Registration Nos. 2-11101
811-242
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 108 [X ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X ]
ACT OF 1940
Amendment No. 42 [X ]
(Check appropriate box or boxes)
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NEW ENGLAND FUNDS TRUST II
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices, including Zip Code)
(617) 578-1388
(Registrant's Telephone Number, including Area Code)
-------------------------------------
John E. Pelletier, 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
[ ] on (date) pursuant to paragraph (b) of Rule 485
[X ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
NEW ENGLAND FUNDS TRUST II
(Prospectus and Statement of Additional Information)
CROSS-REFERENCE SHEET
Items required by Form N-1A
Item No. of
Form N-1A Caption in Prospectus
--------- ---------------------
1 ............................ Cover page
2 ............................ Schedule of Fees
3 ............................ Financial Highlights
4 ............................ Cover page; Additional Facts About
the Funds; Investment Objectives; How
the Funds Pursue Their Objectives;
Fund Investments; Investment Risks
5 ............................ Fund Management; Additional Facts
About the Funds
5A ............................ None
6 ............................ Cover page; Additional Facts About
the Funds; Buying Fund Shares; Owning
Fund Shares; Income Tax Considerations
7 ............................ Cover page; Schedule of Fees; Buying
Fund Shares; Owning Fund Shares;
Selling Fund Shares; How Fund Share
Price is Determined; Fund Management
8 ............................ Selling Fund Shares; Exchanging Among
New England Funds
9 ............................ None
<PAGE>
Item No. of Caption in Statement of
Form N-1A Additional Information
--------- ----------------------
10 ........................... Cover page
11 ........................... Table of Contents
12 ........................... Description of the Trusts and
Ownership of Shares
13 ........................... Miscellaneous Investment Practices;
Investment Restrictions
14 ........................... Management of the Trusts
15 ........................... Fund Charges and Expenses; Management
of the Trusts
16 ........................... Fund Charges and Expenses; Management
of the Trusts
17 ........................... Fund Charges and Expenses; Portfolio
Transactions and Brokerage
18 ........................... Description of the Trusts and
Ownership of Shares
19 ........................... How to Buy Shares; Net Asset Value
and Public Offering Price; Reduced
Sales Charges; Shareholder Services;
Redemptions
20 ........................... Income Dividends, Capital Gain
Distributions and Tax Status
21 ........................... Fund Charges and Expenses; Management
of the Trusts
22 ........................... Performance Criteria (in Prospectus);
Investment Performance of the Funds;
Standard Performance Measures
23 ........................... Financial Statements
<PAGE>
[GRAPHIC OMITTED]
New England Funds(R)
Where The Best Minds Meet(R)
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
Prospectus and Application -- May 1, 1998
New England Intermediate Term Tax Free Fund of California (the "California
Fund") and New England Tax Free Income Fund of New York (formerly, 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, New England Funds Trust I and New England Funds Trust
III are referred to in this prospectus as the "Trusts."
Each Fund seeks as high a level of current income exempt from federal income tax
and its state's personal income tax (and New York City personal income tax, in
the case of the New York Fund) as is consistent with preservation of capital.
There can be no assurance that a Fund will achieve its investment objective.
Each Fund offers two classes of shares to the general public. The offering price
is based on the 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, 1998 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. In addition, the SEC maintains a website
(http://www.sec.gov) that contains the Statement, material incorporated by
reference, and other information regarding each of the Funds. 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.
- --------------------------------------------------------------------------------
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.
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<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
<TABLE>
<CAPTION>
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
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.
o Through your investment dealer
o By mail
o By wire transfer of Federal Funds
o By Investment Builder
o By electronic purchase through ACH
o 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.
o Through your investment dealer
o By telephone
o By mail
o By check
o 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>
- --------------------------------------------------------------------------------
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
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
<TABLE>
<CAPTION>
California Fund New York Fund
------------------- -------------------
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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%
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See
"Buying Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any
portion of certain purchases of Class A shares greater than $1,000,000
redeemed within one year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
Annual Fund operating expenses*
(as a percentage of average net assets)
<TABLE>
<CAPTION>
California Fund New York Fund
-------------------- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees
(after voluntary fee waiver and
expense reduction) ............ %*** %*** %**** %****
12b-1 Fees ...................... 0.2 1.0** 0.2 1.0**
Other Expenses
(after voluntary fee waiver and
expense reduction
for the New York Fund) ........ **** ****
Total Fund Operating Expenses
(after voluntary fee waiver and
expense reduction) ............ *** *** **** ****
</TABLE>
** Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
*** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be ___% for both classes, and Total Fund
Operating Expenses would be ___% for Class A shares and ___% for Class B
shares. These voluntary limitations can be terminated by the Fund's
adviser 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 ___% and ___%,
respectively, for both classes, and Total Fund Operating Expenses would be
___% for Class A shares and ___% for Class B shares. These voluntary
limitations can be terminated by the Fund's adviser at any time. See "Fund
Management."
1
<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.
<TABLE>
<CAPTION>
California Fund New York Fund
----------------------- --------------------------
Class A Class B Class A Class B
------- -------------- ------- --------------
(1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C>
1 year............................. $ $ $ $ $ $
3 years ........................... $ $ $ $ $ $
5 years ........................... $ $ $ $ $ $
10 years*.......................... $ $ $ $ $ $
</TABLE>
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years
9 and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management 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.
2
<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 Price Waterhouse LLP (and
by Coopers & Lybrand LLP, for pre-1997 data), 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 1997 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
<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
</TABLE>
(a) The Funds commenced operations on April 23, 1993. Class B shares were
first offered on September 13, 1993.
(b) Commencing April 23, 1993, expenses were voluntarily limited to 0.70% of
Class A average net assets and, effective September 13, 1993, 1.45% of
Class B average net assets, in each case through 8/30/96. 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. 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 and 1.33%, 1.31%,
1.34% and ___%, respectively, for the years ended December 31, 1994, 1995,
1996 and 1997; 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 and 2.08%, 2.06%, 2.09% and __%,
respectively, for the years ended December 31, 1994, 1995, 1996 and 1997.
(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.
3
<PAGE>
New England Tax Free Income Fund of New York
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------- -------------------------------------------
April 23(a) Sept.13(a)
through Year Ended December 31, through Year Ended December 31,
Dec. 31, ---------------------------------- Dec. 31, --------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
------ ------ ------ -------------- ------ ------ -----------------------
<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
</TABLE>
(a) The Funds commenced operations on April 23, 1993. Class B shares were
first offered beginning September 13, 1993.
(b) Commencing April 23, 1993, expenses were voluntarily limited to 0.70% of
Class A average net assets and, effective September 13, 1993, 1.45% of
Class B average net assets, in each case through 8/30/96. 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. The ratio of
operating expenses to average net assets for Class A shares without giving
effect to the expense limitations would have been 2.11% (annualized) for
the period April 23, 1993 through December 31, 1993, and 1.79%, 1.88%,
1.93% and ___%, respectively, for the years ended December 31, 1994, 1995,
1996 and 1997. 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, and 2.54 %, 2.63%, 2.68% and ___%,
respectively, for the years ended December 31, 1994, 1995, 1996 and 1997.
(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.
4
<PAGE>
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INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
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 least 85% of each Fund's assets will consist of securities rated (at the time
of investment) 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.
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.
The California Fund will ordinarily seek to maintain an average dollar-weighted
maturity of three to ten years. The New York Fund will not seek to maintain any
particular average dollar-weighted maturity.
"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 New York Fund will not seek to maintain
any particular average portfolio duration. The greater the average duration the
greater the risk of loss an investor will face 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
6
<PAGE>
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.
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, short-term capital gain, or
long-term capital gain, (i.e., "20% Rate Gain" or 28% Rate 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 [THE FOLLOWING CHARTS WILL BE UPDATED FOR 1998]
California Fund
<TABLE>
<CAPTION>
1997
Combined
Taxable Income* Federal and If Tax Exempt Yield is
- --------------------------------------------- California -------------------------------------------------------
Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00%
Return ($) Return ($) Tax Rate** then the Equivalent Taxable Yield would be:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11,633 - 18,357 23,265 - 36,714 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
18,358 - 24,650 36,715 - 41,200 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
24,651 - 25,484 41,201 - 50,968 32.32% 5.91% 7.39% 8.87% 10.34% 11.82%
25,485 - 32,207 50,969 - 64,414 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
32,208 - 59,750 64,415 - 99,600 34.70% 6.13% 7.66% 9.19% 10.72% 12.25%
59,751 - 111,695 99,601 - 151,750 37.42% 6.39% 7.99% 9.59% 11.19% 12.78%
111,696 - 124,650 37.90% 6.44% 8.05% 9.66% 11.27% 12.88%
151,751 - 223,390 41.95% 6.89% 8.61% 10.34% 12.06% 13.78%
124,651 - 223,390 223,391 - 271,050 42.40% 6.94% 8.68% 10.42% 12.15% 13.89%
223,391 - 271,050 43.04% 7.02% 8.78% 10.53% 12.29% 14.04%
271,051 - 446,780 45.64% 7.36% 9.20% 11.04% 12.88% 14.72%
over - 271,050 over - 446,780 46.24% 7.44% 9.30% 11.16% 13.02% 14.88%
</TABLE>
New York Fund
<TABLE>
<CAPTION>
1997
Combined
Taxable Income* Federal and If Tax Exempt Yield is
- --------------------------------------------- New York -------------------------------------------------------
Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00%
Return ($) Return ($) Tax Rate** then the Equivalent Taxable Yield would be:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8,001 - 11,000 16,001 - 22,000 18.83% 4.93% 6.16% 7.39% 8.62% 9.86%
11,001 - 13,000 22,001 - 26,000 19.46% 4.97% 6.21% 7.45% 8.69% 9.93%
13,001 - 20,000 26,001 - 40,000 20.02% 5.00% 6.25% 7.50% 8.75% 10.00%
20,001 - 24,650 40,001 - 41,200 20.82% 5.05% 6.31% 7.58% 8.84% 10.10%
24,651 - 59,750 41,201 - 99,600 32.93% 5.96% 7.46% 8.95% 10.44% 11.93%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
59,751 - 124,650 99,601 - 151,750 35.73% 6.22% 7.78% 9.34% 10.89% 12.45%
124,651 - 271,050 151,751 - 271,050 40.38% 6.71% 8.39% 10.06% 11.74% 13.42%
over - 271,050 over - 271,050 43.74% 7.11% 8.89% 10.66% 12.44% 14.22%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
1997
Combined
Federal and
New York
Taxable Income* State and If Tax Exempt Yield is****
- --------------------------------------------- City --------------------------------------------------------
Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00%
Return ($) 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%
</TABLE>
* 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.
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 California Fund will maintain an average portfolio maturity in the
intermediate range, either Fund 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
participants in lease obligations or installment purchase contract
obligations ("lease obligations") of municipal authorities or entities. Although
lease obligations do not
9
<PAGE>
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.
10
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in a Fund before you
invest.
o 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."
o 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.
11
<PAGE>
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.
o 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.
o 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, 1997, __% and __% of
the average month-end net assets of the California Fund and the New
12
<PAGE>
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."
o 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."
13
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
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 was
organized in 1995 and 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 ___ mutual fund portfolios and over $__ billion of
securities. James S. Welch, Vice President of Back Bay Advisors, has served as
the portfolio manager of the Funds since their inception in April 1993.
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.
The transfer and dividend paying agent for the funds is New England Funds
Service Corporation ("NEFSCO"), 399 Boylston Street, Boston, Massachusetts
02116. NEFSCO has subcontracted certain of its obligations as such to State
Street Bank and Trust Company ("State Street Bank"), 225 Franklin Street,
Boston, MA 02110.
The general partners of each of NEFM, Back Bay Advisors and the Distributor, and
the sole shareholder of NEFSCO, are special purpose corporations that are
indirect, wholly-owned subsidiaries of NEIC Operating Partnership, L.P.
("NEICOP"). NEICOP's managing general partner, New England Investment Companies,
Inc. ("NEIC, Inc."), is an indirect wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife"), a mutual life insurance company. MetLife owns
directly 46% (and in the aggregate, directly and indirectly, 47%) of the limited
partnership interests in NEICOP. NEICOP's advising general partner, New England
Investment Companies, L.P., ("NEIC") is a publicly-traded company listed on the
New York Stock Exchange. NEIC, Inc. is the sole general partner of NEIC.
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 received 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 order
also permits, 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 will be notified of any subadviser
changes.
14
<PAGE>
- --------------------------------------------------------------------------------
BUYING FUND SHARES
- --------------------------------------------------------------------------------
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:
o $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
o $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 New England Funds Personal Access Line(TM) 1-800-346-5984
New England Funds Personal Access Line(TM) 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 New England Funds Personal Access Line(TM) 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:
o Through your investment dealer:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
o 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.
o 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.
o 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.
15
<PAGE>
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.
o 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 New England Funds Personal Access
Line(TM) 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 New England Funds Personal Access Line(TM) 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.
o 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 (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.
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<PAGE>
Sales Charges
The Funds offer two classes of shares:
Class A Shares
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% annual
service fee. Class A shares are offered subject to the following 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 and 0.50% on the excess over $3
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.
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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 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.
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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.
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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 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
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<PAGE>
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 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.
* As set forth in Part II of the Statement under "Redemptions," Class B shares
purchased prior to May 1, 1997, the CDSC will be calculated according to a
different schedule.
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
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 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 the discussion that follows in this section.
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.
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<PAGE>
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)
o 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.
o 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.
o 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.
o 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.
o 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.
o 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
19
<PAGE>
Advisors out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
o 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.
o There is no sales charge, CDSC or initial investment minimum related to
investments by 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, in-laws, 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.
o 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.
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.
20
<PAGE>
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OWNING FUND SHARES
- --------------------------------------------------------------------------------
Exchanging Among New England Funds
Class A Shares.
Except as indicated in the next two sentences, you may exchange Class A shares
of 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 New England Funds Personal Access Line(TM) 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. The
Funds and NEFSCO 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. The Funds and NEFSCO
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.
Market Timer Restrictions. Purchases and exchanges into the Funds should be made
for investment purposes only. The Funds and the Distributor reserve the right to
refuse or limit any purchase or exchange order by a particular purchaser (or
group of related purchasers) when such transaction is deemed harmful to the best
interests of the Fund's other shareholders or would disrupt the management of
the Fund. Without limiting the generality of the foregoing, the Funds and the
Distributor reserve the right to restrict (e.g., by limiting to a specific
maximum dollar amount) purchases and exchanges for the account of "market
timers." An account will be deemed to be the account of a market timer if (i)
more than two exchange purchases of a given Fund are effected for the account in
a calendar quarter or (ii) the account effects one or more exchange purchases of
a given Fund in a calendar quarter in an aggregate amount in excess of 1% of the
Fund's total net assets.
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.
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<PAGE>
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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.
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22
<PAGE>
Fund Dividend Payments
The Funds declare dividends daily and pay them monthly. Each Fund pays as
dividends substantially all net investment income (tax-exempt and taxable income
other than long-term capital gains) each year and distributes annually all net
realized long-term capital gains (after applying any available capital loss
carryovers). 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. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
- --------------------------------------------------------------------------------
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.
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23
<PAGE>
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SELLING FUND SHARES
- --------------------------------------------------------------------------------
5 Ways to Sell Fund Shares
You may sell shares of the Funds in the following ways:
o Through your investment dealer:
Call your authorized investment dealer for information.
o 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
New England Funds Personal Access Line(TM) 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 New England Funds Personal Access Line(TM) 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.
o 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 the Funds and NEFSCO. Signature guarantees by notaries
public are not acceptable.
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<PAGE>
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.
o 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.
o 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. The Fund(s) reserve the right to suspend account services or refuse
transaction requests when notice has been received by the Fund of a dispute
between the registered or beneficial owners of an account or there is suspicion
or evidence that a fraudulent act may result.
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
25
<PAGE>
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.
26
<PAGE>
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FUND DETAILS
- --------------------------------------------------------------------------------
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) (or, under limited circumstances, such other time no later than 8:00 p.m.
(Eastern Time) as may be agreed upon between the dealer and the Distributor) 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 income, other
ordinary income and short-term capital gains, if any, will be taxable as
ordinary income, whether received in cash or additional shares. Distributions
designated by the Fund as deriving from net gains on securities held for more
than one year but not more than 18 months ("28% Rate Gain") and from net gains
on securities held for more than 18 months ("20% Rate Gain")are taxable as such,
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 realized upon the sale, exchange or redemption of shares
will be treated as 28% Rate Gain if the shares have been held for more than one
year, but not more than 18 months, as 20% Rate Gain if the shares have been held
for more than 18 months, and otherwise as a short-term gain, assuming the shares
are held as capital assets. In general, any loss realized upon a taxable
disposition of shares will be treated as long-term loss if the shares have been
held for more than one year, and otherwise as short-term capital loss. Howeve,
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, rather than short-term capital
losses,
27
<PAGE>
to the extent of long-term capital gain distributions received with respect to
such shares. Furthermore, no loss will be allowed on the sale of Fund shares to
the extent you acquired other shares of the Fund within 30 days prior to the
sale of the loss shares or 30 days after such sale.
If you receive social security or railroad retirement benefits, you may be taxed
on a portion of those benefits as a result of receiving exempt-interest
dividends. 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.
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, plus any retained amount from the prior year.
Distributions declared and payable in October, November or December to
shareholders of record on a date in those months and paid the following January
will be considered for federal income tax purposes to have been received by
shareholders on December 31 of the year in which declared.
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 and alternative minimum tax 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
28
<PAGE>
services to investors in shares of the Fund and/or maintenance of shareholder
accounts [on a quarterly basis unless other arrangements are made between the
Distributor and the securities dealer]. 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, on a quarterly basis, unless other arrangements are made between the
Distributor and the securities dealer. The Distributor retains the balance of
the distribution fee as compensation for the Distributor's services as
distributor of the Class B shares.
In addition, NEFM performs certain accounting and administrative services for
the Funds. For those services each Fund reimburses NEFM 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 Fund, (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 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.
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 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
29
<PAGE>
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o The Class A and Class B structure could be terminated should certain IRS
rulings be rescinded.
30
<PAGE>
Printed on Recycled Paper XT51-0597
31
<PAGE>
[NEW ENGLAND FUNDS LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
Statement of Additional Information -- PART I
May 1, 1998
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 Tax Free Income 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, 1998 (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.
Table of Contents
Page
----
Part I
Investment Restrictions ii
Fund Charges and Expenses iii
Ownership of Fund Shares v
Investment Performance of the Funds vi
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 24
Description of the Trusts and Ownership of Shares 31
How to Buy Shares 34
Net Asset Value and Public Offering Price 35
Reduced Sales Charges 36
Shareholder Services 38
Redemptions 42
Standard Performance Measures 44
Income Dividends, Capital Gain Distributions and Tax Status 48
Financial Statements 50
Appendix A - Description of Bond Ratings 51
Appendix B - Publications That May Contain Fund
Information 53
Appendix C - Advertising and Promotional Literature 55
Appendix D - Portfolio Composition of the Municipal
Income, Bond Income and California Funds 60
Appendix E - Growth Fund of Israel 62
i
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds. The restrictions marked with an asterisk may not be changed
without the 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;
ii
<PAGE>
*(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.
- --------------------------------------------------------------------------------
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
iii
<PAGE>
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, 1995, 1996 and 1997. Had the voluntary limitations for the
California Fund not been in effect, Back Bay Advisors would have been paid
$150,341 in advisory fees by the Fund for the fiscal year ended December 31,
1995 and NEFM would have been paid $210,469 and $________, respectively, in
management fees for the fiscal years ended December 31, 1996 and 1997. Had the
voluntary limitations for the New York Fund not been in effect, Back Bay
Advisors would have been paid $70,795 in advisory fees by the Fund for the
fiscal year ended December 31, 1995 and NEFM would have been paid $100,284 and
$_______, respectively, in management fees for the fiscal years ended December
31, 1996 and 1997. For the fiscal years ended December 31, 1996 and 1997, NEFM
paid Back Bay Advisors $-0- and $_____, respectively, in subadvisory fees for
the New York Fund, after voluntary expense limitations. Had the voluntary
limitations not been in effect, Back Bay Advisors' subadvisory fees for the New
York Fund would have been $50,142 and $________, respectively. For the fiscal
years ended December 31, 1996 and 1997, NEFM paid Back Bay Advisors $-0- and
$_______, respectively, in subadvisory fees for the California Fund, after
voluntary expense limitations. Had the voluntary limitations not been in effect,
Back Bay Advisors' subadvisory fees for the California Fund would have been
$105,234 and $______, respectively.
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1995, 1996 and 1997, 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, 1995, 1996 and 1997, these fees amounted to $79,473, $84,706 and
$81,769, respectively, for the California Fund's Class A shares, and $57,947,
$63,402 and $81,901, respectively, for the California Fund's Class B shares. For
the fiscal years ended December 31, 1995, 1996 and 1997, these fees amounted to
iv
<PAGE>
$40,660, $42,803 and $49,186, respectively, for the New York Fund's Class A
shares, and $14,352, $20,550 and $24,838, respectively, for the New York Fund's
Class B shares.
During the fiscal year ended December 31, 1997, on sales of the California
Fund's and the New York Fund's Class A shares, the Distributor paid $81,688 and
$49,200, respectively, as compensation to investment dealers and $104,521 and
$99,137, respectively, as compensation to its sales personnel and other related
costs. During the fiscal year ended December 31, 1997, on sales of the
California Fund's and the New York Fund's Class B shares, the Distributor paid
$56,571 and $31,067, respectively, as compensation to investment dealers and
$100,438 and $95,644, respectively, as compensation to sales personnel and other
related costs. Of the amounts paid to investment dealers, $20,209 and $19,022
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 $25,064 and $12,586 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 February 2, 1998, 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 William L. Spangler 7.00%
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
MLPF&S for the Sole Benefit of its 5.56%
Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Allen Kelly & Margaret Kelly, TTEES 5.
Kelly Family Trust 317%
19980 Angus Ct.
Saratoga, CA 95070-4406
New York Fund
Class A shares NFSC FEBO 7.49%
Good Earth Organics Corp.
5960 Broadway
Lancaster, NY 14086-9531
Class A shares MLPF&S for the Sole Benefit of its 5.67%
Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
v
<PAGE>
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
Class A shares
MLPF&S for the Sole Benefit of its 5.56%
Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Class B shares NFSC FEBO 6.87%
The Michael J. Cardito Personnel Tr.
400 East 56th Street
New York, NY 10022-4147
Rose Eannone 6.30%
19 Carldon Road
Commack, NY 11725-1610
Prudential Securities Inc. 7.21%
FBO Dr. Jochanan M. Weisenfreund
201 W. 70th Street
New York, NY 10023-4338
vi
<PAGE>
James P. Donovan 6.19%
60 Newport Road
Island Park, NY 11558-1013
PaineWebber for the Benefit of 5.17%
Nathan R. Lorman and Vivian Lorman
201 East 63rd Street
New York, NY 10021-7334
- --------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- --------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/97*
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
Net Asset Value
Maximum Offering Price
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
Net Asset Value
Redemption at End of Period
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
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------- ---------------------
vii
<PAGE>
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- -------------------------------- ------ --------- ---------
Net Asset Value
Net Asset Value
Maximum Offering Price 1.98 20.41 5.16
Redemption at End of Period
* Federal regulations require this example to be calculated using a $1,000
investment. The normal minimum initial investment in shares of each Fund
is $2,500, however.
** Commencement of Fund operations or offering of Class B shares.
*** Assuming deduction of current maximum sales load, the California Fund's
Class A shares' since-inception average annual total return would have
been ___% had a voluntary expense limitation for certain periods not been
in effect, and their aggregate one-year and since-inception total returns
would have been ___% and ___%, respectively. Based on net asset values,
the Fund's Class A shares' since-inception average annual total return
would have been ___%, and their aggregate one-year and since-inception
total returns would have been ___% and ___%, respectively, without the
voluntary limitation. Assuming redemption at the end of the period, the
California Fund's Class B shares' average annual total return for the
since-inception period would have been ___%, had a voluntary expense
limitation not been in effect, and their aggregate total returns for the
one-year and since-inception periods would have been ___% and ___%,
respectively. Based on net asset values, the Fund's Class B shares'
average annual total return for the since-inception period would have been
___%, and their aggregate total returns for the one-year and
since-inception periods would have been ___% and ___%, respectively,
without the voluntary limitation.
**** Assuming deduction of current maximum sales load, the New York Fund's
Class A shares' since-inception average annual total returns would have
been ___% had a voluntary expense limitation for certain periods not been
in effect, and their aggregate one-year and since-inception total returns
would have been ___% and ___%, respectively. Based on net asset values,
the Fund's Class A shares' since-inception average annual total returns
would have been ___%, and their aggregate one-year and since-inception
total returns would have been ___% and ___%, respectively, without the
voluntary limitation. Assuming redemption at the end of the period, the
New York Fund's Class B shares' average annual total returns for the
since-inception period would have been ___% had a voluntary expense
limitation not been in effect, and their aggregate total returns for the
one-year and since-inception periods would have been ___% and ___%,
respectively. Based on net asset values, the Class B shares' average
annual total return for the since-inception period would have been ___%,
and their aggregate total returns for the one-year and since-inception
periods would have been ___% and ___%, respectively, without the voluntary
limitation.
DISTRIBUTION RATE OF RETURN
Each class of the Funds may include in their written sales material rates
of return based on that class's distributions from net investment income and
short-term capital gains for a recent 30-day, three-month or one-year period.
Distributions of less than one year are annualized by multiplying the factor
necessary to produce 12 months of distributions. The distribution rates are
determined by dividing the amount of a class's distributions per share over the
relevant period by either the maximum offering price in the case of Class A
shares or the price assuming redemption at the end of the period in the case of
Class B shares or the net asset value of a share of a class on the last day of
the period.
DISTRIBUTION RATES
For Periods Ending 12/31/97
As a % of 30 day 3 months 12 months
-------------------------------------- ------ -------- ---------
California Fund
(Class A shares)
Net Asset Value.......................
viii
<PAGE>
Maximum Offering Price................
(Class B shares)
Net Asset Value.......................
New York Fund
(Class A shares)
Net Asset Value.......................
Maximum Offering Price................
Maximum Offering Price................
(Class B shares)
Net Asset Value.......................
ix
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND FUNDS TRUST III
Statement of Additional Information -- PART II
May 1, 1998
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, New England Funds Trust II and New England Funds Trust
III (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, 1998 for Class A, Class B
and Class C shares and May 1, 1998 for Class Y shares (the "Prospectus" or
"Prospectuses"). The following Funds are described in this Statement:
<TABLE>
<S> <C>
Series of New England Funds Trust I
New England Capital Growth Fund (the "Capital Growth Fund")
New England Balanced Fund (the "Balanced Fund")
New England Growth Fund (the "Growth Fund")
New England International Equity 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")
Series of New England Funds Trust II
New England Growth Opportunities Fund (the "Growth Opportunities Fund")
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government Fund")
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
New England High Income Fund (the "High Income Fund")
New England Massachusetts Tax Free Income Fund (the "Massachusetts Fund")
New England Intermediate Term Tax Free Fund (the "California Fund')
of California
New England Tax Free Income Fund of New York (the "New York Fund")
Series of New England Funds Trust III
- -------------------------------------
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
New England Equity Income Fund (the "Equity Income Fund")
</TABLE>
2
<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
Equity 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
Equity Income Fund
Repurchase Agreements All Funds
Zero Coupon Securities All Funds
Convertible Securities Value Fund
Balanced Fund
Growth Opportunities Fund
High Income Fund
International Equity Fund
Capital Growth Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Equity Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
3
<PAGE>
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Short Sales Star Worldwide Fund
Star Small Cap 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
Equity Income 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
Equity 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 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:
o 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.
4
<PAGE>
o 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.
o "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.
o "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.
o "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. A 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 a 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 a 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 a 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. A 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, a 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. A Fund may enter into repurchase agreements, by which a
Fund purchases a security and obtains a simultaneous commitment from the seller
to repurchase the security at an agreed-upon price and
5
<PAGE>
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.
6
<PAGE>
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,
7
<PAGE>
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.
8
<PAGE>
Short Sales. The Star Small Cap and Star Worldwide Funds may engage in short
sales if it owns (or has the right to acquire without further consideration) the
security it has sold, a practice known as selling short "against the box." Each
Fund may engage in short sales of securities in order to profit from an
anticipated decline in the value of a security or may also engage in short sales
to attempt to limit its exposure to a decline in the value of its portfolio
securities. In a short sale, the Fund does not deliver from its portfolio the
securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such securities. The Fund
is then obligated to replace the security borrowed by delivering such security
to the broker-dealer. Until the security is replaced, the Fund is required to
pay to the lender any accrued interest or dividends paid on the security sold
short and may also be required to pay a premium to the broker-dealer. The
broker-dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to the broker-dealer the securities sold short. To secure its
obligation to deliver to such broker-dealer the securities sold short, the Fund
must deposit and continuously maintain in a separate account with the Fund's
custodian an equivalent amount of (a) the securities sold short, (b) securities
convertible into or exchangeable for such securities without the payment of
additional consideration or (c) cash or certain liquid assets. The Fund is said
to have a short position in the securities sold until it delivers to the
broker-dealer the securities sold, at which time the Fund receives the proceeds
of the sale. The Fund may close out a short position by purchasing, on the open
market, and delivering to the broker-dealer an equal amount of the securities
sold short, or, if such securities are owned by the Fund, by delivering from its
portfolio an equal amount of the securities sold short.
Short sale transactions involve certain risks. If the price of the
security sold short increases between the time of the short sale and the time
the Fund replaces the borrowed security, the Fund will incur a loss, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. If the price declines during this
period, the Fund will realize a short-term capital gain. Any realized short-term
capital gain will be decreased, and any incurred loss increased, by the amount
of transaction costs and any premium, dividend or interest which the Fund may
have to pay in connection with such short sale. The Fund will also incur
transaction costs in connection with short sales. Certain provisions of the Code
may limit the degree to which the Fund is able to enter into short sales. The
Star Small Cap and Star Worldwide Funds currently expect that no more than 25%
and 20% of their total assets, respectively, would be involved in short sales.
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
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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
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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
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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
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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
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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
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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 (54); 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20004; Partner, and former Managing Director, The Carlyle Group
(investments); Public Service Professor, Harvard Graduate School of
Government; Trustee, Council for Excellence in Government (not for
profit); Director, Frontier Ventures (personal investment); Director,
Telcom Ventures (telecommunications); Director, Genesis Cable (cable
communications); Director, Prime Communications (cable communications);
Director, Neptune Communications (undersea cable systems); formerly,
Director of the U.S. Office of Management and Budget and a member of
President Bush's Cabinet; former Director, HighwayMaster Communications
(mobile communications); former Director, Sequana Therapeutics
(biotechnology).
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 (54); 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, 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).
- --------
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
16
<PAGE>
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") and NEIC Operating Partnership, L.P. ("NEICOP");
Chairman of the Board and 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.
PENDELTON 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 (54); 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).
JOHN E. PELLETIER -- Secretary and Clerk (33); 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, Senior Vice President and General Counsel, Fund
Distributor, Inc.; Counsel, The Boston Company Advisors, Inc.; Associate,
Ropes and Gray.
Each person listed above holds the same position(s) with all three 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 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 five trusts
collectively, the "New England Funds Trusts"), comprising as of May 1, 1998 a
total of 23 mutual fund portfolios, a retainer fee at the annual rate of [$] and
meeting attendance fees of [$] for each meeting of the boards he or she attends
and [$] 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 [$]. These fees are allocated among the Funds and the
three other mutual
17
<PAGE>
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, 1997, 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 Aggregate Retirement Total
Compensation Compensation Compensation Benefits Estimated Compensation
from from from New Accrued as Annual from the New
New England New England England Funds Part of Fund Benefits England Funds
Funds Trust I Funds Trust II Trust III Expenses Upon Trusts
Name of Trustee in 1997 in 1997 in 1997 in 1997 Retirement in 1997
--------------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $ $ $ $ $ $
Daniel M. Cain $ $ $ $ $ $
Kenneth J. Cowan $ $ $ $ $ $
Richard Darman $ $ $ $ $ $
Sandra O. Moose $ $ $ $ $ $
John A. Shane $ $ $ $ $ $
Pendleton P. White $ $ $ $ $ $
</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 February 2, 1998, 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,
18
<PAGE>
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 in turn is a wholly-owned subsidiary of NEIC Operating
Partnership, L.P. ("NEICOP"). NEF Corporation is also the sole general partner
of New England Funds, L.P., the distributor of the Funds, and the sole
shareholder of New England Funds Service Corporation ("NEFSCO"), the transfer
and dividend disbursing agent of the Funds. NEICOP owns the entire limited
partnership interest in each of NEFM and New England Funds, L.P.
NEICOP's managing general partner, New England Investment Companies, Inc.,
is a wholly-owned subsidiary of MetLife New England Holdings, Inc., which in
turn is a wholly-owned subsidiary of Metropolitan Life Insurance Company, a
mutual life insurance company ("MetLife"). MetLife owns directly 46% (and in the
aggregate, directly and indirectly, 47%) of the outstanding limited partnership
interests in NEICOP. NEICOP's advising general partner, New England Investment
Companies, L.P. ("NEIC"), is a publicly-traded company listed on the New York
Stock Exchange. New England Investment Companies, Inc. is the sole general
partner of NEIC. NEICOP's 14 principal subsidiary or affiliated asset management
firms, collectively, had more than $120 billion of assets under management as of
September 30, 1997.
Back Bay Advisors, formed in 1986, is a limited partnership whose sole
general partner, BBAI, is a wholly-owned subsidiary of NEIC Holdings. NEICOP
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 $__ billion in total assets.
19
<PAGE>
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. NEICOP 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.
NEICOP 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. NEICOP owns the entire limited partnership interest
in Westpeak.
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 __% of the
outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately __% 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 Holdings. Harris was
acquired by NEIC Holdings in 1995. Harris also serves as investment adviser to
individuals, trusts, retirement plans, endowments and foundations, and manages
numerous private partnerships.
Montgomery Asset Management, LLC ("Montgomery"), a Delaware limited
liability company, was formed in 1997 as an investment adviser. Montgomery is
the successor to Montgomery Asset Management, L.P., a California limited
partnership formed in 1990. On July 31, 1997, Montgomery Asset Management, L.P.
completed the sale of substantially all of its assets to Montgomery. Montgomery
is a wholly-owned subsidiary of Commerzbank AG, a German commercial bank.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), a California limited partnership, was formed in 1993. Prior to
October 1, 1997, the general partner of Robertson Stephens was Robertson,
Stephens & Company, Inc., and the principal limited partner was Robertson,
Stephens & Company Group, L.L.C. On
20
<PAGE>
October 1, 1997 Robertson, Stephens & Company Group, L.L.C. and Robertson,
Stephens & Company, Inc. became wholly-owned subsidiaries of BankAmerica
Corporation, a global financial services company. Robertson Stephens and its
affiliates have in excess of $__ 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 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 and the Equity 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 Value, Balanced, Star Advisers, Star Small Cap, High
Income, Strategic Income, Equity 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, Value, Balanced, Star Advisers, Star
Small Cap, High Income, Equity Income and International Equity Funds outweighs
the disadvantages, if any, which might result from these practices.
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
21
<PAGE>
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 and the Capital Growth Fund
also may invest. When the Funds 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 Funds 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 Advisers, 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 Advisers, 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 Advisers, 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
22
<PAGE>
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
23
<PAGE>
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 NEICOP. 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 (NEICOP 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, New England Funds Trust III
or the affected Fund may be required to change their names and delete these
words or letters. New England Funds, L.P. also acts as general distributor for
New England Cash Management Trust and New England Tax Exempt Money Market Trust.
During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $8,779,918, $10,735,444 and $_______________,
respectively, of which $7,706,937, $9,418,244 and $___________, respectively,
was allowed to other securities dealers and the balance retained by New England
Funds, L.P. During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received CDSCs on the redemption of Class A and Class B shares of
New England Funds Trust I aggregating $899,482, $1,256,009 and $____________,
respectively, of which $879,085, $1,236,000 and $___________, 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, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $1,913,291, $1,674,883 and $_________,
respectively, of which $1,752,050, $1,429,970 and $___________, respectively,
were reallowed to other securities dealers and the balance retained by New
England Funds, L.P. During the years ended December 31, 1995, 1996 and 1997, New
England Funds, L.P. received CDSCs on the redemption of Class A and Class B
shares of New England Funds Trust II aggregating $234,390, $318,167 and
$_____________, respectively, of which $173,421, $313,465 and $__________,
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 II's investment
advisers and subadvisers or the Funds directly for providing certain
administrative services relating to New England Funds Trust II.
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<PAGE>
During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sales of the Class A shares of New
England Funds Trust III aggregating $-0-, $-0- and $__________, respectively, of
which $-0-, $-0- and $__________, respectively, were reallowed to other
securities dealers and the balance retained by New England Funds, L.P. During
the years ended December 31, 1995, 1996 and 1997, New England Funds, L.P.
received CDSCs on the redemption of Class A and Class B shares of New England
Funds Trust III aggregating $-0-, $-0- and $__________, respectively, of which
$-0-, $-0- and $__________, 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 III's investment advisers and subadvisers or the Funds directly for
providing certain administrative services relating to New England Funds Trust
III.
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. 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, 1997 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, 1995, 1996 and
1997, New England Securities received $1,369,323, $1,473,212 and $_____________,
respectively, from the Fund's advisers under these agreements. In the case of
the Capital Growth Fund, New England Funds, L.P. provided similar services 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
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<PAGE>
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 Service
Corporation, New England Funds Service Corporation 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 Service Corporation 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 Service
Corporation 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
Service Corporation 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. The Equity
Income Fund pays a $250 monthly fee to New England Funds Service Corporation for
these services which New England Funds Service Corporation pays in full to State
Street Bank for it to provide through its subsidiary, Boston Financial Data
Services ("BFDS"), transaction processing and other services.
In addition, during the fiscal year ended December 31, 1997 NEFM performed
certain accounting and administrative services for the Funds. Each Fund
reimbursed NEFM 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.
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<PAGE>
During the fiscal year ended December 31, 1996, NEFM 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, Equity Income 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, $0, $98,321 and $24,445,
respectively.
During the fiscal year ended December 31, 1997, NEFM 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, Equity Income Fund, Star
Advisers Fund and Star Worldwide Fund in the amounts of $____________,
$____________, $_____________, $____________, $____________, $____________,
$____________, $____________, $____________, $____________ and $____________.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
All Fixed Income Funds. In placing orders for the purchase and sale of
portfolio securities for each Fund, Back Bay Advisors 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 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 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
or Loomis Sayles. The services may also be used by Back Bay Advisors or Loomis
Sayles in connection with their other advisory accounts and in some cases may
not be used with respect to the Funds.
All Equity 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.
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
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<PAGE>
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.
Star Advisers Fund and Star Worldwide Fund (segments advised by Founders).
It is the policy of Founders, 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 the 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 where a large block is
involved, the availability of the broker to stand ready to execute possibly
difficult transactions for the 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, Founders may execute transactions with brokerage firms which
provide research services and products to Founders. 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 Founders in furtherance of its investment advisory responsibilities to
its advisory clients. Such services and products permit Founders 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. Founders may receive a benefit from these research
services and products which is not passed on, in the form of a direct monetary
benefit, to the segment of the Fund. If Founders 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, Founders may allocate the
cost of such service or product accordingly. The portion of the product or
service that Founders 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 Founders. Subject to the
standards outlined in this and the preceding paragraph, Founders may arrange to
execute a specified dollar amount of
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<PAGE>
transactions through a broker that has provided research products or services.
Such arrangements do not constitute commitments by Founders 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 Founders in providing
investment advice to any of the funds or clients it advises. Likewise,
information made available to Founders 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 the segment of the Fund.
Because selection of executing brokers is not based solely on net
commissions, the segment of the Fund advised by Founders may pay an executing
broker a commission higher than that which might have been charged by another
broker for that transaction. Founders 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 Founders 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 Founders, better
prices and execution are available elsewhere.
All Equity Funds advised by Loomis Sayles. In placing orders for the
purchase and sale of securities for the Balanced Fund, International Equity
Fund, Value Fund, Equity Income Fund and the segments of the Star Advisers Fund
and 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 these Funds or segments 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 these Funds or segments to pay such
greater commissions is also subject to such policies as the trustees of the
Trusts may adopt from time to time.
Growth Opportunities Fund and Capital Growth Fund (advised by Westpeak).
In placing orders for the purchase and sale of securities, Westpeak always seeks
best execution. Westpeak each 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 price and execution. This does not necessarily mean that the lowest
available brokerage commission will be paid. Westpeak 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. Westpeak may cause
the Fund to pay a broker-dealer that provides brokerage and research services to
Westpeak an amount of commission for effecting a securities transaction for the
Fund in excess of the amount another broker-dealer would have charged effecting
that transaction. Westpeak 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 Westpeak's overall responsibilities to the Fund and
its other clients. Westpeak's authority to cause the Fund it manages to pay such
greater commissions is also subject to such policies as the trustees of the Fund
may adopt from time to time.
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<PAGE>
Star Advisers, 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 Advisers, 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 Advisers, 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 Advisers, 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.
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<PAGE>
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.
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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
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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 NEICOP 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 Municipal Income Fund currently offers two classes of
shares, the Government Securities and Growth Funds each currently offer three
classes of shares and the Capital Growth, Balanced, Value, International Equity,
Star Advisers, Star Worldwide, Star Small Cap, 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
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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.
New England Funds Trust III was organized as a Massachusetts business
trust pursuant to a Declaration of Trust dated August 22, 1995. The Trust has
two separate portfolios (the New England Bullseye Fund and the Equity Income
Fund) each currently offering four classes of shares, Classes A, B, C and Y.
The Declarations of Trust of New England Funds Trust I, New England Funds
Trust II and New England Funds Trust III 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 preceding 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
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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 the 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
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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
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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 United 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 NEFSCO 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 all 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 NEFSCO, or, if communicated by a
telephone exchange or order, at the date of telephoning provided a signed
Letter, in good order, reaches NEFSCO 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
38
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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"] if 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 current and retired employees of the Trusts' investment
advisers or subadvisers, New England Funds, L.P., 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 that have selling arrangements with
New England Funds, L.P.; the spouse, parents, children, siblings, in-laws,
grandparents or grandchildren of the persons listed above and any trust,
pension, profit sharing or other benefit plan for any of the foregoing persons
and any separate account of NELICO or MetLife or any insurance 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
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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. NEFSCO 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 NEFSCO for
investment in the Fund. A plan may be opened with an initial investment of $100
or more and thereafter regular monthly checks of $100 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 NEFSCO upon
notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any time by the
investor by written notice to NEFSCO, 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.
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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, at least $500 for IRAs and at
least $100 for any 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.
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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 already paid on their Adjustable
Rate Fund shares and the higher sales charge of the fund into which they are
exchanging at the time of the exchange. When an exchange is made from the Class
A, Class B or Class C shares of one fund to the same class of shares of another
fund, the shares received by the shareholder in exchange will have the same age
characteristics as the shares exchanged. The age of the shares determines the
expiration of the CDSC and, for the Class B shares, the conversion date. If you
own Class A, Class B or Class C shares, you may also elect to exchange your
shares of any fund for shares of the same class of the Money Market Funds. On
all exchanges of Class A, B or C shares into the Money Market Funds, the
exchange stops the aging period relating to the CDSC, if any, and, for Class B
shares only, conversion to Class A shares. The aging resumes only when an
exchange is made back into shares of a fund of the Trusts. If you own Class Y
shares, you may exchange those shares for Class Y shares of other funds or for
Class A shares of the Money Market Funds. These options are summarized in the
Prospectus. An exchange may be effected, provided that neither the registered
name nor address of the accounts are different and provided that a certificate
representing the shares being exchanged has not been issued to the shareholder,
by (1) a telephone request to the fund or New England Funds Service Corporation
at 1-800-225-5478 or (2) a written exchange request to the fund or New England
Funds Service Corporation, 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 minimum amount for an exchange is $1,000.
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.
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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.
New England Equity Income Fund seeks current income and capital growth.
New England Bullseye Fund seeks
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 Tax Free Income 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.
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Money Market Funds:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum 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 February 15, 1998, 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 NEFSCO is notified in writing to terminate the plan. Exchanges may be made
in amounts of $100 or more. The Service Options Form is available from NEFSCO 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 and Class C 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 or Class C
shares, the calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, for Class B shares 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. For Class C shares, it will be assumed that the redemption is first of
any shares that have been in the shareholder's fund account for over a year, and
second of any shares that have been in the shareholder's fund account for under
a year. 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).
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For Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the first year, 3% if
redemption occurs within the second year or third year, 2% if redemption occurs
within the fourth year, 1% if redemption occurs within the 5th year and no CDSC
for redemptions after the fifth year.
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.
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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.
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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, Equity Income 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
47
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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).
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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 3000 Index is a capitalization weighted index which is
comprised of 3000 of the largest capitalized U.S. domiciled companies whose
common stock traded in the United States on the New York Stock Exchange,
American Stock Exchange and National Association of Securities Dealers Automated
Quotations. 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.
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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 NEICOP, its structure, goals
and objectives and the advisory subsidiaries of NEICOP, 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 NEICOP, 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.
Investments At 8% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- -------
$ 50 3,698 9,208 17,417 29,647 47,868 75,015
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
Investments At 10% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- -------
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
The Funds' advertising and sales literature may refer to historical,
current and prospective political, social, economic and financial trends and
developments that affect domestic and international investment as it relates to
any of the New England Funds. The Funds' advertising and sales literature may
include historical and current performance and total returns of investment
alternatives to the New England Funds. For example, the Adjustable Rate Fund's
advertising and sales literature may include the historical and current
performance and total returns of bank certificates of deposits, bank and mutual
fund money market accounts and other income investments; and the advertising and
sales literature of any of the New England Funds, but particularly that of 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
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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, the distributor, and the 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
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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 the 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) distribute
at least 90% of its dividend, interest and certain other taxable income each
year; and (iii) 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
designated by the Fund as deriving from net gains on securities held for more
than one year but not more than 18 months ("28% Rate Gain") and from net gains
on securities held for more than 18 months ("20% Rate Gain") will be taxable to
shareholders as such, 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.
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<PAGE>
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. Each Fund may also elect to treat the
passive foreign investment company as a "qualified electing fund." 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 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. In
general, any gain realized upon a taxable disposition of shares will be treated
as 28% Rate Gain if the shares have been held for more than one year but not
more than 18 months, and as 20% Rate Gain if the shares have been held for than
18 months. Otherwise the gain on the sale, exchange or redemption of fund shares
will be treated as short-term capital gain. 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 and the related reports of
independent accountants included in the Funds' annual reports for the year ended
December 31, 1997 are incorporated herein by reference.
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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.
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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.
FITCH INVESTOR SERVICES, INC.
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.
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APPENDIX B
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates Fortune
Adam Smith's Money World Fox Network and affiliates
America On Line Fund Action
Anchorage Daily News Fund Decoder
Atlanta Constitution Global Finance
Atlanta Journal (the) Guarantor
Arizona Republic Hartford Courant
Austin American Statesman Houston Chronicle
Baltimore Sun INC
Bank Investment Marketing Indianapolis Star
Barron's Individual Investor
Bergen County Record (NJ) Institutional Investor
Bloomberg Business News International Herald Tribune
B'nai B'rith Jewish Monthly Internet
Bond Buyer Investment Advisor
Boston Business Journal Investment Company Institute
Boston Globe Investment Dealers Digest
Boston Herald Investment Profiles
Broker World Investment Vision
Business Radio Network Investor's Daily
Business Week IRA Reporter
CBS and affiliates Journal of Commerce
CFO Kansas City Star
Changing Times KCMO (Kansas City)
Chicago Sun Times KOA-AM (Denver)
Chicago Tribune LA Times
Christian Science Monitor Leckey, Andrew (syndicated column)
Christian Science Monitor News Service Lear's
Cincinnati Enquirer Life Association News
Cincinnati Post Lifetime Channel
CNBC Miami Herald
CNN Milwaukee Sentinel
Columbus Dispatch Money
CompuServe Money Maker
Dallas Morning News Money Management Letter
Dallas Times-Herald Morningstar
Denver Post Mutual Fund Market News
Des Moines Register Mutual Funds Magazine
Detroit Free Press National Public Radio
Donoghues Money Fund Report National Underwriter
Dorfman, Dan (syndicated column) NBC and affiliates
Dow Jones News Service New England Business
Economist New England Cable News
FACS of the Week New Orleans Times-Picayune
Fee Adviser New York Daily News
Financial News Network New York Times
Financial Planning Newark Star Ledger
Financial Planning on Wall Street Newsday
Financial Research Corp. Newsweek
Financial Services Week Nightly Business Report
Financial World Orange County Register
Fitch Insights Orlando Sentinel
Forbes Palm Beach Post
Fort Worth Star-Telegram Pension World
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Pensions and Investments Standard & Poor's Stock Guide
Personal Investor Stanger's Investment Advisor
Philadelphia Inquirer Stockbroker's Register
Porter, Sylvia (syndicated column) Strategic Insight
Portland Oregonian Tampa Tribune
Prodigy Time
Public Broadcasting Service Tobias, Andrew (syndicated column)
Quinn, Jane Bryant (syndicated column) Toledo Blade
Registered Representative UPI
Research Magazine US News and World Report
Resource USA Today
Reuters USA TV Network
Rocky Mountain News Value Line
Rukeyser's Business (syndicated column) Wall St. Journal
Sacramento Bee Wall Street Letter
San Diego Tribune Wall Street Week
San Francisco Chronicle Washington Post
San Francisco Examiner WBZ
San Jose Mercury WBZ-TV
Seattle Post-Intelligencer WCVB-TV
Seattle Times WEEI
Securities Industry Management WHDH
Smart Money Worcester Telegram
St. Louis Post Dispatch World Wide Web
St. Petersburg Times Worth Magazine
Standard & Poor's Outlook WRKO
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APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to NEICOP 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 NEICOP affiliates including, but not limited to,
New England Investment Associates, L. P. ("NEIC"), 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 NEICOP 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, 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:
o Specific and general assessments and forecasts regarding U.S. and world
economies, and the economics of specific nations and their impact on the
New England Funds;
o Specific and general investment emphasis, specialties, fields of
expertise, competencies, operations and functions;
o Specific and general investment philosophies, strategies, processes,
techniques and types of analysis;
o 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;
o The corporate histories, founding dates and names of founders of the
entities;
o Awards, honors and recognition given to the entities;
o The names of those with ownership interest and the percentage of ownership
interest;
o The industries and sectors from which clients are drawn and specific
client names and background information on current individual, corporate
and institutional clients, including pension and profit sharing plans;
o Current capitalizations, levels of profitability and other financial and
statistical information;
o Identification of portfolio managers, researchers, economists, principals
and other staff members and employees; and
o The
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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.
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o Current and historical statistics regarding:
-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 sub-adviser
o 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, income oriented, risk management or other
strategies
-the manner and degree to which the strategy is pursued
-whether the strategy is conservative, moderate or extreme and an
explanation of other features and attributes
-the types and characteristics of investments sought and specific
portfolio holdings
-the actual or potential impact and result from strategy implementation
-through its own areas of expertise and operations, the value added by
sub-advisers to the management process
-the disciplines it employs, e.g., in the case of Loomis Sayles, the
strict buy/sell guidelines and focus on sound value it employs, and goals
and benchmarks that it establishes in management, e.g., CGM pursues
growth 50% above the S&P 500
-the systems utilized in management, the features and characteristics of
those systems and the intended results from such computer analysis, e.g.,
Westpeak's efforts to identify overvalued and undervalued issues.
o 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. 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' advisers and
sub-advisers, 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 NEICOP and its
affiliates:
NEICOP is part of an affiliated group including NEIC, a publicly traded
company listed on the New York Stock Exchange. NEICOP has 14 principal
subsidiary or affiliated asset management firms, which collectively had more
than $120 billion of assets under management as of September 30, 1997. In
addition, promotional materials may include:
o Specific and general references to New England Funds multi-manager
approach through NEICOP 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 NEICOP 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."
60
<PAGE>
Financial Adviser Services ("FAS"), a division of NEICOP, may be
referenced in Fund advertising and promotional literature concerning the
marketing services it provides to NEICOP-affiliated fund groups including: New
England Funds, Loomis Sayles Funds, Oakmark Funds and Reich & Tang Funds.
FAS will provide marketing support to NEICOP 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:
o Specific and general references to industry statistics regarding 401(k)
and retirement plans including historical information, 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.
o Specific and general references 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.
o 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 regulations. 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; and
-current and prospective ERISA regulation and requirements.
o 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
61
<PAGE>
-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.
o 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.
o 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.
62
<PAGE>
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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, 1997, 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, 1997
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, 1997, 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
63
<PAGE>
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, 1997
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, 1997, 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.
64
<PAGE>
65
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) None.
1
<PAGE>
Registration Nos. 2-11101
811-242
(b) Exhibits:
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. 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 & Company, L.P. ("Loomis
Sayles") is incorporated herein by reference to Post-Effective
Amendment No. 106 to this Registration Statement, filed on April 18,
1997.
(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:
2
<PAGE>
Registration Nos. 2-11101
811-242
(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 incorporated herein
by reference to Post-Effective Amendment No. 106 to this
Registration Statement, filed on April 18, 1997.
(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 incorporated
herein by reference to Post-Effective Amendment No. 106 to this
Registration Statement, filed on April 18, 1997.
(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 incorporated
herein by reference to Post-Effective Amendment No. 106 to this
Registration Statement, filed on April 18, 1997.
(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 incorporated herein by
reference to Post-Effective Amendment No. 106 to this Registration
Statement, filed on April 18, 1997.
3
<PAGE>
Registration Nos. 2-11101
811-242
(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
incorporated herein by reference to Post-Effective Amendment No. 106
to this Registration Statement, filed on April 18, 1997.
10.(a)Opinion and consent of counsel with respect to the Registrant's New
England Growth Opportunities Fund, New England High Income Fund, New
England Limited Term U.S. Government Fund, and New England
Massachusetts Tax Free Income Fund is incorporated herein by
reference to Post-Effective Amendment No. 106 to this Registration
Statement, filed on April 18, 1997.
(b) Opinion and consent of counsel with respect to the Registrant's New
England Adjustable Rate U.S. Government Fund is incorporated by
reference to Post-Effective Amendment No. 88 to this Registration
Statement, filed on August 2, 1991.
(c) Opinions and consents of counsel with respect to the Registrant's
New England Intermediate Term Tax Free Fund of California and New
England Intermediate Term Tax Free Fund of New York are incorporated
herein by reference to Post-Effective Amendment No. 106 to this
Registration Statement, filed on April 18, 1997.
(d) Opinion and consent of counsel with respect to offering multiple
classes of shares for all series of the Registrant is incorporated
herein by reference to Post-Effective Amendment No. 106 to this
Registration Statement, filed on April 18, 1997.
(e) Opinion and consent of counsel with respect to the Registrant's Rule
24e-2 Notice is incorporated herein by reference to Post-Effective
Amendment No. 106 to this Registration Statement, filed on April 18,
1997.
(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. None.
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.
4
<PAGE>
Registration Nos. 2-11101
811-242
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 incorporated herein by reference to
Post-Effective Amendment No. 106 to this Registration Statement,
filed on April 18, 1997.
18. Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940
as amended effective January 31, 1997 is incorporated herein by
reference to Post-Effective Amendment No. 106 to this Registration
Statement, filed on April 18, 1997.
19.(a)Powers of Attorney designating Edward A. Benjamin, Frank Nesvet and
John E. Pelletier as attorneys to sign for Henry L.P. Schmelzer are
filed herein.
(b) Powers of Attorney designating Edward A. Benjamin, Frank Nesvet,
Henry L. P. Schmelzer and John E. Pelletier as attorneys to sign for
Graham T. Allison, Daniel M. Cain, Kenneth J. Cowan, Richard Darman,
Sandra O. Moose, John A. Shane, Peter S. Voss and Pendelton P. White
are filed herein.
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 May 31, 1997.
5
<PAGE>
Registration Nos. 2-11101
811-242
Number of Record Holders
------------------------
Title of Series Class A Class B Class C Class Y
- --------------- ------- ------- ------- -------
New England Adjustable Rate U.S.
Government Fund 3,049 318 --- ---
New England Growth Opportunities Fund 10,418 7,504 372 ---
New England Limited Term U.S. Government
Fund 10,522 1,248 466 5
New England High Income Fund 2,753 1,905 --- ---
New England Massachusetts Tax Free
Income Fund 2,848 298 --- ---
New England Intermediate Term Tax Free
Fund of California 534 166 --- ---
New England Tax Free Income Fund
of New York 544 116 --- ---
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 Income 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 Operating
Partnership, L.P. ("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):
Name and Office with Name and Address of Nature of
Back Bay Advisors Other Affiliations Connection
----------------- ------------------ ----------
Back Bay Advisors, Inc. None None
General Partner
Charles T. Wallis, NEF Corporation Director
President and Chief 399 Boylston Street
Executive Officer Boston, MA 02116
Back Bay Advisors, Inc. President, Chief
399 Boylston Street Executive Officer and
Boston, MA 02116 Director
6
<PAGE>
Registration Nos. 2-11101
811-242
Charles G. Glueck, None None
Senior Vice President
Scott A. Millimet, Back Bay Advisors, Inc. Executive Vice
Executive Vice President President
Edgar M. Reed, Aetna Capital Management* Head of Fixed Income
Executive Vice President 151 Farmington Avenue Management Group
and Chief Investment Hartford, CT 06156
Officer
J. Scott Nicholson, None None
Senior Vice President
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
(b) NEFM, a registered investment adviser that is wholly owned by NEICOP,
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):
Name and Office with Name and Address of Nature of
NEFM Other Affiliations Connection
---- ------------------ ----------
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
7
<PAGE>
Registration Nos. 2-11101
811-242
<TABLE>
<CAPTION>
<S> <C> <C>
New England Funds Service Chief Executive Officer
Corporation ("NEFSCO")
399 Boylston Street
Boston, MA 02116
Back Bay Advisors, Inc. Director
New England Securities Director
Corporation*
399 Boylston Street
Boston, MA 02116
Frank Nesvet, New England Funds, L.P. Managing Director, Senior
Senior Vice President, Vice President and Chief
Chief Financial Officer Financial Officer
and Treasurer
NEF Corporation Senior Vice President,
Chief Financial Officer and
Treasurer
NEFSCO Senior Vice President and
Chief Financial Officer
John E. Pelletier NEF Corporation Senior Vice President,
Senior Vice President, General Counsel, Secretary
General Counsel, Assistant and Clerk
Secretary and Clerk
New England Funds, L.P. Managing Director, Senior
Vice President, General
Counsel, Secretary and Clerk
NEFSCO Senior Vice President,
General Counsel and Chief
Legal Officer
Funds Distributor* Vice President and
Boston, MA General Counsel
Bruce R. Speca, NEF Corporation Executive Vice President
Executive Vice President
New England Funds, L.P. Managing Director and
Executive Vice President
NEFSCO Executive Vice President
and Chief Operating Officer
Peter H. Duffy, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
</TABLE>
8
<PAGE>
Registration Nos. 2-11101
811-242
Martin G. Dyer, NEF Corporation Vice President and
Vice President and Assistant Secretary
Assistant Secretary
New England Funds, L.P. Vice President and
Assistant Secretary
NEFSCO Vice President and Chief
Compliance Officer
Ralph M. Greggs, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
(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):
Name and Office with Name and Address of Nature of
Westpeak Other Affiliations Connection
-------- ------------------ ----------
Westpeak Investment None None
Advisors, Inc.
General Partner
Gerald H. Scriver None None
President, Chief Executive
Officer and Chief
Investment Officer
Edward N. Wadsworth NEIC Executive Vice President,
Clerk, Secretary, Chief 399 Boylston Street Clerk, Secretary and
Legal Officer Boston, MA 02116 General Counsel
NEIC Inc. Executive Vice President,
399 Boylston Street Clerk, Secretary and
Boston, MA 02116 General Counsel
Marlborough Capital Assistant Clerk
Advisors, Inc.
399 Boylston Street
Boston, MA 02116
New England Investment Secretary
Associates, Inc. ("NEIA")
399 Boylston Street
Boston, MA 02116
Robert A. Franz None None
Senior Vice President
9
<PAGE>
Registration Nos. 2-11101
811-242
Philip J. Cooper None None
Vice President Portfolio
Management
(d) Loomis Sayles, the subadviser of the Registrant's New England High Income
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:
Name and Office with Name and Address of Nature of
Loomis Sayles Other Affiliations Connection
------------- ------------------ ----------
Loomis Sayles & Company, None None
Incorporated ("LSCI")
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
Carol C. McMurtie, None None
Vice President
Tricia H. Mills, None None
Vice President
Jeffery C. Petherick, None None
Vice President
10
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Registration Nos. 2-11101
811-242
11
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Registration Nos. 2-11101
811-242
Item 29. Principal Underwriter
(a) New England Funds, L.P., the Registrant's principal underwriter, also
serves as principal underwriter for:
New England Funds Trust I
New England Funds Trust III
New England Tax Exempt Money Market Trust
New England Cash Management Trust
(b) The general partner and officers of the Registrant's principal
underwriter, New England Funds, L.P., and their address are as follows:
Positions and Offices with Positions and Offices
Name Principal Underwriter with Registrant
---- --------------------- ---------------
NEF Corporation General Partner None
Henry L.P. Schmelzer Managing Director, President President and Trustee
and Chief Executive Officer
Bruce R. Speca Managing Director and Executive Vice President
Executive Vice President
John E. Pelletier Managing Director, Senior Secretary
Vice President, General
Counsel, Secretary and Clerk
Frank Nesvet Managing Director, Senior Treasurer
Vice President and Chief
Financial Officer
James H. Davis Managing Director and Senior None
Vice President
Caren I. Leedom Managing Director and Senior None
Vice President
Elizabeth P. Burns Vice President None
Peter H. Duffy Vice President None
Martin G. Dyer Vice President and Assistant None
Secretary
Tracy A. Fagan Vice President None
Raymond K. Girouard Senior Vice President, None
reasurer and Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Marie G. McKenzie Vice President None
12
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Registration Nos. 2-11101
811-242
Robert E. O'Hare Vice President, Senior None
Counsel, Assistant Secretary
and Assistant Clerk
Bernard M. Shavelson Vice President None
Kristine E. Swanson Vice President None
Beatriz A. Pina-Smith Vice President and Assistant None
Controller
Sharon Wratchford Vice President None
The principal business address of all the above persons or entities is 399
Boylston Street, Boston, MA 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents required by the
specified rules:
(a) Registrant
Rule 31a-1(b)(4)
Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a)
Rule 31a(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(c) (i) For series of the Registrant managed by Back Bay Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
Back Bay Advisors, L.P.
New England Funds Management L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); 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)
13
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Registration Nos. 2-11101
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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.
14
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Registration Nos. 2-11101
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NEW ENGLAND FUNDS TRUST II
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment No. 108 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 27th day of February, 1998.
New England Funds Trust II
By: PETER S. VOSS*
------------------------------
Peter S. Voss
Chief Executive Officer
*By: /s/JOHN E. PELLETIER
------------------------------
John E. Pelletier
Attorney-In-Fact
15
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Registration Nos. 2-11101
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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
Signature Title Date
--------- ----- ----
PETER S. VOSS* Chairman of the Board; February 27, 1998
- ------------------------ Chief Executive Officer;
Peter S. Voss Principal Executive
Officer; Trustee
/s/ Frank Nesvet
- ------------------------
Frank Nesvet Treasurer February 27, 1998
HENRY L. P. SCHMELZER* Trustee February 27, 1998
- ------------------------
Henry L. P. Schmelzer
GRAHAM T. ALLISON, JR.* Trustee February 27, 1998
- ------------------------
Graham T. Allison, Jr.
DANIEL M. CAIN* Trustee February 27, 1998
- ------------------------
Daniel M. Cain
KENNETH J. COWAN* Trustee February 27, 1998
- ------------------------
Kenneth J. Cowan
RICHARD DARMAN* Trustee February 27, 1998
- ------------------------
Richard Darman
SANDRA O. MOOSE* Trustee February 27, 1998
- ------------------------
Sandra O. Moose
JOHN A. SHANE* Trustee February 27, 1998
- ------------------------
John A. Shane
PENDELTON P. WHITE* Trustee February 27, 1998
- ------------------------
Pendleton P. White
*By: /s/ John E. Pelletier
------------------------
John E. Pelletier
Attorney-In-Fact
February 27, 1998
16
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Registration Nos. 2-11101
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NEW ENGLAND FUNDS TRUST II
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
-------------- -------
EX - 19(a) Powers of Attorney
EX - 19(b) Powers of Attorney
17
POWER OF ATTORNEY
I, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet and
John E. Pelletier, each of them singly, my true and lawful attorneys, with full
power to them and each of them to sign for me, and in my name in the capacity
indicated below, any and all registration statements and any and all amendments
thereto to be filed with the Securities and Exchange Commission for the purpose
of registering from time to time investment companies of which I am now or
hereafter a Director or Trustee and to register the shares of such companies and
generally to do all such things in my name and in my behalf to enable such
registered investment companies to comply with the provisions of the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and
all requirements and regulations of the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by my said
attorneys and any and all registration statements and amendments thereto.
Witness my hand on the 31st day of October, 1997.
/s/ HENRY L.P. SCHMELZER
-----------------------------------
Henry L.P. Schmelzer - Trustee
POWER OF ATTORNEY
We, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet,
Henry L.P. Schmelzer and John E. Pelletier, each of them singly, our true and
lawful attorneys, with full power to them and each of them to sign for us, and
in our names in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which we are now or hereafter a Director or Trustee and
to register the shares of such companies and generally to do all such things in
our names and on our behalf to enable such registered investment companies to
comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as it may be signed by our said attorneys and any and all
registration statements and amendments thereto.
Witness our hands on the 31st day of October, 1997.
/s/ GRAHAM T. ALLISON /s/ SANDRA O. MOOSE
- -------------------------- --------------------------
Graham T. Allison - Trustee Sandra O. Moose - Trustee
/s/ DANIEL M. CAIN /s/ JOHN A. SHANE
- -------------------------- --------------------------
Daniel M. Cain - Trustee John A. Shane
/s/ KENNETH J. COWAN /s/ PETER S. VOSS
- -------------------------- --------------------------
Kenneth J. Cowan - Trustee Peter S. Voss - Trustee
/s/ RICHARD DARMAN /s/ PENDELTON P. WHITE
- -------------------------- --------------------------
Richard Darman - Trustee Pendelton P. White - Trustee
