
the corporate user (and any guarantor).
Prices and yields on tax exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the tax exempt bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of tax exempt bonds may not be as extensive as that made available
by corporations whose securities are publicly traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
and Poor's Ratings Group ("Standard & Poor's" or "S&P") represent their opinions
and are not absolute standards of quality. Tax exempt bonds with the same
maturity, interest rate and rating may have different yields while tax exempt
bonds of the same maturity and interest rate with different ratings may have the
same yield.
Obligations of issuers of tax exempt bonds are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Bankruptcy
Reform Act of 1978, affecting the rights and remedies of creditors. Congress or
state legislatures may seek to extend the time for payment of principal or
interest, or both, or to impose other constraints upon enforcement of such
obligations. There is also the possibility that, as a result of litigation or
other conditions, the power or ability of issuers to meet their obligations for
the payment of interest and principal on their tax exempt bonds may be
materially affected, or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax exempt bonds or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's tax exempt bonds in the
same manner.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on debt obligations issued by states and their political subdivisions
and similar proposals may well be introduced in the future. If such a proposal
were enacted, the availability of tax exempt securities for investment by the
Fund and the value of the Fund's portfolio could be materially affected, in
which event the Fund would reevaluate its investment objective and policies and
consider changes in the structure of the Fund or dissolution.
All debt securities, including tax exempt bonds, are subject to credit
and market risk. Generally, for any given change in the level of interest rates,
prices for longer maturity issues tend to fluctuate more than prices for shorter
maturity issues. The ability of the Fund to invest in securities other than tax
exempt bonds is limited by a requirement of the Code that at least 50% of the
Fund's total assets be invested in tax exempt bonds at the end of each calendar
quarter.
State Tax Exempt Securities. The Fund may invest in "State Tax Exempt
Securities" which term refers to debt securities the interest from which is, in
the opinion of bond counsel, exempt from federal income tax and State personal
income taxes (other than the possible incidence of any alternative minimum
taxes). State Tax Exempt Securities consist primarily of bonds of the Fund's
named state, their political subdivisions (for example, counties, cities, towns,
villages and school districts) and authorities issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which certain State Tax Exempt Securities may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses, or obtaining funds to lend to public or private institutions for the
construction of facilities such as educational, hospital and housing facilities.
In addition, certain types of industrial development bonds and private activity
bonds have been or may be issued by public authorities or on behalf of state or
local governmental units to finance privately operated housing facilities,
sports facilities, convention or trade facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Other types of industrial
development and private activity bonds are used to finance the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities. Industrial development bonds and private activity bonds are included
within the term "State Tax Exempt Securities" if the interest paid thereon is,
in the opinion of bond counsel, exempt from federal income tax and State
personal income taxes (other than the possible incidence of any alternative
minimum taxes). The Fund may invest more than 25% of the value of its total
assets in such bonds, but not more than 25% in bonds backed by non-governmental
users in any one industry (see "Investment Restrictions" in Part I of this
Statement). However, as described in the Fund's Prospectus, the income from
certain private activity bonds is an item of tax preference for purposes of the
federal alternative minimum tax, and it is a fundamental policy of the Fund that
distributions from interest income on such private activity bonds, together with
distributions of interest income on investments other than State Tax Exempt
Securities, will normally not exceed 10% of the total amount of the Fund's
income distributions.
In addition, the term "State Tax Exempt Securities" includes debt
obligations issued by other governmental entities (for example, U. S.
territories) if such debt obligations generate interest income which is exempt
from federal income tax and State personal income taxes (other than any
alternative minimum taxes).
There are, of course, variations in the quality of State Tax Exempt
Securities, both within a particular classification and between classifications,
depending on numerous factors (see Appendix A).
The yields on State Tax Exempt Securities are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the State Tax Exempt Securities market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The ratings of Moody's and Standard and Poor's represent their
opinions as to the quality of the State Tax Exempt Securities which they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, State Tax Exempt
Securities with the same maturity, interest rate and rating may have different
yields while State Tax Exempt Securities of the same maturity and interest rates
with different ratings may have the same yield. Subsequent to its purchase by
the Fund, an issue of State Tax Exempt Securities or other investments may cease
to be rated or the rating may be reduced below the minimum rating required for
purchase by the Fund. Neither event will require the elimination of an
investment from the Fund's portfolio, but the Fund's subadviser will consider
such an event as part of its normal, ongoing review of all the Fund's portfolio
securities.
The Fund does not currently intend to invest in so-called "moral
obligation" bonds, where repayment is backed by a moral commitment of an entity
other than the issuer, unless the credit of the issuer itself, without regard to
the "moral obligation," meets the investment criteria established for
investments by the Fund.
Securities in which the Fund may invest, including State Tax Exempt
Securities, are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or the State
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations. There is also
the possibility that as a result of litigation or other conditions the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their State Tax Exempt Securities may be materially affected or
that their obligations may be found to be invalid and unenforceable.
The Fund's named state and certain of its cities and towns and public
bodies have from time to time encountered financial difficulties which have
adversely affected their respective credit standings and borrowing abilities.
Such difficulties could, of course, affect outstanding obligations of such
entities, including obligations held by the Fund.
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 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 liquid securities eligible for purchase by the Fund
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 liquid securities eligible for purchase
by the Fund 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 or
liquid securities eligible for purchase by the Fund 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 or
liquid securities eligible for purchase by the Fund with a value equal to the
exercise price in a segregated account with the Fund's custodian, or else holds
a put on the same futures contract (or security, as the case may be) as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the writer of an option wishes to terminate its position, it may
effect a closing purchase transaction by buying an option identical to the
option previously written. The effect of the purchase is that the writer's
position will be canceled. Likewise, the holder of an option may liquidate its
position by selling an option identical to the option previously purchased.
Closing a written call option will permit the Fund to write another
call option on the portfolio securities used to cover the closed call option.
Closing a written put option will permit the Fund to write another put option
secured by the segregated assets used to secure the closed put option. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any futures contract or securities subject to the option to
be used for other Fund investments. If the Fund desires to sell particular
securities covering a written call option position, it will close out its
position or will designate from its portfolio comparable securities to cover the
option prior to or concurrent with the sale of the covering securities.
The Fund will realize a profit from closing out an option if the price
of the offsetting position is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from closing out an option transaction if the price of the
offsetting option position is more than the premium received from writing the
option or is less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the covering securities, any loss resulting from the
closing of a written call option position is expected to be offset in whole or
in part by appreciation of such covering securities.
Since premiums on options having an exercise price close to the value
of the underlying securities or futures contracts usually have a time value
component (i.e., a value that diminishes as the time within which the option can
be exercised grows shorter) an option writer may profit from the lapse of time
even though the value of the futures contract (or security in some cases)
underlying the option (and of the security deliverable under the futures
contract) has not changed. Consequently, profit from option writing may or may
not be offset by a decline in the value of securities covering the option. If
the profit is not entirely offset, the Fund will have a net gain from the
options transaction, and the Fund's total return will be enhanced. Likewise, the
profit or loss from writing put options may or may not be offset in whole or in
part by changes in the market value of securities acquired by the Fund when the
put options are closed.
As an alternative to purchasing call and put options on index futures,
the Fund may purchase or sell call or put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant; if the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at a time when, in
the case of a call warrant, the exercise price is less than the value of the
underlying index, or in the case of a put warrant, the exercise price is less
than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to its
use of options on securities indices. The risks of the Fund's use of index
warrants are generally similar to those relating to its use of index options.
Unlike most index options, however, index warrants are issued in limited amounts
and are not obligations of a regulated clearing agency, but are backed only by
the credit of the bank or other institution which issues the warrant. Also,
index warrants generally have longer terms than index options. Although the Fund
will normally invest only in exchange-listed warrants, index warrants are not
likely to be as liquid as certain index options backed by a recognized clearing
agency. In addition, the terms of index warrants may limit the Fund's ability to
exercise the warrants at such time, or in such quantities, as the Fund would
otherwise wish to do.
The Fund may buy and write options on foreign currencies in a manner
similar to that in which futures or forward contracts on foreign currencies will
be utilized. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
the portfolio securities, the Fund may buy put options on the foreign currency.
If the value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in
part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund from purchases of foreign currency
options will be reduced by the amount of the premium and related transactions
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Fund could sustain losses on transactions in foreign
currency options that would require the Fund to forego a portion or all of the
benefits of advantageous changes in those rates.
The Fund may also write options on foreign currencies. For example, to
hedge against a potential decline in the U.S. dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates, the Fund
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities be offset at least
in part by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move in
the manner projected, will expire unexercised and allow the Fund to hedge the
increased cost up to the amount of the premium. If exchange rates do not move in
the expected direction, the option may be exercised and the Fund would be
required to buy or sell the underlying currency at a loss, which may not be
fully offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may lose all or a portion of the benefits
which might otherwise have been obtained from favorable movements in exchange
rates.
All call options written by the Fund on foreign currencies will be
"covered." A call option written on a foreign currency by the Fund is "covered"
if the Fund owns the foreign currency underlying the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currencies held
in its portfolio. A call option is also covered if the Fund has a call on the
same foreign currency in the same principal amount as the call written if the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written, if the difference is maintained by the Fund in cash or liquid
securities eligible to be purchased by the Fund 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 securities eligible to be purchased by the Fund 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 at all times in a
segregated account with its custodian cash or liquid securities eligible to be
purchased by the Fund 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.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid secondary
market for an option of the same series. If a liquid secondary market for an
exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund would have to exercise the option in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction in a secondary market,
it will be not be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise. Reasons for the absence of
a liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing Corporation
or other clearing organization may not at all times be adequate to handle
current trading volume or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
Because the specific procedures for trading foreign stock index futures
on futures exchanges are still under development, additional or different margin
requirements as well as settlement procedures may be applicable to foreign stock
index futures at the time the International Equity Fund purchases foreign stock
index futures.
The successful use of transactions in futures and options depends in
part on the ability of a Fund's adviser or subadviser(s) to forecast correctly
the direction and extent of interest rate movements within a given time frame.
To the extent interest rates move in a direction opposite to that anticipated,
the Fund may realize a loss on the hedging transaction that is not fully or
partially offset by an increase in the value of portfolio securities. In
addition, whether or not interest rates move during the period that the Fund
holds futures or options positions, the Fund will pay the cost of taking those
positions (i.e., brokerage costs). As a result of these factors, the Fund's
total return for such period may be less than if it had not engaged in the
hedging transaction.
Options trading involves price movement correlation risks similar to
those inherent in futures trading. Additionally, price movements in options on
futures may not correlate with price movements in the futures underlying the
options. Like futures, options positions may become less liquid because of
adverse economic circumstances. The securities covering written option positions
are expected to offset adverse price movements if those options positions cannot
be closed out in a timely manner, but there is no assurance that such offset
will occur. Also, an option writer may not effect a closing purchase transaction
after it has been notified of the exercise of an option.
OVER-THE-COUNTER OPTIONS. An over-the-counter option (an option not traded on a
national securities exchange) may be closed out only with the other party to the
original option transaction. While the Fund will seek to enter into
over-the-counter options only with dealers who agree to or are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an over-the-counter option at
a favorable price at any time prior to its expiration. Accordingly, the Fund
might have to exercise an over-the-counter option it holds in order to realize
any profit thereon and thereby would incur transactions costs on the purchase or
sale of the underlying assets. If the Fund cannot close out a covered call
option written by it, it will not be able to sell the underlying security until
the option expires or is exercised. Furthermore, over-the-counter options are
not subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation or other clearing organizations.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that over-the-counter options on U.S. Government securities
and the assets used as cover for written over-the-counter options on U.S.
Government securities should generally be treated as illiquid securities for
purposes of the investment restrictions prohibiting the Government Securities
Fund from investing more than 15% of its net assets in illiquid securities.
However, if a dealer recognized by the Federal Reserve Bank of New York as a
"primary dealer" in U.S. Government securities is the other party to an option
contract written by the Fund, and the Fund has the absolute right to repurchase
the option from the dealer at a formula price established in a contract with the
dealer, the SEC staff has agreed that the Fund only needs to treat as illiquid
that amount of the "cover" assets equal to the amount at which (i) the formula
price exceeds (ii) any amount by which the market value of the securities
subject to the options exceeds the exercise price of the option (the amount by
which the option is "in-the-money"). Although Back Bay Advisors, L.P. ("Back Bay
Advisors"), the Government Securities Fund's subadviser, does not believe that
over-the-counter options on U.S. Government securities are generally illiquid,
the Fund has agreed that pending resolution of this issue it will conducts its
operations in conformity with the views of the SEC staff on such matters.
Back Bay Advisors has established standards for the creditworthiness of
the primary dealers with which the Government Securities Fund may enter into
over-the-counter option contracts having the formula-price feature referred to
above. Those standards, as modified from time to time, are implemented and
monitored by Back Bay Advisors. Such contracts will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, by
which the option is "in-the-money." The formula will also include a factor to
account for the difference between the price of the securities and the exercise
price of the option if the option is written out-of-the-money. Although each
agreement will provide that the Fund's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined pursuant to the
formula), the formula price will not necessarily reflect the market value of the
option written, and therefore the Fund might pay more to repurchase the option
contract than the Fund would pay to close out a similar exchange-traded option.
ECONOMIC EFFECTS AND LIMITATIONS. Income earned by the Fund from its hedging
activities will be treated as capital gain and, if not offset by net recognized
capital losses incurred by the Fund, will be distributed to shareholders in
taxable distributions. Although gain from futures and options transactions may
hedge against a decline in the value of the Fund's portfolio securities, that
gain, to the extent not offset by losses, will be distributed in light of
certain tax considerations and will constitute a distribution of that portion of
the value preserved against decline. If the Municipal Income Fund is required to
use taxable fixed-income securities as margin, the portion of the Fund's
dividends that is taxable to shareholders will be larger than if that Fund is
permitted to use tax exempt bonds for that purpose.
The Fund intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" adopted by the CFTC
and the National Futures Association, which regulate trading in the futures
markets. The Fund will use futures contracts and related options primarily for
bona fide hedging purposes within the meaning of CFTC regulations. To the extent
that the Fund holds positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions, the aggregate
initial margin and premiums required to establish such positions will not exceed
5% of the fair market value of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into.
FUTURE DEVELOPMENTS. The above discussion relates to the Fund's proposed use of
futures contracts, options and options on futures contracts currently available.
The relevant markets and related regulations are still in the developing stage.
In the event of future regulatory or market developments, the Fund may also use
additional types of futures contracts or options and other investment techniques
for the purposes set forth above.
FOREIGN CURRENCY HEDGING TRANSACTIONS. To protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell a security and the settlement date for the purchase or sale, or
to "lock in" the equivalent of a dividend or interest payment in another
currency, the Fund might purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate. If conditions warrant, the Fund may also
enter into contracts with banks or broker-dealers to purchase or sell foreign
currencies at a future date ("forward contracts"). The Fund will maintain cash
or liquid securities eligible for purchase by the Fund in a segregated account
with the custodian in an amount at least equal to (i) the difference between the
current value of the Fund's liquid holdings that settle in the relevant currency
and the Fund's outstanding obligations under currency forward contracts, or (ii)
the current amount, if any, that would be required to be paid to enter into an
offsetting forward currency contract which would have the effect of closing out
the original forward contract. The Fund's use of currency hedging transactions
may be limited by tax considerations. The Fund may also purchase or sell foreign
currency futures contracts traded on futures exchanges. Foreign currency futures
contract transactions involve risks similar to those of other futures
transactions. See "Futures, Options and Swap Contracts" above.
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MANAGEMENT OF THE TRUSTS
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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 (57); 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 (52); 452 Fifth Avenue, New York, NY 10018; President
and CEO, Cain Brothers & Company, Incorporated (investment banking);
formerly, Trustee, Universal Health Realty Income Trust; Chairman, Inter
Fish, Inc. (an aqua culture venture in Barbados).
KENNETH J. COWAN -- Trustee (65); One Beach Drive, S.E. #2103, St. Petersburg,
Florida 33701; Retired; Director, A Young Woman's Residence; formerly,
Senior Vice President-Finance and Chief Financial Officer, Blue Cross of
Massachusetts, Inc. and Blue Shield of Massachusetts, Inc.; Director,
Neworld Bank for Savings and Neworld Bancorp.
RICHARD DARMAN - Trustee (53); 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 (55); 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 (53); 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"); Director, Maine Bank & Trust Company; formerly, Director, New
England Securities Corporation ("New England Securities").
JOHN A. SHANE -- Trustee (64); 200 Unicorn Park Drive, Woburn, Massachusetts
01801; President, Palmer Service Corporation (venture capital organization);
General Partner and Palmer Partners L.P.; Director, Abt Associates, Inc.
(consulting firm); Director, Arch Communications Group, Inc. (paging
service); Director, Dowden Publishing Company, Inc. (publishers of medial
magazines); Director, Eastern Bank Corporation; Director, Gensym Corporation
(expert system software); Director, Overland Data, Inc. (manufacturer of
computer tape drives); Director, Summa Four, Inc. (manufacturer of telephone
switching equipment); Director, United Asset Management Corporation (holding
company for institutional money management).
PETER S. VOSS* -- Chairman of the Board, Chief Executive Officer and Trustee
(50); 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;
formerly, Director, New England Life Insurance Company ("NELICO"); Group
Executive Vice President, Bank of America (Los Angeles); Group Head of
International Banking, Trading and Securities, Security Pacific National
Bank and Chief Executive Officer, Security Pacific Investment Group.
PENDLETON P. WHITE -- Trustee (66); 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 -- Vice President (41); Executive Vice President, NEF
Corporation; Executive Vice President, New England Funds, L.P.; Executive
Vice President, NEFM.
FRANK NESVET -- Treasurer (53); 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 (43); 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 NELICO or Metropolitan Life
Insurance Company ("MetLife"), 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 trustee of certain other
investment companies for which New England Funds, L.P. acts as principal
underwriter. Except as indicated above, the address of each trustee and officer
of the Trusts is 399 Boylston Street, Boston, Massachusetts 02116.
- ----------------
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
<PAGE>
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 as of May 1, 1997 a
total of 22 mutual fund portfolios, a retainer fee at the annual rate of $40,000
and meeting attendance fees of $2,500 for each meeting of the boards he or she
attends and $1,500 for each meeting he or she attends of a committee of the
board of which he or she is a member. Each committee chairman receives an
additional retainer fee at the annual rate of $2,500. These fees are allocated
among the Funds and the three 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, 1996, 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.
<TABLE>
<CAPTION>
Pension or
Aggregate Aggregate Retirement
Compensation Compensation Benefits
from from Accrued as Estimated Total Compensation
New England New England Part of Fund Annual from the New England
Funds Trust I Funds Trust II Expenses Benefits Upon Funds Trusts
Name of Trustee in 1996 in 1996 in 1996 Retirement in 1996
--------------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $30,251 $16,901 $0 $0 $54,500
Daniel M. Cain (a) $28,317 $16,113 $0 $0 $51,250
Kenneth J. Cowan $33,997 $18,946 $0 $0 $61,250
Richard Darman (a) $26,750 $15,242 $0 $0 $48,500
Sandra O. Moose $32,500 $18,537 $0 $0 $59,000
James H. Scott (b) $ 7,907 $ 4,166 $0 $0 $14,000
John A. Shane $32,501 $18,537 $0 $0 $59,000
Pendleton P. White $31,751 $17,992 $0 $0 $57,500
(a) Became a trustee of the Trusts effective February 23, 1996.
(b) Resigned as a trustee of the Trusts effective March 5, 1996.
</TABLE>
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, 1997, 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 Capital Growth Management Limited Partnership ("CGM"), in the case of
the Growth Fund) provides that the adviser (NEFM or CGM) will furnish or pay the
expenses of the applicable Fund for office space, facilities and equipment,
services of executive and other personnel of the Trust and certain
administrative services.
Each Fund pays all expenses not borne by its adviser or subadviser(s)
including, but not limited to, the charges and expenses of the Fund's custodian
and transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees and
expenses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders and the compensation of
trustees who are not directors, officers or employees of the Fund's adviser,
subadviser(s) or their affiliates, other than affiliated registered investment
companies. Each Fund (except the Growth Fund) also pays NEFM for certain legal
and accounting services provided to the Fund by NEFM.
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, Star Worldwide and Star
Small Cap Funds, each subadvisory agreement between NEFM and the subadviser that
manages a segment or segments 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 or 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 board of trustees of
the relevant Trust 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 terminates 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
MetLife New England Holdings, Inc., which in turn is a wholly-owned subsidiary
of MetLife. MetLife owns a majority limited partnership interest in NEIC. NEIC
and its ________ subsidiary or affiliated asset management firms, collectively,
have more than $100 billion of assets under management or administration.
Back Bay Advisors, formed in 1986, is a limited partnership whose sole
general partner, BBAI, is a wholly-owned subsidiary of NEIC Holdings. NEIC owns
the entire limited partnership interest in Back Bay Advisors. Back Bay Advisors
provides investment management services to institutional clients, including
other registered investment companies and accounts of NELICO and its affiliates.
Back Bay Advisors specializes in fixed-income management and currently manages
over $7 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
NELICO and MetLife and their affiliates. 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, New England
Zenith Fund's Capital Growth Series and New England Variable Annuity Fund I. CGM
also provides investment advice to other mutual funds and other institutional
and individual clients.
Westpeak Investment Advisors, L.P. ("Westpeak"), organized in 1991,
provides investment management services to institutional clients, including
accounts of NELICO 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.
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.
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.
Harris Associates, L.P. ("Harris") was organized in 1995 to succeed to
the business of a predecessor limited partnership also named Harris Associates,
L.P., which together with its predecessor had advised and managed mutual funds
since 1970. Harris is a limited partnership whose sole general partner is Harris
Associates, Inc., a wholly-owned subsidiary of NEIC. Harris was acquired by NEIC
in 1995. Harris also serves as investment adviser to individuals, trusts,
retirement plans, endowments and foundations, and manages numerous private
partnerships.
Montgomery Asset Management, L.P. ("Montgomery"), a California limited
partnership, was formed in 1990 as an investment adviser and since then has
advised institutional and retail clients. Its general partner is Montgomery
Asset Management, Inc., and its sole limited partner is Montgomery Group
Holdings, LLC. Montgomery Securities is the distributor for The Montgomery
Funds. Under the 1940 Act, both Montgomery Asset Management, Inc. and Montgomery
Securities may be deemed control persons of Montgomery. Although the operations
and management of Montgomery are independent from those of Montgomery
Securities, Montgomery may draw upon the research and administrative resources
of Montgomery Securities in its discretion and consistent with applicable
regulations.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), a California limited partnership, was formed in 1993 and is
registered as an investment adviser with the Securities and Exchange Commission.
The general partner of Robertson Stephens is Robertson, Stephens & Company,
Inc., and the principal limited partner is Robertson, Stephens & Company LLC, a
mutual funds distributor and a major investment banking firm specializing in
emerging growth companies that has developed substantial investment research,
underwriting, and venture capital expertise. Robertson Stephens and its
affiliates have in excess of $4.5 billion under management in public and private
investment funds.
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 Trusts' 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 segments of the Star
Advisers and Star Small Cap Funds' portfolios that are managed (or subadvised)
by Loomis Sayles, the Boston office buys and sells portfolio securities for the
Strategic Income Fund and the International Equity Fund and the New York office
buys and sells portfolio securities for the High 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, Star Advisers, Star Small Cap, High Income,
Strategic Income and International Equity 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 Trusts'
trustees that the desirability of retaining Loomis Sayles as subadviser for the
Strategic Income, Capital Growth, Value, Balanced, Star Advisers, Star Small
Cap, High Income and International Equity Funds outweighs the disadvantages, if
any, which might result from these practices.
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 Trusts' 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 segments of the Star Advisers and Star Worldwide Funds 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 segments of the Funds 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 Funds and other clients in a manner deemed equitable to all
by Founders. 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 Funds. However, the
ability of the Funds to participate in volume transactions may possibly produce
better executions for the Funds in some cases. It is the opinion of the trustees
of the Trusts that the desirability of retaining Founders as a subadviser to the
Star Advisers and Star Worldwide Funds 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, as well as for
its segments of the portfolios of the Star Advisers and Star Worldwide Funds.
Although the overall investment objectives of the Funds may differ from the
objectives of the other investment accounts and other funds served by Janus
Capital, there may be securities that are suitable for the portfolio of the
Funds as well as for one or more of the other funds or the other investment
accounts. Therefore, purchases and sales of the same investment securities may
be recommended for the Funds and for one or more of the other funds or other
investment accounts. To the extent that the Funds and one or more of the other
funds or other investment accounts seek to acquire or sell the same security at
the same time, either the price obtained by the Funds or the amount of
securities that may be purchased or sold by the Funds at one time may be
adversely affected. In such cases, the purchase and sale transactions are
allocated among the Funds, the other funds and the other investment accounts in
a manner believed by the management of Janus Capital to be equitable to each. It
is the opinion of the trustees of the Trusts that the desirability of retaining
Janus Capital as a subadviser to the Star Advisers and Star Worldwide Funds
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 Trusts. 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 Trusts that the desirability of retaining Westpeak as
subadviser for the Fund outweighs the disadvantages, if any, which might result
from these practices.
Certain officers and employees of Harris have responsibility for
portfolio management of other advisory accounts and clients (including other
registered investment companies and accounts of affiliates of Harris) that may
invest in securities in which the Star Worldwide and/or Star Small Cap Funds may
invest. Where Harris 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 Harris to the participating accounts. Where advisory
accounts have competing interests in a limited investment opportunity, Harris
will allocate investment opportunities based on numerous considerations,
including the time the competing accounts have had funds available for
investment, the amounts of available funds, an account's cash requirements and
the time the competing accounts have had investments available for sale. It is
Harris's 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 Star Worldwide and
Star Small Cap Funds to participate in larger volume transactions in this manner
will in some cases produce better executions for these Funds. However, in some
cases, this procedure could have a detrimental effect on the price and amount of
a security available to these Funds or the price at which a security may be
sold. The trustees of the Trusts are of the view that the benefits of retaining
Harris as a subadviser to the Star Worldwide and Star Small Cap Funds outweigh
the disadvantages, if any, that might result from participating in such
transactions.
In addition to managing segments of the Star Worldwide and Star Small
Cap Funds' portfolios, Montgomery serves as investment adviser to other mutual
funds, pension and profit-sharing plans, and other institutional and private
investors. At times, Montgomery may effect purchases and sales of the same
investment securities for the Star Worldwide and/or Star Small Cap Funds and for
one or more other investment accounts. In such cases, it will be the practice of
Montgomery to allocate the purchase and sale transactions among the Funds 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 Funds and the accounts, the relative size of portfolio holdings of the same
or comparable securities, the current availability of cash for investment by the
Funds and each account, the size of investment commitments generally held by the
Funds and each account and the opinions of the persons at Montgomery responsible
for selecting investments for the Funds and the accounts. It is the opinion of
the trustees of the Trusts that the desirability of retaining Montgomery as a
subadviser to the Star Worldwide and Star Small Cap Funds outweighs the
disadvantages, if any, which might result from these procedures.
Investment decisions for its segment of the Star Small Cap Fund and for
other investment advisory clients of Robertson Stephens and its affiliates are
made with a view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic suitability for
the particular client involved. Thus, a particular security may be bought or
sold for certain clients even though it could be bought or sold for other
clients at the same time. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling the same security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in Robertson Stephens' opinion is equitable to each and in
accordance with the amount being purchased or sold by each client. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients. Robertson Stephens employs
staffs of portfolio managers who draw upon a variety of resources, including
Robertson Stephens & Company, Inc., for research information. It is the opinion
of the trustees of the Trusts that the desirability of retaining Robertson
Stephens as a subadviser to the Star Small Cap Fund outweighs the disadvantages,
if any, which could result from these procedures.
Distribution Agreements and Rule 12b-1 Plans. Under a separate
agreement with each Fund, New England Funds, L.P. serves as the general
distributor of each class of shares of the Funds. Under these agreements, New
England Funds, L.P. is not obligated to sell a specific number of shares. New
England Funds, L.P. bears the cost of making information about the Funds
available through advertising and other means and the cost of printing and
mailing Prospectuses to persons other than shareholders. Each Fund pays the cost
of registering and qualifying its shares under state and federal securities laws
and the distribution of Prospectuses to existing shareholders.
New England Funds, L.P. is compensated under each agreement through
receipt of the sales charges on Class A shares described below under "Net Asset
Value and Public Offering Price" and is paid by the Funds the service and
distribution fees described in the Prospectus.
As described in the Prospectuses, each Fund has adopted Rule 12b-1
plans (the "Plans") for its Class A, Class B and Class C shares which, among
other things, permit it to pay the Fund's distributor (currently New England
Funds, L.P.) monthly fees out of its net assets. Pursuant to Rule 12b-1 under
the 1940 Act, each Plan was approved by the shareholders of each Fund, and
(together with the related Distribution Agreement) by the board of trustees,
including a majority of the trustees who are not interested persons of the
relevant Trust (as defined in the 1940 Act) and who have no direct or indirect
financial interest in the operation of the Plan or the Distribution Agreement
(the "Independent Trustees").
Each Plan may be terminated by vote of a majority of the relevant
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the relevant class of shares of the relevant Fund. Each Plan may
be amended by vote of the relevant trustees, including a majority of the
relevant Independent Trustees, cast in person at a meeting called for that
purpose. Any change in any Plan that would materially increase the fees payable
thereunder by the relevant class of shares of the relevant Fund requires
approval by vote of the holders of a majority of such shares outstanding. The
Trusts' trustees review quarterly a written 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 MetLife), 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 Funds Trust III,
New England Cash Management Trust and New England Tax Exempt Money Market Trust.
During the years ended December 31, 1994, 1995 and 1996, New England
Funds, L.P. received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $9,569,312, $8,779,918 and $10,735,444, respectively,
of which $8,290,120, $7,706,937 and $9,418,244, respectively, was allowed to
other securities dealers and the balance retained by New England Funds, L.P.
During the years ended December 31, 1994, 1995 and 1996, New England Funds, L.P.
received CDSCs on the redemption of Class A and Class B shares of New England
Funds Trust I aggregating $228,526, $899,482 and $1,256,009, respectively, of
which $188,000, $879,085 and $1,236,000, respectively, was paid to FEP Capital,
L.P. 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 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, 1994, 1995 and 1996, New England
Funds, L.P. received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $2,071,744, $1,913,291 and $1,674,883,
respectively, of which $1,780,651, $1,752,050 and $1,429,970, respectively, were
reallowed to other securities dealers and the balance retained by New England
Funds, L.P. During the years ended December 31, 1994, 1995 and 1996, New England
Funds, L.P. received CDSCs on the redemption of Class A and Class B shares of
New England Funds Trust II aggregating $256,811, $234,390 and $318,167,
respectively, of which $111,876, $173,421 and $313,465, respectively was paid to
FEP Capital, L.P. 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.
Proceeds from the CDSC on Class A shares are paid to New England Funds,
L.P. and are used by New England Funds, L.P. to defray the expenses for services
New England Funds, L.P. provides the Trust. Proceeds from the CDSC on Class B
shares are paid to New England Funds, L.P. and are remitted to FEP Capital, L.P.
to compensate FEP Capital, L.P. for financing the sale of Class B shares
pursuant to certain Class B financing and servicing agreements between New
England Funds, L.P. and FEP Capital, L.P.
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. The Trusts' independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Cooper's &
Lybrand LLP, One Post Office Square, Boston, Massachusetts 02109 were the
independent accountants for New England Funds Trust II for the fiscal year ended
December 31, 1996. 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, 1996 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, 1995 and 1996, New England Securities received $1,361,705, $1,369,323 and
$1,473,212, 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 prior to January 2, 1996 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 prior to January 2, 1996 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.
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 an annual per-account fee to New England Funds, L.P. for these services in
the amount of $17.75 for the Balanced Fund, Growth Fund, Capital Growth Fund,
Value Fund, International Equity Fund, Star Advisers Fund, Star Worldwide Fund,
Star Small Cap Fund, Growth Opportunities Fund and Strategic Income Fund, and
$15.95 for the High Income Fund, Massachusetts Fund, Limited Term U.S.
Government Fund, Adjustable Rate Fund, California Fund, New York Fund, 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 monthly per account fee of $0.95 for the California Fund, New York
Fund, Bond Income Fund, Municipal Income Fund, Adjustable Rate Fund, Government
Securities Fund and Strategic Income Fund; $0.87 for the Massachusetts Fund,
High Income Fund and Limited Term U.S. Government Fund; $0.78 for the
International Equity Fund, Capital Growth Fund, Balanced Fund, Value Fund,
Growth Fund, Star Advisers Fund, Star Worldwide Fund and Star Small Cap Fund;
and $0.70 for the Growth Opportunities Fund.
In addition, during the fiscal year ended 1996 New England Funds, L.P.
performed certain accounting and administrative services for the Growth Fund,
Balanced Fund, Value Fund, Bond Income Fund, Municipal Income Fund, Government
Securities Fund, International Equity Fund, Capital Growth Fund, Star Advisers
Fund and Star Worldwide Fund. Each Fund reimbursed New England Funds for all or
part of New England Funds' expenses of providing these services which include
the following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing and financial reporting functions and clerical functions
relating to the Fund, (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder reports and
notices, proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities.
During the fiscal year ended 1996, 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, Star Advisers Fund and Star
Worldwide Fund in the amounts of $173,071, $56,069, $54,574, $44,322, $40,947,
$34,007, $51,077, $36,732, $98,321 and $24,445, respectively.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
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All Funds (except International Equity Fund, Star Small Cap Fund,
segments of the Star Advisers Fund advised by Berger and Janus Capital and
segments of the Star Worldwide Fund advised by Loomis Sayles, Harris and Janus
Capital). In placing orders for the purchase and sale of portfolio securities
for each Fund, Back Bay Advisors, CGM, 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, 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, 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, Founders,
Westpeak or Loomis Sayles. The services may also be used by Back Bay Advisors,
CGM, Founders, Westpeak or Loomis Sayles in connection with their other advisory
accounts and in some cases may not be used with respect to the Funds.
In placing orders for the purchase and sale of equity securities, each
Fund's adviser or subadviser selects only brokers which it believes are
financially responsible, will provide efficient and effective services in
executing, clearing and settling an order and will charge commission rates that,
when combined with the quality of the foregoing services, will produce best
price and execution for the transaction. This does not necessarily mean that the
lowest available brokerage commission will be paid. However, the commissions are
believed to be competitive with generally prevailing rates. Each Fund's adviser
or subadviser will use its best efforts to obtain information as to the general
level of commission rates being charged by the brokerage community from time to
time and will evaluate the overall reasonableness of brokerage commissions paid
on transactions by reference to such data. In making such evaluation, all
factors affecting liquidity and execution of the order, as well as the amount of
the capital commitment by the broker in connection with the order, are taken
into account. Except for the International Equity Fund and the segment of the
Star Small Cap Fund managed by Loomis Sayles, 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 some of the 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. Other
research services provided by brokers include computerized stock quotation and
trading information, fundamental and technical analysis data and software,
computerized stock market and business news services and account performance
data. The research services received from brokers are 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 and Star Worldwide Fund (segments advised by Janus
Capital). Decisions as to the assignment of portfolio business for the segments
of the Star Advisers and Star Worldwide Funds' portfolios 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 segments, Janus Capital may agree to pay
brokerage commissions for effecting a securities transaction, in an amount
higher than another broker or dealer would have charged for effecting that
transaction as authorized, under certain circumstances, by the Securities
Exchange Act of 1934.
In selecting brokers and dealers and in negotiating commissions, Janus
Capital considers a number of factors, including, but not limited to: Janus
Capital's knowledge of currently available negotiated commission rates or prices
of securities currently available and other current transaction costs; the
nature of the securities being traded; the size and type of the transaction; the
nature and character of the markets for the security to be purchased or sold;
the desired timing of the trade; the activity existing and expected in the
market for the particular security; confidentiality; the quality of the
execution, clearance and settlement services; financial stability of the broker
or dealer; the existence of actual or apparent operational problems of any
broker or dealer; and research products or services provided. In recognition of
the value of the foregoing factors, Janus Capital may place portfolio
transactions with a broker or dealer with whom it has negotiated a commission
that is in excess of the commission another broker or dealer would have charged
for effecting that transaction if Janus Capital determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research provided by such broker or dealer viewed in terms of
either that particular transaction or of the overall responsibilities of Janus
Capital. Research may include furnishing advice, either directly or through
publications or writing, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and government
officials; comparative performance evaluation and technical measurement services
and quotation services, and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist Janus Capital in carrying out its responsibilities. Research received
from brokers or dealers is supplemental to Janus Capital's own research efforts.
Janus Capital may use research products and services in servicing other
accounts in addition to the Star Advisers Fund. If Janus Capital determines that
any research product or service has a mixed use, such that it also serves
functions that do not assist in the investment decision-making process, Janus
Capital may allocate the costs of such service or product accordingly. Only that
portion of the product or service that Janus Capital determines will assist it
in the investment decision-making process may be paid for in brokerage
commission dollars. Such allocation may create a conflict of interest for Janus
Capital.
Janus Capital may also consider sales of shares of mutual funds advised
by Janus Capital by a broker-dealer or the recommendation of a broker-dealer to
its customers that they purchase shares of such funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Star
Advisers and Star Worldwide Funds. In placing portfolio business with such
broker-dealers, Janus Capital will seek the best execution of each transaction.
International Equity Fund and Star Small Cap Fund (segment advised by
Loomis Sayles.) In placing orders for the purchase and sale of securities for
the International Equity Fund and the segment of the Star Small Cap Fund advised
by Loomis Sayles, Loomis Sayles follows the same policies as for the other Funds
for which it acts as subadviser, except that Loomis Sayles may cause the
International Equity Fund or its segment of the Star Small Cap Fund to pay a
broker-dealer that provides brokerage and research services to Loomis Sayles an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount another broker-dealer would have charged for effecting that
transaction. Loomis Sayles must determine in good faith that such greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of that
particular transaction or Loomis Sayles' overall responsibilities to the Fund
and its other clients. Loomis Sayles' authority to cause the International
Equity Fund or its segment of the Star Small Cap Fund to pay such greater
commissions is also subject to such policies as the trustees of the Trusts may
adopt from time to time.
Star Worldwide and Star Small Cap Funds (segments advised by Harris.)
In placing orders for the purchase and sale of portfolio securities for the
segments of the Star Worldwide and Star Small Cap Funds advised by Harris,
Harris always seeks best execution, subject to the considerations set forth
below. Transactions in unlisted securities are carried out through
broker-dealers who make the market for such securities unless, in the judgment
of Harris, a more favorable execution can be obtained by carrying out such
transactions through other brokers or dealers.
Harris selects only brokers or dealers which it believes are
financially responsible, will provide efficient and effective services in
executing, clearing and settling an order and will charge commission rates
which, when combined with the quality of the foregoing services, will produce
best 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. Harris 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.
Receipt of brokerage or research services from brokers may sometimes be
a factor in selecting a broker which Harris believes will provide best execution
for a transaction. These services include not only a wide variety of reports on
such matters as economic and political developments, industries, companies,
securities, portfolio strategy, account performance, daily prices of securities,
stock and bond market conditions and projections, asset allocation and portfolio
structure, but also meetings with management representatives of issuers and with
other analysts and specialists. Although it is not possible to assign an exact
dollar value to these services, they may, to the extent used, tend to reduce
Harris's expenses. Such services may be used by Harris in servicing other client
accounts and in some cases may not be used with respect to the Funds. Consistent
with the Rules of the National Association of Securities Dealers, Inc., and
subject to seeking best execution, Harris may, however, consider purchases of
shares of the Star Worldwide and Star Small Cap Funds by customers of
broker-dealers as a factor in the selection of broker-dealers to execute Fund
portfolio transactions.
Harris may cause its segments of the Star Worldwide and Star Small Cap
Funds to pay a broker-dealer that provides brokerage and research services to
Harris an amount of commission for effecting a securities transaction for the
Fund in excess of the amount another broker-dealer would have charged for
effecting that transaction. Harris must determine in good faith that such
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
that particular transaction or Harris's overall responsibilities to the Funds
and its other clients. Harris's authority to cause the Funds to pay such greater
commissions is also subject to such policies as the trustees of the Trusts may
adopt from time to time.
Star Worldwide and Star Small Cap Funds (segments advised by
Montgomery.) In all purchases and sales of securities for its segments of the
Funds, Montgomery's primary consideration is to obtain the most favorable
execution available. Pursuant to the subadvisory agreements between NEFM and
Montgomery, Montgomery determines which securities are to be purchased and sold
by its segments and which broker-dealers are eligible to execute its segments'
portfolio transactions, subject to the instructions of, and review by, NEFM and
the trustees. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a market-maker
unless, in the opinion of Montgomery, a better price and execution can otherwise
be obtained by using a broker for the transaction.
For the Star Worldwide Fund, Montgomery contemplates purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. In purchasing American
Depository Receipts ("ADRs") and European Depository Receipts ("EDRs") (and
other similar instruments), Montgomery's segments of the Star Worldwide Fund may
purchase those listed on stock exchanges, or traded in the over-the-counter
markets in the U.S. or Europe, as the case may be. ADRs, like other securities
traded in the U.S., will be subject to negotiated commission rates. The foreign
and domestic debt securities and money market instruments in which Montgomery's
segment of the Star Worldwide Fund may invest may be traded in the
over-the-counter markets.
Purchases of portfolio securities for the segments also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which this segment will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, Montgomery will use its best efforts
to choose a broker-dealer capable of providing the services necessary generally
to obtain the most favorable execution available. The full range and quality of
services available will be considered in making these determinations, such as
the firm's ability to execute trades in a specific market required by the
segment of the Fund, such as in an emerging market, the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors.
Montgomery may also consider the sale of the Star Worldwide and Star
Small Cap Funds' shares as a factor in the selection of broker-dealers to
execute portfolio transactions for its segments. The placement of portfolio
transactions with broker-dealers who sell shares of the Funds is subject to
rules adopted by the National Association of Securities Dealers, Inc.
While Montgomery's general policy is to seek first to obtain the most
favorable execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to Montgomery, even if the
specific services were not imputed just to the Fund and may be lawfully and
appropriately used by Montgomery in advising other clients. Montgomery considers
such information, which is in addition to, and not in lieu of, the services
required to be performed by it under its subadvisory agreements with NEFM, to be
useful in varying degrees, but of indeterminable value. In negotiating any
commissions with a broker or evaluating the spread to be paid to a dealer, the
segments of the Funds may therefore pay a higher commission or spread than would
be the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by Montgomery to be reasonable in relation to the value
of the brokerage and/or research services provided by such broker-dealer, which
services either produce a direct benefit to the segments of the Funds or assist
Montgomery in carrying out its responsibilities to the segments of the Funds.
The standard of reasonableness is to be measured in light of Montgomery's
overall responsibilities to its segments. The trustees of the Trusts review all
brokerage allocations where services other than best execution capabilities are
a factor to ensure that the other services provided meet the criteria outlined
above and produce a benefit to the Fund.
On occasion, situations may arise in which legal and regulatory
considerations will preclude trading for the segments' accounts by reason of
activities of Montgomery Securities, a broker-dealer affiliated with Montgomery,
or its affiliates. It is the judgment of the trustees that the Funds will not be
materially disadvantaged by any such trading preclusion and that the
desirability of continuing their subadvisory arrangements with Montgomery and
Montgomery's affiliation with Montgomery Securities and other affiliates of
Montgomery Securities outweigh any disadvantages that may result from the
foregoing.
Montgomery's sell discipline for the segments' investment in issuers is
based on the premise of a long-term investment horizon; however, sudden changes
in valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by Montgomery in determining the appropriate investment horizon.
At the company level, sell decisions are influenced by a number of
factors, including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and
declining financial flexibility, may also signal a sell.
Star Small Cap Fund (segment advised by Robertson Stephens.) It is the
policy of Robertson Stephens, in effecting transactions in portfolio securities,
to seek the best execution of orders. The determination of what may constitute
best execution in a securities transaction involves a number of judgmental
considerations, including, without limitation, the overall direct net economic
result to this segment of the Fund (involving both price paid or received and
any commissions and other costs), the efficiency with which the transaction is
effected, the ability to effect the transaction at all when a large block is
involved, the availability of the broker to stand ready to execute possibly
difficult transactions for this segment in the future, and the financial
strength and stability of the broker.
Subject to the policy of seeking best execution of orders at the most
favorable prices, Robertson Stephens may execute transactions with brokerage
firms which provide research services and products to Robertson Stephens. The
phrase "research services and products" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
the availability of securities or purchasers or sellers of securities, the
furnishing of analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts,
and the obtainment of products such as third-party publications, computer and
electronic access equipment, software programs, and other information and
accessories that may assist Robertson Stephens in furtherance of its investment
advisory responsibilities to its advisory clients. Such services and products
permit Robertson Stephens to supplement its own research and analysis
activities, and provide it with information from individuals and research staffs
of many securities firms. Generally, it is not possible to place a dollar value
on the benefits derived from specific research services and products. Robertson
Stephens may receive a benefit from these research services and products which
is not passed on, in the form of a direct monetary benefit, to this segment of
the Fund. If Robertson Stephens 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, Robertson Stephens may allocate the cost of
such service or product accordingly. The portion of the product or service that
Robertson Stephens determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Any such allocation may
create a conflict of interest for Robertson Stephens. Subject to the standards
outlined in this and the preceding paragraph, Robertson Stephens may arrange to
execute a specified dollar amount of transactions through a broker that has
provided research products or services. Such arrangements do not constitute
commitments by Robertson Stephens to allocate portfolio brokerage upon any
prescribed basis, other than upon the basis of seeking best execution of orders.
Research services and products may be useful to Robertson Stephens in
providing investment advice to any of the funds or clients it advises. Likewise,
information made available to Robertson Stephens from brokers effecting
securities transactions for such other funds and clients may be utilized on
behalf of another fund. Thus, there may be no correlation between the amount of
brokerage commissions generated by a particular fund or client and the indirect
benefits received by that fund or client.
Subject to the policy of seeking the best execution of orders, sales of
shares of the Fund may also be considered as a factor in the selection of
brokerage firms to execute portfolio transactions for this segment of the Fund.
Because selection of executing brokers is not based solely on net
commissions, the segment of the Fund advised by Robertson Stephens may pay an
executing broker a commission higher than that which might have been charged by
another broker for that transaction. Robertson Stephens will not knowingly pay
higher mark-ups on principal transactions to brokerage firms as consideration
for receipt of research services or products. While it is not practicable for
Robertson Stephens to solicit competitive bids for commissions on each portfolio
transaction, consideration is regularly given to available information
concerning the level of commissions charged in comparable transactions by
various brokers. Transactions in over-the-counter securities are normally placed
with principal market makers, except in circumstances where, in the opinion of
Robertson Stephens, better prices and execution are available elsewhere.
Subject to the overriding objective of obtaining the best possible
execution of orders, each of the subadvisers may allocate brokerage transactions
to affiliated brokers. In order for the affiliated broker to effect portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by the affiliated broker must be reasonable and fair compared to the
commissions, fees and other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period. Furthermore, the
trustees of the Trusts, including a majority of those trustees who are not
"interested persons" of the Trusts as defined in the 1940 Act have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.
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 the Trusts, including those who are not "interested persons" of the Trusts,
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 Funds' dealer in connection with such transactions.
It is expected that the portfolio transactions in fixed-income securities
will generally be with issuers or dealers on a net basis without a stated
commission. Securities firms may receive brokerage commissions on transactions
involving options, futures and options on futures and the purchase and sale of
underlying securities upon exercise of options. The brokerage commissions
associated with buying and selling options may be proportionately higher than
those associated with general securities transactions.
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DESCRIPTION OF THE TRUSTS AND OWNERSHIP OF SHARES
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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 twelve
separate portfolios. The Growth Fund and the Municipal Income Fund currently
offer two classes of shares, the Government Securities, Star Worldwide and Star
Small Cap Funds each currently offer three classes of shares and the Capital
Growth, 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. The Star Worldwide
Fund was organized in 1995 and commenced operations on December 29, 1995. The
Star Small Cap Fund was organized in 1996 and commenced operations on December
31, 1996. The remaining Funds in the Trust are successors to the following
corporations which commenced operations in the years indicated:
Corporation Date of Commencement
----------- --------------------
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, 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
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 seven separate
portfolios. The High Income, Massachusetts, California and New York Funds each
currently offers two classes of shares, the Adjustable Rate Fund 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.
The Declarations of Trust of New England Funds Trust I and New England
Funds Trust II currently permit each Trust's trustees to issue an unlimited
number of full and fractional shares of each series. Each Fund is represented by
a particular series of shares. The Declarations of Trust further permit each
Trust's trustees to divide the shares of each series into any number of separate
classes, each having such rights and preferences relative to other classes of
the same series as the trustees may determine. The shares of each Fund do not
have any preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of each class of the Fund
are entitled to share pro rata in the net assets attributable to that class of
shares of the Fund available for distribution to shareholders. The Declarations
of Trust also permit the trustees to charge shareholders directly for custodial,
transfer agency and servicing expenses.
The shares of all the Funds (except as noted in the first two
paragraphs of this section) are divided into four classes, Class A, Class B,
Class C and Class Y. Each Fund offers such classes of shares as set forth in
such Fund's Prospectus. Class Y shares are available for purchase only by
certain eligible institutional investors and have higher minimum purchase
requirements than Classes A, B and C. All expenses of each Fund [excluding
transfer agency fees and expenses of printing and mailing Prospectuses to
shareholders ("Other Expenses")] are borne by its Class A, B, C and Y shares on
a pro rata basis, except for 12b-1 fees, which are borne only by Classes A, B
and C and may be charged at a separate rate to each such class. Other Expenses
of Classes A, B and C are borne by such classes on a pro rata basis, but Other
Expenses relating to the Class Y shares may be allocated separately to the Class
Y shares.
The assets received by each class of a Fund for the issue or sale of
its shares and all income, earnings, profits, losses and proceeds therefrom,
subject only to the rights of the creditors, are allocated to, and constitute
the underlying assets of, that class of a Fund. The underlying assets of each
class of a Fund are segregated and are charged with the expenses with respect to
that class of a Fund and with a share of the general expenses of the relevant
trust. Any general expenses of the Trust that are not readily identifiable as
belonging to a particular class of a Fund are allocated by or under the
direction of the trustees in such manner as the trustees determine to be fair
and equitable. While the expenses of each Trust are allocated to the separate
books of account of each Fund, certain expenses may be legally chargeable
against the assets of all of the Funds in a Trust.
The Declarations of Trust also permit each Trust's trustees, without
shareholder approval, to subdivide any series or class of shares or fund into
various sub-series or sub-classes with such dividend preferences and other
rights as the trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The trustees may also,
without shareholder approval, establish one or more additional series or classes
or merge two or more existing series or classes.
The Declarations of Trust provide for the perpetual existence of the
Trusts. Either Trust or any Fund, however, may be terminated at any time by vote
of at least two-thirds of the outstanding shares of each Fund affected.
Similarly, any class within a Fund may be terminated by vote of at least
two-thirds of the outstanding shares of such class. While each Declaration of
Trust further provides that the board of trustees may also terminate the
relevant Trust upon written notice to its shareholders, the 1940 Act requires
that the Trust receive the authorization of a majority of its outstanding shares
in order to change the nature of its business so as to cease to be an investment
company.
Voting Rights
As summarized in the Prospectuses, shareholders are entitled to one
vote for each full share held (with fractional votes for each fractional share
held) and may vote (to the extent provided therein) in the election of trustees
and the termination of the Trust and on other matters submitted to the vote of
shareholders.
The Declarations of Trust provide that on any matter submitted to a
vote of all shareholders of a Trust, all Trust shares entitled to vote shall be
voted together irrespective of series or class unless the rights of a particular
series or class would be adversely affected by the vote, in which case a
separate vote of that series or class shall also be required to decide the
question. Also, a separate vote shall be held whenever required by the 1940 Act
or any rule thereunder. Rule 18f-2 under 1940 Act provides in effect that a
series or class shall be deemed to be affected by a matter unless it is clear
that the interests of each series or class in the matter are substantially
identical or that the matter does not affect any interest of such series or
class. On matters affecting an individual series or class, only shareholders of
that series or class are entitled to vote. Consistent with the current position
of the SEC, shareholders of all series and classes vote together, irrespective
of series or class, on the election of trustees and the selection of the Trust's
independent accountants, but shareholders of each series vote separately on
other matters requiring shareholder approval, such as certain changes in
investment policies of that series or the approval of the investment advisory
and subadvisory agreement relating to that series, and shareholders of each
class within a series vote separately as to the Rule 12b-1 plan (if any)
relating to that class.
There will normally be no meetings of shareholders for the purpose of
electing trustees except that, in accordance with the 1940 Act, (i) a Trust will
hold a shareholders' meeting for the election of trustees at such time as less
than a majority of the trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy on the board of trustees,
less than two-thirds of the trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with a Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of shares having a net asset value
of at least $25,000 or at least 1% of the outstanding shares stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
trustee, the Trusts have undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders).
Except as set forth above, the trustees shall continue to hold office
and may appoint successor trustees. Shareholder voting rights are not
cumulative.
No amendment may be made to a Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the relevant Trust
except (i) to change the Trust's or a Fund's name or to cure technical problems
in the Declaration of Trust, (ii) to establish and designate new series or
classes of Trust shares and (iii) to establish, designate or modify new and
existing series or classes of Trust shares or other provisions relating to Trust
shares in response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Trust.
However, the Declarations of Trust disclaim shareholder liability for acts or
obligations of a Trust and require that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by a Trust or
the trustees. The Declarations of Trust provide for indemnification out of each
Fund's property for all loss and expense of any shareholder held personally
liable for the obligations of the Fund by reason of owning shares of such Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and a Fund itself would be unable to meet
its obligations.
The Declarations of Trust further provide that the relevant board of
trustees will not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declarations of Trust protects a trustee against any
liability to which the trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. The By-Laws of each Trust provide
for indemnification by the Trust of trustees and officers of the relevant Trust,
except with respect to any matter as to which any such person did not act in
good faith in the reasonable belief that his or her action was in or not opposed
to the best interests of the Trust. Such persons may not be indemnified against
any liability to the Trust or the Trust's shareholders to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
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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 third 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 three 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.
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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, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Securities listed on a national securities exchange or on the
NASDAQ National Market System are valued at their last sale price, or, if there
is no reported sale during the day, the last reported bid price estimated by a
broker. Unlisted securities traded in the over-the-counter market are valued at
the last reported bid price in the over-the-counter market or on the basis of
yield equivalents as obtained from one or more dealers that make a market in the
securities. U.S. Government securities are traded in the over-the-counter
market. Options, interest rate futures and options thereon that are traded on
exchanges are valued at their last sale price as of the close of such exchanges.
Securities for which current market quotations are not readily available and all
other assets are taken at fair value as determined in good faith by the board of
trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the board.
Generally, trading in foreign government securities and other
fixed-income securities, as well as trading in equity securities in markets
outside the United States, is substantially completed each day at various times
prior to the close of the New York Stock Exchange. Securities traded on a
non-U.S. exchange will be valued at their last sale price (or the last reported
bid price, if there is no reported sale during the day), on the exchange on
which they principally trade, as of the close of regular trading on such
exchange. The value of other securities principally traded outside the United
States will be computed as of the completion of substantial trading for the day
on the markets on which such securities principally trade. Securities
principally traded outside the United States will generally be valued several
hours before the close of regular trading on the New York Stock Exchange,
generally 4:00 p.m. Eastern time, when the Funds compute the net asset value of
their shares. Occasionally, events affecting the value of securities principally
traded outside the United States may occur between the completion of substantial
trading of such securities for the day and the close of the New York Stock
Exchange, which events will not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of a Fund's securities
occur during such period, then these securities will be valued at their fair
value as determined in good faith by or in accordance with procedures approved
by the Trusts' trustees.
Trading in some of the portfolio securities of some of the Funds takes
place in various markets outside the Untied States on days and at times other
than when the New York Stock Exchange is open for trading. Therefore, the
calculation of these Funds' net asset value does not take place at the same time
as the prices of many of its portfolio securities are determined, and the value
of the Fund's portfolio may change on days when the Fund is not open for
business and its shares may not be purchased or redeemed.
The per share net asset value of a class of a Fund's shares is computed
by dividing the number of shares outstanding into the total net asset value
attributable to such class. The public offering price of a Class A share of a
Fund is the net asset value per share next-determined after a properly completed
purchase order is accepted by New England Funds, L.P. or State Street Bank, plus
a sales charge as set forth in the Fund's Prospectus. The public offering price
of a Class B, C or Y share of a Fund is the next-determined net asset value.
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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, the reduced
sales charge of 4.5% of the public offering price will apply to the entire
amount of the additional investment.
Letter of Intent. A Letter of Intent (a "Letter"), which can be
effected at any time, is a privilege available to investors which reduces the
sales charge on investments in Class A shares. Ordinarily, reduced sales charges
are available for single purchases of Class A shares only when they reach
certain breakpoints (e.g., $50,000, $100,000, etc.). By signing a Letter, a
shareholder indicates an intention to invest enough money in Class A shares
within 13 months to reach a breakpoint. If the shareholder's intended aggregate
purchases of all series and classes of the Trusts over a defined 13-month period
will be large enough to qualify for a reduced sales charge, the shareholder may
invest the smaller individual amounts at the public offering price calculated
using the sales load applicable to the 13-month aggregate investment.
A Letter is a non-binding commitment, the amount of which may be
increased, decreased or canceled at any time. The effective date of a Letter is
the date it is received in good order at New England Funds, L.P., or, if
communicated by a telephone exchange or order, at the date of telephoning
provided a signed Letter, in good order, reaches New England Funds, L.P. within
five business days.
A reduced sales charge is available for aggregate purchases of all
series and classes of shares of the Trusts pursuant to a written Letter effected
within 90 days after any purchase. In the event the account was established
prior to 90 days before the Letter effective date, the account will be credited
with Rights of Accumulation ("ROA") towards the breakpoint level that will be
reached upon the completion of the 13 months' purchases. The ROA credit is the
value of all shares held as of the effective date of the Letter based on the
"public offering price computed on such date."
The cumulative purchase discount, described above, permits the
aggregate value at the current public offering price of Class A shares of any
accounts with the Trusts held by a shareholder to be added to the dollar amount
of the intended investment under a Letter, provided the shareholder lists them
on the account application.
State Street Bank will hold in escrow shares with a value at the
current public offering price of 5% of the aggregate amount of the intended
investment. The amount in escrow will be released when the Letter is completed.
If the shareholder does not purchase shares in the amount indicated in the
Letter, the shareholder agrees to remit to State Street Bank the difference
between the sales charge actually paid and that which would have been paid had
the Letter not been in effect, and authorizes State Street Bank to redeem
escrowed shares in the amount necessary to make up the difference in sales
charges. Reinvested dividends and distributions are not included in determining
whether the Letter has been completed.
Combining Purchases. Purchases of all series and classes of the Trusts
by or for an investor, the investor's spouse, parents, children, siblings,
grandparents or grandchildren and any other account of the investor, including
sole proprietorships, in either Trust may be treated as purchases by a single
individual for purposes of determining the availability of a reduced sales
charge. Purchases for a single trust estate or a single fiduciary account may
also be treated as purchases by a single individual for this purpose, as may
purchases on behalf of a participant in a tax-qualified retirement plan and
other employee benefit plans, provided that the investor is the sole participant
in the plan.
Combining with Other Series and Classes of the Trusts. A shareholder's
total investment for purposes of the cumulative purchase discount and purchases
under a Letter of Intent includes the value at the current public offering price
of any shares of series and classes of the Trusts that the shareholder owns
(which includes shares of New England Cash Management Trust and New England Tax
Exempt Money Market Trust [the "Money Market Funds"] unless such shares were
purchased by exchanging shares of either of the Trusts). Shares owned by persons
described in the preceding paragraph may also be included.
Unit Holders of Unit Investment Trusts. Unit investment trust
distributions may be invested in Class A shares of any Fund at a reduced sales
charge of 1.50% of the public offering price (or 1.52% of the net amount
invested); for large purchases on which a sales charge of less than 1.50% would
ordinarily apply, such lower charge also applies to investments of unit
investment trust distributions.
Clients of Advisers or Subadvisers. No sales charge or contingent
deferred sales charge applies to investments of $100,000 or more in Class A
shares of the Funds by (1) clients of an adviser or subadviser to the Funds; any
director, officer or partner of a client of an adviser or subadviser to the
Funds; and the spouse, parents, children, siblings, grandparents or
grandchildren of the foregoing; (2) any individual who is a participant in a
Keogh or IRA Plan under a prototype of an adviser or subadviser to the Funds if
at least one participant in the plan qualifies under category (1) above; and (3)
an individual who invests through an IRA and is a participant in an employee
benefit plan that is a client of an adviser or subadviser to the Funds. Any
investor eligible for this arrangement should so indicate in writing at the time
of the purchase.
Offering to Employees of MetLife and Associated Entities. There is no
sales charge, CDSC or initial investment minimum related to investments in Class
A shares of the Funds by any of the Trusts' investment advisers or subadvisers,
New England Funds, L.P. or any other company affiliated with NELICO or MetLife;
current and former directors and trustees of the Trusts or their predecessor
companies; agents and general agents of NELICO or MetLife and their insurance
company subsidiaries; current and retired employees of such agents and general
agents; registered representatives of broker-dealers that have selling
arrangements with New England Funds, L.P.; the spouse, parents, children,
siblings, grandparents or grandchildren of the persons listed above and any
trust, pension, profit sharing or other benefit plans for any of the foregoing
persons and any separate account of NELICO or MetLife or any other company
affiliated with NELICO or MetLife.
Eligible Governmental Authorities. There is no sales charge or
contingent deferred sales charge related to investments in Class A shares of any
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 Sections 401(a), 403(b), 401(k) and 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 the Funds 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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SHAREHOLDER SERVICES
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Open Accounts
A shareholder's investment is automatically credited to an open account
maintained for the shareholder by State Street Bank. Following each transaction
in the account, a shareholder will receive a confirmation statement disclosing
the current balance of shares owned and the details of recent transactions in
the account. After the close of each calendar year, State Street Bank will send
each shareholder a statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This statement should be
retained as a permanent record.
New England Funds, L.P. may charge a fee for providing duplicate information.
The open account system provides for full and fractional shares
expressed to three decimal places and, by making the issuance and delivery of
stock certificates unnecessary, eliminates problems of handling and safekeeping,
and the cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.
The costs of maintaining the open account system are paid by the Funds
and no direct charges are made to shareholders. Although the Funds have no
present intention of making such direct charges to shareholders, they each
reserve the right to do so. Shareholders will receive prior notice before any
such charges are made.
Automatic Investment Plans (Class A, B and C Shares)
Subject to each Fund's investor eligibility requirements, investors may
automatically invest in additional shares of a Fund on a monthly basis by
authorizing New England Funds, L.P. to draw checks on an investor's bank
account. The checks are drawn under the Investment Builder Program, a program
designed to facilitate such periodic payments, and are forwarded to New England
Funds, L.P. for investment in the Fund. A plan may be opened with an initial
investment of $50 or more and thereafter regular monthly checks of $50 or more
will be drawn on the investor's account. The reduced minimum initial investment
pursuant to an automatic investment plan is referred to in the Prospectus. An
Investment Builder application must be completed to open an automatic investment
plan. An application may be found in the Prospectus or may be obtained by
calling New England Funds, L.P. at 1-800-225-5478 or your investment dealer.
This program is voluntary and may be terminated at any time by New
England Funds, L.P. upon notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any time by
the investor by written notice to New England Funds, L.P., which must be
received at least five business days prior to any payment date. The plan may be
discontinued by State Street Bank at any time without prior notice if any check
is not paid upon presentation; or by written notice to you at least thirty days
prior to any payment date. State Street Bank is under no obligation to notify
shareholders as to the nonpayment of any check.
Retirement Plans Offering Tax Benefits (Class A, B and C Shares)
The federal tax laws provide for a variety of retirement plans offering
tax benefits. These plans may be funded with shares of the Funds or with certain
other investments. The plans include H.R. 10 (Keogh) plans for self-employed
individuals and partnerships, individual retirement accounts (IRAs), corporate
pension trust and profit sharing plans, including 401(k) plans, and retirement
plans for public school systems and certain tax exempt organizations, i.e.,
403(b) plans.
The reduced minimum initial investment available to retirement plans
offering tax benefits is referred to in the Prospectus. For these plans, initial
investments in a Fund must be at least $250 for each participant in corporate
pension and profit sharing plans and Keogh plans, and $100 for subsequent
investments. There is a special initial and subsequent investment minimum of $25
for payroll deduction investment programs for 401(k), SARSEP, SEP, SIMPLE Plans,
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, as amended
("ERISA") and as to the eligibility requirements for a specific plan and its
state as well as federal tax aspects.
Certain retirement plans may also be eligible to purchase Class Y
shares. See the Prospectus relating to Class Y shares.
Systematic Withdrawal Plans (Class A, B and C Shares)
An investor owning a Fund's shares having a value of $5,000 or more at
the current public offering price may establish a Systematic Withdrawal Plan
providing for periodic payments of a fixed or variable amount. An investor may
terminate the plan at any time. A form for use in establishing such a plan is
available from the servicing agent or your investment dealer. Withdrawals may be
paid to a person other than the shareholder if a signature guarantee is
provided. Please consult your investment dealer or New England Funds, L.P.
A shareholder under a Systematic Withdrawal Plan may elect to receive
payments monthly, quarterly, semiannually or annually for a fixed amount of not
less than $50 or a variable amount based on (1) the market value of a stated
number of shares, (2) a specified percentage of the account's market value or
(3) a specified number of years for liquidating the account (e.g., a 20-year
program of 240 monthly payments would be liquidated at a monthly rate of 1/240,
1/239, 1/238, etc.). The initial payment under a variable payment option may be
$50 or more.
In the case of shares subject to a CDSC, the amount or percentage you
specify may not, on an annualized basis, exceed 10% of the value, as of the time
you make the election, of your account with the Fund with respect to which you
are electing the Plan. Withdrawals of Class B shares of a Fund under the Plan
will be treated as redemptions of shares purchased through the reinvestment of
Fund distributions, or, to the extent such shares in your account are
insufficient to cover Plan payments, as redemptions from the earliest purchased
shares of such Fund in your account. No CDSC applies to a redemption pursuant to
the Plan.
All shares under the Plan must be held in an open (uncertificated)
account. Income dividends and capital gain distributions will be reinvested
(without a sales charge in the case of Class A shares) at net asset value
determined on the record date.
Since withdrawal payments represent proceeds from the liquidation of
shares, withdrawals may reduce and possibly exhaust the value of the account,
particularly in the event of a decline in net asset value. Accordingly, a
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 a 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 (except for shares of
the Adjustable Rate Fund and in the case of Class A shares of the 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 (subject to the investor eligibility
requirements, if any, 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. In the case of Class A shares of the Adjustable Rate Fund, if exchanged
for shares of any other Fund that has a higher sales charge, shareholders will
pay the difference between any sales charge they have already paid on their
Adjustable Rate Fund shares and the higher sales charge of the Fund into which
they are exchanging. 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 or Class B shares, you may also elect to exchange your shares of any Fund 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. 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 1-800-225-5478 or (2) a written
exchange request to New England Funds, P.O. Box 8551, Boston, MA 02266-8551. You
must acknowledge receipt of a current Prospectus for a Fund before an exchange
for that Fund can be effected.
The investment objectives of the Funds in the Trusts and the Money Market Funds
are as follows:
STOCK FUNDS:
NEW ENGLAND GROWTH FUND seeks long-term growth of capital through
investments in equity securities of companies whose earnings are expected to
grow at a faster rate than the United States economy.
NEW ENGLAND CAPITAL GROWTH FUND seeks long-term growth of capital.
NEW ENGLAND VALUE FUND seeks a reasonable long-term investment return
from a combination of market appreciation and dividend income from equity
securities.
NEW ENGLAND BALANCED FUND seeks a reasonable long-term investment
return from a combination of long-term 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.
NEW ENGLAND STAR SMALL CAP FUND seeks capital appreciation.
BOND FUNDS:
NEW ENGLAND GOVERNMENT SECURITIES FUND seeks a high level of current
income consistent with safety of principal by investing in U.S. Government
securities and engaging in transactions involving related options, futures and
options on futures.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND seeks a high current
return consistent with preservation of capital.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND seeks a high level of
current income consistent with low volatility of principal.
NEW ENGLAND STRATEGIC INCOME FUND seeks high current income with a
secondary objective of capital growth.
NEW ENGLAND BOND INCOME FUND seeks a high level of current income
consistent with what the Fund considers reasonable risk. The Bond Income Fund
invests primarily in corporate and U.S. Government bonds.
NEW ENGLAND HIGH INCOME FUND seeks high current income plus the
opportunity for capital appreciation to produce a high total return.
NEW ENGLAND MUNICIPAL INCOME FUND seeks as high a level of current
income exempt from federal income taxes as is consistent with reasonable risk
and protection of shareholders' capital. The Municipal Income Fund invests
primarily in debt securities of municipal issuers, the interest of which is
exempt from federal income tax but may be subject to the federal alternative
minimum tax, and may engage in transactions in financial futures contracts and
options on futures.
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND seeks as high a level of
current income exempt from federal income tax and Massachusetts personal income
taxes as Back Bay Advisors, the Fund's subadviser, believes is consistent with
preservation of capital.
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA seeks as high
a level of current income exempt from federal income tax and its state personal
income tax as is consistent with preservation of capital.
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK seeks as high a
level of current income exempt from federal income tax and its state personal
income tax and New York City personal income tax as is consistent with
preservation of capital.
MONEY MARKET FUNDS:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum current income consistent with
preservation of capital and liquidity.
U.S. Government Series -- highest current income consistent with
preservation of capital and liquidity.
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST -- current income exempt from federal
income taxes consistent with preservation of capital and liquidity.
As of April 15, 1997, the net assets of the Funds and the Money Market
Funds totaled over $__ 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. 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 $50 [or $500] or over ($____ 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.
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REDEMPTIONS
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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 Fund 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 six years,
third of shares issued in connection with dividend reinvestment and fourth of
shares held longest during the six-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value of shares
since the time of purchase or reinvested distributions associated with such
shares. Unless you request otherwise at the time of redemption, the CDSC is
deducted from the redemption, not the amount remaining in the account.
To illustrate, assume an investor purchased 100 shares at $10 per share
(at a cost of $1,000) and in the second year after purchase, the net asset value
per share is $12 and, during such time, the investor has acquired 10 additional
shares under dividend reinvestment. If at such time the investor makes his or
her first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in the net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 4% (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
1-800-225-5478. 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 Funds reserve 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 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 Prospectus describes 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.
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STANDARD PERFORMANCE MEASURES
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Calculations of Yield
Each Fund (except the Growth, Value, Growth Opportunities, Star
Advisers, Star Worldwide, Star Small Cap, 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
relevant 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, the California and
the New York Funds each may also advertise a taxable equivalent yield,
calculated as described above except that, for any given tax bracket, net
investment income will be calculated using as gross investment income an amount
equal to the sum of (i) any taxable income of the Fund plus (ii) the tax-exempt
income of the Fund divided by the difference between 1 and the effective federal
(or combined federal and state) income tax rate for taxpayers in that tax
bracket.
At any time in the future, yields and total return may be higher or
lower than past yields and there can be no assurance that any historical results
will continue.
Investors in the Funds are specifically advised that share prices,
expressed as the net asset values per share, will vary just as yield will vary.
An investor's focus on the yield of a Fund to the exclusion of the consideration
of the share price of that Fund may result in the investor's misunderstanding
the total return he or she may derive from the Fund.
Calculation of Total Return. Total return is a measure of the change in
value of an investment in a Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in shares
of the same class of that Fund rather than paid to the investor in cash. The
formula for total return used by the Funds is prescribed by the SEC and includes
three steps: (1) adding to the total number of shares of the particular class
that would be purchased by a hypothetical $1,000 investment in the Fund (with or
without giving effect to the deduction of sales charge or CDSC, if applicable)
all additional shares that would have been purchased if all dividends and
distributions paid or distributed during the period had been automatically
reinvested; (2) calculating the value of the hypothetical initial investment as
of the end of the period by multiplying the total of shares owned at the end of
the period by the net asset value per share of the relevant class on the last
trading day of the period; (3) dividing this account value for the hypothetical
investor by the amount of the initial investment, and annualizing the result for
periods of less than one year. Total return may be stated with or without giving
effect to any expense limitations in effect for a Fund.
Performance Comparisons
Yield and Total Return. Yields and total returns will generally be
higher for Class A shares than for Class B and Class C shares of the same Fund,
because of the higher levels of expenses borne by the Class B and Class C
shares. Because of its lower operating expenses, Class Y shares of each Fund can
be expected to achieve a higher yield and total return than the same Fund's
Class A, Class B and Class C shares. The Funds may from time to time include
their yield and total return in advertisements or in information furnished to
present or prospective shareholders. The Funds may from time to time include in
advertisements its total return and the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by Lipper
Analytical Services as having similar investment objectives.
Total return may also be used to compare the performance of the Fund
against certain widely acknowledged standards or indices for stock and bond
market performance or against the U.S. Bureau of Labor Statistics' Consumer
Price Index.
The Standard & Poor's Composite Index of 500 Stocks (the "S&P 500") is
a market value-weighted and unmanaged index showing the changes in the aggregate
market value of 500 stocks relative to the base period 1941-43. The S&P 500 is
composed almost entirely of common stocks of companies listed on the New York
Stock Exchange, although the common stocks of a few companies listed on the
American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 400 industrial, 60 transportation and 40 financial
services concerns. The S&P 500 represents about 80% of the market value of all
issues traded on the New York Stock Exchange.
The Salomon Brothers World Government Bond Index includes a broad range
of institutionally-traded fixed-rate government securities issued by the
national governments of the nine countries whose securities are most actively
traded. The index generally excludes floating- or variable-rate bonds,
securities aimed principally at non-institutional investors (such as U.S.
Savings Bonds) and private-placement type securities.
The Shearson Lehman Government Bond Index (the "SL Government Index")
is a measure of the market value of all public obligations of the U.S. Treasury;
all publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized rated
agency.
The Lehman Brothers Municipal Bond Index is a composite measure of the
total return performance of the municipal bond market. This index is computed
from prices on approximate 1800 bonds.
The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.
The Merrill Lynch High Yield Index includes over 750 issues and
represents public debt greater than $10 million (original issuance rated BBB/BB
and below), and the First Boston High Yield Index includes over 350 issues and
represents all public debt greater than $100 million (original issuance and
rated BBB/BB and below).
The Salomon Brothers Broad Investment Grade Bond Index is a price
composite of a broad range of institutionally based U.S. Government
mortgage-backed and corporate debt securities of investment outstanding of at
least $1 million and with a remaining period to maturity of at least one year.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices of
goods and services in major expenditure groups.
Lipper Analytical Services, Inc. is an independent service that
monitors the performance of over 1,300 mutual funds, and calculates total return
for the funds grouped by investment objective. Lipper's Mutual Fund Performance
Analysis, Small Cap Company Analysis and Mutual Fund Indices measure total
return and average current yield for the mutual fund industry. Rankings of
individual mutual fund performance over specified time periods assume
reinvestment of all distributions, exclusive of sales charges.
The Russell 2000 Index represents the top 2,000 stocks traded on the
New York Stock Exchange, American Stock Exchange and National Association of
Securities Dealers Automated Quotations, by market capitalizations.
The Morgan Stanley Capital International Europe, Australasia 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, Australasia 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 and Star Worldwide Funds may compare their
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's 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, and commercial paper rates. Some indexes, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds
Index, tend to lag behind changes in market rate levels and tend to be somewhat
less volatile.
The current interest rate on many FNMA ARMs is set by reference to the
11th District Cost of Funds Index published monthly by the Federal Reserve.
Since June 1987, the current interest rate on these ARMs, measured on a monthly
basis, has been higher than the average yield of taxable money market funds
represented by Donoghue's Taxable Money Fund Average and current rates on newly
issued one year bank certificates of deposit. The interest rates on other ARMs
and the yield on the Adjustable Rate Fund's portfolio may be higher or lower
than the interest rates on FNMA ARMs and there is also no assurance that
historical yield relationships among different types of investments will
continue.
Advertising and promotional materials may refer to the maturity and
duration of the Bond Funds. Maturity refers to the period of time before a bond
or other debt instrument becomes due. Duration is a commonly used measure of the
price responsiveness of a fixed-income security to an interest rate change
(i.e., the change in price one can expect from a given change in yield).
Articles and releases, developed by the Funds and other parties, about
the Funds regarding performance, rankings, statistics and analyses of the
individual Funds' and the fund group's asset levels and sales volumes, numbers
of shareholders by Fund or in the aggregate for New England Funds, statistics
and analyses of industry sales volumes and asset levels, and other
characteristics may appear in advertising, promotional literature, publications,
including, but not limited to, those publications listed in Appendix B to this
Statement, and on various computer networks, for example, the Internet. In
particular, some or all of these publications may publish their own rankings or
performance reviews of mutual funds, including, but not limited to, Lipper
Analytical Services and Morning Star. References to these rankings or reviews 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 use the accumulation charts below in their advertisements
to demonstrate the benefits of monthly savings at an 8% and 10% rate of return,
respectively.
<TABLE>
INVESTMENTS AT 8% RATE OF RETURN
<CAPTION>
5 YRS. 10 15 20 25 30
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <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
<CAPTION>
INVESTMENTS AT 10% RATE OF RETURN
5 YRS. 10 15 20 25 30
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <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 the
Star Worldwide Fund and the 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
broker-dealer registration under the Securities Exchange Act of 1934.
Advertising and sales literature developed to publicize such arrangements will
explain the relationship of the bank to New England Funds and New England Funds,
L.P. as well as the services provided by the bank relative to the Funds. The
material may identify the bank by name and discuss the history of the bank
including, but not limited to, the type of bank, its asset size, the nature of
its business and services and its status and standing in the industry.
In addition, sales literature may be published concerning topics of
general investor interest for the benefit of registered representatives and the
Funds' prospective shareholders. These materials may include, but are not
limited to, discussions of college planning, retirement planning, reasons for
investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
- --------------------------------------------------------------------------------
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
- --------------------------------------------------------------------------------
As described in the Prospectus, 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)
diversify its holdings so that at the end of each fiscal quarter, (a) at least
50% of the value of its total assets consists of cash, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited generally, with respect to any one issuer, to no more than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its assets
is 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 or 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 and payable by a Fund during October, November or
December to shareholders of record on a date in any such month and paid by the
Fund during the following January will be treated for federal tax purposes as
paid by the Fund and received by shareholders on December 31 of the year in
which declared.
Shareholders of each Fund will be subject to federal income taxes on
distributions made by the Fund (other than "exempt-interest dividends" paid by
the Municipal Income, Massachusetts, New York and California Funds, as described
in the relevant Prospectuses) whether received in cash or additional shares of
the Fund. Distributions by each Fund of net income and short-term capital gains,
if any, will be taxable to shareholders as ordinary income. Distributions of
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains, without regard to how long a shareholder has held shares of the
Fund. A loss on the sale of shares held for six 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, Star Worldwide and Star Small Cap Funds may
be eligible to make and, if eligible, may make an election under Section 853 of
the Code so that their 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 of 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 or capital gain 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 Equity, Star Worldwide and Star Small Cap Funds 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, each 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, each Fund may be required to
sell securities it would have otherwise continued to hold in order to make
distributions to shareholders in or order to avoid any Fund-level tax.
Redemptions and exchanges of each Fund's shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions. If
shares have been held for more than one year, gain or loss realized will be
long-term capital gain or loss, provided the shareholder holds the shares as a
capital asset. Furthermore, no loss will be allowed on the sale of Fund shares
to the extent the shareholder acquired other shares of the same Fund within 30
days prior to the sale of the loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions.
Dividends and distributions also may be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state or local taxes.
The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Funds (except the Star Small Cap Fund)
and the related reports of independent accountants included in the Funds' annual
reports for the year ended December 31, 1996 are incorporated herein by
reference.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-); The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, if
fact, have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default of there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is not longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aa1, A1, Baa1, and B1.
<PAGE>
APPENDIX B
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
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
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
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
<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 also including, but not limited to:
Back Bay Advisors, Harris Associates L.P., Loomis Sayles, CGM and Westpeak.
Reference also may be made to the Funds of their respective fund groups, namely,
Loomis Sayles Fund and the Oakmark Funds.
References may be included in New England Funds' advertising and
promotional literature to other NEIC affiliates including, but not limited to,
New England Investment Associates, L. P., AEW Capital Management, L.P.,
Marlborough Capital Advisors, L.P., Reich & Tang Capital Management, Reich and
Tang Mutual Funds Group and Jurika & Voyles and their fund group.
References to subadvisers unaffiliated with NEIC that perform
subadvisory functions on behalf of New England Funds and their respective fund
groups may be contained in New England Funds' advertising and promotional
literature including, but not limited to, Berger, Janus Capital, Founders,
Montgomery and Robertson Stephens.
New England Funds' advertising and promotional material will include,
but is not limited to, discussions of the following information about both
affiliated and unaffiliated entities:
|*| Specific and general assessments and forecasts regarding U.S., world
economies, the economics of specific nations and their impact on the New
England Funds
|*| Specific and general investment emphasis, specialties, fields of expertise,
competencies, operations and functions
|*| Specific and general investment philosophies, strategies, processes,
techniques and types of analysis
|*| 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
|*| The industries and sectors from which clients are drawn and specific client
names and background information on those clients
|*| Current capitalization, levels of profitability and other financial
information
|*| Identification of portfolio managers, researchers, economists, principals
and other staff members and employees
|*| The specific credentials of the above individuals, including, but not
limited to, previous employment, current and past positions, titles and
duties performed, industry experience, educational background and degrees,
awards and honors
|*| Specific identification of, and general reference to, current individual,
corporate and institutional clients, including pension and profit sharing
plans
|*| Current and historical statistics about:
-total dollar amount of assets managed
-New England Funds' assets managed in total and by Fund
-the growth of assets
-asset types managed
-numbers of principal parties and employees, and the length of their
tenure, including officers, portfolio managers, researchers, economists,
technicians and support staff
-the above individuals' total and average number of years of industry
experience and the total and average length of their service to the
adviser or the subadviser
|*| The general and specific strategies applied by the advisers in the
management of New England Funds portfolios including, but not limited to:
-the pursuit of growth, value or income oriented strategies
-the manner and degree to which the strategy is pursued
-the types and characteristics of investments sought and specific
portfolio holdings
-the actual or potential impact and result from strategy implementation
|*| 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, the Star Small Cap Fund's portfolio manager John Wallace of Robertson
Stephens, who also serves as portfolio manager of The Robertson Stephens
Growth & Income Fund and The Robertson Stephens Diversified Growth Fund; the
Star Small Cap Fund's portfolio manager Andrew Pratt of Montgomery and the
Montgomery Funds who serves as the portfolio manager for the Montgomery
Small Cap Opportunities Fund and the Montgomery Micro Cap Fund; the Star
Small Cap Fund's portfolio managers Christopher Ely, Philip Fine and David
Smith of Loomis Sayles and the Fund's portfolio manager Steven Reid of
Harris Associates and The Oakmark Family of Funds who serves as the
portfolio manager of The Oakmark Small Cap Fund; the Star Advisers Fund
portfolio manager Patrick S. Adams of Berger Associates, Inc. and Berger
Funds, who also serves as portfolio manager of the Berger 100 Fund; the Star
Advisers Fund portfolio manager Warren B. Lammert of Janus Capital and Janus
Funds, who also serves as portfolio manager of Janus Mercury 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; the Star Worldwide Fund portfolio managers
Josephine S. Jimenez and Bryan L. Sudweeks of Montgomery, who also serve as
portfolio managers of Montgomery Emerging Markets Fund; the Star Advisers
Fund portfolio manager Edward F. Keely and 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 the Star Worldwide Fund
portfolio managers Robert J. Sanborn and David G. Herro of Harris Associates
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 the 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 managed by the Funds' adviser 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 one of the largest publicly traded managers in the U.S. listed
on the New York Stock Exchange. NEIC maintains over $100 billion in assets under
management. In addition, promotional materials may include:
|*| Specific and general references to New England Funds multi-manager approach
through NEIC affiliates and outside firms including, but not limited to, the
following:
-that each adviser/manager operates independently on a day-to-day basis
and maintains an image and identity separate from NEIC and the other
investment managers
-other fund companies are limited to a "one size fits all" approach but
New England Funds draws upon the talents of multiple managers whose
expertise best matches the fund objective
-in this and other contexts reference may be made to New England Funds
slogan "Where The Best Minds Meet"(R) and that New England Funds ability
to match the talent to the task is one more reason it is becoming known
as "Where The Best Minds Meet."
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.
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.
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 is a Chicago-based investment management company with more than
$__ billion in assets under management, comprised of the $__ billion Oakmark
Fund Group and $__ billion in individual and institutional assets. Harris'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.
Graystone Partners, L.P. ("Graystone") is 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.
Vaughan, Nelson, Scarborough & McConnell L.P. ("VNSM") is a
Houston-based investment management firm focusing on institutional and high net
worth clients, approximately half of which are foundations and endowments.
Founded in 1970, VNSM manages equity, fixed income and balanced portfolios and
focuses on strong fundamental research, solid investment performance and
excellent client service.
Jurika & Voyles is an Oakland-based investment management firm that
employs a fundamental, research driven style, based on principles of value and
growth in search of quality businesses at opportunistic prices that demonstrate
potential for growing cash flows. Jurika & Voyles manages its own no-load fund
family and other portfolios, which are characterized by investment in: all-cap
equity, mid-cap plus, all-cap balanced and mini-cap on high concentrations of a
limited number of securities.
Financial Adviser Services ("FAS"), a division of NEIC, may be
referenced in Fund advertising and promotional literature concerning the
marketing services it provides to NEIC-affiliated fund groups including: New
England Funds, Loomis Sayles Funds, Oakmark Funds and Reich & Tang Funds.
FAS will provide marketing support to NEIC affiliated fund groups
targeting financial advisers, financial intermediaries and institutional clients
who may transact purchases and other fund-related business directly with these
fund groups. Communications will contain information including, but not limited
to: descriptions of clients and the marketplaces to which it directs its
efforts; the mission and goals of FAS and the types of services it provides
which may include: seminars; its 1-800 number, web site, Internet or other
electronic facilities; qualitative information about the funds' investment
methodologies; information about specific strategies and management techniques;
performance data and features of the funds; institutional oriented research and
portfolio manager insight and commentary. Additional information contained in
advertising and promotional literature may include: rankings and ratings of the
funds including, but not limited to, those of Morningstar and Lipper Analytical
Services; statistics about the advisers', fund groups' or a specific fund's
assets under management; the histories of the advisers and biographical
references to portfolio managers and other staff including, but not limited to,
background, credentials, honors, awards and recognition received by the advisers
and their personnel; and commentary about the advisers, their funds and their
personnel from third-party sources including newspapers, magazines, periodicals,
radio, television or other electronic media.
References may be included in New England Funds' advertising and
promotional literature about its 401(k) and retirement plans. The information
may include, but is not limited to:
|*| Specific and general references to industry statistics regarding 401(k) and
retirement plans including historical information and industry trends and
forecasts regarding the growth of assets, numbers of plans, funding
vehicles, participants, sponsors and other demographic data relating to
plans, participants and sponsors, third party and other administrators,
benefits consultants and firms including, but not limited to, DC Xchange,
William Mercer and other organizations involved in 401(k) and retirement
programs with whom New England Funds may or may not have a relationship.
|*| Specific and general reference to comparative ratings, rankings and other
forms of evaluation as well as statistics regarding the New England Funds as
a 401(k) or retirement plan funding vehicle produced by, including, but not
limited to, Access Research, Dalbar, Investment Company Institute and other
industry authorities, research organizations and publications.
|*| Specific and general discussion of economic, legislative, and other
environmental factors affecting 401(k) and retirement plans, including, but
not limited to, statistics, detailed explanations or broad summaries of:
-past, present and prospective tax regulation, Internal Revenue Service
requirements and rules, including, but not limited to, reporting
standards, minimum distribution notices, Form 5500, Form 1099R and other
relevant forms and documents, Department of Labor rules and standards and
other regulation. This includes past, current and future initiatives,
interpretive releases and positions of regulatory authorities about the
past, current or future eligibility, availability, operations,
administration, structure, features, provisions or benefits of 401(k) and
retirement plans
-information about the history, status and future trends of Social
Security and similar government benefit programs including, but not
limited to, eligibility and participation, availability, operations and
administration, structure and design, features, provisions, benefits and
costs
-current and prospective ERISA regulation and requirements.
|*| Specific and general discussion of the benefits of 401(k) investment and
retirement plans, and, in particular, the New England Funds 401(k) and
retirement plans, to the participant and plan sponsor, including
explanations, statistics and other data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but not limited
to, videos, slides, presentation materials, brochures, an investment
calculator, payroll stuffers, quarterly publications, releases and
information on a periodic basis and the availability of wholesalers and
other personnel.
|*| Specific and general reference to the benefits of investing in mutual funds
for 401(k) and retirement plans, and, in particular, New England Funds and
investing in its 401(k) and retirement plans, including, but not limited to:
-the significant economies of scale experienced by mutual fund companies
in the 401(k) and retirement benefits arena
-broad choice of investment options and competitive fees
-plan sponsor and participant statements and notices
-the plan prototype, summary descriptions and board resolutions
-plan design and customized proposals
-trusteeship, record keeping and administration
-the services of State Street Bank, including, but not limited to,
trustee services and tax reporting
-the services of DST and BFDS, including, but not limited to, mutual
fund processing support, participant 800 numbers and participant 401(k)
statements
-the services of Trust Consultants Inc. (TCI), including, but not
limited to, sales support, plan record keeping, document service
support, plan sponsor support, compliance testing and Form 5500
preparation.
|*| Specific and general reference to the role of the investment dealer and the
benefits and features of working with a financial professional including:
-access to expertise on investments
-assistance in interpreting past, present and future market trends and
economic events
-providing information to clients including participants during
enrollment and on an ongoing basis after participation
-promoting and understanding the benefits of investing, including mutual
fund diversification and professional management.
<PAGE>
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock .................................... ---%
Short-term Obligations and Other Assets ............ 1.6%
Debt-- Unrated ..................................... 5.0%
Debt-- Standard and Poor's Rating
AAA ....................................... 15.6%
AA ........................................ 6.3%
A ......................................... 9.5%
BBB........................................ 55.0%
BB......................................... 7.0%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the Municipal Income Fund for the
fiscal year ended December 31, 1996, 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.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
BOND INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock .................................... ---%
Short-term Obligations and Other Assets ............ 0.5%
Debt-- Unrated ..................................... ---%
Debt-- Standard and Poor's Rating
AAA ....................................... 26.3%
AA ........................................ 14.1%
A ......................................... 8.8%
BBB........................................ 30.8%
BB......................................... 19.5%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the Bond Income Fund for the fiscal
year ended December 31, 1996, 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.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
CALIFORNIA FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock ..................................... ---%
Short-term Obligations and Other Assets ............. 2.0%
Debt-- Unrated ..................................... 10.0%
Debt-- Standard and Poor's Rating
AAA ....................................... 29.0%
AA ........................................ 5.0%
A ......................................... 28.0%
BBB........................................ 26.0%
BB......................................... ---%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the California Fund for the fiscal
year ended December 31, 1996, 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
California Fund's net assets invested in each category as of the end of each
month during the year. Back Bay Advisors does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
<PAGE>
APPENDIX E
GROWTH FUND OF ISRAEL
The following information pertains to Growth Fund of Israel (the
"Fund"), a series of New England Funds Trust II which ceased operations on
January 31, 1997.
Pursuant to successive Advisory Agreements dated December 29, 1995 and
August 30, 1996, New England Funds Management, L.P. ("NEFM") agreed, subject to
the supervision of the board of trustees of New England Funds Trust II, 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 paid NEFM a management fee at the annual rate
of 1.10% of the Fund's average daily net assets. NEFM voluntarily agreed to
waive its fees, so that it received no management fees from the Fund for any
period. If this voluntary waiver had not been in effect, management fees paid by
the Fund would have been $91,520 for the period March 15, 1996 (commencement of
operations) to December 31, 1996 and $9,178 for the period January 1 to January
31, 1997 (cessation of operations).
The Advisory Agreement provided that NEFM could delegate its
responsibilities thereunder to other parties. NEFM delegated responsibility for
the investment and reinvestment of the assets of the portfolio to Harris
Associates, L.P. ("Harris"). NEFM paid Harris a subadvisory fee for managing the
Fund's portfolio, at the annual rate of 0.70% of the average daily net assets of
the Fund up to $50 million, and 0.60% of such assets in excess of $50 million.
NEFM paid subadvisory fees of $58,240 to Harris for the period March 15 to
December 31, 1996 and $5,841 for the period January 1 to January 31, 1997.
Batucha Securities & Investment Ltd. ("Batucha") provided information,
advice to the Fund on various matters relating to or affecting Israel, and
information on markets and industries in Israel, pursuant to an agreement
between NEFM and Batucha. NEFM paid Batucha a fee for such services at the
annual rate of 0.10% of the Fund's average daily net assets. NEFM paid fees of
$2,775 to Batucha under this agreement for the period March 15 to December 31,
1996 and $834 for the period January 1 to January 31, 1997.
During the period _________ to December 31, 1996 and the period January
1 to ___________, 1997, the Fund paid total brokerage commissions of $_________
and $________, respectively. Of these amounts, $_______ and $_______ were paid
on transactions allocated to brokers providing research services. [Any
affiliated brokerage?]
The Class A, Class B and Class C shares of the Fund adopted plans
pursuant to Rule 12b-1 under the Investment Company Act of 1940 by which the
Fund made payments to its distributor, New England Funds, L.P. (the
"Distributor"). The Class A, Class B and Class C shares of the Fund paid
$17,697, $11,312 and $1,099, respectively, in Rule 12b-1 fees for the period
March 15 to December 31, 1996 and $1,796, $105 and $264, respectively, in Rule
12b-1 fees for the period January 1 to January 31, 1997. Expenses relating to
the Fund's 12b-1 plans were as follows:
<TABLE>
<CAPTION>
(Class A shares) 3/15/96 - 12/31/96 1/01/97 - 1/31/97
------------------ -----------------
<S> <C> <C>
Compensation to Investment Dealers $17,708 $1,703
Compensation to Distributor's Sales Personnel $--- $93
(Class B shares)
Compensation to Investment Dealers $11,312 $71
Compensation to Distributor's Sales Personnel $--- $94
(Class C shares)
Compensation to Investment Dealers $1,099 $87
Compensation to Distributor's Sales Personnel $--- $18
</TABLE>
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation, a broker-dealer affiliate of the Distributor: $2,005, $23,645 and
$37 relating to the Fund's Class A, Class B and Class C shares, respectively,
for the period March 15 to December 31, 1996 and $159, $51 and $-0- relating to
the Fund's Class A, Class B and Class C shares, respectively, for the period
January 1 to January 31, 1997.
The Fund's financial statements and the related report of independent
accountants included in the Fund's annual report for the year ended December 31,
1996 are incorporated herein by reference.
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Highlights for all series of the Registrant are included in
Part A hereof. The following financial statements are incorporated in
Part II of the statement of additional information filed as 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,
1996, which were filed with the Commission on the dates appearing in
parentheses below:
(1) Growth Fund of Israel (March 10, 1997)
(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 Adjustable Rate U.S. Government Fund
(March 4, 1997)
(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 Growth Opportunities Fund (March 3, 1997)
(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 6, 1997)
(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 7, 1997)
(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
(6) New England Limited Term U.S. Government Fund (March 7, 1997)
(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 California
(March 7, 1997)
(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
(8) New England Intermediate Term Tax Free Fund of New York
(March 7, 1997)
(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
<TABLE>
(b) Exhibits:
<S> <C> <C>
1.(a) Second Amended and Restated Agreement and Declaration of Trust of the Registrant is incorporated
herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on
April 19, 1996.
(b) Amendment No. 5 to Second Amended and Restated Agreement and Declaration of Trust of the
Registrant is incorporated herein by reference to Post-Effective Amendment No. 104 to this
Registration Statement, filed on April 19, 1996.
(c) Amendment No. 6 to Second Amended and Restated Agreement and Declaration of Trust of the
Registrant is incorporated herein by reference to Post-Effective Amendment No. 104 to this
Registration Statement, filed on April 19, 1996.
2.(a) Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit
2(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996.
(b) Amendment to the By-Laws of the Registrant is incorporated herein by reference to Exhibit 2(b) to
Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996.
3. Not applicable.
4. Rights of shareholders are described in Article III, Section 6 of the Second Amended and Restated
Agreement and Declaration of Trust of the Registrant incorporated by reference as Exhibit 1(a) to
this Registration Statement.
5.(a) Advisory Agreement between the Registrant and New England Funds Management, L.P. ("NEFM")
relating to the Registrant's New England High Income Fund is incorporated herein by reference to
Exhibit 5(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August
15, 1996.
(b) Advisory Agreements between the Registrant and NEFM relating to the following series of the
Registrant are incorporated herein by reference to Post-Effective Amendment No. 104 to this
Registration Statement, filed on April 19, 1996:
(i) New England Growth Opportunities Fund
(ii) New England Limited Term U.S. Government Fund
(iii) New England Adjustable Rate U.S. Government Fund
(iv) New England Massachusetts Tax Free Income Fund
(v) New England Intermediate Term Tax Free Fund of California
(vi) New England Intermediate Term Tax Free Fund of New York
(c) Sub-Advisory Agreement relating to the Registrant's New England High Income Fund between NEFM and
Loomis, Sayles & Co., L.P. is filed herein.
(d) Sub-Advisory Agreements relating to the following series of the Registrant between NEFM and the
subadvisers indicated in parentheses are incorporated herein by reference to Post-Effective
Amendment No. 104 to this Registration Statement, filed on April 19, 1996:
(i) New England Growth Opportunities Fund (Westpeak Investment Advisors, L.P. ["Westpeak"])
(ii) New England Limited Term U.S. Government Fund (Back Bay Advisors, L.P. ["Back Bay Advisors"])
(iii) New England Adjustable Rate U.S. Government Fund (Back Bay Advisors)
(iv) New England Massachusetts Tax Free Income Fund (Back Bay Advisors)
(v) New England Intermediate Term Tax Free Fund of California (Back Bay Advisors)
(vi) 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 incorporated herein by reference to Post-Effective Amendment No. 104 to
this Registration Statement, filed on April 19, 1996.
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 filed herewith.
(b) 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 filed herewith.
(c) Form of Letter Agreement between the Registrant and State Street Bank and Trust Company relating
to the applicability of the Custodian Contract and the Transfer Agency and Service Agreement to
Growth Fund of Israel is incorporated herein by reference to Post-Effective Amendment No. 100 to
this Registration Statement, filed on October 11, 1995.
(d) Custodian Agreement between the Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 8(d) to Post-Effective Amendment No. 105 to this
Registration Statement, filed on August 15, 1996.
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) Shareholder Servicing and Transfer Agent Agreement between the Registrant and TNE Investment
Services Corporation is filed herewith.
(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 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 filed herewith.
(e) Form of Class B Shares Remittance Agreement between the Registrant and New England Funds, L.P.,
relating to each series of the Registrant, is incorporated by reference to Post-Effective
Amendment No. 104 to this Registration Statement, filed on April 19, 1996.
(f) Organizational Expense Reimbursement Agreement between the Registrant, on behalf of its Growth
Fund of Israel, and New England Funds, L.P. is incorporated by reference to Post-Effective
Amendment No. 104 to this Registration Statement, filed on April 19, 1996.
(g) Sub-Transfer Agency and Service Agreement between TNE Investment Services Corporation and State
Street Bank and Trust Company 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 filed herewith.
(b) Opinion and consent of counsel with respect to the Registrant's New England Adjustable Rate U.S.
Government Fund is incorporated by reference to Post-Effective Amendment No. 88 to this
Registration Statement, filed on August 2, 1991.
(c) Opinions and consents of counsel with respect to the Registrant's New England Intermediate Term
Tax Free Fund of California and New England Intermediate Term Tax Free Fund of New York are filed
herewith.
(d) Opinion and consent of counsel with respect to offering multiple classes of shares for all series
of the Registrant is filed herewith.
(e) Opinion and consent of counsel with respect to the Registrant's Rule 24e-2 Notice is filed
herewith.
(f) Opinion and consent of counsel with respect to the Registrant's Rule 24e-2 Notice is incorporated
herein to Post-Effective Amendment No. 104 to this Registration Statement filed on April 19, 1996.
11. Consents of Price Waterhouse and Coopers & Lybrand are 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) 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 Exhibit 15(a) to Post-Effective
Amendment No. 105 to this Registration Statement, filed on August 15, 1996.
(b) Form of Rule 12b-1 Plan relating to the Class B shares of each series of the Registrant is
incorporated by reference to Post-Effective Amendment No. 104 to this Registration Statement,
filed on April 19, 1996.
(c) Rule 12b-1 Plan relating to the Class C shares of New England Limited Term U.S. Government Fund
is incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 105 to this
Registration Statement, filed on August 15, 1996.
(d) Rule 12b-1 Plan relating to Class C shares of New England Growth Opportunities Fund is
incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 105 to this
Registration Statement, filed on August 15, 1996.
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 pursuant to Rule 18f-3 under the 1940 Act as amended effective January 31, 1997 is filed
herewith.
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 incorporated by
reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19,
1996.
</TABLE>
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, 1997.
<TABLE>
<CAPTION>
Number of Record Holders
------------------------
Title of Series Class A Class B Class C Class Y
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
New England Adjustable Rate U.S. Government Fund 4,126 231 --- ---
New England Growth Opportunities Fund 8,729 3,393 215 ---
New England Limited Term U.S. Government Fund 16,001 1,301 136 3
New England High Income Fund 2,335 716 --- ---
New England Massachusetts Tax Free Income Fund 5,352 283 --- ---
New England Intermediate Term Tax Free Fund of
California 597 135 --- ---
New England Intermediate Term Tax Free Fund of
New York 575 96 --- ---
Growth Fund of Israel closed 1/31/97
</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 Investment Companies, L.P. ("NEIC"), the parent company
of the Registrant's adviser and distributor, maintains a directors and officers
liability insurance policy with maximum coverage of $15 million, under which the
trustees and officers of the Registrant are named insured.
Item 28. Business and Other Connections of Investment Adviser
(a) Back Bay Advisors, the subadviser of the Registrant's New England
Massachusetts Tax Free Income Fund, New England Intermediate Term Tax
Free Fund of California, New England Intermediate Term Tax Free Fund of
New York, New England Limited Term U.S. Government Fund and New England
Adjustable Rate U.S. Government Fund, is wholly owned by NEIC. 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 Officer 399 Boylston Street
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, Back Bay Advisors, Inc. Executive Vice President
Executive Vice President
Edgar M. Reed, Aetna Capital Management* Head of Fixed Income Management
Executive Vice President and Chief 151 Farmington Avenue Group
Investment Officer Hartford, CT 06156
J. Scott Nicholson, None None
Senior Vice President
Kimberly J. Forsyth, Via International City/County Management Independent Consultant to
Senior Vice President Association Bulgaria
777 North Capital Street, NE
Washington, DC 20002
Legg Mason Incorporated* Senior Vice President and
7 East Redwood Street Director of Tax-Exempt Credit
Baltimore, MD 21202 Research
Catherine Bunting, None None
Senior Vice President
Nathan R. Wentworth, None None
Vice President
Paul Zamagni, None None
Vice President and Treasurer
Harold B. Bjornson, None None
Vice President
Peter Palfrey, None None
Vice President
Eric Gutterson, None None
Vice President
</TABLE>
(b) 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 with Name and Address of Nature of
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. Managing Director, President and Chief
President and Chief Executive Officer Executive Officer
NEF Corporation President, Chief Executive Officer and
Director
Back Bay Advisors, Inc. Director
New England Securities Corporation* Director
399 Boylston Street
Boston, MA 02116
Frank Nesvet, New England Funds, L.P. Managing Director, Senior Vice
Senior Vice President, Chief Financial President and Chief Financial Officer
Officer and Treasurer
NEF Corporation Senior Vice President, Chief Financial
Officer and Treasurer
Robert P. Connolly, NEF Corporation Senior Vice President, General
Senior Vice President, General Counsel, Counsel, Secretary and Clerk
Assistant Secretary and Clerk
New England Funds, L.P. Managing Director, Senior Vice
President, General Counsel, Secretary
and Clerk
Kroll Associates, Inc.* Managing Director and General Counsel
900 3rd Avenue
New York, NY 10022
Bruce R. Speca, NEF Corporation Executive Vice President
Executive Vice President
New England Funds, L.P. Managing Director and 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 and Assistant Secretary
Vice President and Assistant Secretary
New England Funds, L.P. Vice President and Assistant Secretary
Ralph M. Greggs, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
</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 with Name and Address of Nature of
Westpeak Other Affiliations Connection
-------- ------------------ ----------
<S> <C> <C>
Westpeak Investment Advisors, Inc. None None
General Partner
Gerald H. Scriver None None
President, Chief Executive Officer and
Chief Investment Officer
Edward N. Wadsworth NEIC Executive Vice President, Clerk,
Clerk, Secretary, Chief Legal Officer 399 Boylston Street Secretary and General Counsel
Boston, MA 02116
NEIC Inc. Executive Vice President, Clerk,
399 Boylston Street Secretary and General Counsel
Boston, MA 02116
Marlborough Capital Advisors, Inc. Assistant Clerk
399 Boylston Street
Boston, MA 02116
New England Investment Associates, Secretary
Inc. ("NEIA")
399 Boylston Street
Boston, MA 02116
Robert A. Franz None None
Senior Vice President
Philip J. Cooper None None
Vice President Portfolio Management
Beverly J. DeWitt NELICO Attorney and Assistant Secretary
Assistant Secretary and Assistant Clerk 501 Boylston Street
Boston, MA 02116
TNE Advisers, Inc. Chief Legal Officer, Secretary and Clerk
501 Boylston Street
Boston, MA 02116
</TABLE>
(d) Loomis Sayles, the subadviser of the Registrant's New England Value
Fund, New England International Equity Fund, New England Balanced Fund,
New England Capital Growth Fund, New England Strategic Income Fund and
New England High Income Fund and a subadviser of New England Star
Advisers Fund and New England Star Small Cap Fund, provides investment
advice to a number of other registered investment companies and to
other organizations and individuals. Loomis Sayles' general partner,
directors and officers have been engaged during the past two fiscal
years in the following other businesses, professions, vocations or
employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Loomis Sayles Other Affiliations Connection
<S> <C> <C>
Loomis Sayles & Company, Incorporated None None
General Partner
Robert J. Blanding, None None
President and Chief Executive Officer
Daniel J. Fuss, None None
Executive Vice President
Jeffrey L. Meade, None None
Executive Vice President and Chief
Operating Officer
Sandra P. Tichenor, None None
Vice President, General Counsel and
Secretary
Meri Anne Beck, None None
Vice President
Mary C. Champagne, None None
Vice President
Paul Drexler, None None
Vice President
Richard W. Hurkes, None None
Vice President
Scott A. Pape, None None
Vice President
Douglas D. Ramos, None None
Vice President
Carol C. McMurtie, None None
Vice President
Tricia H. Mills, None None
Vice President
Jeffery C. Petherick, 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 with Positions and Offices
Name Principal Underwriter with Registrant
---- --------------------- ---------------
<S> <C> <C>
NEF Corporation General Partner None
Henry L.P. Schmelzer Managing Director, President and Chief President and Trustee
Executive Officer
Bruce R. Speca Managing Director and Executive Vice Executive Vice President
President
Robert P. Connolly Managing Director, Senior Vice President, Secretary
General Counsel, Secretary and Clerk
Frank Nesvet Managing Director, Senior Vice President Treasurer
and Chief Financial Officer
James H. Davis Managing Director and Senior Vice President None
Caren I. Leedom Managing Director and Senior Vice President None
Munish Agrawal Vice President None
Elizabeth P. Burns Vice President None
Peter H. Duffy Vice President None
Martin G. Dyer Vice President and Assistant Secretary None
Tracy A. Fagan Vice President None
Raymond K. Girouard Senior Vice President, Treasurer and None
Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Marie G. McKenzie Vice President None
Robert E. O'Hare Vice President, Senior Counsel, Assistant None
Secretary and Assistant Clerk
Bernard M. Shavelson Vice President None
Kristine E. Swanson Vice President None
Beatriz A. Pina-Smith Vice President and Assistant Controller None
Sharon Wratchford Vice President None
The principal business address of all the above persons or entities is 399 Boylston Street, Boston, MA 02116.
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents required by the
specified rules:
(a) Registrant
Rule 31a-1(b)(4)
Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a)
Rule 31a(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(c) (i) For series of the Registrant managed by Back Bay Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d),(e)
Back Bay Advisors, L.P.
New England Funds Management L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d),(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),(e)
(iii) For New England High Income 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)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02110
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.
<PAGE>
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. 106 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. 106 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 18th day of April, 1997.
New England Funds Trust II
By: PETER S. VOSS*
------------------------
Peter S. Voss
Chief Executive Officer
*By: /s/ ROBERT P. CONNOLLY
------------------------
Robert P. Connolly
Attorney-In-Fact
<PAGE>
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
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
PETER S. VOSS* Chairman of the Board; Chief Executive April 18, 1997
- ----------------------- Officer; Principal Executive Officer;
Peter S. Voss Trustee
/s/ FRANK NESVET
- -----------------------
Frank Nesvet Treasurer April 18, 1997
HENRY L. P. SCHMELZER* Trustee April 18, 1997
- -----------------------
Henry L. P. Schmelzer
GRAHAM T. ALLISON, JR.* Trustee April 18, 1997
- -----------------------
Graham T. Allison, Jr.
DANIEL M. CAIN* Trustee April 18, 1997
- -----------------------
Daniel M. Cain
KENNETH J. COWAN* Trustee April 18, 1997
- -----------------------
Kenneth J. Cowan
RICHARD DARMAN* Trustee April 18, 1997
- -----------------------
Richard Darman
SANDRA O. MOOSE* Trustee April 18, 1997
- -----------------------
Sandra O. Moose
JOHN A. SHANE* Trustee April 18, 1997
- -----------------------
John A. Shane
PENDLETON P. WHITE* Trustee April 18, 1997
- -----------------------
Pendleton P. White
*By: /s/ ROBERT P. CONNOLLY
------------------------
Robert P. Connolly
Attorney-In-Fact
April 18, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND FUNDS TRUST II
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
-------------- -------
<S> <C> <C>
EX-99.5(c) Sub-Advisory Agreement relating to the Registrant's New England High Income
Fund between NEFM and Loomis, Sayles & Company, L.P.
EX-99.8(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
EX-99.8(b) 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
EX-99.9(b) Shareholder Servicing and Transfer Agent Agreement between the Registrant and
TNE Investment Services Corporation
EX-99.9(d) 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.
EX-99.9(g) Sub-Transfer Agency and Service Agreement between TNE Investment Services
Corporation and State Street Bank and Trust Company
EX-99.10(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
EX-99.10(c) Opinion 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
EX-99.10(d) Opinion and consent of counsel with respect to offering multiple classes of
shares for all series of the Registrant
EX-99.10(e) Opinion and consent of counsel with respect to the Registrant's Rule 24e-2
Notice
EX-99.11 Consents of Price Waterhouse LLP and Coopers & Lybrand LLP
EX-99.18 Plan pursuant to Rule 18f-3 under the 1940 Act as amended effective January
31, 1997
EX-27.17 Financial Data Schedule
</TABLE>
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.5(C)
SUB-ADVISORY AGREEMENT RELATING TO THE REGISTRANT'S NEW ENGLAND HIGH INCOME FUND
BETWEEN NEFM AND LOOMIS, SAYLES & COMPANY, L.P.
<PAGE>
NEW ENGLAND HIGH INCOME FUND
SUB-ADVISORY AGREEMENT
(LOOMIS SAYLES)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
August 30, 1996 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Loomis, Sayles & Company, L.P., a
Delaware limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated
August 30, 1996 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 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.
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 "Loomis, Sayles & Company, L.P." and
that all use of any designation consisting in whole or part of "Loomis, Sayles &
Company, 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 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 0.350% of the first $200 million of the average daily net assets of the
Series and 0.300% of any excess of such assets over $200 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 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 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 LOOMIS, SAYLES & COMPANY, L.P.
MANAGEMENT, L.P.
By NEF Corporation, its general partner By Loomis, Sayles & Company, Inc.,
its general partner
By: /s/ BRUCE R. SPECA By: /s/ MARK W. HOLLAND
----------------------- -----------------------
Name: Bruce R. Speca Name: Mark W. Holland
Title: Executive Vice President Title: Vice President, Finance
& Administration
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.8(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
<PAGE>
September 10, 1991
State Street Bank and Trust Company
1776 Heritage Drive
Fiduciary Control 42N
North Quincy, MA 02171
Re: TNE Adjustable Rate U.S. Government Fund
Gentlemen:
This is to advise you that Investment Trust of Boston Funds (the
"Trust") has established a new series of shares, the TNE Adjustable Rate U.S.
Government Fund. In accordance with the Additional Funds provision in Section 17
of the Custodian Contract dated January 3, 1989 between the Trust and State
Street Bank and Trust Company and in Article 8 of the Transfer Agency and
Service Agreement dated January 3, 1989 between the Trust and State Street Bank
and Trust Company, the Trust hereby requests that you act as Custodian and
Transfer Agent for the new series under the terms of the respective contracts.
Please indicate your acceptance of the foregoing by executing two
copies of this Letter Agreement, returning one to the Trust and retaining one
copy for your records.
By /s/ HENRY L.P. SCHMELZER
---------------------------
Henry L. P. Schmelzer
President
Investment Trust of Boston Funds
Agreed to this 16th day of September, 1991
State Street Bank and Trust Company
By /s/
---------------------------
Vice President
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.8(B)
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
<PAGE>
February 12, 1993
State Street Bank and Trust Company
1776 Heritage Drive
Fiduciary Control 42N
North Quincy, MA 02171
RE: TNE Intermediate Term Tax Free Fund of California and
TNE Intermediate Term Tax Free Fund of New York
Gentlemen:
This is to advise you that TNE Funds Trust (the "Trust") has
established two new series of shares, TNE Intermediate Term Tax Free Fund of
California and TNE Intermediate Term Tax Free Fund of New York. In accordance
with the Additional Funds provisions in Section 17 of the Custodian Contract
dated January 3, 1989 between the Trust and State Street Bank and Trust Company
and in Article 8 of the Transfer Agency and Service Agreement dated January 3,
1989 between the Trust and State Street Bank and Trust Company, the Trust hereby
requests that you act as Custodian and Transfer Agent for the new series under
the terms of the respective contracts.
Please indicate your acceptance of the foregoing by executing two
copies of this Letter Agreement, returning one to the Trust and retaining one
copy for your records.
By /s/ HENRY L.P. SCHMELZER
---------------------------
Henry L. P. Schmelzer
President
TNE Funds Trust
Agreed to this 16th day of February, 1993
State Street Bank and Trust Company
By /s/
---------------------------
Vice President
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.9(B)
SHAREHOLDER SERVICING AND TRANSFER AGENT AGREEMENT BETWEEN THE
REGISTRANT AND TNE INVESTMENT SERVICES CORPORATION
<PAGE>
SHAREHOLDER SERVICING AND TRANSFER AGENT AGREEMENT
AGREEMENT made as of the 1st day of September, 1993, by and between
each of the TNE Funds listed in Appendix A hereto (as the same may from time to
time be amended to add one or more additional TNE Funds or to delete one or more
of such Funds), each of such Funds acting severally on its own behalf and not
jointly with any of such other Funds (each of such Funds being hereinafter
referred to as the "Fund"), and TNE Investment Services Corporation (the
"Agent").
W I T N E S S E T H:
WHEREAS, the Fund is an investment company registered under the
Investment Company Act of 1940, as amended; and
WHEREAS, the Fund desires to engage the Agent to provide all services
required by the Fund in connection with the establishment, maintenance and
recording of shareholder accounts, including without limitation all related tax
and other reporting requirements, and the implementation of investment and
redemption arrangements offered in connection with the sale of the Fund's
shares; and
WHEREAS, the Agent is willing to provide such services on the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
1. APPOINTMENT.
The Fund hereby appoints the Agent as its "Investor Servicing Agent" on
the terms and conditions set forth herein. In such capacity the Agent shall act
as transfer, distribution disbursing and redemption agent for the Fund and shall
act as agent for the shareholders of the Fund in connection with the various
shareholder investment and/or redemption plans from time to time made available
to shareholders. The Agent hereby accepts such appointment and agrees to perform
the respective duties and functions of such offices in accordance with the terms
of this agreement and in a manner generally consistent with the practices and
standards customarily followed by other high quality investor servicing agents
for registered investment companies. The Agent may subcontract certain
shareholder accounting and administrative servicing functions to State Street
Bank and Trust Company, pursuant to an agreement substantially in the form
attached hereto as Appendix B, or to such other entity and pursuant to such
agreement as approved by the Fund's Trustees.
2. GENERAL AUTHORITY AND DUTIES.
By its acceptance of the foregoing appointment, the Agent shall be
responsible for performing all functions and duties which, in the reasonable
judgment of the Fund, are necessary or desirable in connection with the
establishment, maintenance and recording of the Fund's shareholder accounts and
the conduct of its relations with shareholders with respect to their accounts.
Without limiting the generality of the foregoing, the Agent shall be
responsible:
(a) as transfer agent, for performing all functions customarily
performed by transfer agents for registered investment companies, including
without limitation all functions necessary or desirable to establish and
maintain accounts evidencing the ownership of securities issued by the Fund and,
to the extent applicable, the issuance of certificates representing such
securities, the recording of all transactions pertaining to such accounts, and
effecting the issuance and redemption of securities issued by the Fund;
(b) as distribution disbursing agent, for performing all functions
customarily performed by distribution disbursing agents for registered
investment companies, including without limitation all functions necessary or
desirable to effect the payment to shareholders of distributions declared from
time to time by the Trustees of the Fund;
(c) as redemption agent for the Fund, for performing all functions
necessary or desirable to effect the redemption of securities issued by the Fund
and payment of the proceeds thereof; and
(d) as agent for shareholders of the Fund, for performing all functions
necessary or desirable to maintain all plans or arrangements from time to time
made available to shareholders to facilitate the purchase or redemption of
securities issued by the Fund.
In performing its duties hereunder, in addition to the provisions set
forth herein, the Agent shall comply with the terms of the Declaration of Trust,
the Bylaws and the current Prospectus and Statement of Additional Information of
the Fund, and with the terms of votes adopted from time to time by the Trustees
and shareholders of the Fund, relating to the subject matters of this Agreement,
all as the same may be amended from time to time.
3. STANDARD OF SERVICE; COMPLIANCE WITH LAWS.
The Agent will use its best efforts to provide high quality services to
the Fund's shareholders and in so doing will seek to take advantage of such
innovations and technological improvements as may be appropriate or desirable
with a view to improving the quality and, where possible, reducing the cost of
its services to the Fund. In performing its duties hereunder, the Agent shall
comply with the provisions of all applicable laws and regulations and shall
comply with the requirements of any governmental authority having jurisdiction
over the Agent or the Fund with respect to the duties of the Agent hereunder.
4. COMPENSATION.
The Fund shall pay to the Agent, for its services rendered and its
costs incurred in connection with the performance of its duties hereunder, such
compensation and reimbursements as may from time to time be approved by vote of
the Trustees of the Fund.
5. DUTY OF CARE; INDEMNIFICATION.
The Agent will at all times act in good faith and exercise reasonable
care in performing its duties hereunder. The Agent shall indemnify and hold the
Fund harmless from and against any and all losses, damages, costs, charges,
reasonable counsel fees, payments, expenses and liability arising out of or
attributable to any action or failure or omission to act by the Agent as a
result of the Agent's lack of good faith, negligence or willful misconduct. The
Agent will not be liable or responsible for delays or errors resulting from
circumstances beyond its control, including acts of civil or military
authorities, national emergencies, labor difficulties, fire, mechanical
breakdown beyond its control, flood or catastrophe, acts of God, insurrection,
war, riots or failure beyond its control of transportation, communication or
power supply.
The Agent may rely on certifications of the Secretary, the President,
the Chairman, a Senior Vice President or the Treasurer of the Fund as to any
action taken by the shareholders or trustees of the Fund, and upon instructions
not inconsistent with this Agreement received from the President, the Chairman,
a Senior Vice President, the Treasurer or any other officer of the Fund
authorized by the Fund's Trustees to give such instructions. If any officer of
the Fund shall no longer be vested with authority to give instructions for the
Fund, written notice thereof shall forthwith be given to the Agent by the Fund
and, until receipt of such notice by it, the Agent shall be entitled to
recognize and act in good faith upon certificates or other instruments bearing
the signatures or facsimile signatures of such officers. The Agent may request
advice of counsel for the Fund, at the expense of the Fund, with respect to the
performance of its duties hereunder.
The Fund will indemnify and hold the Agent harmless from any and all
losses, claims, damages, liabilities and expenses (including reasonable fees and
expenses of counsel) arising out of (i) any action taken by the Agent in good
faith consistent with the exercise of reasonable care in accordance with such
certifications, instructions or advice, (ii) any action taken by the Agent in
good faith consistent with the exercise of reasonable care in reliance upon any
instrument or certificate for securities believed by it (a) to be genuine, and
(b) to be executed by any person or persons authorized to execute the same;
provided, however, that the Agent shall not be so indemnified in the event of
its failure to obtain a proper signature guarantee to the extent the same is
required by the Declaration of Trust, Bylaws, current Prospectus or Statement of
Additional Information of the Fund or a vote of the Trustees of the Fund, and
such requirement has not been waived by vote of the Trustees of the Fund, or
(iii) any other action taken by the Agent in good faith consistent with the
exercise of reasonable care in connection with the performance of its duties
hereunder.
In the event that the Agent proposes to assert the right to be
indemnified under this Section 5 in connection with any action, suit or
proceeding against it, the Agent shall promptly after receipt of notice of
commencement of such action, suit or proceeding notify the Fund of the same,
enclosing a copy of all papers served. In such event, the Fund shall be entitled
to participate in such action, suit or proceeding, and, to the extent that it
shall wish, to assume the defense thereof, and the Fund shall not be liable to
the Agent for any legal or other expenses incurred after notice from the Fund to
the Agent of its election so to assume the defense thereof. The parties shall
cooperate with each other in the defense of any such action, suit or proceeding.
In no event shall the Fund be liable for any settlement of any action or claim
effected without its consent.
6. MAINTENANCE OF RECORDS.
The Agent will maintain and preserve all records relating to its duties
under this Agreement in compliance with the requirements of applicable statutes,
rules and regulations, including, without limitation, Rule 31a-1 under the
Investment Company Act of 1940. Such records shall be the property of the Fund
and shall at all times be available for inspection and use by the officers and
agents of the Fund. The Agent shall furnish to the Fund such information
pertaining to the shareholder accounts of the Fund and the performance of its
duties hereunder as the Fund may from time to time request. The Agent shall
notify the Fund promptly of any request or demand by any third party to inspect
the records of the Fund maintained by it and will act upon the instructions of
the Fund in permitting or refusing such inspection.
7. FUND ACCOUNTS.
All moneys of the Fund from time to time made available for the payment
of distributions to shareholders or redemptions of shares, or otherwise coming
into the possession or control of the Agent or its officers, shall be deposited
and held in one or more accounts maintained by the Agent solely for the benefit
of the Funds.
8. INSURANCE.
The Agent will at all times maintain in effect insurance coverage,
including, without limitation, Errors and Omissions, Fidelity Bond and
Electronic Data Processing coverages, at levels of coverage consistent with
those customarily maintained by other high quality investor servicing agents for
registered investment companies and with such policies as the Trustees of the
Fund may from time to time adopt.
9. EMPLOYEES.
The Agent shall be responsible for the employment, control and conduct
of its agents and employees and for injury to such agents or employees or to
others caused by such agents or employees. The Agent shall assume full
responsibility for its agents and employees under applicable statutes and agrees
to pay all applicable employer taxes thereunder with respect to such agents and
employees, and such agents and employees shall in no event be considered to be
agents or employees of the Fund.
10. TERMINATION.
This Agreement shall continue indefinitely until terminated by not less
than ninety (90) days prior written notice given by the Fund to the Agent, or by
not less than six months prior written notice given by the Agent to the Fund.
Upon termination hereof, the Fund shall pay the Agent such compensation as may
be due to the Agent as of the date of such termination.
In the event that in connection with any such termination a successor
to any of the Agent's duties or responsibilities hereunder is designated by the
Fund by written notice to the Agent, the Agent will cooperate fully in the
transfer of such duties and responsibilities, including provision for assistance
by the Agent's personnel in the establishment of books, records and other data
by such successor. The Fund will reimburse the Agent for all expenses incurred
by the Agent in connection with such transfer.
11. MISCELLANEOUS.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of The Commonwealth of Massachusetts.
The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions of this
Agreement or otherwise affect their construction or effect. This Agreement may
be executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
A copy of the Declaration of Trust (including any amendments thereto)
of the Fund is on file with the Secretary of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed in behalf of the
Trustees of the Fund as Trustees and not individually and that the obligations
of or arising out of this instrument are not binding upon any of the Trustees or
officers or shareholders individually, but binding only upon the assets and
property of the Fund.
TNE Investment Services anticipates that it will be reorganized, on or
about September 15, 1993, into a new entity called TNE Investment Services, L.P.
Effective at the date of the reorganization, any and all benefits,
responsibilities and obligations of TNE Investment Services Corporation under
this Agreement will be assumed by TNE Investment Services, L.P.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date and year first above
written.
TNE FUNDS
By /s/HENRY L.P. SCHMELZER
-------------------------
Henry L.P. Schmelzer
President
TNE Investment Services Corporation
By /s/BRUCE R. SPECA
-------------------------
Bruce R. Speca
Senior Vice President
<PAGE>
APPENDIX A
NEW ENGLAND FUNDS
o New England Growth Fund
o New England International Equity Fund
o New England Capital Growth Fund
o New England Value Fund
o New England Growth Opportunities Fund
o New England Balanced Fund
o New England Star Advisers Fund
o Growth Fund of Israel
o New England Star Worldwide Fund
o New England Equity Income Fund
o New England High Income Fund
o New England Government Securities Fund
o New England Bond Income Fund
o New England Limited Term U.S. Government Fund
o New England Adjustable Rate U.S. Government Fund
o New England Strategic Income Fund
o New England Tax Exempt Income Fund
o New England Massachusetts Tax Free Income Fund
o New England Intermediate Term Tax Free Fund of California
o New England Intermediate Term Tax Free Fund of New York
o New England Cash Management Trust
o Money Market Series
o U.S. Government Series
o New England Tax Exempt Money Market Trust
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.9(D)
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.
<PAGE>
ORGANIZATIONAL EXPENSE
REIMBURSEMENT AGREEMENT
This Agreement, made this as of the lst day of March, 1993, by and
between TNE Funds Trust, a Massachusetts business trust (the "Trust"), on behalf
of its TNE Intermediate Term Tax Free Fund of California and TNE Intermediate
Term Tax Free Fund of New York series (the "Series") and TNE Investment Services
Corporation (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 $200,000 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.
TNE Funds Trust, on behalf of its
TNE Intermediate Term Tax Free Fund of California and
TNE Intermediate Term Tax Free Fund of New York
By /s/HENRY L.P. SCHMELZER
-------------------------
Henry L.P. Schmelzer
President
TNE Investment Services Corporation
By /s/BRUCE R. SPECA
-------------------------
Bruce R. Speca
Senior Vice President
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.9(G)
SUB-TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN TNE INVESTMENT SERVICES
CORPORATION AND STATE STREET BANK AND TRUST COMPANY
<PAGE>
SUB-TRANSFER AGENCY AND SERVICE AGREEMENT
between
TNE INVESTMENT SERVICES CORPORATION
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment;Duties of the Bank.........2
Article 2 Fees and Expenses...............................6
Article 3 Representations and Warranties of the Bank......7
Article 4 Representations and Warranties of the Transfer
Agent...........................................8
Article 5 Data Access and Proprietary Information.........9
Article 6 Indemnification................................11
Article 7 Standard of Care...............................14
Article 8 Covenants of the Fund and the Transfer Agent...14
Article 9 Termination of Agreement.......................16
Article 10 Assignment.....................................16
Article 11 Amendment......................................17
Article 12 Massachusetts Law to Apply.....................17
Article 13 Force Majeure..................................17
Article 14 Consequential Damages..........................18
Article 15 Merger of Agreement............................18
Article 16 Counterparts...................................18
<PAGE>
SUB-TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of September, 1993, by and between TNE
INVESTMENT SERVICES CORPORATION, a Massachusetts corporation, having its
principal office and place of business at 399 Boylston Street, Boston,
Massachusetts 02116 (the "Transfer Agent"), and STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust company having its principal office and place of
business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Transfer Agent has been appointed by each of the
investment companies (including each series thereof) listed on Schedule A (the
"Fund(s)"), each an open-end management investment company registered under the
Investment Company Act of 1940, as amended, as transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
activities, and the Transfer Agent has accepted each such appointment;
WHEREAS, the Transfer Agent has entered into a Shareholder Servicing
and Transfer Agent Agreement with each of the Funds (including each series
thereof) listed on Schedule A pursuant to which the Transfer Agent is
responsible for certain transfer agency and dividend disbursing functions and
the Transfer Agent is authorized to subcontract for the performance of its
obligations and duties thereunder in whole or in part with the Bank;
WHEREAS, the Transfer Agent is desirous of having the Bank perform
certain shareholder accounting, administrative and servicing functions
(collectively "Shareholder and Record-Keeping Services");
WHEREAS, the Transfer Agent desires to appoint the Bank as its agent,
and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Transfer Agent hereby employs and appoints the Bank to act as,
and the Bank agrees to act as, the agent of the Transfer Agent for the Shares of
each of the Funds in connection with any accumulation, open-account, retirement
plan or similar plan provided to the shareholders of each Fund ("Shareholders")
and set out in the currently effective prospectus and statement of additional
information ("Prospectus") of each such Fund, including without limitation any
periodic investment plan or periodic withdrawal program. As used herein, the
term "Shares" means the authorized and issued shares of common stock, or shares
of beneficial interest, as the case may be, for each of the Funds (including
each class thereof) enumerated in Schedule A hereto (as the same may from time
to time be amended to add one or more Funds or to delete one or more Funds).
1.02 The Bank agrees that it will perform the following
Shareholder and Record-Keeping services:
(a) In accordance with procedures established from time to time by
agreement between the Transfer Agent and the Bank, the Bank shall:
(i) Receive for acceptance, order for the purchase of Shares,
and promptly deliver payment and appropriate documentation
thereof to the Custodian of the Fund authorized pursuant to
the Articles of Incorporation or Declaration of Trust of
each Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number
of Shares and hold such Shares in the appropriate
Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation
thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
the Funds' principal underwriter (the "Distributor") or
with broker-dealers authorized by the Distributor who shall
thereby be deemed to be acting on behalf of the Funds;
(v) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner
such monies as instructed by the redeeming Shareholders,
and calculate the amount of and pay over or cause to be
paid over to the Distributor any applicable contingent
deferred sales charges;
(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by each Fund;
(viii) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt
by the Bank of indemnification satisfactory to the Bank and
protecting the Bank and each Fund, and the Bank, at its
option, may issue replacement certificates in place of
mutilated stock certificates upon presentation thereof and
without such indemnity;
(ix) Maintain records of account for and advise each Fund and
its Shareholders as to the foregoing; and
(x) Record the issuance of shares of each Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total
number of shares of each Fund which are authorized, based
upon data provided to it by each Fund, and issued and
outstanding. The Bank shall also provide each Fund on a
regular basis with the total number of shares which are
authorized and issued and outstanding and shall have no
obligation, when recording the issuance of shares, to
monitor the issuance of such shares or to take cognizance
of any laws relating to the issue or sale of such shares,
which functions shall be the sole responsibility of the
Distributor.
(b) In addition to and neither in lieu nor in contravention of
the services set forth in the above paragraph (a), the Bank
shall: (i) perform the customary services of a transfer
agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including
without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to:
maintaining all Shareholder accounts, preparing Shareholder
meeting lists, mailing and tabulating proxies, mailing
Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and
non-resident alien accounts, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms
required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and
mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts,
preparing and mailing activity statements for Shareholders,
and providing Shareholder account information and (ii)
provide a system which will enable each Fund to monitor the
total number of Shares sold in each State.
(c) In addition, each Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as
exempt from blue sky reporting for each State and (ii)
verify the establishment of transactions for each State on
the system prior to activation and thereafter monitor the
daily activity for each State. The responsibility of the
Bank for each Fund's blue sky State registration status is
solely limited to the initial establishment of transactions
subject to blue sky compliance by each Fund and the
reporting of such transactions to each Fund as provided
above.
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time
by agreement between the Transfer Agent and the Bank per
the attached service responsibility schedule. The Bank may
at times perform only a portion of these services and the
Transfer Agent, the Funds or their agent may perform these
services on each Fund's behalf.
(e) The Bank shall provide additional services on behalf of the
Transfer Agent (i.e., escheatment services) which may be
agreed upon in writing between the Fund and the Bank.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this Agreement,
the Transfer Agent agrees to pay the Bank an annual maintenance fee for each
Shareholder account as set out in the initial fee schedule attached hereto. Such
fees and out-of-pocket expenses and advances identified under Section 2.02 below
may be changed from time to time subject to mutual written agreement between the
Transfer Agent and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the
Transfer Agent agrees to reimburse the Bank for out-of-pocket expenses,
including but not limited to confirmation production, postage, forms, telephone,
microfilm, microfiche, tabulating proxies, records storage, or advances incurred
by the Bank for the items set out in the fee schedule attached hereto. In
addition, any other expenses incurred by the Bank at the request or with the
consent of the Transfer Agent will be reimbursed by the Transfer Agent.
2.03 The Transfer Agent agrees to pay all fees and reimbursable
expenses within five days following the receipt of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all shareholder accounts shall be advanced to the Bank by the
Transfer Agent at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Transfer Agent that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
3.06 It has and will at all times maintain in effect insurance
coverage, including, without limitation, errors and omissions, fidelity bond and
electronic data processing coverage at levels of coverage consistent with those
customarily maintained by other high quality servicing agents for registered
investment companies.
Article 4 Representations and Warranties of the Transfer Agent
The Transfer Agent represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 Each Fund is an open-end management investment company
registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended, for each Fund is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of each Fund being offered for sale.
Article 5 Data Access and Proprietary Information
5.01 The Transfer Agent acknowledges that the data bases, computer
programs, screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Transfer Agent by the Bank as part of the
Fund's ability to access certain Fund-related data ("Customer Data") maintained
by the Bank on data bases under the control and ownership of the Bank or other
third party ("Data Access Services") constitute copyrighted, trade secret, or
other proprietary information (collectively, "Proprietary Information") of
substantial value to the Bank or other third party. In no event shall
Proprietary Information be deemed Customer Data. The Transfer Agent agrees to
treat all Proprietary Information as proprietary to the Bank and further agrees
that it shall not divulge any Proprietary Information to any person or
organization except as may be provided hereunder. Without limiting the
foregoing, the Transfer Agent agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance
with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such access
is inadvertently obtained, to inform the Bank in a timely
manner of such fact and dispose of such information in
accordance with the Bank's instructions;
(d) to refrain from causing or allowing third-party data
acquired hereunder from being retransmitted to any other
computer facility or other location, except with the prior
written consent of the Bank;
(e) that the Transfer Agent shall have access only to those
authorized transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank
to protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal
copyright law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Transfer Agent notifies the Bank that any of the Data
Access Services do not operate in material compliance with the most recently
issued user documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure.
Organizations from which the Bank may obtain certain data included
in the Data Access Services are solely responsible for the contents of such data
and the Transfer Agent agrees to make no claim against the Bank arising out of
the contents of such third-party data, including, but not limited to, the
accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS
AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Transfer Agent include
the ability to originate electronic instructions to the Bank in order to (i)
effect the transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information then in such event the Bank shall be entitled
to rely on the validity and authenticity of such instruction without undertaking
any further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Transfer Agent
shall indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Transfer Agent's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Transfer Agent hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i) are
received by the Bank or its agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Transfer Agent or each Fund or any
other person or firm on behalf of the Transfer Agent or each Fund including but
not limited to any previous transfer agent or registrar (other than the Bank).
(d) The carrying out by the Bank or its agents or subcontractors
of any instructions or requests of the Transfer Agent or each Fund, provided
that such instructions or requests are undertaken in conformity with security
procedures established by the Bank from time to time.
(e) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state or in
violation of any stop order or other determination or ruling by any federal
agency or by any state with respect to the offer or sale of such Shares in such
state.
6.02 At any time the Bank may apply to any officer of the Transfer
Agent for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Transfer Agent for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel. The Bank, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Transfer Agent or each Fund, reasonably believed to be genuine and to have
been signed by the proper person or persons, or upon any instruction,
information, data, records or documents provided the Bank or its agents or
subcontractors by machine readable input, telex, CRT data entry or other similar
means authorized by the Transfer Agent and reasonably believed to be genuine,
and shall not be held to have notice of any change of authority of any person,
until receipt of written notice thereof from the Transfer Agent. The Bank, its
agents and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of each Fund, and the proper
countersignature of the Transfer Agent or any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in
this Article 6 shall apply, upon the assertion of a claim for which the Transfer
Agent may be required to indemnify the Bank, the Bank shall promptly notify the
Transfer Agent of such assertion, and shall keep the Transfer Agent advised with
respect to all developments concerning such claim. The Transfer Agent shall have
the option to participate with the Bank in the defense of such claim or to
defend against said claim in its own name or in the name of the Bank. The Bank
shall in no case confess any claim or make any compromise in any case in which
the Transfer Agent may be required to indemnify the Bank except with the
Transfer Agent's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and agrees to
use its best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility and shall
not be liable for loss or damage due to errors unless said errors are caused by
its negligence, bad faith, or willful misconduct or that of its employees.
Article 8 Covenants of the Transfer Agent and the Bank
8.01 The Transfer Agent shall promptly furnish to the Bank the
following:
(a) A certified copy of the resolution of the Board of Directors
of the Transfer Agent authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
8.02 The Bank hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Transfer Agent for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of each Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to each Fund on and in accordance with its request.
8.04 The Bank and the Transfer Agent agree that all books,
records, information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
8.05 In case of any requests or demands for the inspection of the
Shareholder records of any of the Funds, the Bank will endeavor to notify the
Transfer Agent and to secure instructions from an authorized officer of the
Transfer Agent as to such inspection. The Bank reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised by its
counsel that it may be held liable for the failure to exhibit the Shareholder
records to such person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other. Notwithstanding the
foregoing, this Agreement shall terminate concurrently with the termination of
the Shareholder Servicing and Transfer Agent Agreement in effect between the
Transfer Agent and the Funds.
9.02 Should the Transfer Agent exercise its right to terminate,
all out-of-pocket expenses associated with the movement of records and material
will be borne by the Transfer Agent. Additionally, the Bank reserves the right
to charge for any other reasonable expenses associated with such termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 and 10.04 below, neither
this Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the
Transfer Agent, subcontract for the performance hereof with (i) Boston Financial
Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly
registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities
Exchange Act of 1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary
duly registered as a transfer agent pursuant to Section 17A(c)(1) or (iii) a
BFDS affiliate; provided, however, that the Bank shall be as fully responsible
to the Transfer Agent for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
10.04 The Transfer Agent may, without further consent on the part
of the Bank, and upon written notice to the Bank assign this Agreement to any
other entity that (i) is then under common control with the Transfer Agent, (ii)
is acting or has been appointed to act as Transfer Agent for the Funds and (iii)
is duly registered as a Transfer Agent pursuant to Section 17A(c)(1).
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Transfer Agent.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 13 Force Majeure
13.01 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable to
the other for any damages resulting from such failure to perform or otherwise
from such causes.
Article 14 Consequential Damages
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
Article 15 Merger of Agreement
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
Article 16 Counterparts
16.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
TNE INVESTMENT SERVICES CORPORATION
BY:/s/BRUCE R. SPECA
---------------------------
ATTEST:
- ----------------------------
STATE STREET BANK AND TRUST COMPANY
BY:/s/RONALD E. LOGUE
---------------------------
Executive Vice President
ATTEST:
/s/D. HUFNAGLE
- ----------------------------
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase of Shares. X Add-ons X New
2. Issue Shares and hold Shares in X
Shareholders accounts.
3. Receive redemption requests. X X
4. Effect transactions 1-3 above X X
directly with broker-dealers.
5. Pay over monies to redeeming Shareholders. X
6. Effect transfers of Shares. X
7. Prepare and transmit dividends X
and distributions.
8. Issue Replacement Certificates. X
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and accurate X
control book for each issue of securities.
12. Mail proxies. OTI
13. Mail Shareholder reports. X
14. Mail prospectuses to current Shareholders. X
15. Withhold taxes on U.S. resident X
and non-resident alien accounts.
16. Prepare and file U.S. Treasury X
Department forms.
17. Prepare and mail account and confirmation X
statements for Shareholders.
18. Provide Shareholder account information. X
19. Blue sky reporting. X
* Such services are more fully described in Article 1.02 (a),
(b) and (c) of the Agreement.
TNE INVESTMENT SERVICES CORPORATION
BY:/s/BRUCE R. SPECA
---------------------------
ATTEST:
- ----------------------------
STATE STREET BANK AND TRUST COMPANY
BY:/s/RONALD E. LOGUE
---------------------------
Executive Vice President
ATTEST:
/s/D. HUFNAGLE
- ----------------------------
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.10(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
<PAGE>
[Ropes & Gray Letterhead]
January 3, 1989
Investment Trust of Boston Funds (the "Trust")
399 Boylston Street
Boston, MA 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 Investment Trust of Boston -
Growth Opportunities Portfolio, Investment Trust of Boston - High Income
Portfolio, Investment Trust of Boston - Massachusetts Tax Free Income Portfolio,
Investment Trust of Boston - Liquid Reserves Portfolio, Investment Trust of
Boston - Premium Income Portfolio and Investment Trust of Boston - World Income
Portfolio, each of which is a separate series of shares of beneficial interest
of the Trust (each a "Series" and collectively the "Series") at not less than
"net asset value" as defined in your By-Laws.
We have examined your Agreement and Declaration of Trust, as amended,
on file in the office of the Secretary of State of The Commonwealth of
Massachusetts and the Clerk of the City of Boston and are familiar with the
action taken by your trustees to authorize the issue and sale from time to time
of your authorized but unissued shares of the Series.
We have further examined a copy of your By-Laws and such other
documents, receipts 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 each Series is divided into an unlimited
number of shares of beneficial interest, no par value.
2. The issue and sale of your authorized but unissued shares of each
Series have been duly authorized under Massachusetts law. Upon the issue and
sale of any of the authorized but unissued shares of each Series and upon
receipt of the authorized consideration therefor in an amount equal to not less
than the net asset value of the shares established and in force at the time of
their sale, the shares so issued will be validly issued, fully paid and
nonassessable.
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 solely
by reason of his being or having been a shareholder. Thus, the risk of
shareholder liability is limited to circumstances in which that series of shares
itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with
registering an indefinite number of shares of beneficial interest of the Series
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,
/s/ROPES & GRAY
Ropes & Gray
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.10(C)
OPINION 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
<PAGE>
[Ropes & Gray Letterhead]
February 24, 1993
TNE Funds Trust
399 Boylston Street
Boston, Massachusetts 02116
Re: TNE Intermediate Term Tax Free Fund of California
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 TNE Intermediate Term Tax
Free Fund of California 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 (the "Declaration of
Trust") on file in the office of the Secretary of State of The Commonwealth of
Massachusetts, 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, receipts 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 TNE Intermediate Term Tax Free Fund
of California series is divided into an unlimited number of Shares.
2. The issue and sale of your 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 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 held personally liable solely by reason of
his being or having been a shareholder of that series. Thus, the risk of
shareholder incurring financial loss on account of being a shareholder is
limited to circumstances in which that 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 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,
/s/ROPES & GRAY
Ropes & Gray
<PAGE>
[Ropes & Gray Letterhead]
February 24, 1993
TNE Funds Trust
399 Boylston Street
Boston, Massachusetts 02116
Re: TNE Intermediate Term Tax Free Fund of New York
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 TNE Intermediate Term Tax
Free Fund of New York 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 (the "Declaration of
Trust") on file in the office of the Secretary of State of The Commonwealth of
Massachusetts, and are familiar with the action taken by your trustees to
authorize the issue and sale to the public from time to time of your authorized
but unissued Shares. We have further examined a copy of your By-Laws and such
other documents, receipts 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 TNE Intermediate Term Tax Free Fund
of New York series is divided into an unlimited number of Shares.
2. The issue and sale of your 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 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 held personally liable solely by reason of
his being or having been a shareholder of that series. Thus, the risk of
shareholder incurring financial loss on account of being a shareholder is
limited to circumstances in which that 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 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,
/s/ROPES & GRAY
Ropes & Gray
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.10(D)
OPINION AND CONSENT OF COUNSEL WITH RESPECT TO OFFERING MULTIPLE CLASSES OF
SHARES FOR ALL SERIES OF THE REGISTRANT
<PAGE>
[Ropes & Gray Letterhead]
September 10, 1993
TNE Funds Trust
399 Boylston Street
Boston, MA 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 ("Shares"), of (1) Classes A and B of
each of your TNE Massachusetts Tax Exempt Income Fund, TNE Adjustable Rate U.S.
Government Fund, TNE Growth Opportunities Fund, TNE Intermediate Term Tax Free
Fund of California and TNE Intermediate Term Tax Free Fund of New York series
(each such series, a "Multi-Class Series") and (2) Classes A and B of each of
your TNE High Income Fund and TNE Limited Term U.S. Government Fund (each such
series, a "Single Class Series"), all at not less than net asset value.
We have examined (1) an executed copy of your Second Amended and
Restated Agreement and Declaration of Trust dated February 2, 1993 (the
"Declaration of Trust") and Amendments Nos. 1 and 2 thereto on file in the
office of the Secretary of State of The Commonwealth of Massachusetts, and (2) a
copy of the Amendment No. 3 to the Declaration of Trust ("Amendment No. 3"), in
form for execution by your trustees. We 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 also examined a copy of your By-Laws and
such other documents as we have deemed necessary for the purpose of this
opinion. We have assumed that Amendment No. 2 to the Declaration of Trust has
been authorized by vote of a majority of the Shares of each of your TNE
Massachusetts Tax Free Income Fund, TNE Adjustable Rate U.S. Government Fund and
TNE Growth Opportunities Fund series.
Based on the foregoing, we are of the opinion that:
1. The beneficial interest of each Multi-Class Series is divided into
an unlimited number of Shares, consisting of an unlimited number of Shares of
each of Class A and Class B.
2. The issue and sale of the authorized but unissued Class A and Class
B Shares of each Multi-Class Series has been duly authorized under Massachusetts
law. Upon the original issue and sale of any such authorized but unissued Shares
and upon receipt by TNE Funds Trust (the "Trust") 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.
3. The beneficial interest of each Single Class Series is divided into
an unlimited number of Shares. Upon the authorization by a majority of the
Shares of each Single Class Series of Amendment No. 3, the execution of
Amendment No. 3 by a majority of your then trustees and the filing of Amendment
No. 3 with the Secretary of State of The Commonwealth of Massachusetts, (A) the
beneficial interest of each Single Class Series will consist of an unlimited
number of shares of each of Class A and Class B, (B) the issue and sale of such
authorized but unissued Class A and Class B Shares will have been duly
authorized under Massachusetts law and (C) upon the original issue and sale of
any of such authorized but unissued Shares and upon receipt by the Trust of the
authorized consideration therefor in an amount no 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 the Trust
or its trustees. The Declaration of Trust provides for indemnification out of
the property of the particular series of shares for all loss and expense of any
shareholder held personally liable solely by reason of his being or having been
a shareholder of that series. Thus, the risk of a shareholder incurring
financial loss on account of being a shareholder is limited to circumstances in
which that series of shares itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with
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,
/s/ROPES & GRAY
Ropes & Gray
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.10(E)
OPINION AND CONSENT OF COUNSEL WITH RESPECT TO THE
REGISTRANT'S RULE 24E-2 NOTICE
<PAGE>
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
April 18, 1997
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 52,351,644 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 and New England Intermediate Term
Tax Free Fund of New York (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 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 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 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. 106 to your Registration Statement
on Form N-1A (File No. 2-11101).
Very truly yours,
/s/ ROPES & GRAY
ROPES & GRAY
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.11
CONSENTS OF PRICE WATERHOUSE LLP AND COOPERS & LYBRAND LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 106 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 7, 1997 relating to the financial
statements and the financial highlights appearing in the December 31, 1996
Annual Report to Shareholders of New England Growth Fund of Israel, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Independent Accountants" in such
Prospectuses and to the reference to us under the heading "Financial Statements"
in the Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 18, 1997
<PAGE>
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. 106
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 of our reports
dated February 7, 1997 and February 10, 1997 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,
1996, which are incorporated by reference in the Registration Statement. We also
consent to the reference to our Firm under the captions "Financial Highlights",
"Independent Accountants" and "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
April 15, 1997
<PAGE>
Registration Nos. 2-11101
811-242
EXHIBIT
EX-99.18
PLAN PURSUANT TO RULE 18-3 UNDER THE 1940 ACT AS AMENDED
EFFECTIVE JANUARY 31, 1997
<PAGE>
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND FUNDS TRUST III
Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940
As amended effective January 31, 1997
Each series ("Fund") of New England Funds Trust I, New England Funds Trust II
and New England Funds Trust III (the "Trusts") may from time to time issue one
or more of the following classes of shares: Class A shares, Class B shares,
Class C shares and Class Y shares. Each class is subject to such investment
minimums and other conditions of eligibility as are set forth in the Funds'
prospectuses as from time to time in effect. The differences in expenses among
these classes of shares, and the conversion and exchange features of each class
of shares, are set forth below in this Plan, which is subject to change, to the
extent permitted by law and by the Declaration of Trust and By-Laws of each
Trust, by action of the Board of Trustees of each Trust.
Initial Sales Charge
Class A shares are offered at a public offering price that is equal to their net
asset value ("NAV") plus a sales charge of up to 6.50% of the public offering
price (which maximum may be less for certain Funds, as described in the Funds'
prospectus as from time to time in effect). The sales charges on Class A shares
are subject to reduction or waiver as permitted by Rule 22d-1 under the
Investment Company Act of 1940 (the "1940 Act") and as described in the Funds'
prospectuses as from time to time in effect.
Class B, Class C and Class Y shares are offered at their NAV, without an initial
sales charge.
Contingent Deferred Sales Charge
Purchases of Class A shares of $1 million or more that are redeemed within one
year from purchase are subject to a contingent deferred sales charge (a "CDSC")
of 1% of either the purchase price or the NAV of the shares redeemed, whichever
is less. Class A shares are not otherwise subject to a CDSC.
Class B shares that are redeemed within 5 years from purchase are subject to a
CDSC of up to 4% of either the purchase price or the NAV of the shares redeemed,
whichever is less; such percentage declines the longer the shares are held, as
described in the Funds' prospectuses as from time to time in effect. Class B
shares purchased with reinvested dividends or capital gain distributions are not
subject to a CDSC.
The CDSC on Class A and Class B shares is subject to reduction or waiver in
certain circumstances, as permitted by Rule 6c-10 under the 1940 Act and as
described in the Funds' prospectuses as from time to time in effect.
Class C and Class Y shares are not subject to any CDSC.
Service, Administration and Distribution Fees
Class A, Class B and Class C shares pay distribution and service fees pursuant
to plans adopted pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans")
for such classes. There is no 12b-1 Plan for Class Y shares.
Class A, Class B and Class C shares each pay, pursuant to the 12b-1 Plans, a
service fee of up to .25% per annum of the average daily net assets attributable
to such class.
Class A shares do not pay a distribution fee, with the exception that the Class
A shares of the following Funds pay, pursuant to the 12b-1 Plans, a distribution
fee of up to .10% per annum of the average daily net assets of such Fund
attributable to Class A shares: New England Massachusetts Tax Free Income Fund,
New England High Income Fund and New England Limited Term U.S. Government Fund.
Class B and Class C shares pay, pursuant to the 12b-1 Plans, a distribution fee
of up to .75% per annum of the average daily net assets of such Fund
attributable to such class of shares.
<PAGE>
Conversion and Exchange Features
Class B shares automatically convert to Class A shares of the same Fund eight
years after purchase, except that Class B shares purchased through the
reinvestment of dividends and other distributions on Class B shares convert to
Class A shares at the same time as the shares with respect to which they were
purchased are converted. Class Y shares of a Fund purchased through wrap fee
programs offered by certain broker-dealers will, upon termination of the
holder's participation in the wrap fee program and at the discretion of the
broker-dealer, be converted to Class A shares of the same Fund. Class A, Class C
and Class Y shares do not convert to any other class of shares.
Class A shares of any Fund may be exchanged, at the holder's option, for Class A
shares of another Fund without the payment of a sales charge, except that if
Class A shares of New England Adjustable Rate U.S. Government Fund are exchanged
for shares of a Fund with a higher sales charge, then the difference in sales
charges must be paid on the exchange; and except that Class A shares of New
England Intermediate Term Tax Free Fund of New York and New England Intermediate
Term Tax Free Fund of California must have been held for at least six months
before the exchange privilege applies to such shares. The holding period for
determining any CDSC will include the holding period of the shares exchanged.
Class A shares may also be exchanged for Class A shares of New England Cash
Management Trust or New England Tax Exempt Money Market Trust (the "Money Market
Funds"), in which case the holding period for purposes of determining the
expiration of the CDSC on such shares, if any, will stop and will resume only
when an exchange is made back into Class A shares of a Fund. If such Money
Market Fund shares are subsequently redeemed for cash, they will be subject to a
CDSC to the same extent that the shares exchanged would have been subject to a
CDSC at the time of the exchange into the Money Market Fund. Class A shares of a
Money Market Fund so purchased may be exchanged for Class A shares of a Fund
without sales charge or CDSC to the same extent as the Class A shares exchanged
for the Money Market Fund Class A shares could have been so exchanged. The
holding period for determining any CDSC for the acquired Fund shares will not
include the period during which the Money Market Fund shares were held, but will
include the holding period for the Class A Fund shares that were exchanged for
the Money Market Fund shares.
Class A shares of a Fund acquired in connection with certain deferred
compensation plans offered by New England Life Insurance Company ("NELICO") and
its affiliates to any of their directors, senior officers, agents or general
agents may be exchanged, at the holder's option and with the consent of NELICO,
for Class Y shares of the same Fund or for Class Y shares of any other Fund that
offers Class Y shares.
Class B shares of any Fund may be exchanged, at the holder's option, for Class B
shares of another Fund, without the payment of a CDSC. The holding period for
determining the CDSC and the conversion to Class A shares will include the
holding period of the shares exchanged. Class B shares of any Fund may also be
exchanged for Class B shares of a Money Market Fund, without the payment of a
CDSC. If such Money Market Fund shares are subsequently redeemed for cash, they
will be subject to a CDSC to the same extent that the shares exchanged would
have been subject to a CDSC at the time of the exchange into the Money Market
Fund. If such Money Market Fund shares are exchanged for Class B shares of a
Fund, no CDSC will apply to the exchange, and the holding period for the
acquired shares will include the holding period of the shares that were
exchanged for the Money Market Fund shares (but not the period during which the
Money Market Fund shares were held).
Class C shares of any Fund may be exchanged, at the holder's option, for Class C
shares of any other Fund that offers Class C shares, or for Class A shares of a
Money Market Fund.
Class Y shares of any Fund may be exchanged, at the holder's option, for Class Y
shares of any other Fund that offers Class Y shares, or for Class A shares of a
Money Market Fund or of any other Fund which does not offer Class Y shares.
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