<PAGE>
Registration Nos. 2-11101
811-242
- - - - - - - - - - - - - - -
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- - - - - - - - - - - - - - -
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 109 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
Amendment No. 43 [X]
(Check appropriate box or boxes)
- - - - - - - - - - - - - - -
NEW ENGLAND FUNDS TRUST II
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices, including Zip Code)
(617) 578-1388
(Registrant's Telephone Number, including Area Code)
- - - - - - - - - - - - - - -
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)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<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
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>
[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND EQUITY INCOME FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1998
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.
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund and New England Value Fund, each a
series of New England Funds Trust I, New England Growth Opportunities Fund, a
series of New England Funds Trust II, and New England Equity Income Fund, a
series of New England Funds Trust III, are separate mutual funds (the "Funds"
and each a "Fund"). New England Funds Trust I, New England Funds Trust II and
New England Funds Trust III are referred to in this Prospectus as the "Trusts."
Each Fund offers three classes of shares to the general public (Classes A, B and
C), except as described in the next paragraph. The offering price is based on
the net asset value per share next determined after an order is received. Class
A share purchases generally involve a sales charge at the time of purchase. No
initial sales charge applies to Class B or Class C share purchases. A contingent
deferred sales charge (a "CDSC"), however, is imposed upon certain redemptions
of Class B and Class C shares. Class B shares automatically convert to Class A
shares eight years after purchase. Class C shares do not have a conversion
feature. Class B and Class C shares bear higher annual 12b-1 fees than Class A
shares. See "Buying Fund Shares -- Sales Charges." Through a separate
Prospectus, each Fund, except as described in the next paragraph, also offers an
additional class of shares, Class Y shares, to certain institutional investors.
To obtain more information about Class Y shares, please call New England Funds,
L.P. (the "Distributor") toll-free at 1-800-225-5478.
New England Growth Fund currently offers only Class A and Class B shares, but
may at a later date offer Class C shares to the general public and/or Class Y
shares to certain institutional investors. If and when New England Growth Fund
offers such additional classes of shares for sale, the Fund will supplement its
Prospectus.
This Prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Funds dated May
1, 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., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116, or call toll free at
1-800-225-5478. In addition, the SEC maintains a Web site (http://www.sec.gov)
that contains the Statement, materials 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.
<PAGE>
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TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly
3 Financial Highlights operating expenses.
Historical information on
the Funds' performance.
- -------------------------------------------------------------------------------
INVESTMENT STRATEGY
13 Investment Objectives The investment goal for
13 Nvest Companies and the each Fund.
Funds' Advisers and Subadvisers
14 How the Funds Pursue Their Objectives
14 Fund Investments
- -------------------------------------------------------------------------------
16 INVESTMENT RISKS It is important to
understand the risks
inherent in a Fund before
you invest.
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23 FUND MANAGEMENT
- -------------------------------------------------------------------------------
26 SUBADVISER'S PAST PERFORMANCE
- -------------------------------------------------------------------------------
BUYING FUND SHARES
27 Minimum Investment Everything you need to know
27 6 Ways to Buy Fund Shares to open and add to a New
[] Through your investment dealer England Funds account.
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
28 Sales Charges
31 Reduced Sales Charges (Class A Shares Only)
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OWNING FUND SHARES
33 Exchanging Among New England Funds New England Funds offers
three convenient ways to
exchange Fund shares.
34 Fund Dividend Payments
- -------------------------------------------------------------------------------
SELLING FUND SHARES
35 4 Ways to Sell Fund Shares How to withdraw money or
[] Through your investment dealer close your account.
[] By telephone
[] By mail
[] By Systematic Withdrawal Plan
37 Repurchase Option (Class A Shares Only) An opportunity to reinvest
your redemption proceeds
within 120 days for no
sales charge.
- -------------------------------------------------------------------------------
FUND DETAILS
38 How Fund Share Price is Determined Additional information you
39 Income Tax Considerations may find important.
40 The Funds' Expenses
41 Performance Criteria
41 Additional Facts About the Funds
44 Glossary of Terms
<PAGE>
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FUND EXPENSES AND FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class A, B and C shares of the Funds and estimated annual expenses for the
Funds' Class A, B and C shares. The Example on the following page shows the
cumulative expenses attributable to a hypothetical $1,000 investment in Class A,
B and C shares of the Funds for the periods specified.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
ALL FUNDS
--------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(1)(2) ..................... 5.75% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or redemption
proceeds, as applicable)(2) ................................... (3) 5.00% 1.00%
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying Fund Shares -- Reduced
Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to certain purchases of Class A shares
greater than $1,000,000 redeemed within 1 year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
BALANCED FUND INTERNATIONAL EQUITY FUND EQUITY INCOME FUND
----------------------------- --------------------------------- -----------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees (in
the case of New
England International
Equity Fund and New
England Equity Income
Fund, after voluntary
fee waiver and/or
expense reduction) 0.73% 0.73% 0.73% 0.76%** 0.76%** 0.76%** 0.00%*** 0.00%*** 0.00%***
12b-1 Fees ......... 0.25 1.00* 1.00* 0.25 1.00%* 1.00%* 0.25 1.00* 1.00*
Other Expenses (in
the case of New
England Equity
Income Fund, after
voluntary fee
waiver and expense
reduction) ....... 0.31 0.31 0.31 0.99 0.99 0.99 1.25*** 1.25*** 1.25***
Total Fund Operating
Expenses (in the
case of New England
International Equity
Fund and New England
Equity Income Fund,
after voluntary fee
waiver and/or expense
reduction)........ 1.29 2.04 2.04 2.00** 2.75** 2.75** 1.50*** 2.25*** 2.25***
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND GROWTH NEW ENGLAND
CAPITAL GROWTH FUND VALUE FUND OPPORTUNITIES FUND GROWTH FUND
-------------------------- ----------------------------- -------------------------- ----------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.75% 0.75% 0.75% 0.72% 0.72% 0.72% 0.69% 0.69% 0.69% 0.67% 0.67%
12b-1 Fees ..... 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25 1.00*
Other Expenses . 0.45 0.45 0.45 0.28 0.28 0.28 0.31 0.31 0.31 0.20 0.20
Total Fund
Operating
Expenses ..... 1.45 2.20 2.20 1.25 2.00 2.00 1.25 2.00 2.00 1.12 1.87
* 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 by the Fund's adviser, Management Fees would be 0.90% for all classes and Total Fund Operating
Expenses would be 2.14% for Class A shares, 2.89% for Class B shares and 2.89% for Class C 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, Other Expenses and Total Fund
Operating Expenses would be 0.70%, 2.15% and 3.10%, respectively, for Class A shares and 0.70%, 2.15% and 3.85%, respectively,
for both Class B and Class C shares. These voluntary limitations can be terminated by the Fund's adviser at any time.
See "Fund Management."
</TABLE>
<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 period end. The 5%
return and expenses in the Example should not be considered indicative of actual
or expected Fund performance or expenses, both of which may be more or less than
those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND INTERNATIONAL EQUITY FUND
-------------------------------- -------------------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- ----------- ----------- -------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
1 year ................ $ 71 $ 72 $ 22 $ 32 $ 22 $ 70 $ 71 $ 21 $ 31 $ 21 $ 77 $ 78 $ 28 $ 38 $ 28
3 years ............... $101 $ 99 $ 69 $ 69 $ 69 $ 96 $ 94 $ 64 $ 64 $ 64 $117 $115 $ 85 $ 85 $ 85
5 years ............... $132 $138 $118 $118 $118 $124 $130 $110 $110 $110 $159 $165 $145 $145 $145
10 years* ............. $221 $235 $235 $253 $253 $204 $218 $218 $237 $237 $277 $290 $290 $308 $308
<CAPTION>
NEW ENGLAND NEW ENGLAND GROWTH NEW ENGLAND
VALUE FUND OPPORTUNITIES FUND GROWTH FUND
-------------------------------- -------------------------------- -------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B
-------- ----------- ----------- -------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
1 year ............................. $ 70 $ 70 $ 20 $ 30 $ 20 $ 70 $ 70 $ 20 $ 30 $ 20 $ 68 $ 69 $ 19
3 years ............................ $ 95 $ 93 $ 63 $ 63 $ 63 $ 95 $ 93 $ 63 $ 63 $ 63 $ 91 $ 89 $ 59
5 years ............................ $122 $128 $108 $108 $108 $122 $128 $108 $108 $108 $116 $121 $101
10 years* .......................... $200 $214 $214 $233 $233 $200 $214 $214 $233 $233 $186 $200 $200
<CAPTION>
NEW ENGLAND
EQUITY INCOME FUND
--------------------------------
CLASS A CLASS B CLASS C
------- --------- ---------
<S> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year ........................................................................................ $ 72 $ 73 $ 23 $ 33 $ 23
3 years ....................................................................................... $102 $100 $ 70 $ 70 $ 70
5 year ........................................................................................ $135 $140 $120 $120 $120
10 years* ..................................................................................... $226 $240 $240 $258 $258
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years; therefore, Class B amounts are calculated using Class A
expenses in years 9 and 10.
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management," "The Funds" Expenses" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A, B and C shares of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 3 through 12 have been included in
financial statements for the Funds, which have been examined by Price Waterhouse
LLP, independent accountants (and, for periods prior to 1997 for New England
Growth Opportunities Fund, by Coopers & Lybrand L.L.P., independent
accountants). The reports of Price Waterhouse LLP and Coopers & Lybrand L.L.P.
are incorporated by reference in Part II of the Statement and may be obtained by
shareholders. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in Part II
of the Statement. Each Fund's annual report contains additional performance
information and is available upon request and without charge.
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
AUG. 3(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------------------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $14.23 $15.27 $15.02 $18.41 $19.27
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.02 0.00 (0.08) (0.11)(e) (0.14)(f) (0.18)(f)
Net gain or (loss) on investments
(both realized and unrealized) 1.84 1.12 (0.17) 4.74 3.22 3.43
------ ------ ------ ------ ------ ------
Total from investment operations 1.86 1.12 (0.25) 4.63 3.08 3.25
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) 0.00 0.00 0.00 0.00 0.00
Distributions from net realized
capital gains (0.11) (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------ ------
Total distributions (0.13) (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------ ------
Net asset value, end of period $14.23 $15.27 $15.02 $18.41 $19.27 $19.95
====== ====== ====== ====== ====== ======
Total return (%)(c) 14.9 7.9 (1.6) 30.7 17.1 17.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $34,772 $98,735 $95,803 $123,504 $141,326 $149,734
Ratio of operating expenses to
average net assets(%)(d) 1.00(b) 1.23 1.63 1.61 1.50 1.45
Ratio of net investment income
(loss) to average
net assets (%) 0.74(b) (0.03) (0.45) (0.67) (0.71) (0.87)
Portfolio turnover rate (%) 15 77 82 69 74 48
Average commission rate (g) -- -- -- -- $0.0509 $0.0506
<CAPTION>
CLASS B CLASS C
------------------------------------------------------ --------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------- --------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.79 $15.24 $14.89 $18.09 $18.74 $14.89 $18.08 $18.74
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.00 (0.08) (0.16)(e) (0.28)(f) (0.32)(f) (0.09)(e) (0.28)(f) (0.34)(f)
Net gain or (loss) on investments
(both realized and unrealized) 0.53 (0.27) 4.60 3.15 3.25 4.52 3.16 3.28
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 0.53 (0.35) 4.44 2.87 2.93 4.43 2.88 2.94
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from net realized
capital gains (0.08) 0.00 (1.24) (2.22) (2.57) (1.24) (2.22) (2.57)
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.08) 0.00 (1.24) (2.22) (2.57) (1.24) (2.22) (2.57)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $15.24 $14.89 $18.09 $18.74 $19.10 $18.08 $18.74 $19.11
====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 3.6 (2.3) 29.7 16.2 15.9 29.7 16.2 15.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $6,748 $15,390 $26,234 $37,439 $45,546 $ 354 $ 504 $ 979
Ratio of operating expenses to
average net assets(%)(d) 2.29(b) 2.38 2.36 2.25 2.20 2.36 2.25 2.20
Ratio of net investment income
(loss) to average
net assets (%) (1.15)(b (1.20) (1.42) (1.46) (1.62) (1.42) (1.46) (1.62)
Portfolio turnover rate (%) 77 82 69 74 48 69 74 48
Average commission rate (g) -- -- -- $0.0509 $0.0506 -- $0.0509 $0.0506
(a) The Fund commenced operations on August 3, 1992. Class B shares were first offered on September 13, 1993. Class C shares were
first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B and Class C shares are not reflected
in total return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary expense limitations in effect
from August 3, 1992 through September 30, 1993 would have been: (%)
CLASS A CLASS B
----------------------------------- -------------
8/3/92- YEAR ENDED 9/13/93-
12/31/92 12/31/93 12/31/93
-------- ---------- --------
2.20(b) 1.58 2.97(b)
(e) Per share net investment income (loss) does not reflect current period's reclassification of permanent differences between book
and tax basis net investment income (loss).
(f) Per share net investment loss has been calculated using the average shares outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 16, 1998. These financial highlights reflect results achieved by
the previous subadviser.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH FUND
CLASS A
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.59 $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44 $ 8.87
-------- -------- -------- -------- ---------- ---------- -------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.28 0.09 0.07 0.10 0.09 0.02 0.11 0.05
Net gains or losses on investments
(both realized and unrealized) (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84) 3.30
-------- -------- -------- -------- ---------- ---------- -------- ----------
Total income (loss) from
investment operations 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73) 3.35
-------- -------- -------- -------- ---------- ---------- -------- ----------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11) (0.05)
Distributions from net realized
capital gains 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73) (1.62)
Distributions from paid-in capital 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- ---------- ---------- -------- ----------
Total distributions (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84) (1.67)
-------- -------- -------- -------- ---------- ---------- -------- ----------
Net asset value, end of period $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44 $ 8.87 $ 10.55
======== ======== ======== ======== ========== ========== ======== ==========
Total return (%)(c) 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1) 38.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430 $1,201,110
Ratio of operating expenses to
average net assets(%) 1.26 1.22 1.23 1.14 1.15 1.18 1.19 1.20
Ratio of net investment income
(loss) to average net assets(%) 3.64 1.19 0.77 0.89 0.89 0.16 1.05 0.42
Portfolio turnover rate(%) 283 203 185 186 218 145 141 235
Average commission rate (d) -- -- -- -- -- -- -- --
<CAPTION>
CLASS A CLASS B
------------------------- --------
MARCH 1,
(a)
YEAR ENDED DECEMBER 31, THROUGH
----------------------- DEC. 31,
1996 1997 1997
---------- ---------- -------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.55 $ 11.63 $ 12.47
---------- ---------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.04 0.01 (0.07)(b)
Net gains or losses on investments
(both realized and unrealized) 2.07 2.79 1.94
---------- ---------- -------
Total income (loss) from
investment operations 2.11 2.80 1.87
---------- ---------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) 0.00 0.00
Distributions from net realized
capital gains (0.99) (4.02) (4.02)
Distributions from paid-in capital 0.00 0.00 0.00
---------- ---------- -------
Total distributions (1.03) (4.02) (4.02)
---------- ---------- -------
Net asset value, end of period $ 11.63 $ 10.41 $ 10.32
========== ========== =======
Total return (%)(c) 20.9 23.5 14.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,296,542 $1,459,747 $17,757
Ratio of operating expenses to
average net assets(%) 1.18 1.12 1.87(e)
Ratio of net investment income
(loss) to average net assets(%) 0.33 0.08 (0.67)(e)
Portfolio turnover rate(%) 199 214 214
Average commission rate (d) $ 0.0668 $ 0.0688 $0.0688
(a) Class B shares were first offered on March 1, 1997.
(b) Net investment income (loss) per share has been calculated using the average shares outstanding during the year.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs
or spreads on shares traded on a principal basis.
(e) Computed on an annualized basis.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ----- ----- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.94 $9.50 $9.47 $ 8.11 $10.15 $11.16 $12.13 $11.27 $13.14 $13.94
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.39 0.34 0.35 0.30 0.30 0.31 0.33 0.42 0.38 0.33
Net gains or losses on
investments (both
realized and
unrealized) 0.50 0.65 (1.34) 2.05 1.10 1.26 (0.65) 2.49 1.76 2.05
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Total income (loss)
from investment
operations 0.89 0.99 (0.99) 2.35 1.40 1.57 (0.32) 2.91 2.14 2.38
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.33) (0.41) (0.35) (0.30) (0.30) (0.31) (0.33) (0.40) (0.39) (0.33)
Distributions from net
realized capital gains 0.00 (0.61) 0.00 0.00 (0.09) (0.29) (0.21) (0.64) (0.95) (1.74)
Distributions from
paid-in capital 0.00 0.00 (0.02) (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Total distributions (0.33) (1.02) (0.37) (0.31) (0.39) (0.60) (0.54) (1.04) (1.34) (2.07)
----- ----- ----- ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period $9.50 $9.47 $8.11 $10.15 $11.16 $12.13 $11.27 $13.14 $13.94 $14.25
===== ===== ===== ====== ====== ====== ====== ====== ====== ======
Total return (%)(a) 10.0 10.4 (10.6) 29.2 13.9 14.2 (2.7) 26.3 17.1 17.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $51,902 $59,405 $52,134 $67,467 $90,527 $158,308 $158,332 $196,514 $219,626 $233,421
Ratio of operating
expenses to average
net assets (%) 1.52 1.52 1.58 1.53 1.48 1.40 1.40 1.36 1.33 1.29
Ratio of net
investment income to
average net assets(%) 4.19 3.35 4.00 3.18 2.84 2.66 2.91 3.37 2.79 2.25
Portfolio turnover rate(%) 58 111 68 51 38 50 36 54 70 69
Average commission rate(b) -- -- -- -- -- -- -- -- $0.0577 $0.0590
(a) A sales charge is not reflected in total return calculations.
(b) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund was changed from an "equity income" fund to a "balanced" fund on March 1, 1990. Results for periods prior to March 1, 1990
reflect former investment policies and are not necessarily representative of results that would have been achieved had the Fund's
current investment policies then been in effect.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------------- ----------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------- ----------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.16 $12.11 $11.24 $13.08 $13.86 $11.24 $13.05 $13.82
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.26 0.34 0.29 0.23 0.35 0.29 0.23
Net gains or losses on investments
(both realized and unrealized) 0.24 (0.66) 2.46 1.74 2.03 2.44 1.73 2.02
------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 0.40 (0.40) 2.80 2.03 2.26 2.79 2.02 2.25
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.16) (0.26) (0.32) (0.30) (0.23) (0.34) (0.30) (0.23)
Distributions from net
realized capital gains (0.29) (0.21) (0.64) (0.95) (1.74) (0.64) (0.95) (1.74)
Distributions from paid-in capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.45) (0.47) (0.96) (1.25) (1.97) (0.98) (1.25) (1.97)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $12.11 $11.24 $13.08 $13.86 $14.15 $13.05 $13.82 $14.10
====== ====== ====== ====== ====== ====== ====== ======
Total return(%)(c) 3.3 (3.4) 25.3 16.3 16.7 25.2 16.2 16.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $4,691 $21,607 $40,361 $58,367 $76,558 $718 $2,538 $4,596
Ratio of operating expenses to
average net assets (%) 2.36(b) 2.15 2.11 2.08 2.04 2.11 2.08 2.04
Ratio of net investment income to
average net assets (%) 1.92(b) 2.16 2.62 2.04 1.50 2.62 2.04 1.50
Portfolio turnover rate (%) 50 36 54 70 69 54 70 69
Average commission rate (d) -- -- -- $0.0577 $0.0590 -- $0.0577 $0.0590
(a) Class B shares were first offered on September 13, 1993. Class C shares were first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
MAY 21(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------------------
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.50 $ 11.80 $ 14.85 $ 15.50 $ 16.13 $ 16.31
------- ------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) 0.01 0.11 0.00 0.27 0.02(e) 0.09(e)
Net gain or (loss) on
investments (both
realized and unrealized) (0.63) 3.37 1.19 0.63 0.51 (1.25)
------- ------- -------- -------- -------- -------
Total income (loss) from
investment operations (0.62) 3.48 1.19 0.90 0.53 (1.16)
------- ------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from
net investment income (0.01) (0.11) 0.00 (0.27) (0.02) 0.00
Distributions from net
realized capital gains 0.00 (0.32) (0.53) 0.00 (0.33) (1.05)
Distributions in excess
of net realized gains 0.00 0.00 0.00 0.00 0.00 (0.04)
Distributions from
paid in capital (0.07) 0.00 (0.01) 0.00 0.00 0.00
------- ------- -------- -------- -------- -------
Total distributions (0.08) (0.43) (0.54) (0.27) (0.35) (1.09)
------- ------- -------- -------- -------- -------
Net asset value, end of period $ 11.80 $ 14.85 $ 15.50 $ 16.13 $ 16.31 $ 14.06
======= ======= ======== ======== ======== =======
Total return (%)(c) (5.0) 29.4 8.1 5.8 3.3 (7.6)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $21,731 $80,937 $142,917 $136,848 $109,773 $57,845
Ratio of operating expenses to
average net assets (%)(d) 1.50(b) 1.60 1.75 1.75 1.75 1.75
Ratio of net investment income
(loss) to average net
assets(%) 0.10(b) 0.24 0.01 1.24 0.14 0.62
Portfolio turnover rate(%) 62 101 123 119 59 154
Average commissio rate(f) -- -- -- -- $ 0.0180 $0.0024
<CAPTION>
CLASS B CLASS C
------------------------------------------------ ------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ------------------------------------ ------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
------ ------- ------- ------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.19 $ 14.81 $ 15.35 $ 15.93 $ 16.00 $15.35 $ 15.96 $ 16.03
------ ------- ------- ------- ------- ------ -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) 0.12 0.00 0.19 (0.10)(e) 0.19(e) (0.10)(e) (0.03)(e)
Net gain or (loss) on
investments (both
realized and unrealized) (0.06) 1.08 0.58 0.50 (1.17) 0.61 0.50 (1.17)
------ ------- ------- ------- ------- ------ -------- --------
Total income (loss) from
investment operations 0.06 1.08 0.77 0.40 (1.20) 0.80 0.40 (1.20)
------ ------- ------- ------- ------- ------ -------- --------
LESS DISTRIBUTIONS
Distributions from
net investment income (0.12) 0.00 (0.19) 0.00 0.00 (0.19) 0.00 0.00
Distributions from net
realized capital gains (0.32) (0.53) 0.00 (0.33) (1.05) 0.00 (0.33) (1.05)
Distributions in excess
of net realized gains 0.00 0.00 0.00 0.00 (0.04) 0.00 0.00 (0.04)
Distributions from
paid in capital 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------- ------- ------- ------- ------ -------- --------
Total distributions (0.44) (0.54) (0.19) (0.33) (1.09) (0.19) (0.33) (1.09)
------ ------- ------- ------- ------- ------ -------- --------
Net asset value, end of period $14.81 $ 15.35 $ 15.93 $ 16.00 $ 13.71 $15.96 $ 16.03 $ 13.74
====== ======= ======= ======= ======= ====== ======== ========
Total return (%)(c) 0.3 7.3 5.0 2.5 (8.0) 5.2 2.5 (8.0)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $9,176 $41,601 $52,895 $45,974 $25,216 $1,066 $ 850 $ 843
Ratio of operating expenses to
average net assets (%)(d) 2.50(b) 2.50 2.50 2.50 2.50 2.50 2.50 2.50
Ratio of net investment income
(loss) to average net
assets(%) (1.69)(b) (0.74) 0.49 (0.61) (0.13) 0.49 (0.61)
Portfolio turnover rate(%) 101 123 119 59 154 119 59 154
Average commissio rate(f) -- -- -- $0.0180 $0.0024 -- $ 0.0180 $ 0.0024
(a) The Fund commenced operations on May 21, 1992. Class B shares were first offered on September 13, 1993. Class C shares were
first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B and Class C shares are not reflected
in total return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary expense limitations would have
been: (%)
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------------------------ -------------------------------- ----------------------------
MAY 21 SEPT. 13
THROUGH YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------- DEC. 31, -------------------------------- ----------------------------
1992 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 1995 1996 1997
------ ---- ---- ---- ---- ---- ------ ------ ---- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2.89(b) 2.16 1.79 1.83 1.79 2.14 3.36(b) 2.54 2.58 2.54 2.89 2.58 2.54 2.89
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 14, 1997. For periods prior to February 14, 1997, these financial
highlights reflect results achieved by the previous subadviser under different investment policies.
</TABLE>
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27 $8.78 $9.60
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.20 0.12 0.16 0.13 0.09 0.07 0.08 0.10 0.06 0.03(a)
Net gains or losses on
investments (both
realized and
unrealized) (0.34) 1.25 (1.04) 1.35 1.02 1.16 (0.19) 2.21 2.12 1.96
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss)
from investment
operations (0.14) 1.37 (0.88) 1.48 1.11 1.23 (0.11) 2.31 2.18 1.99
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.21) (0.12) (0.16) (0.13) (0.09) (0.07) (0.08) (0.09) (0.06) (0.02)
Distributions from net
realized capital gains 0.00 (0.80) 0.00 (0.10) (0.43) (0.57) (0.41) (0.71) (1.30) (1.43)
Distributions from
paid-in capital 0.00 (0.01) (0.03) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.21) (0.93) (0.19) (0.23) (0.52) (0.64) (0.49) (0.80) (1.36) (1.45)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end
of period $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27 $8.78 $9.60 $10.14
===== ===== ===== ===== ===== ===== ===== ===== ===== ======
Total return (%)(b) (2.2) 22.6 (13.6) 27.1 16.6 17.0 (1.4) 32.3 26.3 21.0
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $136,443 $146,831 $139,248 $145,790 $156,240 $189,779 $190,869 $241,038 $297,581 $348,988
Ratio of operating
expenses to average
net assets (%) 1.29 1.29 1.31 1.28 1.32 1.34 1.37 1.37 1.31 1.25
Ratio of net investment
income to average net
assets (%) 3.13 1.69 2.87 1.84 1.26 0.83 1.00 1.22 0.78 0.28
Portfolio turnover rate(%) 243 298 8 33 38 40 29 52 64 55
Average commission rate(c) -- -- -- -- -- -- -- -- $0.0574 $0.0589
(a) Per share net investment income has been calculated using the average shares outstanding during the year.
(b) A sales charge is not reflected in total return calculations.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND VALUE FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------------------------- ---------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, -------------------------------------------------- ---------------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.97 $7.85 $7.23 $8.70 $9.47 $7.23 $8.70 $9.46
----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) 0.11 0.04 0.05 0.01 (0.05)(e) 0.05 0.01 (0.05)(e)
Net gains or losses
on investments
(both realized
and unrealized) 0.39 (0.20) 2.18 2.07 1.92 2.18 2.06 1.94
----- ----- ----- ----- ----- ----- ----- -----
Total income (loss)
from investment
operations 0.50 (0.16) 2.23 2.08 1.87 2.23 2.07 1.89
----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions
from net investment
income (0.05) (0.05) (0.05) (0.01) 0.00 (0.05) (0.01) 0.00
Distributions
from net realized
capital gains (0.57) (0.41) (0.71) (1.30) (1.43) (0.71) (1.30) (1.43)
Distributions
from paid-in capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.62) (0.46) (0.76) (1.31) (1.43) (0.76) (1.31) (1.43)
----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period $7.85 $7.23 $8.70 $9.47 $9.91 $8.70 $9.46 $9.92
===== ===== ===== ===== ===== ===== ===== =====
Total return(%)(c) 6.5 (2.0) 31.3 25.4 20.0 31.3 25.2 20.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of period (000) $2,182 $13,830 $27,941 $48,210 $80,008 $1,224 $3,735 $6,527
Ratio of operating
expenses to average
net assets (%) 2.16(b) 2.12 2.12 2.06 2.00 2.12 2.06 2.00
Ratio of net
investment income
(loss) to average net
assets (%) 0.05(b) 0.25 0.47 0.03 (0.47) 0.47 0.03 (0.47)
Portfolio
turnover rate(%) 40 29 52 64 55 52 64 55
Average commission
rate (d) -- -- -- $0.0574 $0.0589 -- $0.0574 $0.0589
(a) Class B shares were first offered on September 13, 1993. Class C shares were first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
SEVEN
YEAR MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
MAY 31, DECEMBER 31, ---------------------------------------------------------------------------
1988 1988(b) 1989 1990 1991 1992 1993(a) 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $11.92 $10.37 $ 9.55 $10.88 $ 9.54 $11.79 $12.20 $12.67 $12.41 $14.39 $13.87
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment income 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18 0.13 0.07(c)
Net gains or losses
on investments
(both realized and
unrealized) (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01 2.07 4.40
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss)
from investment
operations (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19 2.20 4.47
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from
net investment
income (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18) (0.13) (0.06)
Distributions in
excess of net
investment income 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00
Distributions from
net realized
capital gains (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03) (2.59) (2.93)
Distributions from
paid-in capital (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21) (2.72) (2.99)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $10.37 $ 9.55 $10.88 $ 9.54 $11.79 $12.20 $12.67 $12.41 $14.39 $13.87 $15.35
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(f) (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.0 35.1 17.2 33.4
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693 $166,963 $220,912
Ratio of operating
expenses to
average net
assets(%) 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38 1.30 1.25
Ratio of net
investment income
to average net
assets (%) 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31 0.92 0.46
Portfolio turnover
rate (%) 8 83(e) 17 6 12 10 4 6 69 127 103
Average commission
rate (g) -- -- -- -- -- -- -- -- -- $0.0348 $0.0334
(a) As of January 1, 1993, the Fund discontinued the use of equalization accounting.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's former adviser, Back Bay Advisors, L.P., assumed that
function on July 27, 1988.
(c) Per share net investment income has been calculated using the average shares outstanding during the year.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P., voluntarily agreed to limit total Fund expenses to 1.25%
of the Fund's average annual net assets. Without such limitation, the ratio of operating expenses to average net assets for the
year ended May 31, 1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge is not reflected in total return calculations.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1, 1995. These financial highlights prior to that date
reflect results achieved by earlier advisers under investment policies that are no longer in effect.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------------ ---------------------------------
SEPT. 13(a) MAY 1(a) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31,
DEC. 31, --------------------------------------- DEC. 31, -----------------
1993 1994 1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.95 $12.66 $12.42 $14.40 $13.87 $13.84 $14.39 $13.85
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) 0.06 0.16 0.10 0.03 (0.05)(e) 0.06 0.04 (0.05)(e)
Net gains or losses on
investments (both
realized and unrealized) 0.01 (0.09) 4.01 2.07 4.40 2.58 2.05 4.42
------ ------ ------ ------ ------ ------ ------ ------
Total income from
investment operations 0.07 0.07 4.11 2.10 4.35 2.64 2.09 4.37
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from
net investment income (0.03) (0.14) (0.10) (0.04) (0.01) (0.06) (0.04) (0.01)
Distributions in excess
of net investment income (0.06) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from net
realized capital gains (0.27) (0.17) (2.03) (2.59) (2.93) (2.03) (2.59) (2.93)
Distributions from
paid-in capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.36) (0.31) (2.13) (2.63) (2.94) (2.09) (2.63) (2.94)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $12.66 $12.42 $14.40 $13.87 $15.28 $14.39 $13.85 $15.28
====== ====== ====== ====== ====== ====== ====== ======
Total return(%)(c) 0.6 0.6 34.3 16.3 32.4 20.2 16.3 32.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $1,498 $5,185 $29,026 $46,856 $81,066 $4,707 $3,912 $6,735
Ratio of operating
expenses to average
net assets(%) 2.08(b) 1.93 2.11 2.05 2.00 2.11(b) 2.05 2.00
Ratio of net investment
income to average
net assets(%) 0.71(b) 1.10 0.56 0.17 (0.29) 0.56(b) 0.17 (0.29)
Portfolio turnover rate(%) 4 6 69 127 103 69 127 103
Average commission rate(d) -- -- -- $0.0348 $0.0334 -- $0.0348 $0.0334
(a) Class B shares were first offered on September 13, 1993. Class C shares were first offered on May 1, 1995.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
The Fund's current adviser and subadviser assumed those functions on May 1, 1995. These financial highlights prior to that date
reflect results achieved by earlier advisers under investment policies that are no longer in effect.
</TABLE>
<PAGE>
NEW ENGLAND EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------ ---------- ----------
NOV. 15(a) YEAR ENDED SEPT. 15(a) SEPT. 15(a)
THROUGH DECEMBER 31, THROUGH THROUGH
DEC. 31, ------------------ DEC. 31, DEC. 31,
1995 1996 1997 1997 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.50 $ 12.86 $ 15.15 $ 17.06 $ 17.06
------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.04 0.31 0.25 0.03 0.03
Net gains or losses on investments
(both realized and unrealized) 0.36 3.11 3.15 0.60 0.60
------- ------- -------- -------- --------
Total income from investment operations 0.40 3.42 3.40 0.63 0.63
------- ------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.04) (0.30) (0.26) (0.04) (0.04)
Distributions from net realized
capital gains 0.00 (0.83) (0.70) (0.06) (0.06)
------- ------- -------- -------- --------
Total distributions (0.04) (1.13) (0.96) (0.10) (0.10)
------- ------- -------- -------- --------
Net asset value, end of period $ 12.86 $ 15.15 $ 17.59 $ 17.59 $ 17.59
======= ======= ======== ======== ========
Total return (%)(c) 3.2 26.6 22.6 3.7 3.7
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $ 2,064 $ 2,613 $ 14,681 $ 9,375 $ 1,596
Ratio of operating expenses to average
net assets (%)(d) 1.50(b) 1.50 1.50 2.25(b) 2.25(b)
Ratio of net investment income to
average net assets (%) 3.58(b) 2.06 1.76 1.01(b) 1.01(b)
Portfolio turnover rate (%) 0 45 33 33 33
Average commission rate(e) -- $0.0608 $ 0.0600 $ 0.0600 $ 0.0600
(a) The Fund commenced operations on November 15, 1995. Class B and C shares were first offered on September 15, 1997.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B and Class C shares are not reflected
in total return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect to the expense limitation in effect would
have been (%) 5.97(b) 3.67 3.10 3.85(b) 3.85(b)
(e) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT STRATEGY
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
NEW ENGLAND CAPITAL GROWTH FUND
(THE "CAPITAL GROWTH FUND")
The Fund seeks long-term growth of capital.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
NEW ENGLAND BALANCED FUND
(THE "BALANCED FUND")
The Fund seeks a reasonable long-term investment return from a combination of
long-term capital appreciation and moderate current income.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles"), Pasadena, CA
NEW ENGLAND GROWTH FUND
(THE "GROWTH FUND")
The Fund seeks long-term growth of capital through investment in equity
securities of companies whose earnings are expected to grow at a faster rate
than the United States economy.
Adviser: Capital Growth Management Limited Partnership ("CGM")
NEW ENGLAND INTERNATIONAL EQUITY FUND
(THE "INTERNATIONAL EQUITY FUND")
The Fund seeks total return from long-term growth of capital and dividend
income, primarily through investment in international equity securities.
Subadviser: Loomis Sayles, Boston, MA
NEW ENGLAND VALUE FUND
(THE "VALUE FUND")
The Fund seeks a reasonable long-term investment return from a combination of
market appreciation and dividend income from equity securities.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND GROWTH OPPORTUNITIES FUND
(THE "GROWTH OPPORTUNITIES FUND")
The Fund seeks opportunities for long-term growth of capital and income.
Subadviser: Westpeak
NEW ENGLAND EQUITY INCOME FUND
(THE "EQUITY INCOME FUND")
The Fund seeks current income and capital growth.
Subadviser: Loomis Sayles, New York, NY
NVEST COMPANIES AND THE FUNDS' ADVISERS AND SUBADVISERS
Loomis Sayles and Westpeak are independently operated subsidiaries and CGM is an
affiliate of Nvest Companies, L.P. ("Nvest Companies"), which is part of an
affiliated group including Nvest, L.P., a publicly traded company listed on the
New York Stock Exchange. New England Funds Management, L.P. ("NEFM"), the
adviser to each of the Funds except the Growth Fund, is also an independently
operated subsidiary of Nvest Companies. Nvest Companies' 14 principal subsidiary
or affiliated asset management firms, collectively, had more than $125 billion
of assets under management as of December 31, 1997. Each subadviser operates
independently and is staffed by experienced investment professionals. Both of
the subadvisers apply specialized knowledge and careful analysis to the pursuit
of each Fund's objectives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. is the adviser to each of the Funds except
the Growth Fund, as well as most of the other New England Funds.
LOOMIS, SAYLES & COMPANY, L.P., with over $60 billion of assets under
management, manages portfolios for mutual funds and other institutional
investors and individuals. Loomis Sayles serves as subadviser to the
International Equity, Balanced, Value and Equity Income Funds.
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP, adviser to the Growth Fund, has
over $7 billion of assets under management. CGM specializes in managing
aggressive growth-oriented equity portfolios for mutual funds and other
institutions.
WESTPEAK INVESTMENT ADVISORS, L.P., with over $3 billion of assets under
management, acts as subadviser to the Growth Opportunities and Capital Growth
Funds and also provides investment management services to other mutual funds and
institutional clients, including accounts of New England Life Insurance Company
("NELICO").
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
FUND INVESTMENTS
[] CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing
substantially all of its assets in equity securities. Investments are
selected based on their growth potential; current income is not a
consideration. The Fund normally will invest primarily in equity securities
of companies with medium or large market capitalization (capitalization of
$1 billion to $5 billion and over $5 billion, respectively), but will also
invest a portion of its assets in equity securities of companies with
relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research
and analysis of individual companies and industries. The subadviser selects
investments for the Fund based on qualitative and quantitative criteria
including, among others, industry dominance and competitive position,
consistent earnings growth, a history of high profitability, the
subadviser's expectation of continued high profitability and overall
financial strength, although not every investment will have all of these
characteristics.
[] GROWTH FUND
Most of the Growth Fund's investments are normally in common stocks,
although the Fund may invest in any type of equity securities. The Fund does
not consider current income as a factor in selecting its investments.
[] VALUE FUND
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is
ordinarily placed on undervalued securities. Although long-term market
appreciation is ordinarily the basis for security selection, current income
may be a significant consideration when yields appear to be favorable
compared to overall opportunities for capital appreciation.
[] BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its equity investments are normally
in dividend-paying common stocks of recognized investment quality that are
expected to achieve growth in earnings and dividends over the long term. In
selecting equity investments for the Fund, an emphasis is ordinarily placed
on undervalued securities. Fixed-income securities include notes, bonds,
non-convertible preferred stock and money market instruments. The Fund
invests at least 25% of its assets in fixed-income securities and, under
normal market conditions, more than 50% of its assets in equity securities.
[] INTERNATIONAL EQUITY FUND
The International Equity Fund seeks to achieve its objective by investing
primarily in common stocks, although the Fund may invest in any type of
equity securities. Normally the Fund will invest at least 65% of its total
assets in equity securities of issuers headquartered outside the United
States or that derive a substantial part of their revenues or profits from
countries outside the United States. Under normal conditions the Fund's
portfolio will contain equity securities of issuers from at least three
countries outside the United States. The Fund may also invest in closed-end
investment companies domiciled in the United States that invest primarily in
securities issued by foreign companies. In addition, the Fund may invest up
to 20% of its assets in bonds issued or guaranteed by foreign governments
(including their political subdivisions, agencies, authorities and/or
instrumentalities), supranational agencies or foreign companies, including
but not limited to convertible debt and below investment grade or unrated
debt.
The Fund's subadviser will make investment decisions on behalf of the Fund
by selecting a group of attractively valued countries and then selecting
securities within such countries that are expected to offer the best value
based on its valuation and earnings growth expectations.
[] GROWTH OPPORTUNITIES FUND
It is normally the policy of the Growth Opportunities Fund to invest in a
diversified portfolio of common stocks considered by the Fund's subadviser
to have possibilities for long-term appreciation of capital and income.
Emphasis will be given to both undervalued securities ("value" style) and
securities of companies with growth potential ("growth" style). The Fund
will ordinarily invest substantially all of its assets in equity securities.
[] EQUITY INCOME FUND
Under normal market circumstances, the Fund will invest at least 80% of its
assets in dividend-paying common or preferred stocks. The Fund's portfolio
will be selected to seek current income and capital growth and a current
dividend yield which is comparable to the published composite yield of the
Standard & Poor's Composite Index of 500 Stocks (the "S&P 500"). The Fund
may also invest in non- dividend paying stocks, other equity securities,
zero coupon bonds and strips and foreign securities.
[] ADDITIONAL INFORMATION
The Funds other than the Balanced Fund seek to attain their objectives by
normally investing primarily in equity securities. When the particular
Fund's adviser or subadviser deems it appropriate, however, these Funds may,
for temporary defensive purposes, hold a substantial portion of their assets
in cash or fixed-income investments, including U.S. Government obligations,
investment grade (and comparable unrated) corporate bonds or notes, money
market instruments and repurchase agreements. Corporate obligations in the
lowest investment grade category (rated BBB by Standard & Poor's Ratings
Group ["S&P"] or Baa by Moody's Investors Service, Inc. ["Moody's"]) have
some speculative characteristics and may be more adversely affected by
changing economic conditions than are higher grade obligations. No estimate
can be made as to when or for how long a Fund will employ defensive
strategies. Under some market conditions, the Balanced Fund may, for
temporary purposes, invest less than 50% of its assets in equity securities
and the balance in cash and fixed-income investments.
Each Fund may invest in foreign securities (in the case of the Growth
Opportunities Fund, only if such securities are traded in the U.S. markets).
Each Fund may also engage in certain options and futures transactions.
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT RISKS
- -------------------------------------------------------------------------------
It is important to understand the following risks inherent in a Fund before you
invest.
[] EQUITY SECURITIES
Equity securities are securities that represent an ownership interest (or
the right to acquire such an interest) in a company and include common and
preferred stocks and securities exercisable for or convertible into common
or preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock). While offering greater potential for long-term
growth, equity securities are more volatile and more risky than some other
forms of investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in equity
securities of companies with relatively small market capitalization.
Securities of such companies may be more volatile than the securities of
larger, more established companies and the broad equity market indices. See
"Small Companies" below. Each Fund's investments may include securities
traded "over-the-counter" as well as those traded on a securities exchange.
Some over-the-counter securities may be more difficult to sell under some
market conditions.
Each Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or other
equity securities. Convertible securities also include other securities,
such as warrants, that provide an opportunity for equity participation.
Because convertible securities can be converted into equity securities,
their values will normally increase or decrease as the values of the
underlying equity securities increase or decrease. The movements in the
prices of convertible securities, however, may be smaller than the movements
in the value of the underlying equity securities. The value of convertible
securities that pay dividends or interest, like the value of other
fixed-income securities, generally fluctuates inversely with changes in
interest rates. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. They do
not represent ownership of the securities for which they are exercisable,
but only the right to buy such securities at a particular price. Less than
35% (20% in the case of the Equity Income Fund) of each Fund's respective
net assets will be invested in convertible securities rated below investment
grade and unrated convertible securities of comparable quality.
[] SMALL COMPANIES
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed
those of companies with larger capitalization. Such growth rates may in turn
be reflected in more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets or
financial resources and may be dependent upon a relatively small management
group. The securities may have limited marketability and may be subject to
more abrupt or erratic movements in price than securities of companies with
larger capitalization or market averages in general. The net asset value of
funds that invest in companies with smaller capitalization therefore may
fluctuate more widely than market averages.
[] FOREIGN SECURITIES
Investments in foreign securities present risks not typically associated
with investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Fund may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Funds may purchase securities denominated
in foreign currencies, a change in the value of any such currency against
the U.S. dollar will result in a change in the U.S. dollar value of the
Fund's assets and the Fund's income available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income
in U.S. dollars. Therefore, if the value of a currency relative to the U.S.
dollar declines after a Fund's income has been earned in that currency,
translated into U.S. dollars and declared as a dividend, but before payment
of such dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency
relative to the U.S. dollar declines between the time a Fund incurs expenses
in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate
or government issuer than about a U.S. issuer, and foreign corporate issuers
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and securities custody costs are often higher than those in the
United States, and judgments against foreign entities may be more difficult
to obtain and enforce. With respect to certain foreign countries, there is a
possibility of governmental expropriation of assets, confiscatory taxation,
political or financial instability and diplomatic developments that could
affect the value of investments in those countries. The receipt of interest
on foreign government securities may depend on the availability of tax or
other revenues to satisfy the issuer's obligations.
The International Equity and Equity Income Funds' investments in foreign
securities may include investments in emerging or developing countries,
whose economies or securities markets are not yet highly developed. Special
considerations associated with these investments (in addition to the
considerations regarding foreign investments generally) may include, among
others, greater political uncertainties, an economy's dependence on revenues
from particular commodities or on international aid or development
assistance, currency transfer restrictions, highly limited numbers of
potential buyers for such securities and delays and disruptions in
securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored depository receipts are arranged without involvement
by the issuer of the underlying equity securities. Less information about
the issuer of the underlying equity securities may be available in the case
of unsponsored depository receipts.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities,
and include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal
and Steel Community and the Inter-American Development Bank.
In determining whether to invest in securities of foreign issuers, the
adviser or subadviser of each Fund will consider the likely effects of
foreign taxes on the net yield available to the Fund and its shareholders.
Compliance with foreign tax law may reduce the Fund's net income available
for distribution to shareholders.
[] FOREIGN CURRENCY
Most foreign securities in the Funds' portfolios will be denominated in
foreign currencies or traded in securities markets in which settlements are
made in foreign currencies. Similarly, any income on such securities is
generally paid to the Fund in foreign currencies. The value of these foreign
currencies relative to the U.S. dollar varies continually, causing changes
in the dollar value of the Fund's portfolio investments (even if the local
market price of the investments is unchanged) and changes in the dollar
value of the Fund's income available for distribution to its shareholders.
The effect of changes in the dollar value of a foreign currency on the
dollar value of the Fund's assets and on the net investment income available
for distribution may be favorable or unfavorable.
The Funds may incur costs in connection with conversions between various
currencies. In addition, the Funds may be required to liquidate portfolio
assets, or may incur increased currency conversion costs, to compensate for
a decline in the dollar value of a foreign currency occurring between the
time when the Fund declares and pays a dividend, or between the time when
the Fund accrues and pays an operating expense in U.S. dollars.
[] FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed-income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed
by specific assets (such as mortgages or other receivables) that have been
set aside as collateral for the issuer's obligation. Fixed-income securities
generally involve an obligation of the issuer to pay interest or dividends
on either a current basis or at the maturity of the security, as well as the
obligation to repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk. Credit
risk is the risk that the security's issuer will fail to fulfill its
obligation to pay interest, dividends or principal on the security. Market
risk is the risk that the value of the security will fall because of changes
in market rates of interest. (Generally, the value of fixed-income
securities falls when market rates of interest are rising.) Some
fixed-income securities also involve prepayment or call risk. This is the
risk that the issuer will repay a Fund the principal on the security before
it is due, thus depriving the Fund of a favorable stream of future interest
or dividend payments.
Because interest rates vary, it is impossible to predict the income of a
fund that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income securities
will cause a Fund's net asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the Funds other
than the International Equity, Balanced and Equity Income Funds will, at the
time of purchase, either be rated investment grade by at least one major
rating agency or be unrated but determined to be of investment grade quality
by the Fund's adviser or subadviser.
[] LOWER QUALITY FIXED-INCOME SECURITIES (INTERNATIONAL EQUITY, BALANCED AND
EQUITY INCOME FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities. Lower quality fixed-income securities are
considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. Achievement of the
investment objective of a mutual fund investing in lower quality
fixed-income securities may be more dependent on the fund's adviser's or
subadviser's own credit analysis than for a fund investing in higher quality
bonds. The market for lower quality fixed-income securities may be more
severely affected than some other financial markets by economic recession or
substantial interest rate increases, by changing public perceptions of this
market or by legislation that limits the ability of certain categories of
financial institutions to invest in these securities. In addition, the
secondary market may be less liquid for lower rated fixed-income securities.
This lack of liquidity at certain times may affect the valuation of these
securities and may make the valuation and sale of these securities more
difficult. During the fiscal year ended December 31, 1997, the International
Equity, Balanced and Equity Income Funds had on average 6.3%, 3.04% and 0%
of their assets, respectively, invested in fixed-income securities rated
below investment grade. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as "junk
bonds." For more information, including a detailed description of the
ratings assigned by S&P and Moody's, please refer to the Statement's
"Appendix A - Description of Bond Ratings."
[] MORTGAGE- AND ASSET-BACKED SECURITIES (BALANCED FUND)
The Balanced Fund may invest in mortgage- and asset-backed securities, which
are shares in a pool of mortgages or other debt. These securities are
generally pass-through securities, which means that principal and interest
payments on the underlying securities (less servicing fees) are passed
through to shareholders on a pro rata basis. These securities involve
prepayment risk, which is the risk that the underlying mortgages or other
debt may be refinanced or paid off prior to their maturities during periods
of declining interest rates. In that case, the Fund may have to reinvest the
proceeds from the securities at a lower rate. Potential market gains on a
security subject to prepayment risk may be more limited than potential
market gains on a comparable security that is not subject to prepayment
risk.
[] REPURCHASE AGREEMENTS
Under a repurchase agreement, a Fund buys securities from a seller, usually
a bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date. If the seller
fails to repurchase the securities, the Fund has rights to sell the
securities to third parties. Repurchase agreements can be regarded as loans
by the Fund to the seller, collateralized by the securities that are the
subject of the agreement. Repurchase agreements afford an opportunity for
the Fund to earn a return on available cash at relatively low credit risk,
although the Fund may be subject to various delays and risks of loss if the
seller fails to meet its obligation to repurchase. The staff of the SEC is
currently of the view that repurchase agreements maturing in more than 7
days are illiquid securities.
[] INVESTMENTS IN OTHER INVESTMENT COMPANIES (INTERNATIONAL EQUITY, GROWTH AND
GROWTH OPPORTUNITIES FUNDS)
The International Equity, Growth and Growth Opportunities Funds may each
invest up to 10% of its total assets in securities of other investment
companies. Because of restrictions on direct investment by U.S. entities in
certain countries, investing indirectly in such countries (by purchasing
shares of another fund that is permitted to invest in such countries) may be
the most practical or efficient way for the Fund to invest in such
countries. In other cases, where the Fund's adviser or subadviser desires to
make only a relatively small investment in a particular country, investing
through another fund that holds a diversified portfolio in that country may
be more effective than investing directly in issuers in that country. As an
investor in another investment company, the Fund will indirectly bear its
share of the expenses of that investment company. These expenses are in
addition to the Fund's own costs of operations. In some cases, investing in
an investment company may involve the payment of a premium over the value of
the assets held in that investment company's portfolio.
[] SHORT-TERM TRADING
Although each Fund seeks long-term growth or return (current income and
capital growth in the case of the Equity Income Fund), each Fund may,
consistent with its investment objective, engage in portfolio trading in
anticipation of, or in response to, changing economic or market conditions
and trends. These policies may result in higher turnover rates in the Fund's
portfolio, which may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will not limit any
adviser's or subadviser's investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
The International Equity Fund may buy, sell or write options on securities,
securities indexes, currencies or futures contracts. The Fund may buy and
sell futures contracts on securities, securities indexes or currencies. The
Fund may also enter into swap contracts. The Fund may engage in these
transactions either for the purpose of enhancing investment return, or to
hedge against changes in the value of other assets that the Fund owns or
intends to acquire. The Fund may also conduct foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
The Funds other than the International Equity Fund may also buy and sell
futures contracts on a variety of stock indexes. A Fund would buy such a
futures contract only when the Fund is experiencing significant cash
inflows, and then only for the purpose of maintaining the Fund's exposure to
the equity markets during the time before the Fund has fully invested
incoming cash in equity securities directly. Similarly, a Fund would sell
stock index futures only during periods of cash outflows from the Fund, for
the purpose of reducing equity market exposure before holdings of stock are
liquidated. A Fund will not use futures contracts for speculative purposes
or to hedge against changes in the value of the Fund's securities portfolio.
Options, futures and swap contracts fall into the broad category of
financial instruments known as "derivatives" and involve special risks. Use
of options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are involved
in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at
a specified price, on or before a specified date. The buyer of an option
pays a premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results
in a loss if the option expires unexercised. The writer of an option
receives a premium from writing an option, which may increase its return if
the option expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must continue to
hold the underlying security or other asset until the option expires, to
"cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or receipt) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract
by a Fund exceeds (or is less than) the price of the offsetting purchase,
the Fund will realize a gain (or loss). A Fund may not purchase or sell
futures contracts or purchase related options if immediately thereafter the
sum of the amount of deposits for initial margin or premiums on the existing
futures and related options positions would exceed 5% of the market value of
the Fund's net assets. Transactions in futures and related options involve
the risks of (1) imperfect correlation between the price movement of the
contracts and the underlying securities, (2) significant price movement in
one but not the other market because of different hours, (3) the possible
absence of a liquid secondary market at any point in time, and the risk that
if the subadviser's prediction on interest rates or other economic factors
is inaccurate, the Fund may be worse off than if it had not hedged. Futures
transactions involve potentially unlimited risk of loss.
All of the Funds may enter into interest rate, currency and securities index
swaps. The Funds will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations or to protect against an
increase in the price of securities a Fund anticipates purchasing at a later
date. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange
cash flows on a notional amount based on changes in the relative values of
the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as the S&P
500 or in some other investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve the
possible risk of loss to the Fund of all or a significant part of the value
of its investment. In some cases, the risk of loss may exceed the amount of
the Fund's investment. The Fund will be required, however, to set aside with
its custodian bank certain assets in amounts sufficient at all times to
satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadviser's ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse
changes in the value of securities held in its portfolio through options,
futures and swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap positions and
changes in the values of the portfolio securities. The successful use of
futures and exchange-traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a
timely basis. There can be no assurance that such a market will exist at any
particular time. In the case of swap contracts and of options that are not
traded on an exchange ("over-the-counter" options), the Fund is at risk that
the other party to the transaction will default on its obligations, or will
not permit the Fund to terminate the transaction before its scheduled
maturity. As a result of these characteristics, the Fund will treat most
swap contracts and over-the-counter options (and the assets it segregates to
cover its obligations thereunder) as illiquid. Certain provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and certain
regulatory requirements may limit a Fund's ability to engage in futures,
options and swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets
may be subject to less detailed reporting requirements and regulatory
controls than U.S. markets. Furthermore, investments by the Funds in options
and futures in foreign markets are subject to many of the same risks as are
the Fund's other foreign investments. See "Foreign Securities" above. For
further information, see "Miscellaneous Investment Practices -- Futures,
Options and Swap Contracts" in Part II of the Statement.
[] CURRENCY HEDGING TRANSACTIONS (INTERNATIONAL EQUITY FUND)
The International Equity Fund may, at the discretion of its subadviser,
engage in foreign currency exchange transactions, in connection with the
purchase and sale of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative values of
currencies in which current or future Fund portfolio holdings are
denominated or quoted. Currency hedging transactions may include forward
contracts (contracts with another party to buy or sell a currency at a
specified price on a specified date), futures contracts (which are similar
to forward contracts but are traded on an exchange) and swap contracts. For
more information on foreign currency hedging transactions, see Part II of
the Statement.
[] ZERO COUPON BONDS AND STRIPS (EQUITY INCOME AND BALANCED FUNDS)
The Equity Income and Balanced Funds may invest in zero coupon bonds and in
"strips." Zero coupon bonds do not make regular interest payments; rather,
they are sold at a discount from face value. Principal and accrued discount
(representing interest accrued but not paid) are paid in maturity. "Strips"
are debt securities that are stripped of their interest payments after the
securities are issued, but otherwise are comparable to zero coupon bonds.
The market values of "strips" and zero coupon bonds generally fluctuate in
response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality. Under certain
market conditions, investments in such securities may be illiquid, making it
difficult for the Fund to dispose of them or determine their current value.
[] SECURITIES LENDING
The Equity Income, Capital Growth and International Equity Funds may lend
their portfolio securities to broker-dealers or other parties under
contracts calling for the deposit by the borrower with the Fund's custodian
of cash collateral equal to at least the market value of the securities
lent, marked to market on a daily basis. The Fund will continue to benefit
from interest or dividends on the securities lent and will also receive
interest through investment of the cash collateral in short-term liquid
investments. No loans will be made if, as a result, the aggregate amount of
such loans outstanding at any time would exceed 33 1/3% of the Fund's total
assets (taken at current value). Any voting rights or rights to consent
relating to the lent securities pass to the borrower. However, if a material
event affecting the investment occurs, such loans will be called so that the
securities may be voted by the Fund. The Fund pays various fees in
connection with such loans, including shipping fees and reasonable custodial
or placement fees.
[] MISCELLANEOUS
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable, which may
include securities whose disposition is restricted by federal securities
laws.
The Balanced, International Equity and Equity Income Funds may purchase Rule
144A securities. These are privately offered securities that can be resold
only to certain qualified institutional buyers. Investing in Rule 144A
securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. Rule 144A securities are
treated as illiquid, unless the Fund's subadviser has determined, under
guidelines established by the relevant Trust's trustees, that the particular
issue of Rule 144A securities is liquid. Investment in restricted or other
illiquid securities involves the risk that a Fund may be unable to sell such
a security at the desired time. Also, a Fund may incur expenses, losses or
delays in the process of registering restricted securities prior to resale.
The International Equity, Balanced and Equity Income Fund may purchase
securities on a "when-issued" or "delayed-delivery" basis. This means that
the Fund enters into a commitment to buy the security before the security
has been issued, or, in the case of a security that has already been issued,
to accept delivery of the security on a date beyond the usual settlement
period. If the value of a security purchased on a "when- issued" or "delayed
delivery" basis falls or market rates of interest increase between the time
the Fund commits to buy the security and the delivery date, the Fund may
sustain a loss in value of or yield on the security. For more information on
"when-issued" and "delayed delivery" securities, see Part II of the
Statement.
<PAGE>
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FUND MANAGEMENT
- -------------------------------------------------------------------------------
NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves as the adviser
to each Fund except the Growth Fund (for which CGM serves as adviser). NEFM
oversees, evaluates and monitors the subadvisory services provided to each Fund
except the Growth Fund and furnishes general business management and
administration to each such Fund. NEFM does not determine what investments will
be purchased by the Funds.
The subadviser of the International Equity Fund, the Balanced Fund, the Value
Fund and the Equity Income Fund is Loomis Sayles. Founded in 1926, Loomis
Sayles, One Financial Center, Boston, Massachusetts 02111, is one of the
country's oldest and largest investment counsel firms. Paul Drexler, Vice
President of Loomis Sayles, has served as the portfolio manager of the
International Equity Fund since February 1997. Carol C. McMurtrie and Tricia
H. Mills are the portfolio managers of the Value Fund. Ms. McMurtrie and Ms.
Mills have served in that capacity since March 1993. Ms. McMurtrie and Ms.
Mills are also the portfolio managers of the equity portion of the Balanced
Fund and are responsible for allocating the assets of the Balanced Fund
between equity and fixed-income securities. Ms. McMurtrie and Ms. Mills have
served in these capacities since July 1997. The portfolio management team for
the fixed-income portion of the Balanced Fund consists of Meri Ann Beck, John
Hyll and Barr Segal, who have had portfolio management responsibility for the
Fund's fixed-income investments since 1990, 1994 and 1996, respectively.
Messrs. Hyll and Segal and Mses. Beck and Mills are Vice Presidents of Loomis
Sayles. Ms. McMurtrie is Vice President and Managing Partner of Loomis Sayles.
Mr. Hyll has been employed by Loomis Sayles for more than five years. Mr.
Segal was a Senior Portfolio Manager at TCW Group before joining Loomis Sayles
in 1996. Mr. Drexler was Deputy Manager, Brown Brothers Harriman & Co. before
joining Loomis Sayles in 1993. Mauricio F. Cevallos, Vice President and
Manager of Loomis Sayles, Peter Ramsden, Vice President of Loomis Sayles, and
Tom Kolefas, Vice President of Loomis Sayles, act as portfolio managers of the
Equity Income Fund. Mr. Kolefas joined Loomis Sayles in 1996 and has been a
portfolio manager of the Fund since May 1996. Prior to May 1996, Mr. Kolefas
was employed as a portfolio manager at Mackay Shields Financial Corporation.
Mr. Ramsden and Mr. Cevallos have been employed by Loomis Sayles for more than
five years, and have served as portfolio managers of the Fund since its
inception in November 1995.
The adviser of the Growth Fund is CGM, One International Place, Boston,
Massachusetts 02110. CGM, organized in 1989, serves as investment adviser to
seven mutual funds and to other institutional investors. The general partner of
CGM is a corporation controlled equally by Robert L. Kemp and G. Kenneth
Heebner. Mr. Heebner, Senior Portfolio Manager of CGM, has served as portfolio
manager of the Growth Fund since 1976. Nvest Companies owns a majority limited
partnership interest in CGM. In 1997, the Growth Fund paid 0.67% of its average
net assets in advisory fees to CGM. NEFM has agreed to provide certain
administrative services to the Growth Fund at CGM's expense.
The subadviser of the Growth Opportunities Fund and the Capital Growth Fund is
Westpeak, 1011 Walnut Street, Boulder, Colorado 80302. The portfolio manager of
the Growth Opportunities Fund and the Capital Growth Fund is Gerald H. Scriver,
President and Chief Executive Officer of Westpeak, who has been with Westpeak
since its inception in 1991. Mr. Scriver has been portfolio manager of the
Growth Opportunities Fund since May 1995 and portfolio manager of the Capital
Growth Fund since February 1998.
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table, reduced in each case by the amount of any
subadvisory fee payable by the Fund to the Fund's subadviser (as described
below):
MANAGEMENT FEE PAYABLE BY FUND TO
NEFM (AS A PERCENTAGE OF AVERAGE
FUND DAILY NET ASSETS OF THE FUND)
- ---- -----------------------------
Balanced Fund, .............. 0.75% of the first $200 million
Capital Growth Fund, and 0.70% of the next $300 million
Value Fund 0.65% of amounts in excess of $500 million
Growth Opportunities Fund ... 0.70% of the first $200 million
and Equity Income Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity Fund ... 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of $500 million
The management fee rates payable by the Balanced, Capital Growth, International
Equity and Value Funds are higher than those paid by most other mutual funds but
are comparable to fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds.
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it serves as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund, and employs
professional advisers and securities analysts who provide research services to
the Fund.
Each Fund other than the Growth Fund pays its subadviser a subadvisory fee at
the annual rate set forth in the following table:
<TABLE>
<CAPTION>
SUBADVISORY FEE PAYABLE BY THE FUND
TO SUBADVISER
(AS A PERCENTAGE OF
FUND SUBADVISER AVERAGE DAILY NET ASSETS OF THE FUND)
- -- -------- ---------------------------------------------------
<S> <C> <C>
Balanced Fund and Value Fund ............................... Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund ........................................ Westpeak 0.400% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund .................................. Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund .................................. Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 million
Equity Income Fund ......................................... Loomis Sayles 0.400% of the first $200 million
0.325% of the next $300 million
0.275% of amounts in excess of $500 million
</TABLE>
Prior to February 14, 1997, Draycott Partners, Ltd. served as subadviser to
the International Equity Fund. Prior to February 16, 1998 Loomis Sayles served
as subadviser to the Capital Growth Fund.
NEFM and Loomis Sayles have voluntarily agreed, until further notice to the
International Equity Fund, to waive their respective management and subadvisory
fees for the Fund and, if necessary, NEFM has agreed to bear certain expenses
associated with the Fund, to the extent necessary to limit the Fund's expenses
to the annual rate of 2.00% for Class A shares, 2.75% for Class B shares and
2.75% for Class C shares. NEFM and/or Loomis Sayles may terminate these
voluntary limitations at any time.
Loomis Sayles has voluntarily agreed, until further notice to NEFM, to waive its
entire subadvisory fee with respect to the Equity Income Fund. This waiver by
Loomis Sayles does not reduce the Fund's expenses. This agreement may be
terminated by Loomis Sayles at any time. In addition, under an expense deferral
arrangement, which NEFM may terminate at any time, NEFM has agreed to defer its
management fee for the Fund and, if necessary, to bear certain expenses
associated with the Fund to the extent necessary to limit the Fund's expenses to
the annual rate of 1.50% for Class A shares, 2.25% for Class B shares and 2.25%
for Class C shares, subject to the obligation of the Fund to pay NEFM such
deferred fees and expenses in later periods to the extent that the Fund's
expenses fall below the annual rate of 1.50% for Class A shares, 2.25% for Class
B shares and 2.25% for Class C shares; provided, however, that the Fund is not
obligated to pay any such deferred fees or expenses more than two years after
the end of the fiscal year in which the fee or expense was deferred.
In the event that any of the foregoing voluntary limitations are terminated, the
affected Fund would supplement its Prospectus.
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, Massachusetts 02110.
The general partners of each of NEFM, Loomis Sayles, Westpeak and the
Distributor and the sole shareholder of NEFSCO, are special purpose corporations
that are indirect, wholly-owned subsidiaries of Nvest Companies. Nvest
Companies' managing general partner, Nvest Corporation, is an indirect
wholly-owned subsidiary of Metropolitan Life Insurance Company ("MetLife"), a
mutual life insurance company. MetLife owns in the aggregate, directly and
indirectly, approximately 47% of the outstanding limited partnership interests
in Nvest Companies. Nvest Companies' advising general partner, Nvest, L.P., is a
publicly-traded company listed on the New York Stock Exchange. Nvest Corporation
is the sole general partner of Nvest, L.P.
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, CGM, Loomis Sayles and Westpeak may consider sales of shares
of the Funds and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Funds. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with Nvest Companies, NEFM, CGM,
Loomis Sayles or Westpeak. See "Portfolio Transactions and Brokerage" in Part II
of the Statement.
NEFM provides executive and other personnel for the management of the Trusts.
Each Trust's Board of Trustees supervises the affairs of that Trust as conducted
by the Funds' advisers and subadvisers.
The Funds (excepting the Growth Fund) have received an exemptive order from the
SEC to permit NEFM, subject to certain conditions, to enter into subadvisory
agreements with subadvisers, including subadvisers other than the existing
subadvisers of the Funds, when approved by the relevant Trust's Board of
Trustees, without obtaining shareholder approval. The exemptive 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
relevant Trust's Board of Trustees. Shareholders will be notified of any
subadviser changes.
<PAGE>
- --------------------------------------------------------------------------------
SUBADVISER'S PAST PERFORMANCE
- --------------------------------------------------------------------------------
The first table and the first graph below present information about the
investment performance on an average annual total return basis of the Loomis
Sayles High Yield Equity Composite (the "Loomis Sayles Composite"), which may
be of interest to investors in the Equity Income Fund.
The average annual total returns shown below for the Loomis Sayles Composite
represent composite returns derived from performance data furnished by Loomis
Sayles relating to certain accounts managed by Loomis Sayles, including the
Equity Income Fund. Each of the accounts included in the Loomis Sayles
Composite has investment objectives substantially similar to that of the Fund
and was managed using investment policies and strategies substantially similar
(although not necessarily identical) to those employed by Loomis Sayles in
managing the Fund. The accounts represented by the Loomis Sayles Composite
include all of the accounts (including the Fund) with investment objectives
substantially similar to that of the Fund and managed by Loomis Sayles during
the relevant time periods using investment policies and strategies
substantially similar to those employed by Loomis Sayles in managing the Fund.
The average annual total returns shown below for the Loomis Sayles Composite
have been adjusted to reflect the Fund's operating expenses for Class A shares
(after giving effect to the Fund's voluntary expense deferral arrangement with
NEFM). The performance information for the Loomis Sayles Composite and the
Fund has not been adjusted to reflect deduction of the sales charge payable on
the Fund's Class A shares, nor does it give effect to the higher expense
levels of the Fund's Class B and Class C shares. Performance would be lower if
it were adjusted for these charges and expenses.
Although the Fund's performance is included in the Loomis Sayles Composite for
the periods that the Fund has been in existence, the information regarding the
performance of the Loomis Sayles Composite does not represent the Fund's
performance. Such information should not be considered a prediction of future
performance of the Fund.
Some of the accounts which make up the Loomis Sayles Composite have not been
subject to the same types of expenses to which the Fund is subject nor to the
diversification requirements, investment limitations and other restrictions to
which the Fund is subject under the Investment Company Act of 1940, as amended
(the "1940 Act") or the Code. The performance results for the Loomis Sayles
Composite might have been less favorable had such accounts been subject to
regulations as investment companies under relevant federal laws.
The line graphs below illustrate (i) the growth of a $10,000 investment in the
Loomis Sayles Composite from its inception to December 31, 1997 versus the
growth of a $10,000 investment in the Lipper Equity Income Fund Average over
the same period and (ii) the growth of a $10,000 investment in the Fund from
the Fund's inception on November 28, 1995 to December 31, 1997 versus the
growth in the Lipper Equity Income Fund Average from November 30, 1995 to
December 31, 1997.
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
LIPPER EQUITY
PERIOD ENDED LOOMIS SAYLES INCOME FUND
DECEMBER 31, 1997 COMPOSITE AVERAGE
----------------- ------------- -------------
Since Inception* ....... 15.76% 13.68%
7 years .............. 18.57% 17.31%
5 years .............. 18.51% 17.00%
3 years .............. 25.49% 25.49%
1 year ............... 23.03% 27.44%
*Inception date July 1, 1989.
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
NEW ENGLAND LIPPER EQUITY
PERIOD ENDED EQUITY INCOME INCOME FUND
DECEMBER 31, 1997 FUND** AVERAGE
----------------- ------------- -------------
Since Inception* ....... 25.32% 23.52%
1 year ............... 22.64% 27.44%
*The Fund's inception is November 28, 1995; Lipper Equity Income Fund Average
has been calculated from November 30, 1995.
**Class A shares; does not reflect sales charge.
Growth of $10,000 from Inception
July 1989 - December 1997
Loomis Sayles Lipper Equity
Date Composite Income Avg.
- ---- ------------- -------------
Dec - 89 $10,715.62 $10,774.29
Dec - 90 $10,533.17 $ 9,952.47
Dec - 91 $13,511.05 $12,679.52
Dec - 92 $14,839.54 $13,963.19
Dec - 93 $17,470.73 $15,945.05
Dec - 94 $17,555.83 $15,623.42
Dec - 95 $22,026.18 $20,372.20
Dec - 96 $28,202.17 $24,231.17
Dec - 97 $34,695.91 $30,811.45
Equity Income Mountain Chart
Growth of $10,000
11/30/95 - 12/31/97
N.E. Equity Lipper Equity
Date Income Fund Income Avg.
- ---- ------------- -------------
11/30/95 $10,000 $10,000
12/31/95 $10,288 $10,245
1/31/96 $10,520 $10,491
2/29/96 $10,664 $10,588
3/31/96 $10,840 $10,734
4/30/96 $11,088 $10,857
5/31/96 $11,424 $11,027
6/30/96 $11,320 $11,045
7/31/96 $11,032 $10,653
8/31/96 $11,248 $10,936
9/30/96 $11,664 $11,356
10/31/96 $12,304 $11,616
11/30/96 $13,064 $12,273
12/31/96 $13,026 $12,220
1/01/97 $13,421 $12,662
2/28/97 $13,670 $12,826
3/31/97 $13,051 $12,436
4/30/97 $13,499 $12,793
5/31/97 $14,161 $13,536
6/30/97 $14,582 $14,027
7/31/97 $15,553 $14,928
8/31/97 $15,106 $14,508
9/30/97 $15,659 $15,234
10/31/97 $14,901 $14,784
11/30/97 $15,532 $15,241
12/31/97 $15,975 $15,598
<PAGE>
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BUYING FUND SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in any Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
CALL NEW ENGLAND FUNDS PERSONAL ACCESS LINE(TM) AT 1-800-346-5984. WITH OUR
24 HOUR AUTOMATED CUSTOMER SERVICE SYSTEM YOU HAVE ACCESS TO YOUR ACCOUNT. WITH
A TOUCH-TONE TELEPHONE, OBTAIN YOUR CURRENT ACCOUNT BALANCE, RECENT
TRANSACTIONS, FUND PRICES AND RECENT PERFORMANCE INFORMATION. YOU CAN ALSO
PURCHASE OR EXCHANGE SHARES OF ANY NEW ENGLAND FUND. FOR MORE INFORMATION CALL
US AT 1-800-225-5478.
[] $25 (for initial and subsequent investments) for payroll deduction
investment programs for 401(k), SARSEP, SEP, SIMPLE Plans, 403(b)(7)
retirement plans and certain other retirement plans.
[] $100 on initial and subsequent investments for automatic investing
through the Investment Builder program.
[] $250 on initial and $100 on subsequent investments for retirement plans
with tax benefits such as corporate pension and profit sharing plans and
Keogh plans.
[] $500 on initial and $100 on subsequent investments for IRAs.
[] $2,000 on initial and $100 on subsequent investments for accounts
registered under the Uniform Gifts to Minors Act or the Uniform Transfers
to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and Class C shares of the Funds in the
following ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
[Graphic Omitted] BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with a
check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under
certain circumstances approved by the Distributor. When purchases are made by
check or periodic account investment, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten
calendar days.
[Graphic Omitted] BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business to obtain an
account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and Class of shares), Shareholder Name, Shareholder Account Number. Funds may be
transferred between 9:00 a.m. and 4:00 p.m. (Eastern time) on a day when the
Funds are open for business. Your bank may charge a fee for this service.
[Graphic Omitted] BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an
automatic investment plan through Investment Builder. Indicate the amount of the
monthly investment on the enclosed application and enclose a check marked "Void"
or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at
1-800-225-5478 for a Service Options Form.
[Graphic Omitted] BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clearing
House ("ACH") system as long as your bank or credit union is a member of the ACH
system and you have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling 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 accepted 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 determined at the close of regular trading on the Exchange on
days that the Exchange is open. Proceeds of redemptions of Fund shares purchased
through ACH may not be available for up to ten days after the purchase date.
[Graphic Omitted] BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for 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 (or, under limited circumstances, such other time no
later than 8:00 p.m. as may be agreed upon between the dealer and the
Distributor) 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 and C shares and certain shareholder features may not be available to
persons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you request
them in writing from the Distributor. The Funds' "open account" system for
recording your investment eliminates the problems and expense of handling and
safekeeping certificates. Certificates will not be issued for Class B or Class C
shares. If you wish transactions in your account to be effected by another
person under a power of attorney from you, special rules apply. Please contact
your investment dealer or the Distributor for details.
TO MAKE INVESTING EVEN EASIER, YOU CAN ALSO ORDER PERSONALIZED INVESTMENT SLIPS
BY CALLING 1-800-225-5478 BETWEEN 8 A.M. AND 7:00 P.M. (EASTERN TIME).
SALES CHARGES
Except as otherwise indicated in this Prospectus, each Fund offers three classes
of shares to the general public:
CLASS A SHARES
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% annual
service fee. Class A shares are offered subject to the following sales charges:
SALES CHARGE AS A % OF DEALER'S
-------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $50,000+ 5.75% 6.10% 5.00%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
+[Growth Fund Only.] For accounts established prior to February 28, 1997 having
a total investment value of between (and including) $25,000 and $49,999, a
reduced sales charge of 5.50% of the offering price (or 5.82% of the net amount
invested), with a dealer's concession of 4.25% as a percentage of offering
price, will be charged on the sale of additional Class A shares of the Growth
Fund if the total investment value of the Growth Fund account after such sale
is between (and including) $25,000 and $49,999.
*The Distributor may, at its discretion, pay investment dealers who initiate and
are responsible for such purchases (except investments by plans under Sections
401(a) or 401(k) of the Code whose total investments amount to $1 million or
more or that have 100 or more eligible employees ["Retirement Plans"]) a
commission of up to 1% on the first $3 million invested and 0.50% on the excess
over $3 million. For investments by Retirement Plans, the Distributor may, at
its discretion, pay investment dealers who initiate and are responsible for
such purchases a commission of up to 1% on the first $3 million invested and
0.50% on amounts over $3 million and up to $10 million. These commissions are
not payable if the purchase represents the reinvestment of a redemption made
during the previous 12 calendar months. Section 401(a), 401(k), 457 and 403(b)
plans that have total investment assets of at least $10 million are eligible to
purchase Class Y shares of the Funds, which are described in a separate
Prospectus.
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of Class A
shares of the Funds of $1,000,000 or more or purchases by Retirement Plans as
defined above, a CDSC of 1% applies to redemptions of shares within one year of
the date of purchase. If an exchange is made to Class A shares 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 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. The CDSC
applies to redemptions through the day one year after the day on which the
purchase was accepted. No CDSC applies to a redemption of shares followed by a
reinvestment effected within 30 days after the date of the redemption.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
and are subject to a 0.25% annual service fee, a 0.75% annual distribution fee
for 8 years (at which time they automatically convert to Class A shares) and a
CDSC if they are redeemed within 6 years of purchase. The holding period for
purposes of timing the conversion to Class A shares and determining the CDSC
will continue to run after an exchange to Class B shares of a series of the
Trusts. If the exchange is made to Class B shares of a Money Market Fund, then
the holding period stops and will resume only when an exchange is made back into
Class B shares of a series of the Trusts. If the Money Market Fund shares are
redeemed rather than exchanged back into a series of the Trusts, then a CDSC
applies to the redemption, at the same rate as if the Class B shares of the Fund
had been redeemed at the time they were exchanged for Money Market Fund shares.
For the purpose of the CDSC it is assumed that the shares held the longest are
the first to be redeemed.
The 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.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% of the sales price and advances the first year's service fee (up to 0.25%)
on sales of Class B shares by such dealers.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales charge,
are subject to a 0.25% annual service fee, a 0.75% annual distribution fee, and
a CDSC of 1.00% on redemptions made within one year of the date of purchase, and
do not convert to another class.
The Distributor pays to investment dealers at the time of sale a commission of
1.00% of the sales price of Class C shares sold by such investment dealers.
Unlike Class B shares, there are no conversion features associated with Class C
shares; therefore, if Class C shares are held for more than eight years, Class C
shareholders will be subject to higher distribution fees than shareholders of
other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of a series of the Trusts. If an exchange is made to
Class C shares of a Money Market Fund, then the holding period for purposes of
determining the expiration of the CDSC will stop and resumes only when an
exchange is made back into Class C 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. The
Class C CDSC applies to redemptions through the day one year after the day on
which the purchase was accepted.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or Class C shares are more
appropriate for an investor depends on the amount and intended length of the
investment. Investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because Class A shares have lower
12b-1 fees and pay correspondingly higher dividends per share. For these
reasons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the
relevant section of your application that you have been informed of the relative
advantages and disadvantages of Class A and C shares. Investors making smaller
investments might consider Class B or Class C shares because 100% of the
purchase is invested immediately. Investors making smaller investments who
anticipate redeeming their shares within six years may find Class C shares more
favorable than Class B shares, because Class B shares are subject to a CDSC on
redemptions made within six years after purchase, whereas the Class C CDSC
applies only to redemptions made during the first year after purchase. Class B
shares are more favorable than Class C shares for investors who anticipate
holding their investment for more than eight years, since Class B shares convert
to Class A shares (and thus bear lower ongoing fees) after eight years. Consult
your investment dealer for advice applicable to your particular circumstances.
GENERAL
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The 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,
as described in the following paragraph and under "Reduced Sales Charges (Class
A shares Only)."
A, B OR C SHARES -- WHICH SHOULD YOU CHOOSE? YOUR CHOICE OF SHARE CLASS DEPENDS
ON THE SIZE OF YOUR INVESTMENT AND HOW LONG YOU INTEND TO HOLD YOUR SHARES. IN
GENERAL, THERE ARE ONLY MINOR DIFFERENCES IN PERFORMANCE RESULTS FOR THE
DIFFERENT CLASSES IF HELD FOR THE LONG TERM. CONSULT YOUR FINANCIAL
REPRESENTATIVE FOR HELP IN DECIDING WHICH CLASS IS APPROPRIATE FOR YOU.
NO CDSC ON ANY CLASS OF SHARES APPLIES in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2)
distributions from an IRA due to death, disability or a tax-free return of an
excess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability (as
defined in Section 72(m)(7) of the Code) of a shareholder if the redemption is
made within one year after the shareholder's death or disability. In addition,
there is no CDSC on certain withdrawals pursuant to a Systematic Withdrawal
Plan. See "Selling Fund Shares -- 4 Ways to Sell Fund Shares -- By Systematic
Withdrawal Plan" below.
Each Fund receives the net asset value next determined after an order is
received on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a
purchase and, therefore, would be considered a taxable event on which you may
recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares of each Fund to investment dealers from time to
time. The staff of the SEC is of the view that dealers receiving all or
substantially all of the sales charge may be deemed underwriters of a Fund's
shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible
governmental authority 0.025% of the average daily net assets of an account at
the end of each calendar quarter for up to one year. These commissions are not
payable if the purchase represents the reinvestment of redemption proceeds from
any series of the Trusts or if the account is registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who have sold or
may sell significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A, B and C shares; or (iii)
financial assistance programs to dealers in connection with conferences, sales
or training programs, seminars, advertising and sales campaigns and/or
shareholder services arrangements. Certain broker-dealer firms and their
representatives who have sold or may sell significant amounts of shares, or have
achieved other objectives, may receive gifts of merchandise and/or incentives of
travel and lodging or the payment of these and other expenses incurred in
connection with trips to locations, within or outside the U.S., for educational
seminars or meetings of a business nature. Membership in the New England Funds
President's Council is based on sales achievement and other criteria and may
result in the provision of gifts of merchandise, a subscription to a financial
publication and participation in sales assistance programs and educational
seminars. The participation of broker-dealer firms and their representatives in
compensation and incentive programs is at the discretion of the firm.
Compensation and incentives shall conform with the applicable Rules of the
National Association of Securities Dealers, Inc.
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
[] LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at
which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
[] COMBINING ACCOUNTS -- purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless
the shares were purchased through an exchange from a series of the Trusts)
may be combined with purchases of qualifying accounts of a spouse, parents,
children, siblings, grandparents or grandchildren, individual fiduciary
accounts, sole proprietorships and/or single trust estates. The values of
all accounts are combined to determine the sales charge.
[] UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust
distributions of less than $1 million may be invested in Class A shares of
any Fund at a reduced sales charge of 1.50% of the public offering price (or
1.52% of the net amount invested). The dealer's concession on such sales is
1.50% of the public offering price.
[] ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to
investments by any state, county or city or any instrumentality, department,
authority or agency thereof that has determined that a Fund is a legally
permissible investment and that is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of any registered investment company.
[] CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to
investments of $25,000 or more in the Funds by (1) clients of an adviser or
subadviser to any series of the Trusts, any director, officer or partner of
a client of an adviser or subadviser to any series of the Trusts and the
parents, spouses and children of the foregoing; (2) any individual who is a
participant in a Keogh or IRA Plan under a prototype Plan document of an
adviser or subadviser to any series of the Trusts if at least one
participant in the plan qualifies under category (1) above; and (3) an
individual who invests through an IRA and is a participant in an employee
benefit plan that is a client of an adviser or subadviser to any series of
the Trusts. Any investor eligible for these arrangements should so indicate
in writing at the time of the purchase.
[] Shares of the Funds may be purchased at net asset value by investment
advisers, financial planners or other intermediaries who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; clients of such
investment advisers, financial planners or other intermediaries who place
trades for their own accounts if the accounts are linked to the master
account of such investment adviser, financial planner or other intermediary
on the books and records of the broker or agent; and retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in Sections 401(a), 403(b), 401(k) and 457 of the
Code and "rabbi trusts." Investors may be charged a fee if they effect
transactions through a broker or agent.
[] Shares of the Funds are available at net asset value for investments by
participant-directed 401(a) and 401(k) plans that have 100 or more eligible
employees or by retirement plans whose third party administrator or dealer
has entered into a service agreement with the Distributor to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by the Distributor. This
compensation may be paid indirectly by the Fund in the form of servicing
and/or distribution fees.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies, but are unavailable if the trust department or institution
is part of an organization not principally engaged in banking or trust
activities.
[] Shares of the Funds also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any
transaction fee. Such organizations may receive compensation, in an amount
of up to 0.25% annually of the average value of the Fund shares held by
their customers. This compensation may be paid by NEFM and/or a Fund's
subadviser out of their own assets, or may be paid indirectly by the Fund in
the form of servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investment minimum related to
investments by current and retired employees of the Trusts' investment
advisers or subadvisers, the Distributor, NELICO or MetLife or any other
company affiliated with NELICO or MetLife; current and former directors and
trustees of the Trusts, NELICO or MetLife or their predecessor companies;
agents and general agents of NELICO or MetLife and their insurance company
subsidiaries; current and retired employees of such agents and general
agents; registered representatives of broker- dealers who have selling
arrangements with the Distributor; the spouse, parents, children, siblings,
in-laws, grandparents or grandchildren of the persons listed above; any
trust, pension, profit sharing or other benefit plan for any of the
foregoing persons; and any separate account of NELICO or MetLife or of any
insurance company affiliated with NELICO or MetLife.
[] Shareholders of Reich and Tang Government Securities Trust may exchange
their shares of that fund for Class A shares of the Funds at net asset value
and without imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
- -------------------------------------------------------------------------------
OWNING FUND SHARES
- -------------------------------------------------------------------------------
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALLY EXCHANGED EACH MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS. THE MINIMUM MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. THERE IS NO FEE FOR EXCHANGES MADE PURSUANT TO THIS PROGRAM, BUT THERE
MAY BE A SALES CHARGE AS DESCRIBED ON THIS PAGE. SHARES OF THE ADJUSTABLE RATE
FUND THAT ARE SUBJECT TO A DIFFERENTIAL SALES CHARGE AS DESCRIBED ON THIS PAGE
MAY NOT PARTICIPATE IN THIS PROGRAM.
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California (the
"California Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) may be exchanged for Class A shares of another series
of the Trusts at net asset value only if you have held the California Fund
shares for at least six months; otherwise, you will pay the difference between
any sales charge you have already paid on your California Fund shares and the
higher sales charge of the series into which you are exchanging. If you exchange
Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) for shares of another series of the Trusts that has a
higher sales charge, you will pay the difference between any sales charge you
have already paid on your Adjustable Rate Fund shares and the higher sales
charge of the series into which you are exchanging. In addition, you may redeem
Class A shares of any Money Market Fund that were not acquired through exchanges
from any series of the Trusts and have the proceeds directly applied to the
purchase of shares of a series of the Trusts at the applicable sales charge.
CLASS B SHARES
You may exchange Class B shares of any series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. Such exchanges will be made at the next- determined net
asset value of the shares. Class B shares will automatically convert on a
tax-free basis to Class A shares eight years after they are purchased (excluding
the time the shares are held in a Money Market Fund). See "Sales Charges --
Class B Shares" above.
CLASS C SHARES
You may exchange Class C shares of any series of the Trusts (and Class C shares
of New England Cash Management Trust Money Market Series and Class A shares of
the Money Market Funds that have not been subject to a previous sales charge)
for Class C shares of any other series of the Trusts which offers Class C shares
or for Class C shares of New England Cash Management Trust Money Market Series.
Such exchanges will be made at the next-determined net asset value of the
shares.
CLASS Y SHARES
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection with
deferred compensation plans offered by NELICO for Class Y shares of any series
of the Trusts which offers Class Y shares. To obtain a Prospectus and more
information about Class Y shares, please call the Distributor toll-free at
1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business, call New England
Funds Personal Access Line(TM) at 1-800-346-5984 twenty-four hours a day or
write to New England Funds. Exchange requests after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes earlier than 4:00 p.m., will be processed
at the net asset value determined at the close of regular trading on the next
day that the Exchange is open. The exchange must be for a minimum of $1,000 (or
the total net asset value of your account, whichever is less), except that under
the Automatic Exchange Plan the minimum is $100. All exchanges are subject to
the eligibility requirements of the series into which you are exchanging. In
connection with any exchange, you must obtain and carefully read a current
Prospectus of the series into which you are exchanging. The exchange privilege
may be exercised only in those states where shares of such other series may be
legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. 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.
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.
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
interest 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 specified
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.
FUND DIVIDEND PAYMENTS
The Capital Growth Fund, the Growth Fund, the International Equity Fund and the
Value Fund pay dividends annually, the Growth Opportunities Fund pays dividends
semi-annually and the Balanced Fund and the Equity Income Fund pay dividends
quarterly. Each Fund pays as dividends substantially all net investment income
(other than long-term capital gains) each year and distributes annually all net
realized long- and short-term capital gains (after applying any available
capital loss carryovers). The trustees of the Trusts may adopt a different
schedule as long as payments are made at least annually. If you intend to
purchase shares of a Fund shortly before it declares a capital gain
distribution, you should be aware that a portion of the purchase price may be
returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from dividends and interest in cash while
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in
writing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested.
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DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in 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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<PAGE>
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SELLING FUND SHARS
- --------------------------------------------------------------------------------
4 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
[Graphic Omitted] THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted] BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any of
the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business. Class A 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.
[Graphic Omitted] BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund and class of shares, 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.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
[Graphic Omitted] BY SYSTEMATIC WITHDRAWAL PLAN
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized
basis, 10% of the value of your Fund account (based on the day you establish
your plan). Redemption of shares pursuant to the plan will not be subject to a
CDSC. For information, contact the Distributor or your investment dealer. Since
withdrawal payments may have tax consequences, you should consult your tax
adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer, except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time (or, under limited
circumstances, such other time no later than 8:00 p.m. as may be agreed upon
between the dealer and the Distributor) on the same day will receive that day's
net asset value. Redemption proceeds (LESS ANY APPLICABLE CDSC) will normally be
mailed to you within seven days after State Street Bank or the Distributor
receives your request in good order. However, in those cases where you have
recently purchased your shares by check or an electronic funds transfer through
the ACH system and you make a redemption request within 10 days after such
purchase or transfer, the Fund may withhold redemption proceeds until the Fund
knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply with respect to redemptions under powers of attorney. Please
call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax-qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors. The Funds 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.
If a Fund's adviser or subadviser determines, in its or their sole discretion,
that it would be detrimental to the best interests of the remaining shareholders
of the Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of readily
marketable securities held by the Fund in lieu of cash. Securities used to
redeem Fund shares in kind will be valued in accordance with the Fund's
procedures for valuation described under "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by the
Fund's adviser or subadviser in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions. The Funds' right to pay
redemptions in kind is limited by an election made by the Funds under Rule 18f-1
under the 1940 Act. See "Redemptions" in Part II of the Statement.
REPURCHASE OPTION (CLASS A SHARES ONLY)
You may apply your proceeds from the redemption of Class A shares of the Funds
(without a sales charge) to the repurchase of Class A shares of any series of
the Trusts. To qualify, you must reinvest some or all of the proceeds within 120
days after your redemption and notify New England Funds or your investment
dealer at the time of reinvestment that you are taking advantage of this
privilege. You may reinvest the proceeds either by returning the redemption
check or by sending your check for some or all of the redemption amount. Please
note: For federal income tax purposes, a redemption is a sale that involves tax
consequences (even if the proceeds are later reinvested). Please consult your
tax adviser.
<PAGE>
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FUND DETAILS
- --------------------------------------------------------------------------------
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity securities
are valued at the most recent sales prices on an applicable exchange or on the
Nasdaq National Market System, or, in the case of unlisted securities (or listed
securities which were not traded during the day), at the last quoted bid prices.
Price information on listed securities is generally taken from the closing price
on the exchange where the security is primarily traded. Debt securities (other
than short-term obligations with a remaining maturity of less than sixty days)
are valued on the basis of valuations furnished by a pricing service, authorized
by each Trust's Board of Trustees, which service determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term obligations with a remaining maturity of less than sixty days are
valued at amortized cost, which approximates market value. Securities traded
primarily on an exchange outside the United States which closes before the close
of the Exchange generally will be valued for purposes of calculating the Fund's
net asset value at the last sale or bid price on that non-U.S. exchange, except
that when an occurrence after the closing of that exchange is likely to have
materially changed such a security's value, such security will be valued at fair
value as determined by or under the direction of each Trust's Board of Trustees
as of the close of regular trading on the Exchange. An option written by the
Fund generally will be valued at the last sale price or, in the absence of the
last sale price, the last offer price. A futures contract will be valued at the
unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price. A settlement price may not be used if
the market makes a limit move with respect to a particular futures contract or
if the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price is not used, futures contracts will be valued at their fair value as
determined by or under the direction of each Trust's Board of Trustees. All
other securities and assets of each Fund's portfolio are valued at their fair
market value as determined in good faith by the adviser or subadviser of that
Fund (or a pricing service selected by the adviser or subadviser) under the
supervision of each Trust's Board of Trustees. The value of any assets for which
the market price is expressed in terms of a foreign currency will be translated
into U.S. dollars at the prevailing market rate on the date of the net asset
value computation, or, if no such rate is quoted at such time, at such other
appropriate rate as may be determined by or under the direction of each Trust's
Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of securities (determined as explained above) plus any cash and other assets
(including dividends and interest receivable but not collected) less all
liabilities (including accrued expenses) attributable to each class, by the
number of shares of such class outstanding. The public offering price of each
Fund's Class A shares is determined by adding the applicable sales charge to the
net asset value. See "Buying Fund Shares -- Sales Charges" above. The public
offering price of each Fund's Class B and Class C shares is the net asset value
per share.
The price you pay for a share will be determined using the next set of
calculations made after your order is accepted by State Street Bank. 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.
as may be agreed upon between the dealer and the Distributor) to receive that
day's public offering price.
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CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets - Liabilities
- -------------------------------------------------------- =Net Asset Value (NAV)
Total Number of Outstanding Shares in a Class
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS THE APPLICABLE
SALES CHARGE. THE PUBLIC OFFERING PRICE FOR CLASS B AND CLASS C SHARES IS THE
NAV.
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INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to qualify as a
"regulated investment company" and thus does not expect to pay any federal
income tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and ordinary income
are generally taxable to you as ordinary income. (A portion of these
distributions may qualify for the dividends-received deduction for
corporations.) Distributions designated by the Fund as deriving from net gains
on securities held for more than one year but not more than 18 months (i.e., 28%
Rate Gains) and from net gains on securities held for more than 18 months (i.e.,
20% Rate Gains) are taxable to you as such, regardless of how long you have
owned shares in the Fund. Both ordinary income and capital gains distributions
are taxable whether you elected to receive them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year-end virtually all the Fund's ordinary income earned during that calendar
year, and virtually all of the capital gain net income the Fund realized during
the twelve months ending October 31, plus any retained amount from the prior
year. If declared in October, November or December to shareholders of record in
that month and paid the following January, these distributions will be
considered for federal income tax purposes to have been received by shareholders
on December 31 of the year in which they were declared.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you (i) if you do not provide a correct, certified
taxpayer identification number, (ii) if a Fund is notified that you have
underreported income in the past or (iii) if you fail to certify to a Fund that
you are not subject to such withholding. In addition, each Fund will be required
to withhold 31% of the gross proceeds of Fund shares you redeem if you have not
provided a correct, certified taxpayer identification number or the Fund is
notified that you have underreported income in the past. If you are a tax-exempt
shareholder, however, these backup withholding rules will not apply so long as
you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The International Equity Fund may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in the Fund's portfolio. The Fund may in some circumstances be eligible to, and
in its discretion may, make an election under the Code which would allow Fund
shareholders who (i) are U.S. citizens or U.S. corporations and (ii) hold their
Fund shares (without protection from risk of loss) on the ex-dividend date for a
distribution by the Fund of investment income to shareholders and for at least
15 additional days during the 30-day period surrounding the ex- dividend date to
claim a foreign tax credit or deduction (but not both) on their U.S. income tax
return. If the Fund makes the election, the amount of each shareholder's
distribution reported on the information returns filed by the Fund with the
Internal Revenue Service must be increased by the amount of the shareholder's
portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an
investment in a Fund on their particular federal, state and local tax
situations. Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under foreign laws.
THE FUNDS' EXPENSES
In addition to the management fee paid to its adviser, each Fund pays all
expenses not borne by its adviser or subadviser or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, 12b-1 fees, all brokerage commissions and transfer
taxes in connection with portfolio transactions, all taxes and filing fees, the
fees and expenses for registration or qualification of its shares under federal
and state securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and the
compensation of trustees who are not directors, officers or employees of NELICO
or MetLife or their affiliates, other than affiliated registered investment
companies. In the case of Funds that offer Class Y shares, certain expenses may
be allocated differently between the Fund's Class A, Class B and Class C shares,
on the one hand, and its Class Y shares, on the other hand. (See "Additional
Facts About the Funds" below.)
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund
pays the Distributor a monthly service fee at an annual rate not to exceed 0.25%
of the Fund's average daily net assets attributable to its Class A, Class B and
Class C shares. The Distributor may pay up to the entire amount of this fee to
securities dealers who are dealers of record with respect to the Fund's shares,
for providing personal services to investors in shares of the Fund and/or the
maintenance of shareholder accounts. Such payments will be made on a quarterly
basis, unless other arrangements are made between the Distributor and the
securities dealer. The Class A service fee is payable only to reimburse the
Distributor for amounts it pays or expends in connection with the provision of
personal services to investors and/or the maintenance of shareholder accounts.
To the extent that the Distributor's reimbursable expenses in any year exceed
the maximum amount payable for that year under the relevant Service Plan, such
expenses may be carried forward for reimbursement in future years in which the
Plan remains in effect. The amounts of unreimbursed Class A expenses carried
over into 1998 from previous plan years were $563,284 for the Capital Growth
Fund, $2,041,399 for the Balanced Fund, $2,030,882 for the Growth Fund, $514,256
for the International Equity Fund and $1,651,994 for the Value Fund. The Class B
and C service fees are payable regardless of the amount of the Distributor's
related expenses. In the case of Class C shares, the Distributor retains the
0.25% service fee assessed against such shares during the first year of
investment.
Under Distribution Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each
Fund also pays the Distributor a monthly distribution fee at an annual rate not
to exceed 0.75% of the Fund's average daily net assets attributable to its Class
B and Class C shares. The Distributor may pay up to the entire amount of this
fee to securities dealers who are dealers of record with respect to the Fund's
shares, as distribution fees in connection with the sale of the Fund's shares.
Such payments will be made on a quarterly basis, unless other arrangements are
made between the Distributor and the securities dealer. The Distributor retains
the balance of the fee as compensation for its services as distributor of the
Class B and Class C shares. In the case of Class C shares, the Distributor
retains the 0.75% distribution fee assessed against such shares during the first
year of investment.
The service and distribution fees on Class C shares that are retained by the
Distributor during the first year of investment are paid to compensate the
Distributor for providing distribution-related services to the Fund in
connection with the sale of Class C shares, and to reimburse the Distributor, in
whole or in part, for the commissions paid (and related financing costs) to
investment dealers at the time of sale of Class C 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 and financial
reporting functions and clerical functions relating to the Fund and (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance.
PERFORMANCE CRITERIA
Each Fund may include total return information for each class of shares in
advertisements or other written sales material. Each Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter, or, in the case of the Growth Opportunities Fund's Class A shares, from
July 27, 1988, when there was a change in that Fund's investment adviser, to the
end of the most recent calendar quarter. Total return is measured by comparing
the value of a hypothetical $1,000 investment in a class at the beginning of the
relevant period to the value of the investment at the end of the period
(assuming deduction of the current maximum sales charge on Class A shares,
automatic reinvestment of all dividends and capital gains distributions and, in
the case of Class B and Class C shares, imposition of the CDSC relevant to the
period quoted). Total return may be quoted with or without giving effect to any
voluntary expense limitations in effect for the class in question during the
relevant period. The class may also show total return over other periods, on an
aggregate basis for the period presented, or without deduction of a sales
charge. If a sales charge is not deducted in calculating total return, the
class's total return will be higher.
The Balanced Fund may also include the yield of its Class A, Class B and Class C
shares, accompanied by the total return, in advertising and other written
material. Yield will be computed in accordance with the SEC's standardized
formula by dividing the adjusted net investment income per share earned during a
recent thirty-day period by the maximum offering price of a share of the
relevant class (reduced by any earned income expected to be declared shortly as
a dividend) on the last day of the period. Yield calculations will reflect any
voluntary expense limitations in effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates for each class
in its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital gain
over a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value, rather than the maximum offering price, is used to
calculate the distribution rate, the rate will be higher.
Total return will generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of expenses borne
by the Class B and Class C shares. An investor should balance this expected
lower total return against the benefit gained by 100% immediate investment of
the purchase price of Class B or Class C shares. As a result of lower operating
expenses, Class Y shares of each Fund that offers such shares can be expected to
achieve a higher investment return than the Fund's Class A, Class B or Class C
shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Growth, Value and Balanced Funds were organized prior to 1985 and
conducted investment operations as separate corporations until their
reorganization as series of New England Funds Trust I in January 1987. The
International Equity Fund and the Capital Growth Fund were organized in
1992.
[] New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Growth Opportunities Fund is the original series of shares of the Trust
and has been in operation since 1931.
[] New England Funds Trust III was organized in 1995 as a Massachusetts
business trust and is authorized to issue and unlimited number of full and
fractional shares in multiple series. The Equity Income Fund is the original
series of shares of the Trust and has been in operation since November 1995.
[] When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive annual or quarterly
dividends as determined by the respective Trust's trustees and to cast a
vote for each share you own at shareholder meetings. Shares of each Fund
vote separately from shares of other series of the same Trust, except as
otherwise required by law. Shares of all classes of a Fund vote together,
except as to matters relating to a class's Rule 12b-1 plan, on which only
shares of that class are entitled to vote.
[] Except for matters that are explicitly identified as "fundamental" in this
Prospectus or the Statement, the investment policies of each Fund may be
changed by the relevant Trust's trustees without shareholder approval or, in
most cases, prior notice. The investment objectives of the Growth, Value and
Balanced Funds are fundamental. The investment objectives of the Capital
Growth, International Equity and Equity Income Funds are not fundamental.
The investment objective of the Growth Opportunities Fund is not fundamental
but, as a matter of policy, the trustees would not change the objective
without shareholder approval. If there is a change in the objective of the
Capital Growth, International Equity, Equity Income or Growth Opportunities
Fund, shareholders should consider whether these Funds remain appropriate
investments in light of their current financial position and needs.
[] Each Fund (except the Growth Fund) also offers Class Y shares to certain
qualified investors. Class Y shares are identical to Class A, B and C
shares, except that Class Y shares have no sales charge or CDSC, bear no
Rule 12b-1 fees and have separate voting rights in certain circumstances.
Class Y may bear its own transfer agency and prospectus printing costs and,
if so, will not bear any portion of those costs relating to other classes of
shares.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees
of that Trust from office by votes cast at a shareholder meeting or by
written consent.
[] If the balance in your account with a Fund is less than a minimum amount set
by the trustees of the Trusts from time to time (currently $1,000 for all
accounts, except for those indicated below), that Fund may close your
account and send the proceeds to you. Shareholders who are affected by this
policy will be notified of the Fund's intention to close the account and
will have 60 days immediately following the notice to bring the account up
to the minimum. The minimum does not apply to Keogh, pension and profit
sharing plans, automatic investment plans or accounts that have fallen below
the minimum solely because of fluctuations in a Fund's net asset value per
share.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is
possible that a Trust might become liable for any misstatements in this
prospectus that relate to the other Trusts. The trustees of each Trust have
considered this possible liability and approved the use of this combined
prospectus for Funds of all three Trusts.
[] Each Fund's annual report contains additional performance information and is
available upon request and without charge. Each Fund will send a single copy
of its annual and semi- annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to
be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] The Trust's trustees have the authority without shareholder approval to
issue other classes of shares of a Fund that represent interest in the
Fund's portfolio but that have different sales load and fee arrangements.
[] No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
[] Many of the services provided to the Funds depend on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between
the year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Funds' operations and services provided to shareholders. NEFM, CGM, the
Funds' subadvisers, the Distributor, NEFSCO, State Street Bank and certain
other service providers to the Funds have reported that each expects to
modify its systems, as necessary, prior to January 1, 2000 to address this
so- called "year 2000 problem." However, there can be no assurance that the
problem will be corrected in all respects and that the Funds' operations and
services provided to shareholders will not be adversely affected.
<PAGE>
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GLOSSARY OF TERMS
- -------------------------------------------------------------------------------
Capital gain distributions -- Payments to shareholders of profits earned from
selling securities in the fund's portfolio. Capital gain distributions are
usually paid once a year.
Contingent Deferred Sales Charge (CDSC) -- A fee that may be charged when a
shareholder sells fund shares.
Distribution fee -- An annual asset-based sales charge that is used to pay for
sales-related expenses.
Income Distributions -- Payments to shareholders resulting from interest or
dividend income earned by a fund's portfolio.
Mutual fund -- The pooled assets of a group of investors, professionally managed
in pursuit of a specific objective.
Net asset value (NAV) -- The market value of one share of a mutual fund on any
given day without sales charge or CDSC. Determined by dividing the fund's total
net assets by the number of fund shares outstanding.
New England Funds, L.P. -- The distributor of the New England Funds.
New England Funds Management, L.P. -- The investment adviser to most of the
New England Funds.
New England Funds Service Corporation -- The transfer and dividend disbursing
agent of the New England Funds.
Open-end investment management company -- A mutual fund that allows investors to
redeem fund shares directly from the fund company on any business day.
Public offering price -- The price of one share of a mutual fund, including its
initial sales charge, if there is one.
Record date -- The date on which mutual fund investors must own a fund's shares
to be eligible to receive specific income or capital gain distributions.
Service fee -- Payments by a fund to the fund's distributor or a financial
representative for personal services to investors and/or for maintenance of
shareholder accounts.
Total Return -- The change in value of an investment in a fund over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
Yield -- The rate at which a fund earns income, expressed as a percentage. Yield
calculations are standardized among mutual funds, based on a formula developed
by the SEC.
12b-1 fees -- Fees paid by a mutual fund under a plan adopted under 1940 Act
Rule 12b-1. Can include both distribution fees and service fees.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[recycle symbol] Printed on Recycled Paper XS51-0598
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
Class Y shares of:
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND STAR WORLDWIDE FUND
NEW ENGLAND STAR SMALL CAP FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND EQUITY INCOME FUND
Prospectus and Application -- May 1, 1998
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund, New England Star Advisers Fund, New
England Star Worldwide Fund, New England Star Small Cap Fund and New England
Value Fund, each a series of New England Funds Trust I, New England Growth
Opportunities Fund, a series of New England Funds Trust II, and New England
Equity Income Fund, a series of New England Funds Trust III, are separate mutual
funds (the "Funds" and each a "Fund"). New England Funds Trust I, New England
Funds Trust II and New England Funds Trust III are referred to in this
Prospectus as the "Trusts."
Each Fund except New England Growth Fund offers four classes of shares: Class Y
(for qualified institutional investors) and Classes A, B and C (for other
investors). New England Growth Fund currently offers three classes of shares:
Class Y (for qualified institutional investors) and Classes A and B (for other
investors). Class Y shares of New England Growth Fund, New England Star
Worldwide Fund, New England Star Small Cap Fund and New England Equity Income
Fund are registered for sale only in Massachusetts and are not currently
available for sale except as may be permitted by New England Funds, L.P. This
Prospectus sets forth information investors should know before investing in
Class Y shares. Please read it carefully and keep it for future reference. A
Statement of Additional Information in two parts (the "Statement") about the
Funds dated May 1, 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, Massachusetts 02116, or call toll free at 1-800-225-5478. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains the Statement,
materials 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. Class A, Class B and Class C
shares of the Funds are described in separate Prospectuses. To obtain more
information about Class A, Class B and Class C shares, please call the
Distributor toll-free at 1-800-225-5478.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees
3 Financial Highlights
- -----------------------------------------------------------------
INVESTMENT STRATEGY
17 Investment Objectives
17 How the Funds Pursue Their Objectives
18 Fund Investments
- -----------------------------------------------------------------
23 INVESTMENT RISKS
- -----------------------------------------------------------------
33 FUND MANAGEMENT
- -----------------------------------------------------------------
BUYING FUND SHARES
39 Eligibility and Minimum Investment
40 Ways to Buy Fund Shares
40 |_| By wire transfer
40 |_| By mail
- -----------------------------------------------------------------
OWNING FUND SHARES
42 Exchanging Among New England Funds
42 Fund Dividend Payments
- -----------------------------------------------------------------
SELLING FUND SHARES
44 Ways to Sell Fund Shares
44 |_| By telephone
44 |_| By mail
- -----------------------------------------------------------------
FUND DETAILS
46 How Fund Share Price Is Determined
46 Income Tax Considerations
47 Performance Criteria
48 Additional Facts About the Funds
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class Y shares of the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y shares of the Funds
for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
All Funds
Class Y
--------
<S> <C>
Maximum Initial Sales Charge Imposed on a Purchase ............................. None
Maximum Contingent Deferred Sales Charge ....................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<CAPTION>
NEW ENGLAND NEW ENGLAND
INTERNATIONAL EQUITY FUND EQUITY INCOME FUND
Class Y Class Y
-------- -------
<S> <C> <C>
Management Fees (after voluntary fee waiver and expense limitation) ............ 0.89%* 0.00%**
12b-1 Fees None None
Other Expenses (after voluntary fee waiver and expense limitation
for New England Equity Income Fund) ......................................... 0.51% 1.25%**
Total Fund Operating Expenses
(after voluntary fee waiver and expense limitation) ......................... 1.40%* 1.25%**
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND VALUE FUND GROWTH FUND
Class Y Class Y Class Y Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees .......................... 0.75% 0.73% 0.72% 0.67%
12b-1 Fees ................................ None None None None
Other Expenses ............................ 0.45% 0.15%*** 0.28% 0.20%
Total Fund Operating Expenses ............. 1.20% 0.88% 1.00% 0.87%
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
STAR ADVISERS GROWTH OPPORTUNITIES STAR WORLDWIDE STAR SMALL CAP
FUND FUND FUND FUND
Class Y Class Y Class Y Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees ........................... 1.05% 0.69% 1.05% 1.05%
12b-1 Fees ................................ None None None None
Other Expenses ............................ 0.36%**** 0.31% 0.77% 0.90%
Total Fund Operating Expenses ............. 1.41% 1.00% 1.82% 1.95%
* Without the voluntary fee waiver by the Fund's adviser, Management Fees would be 0.90% and Total Fund Operating
Expenses would be 1.41%. This voluntary limitation can be terminated by the Fund's adviser at any time. See "Fund
Management."
** Without the voluntary fee waiver and expense limitation by the Fund's adviser, Management Fees, Other Expenses and Total Fund
Operating Expenses would be 0.70%, 2.15% and 2.85%, respectively. These voluntary limitations can be terminated by the Fund's
adviser at any time. See "Fund Management."
*** Pursuant to an administration and accounting service agreement among New England Funds Management, L.P., Loomis, Sayles &
Company, L.P., TNE Advisers, Inc. and New England Balanced Fund, TNE Advisers, Inc. will be paid up to 0.25% of the value of
the Class Y shares of New England Balanced Fund held by TNE Advisers' Inc. clients. A maximum fee of 0.05% of the value of
such Class Y shares will be paid by the Fund and the remaining fee payable to TNE Advisers, Inc. under this arrangement will
be shared equally between New England Funds Management, L.P. and Loomis, Sayles & Company, L.P.
**** Pursuant to an administration and accounting service agreement among New England Funds Management, L.P., TNE Advisers, Inc.
and New England Star Advisers Fund, TNE Advisers, Inc. will be paid up to 0.25% of the value of the Class Y shares of New
England Star Advisers Fund held by TNE Advisers' Inc. clients. A maximum fee of 0.05% of the value of such Class Y shares
will be paid by the Fund and the remaining fee payable to TNE Advisers, Inc. under this arrangement will be paid by New
England Funds Management, L.P.
</TABLE>
<PAGE>
<TABLE>
EXAMPLE
A $1,000 investment in Class Y shares of the Funds would incur the following dollar amount of transaction costs and operating
expenses, assuming a 5% annual return and redemption at period end. The 5% return and expenses in the Example should not be
considered indicative of actual or expected Fund performance or expenses, both of which may be more or less than those shown.
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND GROWTH FUND
Class Y Class Y Class Y
------- ------- -------
<S> <C> <C> <C>
1 year ..................................... $12 $9 $9
3 years .................................... $38 $28 $28
5 years .................................... $66 $49 $48
10 years ................................... $145 $108 $107
NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
INTERNATIONAL STAR ADVISERS STAR WORLDWIDE STAR SMALL CAP
EQUITY FUND FUND FUND FUND
Class Y Class Y Class Y Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
1 year ..................................... $14 $14 $18 $20
3 years .................................... $44 $45 $57 $61
5 years .................................... $77 $77 $99 $105
10 years ................................... $168 $169 $214 $227
NEW ENGLAND NEW ENGLAND NEW ENGLAND
VALUE GROWTH OPPORTUNITIES EQUITY INCOME
FUND FUND FUND
Class Y Class Y Class Y
------- ------- -------
<S> <C> <C> <C>
1 year ..................................... $10 $10 $13
3 years .................................... $32 $32 $40
5 years .................................... $55 $55 $69
10 years ................................... $122 $122 $151
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of New England Value Fund, New England Balanced Fund, New
England International Equity Fund and New England Star Advisers Fund outstanding
throughout the indicated periods.) The Class Y shares of New England Capital
Growth Fund, New England Growth Opportunities Fund, New England Star Worldwide
Fund, New England Star Small Cap Fund and New England Equity Income Fund had not
commenced operations as of December 31, 1997; these Funds show financial
highlights for a Class A, Class B and Class C share of each Fund outstanding
throughout the indicated periods. In the case of New England Growth Fund, which
did not offer Class C or Class Y shares as of December 31, 1997, financial
highlights are presented for a Class A and Class B share of the Fund outstanding
throughout the indicated periods.
The Financial Highlights presented on pages 3 through 16 have been included in
financial statements for the Funds, which have been examined by Price Waterhouse
LLP, independent accountants, (and for periods prior to 1997 for New England
Growth Opportunities Fund, by Coopers & Lybrand L.L.P., independent
accountants). The reports of Price Waterhouse LLP and Coopers & Lybrand L.L.P.
are incorporated by reference in Part II of the Statement and may be obtained by
shareholders. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in Part II
of the Statement. Each Fund's annual report contains additional performance
information and is available upon request and without charge.
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------
AUG. 3(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $ 12.50 $ 14.23 $ 15.27 $ 15.02 $ 18.41 $ 19.27
------- ------- ------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income (loss) ........... 0.02 0.00 (0.08) (0.11)(e) (0.14)(f) (0.18)(f)
Net gain (loss) on
investments (both
realized and
unrealized) ............. 1.84 1.12 (0.17) 4.74 3.22 3.43
------- ------- ------- -------- -------- --------
Total from investment
operations ............. 1.86 1.12 (0.25) 4.63 3.08 3.25
LESS DISTRIBUTIONS
Distributions from
net investment
income .................. (0.02) 0.00 0.00 0.00 0.00 0.00
Distributions from
net realized
capital gains ........... (0.11) (0.08) 0.00 (1.24) (2.22) (2.57)
------- ------- ------- -------- -------- --------
Total distributions ...... (0.13) (0.08) 0.00 (1.24) (2.22) (2.57)
------- ------- ------- -------- -------- --------
Net asset value,
end of period ........... $ 14.23 $ 15.27 $ 15.02 $ 18.41 $ 19.27 $ 19.95
======= ======= ======= ======== ======== ========
Total return(%)(c) ....... 14.9 7.9 (1.6) 30.7 17.1 17.2
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) ............ $34,772 $98,735 $95,803 $123,504 $141,326 $149,734
Ratio of operating
expenses to average
net assets (%)(d) ....... 1.00(b) 1.23 1.63 1.61 1.50 1.45
Ratio of net investment
income (loss) to
average net assets(%) ... 0.74(b) (0.03) (0.45) (0.67) (0.71) (0.87)
Portfolio turnover rate(%) 15 77 82 69 74 48
Average commission rate(g) -- -- -- -- $ 0.0509 $ 0.0506
<CAPTION>
CLASS B
--------------------------------------------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $ 14.79 $ 15.24 $ 14.89 $ 18.09 $ 18.74
------- ------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income (loss) ........... 0.00 (0.08) (0.16)(e) (0.28)(f) (0.32)(f)
Net gain (loss) on
investments (both
realized and
unrealized) ............. 0.53 (0.27) 4.60 3.15 3.25
------- ------- -------- ------- -------
Total from investment
operations ............. 0.53 (0.35) 4.44 2.87 2.93
LESS DISTRIBUTIONS
Distributions from
net investment
income .................. 0.00 0.00 0.00 0.00 0.00
Distributions from
net realized
capital gains ........... (0.08) 0.00 (1.24) (2.22) (2.57)
------- ------- -------- ------- -------
Total distributions ...... (0.08) 0.00 (1.24) (2.22) (2.57)
------- ------- -------- ------- -------
Net asset value,
end of period ........... $ 15.24 $ 14.89 $ 18.09 $ 18.74 $ 19.10
======= ======= ======== ======= =======
Total return(%)(c) ....... 3.6 (2.3) 29.7 16.2 15.9
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period(000) ............ $ 6,748 $15,390 $ 26,234 $37,439 $45,546
Ratio of operating
expenses to average
net assets (%)(d) ....... 2.29(b) 2.38 2.36 2.25 2.20
Ratio of net investment
income (loss) to
average net assets(%) ... (1.15)(b) (1.20) (1.42) (1.46) (1.62)
Portfolio turnover rate(%) 77 82 69 74 48
Average commission rate(g) -- -- -- $0.0509 $0.0506
</TABLE>
See the following page for footnotes.
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------
YEAR ENDED DECEMBER 31,
1995(a) 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period ...................... $ 14.89 $ 18.08 $ 18.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .............................. (0.09)(e) (0.28)(f) (0.34)(f)
Net gain (loss) on investments
(both realized and unrealized) .......................... 4.52 3.16 3.28
-------- -------- --------
Total income (loss) from investment operations ............ 4.43 2.88 2.94
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income .................. 0.00 0.00 0.00
Distributions from net realized capital gains ............. (1.24) (2.22) (2.57)
-------- -------- --------
Total distributions ....................................... (1.24) (2.22) (2.57)
-------- -------- --------
Net asset value, end of period ............................ $ 18.08 $ 18.74 $ 19.11
======== ======== ========
Total return (%)(c) ....................................... 29.7 16.2 15.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ........................... $ 354 $ 504 $ 979
Ratio of operating expenses to
average net assets (%)(d) ............................... 2.36 2.25 2.20
Ratio of net investment income (loss) to
average net assets (%) .................................. (1.42) (1.46) (1.62)
Portfolio turnover rate (%) ............................... 69 74 48
Average commission rate(g) ................................ -- $ 0.0509 $ 0.0506
(a) The Fund commenced operations on August 3, 1992. Class B shares were first offered on September 13, 1993.
Class C shares were first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred sales charge in the case of the
Class B and Class C shares are not reflected in total return calculations. Periods of less than one year are not
annualized.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary expense limitations
in effect from August 3, 1992 through September 30, 1993 would have been: (%)
Class A Class B
--------------------------- --------------
8/3/92 - Year Ended 9/13/93
12/31/92 12/31/93 12/31/93
---------- ---------- ----------
2.20(b) 1.58 2.97(b)
(e) Per share net investment income (loss) does not reflect current period's reclassification of permanent differences
between book and tax basis net investment income (loss).
(f) Per share net investment loss has been calculated using the average shares outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades on which commissions are charged. This rate generally does not reflect mark-ups,
mark-downs or spreads on shares traded on a principal basis.
</TABLE>
The Fund's current subadviser assumed that function on February 16, 1998. These
financial highlights reflect results achieved by the previous subadviser.
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------
MARCH 31(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------ -----------------------------------------
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $ 7.57 $ 7.24 $ 8.75 $ 9.55
--------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ........................................... 0.10 0.12 0.08 0.06(e)
Net gain (loss) on investments (both realized and unrealized) ... 0.08 2.21 2.10 1.95
--------- --------- --------- ---------
Total income from investment operations ......................... 0.18 2.33 2.18 2.01
--------- --------- --------- ---------
LESS DISTRIBUTIONS
Distributions from net investment income ........................ (0.10) (0.11) (0.08) (0.03)
Distributions from capital gains ................................ (0.41) (0.71) (1.30 (1.43)
--------- --------- --------- ---------
Total distributions ............................................. (0.51) (0.82) (1.38) (1.46)
Net asset value, end of period .................................. $ 7.24 $ 8.75 $ 9.55 $ 10.10
========= ========= ========= =========
Total return (%) ................................................ 2.4 (c) 32.8 26.4 21.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ................................. $ 4,001 $ 6,738 $ 12,716 $ 24,164
Ratio of operating expenses to average net assets (%) ........... 1.54 (b) 1.12 1.06 1.00
Ratio of net investment income to average net assets (%) ........ 1.05 (b) 1.47 1.03 0.53
Portfolio turnover rate (%) ..................................... 29 52 64 55
Average commission rate(d) ...................................... -- -- $ 0.0574 $ 0.0589
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads
on shares traded on a principal basis.
(e) Per share net investment income has been calculated using the average shares outstanding during the year.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND
<TABLE>
<CAPTION>
CLASS Y
----------------------------------------------
MAR. 8(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------- -----------------------------
1994 1995 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net asset value, beginning of period ........................................... $12.20 $11.27 $13.15 $13.95
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................................... 0.38 0.46 0.44 0.40
Net gain (loss) on investments (both realized and unrealized) .................. (0.72) 2.51 1.76 2.06
------ ------ ------ ------
Total income (loss) from investment operations ................................. (0.34) 2.97 2.20 2.46
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income ....................................... (0.38) (0.45) (0.45) (0.40)
Distributions from net realized capital gains .................................. (0.21) (0.64) (0.95) (1.74)
------ ------ ------ ------
Total distributions ............................................................ (0.59) (1.09) (1.40) (2.14)
------ ------ ------ ------
Net asset value, end of period ................................................ $11.27 $13.15 $13.95 $14.27
====== ====== ====== ======
Total return (%) .............................................................. (2.8)(c) 26.8 17.6 18.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ................................................ $39,183 $59,411 $77,665 $85,620
Ratio of operating expenses to average net assets (%) .......................... 0.99 (b) 1.11 0.88 0.88
Ratio of net investment income to average net assets (%) ....................... 3.69 (b) 3.62 3.24 2.66
Portfolio turnover rate (%) .................................................... 36 54 70 69
Average commission rate(d) -- -- $0.0577 $0.0590
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.59 $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44 $ 8.87 $ 10.55 $ 11.63
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income (loss) ....... 0.28 0.09 0.07 0.10 0.09 0.02 0.11 0.05 0.04 0.01
Net gains or losses on
investments (both
realized and
unrealized) ......... (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84) 3.30 2.07 2.79
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
Total income (loss)
from investment
operations .......... 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73) 3.35 2.11 2.80
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Distributions from net
investment income ... (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11) (0.05) (0.04) 0.00
Distributions from net
realized capital gains 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73) (1.62) (0.99) (4.02)
Distributions from
paid-in capital ..... 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
Total distributions (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84) (1.67) (1.03) (4.02)
-------- -------- -------- -------- ---------- ---------- -------- ---------- ---------- ----------
Net asset value,
end of period ....... $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44 $ 8.87 $ 10.55 $ 11.63 $ 10.41
======== ======== ======== ======== ========== ========== ======== ========== ========== ==========
Total return (%)(a) ... 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1) 38.1 20.9 23.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) ........ $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430 $1,201,110 $1,296,542 $1,459,747
Ratio of operating
expenses to average
net assets (%) ....... 1.26 1.22 1.23 1.14 1.15 1.18 1.19 1.20 1.18 1.12
Ratio of net investment
income to average net
assets (%) .......... 3.64 1.19 0.77 0.89 0.89 0.16 1.05 0.42 0.33 0.08
Portfolio turnover
rate (%) ............ 283 203 185 186 218 145 141 235 199 214
Average commission rate(b) -- -- -- -- -- -- -- -- $0.0668 $0.0688
(a) A sales charge is not reflected in total return calculations.
(b) For the years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share
for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on shares
traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
----------------
MARCH 1(a)
THROUGH
DEC. 31,
1997
-------
<S> <C>
Net asset value, beginning of period .............................................................. $12.47
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) ...................................................................... (0.07)(b)
Net gains or losses on investments (both realized and unrealized) ................................. 1.94
------
Total income (loss) from investment operations ................................................... 1.87
LESS DISTRIBUTIONS
Distributions from net investment income .......................................................... 0.00
Distributions from net realized capital gains ..................................................... (4.02)
Distributions from paid-in capital ................................................................ 0.00
------
Total distributions ............................................................................... (4.02)
------
Net asset value, end of period .................................................................... $10.32
======
Total return (%)(c) ............................................................................... 14.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ................................................................... $17,757
Ratio of operating expenses to average net assets (%) ............................................. 1.87(e)
Ratio of net investment income to average net assets (%) .......................................... (0.67)(e)
Portfolio turnover rate (%) ....................................................................... 214
Average commission rate(d) ........................................................................ (0.0688)
(a) Class B shares were first offered on March 1, 1997.
(b) Net investment income (loss) per share has been calculated using the average of shares outstanding during the period.
(c )A contingent deferred sales charge is not reflected in total return calculations. Periods of less than one year are not
annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or
spreads on shares traded on a principal basis.
(e) Computed on an annualized basis.
</TABLE>
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------------------------
SEPT. 9(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------- -----------------------------------------------
1993 1994 1995 1996 1997
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........................ $ 15.19 $ 14.86 $ 15.64 $ 16.25 $ 16.48
--------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ....................................... 0.13 0.00 0.42 0.11(e) 0.19(e)
Net gain (loss) on investments (both realized and unrealized) (0.01) 1.32 0.60 0.54 (1.23)
--------- ------- ------- ------- -------
Total income from investment operations ..................... 0.12 1.32 1.02 0.65 (1.04)
--------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income .................... (0.13) 0.00 (0.41) (0.09) 0.00
Distributions from net realized capital gains ............... (0.32) (0.53) 0.00 (0.33) (1.05)
Distributions in excess of net realized gains ............... 0.00 0.00 0.00 0.00 (0.04)
Distributions from paid in capital .......................... 0.00 (0.01) 0.00 0.00 0.00
--------- ------- ------- ------- -------
Total distributions ......................................... (0.45) (0.54) (0.41) (0.42) (1.09)
--------- ------- ------- ------- -------
Net asset value, end of period .............................. $ 14.86 $ 15.64 $ 16.25 $ 16.48 $ 14.35
========= ======= ======= ======= =======
Total return (%) ............................................ 0.7(c) 8.9 6.6 4.0 (6.7)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ............................. $ 7,006 $56,561 $83,119 $52,161 $ 4,752
Ratio of operating expenses to average net assets (%) (d) ... 1.00(b) 1.00 1.00 1.00 1.15
Ratio of net investment income to average net assets (%) .... 0.33(b) 0.76 1.99 0.89 1.22
Portfolio turnover rate (%) ................................. 101 123 119 59 154
Average commission rate(f) .................................. -- -- -- $0.0180 $0.0024
(a) Class Y shares were first offered on September 9, 1993.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary expense limitations would
have been 1.35%(b), 1.04%, 1.21%, 1.19%, and 2.14%, respectively, for the periods ended December 31, 1993, 1994, 1995,
1996 and 1997, respectively.
(e) Per share net investment income has been calculated using the average shares outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or
spreads on shares traded on a principal basis.
</TABLE>
The Fund's current subadviser assumed that function on February 14, 1997. For
periods prior to February 14, 1997, these financial highlights reflect results
achieved by the previous subadviser under different investment policies.
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
YEAR SEVEN MONTHS
ENDED ENDED
MAY 31, DECEMBER 31 YEAR ENDED DECEMBER 31,
------- ----------- -----------------------------------------------------------------------------
1988 1988(b) 1989 1990 1991 1992 1993(a) 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .... $ 11.92 $ 10.37 $ 9.55 $ 10.88 $ 9.54 $ 11.79 $ 12.20 $ 12.67 $ 12.41 $ 14.39 $ 13.87
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .... 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18 0.13 0.07(h)
Net gains or losses on
investments (both
realized and unrealized) (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01 2.07 4.40
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total income (loss)
from investment
operations ............. (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19 2.20 4.47
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income ...... (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18) (0.13) (0.06)
Distributions in excess
of net investment income 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00
Distributions from net
realized capital gains (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03) (2.59) (2.93)
Distributions from
paid-in capital ........ (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total distributions ...... (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21) (2.72) 2.99
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Net asset value,
end of period .......... $ 10.37 $ 9.55 $ 10.88 $ 9.54 $ 11.79 $ 12.20 $ 12.67 $ 12.41 $ 14.39 $ 13.87 $ 15.35
======= ======= ======= ======= ======= ======= ======== ======== ======== ======== ========
Total return(%)(f)........ (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1 17.2 33.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) ........... $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693 $166,963 $220,912
Ratio of operating
expenses to
average net assets(%)... 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38 1.30 1.25
Ratio of net investment
income to average net
assets(%) .............. 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31 0.92 0.46
Portfolio turnover
rate(%) ................ 8 83(e) 17 6 12 10 4 6 69 127 103
Average commission rate(g) -- -- -- -- -- -- -- -- -- $0.0348 $0.0334
</TABLE>
See the following page for footnotes.
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------- -------------------------------
SEPT. 13(c) MAY 1(c) YEAR
THROUGH THROUGH ENDED
DEC. 31, YEAR ENDED DEC. 31, DEC. 31, DEC. 31,
------------------------------------ -------------------
1993 1994 1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $12.95 $12.66 $12.42 $14.40 $13.87 $13.84 $14.39 $13.85
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ..................... 0.06 0.16 0.10 0.03 (0.05)(h) 0.06 0.04 (0.05)(h)
Net gain (loss) on investments
(both realized and unrealized) .......... 0.01 (0.09) 4.01 2.07 4.40 2.58 2.05 4.42
------ ------ ------ ------ ------ ------ ------ ------
Total income from investment operations ... 0.07 0.07 4.11 2.10 4.35 2.64 2.09 4.37
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment income) (0.03) (0.14) (0.10) (0.04) (0.01) (0.06) (0.04) (0.01)
Distributions (in excess of net investment
income) ................................. (0.06) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net realized capital
gains) .................................. (0.27) (0.17) (2.03) (2.59) (2.93) (2.03) (2.59) (2.93)
Distributions (from paid-in capital)....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions ....................... (0.36) (0.31) (2.13) (2.63) (2.94) (2.09) (2.63) (2.94)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ............ $12.66 $12.42 $14.40 $13.87 $15.28 $14.39 $13.85 $15.28
====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(f) ....................... 0.6 0.6 34.3 16.3 32.4 20.2 16.3 32.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............ $1,498 $5,185 $29,026 $46,856 $81,066 $4,707 $3,912 $6,735
Ratio of operating expenses
to average net assets (%) ............... 2.08(e) 1.93 2.11 2.05 2.00 2.11(e) 2.05 2.00
Ratio of net investment income
to average net assets (%) ............... 0.71(e) 1.10 0.56 0.17 (0.29) 0.56(e) 0.17 (0.29)
Portfolio turnover rate (%) ............... 4 6 69 127 103 69 127 103
Average commission rate(g) ................ -- -- -- $0.0348 $0.0334 -- $0.0348 $0.0334
(a) As of January 1, 1993, the Fund discontinued the use of equalization accounting.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's former adviser, Back Bay Advisors, L.P., assumed
that function on July 27, 1988.
(c) Class B shares were first offered on September 13, 1993. Class C shares were first offered on May 1, 1995.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P., voluntarily agreed to limit total Fund expenses
to 1.25% of the Fund's average annual net assets. Without such limitation, the ratio of operating expenses to average
net assets for the year ended May 31, 1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a contingent deferred sales charge in the case of the Class B and
Class C shares are not reflected in total return calculations. Unless otherwise indicated, periods of less than one year
are not annualized.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or
spreads on shares traded on a principal basis.
(h) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS Y
----------------------------------------------
NOV. 15(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------- -----------------------------
1994 1995 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.59 $13.24 $16.83 $18.33
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) ................................ 0.06 0.00 (0.02)(e) 0.03(e)
Net gain (loss) on investments (both realized and unrealized) (0.35) 4.58 3.23 3.66
------ ------ ------ ------
Total income from investment operations ..................... (0.29) 4.58 3.21 3.69
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income .................... (0.06) 0.00 0.00 0.00
Distributions from realized capital gains ................... 0.00 (0.99) (1.71) (3.61)
------ ------ ------ ------
Total distributions ......................................... (0.06) (0.99) (1.71) (3.61)
------ ------ ------ ------
Net asset value, end of period .............................. $13.24 $16.83 $18.33 $18.41
====== ====== ====== ======
Total return (%) ............................................ (2.1)(c) 34.8 19.6 20.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ............................. $196 $5,569 $18,649 $37,006
Ratio of operating expenses to average net assets (%) (d).... 1.79(b) 1.57 1.43 1.41
Ratio of net investment income to average net assets (%)..... 2.26(b) (0.08) (0.11) 0.11
Portfolio turnover rate (%) ................................. 100 142 127 168
Average commission rate(f) .................................. -- -- $0.0595 $0.0250
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets (computed on an annualized basis) without giving effect to the
voluntary expense limitations in effect from November 15, 1994 through December 31, 1994 would have been 1.90% for the
period ended December 31, 1994.
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or
spreads on shares traded on a principal basis.
</TABLE>
On July 25, 1997, Harris Associates L.P. succeeded Berger Associates, Inc.
("Berger") as subadviser to one of the four segments of the Fund. These
financial highlights reflect results achieved by this segment prior to July 25,
1997 by Berger under different investment policies.
<PAGE>
NEW ENGLAND STAR WORLDWIDE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(a) 1997 1996(a) 1997 1996(a) 1997
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........................ $12.50 $14.40 $12.50 $14.30 $12.50 $14.31
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)(c) ............................. (0.03) (0.02) (0.12) (0.14) (0.12) (0.13)
Net realized and unrealized gain on investments ............. 2.11 1.88 2.10 1.87 2.11 1.86
------- ------- ------- ------- ------- -------
Total income from investment operations ..................... 2.08 1.86 1.98 1.73 1.99 1.73
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income ................... 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from net realized capital gains ............... (0.18) (0.76) (0.18) (0.76) (0.18) (0.76)
------- ------- ------- ------- ------- -------
Distributions from paid-in capital ......................... 0.00 (0.04) 0.00 (0.04) 0.00 (0.04)
------- ------- ------- ------- ------- -------
Total distributions ........................................ (0.18) (0.80) (0.18) (0.80) (0.18) (0.80)
------- ------- ------- ------- ------- -------
Net asset value, end of period .............................. $14.40 $15.46 $14.30 $15.23 $14.31 $15.24
======= ======= ======= ======= ======= =======
Total return (%)(b) ......................................... 16.7 12.7 15.9 11.9 15.9 11.8
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ............................. $68,509 $118,381 $65,367 $123,467 $17,980 $26,137
Ratio of operating expenses to average net assets (%) ....... 2.58 2.07 3.33 2.82 3.33 2.82
Ratio of net investment income (loss) to average net assets(%) (0.21) (0.12) (0.96) (0.87) (0.96) (0.87)
Portfolio turnover rate (%) ................................ 57 80 57 80 57 80
Average commission rate(d) .................................. $0.0004 $0.0023 $0.0004 $0.0023 $0.0004 $0.0023
(a) Fund commenced operations on December 29, 1995.
(b) A sales charge in the case of the Class A shares and a contingent deferred sales charge in the case of the Class B and Class C
shares are not reflected in total return calculations.
(c) Per share net investment loss has been calculated using the average shares outstanding during the year.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------
NOV. 15 (a)
THROUGH YEAR ENDED
DEC. 31, DEC. 31,
--------------- ------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net asset value, beginning of period .......................... $12.50 $12.86 $15.15
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ......................................... 0.04 0.31 0.25
Net gains or losses on securities (both realized and unrealized) 0.36 3.11 3.15
------ ------ ------
Total from investment operations .............................. 0.40 3.42 3.40
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income .......................... (0.04) (0.30) (0.26)
Distributions from net capital gains .......................... 0.00 (0.83) (0.70)
------ ------ ------
Total distributions .......................................... (0.04) (1.13) (0.96)
Net asset value, end of period ............................... $12.86 $15.15 $17.59
====== ====== ======
Total return(%)(c) ............................................ 3.2 26.6 22.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)................................ $2,064 $2,613 $14,681
Ratio of operating expenses to average net assets(%)(d) ....... 1.50 (b) 1.50 1.50
Ratio of net income to average net assets(%) .................. 3.58(b) 2.06 1.76
Portfolio turnover rate(%) .................................... 0 45 33
Average commission rate (e).................................... -- $0.0608 $0.0600
</TABLE>
See the following page for footnotes.
<PAGE>
NEW ENGLAND EQUITY INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
------------ ------------
SEPT. 15 (a) SEPT. 15 (a)
THROUGH THROUGH
DEC. 31, DEC. 31,
1997 1997
----- -----
<S> <C> <C>
Net asset value, beginning of period ......................... $17.06 $17.06
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .................................. 0.03 0.03
Net gains or losses on investments (both realized and unrealized) 0.60 0.60
------ ------
Total income from investment operations ....................... 0.63 0.63
------ ------
LESS DISTRIBUTIONS
Distributions from net investment income ...................... (0.04) (0.04)
Distributions from net realized capital gains.................. (0.06) (0.06)
------ ------
Total distributions .......................................... (0.10) (0.10)
------ ------
Net asset value, end of period ................................ $17.59 $17.59
====== ======
Total return (%)(c) ........................................... 3.7 3.7
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) .............................. $9,375 $1,596
Ratio of operating expenses to average net assets (%)(d)....... 2.25(b) 2.25(b)
Ratio of net investment income (loss) to average net assets (%) 1.01(b) 1.01(b)
Portfolio turnover rate (%).................................... 33 33
Average commission rate(e) .................................... $0.0600 $0.0600
(a) Fund commenced operations on November 15, 1995. Class B and Class C shares were first offered on
September 15, 1997.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of
Class B and Class C shares are not reflected in total return calculations. Periods less than one year
are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect to the expense limitation
in effect would have been 5.97% (annualized), 3.67%, 3.10%, 3.85% (annualized) and 3.85% (annualized),
for the period ended December 31, 1995 and the fiscal years ended December 31, 1996 and 1997 for
the Class A shares, and the period ended December 31, 1997 for the Class B and Class C shares, respectively.
(e) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades upon which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs, or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------- ------------------- -----------------
YEAR YEAR YEAR
ENDED ENDED ENDED
DEC. 31, 1997(a) DEC. 31, 1997(a) DEC. 31, 1997(a)
------------------- ------------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of year $12.50 $12.50 $12.50
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (b)............................... (0.20) (0.30) (0.30)
Net realized and unrealized gain on investments ...... 3.55 3.54 3.54
------ ------ ------
Total from investment operations .................... 3.35 3.24 3.24
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net realized capital gains ....... (0.48) (0.48) (0.48)
------ ------ ------
Total distributions .................................. (0.48) (0.48) (0.48)
------- ------- -------
Net asset value, end of year ......................... $15.37 $15.26 $15.26
====== ====== ======
Total return (%) (c) ................................. 27.0 26.1 26.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) ........................ $52,066 $52,616 $13,970
Ratio of operating expenses to average net assets (%) 2.20 2.95 2.95
Ratio of net investment loss to average net assets (%) (1.44) (2.19) (2.19)
Portfolio turnover rate (%) .......................... 140 140 140
Average commission rate .............................. $0.0551 $0.0551 $0.0551
(a) Fund commenced operations on December 31, 1996.
(b) Per share net investment loss has been calculated using the average shares outstanding during the year.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of Class B and
Class C shares is not reflected in total return calculations.
</TABLE>
<PAGE>
INVESTMENT STRATEGY
INVESTMENT OBJECTIVES
NEW ENGLAND CAPITAL GROWTH FUND (THE "CAPITAL GROWTH FUND")
The Fund seeks long-term growth of capital.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
NEW ENGLAND BALANCED FUND (THE "BALANCED FUND")
The Fund seeks a reasonable long-term investment return from a combination of
long-term capital appreciation and moderate current income.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles"), Pasadena, CA
NEW ENGLAND GROWTH FUND (THE "GROWTH FUND")
The Fund seeks long-term growth of capital through investment in equity
securities of companies whose earnings are expected to grow at a faster rate
than the United States economy.
Adviser: Capital Growth Management Limited Partnership ("CGM")
NEW ENGLAND INTERNATIONAL EQUITY FUND (THE "INTERNATIONAL EQUITY FUND")
The Fund seeks total return from long-term growth of capital and dividend
income, primarily through investment in international equity securities.
Subadviser: Loomis Sayles, Boston, MA
NEW ENGLAND STAR ADVISERS FUND (THE "STAR ADVISERS FUND")
The Fund seeks long-term growth of capital.
Subadvisers: Harris Associates L.P. ("Harris Associates"), Founders Asset
Management LLC ("Founders"), Janus Capital Corporation
("Janus Capital") and Loomis Sayles, Detroit, MI
NEW ENGLAND STAR WORLDWIDE FUND (THE "STAR WORLDWIDE FUND")
The Fund seeks long-term growth of capital.
Subadvisers: Harris Associates, Montgomery Asset Management, LLC
("Montgomery"), Founders and Janus Capital
NEW ENGLAND STAR SMALL CAP FUND (THE "STAR SMALL CAP FUND")
The Fund seeks capital appreciation.
Subadvisers: Robertson, Stephens & Company Investment Management, L.P.
("Robertson Stephens"), Montgomery, Loomis Sayles, Boston, MA and
Harris Associates
NEW ENGLAND VALUE FUND (THE "VALUE FUND")
The Fund seeks a reasonable long-term investment return from a combination of
market appreciation and dividend income from equity securities.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND GROWTH OPPORTUNITIES FUND (THE "GROWTH OPPORTUNITIES FUND")
The Fund seeks opportunities for long-term growth of capital and income.
Subadviser: Westpeak
NEW ENGLAND EQUITY INCOME FUND (THE "EQUITY INCOME FUND")
The Fund seeks current income and capital growth.
Subadviser: Loomis Sayles, New York, NY
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
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FUND INVESTMENTS
o CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing
substantially all of its assets in equity securities. Investments are
selected based on their growth potential; current income is not a
consideration. The Fund normally will invest primarily in equity securities
of companies with medium or large market capitalization (capitalization of $1
billion to $5 billion and over $5 billion, respectively), but will also
invest a portion of its assets in equity securities of companies with
relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research and
analysis of individual companies and industries. The subadviser selects
investments for the Fund based on qualitative and quantitative criteria
including, among others, industry dominance and competitive position,
consistent earnings growth, a history of high profitability, the subadviser's
expectation of continued high profitability and overall financial strength,
although not every investment will have all of these characteristics.
o GROWTH FUND
Most of the Growth Fund's investments are normally in common stocks, although
the Fund may invest in any type of equity securities. The Fund does not
consider current income as a factor in selecting its investments.
o VALUE FUND
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is ordinarily
placed on undervalued securities. Although long-term market appreciation is
ordinarily the basis for security selection, current income may be a
significant consideration when yields appear to be favorable compared to
overall opportunities for capital appreciation.
o BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its equity investments are normally
in dividend-paying common stocks of recognized investment quality that are
expected to achieve growth in earnings and dividends over the long term. In
selecting equity investments for the Fund, an emphasis is ordinarily placed
on undervalued securities. Fixed-income securities include notes, bonds,
non-convertible preferred stock and money market instruments. The Fund
invests at least 25% of its assets in fixed-income securities and, under
normal market conditions, more than 50% of its assets in equity securities.
o INTERNATIONAL EQUITY FUND
The International Equity Fund seeks to achieve its objective by investing
primarily in common stocks, although the Fund may invest in any type of
equity securities. Normally the Fund will invest at least 65% of its total
assets in equity securities of issuers headquartered outside the United
States or that derive a substantial part of their revenues or profits from
countries outside the United States. Under normal conditions the Fund's
portfolio will contain equity securities of issuers from at least three
countries outside the United States. The Fund may also invest in closed-end
investment companies domiciled in the United States that invest primarily in
securities issued by foreign companies. In addition, the Fund may invest up
to 20% of its assets in bonds issued or guaranteed by foreign governments
(including their political subdivisions, agencies, authorities and/or
instrumentalities), supranational agencies or foreign companies, including
but not limited to convertible debt and below investment grade or unrated
debt.
The Fund's subadviser will make investment decisions on behalf of the Fund by
selecting a group of attractively valued countries and then selecting
securities within such countries that are expected to offer the best value
based on its valuation and earnings growth expectations.
o GROWTH OPPORTUNITIES FUND
It is normally the policy of the Growth Opportunities Fund to invest in a
diversified portfolio of common stocks considered by the Fund's subadviser to
have possibilities for long-term appreciation of capital and income. Emphasis
will be given to both undervalued securities ("value" style) and securities
of companies with growth potential ("growth" style). The Fund will ordinarily
invest substantially all of its assets in equity securities.
o EQUITY INCOME FUND
Under normal market circumstances, the Equity Income Fund will invest at
least 80% of its assets in dividend-paying common or preferred stocks. The
Fund's portfolio will be selected to seek current income and capital growth
and a current dividend yield which is comparable to the published composite
yield of the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500").
The Fund may also invest in non dividend-paying stocks, other equity
securities, zero coupon bonds and strips, and foreign securities.
MULTI-ADVISER FUNDS (STAR ADVISERS FUND, STAR WORLDWIDE AND STAR SMALL CAP FUND)
Capital invested in each of the Star Advisers, Star Worldwide and Star Small Cap
Funds (the "Star Funds") will be allocated equally among the different segments
of the Fund's portfolio, managed by different subadvisers. For each Star Fund,
each subadviser will manage its segment or segments of the Fund's assets in
accordance with the Fund's objective and the subadviser's own investment style
and strategy.
New England Funds Management, L.P. ("NEFM"), the manager of the Star Funds,
believes that a multi-adviser approach to equity investing - one that combines
the varied styles of a number of subadvisers in selecting securities for the
Star Funds' portfolios - offers a different investment opportunity than funds
run by a single adviser using a single style.
Any given management style tends to produce better returns than other styles
under certain market and economic conditions, and to perform less well under
other conditions. Therefore, most single-adviser funds have not consistently
maintained superior performance rankings relative to their peers over long
periods. NEFM believes that consistency of results, minimizing under-performance
even at the cost of out-performance at times, is likely to produce higher
performance over time.
NEFM believes that assigning portfolio management responsibility for the Star
Funds to several subadvisers, whose varying styles have resulted in records of
success, may increase the likelihood that the Fund may produce superior results
for its shareholders, with less variability of return and less risk of
persistent under-performance than a single-adviser fund. Of course, past results
should not be considered a prediction of future performance, and there is no
assurance that a Star Fund will in fact achieve superior results over any time
period.
o STAR ADVISERS FUND
The Star Advisers Fund seeks to attain its objective by investing primarily
in equity securities. The Fund may also invest in other securities, as
described below. Under normal market conditions, however, at least 65% of the
Fund's assets will be invested in equity securities. Capital invested in the
Fund will be allocated on an equal basis among four different subadvisers.
Each subadviser will manage its segment of the Fund's assets in accordance
with that subadviser's own investment style and strategy. The Fund, in the
discretion of each subadviser, may invest without limit in securities of
companies with smaller capitalization. The Fund may in the discretion of each
of its subadvisers invest without limit in securities of foreign issuers
(including issuers in emerging markets) as well as in securities of U.S.
issuers.
The investment styles described below will be those applied by each of the
subadvisers to the segment of the Fund's portfolio for which that subadviser
is responsible.
HARRIS ASSOCIATES' investment philosophy is predicated on the belief that
over time market price and value converge and that investment in securities
priced significantly below long-term value presents the best opportunity to
achieve long term growth of capital. Its segment of the Fund's portfolio
invests primarily in common stocks and securities convertible into common
stock, but may also invest in other securities that are suited to the Fund's
investment objective, including preferred stocks and fixed-income securities
(including lower quality fixed-income securities).
FOUNDERS' segment of the portfolio will invest primarily in common stocks of
well-established, high-quality growth companies. Founders manages its segment
of the Fund's portfolio by investing primarily in established companies with
above-average prospects for growth in earnings per share. This segment will
invest primarily in mid-cap and large capitalization stocks. Founders
believes that mid-cap companies (companies with between $1.0 billion and $5.0
billion of market capitalization) may produce returns comparable to those of
smaller-cap companies, but with less risk because of their generally stronger
infrastructures and performance records and more solid market positions, and
that large-capitalization stocks add stability to the portfolio. These
companies tend to have strong performance records, with continuous operating
records of three years or more. Founders' approach to investment management
gives greater emphasis to the fundamental financial, marketing and operating
characteristics of individual companies, and is less concerned with the
short-term impact of changes in macroeconomic and market conditions, than
some other investment firms. This segment of the portfolio may invest in
bonds, debentures and other corporate obligations when Founders believes that
these investments offer opportunity for growth of capital. This segment of
the portfolio may also invest in Rule 144A securities and may enter into
futures contracts or options thereon for hedging purposes.
JANUS CAPITAL pursues the Fund's investment objective by investing
substantially all of Janus Capital's segment of the portfolio in common
stocks when its portfolio manager believes that the relevant market
environment favors profitable investing in such securities. Janus Capital
manages its segment of the portfolio to seek long-term capital growth
primarily from investing in common stocks of companies of any size, including
large, well-established companies and smaller, emerging growth companies.
Janus Capital's analysis and selection process focus on stocks with earnings
growth potential that may not be recognized by the market. This segment of
the portfolio may also invest in preferred stocks, warrants, government
securities, corporate bonds and debentures or other debt securities or
repurchase agreements when its portfolio manager perceives an opportunity for
capital growth from such securities or to receive a return on idle cash.
Janus Capital's segment may also invest in Rule 144A securities and may enter
into options, futures and forward contracts.
LOOMIS SAYLES manages its segment of the portfolio by investing primarily in
stocks of small capitalization companies with good earnings growth potential
that Loomis Sayles believes are undervalued by the market. Such companies
typically have better than average growth rates, below average price/earnings
ratios and strong balance sheets and cash flow. Normally, the segment will
invest at least 65% of its assets in companies with market capitalization, at
the time of investment, in the range of the market capitalization of those
companies which make up the Russell 2000 Index. Loomis Sayles seeks to build
a core small cap portfolio of solid growth company stocks, with a smaller
emphasis on special situations and turnarounds (companies that have
experienced significant business problems but which Loomis Sayles believes
have favorable prospects for recovery), as well as unrecognized stocks.
o STAR WORLDWIDE FUND
The Star Worldwide Fund seeks to attain its objective by investing primarily
in equity securities. The Fund is a global fund, which means it will seek to
invest in equity securities traded on foreign stock markets as well as the
stock markets of the United States. Foreign markets represent two-thirds of
the value of all stocks traded in the world, and offer many opportunities for
investment in addition to those found in the United States. Foreign markets
may be located in large, developed countries such as Great Britain or in
smaller, developing markets like Singapore. The Fund may also invest in other
securities, as described below. Under normal market conditions, however, at
least 65% of each segment of the Fund's portfolio, and at least 65% of the
Fund's total assets, will be invested in equity securities. The Fund may, in
the discretion of each of its subadvisers (see below), invest without limit
in securities of foreign issuers (including issuers in emerging markets) as
well as in securities of U.S. issuers. Under normal market conditions, the
Fund will invest in securities of issuers in at least three different
countries, one of which will be the United States. As a temporary, defensive
measure, however, the Fund may invest without limit in securities of U.S.
issuers, including corporate and government debt obligations, or in cash or
cash equivalents. For more information about investments in foreign
securities, see "Investment Risks -- Foreign Securities."
Capital invested in the Fund will be allocated equally among five different
segments of the portfolio, managed by four different subadvisers. Each
subadviser will manage its segment or segments of the Fund's assets in
accordance with that subadviser's own investment style and strategy. The
subadvisers' styles and strategies are outlined below.
HARRIS ASSOCIATES manages two segments of the Fund's portfolio, a U.S.
segment and an international segment. Harris Associates' investment
philosophy is predicated on the belief that over time market price and value
converge and that investment in securities priced significantly below
long-term value presents the best opportunity to achieve long term growth of
capital. The U.S. segment invests primarily in equity securities of U.S.
issuers, whereas the international segment invests primarily in markets
outside the United States, which may include both mature and emerging
markets. The segments of the Fund managed by Harris Associates invest
primarily in common stocks and securities convertible into common stock, but
may also invest in other securities that are suited to the Fund's investment
objective, including preferred stocks and fixed-income securities (including
lower quality fixed-income securities).
MONTGOMERY normally will invest at least 65% of its segment of the Fund's
portfolio in equity securities in emerging market countries. Montgomery
selects investments for its segment based on a combination of quantitative
screening techniques, "top-down" industry selection and "bottom-up" stock
selection, using fundamental analysis.
FOUNDERS' segment of the portfolio may invest in both small and established
growth companies, in both emerging and established markets throughout the
world. Founders' approach to investment management gives greater emphasis to
the fundamental financial, marketing and operating characteristics of
individual companies, and is less concerned with the short-term impact of
changes in macroeconomic and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds, debentures and
other fixed-income securities (including lower quality fixed-income
securities) when Founders believes that these investments offer opportunity
for growth of capital.
JANUS CAPITAL pursues the Fund's investment objective by investing its
segment of the portfolio in U.S. and foreign (including emerging) markets,
using a "bottom-up" approach. Janus Capital seeks to identify companies with
earnings growth potential that may not be recognized by the market at large.
This segment of the portfolio invests primarily in common stocks, and may
also invest, to a lesser degree, in preferred stocks, warrants, government
securities, corporate bonds and debentures or other fixed-income securities
(including lower quality fixed-income securities).
o STAR SMALL CAP FUND
The Star Small Cap Fund seeks to attain its objective of capital appreciation
by investing primarily in equity securities of small capitalization
companies, which the Fund currently considers to be companies having total
market capitalization (shares outstanding times market price per share), at
the time of purchase, of under $1 billion ("Small Cap Companies"). Under
normal market conditions, at least 65% of the Fund's net assets will be
invested in Small Cap Companies. The Fund may also invest its assets in
companies having larger market capitalization and in other securities,
including foreign and fixed-income securities. Foreign securities, including
equity securities that are traded over-the-counter or on foreign exchanges,
may constitute up to 25% of the Fund's net assets. There are no geographic
limits on the Fund's foreign investments. For more information about
investment in foreign and fixed income securities see "Investment Risks --
Foreign Securities" and "Investment Risks -- Fixed Income Securities."
The investment styles below will be those applied by each of the subadvisers
to the segment of the Fund's portfolio for which that subadviser manages.
ROBERTSON STEPHENS pursues the Fund's investment objective by selecting
securities for its segment based on a flexible, research-driven, bottom up
approach to value recognition and trend analysis. Stock selection focuses on
a growth catalyst that is expected to drive earnings and valuations higher
over a 1 to 3 year time horizon. The catalyst may be a new product launch, a
new management team, expansion into new markets, realization of undervalued
assets, or some other change expected to result in growth. Once identified,
that catalyst becomes the primary reason for owning the stock.
MONTGOMERY seeks to identify companies at an early stage or a transitional
point of the companies' development, such as the introduction of new
products, favorable management changes, new marketing opportunities or
increased market share for existing product lines. Using fundamental
research, Montgomery targets businesses having positive internal dynamics
that can outweigh unpredictable macro-economic factors, such as interest
rates, commodity prices, foreign currency rates and overall stock market
volatility. Montgomery searches for companies with potential to gain market
share within their respective industries, achieve and maintain high and
consistent profitability, produce increased quarterly earnings and provide
solutions to current and pending problems in their respective industries or
society at large.
LOOMIS SAYLES intends to manage its segment of the Fund by investing in
companies that offer distinctive products, services or technologies. These
companies are expected to exhibit the potential for dynamic earnings growth
as a result of rising sales and improving profitability. Most of these
companies will have market capitalizations between $100 million and $1
billion at the time of initial purchase. Loomis Sayles also places a
significant amount of importance on the quality of management of these
smaller companies because it is Loomis Sayles' belief that ultimately it is
the skill of the management team that will enable these small companies to
mature into large, successful companies. Loomis Sayles employs a fundamental
research approach to identify and invest in these companies. Some of the
factors evaluated include historical results, competitive position, including
market share gains and losses, the impact of technology, secular trends in
the economy and management history. Projections are made for both current and
the following year's results and for longer term (3-5 years) growth rates.
Typically, only companies with a projected long term earnings growth rate in
excess of 20% per year are purchased for the portfolio. Positions are
typically eliminated from the portfolio when the company begins to evidence
slowing growth trends usually associated with larger companies.
HARRIS ASSOCIATES' approach in selecting investments for its segment of the
Fund is oriented to individual stock selection and is driven by the size of
the discount of the security's market price relative to the economic value of
the security as determined by Harris Associates. Harris Associates'
investment philosophy is predicated on the belief that over time market price
and value converge and that investment in securities priced significantly
below long-term value presents the best opportunity to achieve long-term
capital appreciation. In managing its segment, Harris Associates uses several
qualitative and quantitative methods in analyzing economic value, but
considers the primary determinant of value to be the company's long-term
ability to generate cash for its owners. Once Harris Associates has
determined that a security is undervalued, it will be considered for
purchase, taking into account the quality and motivation of the management,
the firm's market position within its industry and its degree of purchasing
power. Harris Associates believes that the risks of equity investment are
often reduced if management's interests are strongly aligned with the
interests of stockholders.
o ADDITIONAL INFORMATION
The Funds other than the Balanced Fund seek to attain their objectives by
normally investing in equity securities. When the particular Fund's
subadviser deems it appropriate, however, these Funds may, for temporary
defensive purposes, hold a substantial portion of their assets in cash or
fixed-income investments, including U.S. Government obligations, investment
grade (and comparable unrated) corporate bonds or notes, money market
instruments and repurchase agreements. Corporate obligations in the lowest
investment grade category (rated BBB by Standard & Poor's Ratings Group
["S&P"] or Baa by Moody's Investors Service, Inc. ["Moody's"]) have some
speculative characteristics and may be more adversely affected by changing
economic conditions than are higher grade obligations. No estimate can be
made as to when or for how long a Fund will employ defensive strategies.
Under some market conditions, the Balanced Fund may, for temporary purposes,
invest less than 50% of its assets in equity securities and the balance in
cash and fixed-income investments.
Each Fund may invest in foreign securities (in the case of the Growth
Opportunities Fund, only if such securities are traded in the U.S. markets).
Each Fund may also engage in certain options and futures transactions.
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INVESTMENT RISKS
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It is important to understand the following risks inherent in a Fund before you
invest.
o EQUITY SECURITIES
Equity securities are securities that represent an ownership interest (or the
right to acquire such an interest) in a company and include common and
preferred stocks and securities exercisable for or convertible into common or
preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock). While offering greater potential for long-term
growth, equity securities are more volatile and more risky than some other
forms of investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in equity
securities of companies with relatively small market capitalization.
Securities of such companies may be more volatile than the securities of
larger, more established companies and the broad equity market indices. See
"Small Companies" below. Each Fund's investments may include securities
traded "over-the-counter" as well as those traded on a securities exchange.
Some over-the-counter securities may be more difficult to sell under some
market conditions.
Each Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or other
equity securities. Convertible securities also include other securities, such
as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally increase or decrease as the values of the underlying equity
securities increase or decrease. The movements in the prices of convertible
securities, however, may be smaller than the movements in the value of the
underlying equity securities. The value of convertible securities that pay
dividends or interest, like the value of other fixed-income securities,
generally fluctuates inversely with changes in interest rates. Warrants have
no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. They do not represent ownership of
the securities for which they are exercisable, but only the right to buy such
securities at a particular price. Less than 35% (20% in the case of the
Equity Income Fund) of each Fund's respective net assets will be invested in
convertible securities rated below investment grade and unrated convertible
securities of comparable quality.
o SMALL COMPANIES
The Star Advisers, Star Worldwide and Equity Income Funds, in the discretion
of each of their subadvisers, may invest without limit in the securities of
companies with smaller capitalization. The Star Small Cap Fund invests
primarily in securities of companies with market capitalization of under $1
billion.
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed those
of companies with larger capitalization. Such growth rates may in turn be
reflected in more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets or financial
resources and may be dependent upon a relatively small management group. The
securities may have limited marketability and may be subject to more abrupt
or erratic movements in price than securities of companies with larger
capitalization or market averages in general. The net asset value of funds
that invest in companies with smaller capitalization therefore may fluctuate
more widely than market averages.
o WARRANTS (STAR FUNDS)
The Star Funds may invest in warrants. A warrant is an instrument that gives
the holder a right to purchase a given number of shares of a particular
security at a specified price until a stated expiration date. Buying a
warrant generally can provide a greater potential for profit or loss than an
investment of equivalent amounts in the underlying common stock. The market
value of a warrant does not necessarily move with the value of the underlying
securities. If a holder does not sell the warrant, it risks the loss of its
entire investment if the market price of the underlying security does not,
before the expiration date, exceed the exercise price of the warrant.
Investment in warrants is a speculative activity. Warrants pay no dividends
and confer no rights (other than the right to purchase the underlying
securities) with respect to the assets of the issuer.
o FOREIGN SECURITIES
Investments in foreign securities present risks not typically associated with
investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Funds may purchase securities denominated in
foreign currencies, a change in the value of any such currency against the
U.S. dollar will result in a change in the U.S. dollar value of the Fund's
assets and the Fund's income available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the value of a currency relative to the U.S.
dollar declines after a Fund's income has been earned in that currency,
translated into U.S. dollars and declared as a dividend, but before payment
of such dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency
relative to the U.S. dollar declines between the time a Fund incurs expenses
in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
governmental issuer than about a U.S. issuer, and foreign corporate issuers
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
securities custody costs are often higher than those in the United States,
and judgments against foreign entities may be more difficult to obtain and
enforce. With respect to certain foreign countries, there is a possibility of
governmental expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could affect the value
of investments in those countries. The receipt of interest on foreign
government securities may depend on the availability of tax or other revenues
to satisfy the issuer's obligations.
The International Equity, Equity Income and Star Funds' investments in
foreign securities may include investments in emerging or developing
countries, whose economies or securities markets are not yet highly
developed. Special considerations associated with these investments (in
addition to the considerations regarding foreign investments generally) may
include, among others, greater political uncertainties, an economy's
dependence on revenues from particular commodities or on international aid or
development assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and disruptions in
securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored depository receipts are arranged without involvement
by the issuer of the underlying equity securities. Less information about the
issuer of the underlying equity securities may be available in the case of
unsponsored depository receipts.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities,
and include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal
and Steel Community and the Inter-American Development Bank.
In determining whether to invest in securities of foreign issuers, the
adviser or subadviser of each Fund will consider the likely effects of
foreign taxes on the net yield available to the Fund and its shareholders.
Compliance with foreign tax law may reduce the Fund's net income available
for distribution to shareholders.
o FOREIGN CURRENCY
Most foreign securities in the Funds' portfolios will be denominated in
foreign currencies or traded in securities markets in which settlements are
made in foreign currencies. Similarly, any income on such securities is
generally paid to the Fund in foreign currencies. The value of these foreign
currencies relative to the U.S. dollar varies continually, causing changes in
the dollar value of the Fund's portfolio investments (even if the local
market price of the investments is unchanged) and changes in the dollar value
of the Fund's income available for distribution to its shareholders. The
effect of changes in the dollar value of a foreign currency on the dollar
value of the Fund's assets and on the net investment income available for
distribution may be favorable or unfavorable.
The Funds may incur costs in connection with conversions between various
currencies. In addition, those Funds may be required to liquidate portfolio
assets, or may incur increased currency conversion costs, to compensate for a
decline in the dollar value of a foreign currency occurring between the time
when the Fund declares and pays a dividend, or between the time when the Fund
accrues and pays an operating expense in U.S. dollars.
o PRIVATIZATIONS (STAR FUNDS)
In a number of countries around the world, governments have undertaken to
sell to investors interests in enterprises that the government has
historically owned or controlled. These transactions are known as
"privatizations" and may in some cases represent opportunities for
significant capital appreciation. In some cases, the ability of U.S.
investors, such as the Funds, to participate in privatizations may be limited
by local law, or the terms of participation may be less advantageous than for
local investors. Also, there is no assurance that privatized enterprises will
be successful, or that an investment in such an enterprise will retain its
value or appreciate in value.
o FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that have been set
aside as collateral for the issuer's obligation. Fixed-income securities
generally involve an obligation of the issuer to pay interest or dividends on
either a current basis or at the maturity of the security, as well as the
obligation to repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk. Credit risk
is the risk that the security's issuer will fail to fulfill its obligation to
pay interest, dividends or principal on the security. Market risk is the risk
that the value of the security will fall because of changes in market rates
of interest. (Generally, the value of fixed-income securities falls when
market rates of interest are rising.) Some fixed-income securities also
involve prepayment or call risk. This is the risk that the issuer will repay
a Fund the principal on the security before it is due, thus depriving the
Fund of a favorable stream of future interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income securities
will cause a Fund's net asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the Funds other than
the International Equity, Equity Income, Star Advisers, Star Worldwide, Star
Small Cap and Balanced Funds will, at the time of purchase, either be rated
investment grade by at least one major rating agency or be unrated but
determined to be of investment grade quality by the Fund's adviser or
subadviser.
o LOWER QUALITY FIXED-INCOME SECURITIES (INTERNATIONAL EQUITY, BALANCED,
EQUITY INCOME AND STAR FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities. Lower quality fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. Achievement of the investment objective of a
mutual fund investing in lower quality fixed-income securities may be more
dependent on the fund's adviser's or subadviser's own credit analysis than
for a fund investing in higher quality bonds. The market for lower quality
fixed-income securities may be more severely affected than some other
financial markets by economic recession or substantial interest rate
increases, by changing public perceptions of this market or by legislation
that limits the ability of certain categories of financial institutions to
invest in these securities. In addition, the secondary market may be less
liquid for lower rated fixed-income securities. This lack of liquidity at
certain times may affect the valuation of these securities and may make the
valuation and sale of these securities more difficult. During the fiscal year
ended December 31, 1997, the International Equity, Balanced, Equity Income,
Star Advisers, Star Worldwide and Star Small Cap Funds had on average 6.3%,
3.0%, 0%, 0%, 0% and 0% of their assets, respectively, invested in
fixed-income securities rated below investment grade. Securities of below
investment grade quality are considered high yield, high risk securities and
are commonly known as "junk bonds." For more information, including a
detailed description of the ratings assigned by S&P and Moody's, please refer
to the Statement's "Appendix A - Description of Bond Ratings."
o MORTGAGE- AND ASSET-BACKED SECURITIES (BALANCED FUND AND STAR FUNDS)
The Balanced and, with respect to up to 25% of their respective total assets,
the Star Funds may each invest in mortgage- and asset-backed securities,
which are shares in a pool of mortgages or other debt. These securities are
generally pass-through securities, which means that principal and interest
payments on the underlying securities (less servicing fees) are passed
through to shareholders on a pro rata basis. These securities involve
prepayment risk, which is the risk that the underlying mortgages or other
debt may be refinanced or paid off prior to their maturities during periods
of declining interest rates. In that case, the Fund may have to reinvest the
proceeds from the securities at a lower rate. Potential market gains on a
security subject to prepayment risk may be more limited than potential market
gains on a comparable security that is not subject to prepayment risk.
o ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES AND "STRIPS" (EQUITY
INCOME, BALANCED, STAR ADVISERS AND STAR WORLDWIDE FUNDS)
The Equity Income, Balanced, Star Advisers and Star Worldwide Funds may
invest in zero coupon securities and in "strips." Zero coupon bonds do not
make regular interest payments; rather, they are sold at a discount from face
value. Principal and accrued discount (representing interest accrued but not
paid) are paid in maturity. "Strips" are debt securities that are stripped of
their interest payments after the securities are issued, but otherwise are
comparable to zero coupon bonds. The Star Advisers Fund may also invest in
pay-in-kind and step coupon securities. Step coupon bonds trade at a discount
from their face value and pay coupon interest. The coupon rate is low for an
initial period and then increases to a higher coupon rate thereafter.
Pay-in-kind bonds normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond with the same
coupon rate and a face value equal to the amount of the coupon payment that
would have been made. The market values of "strips" and zero coupon,
pay-in-kind and step coupon securities generally fluctuate in response to
changes in interest rates to a greater degree than do conventional
interest-paying securities of comparable term and quality. Under many market
conditions, investments in such securities may be illiquid, making it
difficult for the Fund to dispose of them or determine their current value.
o REPURCHASE AGREEMENTS
Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date. If the seller
fails to repurchase the securities, the Fund has rights to sell the
securities to third parties. Repurchase agreements can be regarded as loans
by the Fund to the seller, collateralized by the securities that are the
subject of the agreement. Repurchase agreements afford an opportunity for the
Fund to earn a return on available cash at relatively low credit risk,
although the Fund may be subject to various delays and risks of loss if the
seller fails to meet its obligation to repurchase. The staff of the SEC is
currently of the view that repurchase agreements maturing in more than 7 days
are illiquid securities.
o INVESTMENTS IN OTHER INVESTMENT COMPANIES (INTERNATIONAL EQUITY, GROWTH AND
GROWTH OPPORTUNITIES FUND AND STAR FUNDS)
The International Equity, Growth, Growth Opportunities and the Star Funds may
each invest up to 10% of its total assets in securities of other investment
companies. Because of restrictions on direct investment by U.S. entities in
certain countries, investing indirectly in such countries (by purchasing
shares of another fund that is permitted to invest in such countries) may be
the most practical or efficient way for the Fund to invest in such countries.
In other cases, where the Fund's subadviser desires to make only a relatively
small investment in a particular country, investing through another fund that
holds a diversified portfolio in that country may be more effective than
investing directly in issuers in that country. As an investor in another
investment company, the Fund will indirectly bear its share of the expenses
of that investment company. These expenses are in addition to the Fund's own
costs of operations. In some cases, investing in an investment company may
involve the payment of a premium over the value of the assets held in that
investment company's portfolio.
o SHORT-TERM TRADING
Although each Fund seeks long-term growth or return (current income and
capital growth in the case of the Equity Income Fund), each Fund may,
consistent with its investment objective, engage in portfolio trading in
anticipation of, or in response to, changing economic or market conditions
and trends. These policies may result in higher turnover rates in the Fund's
portfolio, which may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will not limit any
adviser's or subadviser's investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
o OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
The International Equity and Star Funds may buy, sell or write options on
securities, securities indexes, currencies or futures contracts. These Funds
may buy and sell futures contracts on securities, securities indexes or
currencies. These Funds may also enter into swap contracts. These Funds may
engage in these transactions either for the purpose of enhancing investment
return, or to hedge against changes in the value of other assets that the
Fund owns or intends to acquire. These Funds may also conduct foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
The Funds other than the International Equity and Star Funds may also buy and
sell futures contracts on a variety of stock indexes. A Fund would buy such a
futures contract only when the Fund is experiencing significant cash inflows,
and then only for the purpose of maintaining the Fund's exposure to the
equity markets during the time before the Fund has fully invested incoming
cash in equity securities directly. Similarly, a Fund would sell stock index
futures only during periods of cash outflows from the Fund, for the purpose
of reducing equity market exposure before holdings of stock are liquidated. A
Fund will not use futures contracts for speculative purposes or to hedge
against changes in the value of the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be considered a
speculative activity, involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an option pays a
premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results in
a loss if the option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of an option is
unable to close out an unexpired option, it must continue to hold the
underlying security or other asset until the option expires, to "cover" its
obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or receipt) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract by
a Fund exceeds (or is less than) the price of the offsetting purchase, the
Fund will realize a gain (or loss). A Fund may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of
the amount of deposits for initial margin or premiums on the existing futures
and related options positions would exceed 5% of the market value of the
Fund's net assets. Transactions in futures and related options involve the
risks of (1) imperfect correlation between the price movement of the
contracts and the underlying securities, (2) significant price movement in
one but not the other market because of different hours, (3) the possible
absence of a liquid secondary market at any point in time, and the risk that
if the subadviser's prediction on interest rates or other economic factors is
inaccurate, the Fund may be worse off than if it had not hedged. Futures
transactions involve potentially unlimited risk of loss.
All of the Funds may enter into interest rate, currency and securities index
swaps. The Funds will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations or to protect against an
increase in the price of securities a Fund anticipates purchasing at a later
date. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange
cash flows on a notional amount based on changes in the relative values of
the specified currencies. An index swap is an agreement to make or receive
payments based on the different returns that would be achieved if a notional
amount were invested in a specified basket of securities (such as the
Standard & Poor's Composite Index of 500 Stocks [the "S&P 500"]) or in some
other investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve the
possible risk of loss to the Fund of all or a significant part of the value
of its investment. In some cases, the risk of loss may exceed the amount of
the Fund's investment. The Fund will be required, however, to set aside with
its custodian bank certain assets in amounts sufficient at all times to
satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse changes
in the value of securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation between the
changes in the value of futures, options or swap positions and changes in the
values of the portfolio securities. The successful use of futures and
exchange-traded options also depends on the availability of a liquid
secondary market to enable the Fund to close its positions on a timely basis.
There can be no assurance that such a market will exist at any particular
time. In the case of swap contracts and of options that are not traded on an
exchange ("over-the-counter" options), the Fund is at risk that the other
party to the transaction will default on its obligations, or will not permit
the Fund to terminate the transaction before its scheduled maturity. As a
result of these characteristics, the Fund will treat most swap contracts and
over-the-counter options (and the assets it segregates to cover its
obligations thereunder) as illiquid. Certain regulatory requirements may
limit a Fund's ability to engage in futures, options and swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets may
be subject to less detailed reporting requirements and regulatory controls
than U.S. markets. Furthermore, investments by the Funds in options and
futures in foreign markets are subject to many of the same risks as are the
Fund's other foreign investments. See "Foreign Securities" above. For further
information, see "Miscellaneous Investment Practices -- Futures, Options and
Swap Contracts" in Part II of the Statement.
o CURRENCY HEDGING TRANSACTIONS (INTERNATIONAL EQUITY AND STAR FUNDS)
The International Equity and Star Funds may, at the discretion of their
subadvisers, engage in foreign currency exchange transactions, in connection
with the purchase and sale of portfolio securities, to protect the value of
specific portfolio positions or in anticipation of changes in relative values
of currencies in which current or future Fund portfolio holdings are
denominated or quoted. Currency hedging transactions may include forward
contracts (contracts with another party to buy or sell a currency at a
specified price on a specified date), futures contracts (which are similar to
forward contracts but are traded on an exchange) and swap contracts. For more
information on foreign currency hedging transactions, see Part II of the
Statement.
o ZERO COUPON BONDS AND STRIPS (EQUITY INCOME AND BALANCED FUNDS)
The Equity Income and Balanced Funds may invest in zero coupon bonds and in
"strips." Zero coupon bonds do not make regular interest payments; rather,
they are sold at a discount from face value. Principal and accrued discount
(representing interest accrued but not paid) are paid in maturity. "Strips"
are debt securities that are stripped of their interest payments after the
securities are issued, but otherwise are comparable to zero coupon bonds. The
market values of "strips" and zero coupon bonds generally fluctuate in
response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality. Under certain
market conditions, investments in such securities may be illiquid, making it
difficult for the Fund to dispose of them or determine their current value.
o SECURITIES LENDING (EQUITY INCOME, CAPITAL GROWTH, INTERNATIONAL EQUITY AND
STAR FUNDS)
The Equity Income, Capital Growth, International Equity and Star Funds may
lend their portfolio securities to broker-dealers or other parties under
contracts calling for the deposit by the borrower with the Fund's custodian
of cash collateral equal to at least the market value of the securities lent,
marked to market on a daily basis. The Fund will continue to benefit from
interest or dividends on the securities lent and will also receive interest
through investment of the cash collateral in short-term liquid investments.
No loans will be made if, as a result, the aggregate amount of such loans
outstanding at any time would exceed 331/3% of the Fund's total assets (taken
at current value). Any voting rights or rights to consent relating to the
lent securities pass to the borrower. However, if a material event affecting
the investment occurs, such loans will be called so that the securities may
be voted by the Fund. The Fund pays various fees in connection with such
loans, including shipping fees and reasonable custodial or placement fees.
o STRUCTURED NOTES (STAR FUNDS)
The Star Funds may invest in a broad category of instruments known as
"structured notes." These instruments are debt obligations issued by
industrial corporations, financial institutions or governmental or
international agencies. Traditional debt obligations typically obligate the
issuer to repay the principal plus a specified rate of interest. Structured
notes, by contrast, obligate the issuer to pay amounts of principal or
interest that are determined by reference to changes in some external factor
or factors. For example, the issuer's obligations could be determined by
reference to changes in the value of a commodity (such as gold or oil), a
foreign currency, an index of securities (such as the S&P 500) or an interest
rate (such as the U.S. Treasury bill rate). In some cases, the issuer's
obligations are determined by reference to changes over time in the
difference (or "spread") between two or more external factors (such as the
U.S. prime lending rate and the total return of the stock market in a
particular country, as measured by a stock index). In some cases, the
issuer's obligations may fluctuate inversely with changes in an external
factor or factors (for example, if the U.S. prime lending rate goes up, the
issuer's interest payment obligations are reduced). In some cases, the
issuer's obligations may be determined by some multiple of the change in an
external factor or factors (for example, three times the change in the U.S.
Treasury bill rate). In some cases, the issuer's obligations remain fixed (as
with a traditional debt instrument) so long as an external factor or factors
do not change by more than the specified amount (for example, if the value of
a stock index does not exceed some specified maximum), but if the external
factor or factors change by more than the specified amount, the issuer's
obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of a
mutual fund. For example, they can be used to increase the fund's exposure to
changes in the value of assets that the fund would not ordinarily purchase
directly (such as stocks traded in a market that is not open to U.S.
investors). They can also be used to hedge the risks associated with other
investments the fund holds. For example, if a structured note has an interest
rate that fluctuates inversely with general changes in a country's stock
market index, the value of the structured note would generally move in the
opposite direction to the value of holdings of stocks in that market, thus
moderating the effect of stock market movements on the value of the fund's
portfolio as a whole.
Structured notes involve special risks. As with any debt obligation,
structured notes involve the risk that the issuer will become insolvent or
otherwise default on its payment obligations. This risk is in addition to the
risk that the issuer's obligations (and thus the value of the Fund's
investment) will be reduced because of adverse changes in the external factor
or factors to which the obligations are linked. The value of structured notes
will in many cases be more volatile (that is, will change more rapidly or
severely) than the value of traditional debt instruments. Volatility will be
especially high if the issuer's obligations are determined by reference to
some multiple of the change in the external factor or factors. Many
structured notes have limited or no liquidity, so that the Fund would be
unable to dispose of the investment prior to maturity. (The Funds are not
permitted to invest more than 15% of their net assets in illiquid
investments.) As with all investments, successful use of structured notes
depends in significant part on the accuracy of the relevant subadviser's
analysis of the issuer's creditworthiness and financial prospects, and of the
subadviser's forecast as to changes in relevant economic and financial market
conditions and factors. In instances where the issuer of a structured note is
a foreign entity, the usual risks associated with investments in foreign
securities (described above) apply.
o SHORT SALES (STAR SMALL CAP FUND)
The Star Small Cap Fund may engage in short sales. A short sale is a
transaction in which the Fund sells securities it does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When the Fund makes a short sale, the proceeds it receives from the sale will
be held by the broker on behalf of the Fund until the Fund replaces the
borrowed securities. To deliver the securities to the buyer, the Fund will
need to arrange through the broker to borrow the securities and, in doing so,
the Fund will be obligated to replace the securities borrowed at their market
value at the time of replacement, whatever that price may be. The Fund may
have to pay a premium to borrow the securities and must pay any dividends or
interest payable until the securities are replaced. For further information,
see "Miscellaneous Investment Practices -- Short Sales" in Part II of the
Statement.
All short sales must be fully collaterized, and no segment of the Star Small
Cap Fund will sell securities short if, immediately after and as a result of
the sale, the value of all securities sold short by that segment would exceed
25% of that segment's total assets. Each segment of the Fund limits short
sales of any one issuer's securities to 2% of that segment's total assets and
to 2% of any one class of the issuer's securities.
o SHORT SALES AGAINST THE BOX (STAR ADVISERS AND STAR WORLDWIDE FUNDS)
A short sale is a transaction in which a party borrows a security and then
sells the borrowed security to another party. The Star Worldwide and Star
Advisers Funds may engage in short sales only if the Fund owns (or has the
right to acquire without further consideration) the security it has sold
short, a practice known as selling short "against the box." Short sales
against the box may protect the Fund against the risk of losses in the value
of its portfolio securities because any unrealized losses with respect to
such securities should be wholly or partially offset by a corresponding gain
in the short position. However, any potential gains in such securities would
be wholly or partially offset by a corresponding loss in the short position.
Short sales against the box may be used to lock in a profit on a security
when, for tax reasons or otherwise, a subadviser does not want to sell the
security. The tax advantages of short sales against the box may be limited by
certain provisions of the Taxpayer Relief Act of 1997. The Star Worldwide and
Star Advisers Funds do not currently expect that more than 20% of respective
total assets would be involved in short sales against the box. For a more
complete explanation, please refer to Part II of the Statement.
O WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (INTERNATIONAL EQUITY,
BALANCED AND EQUITY INCOME FUND AND STAR FUNDS)
The International Equity, Balanced, Equity Income and Star Funds may purchase
securities on a "when-issued" basis and "delayed delivery" basis.
Additionally, the Star Funds may purchase and sell securities on a "forward
commitment" or "delayed delivery" basis. In these transactions, the price is
fixed at the time the commitment is made, but delivery and payment for the
securities ("settlement") takes place at a later date. When-issued securities
and forward commitments may be sold prior to settlement date, but the Funds
normally will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. No income accrues on securities that have been purchased pursuant to a
forward commitment or on a when-issued basis prior to delivery to the Fund.
There is a risk that the securities may not be delivered and the Fund may
incur a loss. If the Fund disposes of the right to acquire a when-issued
security prior to acquisition or disposes of its right to deliver or receive
against a forward commitment, the Fund may incur a gain or loss.
In connection with transactions on a when-issued or forward commitment basis,
the Fund will set aside with its custodian certain assets to provide for
satisfaction of its obligations under when-issued or forward commitment
transactions.
o MISCELLANEOUS
No Fund will invest more than 15% of its net assets in "illiquid securities,"
that is, securities which are not readily resalable, which may include
securities whose disposition is restricted by federal securities laws.
The Balanced, International Equity, Equity Income and Star Funds may purchase
Rule 144A securities. These are privately offered securities that can be
resold only to certain qualified institutional buyers. The Star Funds may
also purchase commercial paper issued under Section 4(2) of the Securities
Act of 1933. Rule 144A securities and Section 4(2) commercial paper are
treated as illiquid, unless a subadviser has determined, under guidelines
established by the Trusts' trustees, that the particular issue of Rule 144A
securities or commercial paper is liquid. Investment in restricted or other
illiquid securities involves the risk that a Fund may be unable to sell such
a security at the desired time. Also, a Fund may incur expenses, losses or
delays in the process of registering restricted securities prior to resale.
To the extent that the Star Funds may invest in derivative securities for
other than bona fide hedging purposes, such investments may be speculative in
nature and may involve additional risks.
o SPECIAL CONSIDERATIONS REGARDING THE MULTI-ADVISER APPROACH (STAR FUNDS)
NEFM, the manager of the Star Funds, oversees the portfolio management
services provided to each Fund by each of the subadvisers. Subject to the
review of New England Funds Trust I's trustees, NEFM monitors each subadviser
to assure that the subadviser is managing its segment of a Fund consistently
with the Fund's investment objective and restrictions and applicable laws and
guidelines, including, but not limited to, compliance with the
diversification requirements set forth in the 1940 Act and Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). In addition, NEFM
also provides each Fund with administrative services which include, among
other things, day-to-day administration of matters related to the Fund's
existence, maintenance of its records, preparation of reports and assistance
in the preparation of the Fund's registration statement under federal and
state laws. NEFM does not, however, determine what investments will be
purchased or sold for any segment of the Fund. Because each subadviser will
be managing its segment of the portfolio independently from the others, the
same security may be held in two different segments of a Fund or may be
acquired for one segment of a Fund at a time when the subadviser of another
segment deems it appropriate to dispose of the security from that other
segment. Similarly, under some market conditions, one or more of the
subadvisers may believe that temporary, defensive investments in short-term
instruments or cash are appropriate when another subadviser or subadvisers
believe continued exposure to the equity markets is appropriate for their
segment of the Fund. Because each subadviser directs the trading for its own
segment of the Fund, and does not aggregate its transactions with those of
the other subadvisers, the Fund may incur higher brokerage costs than would
be the case if a single adviser or subadviser were managing the entire Fund.
On a daily basis, capital activity will be allocated equally by NEFM among
the segments of the Fund. However, NEFM may, subject to review of New England
Funds Trust I's Board of Trustees, allocate new investment capital
differently among any of the subadvisers. This action may be necessary, if,
for example, a subadviser determines that it desires no additional investment
capital. Similarly, because each segment of the portfolio will perform
differently from the other segments depending upon the investments it holds
and changing market conditions, one segment may be larger or smaller at
various times than other segments. For example, as of December 31, 1997, the
percentages of the Star Advisers Fund's net assets held in the segments of
the Fund managed by Harris Associates, Founders, Janus Capital and Loomis
Sayles were 23%, 27%, 23% and 27%, respectively. As of December 31, 1997, the
percentages of the Star Worldwide Fund's net assets held in the segments of
the Fund managed by Harris Associates (international segment), Harris
Associates (domestic segment), Montgomery, Founders and Janus Capital were
18%, 23%, 17%, 20% and 22%, respectively. As of December 31, 1997, the
percentages of the Star Small Cap Fund's net assets held in the segments of
the Fund managed by Robertson Stephens, Montgomery, Loomis Sayles and Harris
Associates were 26%, 24%, 24% and 26% respectively. Although it reserves the
right to do so, subject to the review of the New England Funds Trust I's
trustees, NEFM does not intend to reallocate assets of any Fund among the
segments to reduce these differences in size.
NEFM may terminate any subadvisory agreement without shareholder approval. In
such case, NEFM may either enter into an agreement with another subadviser to
manage the segment or will allocate the segment's assets equally among the
other segments of the Fund.
<PAGE>
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FUND MANAGEMENT
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NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves as the adviser
to each Fund except the Growth Fund (for which CGM serves as adviser). NEFM
oversees, evaluates and monitors the subadvisory services provided to each Fund
except the Growth Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
ALL FUNDS (EXCEPT THE STAR FUNDS)
The subadviser of the International Equity Fund, the Balanced Fund, the Equity
Income Fund and the Value Fund is Loomis Sayles. Founded in 1926, Loomis Sayles,
One Financial Center, Boston, Massachusetts 02111, is one of the country's
oldest and largest investment counsel firms. Paul Drexler, Vice President of
Loomis Sayles, has served as the portfolio manager of the International Equity
Fund since February 1997. Carol C. McMurtrie and Tricia H. Mills are the
portfolio managers of the Value Fund. Ms. McMurtrie and Ms. Mills have served in
that capacity since March 1993. Ms. McMurtrie and Ms. Mills are also the
portfolio managers of the equity portion of the Balanced Fund and are
responsible for allocating the assets of the Balanced Fund between equity and
fixed-income securities. Ms. McMurtrie and Ms. Mills have served in these
capacities since July 1997. The portfolio management team for the fixed-income
portion of the Balanced Fund consists of Meri Ann Beck, John Hyll and Barr
Segal, who have had portfolio management responsibility for the Fund's
fixed-income investments since 1990, 1994 and 1996, respectively. Messrs. Hyll
and Segal and Mses. Beck and Mills are Vice Presidents of Loomis Sayles. Ms.
McMurtrie is Vice President and Managing Partner of Loomis Sayles. Mr. Hyll has
been employed by Loomis Sayles for more than five years. Mr. Segal was a Senior
Portfolio Manager at TCW Group before joining Loomis Sayles in 1996. Mr. Drexler
was Deputy Manager, Brown Brothers Harriman & Co. before joining Loomis Sayles
in 1993. Mauricio F. Cevallos, Vice President and Manager of Loomis Sayles,
Peter Ramsden, Vice President of Loomis Sayles, and Tom Kolefas, Vice President
of Loomis Sayles, act as portfolio managers of the Equity Income Fund. Mr.
Kolefas joined Loomis Sayles in 1996 and has been a portfolio manager of the
Fund since May 1996. Prior to 1996, Mr. Kolefas was employed as a portfolio
manager at Mackay Shields Financial Corporation. Mr. Ramsden and Mr. Cevallos
have been employed by Loomis Sayles for more than five years, and have served as
portfolio managers of the Fund since its inception in November 1995.
The adviser of the Growth Fund is CGM, One International Place, Boston,
Massachusetts 02110. CGM, organized in 1989, serves as investment adviser to
seven mutual funds and to other institutional investors. The general partner of
CGM is a corporation controlled equally by Robert L. Kemp and G. Kenneth
Heebner. Mr. Heebner, Senior Portfolio Manager of CGM, has served as portfolio
manager of the Growth Fund since 1976. Nvest Companies owns a majority limited
partnership interest in CGM. In 1997, the Growth Fund paid 0.67% of its average
net assets in advisory fees to CGM. NEFM has agreed to provide certain
administrative services to the Growth Fund at CGM's expense.
The subadviser of the Growth Opportunities Fund and the Capital Growth Fund is
Westpeak, 1011 Walnut Street, Boulder, Colorado 80302. The portfolio manager of
the Growth Opportunities Fund and the Capital Growth Fund is Gerald H. Scriver,
President and Chief Executive Officer of Westpeak. Mr. Scriver has been with
Westpeak since its inception in 1991. He has been portfolio manager of the
Growth Opportunities Fund since May 1995 and the portfolio manager of the
Capital Growth Fund since February 1998.
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table, reduced in each case by the amount of any
subadvisory fee payable by the Fund to the Fund's subadviser (as described
below):
Management fee paid by Fund to NEFM
(as a percentage of average
Fund daily net assets of the Fund)
- -------------------- -----------------------------------
Balanced Fund ......... 0.75% of the first $200 million
Value Fund 0.70% of the next $300 million
Capital Growth Fund 0.65% of amounts in excess of
$500 million
Growth Opportunities Fund 0.70% of the first $200 million
Equity Income Fund 0.65% of the next $300 million
0.60% of amounts in excess of
$500 million
International Equity Fund 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of
$500 million
The management fee rates payable by the Balanced, Capital Growth, International
Equity and Value Funds are higher than those paid by most other mutual funds but
are comparable to fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds.
Subject to the supervision of NEFM, each subadviser manages the portfolio(s) of
each Fund to which it serves as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund, and employs
professional advisers and securities analysts who provide research services to
the Fund. The Funds pays no direct fees to their subadvisers.
Each Fund other than the Growth Fund and the Star Funds pays its subadviser a
subadvisory fee at the annual rate set forth in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by the Fund to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- -------------------------------------------- ------------ -----------------------------------------------------------
<S> <C> <C>
Balanced Fund, Value Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Westpeak 0.400% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 million
Equity Income Fund Loomis Sayles 0.400% of the first $200 million
0.325% of the next $300 million
0.275% of amounts in excess of $500 million
</TABLE>
Prior to February 14, 1997, Draycott Partners, Ltd. served as subadviser to the
International Equity Fund. Prior to February 16, 1998 Loomis Sayles served as
subadviser to the Capital Growth Fund.
NEFM and Loomis Sayles have voluntarily agreed, until further notice to the
International Equity Fund, to waive their respective management and subadvisory
fees for the Fund and, if necessary, NEFMhas agreed to bear certain expenses
associated with the Fund, to the extent necessary to limit the Fund's expenses
to the annual rate of 1.40% for Class Y shares. NEFM and/or Loomis Sayles may
terminate these voluntary limitations at any time.
Loomis Sayles has voluntarily agreed, until further notice to NEFM, to waive its
entire subadvisory fee with respect to the Equity Income Fund. This waiver by
Loomis Sayles does not reduce the Fund's expenses. This agreement may be
terminated by Loomis Sayles at any time. In addition, under an expense deferral
arrangement, which NEFM may terminate at any time, NEFM has agreed to defer its
management fee for the Fund and, if necessary, to bear certain expenses
associated with operating the Fund to the extent necessary to limit the Fund's
expenses to the annual rate of 1.25% of average daily net assets for Class Y
shares, subject to the obligation of the Fund to pay NEFM such deferred fees and
expenses in later periods to the extent that the Fund's expenses fall below the
annual rate of 1.25% for Class Y shares; provided, however, that the Fund is not
obligated to pay any such deferred fees more than two years after the end of the
fiscal year in which the fee or expense was deferred.
In the event that any of the foregoing voluntary limitations are terminated, the
affected Fund would supplement its Prospectus.
STAR FUNDS
Below is a brief description of the subadvisers of the Star Funds.
FOUNDERS, 2930 East Third Avenue, Denver, Colorado 80206, and its predecessor
companies have been offering tools to help investors pursue their financial
goals since 1938. To facilitate day-to-day investment management, Founders
employs a unique team-and-lead-manager system. The team is comprised of several
members of Founders' Investment Development, including portfolio managers,
portfolio traders and research analysts. Team members share responsibility for
providing ideas, information, knowledge and expertise in the management of
Founders' segments of the Star Advisers and Star Worldwide Funds. Daily
decisions on portfolio selection rest with the lead portfolio manager, who,
through participation in the team process, utilizes the input, research and
advice of other team members in making purchase and sale determinations. Edward
F. Keely has been lead portfolio manager for the segment of the Star Advisers
Fund managed by Founders since the Fund's inception in 1994. Mr. Keely is a Vice
President of Investments at Founders, where he has been employed since 1989.
Michael W. Gerding has been lead portfolio manager for the segment of the Star
Worldwide Fund managed by Founders since the Fund's inception in 1995. Mr.
Gerding is a Vice President of Investments at Founders and has managed
portfolios at Founders since 1990. Founders is a 90%-owned subsidiary of Mellon
Bank, N.A., with the remaining 10% held by certain Founders executives and
portfolio managers. Mellon Bank, N.A. is a wholly-owned subsidiary of Mellon
Bank Corporation, a publicly-owned multibank holding company which provides a
comprehensive range of financial products and services in domestic and selected
international markets.
JANUS CAPITAL, 100 Fillmore Street, Denver, Colorado 80206 has managed mutual
funds since 1970 and also advises individual, corporate, charitable and
retirement accounts. Warren B. Lammert has, since the Star Advisers Fund's
inception in 1994, had day-to-day management responsibility for those assets of
the Star Advisers Fund allocated to Janus Capital, where he serves as a
portfolio manager and Vice President of Investments. Mr. Lammert has been
employed by Janus Capital since 1987. Helen Young Hayes has had day-to-day
management responsibility for those assets of the Star Worldwide Fund allocated
to Janus Capital since the Fund's inception in 1995. Ms. Hayes is a portfolio
manager and Vice President of Janus Capital, where she has been employed since
1987. Laurence Chang is an assistant portfolio manager of Janus Capital, where
he has been employed since 1993 and became co-portfolio manager of the Janus
Capital segment of the Star Worldwide Fund in May 1997. (Prior to joining Janus
Capital, Mr. Chang was a Project Director for the National Securities Archives,
a nonprofit research organization.) Kansas City Southern Industries, Inc.
("KCSI"), a publicly traded holding company, owns approximately 83% of the
outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately 12% of Janus
Capital's voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's board of directors.
LOOMIS SAYLES. Jeffrey C. Petherick and Mary Champagne, Vice Presidents of
Loomis Sayles, have day-to-day management responsibility for the segment of the
Star Advisers Fund that is allocated to Loomis Sayles. Mr. Petherick, who joined
Loomis Sayles in 1990, has co-managed the Loomis Sayles segment of the Fund
since the Fund's inception. Ms. Champagne has co-managed the Loomis Sayles
segment of the Star Advisers Fund since July 1995. (Prior to joining Loomis
Sayles in 1993, Ms. Champagne served as a portfolio manager at NBD Bank for 10
years.) Christopher Ely, Phil Fine and David Smith, Vice Presidents of Loomis
Sayles, have had day-to-day management responsibilities for the segment of the
Star Small Cap Fund managed by Loomis Sayles since the Fund's inception, with
Mr. Ely as the lead manager. Messrs. Ely, Fine and Smith joined Loomis Sayles in
July 1996. Mr. Ely is a Vice President of Loomis Sayles. Prior to July 1996, Mr.
Ely was Senior Vice President and Portfolio Manager, and Messrs. Smith and Fine
were each a Vice President and Portfolio Manager, at Keystone Investment
Management Co., Inc.
HARRIS ASSOCIATES, Two North LaSalle Street, Chicago, Illinois 60602, has
advised and managed mutual funds since 1970. Harris Associates also serves as
investment adviser to individuals, trusts, retirement plans, endowments and
foundations, and manages several private partnerships. Robert J. Sanborn, CFA,
has been the portfolio manager for the segment of the Star Advisers Fund managed
by Harris Associates since July 1997 and for the U.S. segment of the Star
Worldwide Fund managed by Harris Associates since the Fund's inception. Mr.
Sanborn joined Harris Associates as a portfolio manager and analyst in 1988.
David G. Herro, CFA, and Michael J. Welsh, CFA, CPA, have been the portfolio
managers for the international segment of the Star Worldwide Fund managed by
Harris Associates since the Fund's inception. Mr. Herro joined Harris Associates
in 1992. Mr. Welsh joined Harris Associates as an international analyst in 1992.
Steven Reid has been the portfolio manager for the segment of the Star Small Cap
Fund managed by Harris Associates since the Fund's inception. Mr. Reid joined
Harris Associates as an accountant in 1980 and has been a Partner of Harris
Associates since 1992.
MONTGOMERY, 101 California Street, San Francisco, California 94111, was formed
in 1990 and advises institutional separate accounts as well as a family of
no-load mutual funds. Montgomery is a subsidiary of Commerzbank AG, a German
commercial bank. The portfolio managers for the segment of the Star Worldwide
Fund managed by Montgomery are Josephine S. Jimenez, CFA, Senior Portfolio
Manager and Principal of Montgomery, and Bryan L. Sudweeks, Ph.D., CFA, Senior
Portfolio Manager and Principal of Montgomery. Ms. Jimenez and Mr. Sudweeks
joined Montgomery in 1991, and have been the portfolio managers for this segment
since the Fund's inception. The portfolio manager for the segment of the Star
Small Cap Fund managed by Montgomery is Andrew Pratt, who has managed this
segment since the Fund's inception. Mr. Pratt joined Montgomery in 1993 and is a
Portfolio Manager and Principal of the firm. He is currently a member of
Montgomery's growth equity team, which manages the Montgomery Growth Fund, the
Montgomery Micro Cap Fund and the Montgomery Small Cap Opportunities Fund.
Before he joined Montgomery, he was an equity analyst at Hewlett-Packard
Company, where he managed a portfolio of small capitalization technology
companies, and researched private placement and venture capital investments.
ROBERTSON STEPHENS, 555 California Street, San Francisco, California 94104, was
formed in 1993 and provides advisory services to both private and public
investment funds. Robertson Stephens is a wholly-owned indirect subsidiary of
BankAmerica Corporation, a global financial services corporation. The portfolio
manager for the segment of the Star Small Cap Fund managed by Robertson Stephens
is John Wallace, Managing Director and Portfolio Manager of Robertson Stephens,
who has managed such segment since the Fund's inception. Mr. Wallace joined
Robertson Stephens in 1995 and has been responsible for managing Robertson
Stephens' Growth & Income Fund since its inception in July 1995 and The
Robertson Stephens' Diversified Growth Fund since its inception in August 1996.
Prior to joining Robertson Stephens, he was Vice President of Oppenheimer Funds,
Inc. where he was portfolio manager of the Oppenheimer Main Street Income and
Growth Fund. John H. Seabern, Vice President of Robertson Stephens, has been a
co-portfolio manager for the segment of the Star Small Cap Fund managed by
Robertson Stephens since October 1997. Mr. Seabern, who joined Robertson
Stephens in 1993, is also a co-manager of the Robertson Stephens Diversified
Growth Fund and a research analyst for the Robertson Stephens Growth & Income
Fund. Prior to joining Robertson Stephens, he served as a performance analyst at
Duncan-Hurst Capital Management.
Prior to July 25, 1997, Berger Associates, Inc. served as the subadviser to the
segment of the Star Advisers Fund now managed by Harris Associates.
The Star Small Cap Fund and the Star Worldwide Fund pay NEFM a management fee at
the annual rate of 1.05% of the Fund's average daily net assets, and the Star
Advisers Fund pays NEFM a management fee at the annual rate of 1.05% of the
first $1 billion of the Fund's average daily net assets and 1.00% of such assets
in excess of $1 billion, in each case reduced by the amounts of any subadvisory
fees paid by the Fund directly to the subadvisers (as described below). These
fee rates payable by the Star Funds are higher than that paid by most other
mutual funds, but are believed to be appropriate for the services received by
the Funds and to be comparable to fees paid by some other mutual funds investing
in a manner similar to the Funds. The higher fee rate is partially due to the
multi-adviser format.
Subject to the supervision of NEFM, each subadviser manages its segment(s) of
the portfolio(s) of each Star Fund to which it serves as subadviser in
accordance with the Fund's investment objective and policies, makes investment
decisions for the segment(s), places orders to purchase and sell securities for
the segment(s) and employs professional advisers and securities analysts who
provide research services to the segment(s).
For the Star Advisers Fund, NEFM pays each of Founders and Janus Capital, and
the Fund pays Loomis Sayles, a subadvisory fee at the annual rate of 0.55% of
the first $50 million of the average daily net assets of the segment of the Fund
that the subadviser manages, 0.50% of the next $200 million of such assets and
0.475% of such assets in excess of $250 million, and the Fund pays Harris
Associates, a subadvisory fee at the annual rate of 0.65% of the first $50
million of the average daily net assets of the segment of the Fund managed by
Harris Associates, 0.60% of the next $50 million of such assets and 0.55% of
such assets in excess of $100 million. For the Star Worldwide Fund, NEFM pays
each of Founders and Janus Capital and the Fund pays Harris Associates, a
subadvisory fee at the annual rate of 0.65% of the first $50 million of the
average daily net assets of each segment of the Fund that the subadviser
manages, 0.60% of the next $50 million of such assets and 0.55% of such assets
in excess of $100 million, and NEFM pays Montgomery a subadvisory fee at the
annual rate of 0.90% of the first $25 million of the average daily net assets of
the segment of the Fund that Montgomery manages, 0.70% of the next $25 million
of such assets and 0.55% of such assets in excess of $50 million. For the Star
Small Cap Fund, NEFM pays Robertson Stephens and the Fund pays Loomis Sayles a
subadvisory fee at the annual rate of 0.55% of the first $50 million of the
average daily assets of the segment of the Fund that each such subadviser
manages and 0.50% of such assets in excess of $50 million, NEFM pays Montgomery
a subadvisory fee at an annual rate of 0.65% of the first $50 million of the
average daily net assets of the segment that Montgomery manages and 0.50% of
such assets in excess of $50 million, and the Fund pays Harris Associates a
subadvisory fee at the annual rate of 0.70% of the average daily net assets of
the segment of the Fund that Harris Associates manages.
GENERAL
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, Massachusetts 02110.
The general partners of each of NEFM, Loomis Sayles, Harris, Westpeak and the
Distributor and the sole shareholder of NEFSCO, are special purpose corporations
that are indirect, wholly-owned subsidiaries of Nvest Companies, L.P. ("Nvest
Companies"). Nvest Companies' managing general partner, Nvest Corporation is an
indirect, wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"), a mutual life insurance company. MetLife owns in the aggregate,
directly and indirectly, approximately 47% of the outstanding limited
partnership interests in Nvest Companies. Nvest Companies' advising general
partner, Nvest, L.P., is a publicly-traded company listed on the New York Stock
Exchange. Nvest Corporation is the sole general partner of Nvest, L.P.
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers and subadvisers may consider sales of
shares of the Funds and other mutual funds they manage as a factor in the
selection of broker-dealers to effect portfolio transactions for the Funds.
Subject to procedures adopted by the trustees of the Trusts, Fund brokerage
transactions may be executed by brokers that are affiliated with Nvest
Companies, NEFM, CGM, Loomis Sayles, Westpeak, or any subadviser. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
NEFM provides executive and other personnel for the management of the Trusts.
Each Trust's Board of Trustees supervises the affairs of that Trust as conducted
by the Funds' advisers and subadvisers.
In addition to the management fee paid to its adviser, each Fund pays all
expenses not borne by its adviser, subadviser(s) or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees and
expenses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and the
compensation of trustees who are not directors, officers or employees of New
England Life Insurance Company ("NELICO") or MetLife or their affiliates, other
than affiliated registered investment companies. Certain expenses may be
allocated differently between each Fund's Class A, Class B and Class C shares,
on the one hand, and its Class Y shares, on the other hand. (See "Additional
Facts about the Funds" below.)
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 and financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration statements
and prospectuses, registration of shares in various states, shareholder reports
and notices, proxy solicitation material furnished to shareholders of the Fund
or regulatory authorities and reports and questionnaires for SEC compliance.
The Funds (excepting the Growth Fund) have received an exemptive order from the
SEC to permit NEFM, subject to certain conditions, to enter into subadvisory
agreements with subadvisers, including subadvisers other than the existing
subadvisers of the Funds, when approved by the relevant Trust's Board of
Trustees, without obtaining shareholder approval. The exemptive 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
relevant Trust's Board of Trustees. Shareholders will be notified of any
subadviser changes.
<PAGE>
- -------------------------------------------------------------------------------
BUYING FUND SHARES
- -------------------------------------------------------------------------------
ELIGIBILITY AND MINIMUM INVESTMENT
Class Y shares of the Funds may be purchased by other mutual funds, endowments,
foundations, bank trust departments or trust companies. The minimum initial
investment is $1 million for these entities, and $10,000 is the minimum for each
subsequent investment. Class Y shares may also be purchased by plan sponsors of
401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that have total
investment assets of at least $10 million, and by NELICO or MetLife and any
other insurance company affiliated with NELICO or MetLife or any of their
successor entities (purchases by these entities are referred to as "Insurance
Company Accounts"). Plan sponsors' investment assets in multiple Retirement
Plans can be aggregated for purposes of meeting this minimum. Class Y shares may
also be purchased by any separate account of NELICO or MetLife, any other
insurance company affiliated with NELICO or MetLife ("Separate Accounts") and,
in the case of the International Equity Fund, by bank common trusts, bank
collective trust funds and dedicated corporate or trust funds, such as nuclear
decommissioning trusts and hospital depreciation funds ("Special Accounts").
Class Y shares may also be purchased by wrap fee programs of certain
broker-dealers as to which no service or marketing fees are paid to
broker-dealers by the Fund, NEFM or the Distributor ("Wrap Fee Programs"). There
is no minimum initial or subsequent investment amount for Retirement Plans,
Separate Accounts, Special Accounts, Insurance Company Accounts or Wrap Fee
Programs. Investments in the Funds may also be made by certain individual
retirement accounts if the amounts invested represent rollover distributions
from investments by any of the Retirement Plans of amounts invested in the
Funds. The Distributor serves as the principal underwriter of the Fund's shares.
Shares may be purchased on any day when the New York Stock Exchange (the
"Exchange") is open for business (a "business day"). Investors should contact
New England Funds before attempting to place an order for Fund shares. The Funds
and the Distributor reserve the right at any time to reject a purchase order.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through wrap fee programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the same Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from that
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Service Accounts.
WAYS TO BUY FUND SHARES
A shareholder may purchase Class Y shares for cash on any business day by the
two methods described below:
[graphic omitted] BY WIRE TRANSFER:
Prior to an initial investment, obtain an account number and wire transfer
instructions by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028, DDA
#99011538, Credit [Fund Name] Class Y shares, Shareholder Name, and Shareholder
Account Number.
[graphic omitted] BY MAIL:
For an initial investment, simply complete the attached application and return
it with a check payable to New England Funds and mailed to New England Funds, P
O. Box 8551, Boston, MA 02266-8551. All purchases made by check should be in
U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not be accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
Class Y shares of each Fund other than the Star Funds may also be purchased by
exchanging securities on deposit with a custodian acceptable to the subadviser
of the Fund, or the adviser in the case of the Growth Fund or by a combination
of such securities and cash. Purchase of shares of a Fund in exchange for
securities is subject in each case to the determination by the Fund's subadviser
or adviser that the securities to be exchanged are acceptable for purchase by
the Fund. Securities accepted by the Fund's subadviser or adviser in exchange
for Fund shares will be valued in the same manner as the Fund's assets
(generally the last quoted sales price), as described below under "Fund Details
- -- How Fund Share Price Is Determined," as of the time of the Fund's next
determination of net asset value after such acceptance. All dividends and
subscription or other rights which are reflected in the market price of accepted
securities at the time of valuation become the property of the Fund and must be
delivered to the Fund upon receipt by the investor from the issuer. A gain or
loss for federal income tax purposes may be realized upon the exchange by an
investor that is subject to federal income taxation, depending upon the
investor's basis in the securities tendered. A shareholder who wishes to
purchase shares by exchanging securities should obtain instructions by calling
1-800-225-5478.
A Fund's subadviser or adviser will not approve the acceptance of securities in
exchange for shares of a Fund it manages unless (1) the subadviser, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933, as amended, or otherwise; (3) the securities are
eligible to be acquired under the Fund's investment policies and restrictions;
and (4) the securities have a value which is readily ascertainable (not
established by evaluation procedures alone) as evidenced by a listing on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
System or the principal securities exchange of countries in which the Fund may
invest. No investor owning 5% or more of the Fund's shares may purchase
additional Fund shares by exchange of securities (other than shares of other New
England Funds).
GENERAL
The purchase price of shares of each Fund is the net asset value next determined
after a purchase order is received in good order by New England Funds. For
purposes of calculating the purchase price of Fund shares, a purchase order is
considered received by the Fund on the day that it is "in good order" unless it
is rejected by the Fund. For a purchase order to be in "good order" on a
particular day, in the case of a purchase of Fund shares in exchange for
securities, the investor's securities must be placed on deposit at a depository
acceptable to the Fund's subadviser by 4:00 p.m. (Eastern time) and, in the case
of a cash investment, Federal funds must be wired to the Fund between 9:00 a.m.
and 4:00 p.m. (Eastern time) or a check for the purchase price of the shares,
accompanied by a completed application, must have been received by New England
Funds before 4:00 p.m. (Eastern time) on that day. Orders received after 4:00
p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to three
decimal places. The shareholder will receive a statement of Fund shares owned
following each transaction. Investors will not receive certificates representing
Class Y shares. The Funds and the Distributor reserve the right at any time to
reject a purchase order.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<PAGE>
- -------------------------------------------------------------------------------
OWNING FUND SHARES
- -------------------------------------------------------------------------------
EXCHANGING AMONG NEW ENGLAND FUNDS
You may exchange Class Y shares of the Funds or any other series of the Trusts
for Class Y shares of any other series of the Trusts which offers Class Y shares
or for Class A shares of New England Cash Management Trust Money Market Series
or New England Tax Exempt Money Market Trust (the "Money Market Funds"). Agents,
general agents, directors and senior officers of NELICO and its insurance
company subsidiaries may, at the discretion of NELICO, elect to exchange Class Y
shares of any series of the Trusts in a NELICO Deferred Compensation Plan
Account for Class A shares of any other series of the Trusts which do not offer
Class Y shares. Class A shares of any series of the Trusts in a NELICO Deferred
Compensation Plan Account may also be exchanged for Class Y shares of any series
of the Trusts. To obtain a prospectus and more information about Class A shares,
please call the Distributor toll free at 1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business or write to New
England Funds. Exchange requests after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be processed at the
net asset value determined at the close of regular trading on the next day that
the Exchange is open. All exchanges are subject to the eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read a current prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only in those states
where shares of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. The
Funds and NEFSCO will employ reasonable procedures to confirm that telephone
instructions are genuine, and, if they do not, they 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 telephone
instructions, will provide shareholders with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or loss.
Except as otherwise permitted by SEC rule, shareholders will receive at least 60
days' advance notice of any material change to the exchange privilege.
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 specified
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.
FUND DIVIDEND PAYMENTS
The Capital Growth Fund, the Growth Fund, the International Equity Fund, the
Value Fund, the Star Advisers Fund, the Star Worldwide Fund and the Star Small
Cap Fund pay dividends annually, the Growth Opportunities Fund pays dividends
semi-annually and the Balanced Fund and the Equity Income Fund pay dividends
quarterly. Each Fund pays as dividends substantially all net investment income
(other than long-term capital gains) each year and distributes annually all net
realized long- and short-term capital gains (after applying any available
capital loss carryovers). The trustees of the Trusts may adopt a different
schedule as long as payments are made at least annually. If you intend to
purchase shares of a Fund shortly before it declares a dividend or capital gain
distribution, you should be aware that a portion of the purchase price may be
returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional Class Y shares
of the Fund or in Class Y shares of other series of the Trusts, to receive
distributions from dividends and interest in cash while reinvesting
distributions from capital gains in additional Class Y shares of the Fund or of
other series of the Trusts, or to receive all distributions in cash. Income
distributions and capital gains distributions will be reinvested in Class Y
shares of the respective Fund at net asset value unless you select another
option. You may change your distribution option by notifying New England Funds
in writing or by calling 1-800-225-5478. If you elect to receive your dividends
in cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested.
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DIVIDEND DIVERSIFICATION PROGRAM
- -------------------------------------------------------------------------------
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in Class Y
shares of another New England Fund, subject to the investor eligibility
requirements of that other fund and to state securities law requirements. Shares
will be purchased at the selected fund's net asset value on the dividend record
date. A dividend diversification account must be in the same registration
(shareholder name) as the distributing fund account and, if a new account in the
purchased fund is being established, the purchased fund's minimum investment
requirements must be met. Before establishing a dividend diversification program
into any other New England Fund, you must obtain and carefully read a copy of
that fund's prospectus.
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<PAGE>
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SELLING FUND SHARES
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WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[graphic omitted] BY TELEPHONE:
You may redeem (sell) shares by telephone for cash by the two methods described
below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business. The proceeds generally will be wired on the next
business day to the bank account previously chosen by you on your application. A
wire fee (currently $5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a correspondent
bank that is a member. If your account is with a savings bank, it must have only
one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business and requesting that a check for the proceeds be
mailed to the address on your account, provided that the address has not changed
over the previous month and that the proceeds are for $100,000 or less.
Generally, the check will be mailed to your address of record on the business
day after your redemption request is received.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that the
Exchange is open.
[graphic omitted] BY MAIL:
You may redeem your shares at their net asset value next determined after
receipt of your request in good order by sending a written request (including
any necessary special documentation) to New England Funds, P.O. Box 8551,
Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record or wired to your bank account. 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.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
GENERAL. Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by State
Street Bank. Redemption proceeds will normally be mailed to you within seven
days after State Street Bank or the Distributor receives your request in good
order. However, in those cases where you have recently purchased your shares by
check and you make a redemption request within 10 days after such purchase or
transfer, the Fund may withhold redemption proceeds until the Fund knows that
the check has cleared (which may take up to 15 days).
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above.
Requests are processed at the net asset value next determined after the request
is received.
Special rules apply with respect to redemptions under powers of attorney. Please
call the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors. The Funds reserve the right to suspend account services or refuse
transaction requests when notice has been received by a 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.
If a Fund's adviser or subadviser determines, in its or their sole discretion,
that it would be detrimental to the best interests of the remaining shareholders
of the Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of readily
marketable securities held by the Fund in lieu of cash. Securities used to
redeem Fund shares in kind will be valued in accordance with the Funds'
procedures for valuation described under "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by
NEFM and the Fund's adviser or subadviser(s) in light of the Fund's objective
and will not generally represent a pro rata distribution of each security held
in the Fund's portfolio. Investors may incur brokerage charges on the sale of
any such securities so received in payment of redemptions. The Funds' right to
pay redemptions in kind is limited by an election made by the Funds under Rule
18f-1 under the 1940 Act. See "Redemptions" in Part II of the Statement.
<PAGE>
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FUND DETAILS
- -------------------------------------------------------------------------------
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity securities
are valued at the most recent sales prices on an applicable exchange or on the
Nasdaq National Market System, or, in the case of unlisted securities (or listed
securities which were not traded during the day), at the last quoted bid prices.
Price information on listed securities is generally taken from the closing price
on the exchange where the security is primarily traded. Debt securities (other
than short-term obligations with a remaining maturity of less than sixty days)
are valued on the basis of valuations furnished by a pricing service, authorized
by each Trust's Board of Trustees, which service determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term obligations with a remaining maturity of less than sixty days are
valued at amortized cost, which approximates market value. Securities traded
primarily on an exchange outside the United States, except, in the case of Star
Worldwide Fund, equity securities traded on the London Stock Exchange ("British
Equities"), which closes before the close of the Exchange, generally will be
valued for purposes of calculating the Fund's net asset value at the last sale
or bid price on that non-U.S. exchange, except that when an occurrence after the
closing of that exchange is likely to have materially changed such a security's
value, such security will be valued at fair value as determined by or under the
direction of each Trust's Board of Trustees as of the close of regular trading
on the Exchange. British Equities will be valued at the mean between the last
bid and last asked prices on the London Stock Exchange. An option written by a
Fund generally will be valued at the last sale price or, in the absence of the
last sale price, the last offer price. A futures contract will be valued at the
unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price. A settlement price may not be used if
the market makes a limit move with respect to a particular futures contract or
if the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price is not used, futures contracts will be valued at their fair value as
determined by or under the direction of each Trust's Board of Trustees. All
other securities and assets of each Fund's portfolio (or, in the case of the
Star Funds, each segment of the Fund's portfolio) are valued at their fair
market value as determined in good faith by the adviser or subadviser of that
Fund (or a pricing service selected by the adviser or subadviser) under the
supervision of each Trust's Board of Trustees. The value of any assets for which
the market price is expressed in terms of a foreign currency will be translated
into U.S. dollars at the prevailing market rate on the date of the net asset
value computation, or, if no such rate is quoted at such time, at such other
appropriate rate as may be determined by or under the direction of each Trust's
Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of securities (determined as explained above) plus any cash and other assets
(including dividends and interest receivable but not collected) less all
liabilities (including accrued expenses) attributable to each class, by the
number of shares of such class outstanding. The public offering price of each
Fund's Class Y shares is the net asset value per share.
The price you pay for a share will be determined using the next set of
calculations made after your order is accepted by State Street Bank. 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.
as may be agreed upon between the dealer and the Distributor) to receive that
day's public offering price.
INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to qualify as a
"regulated investment company" and thus does not expect to pay any federal
income tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and ordinary income
are taxable to you as ordinary income. (A portion of these distributions may
qualify for the dividends-received deduction for corporations.) Distributions
designated by the Fund as deriving from net gains on securities held for more
than one year but not more than 18 months (i.e., 28% Rate Gains) and from net
gains on securities held for more than 18 months (i.e., 20% Rate Gains) are
taxable to you as such, regardless of how long you have owned shares in the
Fund. Both ordinary income and capital gains distributions are taxable whether
you elected to receive them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year-end virtually all the Fund's ordinary income earned during that calendar
year, and virtually all of the capital gain net income the Fund realized during
the twelve months ending October 31, plus any retained amount from the prior
year. If declared in October, November, or December to shareholders of record in
that month and paid the following January, these distributions will be
considered for federal income tax purposes to have been received by shareholders
on December 31 of the year in which they were declared.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you (i) if you do not provide a correct, certified
taxpayer identification number, (ii) if a Fund is notified that you have
underreported income in the past or (iii) if you fail to certify to a Fund that
you are not subject to such withholding. In addition, each Fund will be required
to withhold 31% of the gross proceeds of Fund shares you redeem if you have not
provided a correct, certified taxpayer identification number or if the Fund is
notified that you have underreported income in the past. If you are a tax-exempt
shareholder, however, these backup withholding rules will not apply so long as
you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The International Equity, Star Worldwide and Star Small Cap Funds may be liable
to foreign governments for taxes relating primarily to investment income or
capital gains on foreign securities in the Fund's portfolio. The Fund may in
some circumstances be eligible to, and in its discretion may, make an election
under the Code which would allow Fund shareholders who (i) are U.S. citizens or
U.S. corporations and (ii) hold their Fund shares (without protection from risk
of loss) on the ex-dividend date for a distribution by the Fund of investment
income to shareholders and for at least 15 additional days during the 30-day
period surrounding the ex-dividend date to claim a foreign tax credit or
deduction (but not both) on their U.S. income tax return. If the Fund makes the
election, the amount of each shareholder's distribution reported on the
information returns filed by the Fund with the Internal Revenue Service must be
increased by the amount of the shareholder's portion of the Fund's foreign tax
paid.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an
investment in a Fund on their particular federal, state and local tax
situations. Shareholders of the International Equity, Star Worldwide and Star
Small Cap Funds should also consult their tax advisers about consequences of
their investment under foreign laws.
PERFORMANCE CRITERIA
Each Fund may include total return information in advertisements or other
written sales material. Each Fund may show the average annual total return for
each class of shares for the one-, five- and ten-year periods (or the life of
the class, if shorter) through the end of the most recent calendar quarter, or,
in the case of the Growth Opportunities Fund's Class A shares, from July 27,
1988, when there was a change in that Fund's investment adviser, to the end of
the most recent calendar quarter. Total return is measured by comparing the
value of a hypothetical $1,000 investment in a class at the beginning of the
relevant period to the value of the investment at the end of the period
(assuming deduction of the current maximum sales charge on Class A shares,
automatic reinvestment of all dividends and capital gains distributions and, in
the case of Class B and C shares, imposition of the CDSC relevant to the period
quoted). Total return may be quoted with or without giving effect to any
voluntary expense limitations in effect for the class in question during the
relevant period. The classes may also show total return over other periods, on
an aggregate basis for the period presented, or without deduction of a sales
charge. If a sales charge is not deducted in calculating total return, the
class's total return will be higher.
The Balanced Fund may also include the yield of each class of its shares,
accompanied by the total return, in advertising and other written material.
Yield will be computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
12-month, 3-month or 30-day period by the maximum offering price of a share of
the relevant class (reduced by any earned income expected to be declared shortly
as a dividend) on the last day of the period. Yield calculations will reflect
any voluntary expense limitations in effect for the Fund during the relevant
period.
The Balanced Fund may also present one or more distribution rates for each class
in its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital gain
over a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value, rather than the maximum offering price, is used to
calculate the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of each Fund can be
expected to achieve a higher investment return than the Fund's Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
o New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Growth, Value and Balanced Funds were organized prior to 1985 and
conducted investment operations as separate corporations until their
reorganization as series of New England Funds Trust I in January 1987. The
International Equity Fund and the Capital Growth Fund were organized in 1992,
the Star Advisers Fund was organized in 1994, the Star Worldwide Fund was
organized in 1995 and the Star Small Cap Fund was organized in 1996.
o New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Growth Opportunities Fund is the original series of shares of the Trust
and has been in operation since 1931.
o New England Funds Trust III, an open-end management investment company, was
organized in 1995 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Equity Income Fund is the original series of shares of the Trust and has
been in operation since 1995.
o When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive annual or quarterly dividends
as determined by the respective Trust's trustees and to cast a vote for each
share you own at shareholder meetings. Shares of each Fund vote separately
from shares of other series of the same Trust, except as otherwise required
by law. Shares of all classes of a Fund vote together, except as to matters
relating to a class's Rule 12b-1 plan, on which only shares of that class are
entitled to vote. No Rule 12b-1 plan applies to the Class Y shares of any
Fund.
o Class A, Class B and Class C shares are identical to Class Y shares, except
that Class A, Class B and Class C shares are subject to a sales load or
contingent deferred sales charge, bear a service fee at the annual rate of
0.25% of average net assets (and, in the case of Class B and Class C shares,
a 0.75% distribution fee) and have separate voting rights in certain
circumstances. Class Y may bear its own transfer agency and prospectus
printing costs and, if so, will not bear any portion of those costs relating
to other classes of shares.
o Except for matters that are explicitly identified as "fundamental" in this
Prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Growth,
Value and Balanced Funds are fundamental. The investment objectives of the
Capital Growth, International Equity, Equity Income, Star Advisers, Star
Worldwide and Star Small Cap Funds are not fundamental. The investment
objective of the Growth Opportunities Fund is not fundamental but, as a
matter of policy, the trustees would not change the objective without
shareholder approval. If there is a change in the objective of the Capital
Growth, International Equity, Equity Income, Star Advisers, Star Worldwide,
Star Small Cap or Growth Opportunities Funds, shareholders should consider
whether these Funds remain appropriate investments in light of their current
financial position and needs.
o The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
o The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is
possible that a Trust might become liable for any misstatements in this
prospectus that relate to the other Trusts. The trustees of each Trust have
considered this possible liability and approved the use of this combined
prospectus for Funds of all three Trusts.
o Each Fund's annual report contains additional performance information and is
available upon request and without charge. Each Fund will send a single copy
of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to
be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
o The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
o The Trusts' trustees have the authority without shareholder approval to
issue other classes of shares of the Fund that represent interests in the
Fund's portfolio but that have different sales load and fee arrangements.
o No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
o Many of the services provided to the Funds depends on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between the
year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Funds' operations and services provided to shareholders. NEFM, CGM, the
Funds' subadvisers, the Distributor, NEFSCO, State Street Bank and certain
other service providers to the Funds have reported that each expects to
modify its systems, as necessary, prior to January 1, 2000 to address this
so-called "year 2000 problem." However, there can be no assurance that the
problem will be corrected in all respects and that the Funds' operations and
services provided to shareholders will not be adversely affected.
[recycle logo] Printed on recycled paper
<PAGE>
[GRAPHIC OMITTED]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1998
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.
New England Government Securities Fund, New England Strategic Income Fund, New
England Bond Income Fund and New England Municipal Income Fund, each a series of
New England Funds Trust I, and New England Limited Term U.S. Government Fund,
New England Adjustable Rate U.S. Government Fund and New England High Income
Fund, each a series of New England Funds Trust II, are separate mutual funds
(the "Funds" and each a "Fund"). New England Funds Trust I, New England Funds
Trust II and New England Funds Trust III are referred to in this Prospectus as
the "Trusts."
New England Government Securities Fund, New England Adjustable Rate U.S.
Government Fund and New England Municipal Income Fund offer two classes of
shares (Classes A and B) to the general public, and New England Limited Term
U.S. Government Fund, New England Strategic Income Fund, New England Bond Income
Fund and New England High Income Fund offer three classes of shares (Classes A,
B and C) to the general public. The offering price is based on the net asset
value per share next determined after an order is received. Class A share
purchases generally involve a sales charge at the time of purchase. No initial
sales charge applies to Class B and Class C share purchases. A contingent
deferred sales charge (a "CDSC"), however, is imposed upon certain redemptions
of Class B and Class C shares. Class B shares automatically convert to Class A
shares eight years after purchase. Class C shares do not have a conversion
feature. Class B and Class C shares bear higher 12b-1 fees than Class A shares.
See "Buying Fund Shares -- Sales Charges." Through a separate Prospectus, each
Fund except New England Municipal Income Fund also offers an additional class of
shares, Class Y shares, to certain institutional investors. To obtain more
information about Class Y shares, please call New England Funds, L.P. (the
"Distributor") toll-free at 1-800-225-5478.
This Prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Funds dated May
1, 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., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116, or call toll free at
1-800-225-5478. The SEC maintains a Web site (http://www.sec.gov) that contains
the Statement, materials incorporated by reference and other information
regarding the Funds. The Statement contains more detailed information about the
Funds and is incorporated into this Prospectus by reference.
NEW ENGLAND HIGH INCOME FUND INVESTS PRIMARILY IN, AND NEW ENGLAND STRATEGIC
INCOME FUND MAY INVEST UP TO ALL OF ITS ASSETS IN, LOWER RATED BONDS COMMONLY
KNOWN AS "JUNK BONDS." THIS TYPE OF INVESTMENT IS SUBJECT TO GREATER RISK THAN
HIGHER RATED BONDS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS, INCLUDING
THE RISK OF DEFAULT. INVESTORS SHOULD ASSESS CAREFULLY THE RISKS ASSOCIATED WITH
INVESTMENT IN THESE FUNDS. SEE "INVESTMENT RISKS -- LOWER RATED FIXED-INCOME
SECURITIES."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
4 Financial Highlights Historical information on the Funds' performance.
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
16 Investment Objectives The investment goal for each Fund.
16 Nvest Companies and the Funds' The Funds' adviser and subadvisers are affiliates
Adviser and Subadvisers of Nvest Companies.
17 How the Funds Pursue Their Objectives
17 Fund Investments
- -------------------------------------------------------------------------------------------------------------------------
24 INVESTMENT RISKS It is important to understand the risks inherent in
a Fund before you invest.
- -------------------------------------------------------------------------------------------------------------------------
31 FUND MANAGEMENT
- -------------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
34 Minimum Investment Everything you need to know to open and add to
34 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
35 Sales Charges
39 Reduced Sales Charges (Class A Shares Only)
- -------------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
41 Exchanging Among New England Funds New England Funds offers three convenient ways to
42 Fund Dividend Payments exchange Fund shares.
- -------------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
43 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic
Withdrawal Plan
45 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- -------------------------------------------------------------------------------------------------------------------------
FUND DETAILS
46 How Fund Share Price is Determined Additional information you may find important.
47 Income Tax Considerations
48 The Funds' Expenses
50 Performance Criteria
50 Additional Facts About the Funds
53 Appendix A Ratings of Securities.
54 Appendix B Portfolio Composition of the High Income and
Strategic Income 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 Class A, B and C shares of the Funds and estimated annual expenses for the
Funds' Class A, B and C shares. The Example on the following page shows the
cumulative expenses attributable to a hypothetical $1,000 investment in Class
A, B and C shares of the Funds for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
NEW ENGLAND STRATEGIC INCOME FUND
---------------------------------
CLASS A CLASS B CLASS C(4)
------- ------- ----------
Maximum Initial Sales Charge Imposed on a
Purchase (as a percentage of offering
price)(1)(2) ............................ 4.50% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable)(2) ........................... (3) 5.00% 1.00%
NEW ENGLAND
ADJUSTABLE RATE
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT
U.S. GOVERNMENT FUND FUND
-------------------------- ----------------
CLASS A CLASS B CLASS C CLASS A CLASS B
------- ------- ------- ------- -------
Maximum Initial Sales Charge
Imposed on a Purchase
(as a percentage of offering
price)(1)(2) ................ 3.00% None None 1.00% None
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price or
redemption proceeds, as
applicable)(2) .............. (3) 5.00% 1.00% (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See
"Buying Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% CDSC applies with respect to certain purchases of Class A shares
greater than $1,000,000 redeemed within 1 year after purchase, but not to
any other purchases or redemptions of Class A shares. See "Buying Fund
Shares -- Sales Charges."
(4) Applies to New England Bond Income Fund, New England Strategic Income Fund
and New England High Income Fund only.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
GOVERNMENT NEW ENGLAND LIMITED TERM MUNICIPAL NEW ENGLAND BOND
SECURITIES FUND U.S. GOVERNMENT FUND INCOME FUND INCOME FUND
------------------ ------------------------------ ---------------- ----------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees ........ 0.65% 0.65% 0.64% 0.64% 0.64% 0.44% 0.44% 0.43% 0.43% 0.43%
12b-1 Fees ............. 0.25 1.00* 0.35 1.00* 1.00* 0.25 1.00* 0.25 1.00* 1.00*
Other Expenses ......... 0.46 0.46 0.29 0.29 0.29 0.24 0.24 0.37 0.37 0.37
Total Fund Operating
Expenses ............. 1.36 2.11 1.28 1.93 1.93 0.93 1.68 1.05 1.80 1.80
<CAPTION>
NEW ENGLAND
ADJUSTABLE RATE NEW ENGLAND HIGH NEW ENGLAND STRATEGIC
U.S. GOVERNMENT FUND INCOME FUND INCOME FUND
----------------------- ---------------------------------- ----------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees
(in the case
of New England
Adjustable Rate
U.S. Government
Fund, after
voluntary fee
waiver) ...... 0.27%** 0.27%** 0.70% 0.70% 0.70% 0.64% 0.64% 0.64%
12b-1 Fees ..... 0.25 1.00* 0.25 1.00* 1.00* 0.25 1.00* 1.00*
Other Expenses . 0.18 0.18 0.41 0.41 0.41 0.29 0.29 0.29
Total Fund
Operating
Expenses
(in the case
of New England
Adjustable Rate
U.S. Government
Fund, after
voluntary fee
waiver) ...... 0.70** 1.45** 1.36 2.11 2.11 1.18 1.93 1.93
* Because of the higher 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by rules of the National Association of Securities Dealers, Inc.
** Without the voluntary fee waiver by the Fund's adviser, Management Fees would be 0.55% for both classes and Total Fund
Operating Expenses would be 0.98% for Class A shares and 1.73% for Class B shares. These voluntary limitations can be
terminated by the Fund's adviser at any time. See "Fund Management."
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of
actual or expected Fund performance or expenses, both of which may be more or
less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND GOVERNMENT NEW ENGLAND LIMITED NEW ENGLAND ADJUSTABLE
SECURITIES FUND TERM U.S. GOVERNMENT FUND RATE U.S. GOVERNMENT FUND
---------------------- --------------------------------------- -------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
------- ------- ------- ------- ------- ------- -------
(1) (2) (1) (2) (1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year .................... $ 58 $ 71 $ 21 $ 43 $ 70 $ 20 $ 30 $ 20 $ 17 $ 65 $ 15
3 years ................... $ 86 $ 96 $ 66 $ 69 $ 91 $ 61 $ 61 $ 61 $ 32 $ 76 $ 46
5 years ................... $116 $133 $113 $ 98 $124 $104 $104 $104 $ 49 $ 99 $ 79
10 years* ................. $201 $225 $225 $180 $209 $209 $225 $225 $ 96 $153 $153
<CAPTION>
NEW ENGLAND STRATEGIC NEW ENGLAND BOND
INCOME FUND INCOME FUND
----------------------------------------- -----------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
(1) (2) (1) (2) (1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ..................... $ 56 $ 70 $ 20 $ 30 $ 20 $ 55 $ 68 $ 18 $ 28 $ 18
3 years .................... $ 81 $ 91 $ 61 $ 61 $ 61 $ 77 $ 87 $ 57 $ 57 $ 57
5 years .................... $107 $124 $104 $104 $104 $100 $117 $ 97 $ 97 $ 97
10 years* .................. $182 $206 $206 $225 $225 $167 $192 $192 $212 $212
<CAPTION>
NEW ENGLAND NEW ENGLAND MUNICIPAL
HIGH INCOME FUND INCOME FUND
----------------------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B
----------- ------------ ------------ ----------- --------------
(1) (2) (1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ..................... $ 58 $ 71 $ 21 $ 31 $ 21 $ 54 $ 67 $ 17
3 years .................... $ 86 $ 96 $ 66 $ 66 $ 66 $ 73 $ 83 $ 53
5 years .................... $116 $133 $113 $113 $113 $ 94 $111 $ 91
10 years* .................. $201 $225 $225 $244 $244 $154 $179 $179
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years; therefore, Class B amounts are
calculated using Class A expenses in years 9 and 10.
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and
other expenses, please see "Fund Management," "The Funds" Expenses" and
"Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
FINANCIAL HIGHLIGHTS
(For Class A and B shares of each Fund and Class C shares of New England
Limited Term U.S. Government Fund, New England Strategic Income Fund and New
England Bond Income Fund outstanding throughout the indicated periods.)
The Financial Highlights presented on pages 4 through 15 have been included in
financial statements for the Funds. The financial statements for each Fund
have been examined by Price Waterhouse LLP, independent accountants, whose
report thereon is incorporated in Part II of the Statement and can be obtained
by shareholders, and the financial statements for periods prior to 1997 for
New England Limited Term U.S. Government Fund, New England Adjustable Rate
U.S. Government Fund and New England High Income Fund have been examined by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon is
incorporated by reference in Part II of the Statement and can be obtained by
shareholders. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in Part
II of the Statement. Each Fund's annual report contains additional performance
information and is available upon request and without charge.
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.10 $11.85 $11.99 $11.38 $11.92 $11.73 $11.75 $10.43 $11.73 $11.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.93 0.90 0.86 0.82 0.70 0.72 0.69 0.74 0.71 0.62
Net gains (losses) on
investments (both
realized and
unrealized) (0.18) 0.52 (0.27) 0.75 0.07 0.32 (1.32) 1.29 (0.64) 0.48
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss)
from investment
operations 0.75 1.42 0.59 1.57 0.77 1.04 (0.63) 2.03 0.07 1.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment
income (0.85) (0.95) (0.89) (0.82) (0.68) (0.72) (0.69) (0.73) (0.72) (0.62)
Distributions from net
realized capital
gains (0.15) 0.00 0.00 (0.21) (0.28) (0.30) 0.00 0.00 0.00 0.00
Distributions from
paid-in capital 0.00 (0.33) (0.31) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.00) (1.28) (1.20) (1.03) (0.96) (1.02) (0.69) (0.73) (0.72) (0.62)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period $11.85 $11.99 $11.38 $11.92 $11.73 $11.75 $10.43 $11.73 $11.08 $11.56
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(a) 6.8 12.6 5.7 14.9 6.8 9.0 (5.5) 20.0 0.8 10.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $179,130 $183,669 $181,343 $180,198 $178,030 $182,436 $147,986 $147,503 $120,607 $103,583
Ratio of operating
expenses to average
net assets (%) 1.24 1.21 1.21 1.21 1.23 1.22 1.29 1.35 1.32 1.36
Ratio of net
investment income to
average net assets (%) 7.69 7.50 7.63 7.28 5.92 5.70 6.66 6.69 6.45 5.63
Portfolio turnover
rate (%) 150 389 737 305 730 276 809 559 462 391
(a) A sales charge is not reflected in total return calculations.
</TABLE>
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------
SEPT. 23(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ----------------------------------------------
1993 1994 1995 1996 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.26 $11.75 $10.43 $11.74 $11.08
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.16 0.60 0.65 0.63 0.54
Net gains (losses) on investments (both
realized and unrealized) (0.30) (1.32) 1.30 (0.65) 0.48
------ ------ ------ ------ ------
Total income (loss) from investment
operations (0.14) (0.72) 1.95 (0.02) 1.02
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.16) (0.60) (0.64) (0.64) (0.54)
Distributions from net realized capital
gains (0.21) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total distributions (0.37) (0.60) (0.64) (0.64) (0.54)
------ ------ ------ ------ ------
Net asset value, end of period $11.75 $10.43 $11.74 $11.08 $11.56
====== ====== ====== ====== ======
Total return (%)(c) (1.2) (6.2) 19.2 (0.1) 9.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,255 $2,760 $4,858 $5,385 $5,654
Ratio of operating expenses to average net
assets (%) 1.97(b) 2.04 2.10 2.07 2.11
Ratio of net investment income to average
net assets (%) 5.03(b) 5.91 5.94 5.70 4.88
Portfolio turnover rate (%) 276 809 559 462 391
(a) Class B shares were first offered on September 23, 1993.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------------
JAN. 3(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.50 $12.53 $12.44 $12.86 $12.54 $12.49 $11.49 $12.10 $11.55
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.97 0.94 0.93 0.80 0.71 0.82 0.86 0.81 0.72
Net gains or losses on
investments (both
realized and
unrealized) 0.27 0.29 0.69 (0.11) 0.08 (1.10) 0.59 (0.54) 0.09
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 1.24 1.23 1.62 0.69 0.79 (0.28) 1.45 0.27 0.81
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.96) (0.94) (0.94) (0.80) (0.71) (0.72) (0.84) (0.82) (0.72)
Distributions from net
realized capital gains 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00
Distributions from paid-
in capital (0.25) (0.38) (0.26) (0.21) (0.12) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.21) (1.32) (1.20) (1.01) (0.84) (0.72) (0.84) (0.82) (0.72)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $12.53 $12.44 $12.86 $12.54 $12.49 $11.49 $12.10 $11.55 $11.64
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(d) 10.4 10.5 13.8 5.7 6.4 (2.3) 13.0 2.4 7.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $8,430 $50,062 $271,966 $477,396 $562,164 $412,399 $361,520 $276,178 $222,185
Ratio of operating
expenses to average
net assets (%) 1.31(b)(c) 1.25(b) 1.25 1.16 1.14 1.18 1.22 1.25 1.28
Ratio of net investment
income to average net
assets (%) 7.92(c) 7.95 7.24 6.24 5.64 6.80 7.18 7.13 6.40
Portfolio turnover rate (%) 731 55 277 323 124 244 247 327 533
(a) The Fund commenced operations on January 3, 1989.
(b) Commencing May 18, 1989 and ending March 31, 1992, expenses were voluntarily limited to 1.25% of average daily 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 3.47% for the period ended December 31, 1989 and 1.62% for the year ended December 31, 1990.
(c) Computed on an annualized basis.
(d) A sales charge is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
--------------------------------------------------------------------- ----------------------------------------
SEPT. 27(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------------------- ----------------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.76 $12.49 $11.48 $12.09 $11.54 $11.48 $12.10 $11.54
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.17 0.71 0.76 0.73 0.65 0.64 0.75 0.65
Net gains or losses
on investments (both
realized and
unrealized) (0.24) (1.08) 0.61 (0.54) 0.08 0.64 (0.57) 0.09
------ ------ ------ ------ ------ ------ ------ ------
Total income (loss)
from investment
operations (0.07) (0.37) 1.37 0.19 0.73 1.28 0.18 0.74
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from
net investment
income (0.16) (0.64) (0.76) (0.74) (0.65) (0.65) (0.74) (0.65)
Distributions from
net realized
capital gains (0.01) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions in
excess of net
investment income (0.03) 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.20) (0.64) (0.76) (0.74) (0.65) (0.66) (0.74) (0.65)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period $12.49 $11.48 $12.09 $11.54 $11.62 $12.10 $11.54 $11.63
====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) (0.6) (2.9) 12.3 1.7 6.5 11.4 1.6 6.6
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $6,221 $11,891 $18,056 $18,503 $16,060 $5,936 $14,903 $15,699
Ratio of operating
expenses to
average net
assets (%) 1.96(b) 1.83 1.87 1.90 1.93 1.87 1.90 1.93
Ratio of net
investment
income to
average net
assets (%) 4.30(b) 6.15 6.53 6.48 5.75 6.53 6.48 5.75
Portfolio turnover
rate (%) 124 244 247 327 533 247 327 533
(a) Class B shares were first offered beginning September 27, 1993. Class C shares were first offered beginning December 31, 1994.
(b) Computed on an annualized basis.
(c) A CDSC in the case of Class B and Class C shares is not reflected in total return calculations. Periods of less than one year
are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
OCT. 18(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $7.50 $7.50 $7.46 $7.45 $7.20 $7.37 $7.37
----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.09 0.42 0.33 0.37 0.47 0.43 0.47(e)
Net gains or losses on
investments (both realized
and unrealized) 0.00 (0.06) (0.03) (0.31) 0.14 (0.01) (0.02)
----- ----- ----- ----- ----- ----- -----
Total income from investment
operations 0.09 0.36 0.30 0.06 0.61 0.42 0.45
----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.43)
----- ----- ----- ----- ----- ----- -----
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.43)
----- ----- ----- ----- ----- ----- -----
Net asset value, end of period $7.50 $7.46 $7.45 $7.20 $7.37 $7.37 $7.39
===== ===== ===== ===== ===== ===== =====
Total return (%)(d) 1.2 4.9 4.0 0.8 8.6 5.8 6.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $60,684 $294,687 $734,251 $489,637 $331,112 $222,809 $196,928
Ratio of operating expenses to
average net assets (%)(b) 0.50(c) 0.57 0.60 0.60 0.66 0.70 0.70
Ratio of net investment income
to average net
assets (%) 6.43(c) 5.39 4.39 4.85 6.29 6.39 6.27
Portfolio turnover rate (%) 52 49 54 17 73 54 49
<CAPTION>
CLASS B
------------------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ----------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $7.52 $7.45 $7.20 $7.37 $7.36
----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.08 0.29 0.41 0.37 0.41(e)
Net gains or losses on
investments (both realized
and unrealized) (0.08) (0.29) 0.14 (0.02) (0.02)
----- ----- ----- ----- -----
Total income from investment
operations 0.00 0.00 0.55 0.35 0.39
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.07) (0.25) (0.38) (0.36) (0.37)
----- ----- ----- ----- -----
Total distributions (0.07) (0.25) (0.38) (0.36) (0.37)
----- ----- ----- ----- -----
Net asset value, end of period $7.45 $7.20 $7.37 $7.36 $7.38
===== ===== ===== ===== =====
Total return (%)(d) 0.0 0.1 7.8 4.9 5.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $855 $2,056 $2,368 $2,821 $2,961
Ratio of operating expenses to
average net assets (%)(b) 1.35(c) 1.35 1.41 1.45 1.45
Ratio of net investment income
to average net
assets (%) 3.50(c) 4.10 5.54 5.64 5.52
Portfolio turnover rate (%) 54 17 73 54 49
(a) The Fund commenced operations on October 18, 1991. Class B shares were first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class A average net assets and 1.45%
of Class B average net assets. From May 1, 1995 through May 31, 1995 expenses were voluntarily limited to
0.65% of Class A average net assets and 1.40% of Class B average net assets. From April 1, 1992 through
April 30, 1995 expenses were voluntarily limited to 0.60% of Class A average net assets and (beginning
September 13, 1993) 1.35% of Class B average net assets. From October 18, 1991 through March 31, 1992,
expenses were voluntarily limited to 0.50% of Class A average net assets. The ratio of operating expenses
to average net assets without giving effect to these expense limitations would have been 1.26%, 0.96%,
0.86%, 0.88%, 0.89%, 0.94% and 0.98% for the period ended December 31, 1991 and the years ended December
31, 1992, 1993, 1994, 1995, 1996 and 1997, respectively, for Class A shares, and 1.61%, 1.63%, 1.65%, 1.69%
and 1.73% for the period ended December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and
1997, respectively, for Class B shares.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a CDSC in the case of Class B shares are not reflected in
total return calculations. Periods of less than one year are not annualized.
(e) Per share net investment income does not reflect the period's reclassification of permanent differences
between book and tax basis net investment income.
</TABLE>
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $10.98 $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $10.95 $12.36 $12.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.85 0.91 0.89 0.88 0.85 0.77 0.72 0.81 0.84 0.83
Net gains or losses on
investments (both realized
and unrealized) (0.06) 0.34 (0.10) 1.04 0.01 0.66 (1.23) 1.40 (0.31) 0.45
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 0.79 1.25 0.79 1.92 0.86 1.43 (0.51) 2.21 0.53 1.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.88) (0.91) (0.90) (0.90) (0.86) (0.78) (0.72) (0.80) (0.84) (0.81)
Distributions in excess of
net investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01)
Distributions from net
realized capital gains 0.00 0.00 0.00 0.00 (0.02) (0.59) 0.00 0.00 0.00 (0.12)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.88) (0.91) (0.90) (0.90) (0.88) (1.37) (0.72) (0.80) (0.84) (0.94)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $10.95 $12.36 $12.05 $12.39
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(a) 7.4 11.9 7.5 18.1 7.5 12.1 (4.2) 20.8 4.6 11.0
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $67,548 $76,662 $85,372 $113,759 $145,184 $179,264 $155,362 $200,285 $189,685 $193,513
Ratio of operating expenses
to average net assets (%) 1.20 1.18 1.18 1.15 1.08 1.04 1.08 1.14 1.05 1.05
Ratio of net investment
income to average net
assets (%) 7.68 8.27 8.05 7.69 7.08 6.10 6.46 6.81 7.00 6.73
Portfolio turnover rate (%) 88 77 126 218 89 202 77 81 104 54
(a) A sales charge is not reflected in total return calculations.
</TABLE>
<PAGE>
NEW ENGLAND BOND INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------------------------- ------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------------------- ------------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.06 $12.18 $10.95 $12.36 $12.04 $10.95 $12.36 $12.06
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.20 0.63 0.72 0.75 0.74 0.56 0.75 0.74
Net gains or losses on
investments (both
realized and
unrealized) (0.30) (1.23) 1.40 (0.32) 0.46 1.40 (0.30) 0.45
------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations (0.10) (0.60) 2.12 0.43 1.20 1.96 0.45 1.19
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.19) (0.63) (0.71) (0.75) (0.72) (0.55) (0.75) (0.72)
Distributions in excess
of net investment
income 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 (0.01)
Distributions from net
realized capital gains (0.59) 0.00 0.00 0.00 (0.12) 0.00 0.00 (0.12)
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.78) (0.63) (0.71) (0.75) (0.85) (0.55) (0.75) (0.85)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $12.18 $10.95 $12.36 $12.04 $12.39 $12.36 $12.06 $12.40
====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) (0.8) (4.9) 19.9 3.7 10.3 18.1 3.9 10.2
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $2,661 $9,435 $23,398 $31,191 $37,559 $1,009 $2,391 $5,276
Ratio of operating
expenses to average
net assets (%) 1.81(b) 1.83 1.89 1.80 1.80 1.89 1.80 1.80
Ratio of net investment
income to average net
assets (%) 4.79(b) 5.71 6.06 6.25 5.98 6.06 6.25 5.98
Portfolio turnover
rate (%) 202 77 81 104 54 81 104 54
(a) Class B shares were first offered on September 13, 1993. Class C shares were first offered on December 31, 1994.
(b) Computed on an annualized basis.
(c) A CDSC in the case of Class B and Class C shares is not reflected in total return calculations. Periods of less than one year
are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------------
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
AUGUST 31, DEC. 31, ----------------------------------------------------------------- ---------------
1988 1988(c) 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ----- ----- ---- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $13.77 $11.69 $11.08 $10.07 $7.56 $9.07 $ 9.46 $10.06 $8.89 $8.98 $9.42
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 1.53 0.43 1.31 1.30 1.02 0.94 0.90 0.88 0.88 0.84 0.87
Net gains or losses on
investments (both
realized and
unrealized) (1.92) (0.56) (0.93) (2.49) 1.58 0.44 0.61 (1.19) 0.13 0.44 0.52
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Total income (loss)
from investment
operations (0.39) (0.13) (0.38) (1.19) 2.60 1.38 1.51 (0.31) 1.01 1.28 1.39
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income(d) (1.53) (0.43) (1.31) (1.30) (1.02) (0.94) (0.90) (0.86) (0.88) (0.83) (0.87)
Distributions in
excess of net
investment income 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 (0.04) (0.01) 0.00
Distributions from
net realized
capital gains (0.13) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
paid-in capital (0.03) (0.05) (0.08) (0.02) (0.07) (0.05) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Total distributions (1.69) (0.48) (1.39) (1.32) (1.09) (0.99) (0.91) (0.86) (0.92) (0.84) (0.87)
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Net asset value, end
of period $11.69 $11.08 $10.07 $ 7.56 $9.07 $9.46 $10.06 $ 8.89 $8.98 $9.42 $9.94
====== ====== ====== ====== ===== ===== ====== ====== ===== ===== =====
Total return (%)(e) (2.6) (1.2) 3.3 (13.1) 36.3 15.8 16.5 (3.3) 11.8 14.9 15.4
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $14,517 $11,870 $9,070 $6,814 $12,280 $20,992 $31,176 $33,673 $39,148 $42,992 $62,739
Ratio of operating
expenses to average
net assets (%)(a) 1.57 1.50(b) 1.50 1.50 1.50 1.50 1.54 1.60 1.60 1.53 1.36
Ratio of net investment
income to average net
assets (%) 12.45 11.58(b) 12.28 14.00 11.56 9.74 9.17 9.18 9.71 9.32 9.03
Portfolio turnover
rate (%) 29 1 30 7 30 19 43 33 30 134 99
(a) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 1.40% of Class A average net assets. From
October 1, 1993 through June 27, 1996 expenses were voluntarily limited to the annual rate of 1.60% of Class A average net
assets. From May 18, 1989 through September 30, 1993 expenses (including non-recurring items) were voluntarily limited to
1.50% annually of average daily net assets of Class A shares. From July 27, 1988 through May 17, 1989, and during all periods
prior to May 18, 1988, expenses (excludingcertain non- recurring items) were limited to 1.50% annually of average net assets
of Class A shares. Non-recurring expenses excluded for purposes of calculating this expense limitation were $3,267 for the
year ended August 31, 1988, $51,751 for the four months ended December 31, 1988 and $42,482 for the period from January 1
through May 17, 1989. The ratio of operating expenses to average net assets for Class A shares, including all non-recurring
expenses and assuming the foregoing expense limitations had not been in effect, would have been 2.34% for the year ended
August 31, 1988, 2.63% (on an annualized basis) for the four months ended December 31, 1988, and 3.08%, 3.02%, 2.63%, 2.00%,
2.00%, 1.83%, 1.72%, 1.69% and 1.36%, respectively, for the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995,
1996 and 1997. Excluding all non-recurring expenses, this ratio would have been 2.32%, 2.23% (on an annualized basis), 2.68%,
2.97%, 2.63%, 2.00%, 1.82%, 1.83%, 1.72%, 1.69% and 1.36% for the year ended August 31, 1988, the four months ended December
31, 1988 and the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively.
(b) Computed on an annualized basis.
(c) Fiscal year end changed in 1988 from August 31 to December 31.
(d) Amounts distributed include tax basis distributions from paid-in capital of approximately $0.06 and $0.02 per share for the
year ended August 31, 1988 and the four months ended December 31, 1988, respectively.
(e) A sales charge in the case of the Class A shares are not reflected in total return calculations. Periods of less than one year
are not annualized.
Back Bay Advisors, L.P. was responsible for managing the Fund's portfolio from July 27, 1988 until June 30, 1996. Loomis,
Sayles & Company, L.P., the Fund's current subadviser, assumed that function on July 1, 1996. Results prior to July 1, 1996
reflect results achieved by Back Bay Advisors, L.P. (and, prior to July 27, 1988, another investment manager) under different
investment policies.
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
SEPT. 20(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.87 $10.06 $8.88 $8.98 $9.42
------ ------ ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.79 0.83 0.79 0.80
Net gains or losses on investments
(both realized and unrealized) 0.20 (1.18) 0.13 0.42 0.51
------ ------ ----- ----- -----
Total income (loss) from investment
operations 0.43 (0.39) 0.96 1.21 1.31
------ ------ ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment
income (0.23) (0.78) (0.81) (0.76) (0.80)
Distributions in excess of net
investment income (0.01) (0.01) (0.05) (0.01) 0.00
------ ------ ----- ----- -----
Total distributions (0.24) (0.79) (0.86) (0.77) (0.80)
------ ------ ----- ----- -----
Net asset value, end of period $10.06 $ 8.88 $8.98 $9.42 $9.93
====== ====== ===== ===== =====
Total return (%)(d) 4.4 (4.0) 11.2 14.1 14.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,232 $5,233 $10,625 $17,767 $42,401
Ratio of operating expenses to
average net assets (%)(b) 2.25(c) 2.25 2.25 2.19 2.11
Ratio of net investment income to
average net assets (%) 7.66(c) 8.53 8.96 8.33 8.28
Portfolio turnover rate (%) 43(c) 33 30 134 99
(a) Commencement of offering of Class B shares.
(b) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 2.15% of Class B average
net assets. From October 1, 1993 through June 27, 1996 expenses were voluntarily limited to the annual rate
of 2.25% of Class B average net assets. The ratio of operating expenses to average net assets for Class B
shares, assuming the foregoing expense limitations had not been in effect, would have been 2.53% (on an
annualized basis), 2.48%, 2.37%, 2.35% and 2.11%, respectively, for the period September 20, 1993 through
December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and 1997.
(c) Computed on an annualized basis.
(d) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $6.79 $7.10 $7.29 $7.21 $7.53 $7.54 $7.87 $6.85 $7.60 $7.53
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.46 0.47 0.46 0.45 0.44 0.40 0.39 0.42 0.41 0.40
Net gains or losses on
investments (both realized
and unrealized) 0.29 0.20 (0.08) 0.35 0.21 0.53 (1.01) 0.74 (0.07) 0.23
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.75 0.67 0.38 0.80 0.65 0.93 (0.62) 1.16 0.34 0.63
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.44) (0.48) (0.46) (0.43) (0.46) (0.42) (0.40) (0.41) (0.41) (0.41)
Distributions from net
realized capital gains 0.00 0.00 0.00 (0.01) (0.18) (0.18) 0.00 0.00 0.00 0.00
Distributions from paid-in
capital 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.44) (0.48) (0.46) (0.48) (0.64) (0.60) (0.40) (0.41) (0.41) (0.41)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period $7.10 $7.29 $7.21 $7.53 $7.54 $7.87 $6.85 $7.60 $7.53 $7.75
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(a) 11.5 9.8 5.5 11.6 8.9 12.7 (8.0) 17.2 4.6 8.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $131,776 $142,976 $146,232 $162,991 $183,276 $226,881 $184,202 $195,301 $180,983 $177,099
Ratio of operating
expenses to average net
assets (%) 0.98 0.96 0.97 0.95 0.95 0.91 0.92 0.93 0.92 0.93
Ratio of net investments
income to average
net assets (%) 6.67 6.58 6.46 6.18 5.80 5.27 5.44 5.52 5.46 5.19
Portfolio turnover
rate (%) 97 89 85 126 85 86 88 93 24 14
(a) A sales charge is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, -----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.03 $7.86 $6.85 $7.60 $7.53
----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07 0.34 0.36 0.35 0.34
Net gains or losses on investments
(both realized and unrealized) 0.01 (1.01) 0.74 (0.07) 0.23
----- ----- ----- ----- -----
Total income (loss) from investment
operations 0.08 (0.67) 1.10 0.28 0.57
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment
income (0.07) (0.34) (0.35) (0.35) (0.35)
Distributions from net realized
capital gains (0.18) 0.00 0.00 0.00 0.00
----- ----- ----- ----- -----
Total distributions (0.25) (0.34) (0.35) (0.35) (0.35)
----- ----- ----- ----- -----
Net asset value, end of period $7.86 $6.85 $7.60 $7.53 $7.75
===== ===== ===== ===== =====
Total return (%)(c) 1.0 (8.6) 16.3 3.9 7.8
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $3,395 $7,997 $12,069 $12,568 $13,356
Ratio of operating expenses to average
net assets (%) 1.65(b) 1.67 1.68 1.67 1.68
Ratio of net investment income to
average net assets (%) 3.91(b) 4.69 4.77 4.71 4.44
Portfolio turnover rate (%) 86 88 93 24 14
(a) Commencement of offering of Class B shares.
(b) Computed on an annualized basis.
(c) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------- ----------------------------- --------------------------
MAY 1(a) MAY 1(a) MAY 1(a)
THROUGH YEAR ENDED DEC. 31, THROUGH YEAR ENDED DEC. 31, THROUGH YEAR ENDED DEC. 31,
DEC. 31, --------------------- DEC. 31, -------------------- DEC. 31, ------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.50 $12.99 $13.36 $12.50 $12.99 $13.36 $12.50 $12.99 $13.35
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.74 1.05 1.01 0.68 0.95 0.91 0.67 0.95 0.91
Net gains or losses on
investments (both realized and
unrealized) 0.49 0.73 0.21 0.49 0.73 0.21 0.49 0.72 0.21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income from investment
operations 1.23 1.78 1.22 1.17 1.68 1.12 1.16 1.67 1.12
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.73) (1.05) (1.01) (0.67) (0.95) (0.91) (0.66) (0.95) (0.91)
Distributions from net realized
capital gains 0.00 (0.36) (0.15) 0.00 (0.36) (0.15) 0.00 (0.36) (0.15)
Distributions in excess of net
investment income (0.01) 0.00 0.00 (0.01) 0.00 0.00 (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.74) (1.41) (1.16) (0.68) (1.31) (1.06) (0.67) (1.31) (1.06)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $12.99 $13.36 $13.42 $12.99 $13.36 $13.42 $12.99 $13.35 $13.41
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 10.3 14.5 9.3 9.7 13.7 8.5 9.7 13.6 8.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $36,939 $90,729 $144,706 $38,767 $93,408 $146,083 $12,252 $31,746 $56,515
Ratio of operating expenses to
average net assets (%)(d) 0.93(b) 0.96 1.18 1.68(b) 1.71 1.93 1.68(b) 1.71 1.93
Ratio of net investment income
to average net assets (%) 8.75(b) 8.23 7.36 8.00(b) 7.48 6.61 8.00(b) 7.48 6.61
Portfolio turnover rate (%) 22 52 37 22 52 37 22 52 37
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a CDSC in the case of Class B and Class C shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating
expenses to average net
assets without giving
effect to the voluntary
expense limitations in
effect from May 1, 1995
through December 31, 1996
would have been (%): 1.58(b) 1.31 -- 2.33(b) 2.06 -- 2.33(b) 2.06 --
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
NEW ENGLAND GOVERNMENT
SECURITIES FUND
(THE "GOVERNMENT SECURITIES FUND")
The Fund seeks a high level of current income consistent with safety of
principal by investing in U.S. Government securities. Subadviser: Back Bay
Advisors, L.P.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(THE "LIMITED TERM U.S. GOVERNMENT FUND")
The Fund seeks a high current return consistent with preservation of capital.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(THE "ADJUSTABLE RATE FUND")
The Fund seeks a high level of current income consistent with low volatility
of principal. The Fund intends to pursue its objective by investing only in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND STRATEGIC INCOME FUND
(THE "STRATEGIC INCOME FUND")
The Fund seeks high current income with a secondary objective of capital growth.
Subadviser: Loomis, Sayles & Company, L.P.
NEW ENGLAND BOND INCOME FUND
(THE "BOND INCOME FUND")
The Fund seeks a high level of current income consistent with what the Fund
considers reasonable risk. The Bond Income Fund invests primarily in corporate
and U.S. Government bonds.
Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND HIGH INCOME FUND
(THE "HIGH INCOME FUND")
The Fund seeks high current income plus the opportunity for capital
appreciation to produce a high total return.
Subadviser: Loomis, Sayles & Company, L.P.
NEW ENGLAND MUNICIPAL INCOME FUND
(THE "MUNICIPAL INCOME FUND")
The Fund seeks as high a level of current income exempt from federal income
taxes as is consistent with reasonable risk and protection of shareholders'
capital. The Municipal Income Fund invests primarily in debt securities of
municipal issuers, the interest of which is exempt from regular federal income
tax but may be subject to the federal alternative minimum tax ("municipal
securities").
Subadviser: Back Bay Advisors, L.P.
NVEST COMPANIES AND THE FUNDS' ADVISER AND SUBADVISERS
The investment adviser and subadviser of each of the Funds are independently
operated subsidiaries of Nvest Companies, L.P. ("Nvest Companies"), which is
part of an affiliated group including Nvest, L.P., a publicly traded company
listed on the New York Stock Exchange. Nvest Companies' 14 principal
subsidiary or affiliated asset management firms, collectively, had more than
$125 billion of assets under management as of December 31, 1997. Each adviser
and subadviser operates independently and is staffed by experienced investment
professionals. All the advisers and subadvisers apply specialized knowledge
and careful analysis to the pursuit of each Fund's objectives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. ("NEFM") is investment adviser of each of
the Funds, as well as most of the other New England Funds.
BACK BAY ADVISORS(R), L.P.("Back Bay Advisors"), subadviser to all the Funds
except the Strategic Income Fund and the High Income Fund, manages over $7
billion in assets, primarily mutual fund and institutional fixed-income
portfolios.
LOOMIS, SAYLES & COMPANY, L.P. ("Loomis Sayles"), subadviser to the Strategic
Income Fund and the High Income Fund, has over $60 billion of assets under
management. Loomis Sayles manages portfolios for mutual funds and other
institutional investors and individuals.
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in
that Fund to invest in a managed portfolio consisting of securities
appropriate to the Fund's investment objective and policies. There can be no
assurance that any Fund will achieve its objective. Each Fund is a
"diversified" mutual fund.
FUND INVESTMENTS
[] GOVERNMENT SECURITIES FUND
The Government Securities Fund expects that it will invest primarily in U.S.
Government securities, including U.S. Treasury bills (maturity of one year or
less), U.S. Treasury notes (maturity of one to ten years), and U.S. Treasury
bonds (generally maturity greater than ten years), and mortgage-backed
securities issued or guaranteed by U.S. Government agencies, including but
not limited to the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Under normal market conditions, the Fund intends to
maintain a dollar-weighted average duration of between seven and eight years.
The Fund may hold individual securities with duration longer or shorter than
seven or eight years (e.g., a security with a duration of seven years will
typically have a maturity of approximately 10 years, given the current
interest rate environment) as long as the average duration remains within
these limits. See "Duration" below.
The Fund may invest in securities of any maturity and in zero coupon
securities. In addition to investing directly in U.S. Government securities,
the Fund may purchase "stripped" securities.
For hedging purposes, the Government Securities Fund may also purchase and
sell interest rate futures contracts on U.S. Government securities and may
write and purchase options on such futures and options on U.S. Government
securities. Transactions involving futures and options on futures may help to
reduce the volatility of the Fund's net asset value, but this result cannot
be assured. Options and futures are not backed by the U.S. Government.
It is a fundamental policy of the Fund that under normal market conditions it
will invest at least 65% of its total assets in "U.S. Government Securities,"
which term as used in this Prospectus includes all securities issued or
guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
[] LIMITED TERM U.S. GOVERNMENT FUND
The Fund seeks to achieve its objective by investing in U.S. Government
Securities. Under normal market conditions, 65% or more of the Fund's total
assets will be invested in U.S. Government Securities (including zero coupon
bonds) and collateralized mortgage obligations ("CMOs"). The Fund limits its
investments in CMOs to those issued by instrumentalities of the U.S.
Government. The Fund may also invest in asset-backed securities rated Aaa by
Moody's Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's
Ratings Group ("S&P") or unrated but determined by the Fund's subadviser to
be of comparable quality to securities in those rating categories. For
hedging purposes, the Fund may purchase and sell financial futures contracts
and options. The Fund may also engage in securities lending.
The Fund's subadviser, Back Bay Advisors, provides a continuous investment
program designed to maximize current return while minimizing fluctuations in
the value of the Fund's portfolio, thus stabilizing the net asset value of
the Fund's shares. Because the market value of fixed-income securities
fluctuates in response to changes in interest rates, there is a risk of a
decline in the value of the Fund's portfolio (and a corresponding decrease in
the value of the Fund's shares) if interest rates increase. To reduce this
risk, the Fund will ordinarily seek to maintain an average dollar-weighted
maturity of three to seven years. The Fund may hold individual securities
with maturities of more than seven years as long as its average maturity
remains within this limit.
[] ADJUSTABLE RATE FUND
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in adjustable rate mortgage
securities ("ARMs") or other securities collateralized by or representing
interests in mortgages (collectively, "mortgage securities"), which have
interest rates that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. The
Fund also may invest in CMOs issued by instrumentalities of the U.S.
Government, but will not invest in privately issued CMOs. Other securities
purchased by the Fund will be limited to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities but will not include
any stripped securities (such as interest only or principal only obligations)
or zero coupon obligations. When maintaining a temporary defensive he Fund
may invest its assets, without limit, in U.S. Government Securities of any
type.
[] STRATEGIC INCOME FUND
The Fund seeks to achieve its investment objectives by investing at least 65%
of its total assets in debt instruments. The Fund may invest in debt
instruments issued by corporations based in the United States or abroad and
debt instruments that are convertible into equity securities. The Fund may
also invest in U.S. Government Securities and in securities issued or
guaranteed by foreign governments (including their political subdivisions,
agencies, authorities and/or instrumentalities) ("Foreign Government
Securities") and securities issued by supranational agencies. The Fund may
invest in securities of emerging markets. The Fund may invest in debt
instruments in any rating category, including debt instruments rated in the
lowest rating categories (C by Moody's and D by S&P) and in instruments that
are unrated. For more information about the risks of investing in low rated,
high risk securities and securities of foreign issuers, see "Investment Risks
-- Lower Rated Fixed-Income Securities" and "-- Foreign Securities."
Under normal market conditions, the Fund will invest in debt instruments of
both domestic and foreign issuers and in corporate as well as government
issues. At any time, however, the Fund may invest up to 100% of its assets in
debt instruments of U.S. issuers, in debt instruments of foreign issuers, in
corporate debt instruments or in government securities. The Fund may invest
up to a total of 35% of its total assets in preferred stocks, dividend-paying
common stocks and shares of closed-end investment companies (which shares
will not exceed 10% of the Fund's total assets).
The proportion of Fund assets invested in corporate bonds, government bonds
and preferred or common stock will vary over time based on changing market
conditions. When Loomis Sayles believes that a particular market presents
more opportunity than other markets, it may increase the proportion of the
Fund's assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes, the Fund
may also purchase and sell options and futures and engage in foreign currency
transactions. The Fund may also invest in mortgage-backed securities, zero
coupon bonds, stripped securities and pay-in-kind securities. For more
information about all these types of investments, see "Investment Risks"
below.
[] BOND INCOME FUND
The Bond Income Fund invests primarily in corporate and U.S. Government
bonds. At least 80% of its total assets will be invested in bonds carrying
investment grade ratings from one of the recognized rating services. The Fund
may also purchase non-rated or lower- rated bonds. Bonds rated BBB by S&P or
Baa by Moody's (the lowest ratings that are considered investment grade) have
some speculative characteristics, and unfavorable changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity of issuers of these bonds to make principal and interest payments
than is the case with higher grade bonds. If an investment rated BBB or Baa
is downgraded by a major rating agency, the Fund's subadviser will consider
whether the investment remains appropriate for the Fund. The Fund may invest
in debt instruments rated in the rating categories of B (by Moody's or S&P)
or higher and instruments that are unrated. The Fund may invest in securities
of any maturity and in zero coupon securities. The Fund may also invest in
CMOs. The Fund will normally maintain an average dollar-weighted portfolio
maturity of less than ten years. The Fund may invest in convertible
securities and in Rule 144A securities.
The Fund may invest in foreign securities but will do so only when the Fund's
subadviser believes the associated risks are minimal as compared to similar
securities of domestic issuers.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
[] HIGH INCOME FUND
The High Income Fund under normal market conditions will invest at least 65%
of its total assets in fixed-income securities which are rated BBB or lower
by S&P or Baa or lower by Moody's or unrated but are of comparable quality to
securities that are so rated. The Fund may invest in debt instruments in any
rating category, including debt instruments rated in the lowest rating
categories (C by Moody's and D by S&P) and instruments that are unrated. See
"Investment Risks -- Lower Rated Fixed-Income Securities" below. A
diversified portfolio of these securities normally provides a current yield
or yield to maturity that is significantly higher than yields of higher rated
fixed-income securities. In addition to high current income, the Fund seeks
capital appreciation through (1) market price appreciation in periods of
declining interest rates and (2) improvement in the credit standing of
issuers.
The Fund's subadviser, Loomis Sayles, provides the Fund with an investment
program that seeks to reduce risks to the Fund by diversification and
analysis of the underlying creditworthiness of issuers and the underlying
value of securities. Loomis Sayles performs its own credit analyses and does
not rely primarily on the ratings assigned by rating services. Loomis Sayles'
analyses, in ascertaining both creditworthiness and potential for capital
appreciation, focus on technical factors as well as fundamental factors such
as the relationship of current market price to anticipated cash flow and its
coverage of interest or dividend requirements, debt as a percentage of
assets, earnings prospects, the experience and perceived strength of the
issuer's management, price responsiveness of the issuer's securities to
changes in interest rates and business conditions, debt maturity schedules
and borrowing requirements and the issuer's liquidation value.
The Fund will not invest in defaulted issues as a standard practice, but may
from time to time invest in certain defaulted issues that, in the view of
Loomis Sayles, present an attractive opportunity for capital appreciation.
Because defaulted issues are ordinarily not income producing, investment in
such issues would likely reduce the Fund's current yield.
The Fund expects that under normal market conditions at least 80% of the
value of its total assets will be invested in fixed-income securities of U.S.
corporations, including preferred stock and convertible securities, and U.S.
dollar-denominated fixed-income securities issued by foreign governments or
by companies organized in foreign countries. To achieve its basic investment
objective, the Fund from time to time also may invest up to 20% of the value
of its total assets in common stocks and up to 20% of the value of its total
assets in non-U.S. dollar-denominated fixed-income securities issued by
foreign governments or by companies organized in foreign countries. However,
investments in both of these types of securities on a combined basis
generally will not exceed 20% of the value of the Fund's assets. See
"Investment Risks -- Foreign Securities" below.
If Loomis Sayles expects a rising trend in interest rates, it may shift the
Fund's portfolio into shorter-term debt securities and domestic money market
instruments whose prices might not be affected as much by an increase in
interest rates. During those periods, or other periods when market conditions
temporarily warrant a more defensive strategy, the Fund may invest an
unlimited portion of its assets in U.S. Government Securities; certificates
of deposit, bankers' acceptances and other obligations of U.S. banks with
deposits of at least $2 billion at the close of the last calendar year;
commercial paper that is rated in the two highest categories by Moody's or
S&P; short-term fixed-income securities that are rated within the three
highest categories by Moody's or S&P; and repurchase agreements with
financial institutions deemed creditworthy by Loomis Sayles. Investment in
such instruments may result in a lower current yield and would tend to limit
appreciation possibilities. The Fund may also invest in Rule 144A securities.
The Fund may lend portfolio securities amounting to not more than 10% of its
assets to securities dealers. These transactions must be fully collateralized
at all times, but involve some credit risk to the Fund if the other party
should default on its obligations and the Fund is delayed in or prevented
from recovering the collateral.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
[] MUNICIPAL INCOME FUND
The Fund will normally invest at least 80% of its net assets in debt
securities of Municipal Issuers, the interest from which is exempt from
regular federal income tax but may be subject to the federal alternative
minimum tax. For this purpose, "Municipal Issuers" means states and other
political subdivisions of the United States, local governments, and agencies,
authorities and other instrumentalities of the foregoing. Securities
purchased by the Fund will be largely of investment grade quality.
Immediately after the purchase of any investment, at least 85% of the Fund's
assets will consist of securities rated AAA, AA, A or BBB by S&P or Aaa, Aa,
A or Baa by Moody's or unrated but determined by the Fund's subadviser to be
of comparable quality to securities in those rating categories. The other 15%
of the Fund's assets may be invested in securities rated below investment
grade (below BBB or Baa) or unrated but determined by the subadviser to be of
comparable quality. Bonds rated BBB or Baa are considered investment grade
but may have some speculative characteristics. Unfavorable changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of issuers of these bonds to make principal and interest
payments than is the case with higher grade bonds. If an investment rated BBB
or Baa is downgraded by a major rating agency, the subadviser will consider
whether the investment remains appropriate for the Fund. The Fund may invest
in bonds rated in the lowest rating categories, D by S&P or C by Moody's.
These classes of bonds can be regarded as having extremely poor prospects of
ever attaining any real investment standing. The Fund may invest in
securities of any maturity.
The Fund may also purchase and sell interest rate futures contracts and tax-
exempt bond index futures contracts and may write and purchase related
options. Transactions involving futures and options on futures may help to
reduce the volatility of the Fund's net asset value, and the writing of
options on futures may yield additional income for the Fund, but these
results cannot be assured. Income from options and futures transactions is
not tax-exempt.
Although the yield of a tax-exempt fund generally will be lower than that of
a taxable income fund, the net after-tax return to investors may be greater.
The table below illustrates what tax-free investing can mean. It shows what
you must earn from a taxable investment to equal a tax-free yield ranging
from 4% to 6%, under current federal tax rates. You can see that as your tax
rate goes up, so do the benefits of tax-free income. For example, a married
couple with a taxable income of $40,000 filing a joint return would have to
earn a taxable yield of 7.06% to equal a tax-free yield of 6.0%. This example
and the following table do not take into account the effect of state or local
income taxes, if any, or federal income taxes on social security benefits
which may arise as a result of receiving tax-exempt income, or the federal
alternative minimum tax that may be payable to the extent that Fund dividends
are derived from interest on "private activity" bonds (see below). Also, a
portion of the Fund's distributions may consist of ordinary income or
short-term or long-term capital gains and will be taxable to you as such.
<TABLE>
<CAPTION>
TAX FREE INVESTING
Taxable Equivalent Yields
TAXABLE INCOME* IF TAX EXEMPT YIELD IS
FEDERAL -------------------------------------------------
SINGLE JOINT MARGINAL 4.0% 4.5% 5.0% 5.5% 6.0%
RETURN ($) RETURN ($) TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 25,350 0 - 42,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
25,351 - 61,400 42,351 - 102,300 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
61,401 - 128,100 102,301 - 155,950 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
128,101 - 278,450 155,951 - 278,450 36.00% 6.25% 7.03% 7.81% 8.59% 9.38%
278,451 and over 278,451 and over 39.60% 6.62% 7.45% 8.28% 9.11% 9.93%
* This amount represents taxable income as defined in the Internal Revenue Code.
** These rates do not reflect any potential state income tax.
</TABLE>
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
interest on so- called "private activity" bonds is an item of tax preference,
which, depending on the shareholder's particular tax situation, might subject
the shareholder to an alternative minimum tax with a maximum rate of 28%. The
Fund may invest all or any portion of its assets in "private activity" bonds.
The interest on tax exempt bonds issued after certain dates in 1986 is
retroactively taxable from the date of issuance if the issuer does not comply
with certain requirements concerning the use of bond proceeds and the
application of earnings on bond proceeds.
[] U.S. AND FOREIGN GOVERNMENT SECURITIES
Different types of U.S. and Foreign Government Securities have different
kinds of government support. U.S. Government Securities include securities
backed by the full faith and credit of the U.S. Government, as well as many
other securities that are not full faith and credit obligations. For example,
obligations of the Federal Home Loan Banks are supported by the right of the
issuer to borrow from the U.S. Treasury, and obligations of FHLMC and FNMA
are supported only by the credit of those corporations. Similarly,
obligations of foreign governmental entities include obligations issued or
guaranteed by governments with taxing power or by their agencies. Some
Foreign Government Securities are supported by the full faith and credit of a
foreign national government or political subdivision (such as a province of
Canada) and some are not. For example, Foreign Government Securities include
securities issued by corporations which have been charged with a public
purpose and a majority of whose outstanding equity securities are owned by a
foreign government or government agency. Such securities may be supported
only by the credit of the issuing corporation and not by that of the
government or agency.
In addition to investing directly in U.S. and Foreign Government Securities,
the Government Securities and Strategic Income Funds may purchase "stripped"
securities evidencing undivided ownership interests in interest payments or
principal payments, or both, on U.S. and Foreign Government Securities. These
investments may be more volatile than other types of U.S. or Foreign
Government Securities.
[] FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds that may invest in securities denominated in foreign currencies or
traded in foreign markets may engage in related foreign currency exchange
transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Bond Income, High Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward contract is a
contract that obligates parties to the contract to exchange specified amounts
of different currencies at a specified future date. For example, a party may
agree to deliver a specified number of French francs, in exchange for a
specified number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income, High Income or Strategic
Income Fund's assets may be invested in securities that are denominated in
foreign currencies or that are traded in markets where purchase or sale
transactions settle in a foreign currency. Currency forward contracts may be
used both (1) to facilitate settlement of a Fund's transactions in these
securities and (2) to hedge against possible adverse changes in the relative
values of the currencies in which the Fund's portfolio holdings (or intended
future holdings) are denominated.
Currency forward contracts involve transaction costs and the risk that the
banks with which a Fund enters into such contracts will fail financially.
Each Fund's subadviser will, however, monitor the creditworthiness of these
banks on an ongoing basis. Successful use of currency forward contracts for
hedging purposes also depends on the accuracy of the subadviser's forecasts
as to future changes in the relative values of currencies. The accuracy of
such forecasts cannot be assured. The Fund will set aside with its custodian
certain assets to provide for satisfaction of its obligations under currency
forward contracts.
Although the Bond Income, High Income and Strategic Income Funds are
permitted to use currency forward contracts, they are not obligated to do so.
Thus, the Funds will not necessarily be fully (or even partially) hedged
against the risk of adverse currency price movements at any given time.
Foreign currency transactions involve costs and may result in losses. See
Part II of the Statement for more information.
[] DURATION
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an
interest rate change (i.e., the change in price one can expect from a given
change in interest rates). Many investors and investment analysts consider
duration to be a more useful measure of price sensitivity than "maturity." A
debt instrument's duration is derived by discounting principal and interest
payments to their present value using the instrument's current yield to
maturity and calculating the dollar-weighted average time until these
payments will be received. The Government Securities, Limited Term U.S.
Government and Bond Income Funds will seek to maintain an average portfolio
duration within specified limits as set forth in the "Fund Investments"
section for each Fund; however, each Fund's portfolio may include
fixed-income securities with durations longer or shorter than the stated
duration limits, so long as the Fund maintains an average portfolio duration
that is consistent with its investment strategy.
The values of securities having shorter durations generally fluctuate less
than securities with longer durations. In general, investments in short and
intermediate term debt securities are less sensitive to interest rate changes
and provide more stability than longer term investments. For example, based
on yields of 5.55% for a five-year U.S. Treasury security and 5.88% for a
30-year U.S. Treasury security, a 1% increase in interest rates would be
expected to result in approximately a 4.3% reduction in the value of the
five-year security (duration 4.25) as compared to approximately a 13.6%
reduction in the value of the 30-year security (duration 13.56). Conversely,
a 1% decrease in interest rates would be expected to result in similar
increases in value. These expectations represent Back Bay Advisors' estimate
of portfolio volatility based upon historic data collected under a wide
variety of market conditions, but there is no assurance that actual
volatility will be consistent with such expectations.
[] ADDITIONAL INFORMATION
Each Fund may purchase securities for its portfolio on a "when-issued" basis.
This means that the Fund will enter into the commitment to buy the security
before the security has been issued. The Fund's payment obligation and the
interest rate on the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15 to 120 days
later. No interest accrues on the security between the time the Fund enters
into the commitment and the time the security is delivered.
The Funds, consistent with their investment objectives, attempt to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic market
conditions and trends. The Government Securities and Strategic Income Funds
also invest to take advantage of what are believed to be temporary
disparities in the yields of the different segments of the market for U.S.
Government Securities. These policies may result in higher turnover rates in
the Funds' portfolios, which may produce higher transaction costs and a
higher level of taxable capital gains. Portfolio turnover considerations will
not limit any Fund's subadviser's investment discretion in managing the
Fund's assets. Recent portfolio turnover rates for the Funds are set forth
above under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a Fund buys
securities from a seller, usually a bank or brokerage firm, with the
understanding that the seller will repurchase the securities at a higher
price at a later date. If the seller fails to repurchase the securities, the
Fund has rights to sell the securities to third parties. Repurchase
agreements be regarded as loans by the Fund to the seller, collateralized by
the securities that are the subject of the agreement. Repurchase agreements
afford an opportunity for the Fund to earn a return on available cash at
relatively low credit risk, although the Fund may be subject to various
delays and risks of loss if the seller fails to meet its obligation to
repurchase. The staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are illiquid securities.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in a Fund before
you invest.
[] FIXED-INCOME SECURITIES (ALL FUNDS)
The Funds invest principally in fixed-income securities. Because interest
rates vary, it is impossible to predict the income of a Fund for any
particular period. The net asset value of your shares will vary as a result
of changes in the value of the bonds and other securities in a Fund's
portfolio.
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed-income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed by
specific assets (such as mortgages or other receivables) that have been set
aside as collateral for the issuer's obligation. Fixed-income securities
generally involve an obligation of the issuer to pay interest or dividends on
either a current basis or at the maturity of the securities, as well as the
obligation to repay the principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk. Credit risk
relates to the ability of the issuer to make payments of principal and
interest. In the case of municipal bonds, the issuer may make these payments
from money raised through a variety of sources, including (1) the issuer's
general taxing power, (2) a specific type of tax such as a property tax, or
(3) a particular facility or project such as a highway. The ability of an
issuer of municipal bonds to make these payments could be affected by
litigation, legislation or other political events, or the bankruptcy of the
issuer. U.S. Government Securities do not involve the credit risks associated
with other types of fixed-income securities; as a result, the yields
available from U.S. Government Securities are generally lower than the yields
available from corporate fixed-income securities. Market risk is the risk
that the value of the security will fall because of changes in market rates
of interest. (Generally, the value of fixed-income securities falls when
market rates of interest are rising.) Some fixed-income securities also
involve prepayment or call risk. This is the risk that the issuer will repay
a Fund the principal on the security before it is due, thus depriving the
Fund of a favorable stream of future interest payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income securities
will cause the Fund's net asset value to increase or decrease.
[] LOWER RATED FIXED-INCOME SECURITIES (STRATEGIC INCOME FUND, BOND INCOME
FUND, HIGH INCOME FUND AND MUNICIPAL INCOME FUND)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are of below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities, including U.S. Government and many Foreign
Government Securities. Lower quality fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. Achievement of the investment objective of a
mutual fund investing in lower quality fixed-income securities may be more
dependent on the fund's adviser's or subadviser's own credit analysis than
for a fund investing in higher quality bonds. The market for lower quality
fixed- income securities may be more severely affected than some other
financial markets by economic recession or substantial interest rate
increases, by changing public perceptions of this market or by legislation
that limits the ability of certain categories of financial institutions to
invest in these securities. In addition, the secondary market may be less
liquid for lower rated fixed-income securities. This lack of liquidity at
certain times may affect the valuation of these securities and may make the
valuation and sale of these securities more difficult. Securities of below
investment grade quality are considered high yield, high risk securities and
are commonly known as "junk bonds." For more information, including a
detailed description of the ratings assigned by S&P and Moody's, please refer
to the Statement's "Appendix A -- Description of Bond Ratings."
During the fiscal year ended December 31, 1997, 20% and 7.8% of the average
month-end net assets of the Bond Income Fund and the Municipal Income Fund,
respectively, were invested in fixed-income securities rated in the rating
categories below investment grade (BBB/Baa). The portfolio compositions of
the High Income Fund and the Strategic Income Fund during the fiscal year
ended December 31, 1997 are summarized in Appendix B to this Prospectus.
[] FOREIGN SECURITIES (STRATEGIC INCOME FUND, BOND INCOME FUND AND HIGH
INCOME FUND)
Foreign Government Securities and foreign corporate securities present risks
not associated with investments in U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Strategic Income Fund, the Bond Income Fund
and the High Income Fund may purchase securities denominated in foreign
currencies, a change in the value of any such currency against the U.S.
dollar will result in a change in the U.S. dollar value of the Fund's assets
and the Fund's income available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the value of a currency relative to the U.S.
dollar declines after a Fund's income has been earned in that currency,
translated into U.S. dollars and declared as a dividend, but before payment
of such dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency
relative to the U.S. dollar declines between the time a Fund incurs expenses
in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
other fees in some circumstances may be higher than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation of assets, confiscatory taxation, political or financial
instability and diplomatic developments that could affect the value of
investments in those countries. The receipt of interest on foreign government
securities may depend on the availability of tax or other revenues to satisfy
the issuer's obligations. A Fund may have limited legal recourse should a
foreign government be unwilling or unable to repay the principal or interest
owed.
The Strategic Income Fund may invest all or any portion of its assets in the
securities of emerging markets. Investments in emerging markets include
investments in countries whose economies or securities markets are not yet
highly developed. Special considerations associated with these investments
(in addition to the considerations regarding foreign investments as discussed
above) may include, among others, greater political uncertainties, an
economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer restrictions,
highly limited numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities,
and include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal
and Steel Community and the Inter-American Development Bank.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored depository receipts are arranged without involvement
by the issuer of the underlying equity securities. Less information about the
issuer of the underlying equity securities may be available in the case of
unsponsored depository receipts.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution
to shareholders.
[] MORTGAGE-RELATED SECURITIES (ALL FUNDS EXCEPT MUNICIPAL INCOME FUND)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund purchases these
assets at a premium, a faster-than-expected prepayment rate will reduce yield
to maturity, and a slower-than-expected prepayment rate will have the
opposite effect of increasing yield to maturity. If a Fund purchases
mortgage-related securities at a discount, faster-than-expected prepayments
will increase, and slower-than- expected prepayments will reduce, yield to
maturity. Prepayments, and resulting amounts available for reinvestment by
the Fund, are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest rates.
Accelerated prepayments on securities purchased at a premium may result in a
loss of principal if the premium has not been fully amortized at the time of
prepayment. Although these securities will decrease in value as a result of
increases in interest rates generally, they are likely to appreciate less
than other fixed-income securities when interest rates decline because of the
risk of prepayments. In addition, an increase in interest rates would also
increase the inherent volatility of the Fund by increasing the average life
of the Fund's portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or
market interest rate. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because
the interest rates are reset only periodically, changes in the interest rate
on ARMs may lag changes in prevailing market interest rates. Also, some ARMs
(or the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. As a result, changes in the interest rate on an ARM may not
fully reflect changes in prevailing market interest rates during certain
periods. Because of the resetting of interest rates, ARMs are less likely
than non-adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
[] ASSET-BACKED SECURITIES (LIMITED TERM U.S. GOVERNMENT FUND AND BOND INCOME
FUND)
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, assets such as automobile and credit card
receivables are being securitized in pass- through structures similar to
mortgage pass- through structures or in a pay-through structure similar to a
CMO structure. Generally the issuers of asset-backed bonds, notes or
pass-through certificates are special purpose entities and do not have any
significant assets other than the receivables securing such obligations. In
general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans. Instruments backed by pools of receivables are
similar to mortgage-backed securities in that they are subject to unscheduled
prepayments of principal prior to maturity. When the obligations are
pre-paid, the Fund will ordinarily reinvest the prepaid amounts in securities
the yields of which reflect interest rates prevailing at the time. Therefore,
the Fund's ability to maintain a portfolio which includes high-yielding
asset- backed securities will be adversely affected to the extent that
prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss.
[] COLLATERALIZED MORTGAGE OBLIGATIONS (ALL FUNDS EXCEPT MUNICIPAL INCOME FUND)
A CMO is a security backed by a portfolio of mortgages or mortgage securities
held under an indenture. The underlying mortgages or mortgage securities are
issued or guaranteed by the U.S. Government or an agency or instrumentality
thereof. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage securities. CMOs
are issued with a number of classes or series which have different maturities
and which may represent interests in some or all of the interest or principal
on the underlying collateral or a combination thereof. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. In the event of sufficient early prepayments on
such mortgages, the class or series of CMO first to mature generally will be
retired prior to its maturity. Thus, the early retirement of a particular
class or series of CMO held by the Fund would have the same effect as the
prepayment of mortgages underlying a mortgage pass-through security. CMOs may
be considered derivative securities.
[] "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that
receive different proportions of the interest and principal distribution on a
pool of U.S. or Foreign Government Securities or mortgage assets. In some
cases, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have greater
market volatility than other types of fixed-income securities. In the case of
stripped mortgage securities, if the underlying mortgage assets experience
greater than anticipated payments of principal, a Fund may fail to recoup
fully its investments in IOs. The staff of the SEC has indicated that it
views stripped mortgage securities as illiquid unless the securities are
issued by the U.S. Government or its agencies and are backed by fixed-rate
mortgages. The Funds intend to abide by the staff's position. Stripped
securities may be considered derivative securities.
[] ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND) AND
PAY-IN-KIND SECURITIES (HIGH INCOME AND STRATEGIC INCOME FUNDS)
Zero coupon securities are issued at a significant discount from face value
and pay interest only at maturity, rather than at intervals during the life
of the security. Pay-in-kind securities pay dividends or interest in the form
of additional securities of the issuer, rather than in cash. The prices of
pay-in-kind or zero coupon securities may react more strongly to changes in
interest rates than the prices of many other securities. The Funds are
required to accrue and distribute income from pay-in-kind and zero coupon
securities on a current basis, even though the Funds will not receive the
income currently in cash. Thus a Fund may have to sell other investments to
obtain cash needed to make income distributions.
[] WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the
time a Fund commits to buy it and the payment date, the Fund may sustain a
loss. The risk of this loss is in addition to the Fund's risk of loss on the
securities actually in its portfolio at the time. In addition, when a Fund
buys a security on a when-issued basis, it is subject to the risk that market
rates of interest will increase before the time the security is delivered,
with the result that the yield on the security delivered to the Fund may be
lower than the yield available on other, comparable securities at the time of
delivery. Each Fund will set aside with its custodian certain assets to
provide for satisfaction of its obligations under when-issued transactions.
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (ALL FUNDS
EXCEPT ADJUSTABLE RATE FUND)
Except as otherwise noted, the following discussion applies to all Funds
except the Adjustable Rate Fund. The Funds may engage in a variety of
transactions involving the use of options and futures with respect to U.S. or
Foreign Government Securities, corporate fixed-income securities (in the case
of the Strategic Income Fund) or municipal bonds or indices thereof (in the
case of the Municipal Income Fund) for purposes of hedging against changes in
interest rates.
A Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. A Fund may buy and sell futures contracts on
securities, securities indexes or currencies. A Fund may also enter into swap
contracts. A Fund may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the value of
other assets that a Fund owns or intends to acquire. A Fund may also conduct
foreign currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be considered a
speculative activity, involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an option pays a
premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results in
a loss if the option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the option
expires or is closed out at a profit. If a Fund as the writer of an option is
unable to close out an unexpired option, it must continue to hold the
underlying security or other asset until the option expires, to "cover" its
obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract by
the Fund exceeds (or is less than) the price of the offsetting purchase, the
Fund will realize a gain (or loss). A Fund may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of
the amount of deposits for initial margin or premiums on the existing futures
and related options positions would exceed 5% of the market value of the
Fund's net assets. Transactions in futures and related options involve the
risks of (1) imperfect correlation between the price movement of the
contracts and the underlying securities, (2) significant price movement in
one but not the other market because of different hours, (3) the possible
absence of a liquid secondary market at any point in time, and (4) the risk
that if the subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had not hedged.
Futures transactions involve potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index swaps.
The Funds will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against an increase in the price of securities a Fund anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap is
an agreement to exchange cash flows on a notional amount based on changes in
the relative values of the specified currencies. An index swap is an
agreement to make or receive payments based on the different returns that
would be achieved if a notional amount were invested in a specified basket of
securities (such as the Standard & Poor's Composite Index of 500 Stocks [the
"S&P 500"]) or in some other investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve costs
and the possible risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may exceed the
amount of the Fund's investment. The Fund will be required, however, to set
aside with its custodian bank certain assets in amounts sufficient at all
times to satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on a
Fund's subadviser's ability to forecast bond market, currency or other
financial market movements correctly. The Fund's ability to hedge against
adverse changes in the value of securities held in its portfolio through
options, futures and swap transactions also depends on the degree of
correlation between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities. The
successful use of futures and exchange traded options also depends on the
availability of a liquid secondary market to enable the Fund to close its
positions on a timely basis. There can be no assurance that such a market
will exist at any particular time. Trading hours for options may differ from
the trading hours for the underlying securities. Thus, significant price
movements may occur in the securities markets that are not reflected in the
options market. This may limit the effectiveness of options as hedging
devices. In the case of swap contracts and of options that are not traded on
an exchange and not protected by the Options Clearing Corporation
("over-the-counter" options), the Fund is at risk that the other party to the
transaction will default on its obligations, or will not permit the Fund to
terminate the transaction before its scheduled maturity. As a result of these
characteristics, the Funds will treat most swap contracts and
over-the-counter options (and the assets they segregate to cover their
obligations thereunder) as illiquid. Certain provisions of the Code and
certain regulatory requirements may limit the Funds' ability to engage in
futures, options and swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets may
be subject to less detailed reporting requirements and regulatory controls
than U.S. markets. Furthermore, investments by the Bond Income, High Income
and Strategic Income Funds in options and futures in foreign markets are
subject to many of the same risks as are the Fund's other foreign
investments. See "Foreign Securities" above. For further information, see
"Miscellaneous Investment Practices -- Futures, Options and Swap Contracts"
in Part II of the Statement.
[] RULE 144A SECURITIES (STRATEGIC INCOME, HIGH INCOME AND BOND INCOME FUNDS)
Rule 144A securities are privately offered securities that can be resold only
to certain qualified institutional buyers. Rule 144A securities are treated
as illiquid, unless the subadviser has determined, under guidelines
established by the trustees of the Trusts, that the particular issue of Rule
144A securities is liquid. Investment in illiquid securities involves the
risk that the Fund may be unable to sell such securities at the desired time.
[] SECURITIES LENDING (ALL FUNDS)
The Funds may lend their portfolio securities to broker-dealers or other
parties under contracts calling for the deposit by the borrower with the
Fund's custodian of cash collateral equal to at least the market value of the
securities loaned, marked to market on a daily basis. The Fund will continue
to benefit from interest or dividends on the securities loaned and will also
receive interest through investment of the cash collateral in short-term
liquid investments. No loans will be made if, as a result, the aggregate
amount of such loans outstanding at any time would exceed 33 1/3% (25% for
the Limited Term U.S. Government Fund and 15% for the Government Securities
Fund) of the Fund's total assets (taken at current value). Any voting rights,
or rights to consent, relating to securities loaned pass to the borrower.
However, if a material event affecting the investment occurs, such loans will
be called so that the securities may be voted by the Fund. The Fund pays
various fees in connection with such loans, including shipping fees and
reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but involve some
credit risk to the Fund if the borrower defaults on its obligation and the
Fund is delayed or prevented from recovering the collateral.
<PAGE>
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FUND MANAGEMENT
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NEFM, 399 Boylston Street, Boston, Massachusetts 02116, serves as the adviser
to each of the Funds. NEFM oversees, evaluates and monitors the subadvisory
services provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
Loomis Sayles, One Financial Center, Boston, Massachusetts 02111, is the
subadviser of the Strategic Income and High Income Funds. Founded in 1926,
Loomis Sayles is one of the country's oldest and largest investment counsel
firms. Daniel Fuss, Managing Partner and Executive Vice President of Loomis
Sayles, has served as the Strategic Income Fund's portfolio manager since the
Fund's inception in May 1995. Mr. Fuss joined Loomis Sayles in 1976. Kathleen
C. Gaffney, Vice President of Loomis Sayles, has been assisting Mr. Fuss as a
portfolio manager of the Fund since April 1996. Ms. Gaffney joined Loomis
Sayles in 1984. Gary L. Goodenough, Vice President of Loomis Sayles, has
served as the High Income Fund's portfolio manager since July 1996. Mr.
Goodenough served as a Managing Director at Bear Stearns and Salomon Brothers
prior to joining Loomis Sayles in 1993.
The subadviser of the other Funds is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Back Bay Advisors provides discretionary
investment management services to mutual funds and other institutional
investors. Formed in 1986, Back Bay Advisors now manages 15 mutual fund
portfolios and a total of over $6 billion of securities. Joel A. Damiani,
Senior Vice President of Back Bay Advisors, has served as the Government
Securities Fund's portfolio manager since May 1997. James S. Welch, Senior
Vice President of Bay Back Advisors, and Scott A. Millimet, Executive Vice
President of Back Bay Advisors, have served as the Limited Term U.S.
Government Fund's portfolio managers since May 1997.
J. Scott Nicholson, Senior Vice President of Back Bay Advisors, has served as
the Adjustable Rate Fund's portfolio manager since the Fund's inception in
October 1991. Catherine L. Bunting, Senior Vice President of Back Bay
Advisors, has served as the Bond Income Fund's portfolio manager since 1989.
Nathan R. Wentworth, Vice President of Back Bay Advisors, has served as the
Municipal Income Fund's portfolio manager since 1983. Each of the foregoing
persons has been employed by Back Bay Advisors for at least five years, with
the exception of Mr. Millimet, who, prior to joining Back Bay Advisors in
1994, served as a Vice President at BT Futures, Inc. (and as a Senior Vice
President of Carroll McEntee & McGinley).
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it acts as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide research services
relating to the Fund.
Each of the Funds pays NEFM a management fee at the annual rate set forth in
the following table, reduced by the amounts of any subadvisory fee payable by
the Fund to the Fund's subadviser (as described below):
MANAGEMENT FEE PAID BY FUND TO NEFM
(AS A PERCENTAGE OF AVERAGE DAILY
FUND NET ASSETS OF THE FUND)
---- -----------------------
Adjustable Rate
Fund ............................. 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of
$500 million
Bond Income Fund and ............. 0.500% of the first $100 million
Municipal Income Fund 0.375% of amounts in excess of
$100 million
Government Securities ............ 0.650% of the first $200 million
Fund and Limited Term 0.625% of the next $300 million
U.S. Government Fund 0.600% of amounts in excess of
$500 million
High Income Fund ................. 0.70% of the first $200 million
0.60% of amounts in excess of
$200 million
Strategic Income
Fund ............................. 0.65% of the first $200 million
0.60% of amounts in excess of
$200 million
Each Fund pays its subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
SUBADVISORY FEE PAYABLE
TO SUBADVISER
(AS A PERCENTAGE OF
FUND SUBADVISER AVERAGE DAILY NET ASSETS OF THE FUND)
---- ---------- ---------------------------------------------
<S> <C> <C>
Adjustable Rate Fund ........................................ Back Bay 0.275% of the first $200 million
Advisors 0.255% of the next $300 million
0.235% of amounts in excess of $500 million
Bond Income Fund and Municipal Income Fund .................. Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of $100 million
Government Securities Fund and Limited Term ................. Back Bay 0.3250% of the first $200 million
U.S. Government Fund Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund and Strategic Income Fund .................. Loomis Sayles 0.35% of the first $200 million
0.30% of amounts in excess of $200 million
</TABLE>
NEFM has voluntarily agreed, until further notice to the High Income Fund, to
reduce its management fee and, if necessary, to bear certain expenses
associated with operating the Fund in order to limit the Fund's expenses to an
annual rate of 1.40% of the average daily net assets of the Fund attributable
to Class A shares, 2.15% of such assets attributable to the Fund's Class B
shares and 2.15% of such assets attributable to the Fund's Class C shares.
NEFM and Back Bay Advisors have voluntarily agreed, until further notice to
the Adjustable Rate Fund, to reduce their fees and, if necessary, to bear
certain expenses associated with operating the Fund, in order to limit the
Fund's expenses to the annual rate of 0.70% of the Fund's average daily net
assets attributable to Class A shares and 1.45% of such assets attributable to
Class B shares.
If any of the voluntary fee reductions described above are terminated, the
Prospectus of the affected Fund will be supplemented.
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, Massachusetts 02110.
The general partners of each of Back Bay Advisors, Loomis Sayles, NEFM and the
Distributor, and the sole shareholder of NEFSCO, are special purpose
corporations that are indirect, wholly-owned subsidiaries of Nvest Companies.
Nvest Companies' managing general partner, Nvest Corporation, is an indirect
wholly-owned subsidiary of Metropolitan Life Insurance Company ("MetLife"), a
mutual life insurance company. MetLife owns in the aggregate, directly and
indirectly, approximately 47% of the outstanding limited partnership interests
in Nvest Companies. Nvest Companies' advising general partner, Nvest, L.P., is
a publicly-traded company listed on the New York Stock Exchange. Nvest
Corporation is the sole general partner of Nvest, L.P.
In placing portfolio transactions for the Funds, Back Bay Advisors and Loomis
Sayles seek the most favorable price and execution available. Subject to
applicable regulatory restrictions and such policies as each Trust's trustees
may adopt, Back Bay Advisors and Loomis Sayles may consider sales of shares of
the Funds and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Funds. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with Nvest Companies, NEFM or
any subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
In addition to overseeing the management of the Funds' portfolios as conducted
by the subadvisers, NEFM provides executive and other personnel for the
management of the Trusts. Each Trust's Board of Trustees supervises the
affairs of that Trust as conducted by NEFM and the subadvisers.
The Funds have received an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers, including subadvisers other than the existing subadvisers of the
Funds, when approved by the relevant Trust's Board of Trustees, without
obtaining shareholder approval. The exemptive 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 relevant
Trust's Board of Trustees. Shareholders will be notified of any subadviser
changes.
<PAGE>
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BUYING FUND SHARES
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MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in any Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
[] $25 (for initial and subsequent investments) for payroll deduction investment
programs for 401(k), SARSEP, SEP, SIMPLE Plans, 403(b)(7) retirement plans
and certain other retirement plans.
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $250 on initial and $100 on subsequent investments for retirement plans with
tax benefits such as corporate pension and profit sharing plans and Keogh
plans.
[] $500 on initial and $100 on subsequent investments for IRAs.
[] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
CALL NEW ENGLAND FUNDS PERSONAL ACCESS
LINE(TM) AT 1-800-346-5984.
WITH OUR 24 HOUR AUTOMATED CUSTOMER
SERVICE SYSTEM YOU HAVE ACCESS TO YOUR
ACCOUNT. WITH A TOUCH-TONE TELEPHONE,
OBTAIN YOUR CURRENT ACCOUNT BALANCE,
RECENT TRANSACTIONS, FUND PRICES AND
RECENT PERFORMANCE INFORMATION. YOU CAN
ALSO PURCHASE OR EXCHANGE SHARES OF ANY
NEW ENGLAND FUND. FOR MORE INFORMATION
CALL US AT 1-800-225-5478.
You may purchase Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income, Bond Income and High Income Funds) Class C
shares of the Funds in the following ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
[Graphic Omitted]
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with
a check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier,
you can also order personalized investment slips by calling 1-800-225-5478
between 8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under certain
circumstances approved by the Distributor. When purchases are made by check or
periodic account investment, redemptions may not be allowed until the investment
being redeemed has been in the account for a minimum of ten calendar days.
[Graphic Omitted]
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business to obtain an
account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and Class of shares), Shareholder Name, Shareholder Account Number. Funds may
be transferred between 9:00 a.m. and 4:00 p.m. (Eastern time) on a day when
the Funds are open for business. Your bank may charge a fee for this service.
[Graphic Omitted]
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking
or savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an
automatic investment plan through Investment Builder. Indicate the amount of
the monthly investment on the enclosed application and enclose a check marked
"Void" or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at
1-800-225-5478 for a Service Options Form.
[Graphic Omitted]
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated
Clearing House ("ACH") system as long as your bank or credit union is a member
of the ACH system and you have a completed, approved ACH application on file
with the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling 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 accepted 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 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.
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).
[Graphic Omitted]
BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for 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 (or, under limited circumstances, such
other time no later than 8:00 p.m. as may be agreed upon between the dealer
and the Distributor) 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 and C shares and certain shareholder features may not be available to
persons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you
request them in writing from the Distributor. The Funds' "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B or
Class C shares. If you wish transactions in your account to be effected by
another person under a power of attorney from you, special rules apply. Please
contact your investment dealer or the Distributor for details.
SALES CHARGES
Each Fund offers two (or, in the case of the Limited Term U.S. Government
Fund, Strategic Income Fund, Bond Income Fund and High Income Fund, three)
classes of shares to the general public:
CLASS A SHARES
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25%
annual service fee and, in the case of the Limited Term U.S. Government Fund,
a 0.10% annual distribution fee. Class A shares are offered subject to the
following sales charges:
GOVERNMENT SECURITIES FUND
STRATEGIC INCOME FUND
BOND INCOME FUND
MUNICIPAL INCOME FUND
HIGH INCOME FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $100,000 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
LIMITED TERM U.S. GOVERNMENT FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $100,000 3.00% 3.09% 2.70%
$100,000 - $249,999 2.50% 2.56% 2.15%
$250,000 - $499,999 2.00% 2.04% 1.70%
$500,000 - $999,999 1.25% 1.27% 1.00%
$1,000,000 or more None None *
ADJUSTABLE RATE FUND
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Up to $999,999 1.00% 1.01% 0.85%
$1,000,000 or more None None *
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases of the Funds (except the Adjustable
Rate Fund and investments by plans under Section 401(a) or 401(k) of the Code
whose total investments amount to $1 million or more or that have 100 or more
eligible employees ["Retirement Plans"]) a commission of up to 1% on the
first $3 million invested and 0.50% on the excess over $3 million. The
Distributor may, at its discretion, pay investment dealers who initiate and
are responsible for such purchases of the Adjustable Rate Fund, including
purchases by Retirement Plans, a commission of up to 0.50% on the first $3
million invested, 0.20% on the next $2 million and 0.08% on the excess over
$5 million. For investments by Retirement Plans in Funds other than the
Adjustable Rate Fund, the Distributor may, at its discretion, pay investment
dealers who initiate and are responsible for such purchases a commission of
up to the following amounts: 1% on the first $3 million invested and 0.50% on
amounts over $3 million and up to $10 million. These commissions are not
payable if the purchase represents the reinvestment of a redemption from any
New England Fund during the previous 12 calendar months. Section 401(a),
401(k), 457 and 403(b) plans that have total investment assets of at least
$10 million are eligible to purchase Class Y shares of the Funds, which are
described in a separate Prospectus.
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of Class
A shares of the Funds of $1,000,000 or more or purchases by Retirement Plans
as defined above, a CDSC of 1% applies to redemptions of shares within one
year of the date of purchase. If an exchange is made to Class A shares 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 the Trusts, then a CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the Class A shares held the longest
are the first to be redeemed. The CDSC applies to redemptions through the day
one year after the day on which the purchase was accepted. No CDSC applies to
a redemption of shares followed by a reinvestment effected within 30 days
after the date of the redemption.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge, and are subject to a 0.25% annual service fee, a 0.75% annual
distribution fee for eight years (at which time they automatically convert to
Class A shares) and a CDSC if they are redeemed within six years of purchase.
The holding period for purposes of timing the conversion to Class A shares and
determining the CDSC will continue to run after an exchange to Class B shares
of any series of the Trusts. If the exchange is made to Class B shares of a
Money Market Fund, then the holding period stops and will resume only when an
exchange is made back into Class B shares of a series of the Trusts. If the
Money Market Fund shares are redeemed rather than exchanged back into a series
of the Trusts, then a CDSC applies to the redemption, at the same rate as if
the Class B shares of the Fund had been redeemed at the time they were
exchanged for Money Market Fund shares. For the purpose of the CDSC it is
assumed that the shares held the longest are the first to be redeemed.
The 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.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% of the sales price on sales of Class B shares of the Government
Securities, Strategic Income, Bond Income, High Income and Municipal Income
Funds and 2.75% of the sales price on sales of the Class B shares of the
Limited Term U.S. Government and Adjustable Rate Funds and advances the first
year's service fee (up to 0.25%) on sales of the Funds' Class B shares by such
dealers.
A, B OR C SHARES -- WHICH SHOULD YOU
CHOOSE?
YOUR CHOICE OF SHARE CLASS DEPENDS ON
THE SIZE OF YOUR INVESTMENT AND HOW LONG
YOU INTEND TO HOLD YOUR SHARES. IN
GENERAL, THERE ARE ONLY MINOR
DIFFERENCES IN PERFORMANCE RESULTS FOR
THE DIFFERENT CLASSES IF HELD FOR THE
LONG TERM. CONSULT YOUR FINANCIAL
REPRESENTATI VE FOR HELP IN DECIDING
WHICH CLASS IS APPROPRIATE FOR YOU.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales
charge, are subject to a 0.25% annual service fee, a 0.75% annual distribution
fee, and a CDSC of 1.00% on redemptions made within one year of the date of
purchase, and do not convert into another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such
investment dealers. Unlike Class B shares, there are no conversion features
associated with Class C shares; therefore, if Class C shares are held for more
than eight years Class C shareholders will be subject to higher distribution
fees than shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of another series of the Trusts. If an exchange is
made to Class C shares of a Money Market Fund, then the holding period for
purposes of determining the expiration of the CDSC will stop and resumes only
when an exchange is made back into Class C 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. The CDSC applies to redemptions through the day one year after the
day on which the purchase was accepted.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or (in the case of the Limited
Term U.S. Government, Strategic Income, Bond Income and High Income Funds)
Class C shares are more appropriate for an investor depends on the amount and
intended length of the investment. Investors making large investments,
qualifying for a reduced initial sales charge, might consider Class A shares
because Class A shares have lower 12b-1 fees and pay correspondingly higher
dividends per share. For these reasons, the Distributor will treat any order
of $1 million or more for Class B shares as a Class A order. Any order of $1
million or more for Class C shares will be treated as an order for Class A
shares, unless you indicate on the relevant section of your application that
you have been informed of the relative advantages and disadvantages of Class A
and Class C shares. Investors making smaller investments might consider Class
B or Class C shares because 100% of the purchase is invested immediately.
Investors making smaller investments who anticipate redeeming their shares
within six years may find Class C shares more favorable than Class B shares,
because Class B shares are subject to a CDSC on redemptions made within six
years after purchase, whereas the Class C CDSC applies only to redemptions
made during the first year after purchase. Class B shares are more favorable
than Class C shares for investors who anticipate holding their investment for
more than eight years since Class B shares convert to Class A shares (and thus
bear lower ongoing fees) after eight years. Consult your investment dealer for
advice applicable to your particular circumstances.
GENERAL
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The 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,
as described in the following paragraph and under "Reduced Sales Charges
(Class A Shares Only)."
NO CDSC ON ANY CLASS OF SHARES APPLIES in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2)
distributions from an IRA due to death, disability or a tax-free return of an
excess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment
of age 70 1/2 for 403(b)(7) and IRA accounts established on or after January
3, 1995. There is also no CDSC on redemptions following the death or
disability (as defined in Section 72(m)(7) of the Code) of a shareholder if
the redemption is made within one year after the shareholder's death or
disability. In addition, there is no CDSC on certain withdrawals pursuant to a
Systematic Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund
Shares -- By Systematic Withdrawal Plan" below.
Each Fund receives the net asset value next determined after an order is
received on sales of each class of shares. The sales charge is allocated
between the investment dealer and the Distributor. The Distributor receives
the CDSC. For purposes of the CDSC, an exchange from one series of the Trusts
to another series of the Trusts is not considered a redemption or a purchase.
For federal tax purposes, however, such an exchange is considered a redemption
and a purchase and, therefore, would be considered a taxable event on which
you may recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge
imposed on the sale of Class A shares of each Fund to investment dealers from
time to time. The staff of the SEC is of the view that dealers receiving all
or substantially all of the sales charge may be deemed underwriters of a
Fund's shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible
governmental authority 0.025% of the average daily net assets of an account at
the end of each calendar quarter for up to one year. The same compensation
schedule applies to sales of $250,000 or more of shares of the Adjustable Rate
Fund and $5 million or more of shares of the Limited Term U.S. Government Fund
to trust companies, bank trust departments, corporations and credit unions as
described below under "Reduced Sales Charges (Class A Shares Only)." These
commissions are not payable if the purchase represents the reinvestment of
redemption proceeds from any series of the Trusts or if the account is
registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate
of the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell
significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A, B and C shares; (iii)
financial assistance programs to dealers in connection with conferences, sales
or training programs, seminars, advertising and sales campaigns and/or
shareholder services arrangements. Certain firms and their representatives who
have sold or may sell significant amounts of shares, or have achieved other
objectives, may receive gifts of merchandise and/or incentives of travel and
lodging or the payment of these and other expenses incurred in connection with
trips to locations, within or outside the U.S., for educational seminars or
meetings of a business nature. Membership in the New England Funds President's
Council is based on sales achievement and other criteria and may result in the
provision of gifts of merchandise, a subscription to a financial publication
and participation in sales assistance programs and educational seminars. The
participation of broker-dealer firms and their representatives in compensation
and incentive programs is at the discretion of the firm. Compensation and
incentives shall conform with the applicable Rules of the National Association
of Securities Dealers, Inc.
REDUCED SALES CHARGES
(CLASS A SHARES ONLY)
[] LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at
which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
[] COMBINING ACCOUNTS -- purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of qualifying accounts of a spouse, parents,
children, siblings, grandparents or grandchildren, individual fiduciary
accounts, sole proprietorships and/or single trust estates. The values of all
accounts are combined to determine the sales charge.
[] UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of less than $1 million may be invested in shares of any Fund at a reduced
sales charge of a maximum of 1.50% of the public offering price (or 1.52% of
the net amount invested). 100% of the sales charge is paid to the dealer as a
dealer's concession on such sales.
[] Shares of the Adjustable Rate Fund and Limited Term U.S. Government Fund may
be purchased at net asset value, without payment of sales charge or CDSC, by
trust companies and bank trust departments for funds over which they exercise
discretionary investment authority and which they hold in a fiduciary,
agency, custodial or similar capacity, by corporations that purchase shares
for their own account and by credit unions, provided that the amount invested
is $250,000 or more in the case of the Adjustable Rate Fund and $5 million or
more in the case of the Limited Term U.S. Government Fund.
[] ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to
investments by any state, county or city or any instrumentality, department,
authority or agency thereof that has determined that a Fund is a legally
permissible investment and that is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of any registered investment company.
[] CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to
investments of $25,000 or more in the Funds by (1) clients of an adviser or
subadviser to any series of the Trusts, any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts and the
parents, spouses and children of the foregoing; (2) any individual who is a
participant in a Keogh or IRA Plan under a prototype Plan document of an
adviser or subadviser to any series of the Trusts if at least one participant
in the plan qualifies under category (1) above; and (3) an individual who
invests through an IRA and is a participant in an employee benefit plan that
is a client of an adviser or subadviser to any series of the Trusts. Any
investor eligible for these arrangements should so indicate in writing at the
time of the purchase.
[] Shares of the Funds may be purchased at net asset value by investment
advisers, financial planners or other intermediaries who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; clients of such
investment advisers, financial planners or other intermediaries who place
trades for their own accounts if the accounts are linked to the master
account of such investment adviser, financial planner or other intermediary
on the books and records of the broker or agent; and retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in Sections 401(a), 403(b), 401(k) and 457 of the
Code and "rabbi trusts." Investors may be charged a fee if they effect
transactions through a broker or agent.
[] Shares of the Funds are available at net asset value for investments by
participant-directed 401(a) and 401(k) plans that have 100 or more eligible
employees or by retirement plans whose third party administrator or dealer
has entered into a service agreement with the Distributor to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by the Distributor. This
compensation may be paid indirectly by the Fund in the form of servicing and
distribution fees.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies but are unavailable if the trust department or institution is
part of an organization not principally engaged in banking or trust
activities.
[] Shares of the Funds also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any
transaction fee. Such organizations may receive compensation, in an amount of
up to 0.35% annually of the average value of the Fund shares held by their
customers. This compensation may be paid by NEFM and/or a Fund's subadviser
out of their own assets, or may be paid indirectly by the Fund in the form of
servicing, distribution or transfer agent fees.
[] There is no sales charge, CDSC or initial investments minimum on investments
by current and retired employees of the Trusts' investment advisers,
subadvisers, the Distributor, New England Life Insurance Company ("NELICO")
or MetLife or any other company affiliated with NELICO or MetLife; current
and former directors and trustees of the Trusts, NELICO or MetLife or their
predecessor companies; agents and general agents of NELICO or MetLife and
their insurance company subsidiaries; current and retired employees of such
agents and general agents; registered representatives of broker- dealers who
have selling arrangements with the Distributor; the spouse, parents,
children, siblings, in-laws, grandparents or grandchildren of any of the
persons listed above; any trust, pension, profit sharing or other benefit
plan for any of the foregoing persons and any separate account of NELICO or
MetLife or of any insurance company affiliated with NELICO or MetLife.
[] Shareholders of Reich and Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Funds at net asset value and
without the imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
- --------------------------------------------------------------------------------
OWNING FUND SHARES
- --------------------------------------------------------------------------------
EXCHANGING AMONG
NEW ENGLAND FUNDS
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE
PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALL Y EXCHANGED EACH
MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS. THE MINIMUM
MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. THERE IS NO FEE FOR EXCHANGES
MADE PURSUANT TO THIS PROGRAM, BUT THERE
MAY BE A SALES CHARGE AS DESCRIBED ON
THIS PAGE. SHARES OF THE ADJUSTABLE RATE
FUND THAT ARE SUBJECT TO A DIFFERENTIAL
SALES CHARGE AS DESCRIBED ON THIS PAGE
MAY NOT PARTICIPATE IN THIS PROGRAM.
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California (the
"California Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) may be exchanged for Class A shares of another series
of the Trusts at net asset value only if you have held the California Fund
shares for at least six months; otherwise, you will pay the difference between
any sales charge you have already paid on your California Fund shares and the
higher sales charge of the series into which you are exchanging. If you exchange
Class A shares of the Adjustable Rate Fund (and shares of the Money Market Funds
acquired through exchanges of such shares) for shares of another series of the
Trusts that has a higher sales charge, you will pay the difference between any
sales charge you have already paid on your Adjustable Rate Fund shares and the
higher sales charge of the series into which you are exchanging. In addition,
you may redeem Class A shares of any Money Market Fund that were not acquired
through exchanges from any series of the Trusts and have the proceeds directly
applied to the purchase of shares of a series of the Trusts at the applicable
sales charge.
CLASS B SHARES
You may exchange Class B shares of any series of the Trusts (and Class B
shares of the Money Market Funds and Class A shares of the Money Market Funds
that have not been subject to a previous sales charge) for Class B shares of
any other series of the Trusts. Such exchanges will be made at the next-
determined net asset value of the shares. Class B shares will automatically
convert on a tax-free basis to Class A shares eight years after they are
purchased (excluding the time the shares are held in a Money Market Fund). See
"Sales Charges -- Class B Shares" above.
CLASS C SHARES
You may exchange Class C shares of any series of the Trusts (and Class C
shares of the Money Market Funds and Class A shares of the Money Market Funds
that have not been subject to a previous sales charge) for Class C shares of
any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
CLASS Y SHARES
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection
with deferred compensation plans offered by NELICO for Class Y shares of any
series of the Trusts which offers Class Y shares. To obtain a Prospectus and
more information about Class Y shares, please call the Distributor toll-free
at 1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business, write to
New England Funds or call New England Funds Personal Access Line(TM) at
1-800-346-5984 twenty-four hours a day. Exchange requests after 4:00 p.m.,
(Eastern time), or after the Exchange closes if it closes earlier than 4:00
p.m., will be processed at the net asset value determined at the close of
regular trading on the next day that the Exchange is open. The exchange must
be for a minimum of $1,000 (or the total net asset value of your account,
whichever is less), except that under the Automatic Exchange Plan, the minimum
is $100. All exchanges are subject to the eligibility requirements of the
series into which you are exchanging. In connection with any exchange, you
must obtain and carefully read a current Prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only in those
states where shares of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone.
The Fund 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 Fund 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.
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.
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 specified 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.
FUND DIVIDEND PAYMENTS
Each Fund declares dividends daily and pays them monthly. Each Fund pays as
dividends substantially all net investment income (tax-exempt and taxable
income other than long-term capital gains) each year and distributes annually
all net realized long-term capital gains (after applying any available capital
loss carryovers). Each Fund distributes net realized short-term capital gains
annually. The trustees of the Trusts may adopt a different schedule as long as
payments are made at least annually. If you intend to purchase shares of a
Fund shortly before it declares a capital gain distribution, you should be
aware that a portion of the purchase price may be returned to you as a taxable
distribution.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from ordinary income in cash while
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of other series of the Trusts, or to
receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at
net asset value (without a sales charge or CDSC) unless you select another
option. You may change your distribution option by notifying New England Funds
in writing or by calling 1-800-225-5478. If you elect to receive your
dividends in cash and the dividend checks sent to you are returned
"undeliverable" to the Fund or remain uncashed for six months, your cash
election will automatically be changed and your future dividends will be
reinvested.
- ------------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION PROGRAM
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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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<PAGE>
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SELLING FUND SHARES
- --------------------------------------------------------------------------------
5 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted]
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any
of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, Class A, Class B and Class C shares may
be redeemed by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. Class A 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 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.
[Graphic Omitted]
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a
written request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund and class of shares, 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.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds
recommend that certificates be sent by registered mail.
[Graphic Omitted]
BY CHECK:
Checkwriting is available on Class A shares of the Limited Term U.S.
Government and Adjustable Rate Funds only. To elect checkwriting for your
account, select the checkwriting option on your application and complete the
attached signature card. To add checkwriting to an existing account, please
call 1-800-225-5478 for our Service Options Form. The Fund will send you
checks drawn on State Street Bank. You will continue to earn dividends on
shares redeemed by check until the check clears. Each check must be written
for $500 or more. The checkwriting privilege does not apply to shares for
which you have requested share certificates to be issued. Checkwriting is not
available for investor accounts containing Class A shares subject to a CDSC.
If you use withdrawal checks, you will be subject to State Street Bank's rules
governing checking accounts. The Limited Term U.S. Government Fund, the
Adjustable Rate Fund and the Distributor are in no way responsible for any
checkwriting account established with State Street Bank.
You may not close your account by withdrawal check because the exact balance
of your account will not be known until after the check is received by State
Street Bank.
[Graphic Omitted]
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem
shares and receive payments on a regular schedule. In the case of shares
subject to a CDSC, the amount or percentage you specify may not exceed, on an
annualized basis, 10% of the value of your Fund account (based on the day you
establish your plan). Redemption of shares pursuant to the plan will not be
subject to a CDSC. For information, contact the Distributor or your investment
dealer. Since withdrawal payments may have tax consequences, you should
consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by State
Street Bank or your investment dealer, except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time (or, under limited
circumstances, such other time no later than 8:00 p.m. as may be agreed upon
between the dealer and the Distributor) on the same day will receive that day's
net asset value. Redemption proceeds (LESS ANY APPLICABLE CDSC) will normally be
sent to you within seven days after State Street Bank or the Distributor
receives your request in good order. However, in those cases where you have
recently purchased your shares by check or an electronic funds transfer through
the ACH system and you make a redemption request within 10 days after such
purchase or transfer, the Fund may withhold redemption proceeds until the Fund
knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in
person to the Distributor or by mail as described above. Requests are
processed at the net asset value next determined after the request is
received.
Special rules apply to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax-qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for
redemption by mail above.
The Funds may suspend the right of redemption and may postpone payment for
more than seven days when the Exchange is closed for other than weekends or
holidays, or if permitted by the rules of the SEC when trading on the Exchange
is restricted or during an emergency that makes it impracticable for the Funds
to dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income and
High Income Funds, determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of readily marketable securities
held by the Fund in lieu of cash. Securities used to redeem Fund shares in
kind will be valued in accordance with the Fund's procedures for valuation
described under "Fund Details -- How Fund Share Price Is Determined."
Securities distributed by a Fund in kind will be selected by Back Bay Advisors
or Loomis Sayles in light of the Fund's objective and will not generally
represent a pro rata distribution of each security held in the Fund's
portfolio. Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions. The Fund's right to pay
redemptions in kind is limited by an election made by the Funds under Rule
18f-1 under the 1940 Act. See "Redemptions" in Part II of the Statement.
The Funds 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 some or all of the proceeds within
120 days after your redemption and notify New England Funds or your investment
dealer at the time of reinvestment that you are taking advantage of this
privilege. You may reinvest the proceeds either by returning the redemption
check or by sending your check for some or all of the redemption amount.
Please note: for federal income tax purposes, a redemption is a sale that
involves tax consequences (even if the proceeds are later reinvested). Please
consult your tax adviser.
<PAGE>
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FUND DETAILS
- --------------------------------------------------------------------------------
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on the Exchange on each day
that the Exchange is open for trading. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on
the basis of valuations furnished by a pricing service, authorized by each
Trust's Board of Trustees, which service determines valuations for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Short-term
obligations with a remaining maturity of less than sixty days are valued at
amortized cost, which approximates market value. Securities traded primarily
on an exchange outside the United States which closes before the close of the
Exchange generally will be valued for purposes of calculating the Fund's net
asset value at the last sale or bid price on that non-U.S. exchange, except
that when an occurrence after the closing of that exchange is likely to have
materially changed such a security's value, such security will be valued at
fair value as determined by or under the direction of each Trust's Board of
Trustees as of the close of regular trading on the Exchange. An option that is
written by the Fund generally will be valued at the last sale price or, in the
absence of the last sale price, the last offer price. A futures contract will
be valued at the unrealized gain or loss on the contract that is determined by
marking the contract to the current settlement price. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the futures contract
experience significant price fluctuations after the determination of the
settlement price. When a settlement price is not used, futures contracts will
be valued at their fair value as determined by or under the direction of each
Trust's Board of Trustees. All other securities and assets of each Fund's
portfolio are valued at their fair market value as determined in good faith by
the adviser or subadviser of that Fund (or a pricing service selected by the
adviser or subadviser) under the supervision of each Trust's Board of
Trustees. The value of any assets for which the market price is expressed in
terms of a foreign currency will be translated into U.S. dollars at the
prevailing market rate on the date of the net asset value computation, or, if
no such rate is quoted at such time, at such other appropriate rate as may be
determined by or under the direction of each Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the
value (determined as explained above) of all securities plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses) attributable to such class,
by the number of shares of such class outstanding. The public offering price
of each Fund's Class A shares is determined by adding the applicable sales
charge to the net asset value. See "Buying Fund Shares -- Sales Charges"
above. The public offering price of Class B and Class C shares is the net
asset value per share.
The exact price you pay for a share will be determined by the next set of
calculations made after your order is accepted by NEFSCO. 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.
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CALCULATING THE PRICE OF SHARES
- -------------------------------------------------------------------------------
Total Market Value of
Portfolio Securities + Other Any
Assets -- Liabilities
--------------------------------------------------- = Net Asset Value (NAV)
Total Number of Outstanding Shares in a Class
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS THE
APPLICABLE SALES CHARGE. THE PUBLIC OFFERING PRICE FOR CLASS B AND
CLASS C SHARES IS THE NAV.
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INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to ensure
that it qualifies as a regulated investment company and thus does not expect
to pay any federal income tax on investment income and capital gains
distributed to shareholders in cash or additional shares. Unless
you are a tax-exempt entity, your distributions derived from a Fund's short-
term capital gains and, except for the Municipal Income Fund, ordinary income
are generally taxable to you as ordinary income. Distributions designated by
the Fund as deriving from net gains on securities held for more than one year
but not more that 18 months (i.e., 28% Rate Gains) and from net gains on
securities held for more than 18 months (i.e., 20% Rate Gains) are taxable to
you as such, regardless of how long you have owned shares in the Fund. Both
ordinary income and capital gains distributions are taxable whether
distributed to you in cash or additional shares.
A Fund's transactions in foreign currency-denominated debt securities and its
hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a part or all of a Fund's
income distributions to constitute returns of capital for tax purposes or
require the Fund to make distributions exceeding book income to avoid federal
income tax liability.
Dividends derived from interest on U.S. Government securities may be exempt
from state and local income taxes. The Funds intend to advise shareholders of
the proportion of each Fund's dividends that are derived from such interest.
Before investing in any of the Funds, you should check the consequences under
your local and state tax laws, which may be different from the federal tax
consequences, and the consequences for any retirement plan offering tax
benefits.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year-end virtually all the Fund's ordinary income earned during that calendar
year, and virtually all of the capital gain net income the Fund realized
during the twelve months ending October 31 but has not previously distributed.
If declared in October, November or December to shareholders of record in that
month and paid the following January, these distributions will be considered
for federal income tax purposes to have been received by shareholders on
December 31 of the year in which they were declared.
Each Fund (possibly excepting the Municipal Income Fund, as described below)
is required to withhold 31% of all income dividends and capital gains
distributions it pays to you (i) if you do not provide a correct, certified
taxpayer identification number, (ii) if the Fund is notified that you have
underreported income in the past or (iii) if you fail to certify to the Fund
that you are not subject to such withholding. In addition, each Fund will be
required to withhold 31% of the gross proceeds of Fund shares you redeem if
you have not provided a correct, certified taxpayer identification number or
if the Fund is notified that you have underreported income in the past. If you
are a tax-exempt institution, however, these back-up withholding rules will
not apply so long as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions.
Be sure to keep the Form 1099 as a permanent record. A fee may be charged for
any duplicate information requested.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
You should consult a competent tax adviser as to the effect of an investment
in a Fund on your particular federal, state and local tax situations.
[] Adjustable Rate Fund
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by a Fund from direct obligations of
the U.S. Government, less than 20% of the distributions of the Adjustable
Rate Fund during the current fiscal year are expected to qualify for such
tax-free treatment. Investments in mortgage-backed securities (including
GNMA, FNMA and FHLMC securities) and repurchase agreements collateralized by
U.S. Government securities do not qualify as direct federal obligations in
most states.
[] Municipal Income Fund
Dividends paid to you as a shareholder of the Municipal Income Fund that are
derived from interest on municipal securities are "exempt- interest
dividends" and may be excluded from gross income on your federal tax return.
However, if you receive social security benefits, you may be taxed on a
portion of those benefits as a result of receiving tax- exempt income. Also,
if the Municipal Income Fund invests in "private activity" bonds, a portion
of the Fund's dividends may constitute a tax preference item subject to the
alternative minimum tax. See "Investment Strategy -- Fund Investments" for
further information.
Other ordinary income and short-term capital gain distributions, if any, paid
by the Municipal Income Fund are taxable to you as ordinary income, and long-
term capital gains distributions paid by the Fund are taxable to you as
capital gains (28% Rate Gain or 20% Rate Gain, as the case may be), whether
received in cash or additional shares.
If at least 95% of the Fund's dividends are "exempt-interest dividends,"
federal back-up withholding rules do not apply. However, if the percentage
should ever drop below 95%, the Fund will be required to withhold 31% of all
income dividends that are not "exempt-interest dividends" and 31% of all
capital gain distributions it pays to you (i) if you do not provide a
correct, certified taxpayer identification number, (ii) if the Fund is
notified that you have underreported income in the past, or (iii) if you fail
to certify to the Fund that you are not subject to such withholding. The
federal exemption for "exempt-interest dividends" does not necessarily result
in exemption from state and local taxes. Distributions of "exempt-interest
dividends" may be exempt from local and state taxation to the extent they are
derived from the state or locality in which you reside. Before investing in
the Fund, you should check the consequences under your local and state tax
laws. The Fund will report annually on a state-by-state basis the source of
income the Fund receives on tax-exempt bonds that was paid out as dividends
during the preceding year.
THE FUNDS' EXPENSES
In addition to the management fee paid to NEFM, each Fund pays all expenses
not borne by its adviser or subadviser or the Distributor, including, but not
limited to, the charges and expenses of the Fund's custodian and transfer
agent, independent auditors and legal counsel for the Fund and the Trusts'
independent trustees, 12b-1 fees, all brokerage commissions and transfer taxes
in connection with portfolio transactions, all taxes and filing fees, the fees
and expenses for registration or qualification of its shares under federal and
state securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and
the compensation of trustees who are not directors, officers or employees of
NELICO or MetLife or their affiliates, other than affiliated registered
investment companies. In the case of Funds that offer Class Y shares, certain
expenses may be allocated differently between the Fund's Class A, Class B and
Class C shares, on one hand, and its Class Y shares, on the other hand. (See
"Additional Facts About the Funds"
below.)
Under plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund pays
the Distributor a monthly service fee at an annual rate not to exceed 0.25% of
the Fund's average daily net assets attributable to its Class A, Class B and
Class C shares. The Distributor may pay up to the entire amount of this fee to
securities dealers who are dealers of record with respect to the Fund's
shares, for providing personal services to investors in shares of the Fund
and/or maintenance of shareholder accounts. Such payments will be made on a
quarterly basis, unless other arrangements are made between the Distributor
and the securities dealer. In the case of Class C shares, the Distributor
retains the 0.25% service fee assessed against such shares during the first
year of investment.
In addition to the 0.25% service fee, the Limited Term U.S. Government Fund
pays the Distributor a monthly distribution fee at an annual rate not to
exceed 0.10% of the Fund's average daily net assets of the respective Funds'
Class A shares. Under Distribution Plans adopted pursuant to Rule 12b-1 under
the 1940 Act, each Fund also pays the Distributor a monthly distribution fee
at an annual rate not to exceed 0.75% of the Fund's average daily net assets
attributable to its Class B shares and Class C shares. The Distributor may pay
up to the entire amount of the distribution fee to securities dealers who are
dealers of record with respect to the Fund's shares, as distribution fees in
connection with the sale of the Fund's shares. Such payments will be made on a
quarterly basis, unless other arrangements are made between the Distributor
and the securities dealer. Except in the case of the Class A shares of the
Limited Term U.S. Government Fund, the Distributor retains the balance of the
fee as compensation for its services as distributor of the relevant class of
shares. In the case of the Class A shares of the Limited Term U.S. Government
Fund, the Distributor may also use all or any portion of the distribution fee
to pay its expenses in connection with the distribution of shares, including,
without limitation, expenses of printing and distributing prospectuses to
persons other than shareholders of the Funds, expenses of preparing, printing
and distributing advertising and sales literature and reports to shareholders
used in connection with the sales of shares, expenses of personnel and
communication equipment used in connection with prospective shareholder
inquiries and overhead expenses relating to any of the foregoing. In the case
of Class C shares, the Distributor retains the 0.75% distribution fee assessed
against such shares during the first year of investment.
The service and distribution fees on Class C shares that are retained by the
Distributor during the first year of investment are paid to compensate the
Distributor for providing distribution-related services to the Fund in
connection with the sale of Class C shares, and to reimburse the Distributor,
in whole or in part, for the commissions paid (and related financing costs) to
investment dealers at the time of sale of Class C shares.
The Class A service fee is payable only to reimburse the Distributor for
amounts it pays or expends in connection with the provision of personal
services to investors and/or the maintenance of shareholder accounts, and may
be used to reimburse such expenses incurred by the Funds' former distributor
(an affiliate of the Distributor) in prior years. To the extent that the
Distributor's reimbursable expenses in any year exceed the maximum amount
payable under the relevant Plan for that year, such expenses may be carried
forward for reimbursement in future years in which the Plan remains in effect.
Similarly, the Class A distribution fee of the Limited Term U.S. Government
Fund is payable only to reimburse the Distributor for expenses in connection
with the distribution of the Fund's shares, but unreimbursed expenses can be
carried forward into future years. The amounts of unreimbursed expenses
carried over into 1998 from previous plan years with respect to the Class A
shares are as follows: $1,583,658 for the Government Securities Fund;
$2,272,723 for the Limited Term U.S. Government Fund; $1,929,283 for the
Adjustable Rate Fund; $1,919,349 for the Bond Income Fund; $0 for the
Strategic Income Fund; $1,700,600 for the Municipal Income Fund and $0 for the
High Income Fund. The Class B and Class C service fees are payable regardless
of the amount of the Distributor's related expenses.
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 and
financial reporting functions and clerical functions relating to the Fund, and
(ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance.
PERFORMANCE CRITERIA
Each Fund may include total return information in advertisements or other
written sales material. Each Fund may show the average annual total return for
each class of shares for the one-, five- and ten-year periods through the end
of the most recent calendar quarter (or, if shorter, the period since the
commencement of the class's operations) or, in the case of the High Income
Fund's Class A shares, for the period since July 27, 1988, when Back Bay
Advisors became the High Income Fund's investment adviser. Total return is
measured by comparing the value of a hypothetical $1,000 investment in a class
at the beginning of the relevant period to the value of the investment at the
end of the period (assuming deduction of the current maximum sales charge on
Class A shares, automatic reinvestment of all dividends and capital gains
distributions and, in the case of the Class B and C shares, imposition of the
CDSC for the period of time quoted). Total return may be quoted with or
without giving effect to any voluntary expense limitations in effect for the
class in question during the relevant period. The classes may also show total
return over other periods, on an aggregate basis for the period presented, or
without deduction of a sales charge. If a sales charge is not deducted in
calculating total return, the class's total return will be higher.
Each Fund may also include the yield, accompanied by the total return, for
each class of shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's standardized formula by dividing the
adjusted net investment income per share earned during a recent 30-day period
by the maximum offering price of a share of the relevant class (reduced by any
earned income expected to be declared shortly as a dividend) on the last day
of the period. Yield calculations will reflect any voluntary expense
limitations in effect for the Fund during the relevant period.
In addition, the Municipal Income Fund may include the taxable-equivalent
yield for each class of shares in advertising and other written material.
Taxable-equivalent yield is calculated by adjusting the class's tax-exempt
yield by a factor designed to show the approximate yield that a taxable
investment would have to earn to produce an after-tax yield equal, for a
shareholder in a specified tax bracket, to the class's tax-exempt yield.
Each Fund may also present one or more distribution rates for each class in
its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital
gains over a recent 12-month, 3-month or 30-day period and dividing that
amount by the maximum offering price or the net asset value on the last day of
such period. If the net asset value rather than the maximum offering price is
used to calculate the distribution rate, the rate will be higher.
Total return will generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of expenses
borne by the Class B and Class C shares. However, this difference may be
offset in whole or in part by the benefit gained by 100% immediate investment
of the purchase price of Class B shares or Class C shares. As a result of
lower operating expenses, Class Y shares of the Funds can be expected to
achieve a higher investment return than the Funds' Class A, Class B or (in the
case of the Limited Term, Strategic Income, Bond Income and High Income Funds)
Class C shares.
All performance information is based on past results and is not an indication
of likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Government Securities Fund represents the original series of shares of
New England Funds Trust I. The Bond Income and Municipal Income Funds were
organized prior to 1985 and conducted investment operations as separate
corporations until their reorganization as series of New England Funds Trust
I in January 1987. The Strategic Income Fund commenced investment operations
in 1995.
[] New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Limited Term U.S. Government Fund commenced investment operations in
1989. The High Income Fund was organized in 1984 and conducted investment
operations as a separate corporation until its reorganization as a series of
New England Funds Trust II in 1989. The Adjustable Rate Fund commenced
investment operations in 1991.
[] When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive dividends as determined by
the respective Trust's trustees and to cast a vote for each share you own at
shareholder meetings. Shares of each Fund vote separately from shares of
other series of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters relating to a
class's Rule 12b-1 plan, for which only shares of that class are entitled to
vote.
[] Except for matters that are explicitly identified as "fundamental" in this
Prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Government
Securities, Bond Income and Municipal Income Funds are fundamental. The
investment objectives of the Adjustable Rate and Strategic Income Funds are
not fundamental. The investment objectives of the Limited Term U.S.
Government and High Income Funds are not fundamental but, as a matter of
policy, the trustees would not change those objectives without shareholder
approval. If there is a change in the investment objective of the Adjustable
Rate or Strategic Income Fund, you should consider whether the Fund remains
an appropriate investment in light of your then current financial position
and needs.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
[] Each Fund other than the Municipal Income Fund offers Class Y shares to
qualified investors. Class Y shares are identical to Class A, Class B and
Class C shares, except that Class Y shares have no sales charge of CDSC, bear
no Rule 12b-1 fees and have separate voting rights in certain circumstances.
Class Y may bear its own transfer agency and prospectus printing costs and,
if so, will not bear any portion of those costs relating to other classes of
shares.
[] If the balance in your account with a Fund is less than a minimum dollar
amount set by the trustees of the Trusts from time to time (currently $1,000
for all accounts, except for those indicated below), that Fund may close your
account and send the proceeds to you. Shareholders who are affected by this
policy will be notified of the Fund's intention to close the account and will
have 60 days immediately following the notice to bring the account up to the
minimum. The minimum does not apply to Keogh, pension and profit sharing
plans, automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in net asset value per share.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each of New England Funds Trust I and New England Funds Trust II
offers only its own funds' shares for sale, but it is possible that one Trust
might become liable for any misstatements in this Prospectus that relate to
the other Trust. The trustees of each Trust have considered this possible
liability and approved the use of this combined prospectus for Funds of both
Trusts.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] Each Fund will send a single copy of its annual and semi-annual reports to an
address at which more than one shareholder of record with the same last name
has indicated that mail is to be delivered. Shareholders may request
additional copies of any annual or semi-annual report in writing or by
telephone.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of a Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
[] Many of the services provided to the Funds depend on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between the
year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Funds' operations and services provided to shareholders. NEFM, the Funds'
subadvisers, the Distributor, NEFSCO, State Street Bank and certain other
service providers to the Funds have reported that each expects to modify its
systems, as necessary, prior to January 1, 2000 to address this so-called
"year 2000 problem." However, there can be no assurance that the problem will
be corrected in all respects and that the Funds' operations and services
provided to shareholders will not be adversely affected.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A --Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa
are rated lower than Aaa securities because margins of protection may not be
as large as in the latter or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree. Bonds
rated A have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to repay principal and pay
interest for bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
SECURITY OF NET ASSETS
- -------- -------------
Common Stock .................................................. 0.9%
Preferred Stock ............................................... 7.9%
Short-term Obligations and Other Assets ....................... 3.9%
Debt -- Unrated ............................................... 0.0%
Debt -- Standard and Poor's Rating
AAA ....................................................... 0.0%
BBB ....................................................... 0.0%
BB ........................................................ 6.5%
B ......................................................... 67.3%
CCC ....................................................... 13.5%
The chart above indicates the composition of the High 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
High Income Fund's net assets invested in each category as of the end of each
month during the year. Loomis Sayles does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does
not necessarily indicate what the composition of the Fund's portfolio will be
in subsequent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
SECURITY OF NET ASSETS
- -------- -------------
Preferred Stock ............................................... 1.2%
Short-term Obligations and Other Assets ....................... 0.2%
Common Stock .................................................. 7.4%
Debt -- Unrated ............................................... 3.7%
Debt -- Standard and Poor's Rating
AAA ....................................................... 10.6%
AA ........................................................ 5.7%
A ......................................................... 9.0%
BBB ....................................................... 17.7%
BB ........................................................ 28.2%
B ......................................................... 13.7%
CCC and lower ............................................. 2.6%
The chart above indicates the composition of the Strategic 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
Strategic Income Fund's net assets invested in each category as of the end of
each month during the year. Loomis Sayles does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does
not necessarily indicate what the composition of the Fund's portfolio will be
in subsequent fiscal years.
[Recycle Logo] Printed on Recycled Paper XB51-0598
<PAGE>
[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
Class Y shares of:
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1998
New England Government Securities Fund, New England Strategic Income Fund and
New England Bond Income Fund, each a series of New England Funds Trust I, and
New England Limited Term U.S. Government Fund, New England Adjustable Rate U.S.
Government Fund and New England High Income Fund, each a series of New England
Funds Trust II, are separate mutual funds (the "Funds" and each a "Fund"). New
England Funds Trust I, New England Funds Trust II and New England Funds Trust
III are referred to in this Prospectus as the "Trusts."
Each Fund offers Class Y shares to qualified institutional investors. New
England Limited Term U.S. Government Fund, New England Strategic Income Fund,
New England High Income Fund and New England Bond Income Fund offer Class A,
Class B and Class C shares (for other investors), and New England Government
Securities Fund and New England Adjustable Rate U.S. Government Fund offer Class
A and Class B shares (for other investors). Class Y shares of New England High
Income Fund are registered for sale only in Massachusetts and are not currently
available for sale except as may be permitted by New England Funds, L.P (the
"Distributor"). This Prospectus sets forth information investors should know
before investing in Class Y shares. Please read it carefully and keep it for
future reference. A Statement of Additional Information in two parts (the
"Statement") about the Funds dated May 1, 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., SAI Fulfillment Desk, 399 Boylston Street,
Boston, Massachusetts 02116, or call toll-free at 1-800-225-5478. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains the Statement,
materials 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. Class A, Class B and Class C
shares are described in a separate Prospectus. To obtain more information about
Class A, Class B and Class C shares, please call the Distributor toll-free at
1-800-225-5478.
NEW ENGLAND HIGH INCOME FUND INVESTS PRIMARILY IN, AND NEW ENGLAND STRATEGIC
INCOME FUND MAY INVEST UP TO ALL OF ITS ASSETS IN, LOWER RATED BONDS COMMONLY
KNOWN AS "JUNK BONDS." THIS TYPE OF INVESTMENT IS SUBJECT TO GREATER RISK THAN
HIGHER RATED BONDS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS, INCLUDING
THE RISK OF DEFAULT. INVESTORS SHOULD ASSESS CAREFULLY THE RISKS ASSOCIATED WITH
INVESTMENT IN THESE FUNDS. SEE "INVESTMENT RISKS--LOWER RATED FIXED-INCOME
SECURITIES."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees
3 Financial Highlights
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
11 Investment Objectives
11 How the Funds Pursue Their Objectives
11 Fund Investments
- --------------------------------------------------------------------------------
17 INVESTMENT RISKS
- --------------------------------------------------------------------------------
23 FUND MANAGEMENT
- --------------------------------------------------------------------------------
BUYING FUND SHARES
26 Eligibility and Minimum Investment
27 Ways to Buy Fund Shares
27 |_| By wire transfer
27 |_| By mail
- --------------------------------------------------------------------------------
OWNING FUND SHARES
29 Exchanging Among New England Funds
29 Fund Dividend Payments
- --------------------------------------------------------------------------------
SELLING FUND SHARES
31 Ways to Sell Fund Shares
31 |_| By telephone
31 |_| By mail
- --------------------------------------------------------------------------------
FUND DETAILS
33 How Fund Share Price Is Determined
33 Income Tax Considerations
34 Performance Criteria
35 Additional Facts About the Funds
37 Appendix A
38 Appendix B
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES AND FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class Y shares of the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y shares of the Funds
for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
ALL FUNDS
CLASS Y
---------
Maximum Initial Sales Charge Imposed on a Purchase None
Maximum Contingent Deferred Sales Charge None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. BOND INCOME STRATEGIC INCOME
SECURITIES FUND GOVERNMENT FUND FUND FUND
CLASS Y CLASS Y CLASS Y CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees 0.65% 0.64% 0.43% 0.64%
12b-1 Fees None None None None
Other Expenses 0.46% 0.29% 0.37% 0.29%
Total Fund Operating Expenses 1.11% 0.93% 0.80% 0.93%
<CAPTION>
NEW ENGLAND NEW ENGLAND
ADJUSTABLE RATE U.S. HIGH INCOME
GOVERNMENT FUND FUND
CLASS Y CLASS Y
------- -------
<S> <C> <C>
Management Fees
(after voluntary fee waiver and expense limitation) 0.27%* 0.70%
12b-1 Fees None None
Other Expenses 0.18% 0.41%
Total Fund Operating Expenses
(after voluntary fee waiver and expense limitation) 0.45%* 1.11%
</TABLE>
*Without the voluntary fee waiver and expense limitation by the Fund's adviser
and subadviser, Management Fees would be 0.55% and Total Fund Operating
Expenses would be 0.73%. This voluntary limitation can be terminated by the
Fund's adviser or subadviser at any time. See "Fund Management."
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at period end. The 5% return and expenses in
the Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which may be more or less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. ADJUSTABLE RATE U.S.
SECURITIES FUND GOVERNMENT FUND GOVERNMENT FUND
CLASS Y CLASS Y CLASS Y
------- ------- -------
<S> <C> <C> <C>
1 year $11 $9 $5
3 years $35 $30 $14
5 years $61 $51 $25
10 years $135 $114 $57
<CAPTION>
NEW ENGLAND STRATEGIC NEW ENGLAND NEW ENGLAND
INCOME FUND BOND INCOME FUND HIGH INCOME FUND
CLASS Y CLASS Y CLASS Y
------- ------- -------
<S> <C> <C> <C>
1 year $9 $8 $11
3 years $30 $26 $35
5 years $51 $44 $61
10 years $114 $99 $135
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
Financial Highlights
(For a Class Y share of New England Limited Term U.S. Government Fund, New
England Government Securities Fund and New England Bond Income Fund outstanding
throughout the indicated periods. In the case of New England Adjustable Rate
U.S. Government Fund, New England Strategic Income Fund and New England High
Income Fund, which had no Class Y shares outstanding prior to 1998, financial
highlights are presented for a Class A and Class B (and Class C for New England
Strategic Income Fund) share of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 3 through 10 have been included in
financial statements for the Funds. The financial statements for New England
Government Securities Fund, New England Bond Income Fund and New England
Strategic Income Fund have been examined by Price Waterhouse LLP, independent
accountants, and the financial statements for New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government Fund and New
England High Income Fund have been examined by Price Waterhouse LLP, independent
accountants, for 1997 and by Coopers & Lybrand L.L.P., independent accountants
for periods prior to 1997. The reports of Price Waterhouse LLP and Coopers &
Lybrand L.L.P. are incorporated by reference in Part II of the Statement and may
be obtained by shareholders. The Financial Highlights should be read in
conjunction with the financial statements and the notes thereto incorporated by
reference in the Statement. Each Fund's annual report contains additional
performance information and is made available upon request and without charge.
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------
MAR. 31 (A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
-----------------------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................. $11.20 $10.44 $11.71 $11.07
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................................ 0.54 0.80 0.74 0.65
Net gains (losses) on investments (both realized and unrealized) ..... (0.77) 1.26 (0.63) 0.47
------ ------ ------ ------
Total income (loss) from investment operations ....................... (0.23) 2.06 0.11 1.12
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income ............................. (0.53) (0.79) (0.75) (0.65)
------ ------ ------ ------
Total distributions .................................................. (0.53) (0.79) (0.75) (0.65)
------ ------ ------ ------
Net asset value, end of period ....................................... $10.44 $11.71 $11.07 $11.54
====== ====== ====== ======
Total return (%) ..................................................... (2.0)(c) 20.3 1.1 10.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ...................................... $4,104 $7,364 $6,384 $6,658
Ratio of operating expenses to average net assets (%) ................ 0.93 (b) 1.10 1.07 1.11
Ratio of net investment income to average net assets (%) ............. 7.25 (b) 6.94 6.70 5.88
Portfolio turnover rate (%) .......................................... 809 559 462 391
</TABLE>
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------
MAR. 31 (A)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................. $12.11 $11.51 $12.13 $11.58
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................................ 0.71 0.86 0.85 0.76
Net gains (losses) on investments (both realized and unrealized) ..... (0.74) 0.63 (0.54) 0.08
------ ------ ------ ------
Total income (loss) from investment operations ....................... (0.03) 1.49 0.31 0.84
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income ............................. (0.57) (0.87) (0.86) (0.76)
------ ------ ------ ------
Total distributions .................................................. (0.57) (0.87) (0.86) (0.76)
------ ------ ------ ------
Net asset value, end of period ....................................... $11.51 $12.13 $11.58 $11.66
====== ====== ====== ======
Total return (%) ..................................................... (0.8)(c) 13.3 2.8 7.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ...................................... $1,822 $5,723 $5,313 $5,262
Ratio of operating expenses to average net assets (%) ................ 0.83 (b) 0.87 0.90 0.93
Ratio of net investment income to average net assets (%) ............. 7.15 (b) 7.53 7.48 6.75
Portfolio turnover rate (%) .......................................... 244 247 327 533
</TABLE>
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
Class Y
--------------------------------
Year Ended Dec. 31,
1995(a) 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net asset value, beginning of year .............................. $10.95 $12.40 $12.06
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ........................................... 0.80 0.87 0.86
Net gains or losses on investments (both realized and unrealized) 1.44 (0.34) 0.46
------ ------ ------
Total income from investment operations ......................... 2.24 0.53 1.32
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income ........................ (0.79) (0.87) (0.84)
Distributions in excess of net investment income ................ 0.00 0.00 (0.01)
Distributions from net realized capital gains ................... 0.00 0.00 (0.12)
------ ------ ------
Total distributions ............................................. (0.79) (0.87) (0.97)
______ ______ ______
Net asset value, end of year .................................... $12.40 $12.06 $12.41
====== ====== ======
Total return (%) ................................................ 21.0 4.6 11.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) ................................... $2,241 $1,844 $4,153
Ratio of operating expenses to average net assets (%) ........... 0.89 0.80 0.80
Ratio of net investment income to average net assets (%) ........ 7.06 7.25 6.98
Portfolio turnover rate (%) ..................................... 81 104 54
(a) Class Y shares were first offered on December 31, 1994.
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------
OCT. 18 (A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, -------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $7.50 $7.50 $7.46 $7.45 $7.20 $7.37 $7.37
----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income .................... 0.09 0.42 0.33 0.37 0.47 0.43 0.47(e)
Net gains or losses on investments
(both realized and unrealized) ......... 0.00 (0.06) (0.03) (0.31) 0.14 (0.01) (0.02)
----- ----- ----- ----- ----- ----- -----
Total income from investment operations .. 0.09 0.36 0.30 0.06 0.61 0.42 0.45
----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment income . (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.43)
----- ----- ----- ----- ----- ----- -----
Total distributions ...................... (0.09) (0.40) (0.31) (0.31) (0.44) (0.42) (0.43)
----- ----- ----- ----- ----- ----- -----
Net asset value, end of period ........... $7.50 $7.46 $7.45 $7.20 $7.37 $7.37 $7.39
===== ===== ===== ===== ===== ===== =====
Total return (%)(d) ...................... 1.2 4.9 4.0 0.8 8.6 5.8 6.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) .......... $60,684 $294,687 $734,251 $489,637 $331,112 $222,809 $196,928
Ratio of operating expenses to average
net assets (%)(b) ...................... 0.50(c) 0.57 0.60 0.60 0.66 0.70 0.70
Ratio of net investment income to average
net assets (%) ......................... 6.43(c) 5.39 4.39 4.85 6.29 6.39 6.27
Portfolio turnover rate (%) .............. 52 49 54 17 73 54 49
(a) The Fund commenced operations on October 18, 1991.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class
A average net assets. From May 1, 1995 through May 31, 1995 expenses were
voluntarily limited to 0.65% of Class A average net assets. From April 1, 1992
through April 30, 1995 expenses were voluntarily limited to 0.60% of Class A
average net assets. From October 18, 1991 through March 31, 1992, expenses
were voluntarily limited to 0.50% of Class A average net assets. The ratio of
operating expenses to average net assets without giving effect to these
expense limitations would have been 1.26%, 0.96%, 0.86%, 0.88%, 0.89%, 0.94%
and 0.98% for the period ended December 31, 1991 and the years ended December
31, 1992, 1993, 1994, 1995, 1996 and 1997, respectively.
(c) Computed on an annualized basis.
(d) A sales charge is not reflected in total return calculations. Periods of
less than one year are not annualized.
(e) Per share net investment income does not reflect the period's
reclassification of permanent differences between book and tax basis net
investment income.
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, -----------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............... $7.52 $7.45 $7.20 $7.37 $7.36
----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income .............................. 0.08 0.29 0.41 0.37 0.41(e)
Net gains (losses) on investments
(both realized and unrealized) .................. (0.08) (0.29) 0.14 (0.02) (0.02)
----- ----- ----- ----- -----
Total income from investment operations ............ 0.00 0.00 0.55 0.35 0.39
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment income ........... (0.07) (0.25) (0.38) (0.36) (0.37)
----- ----- ----- ----- -----
Total distributions ................................ (0.07) (0.25) (0.38) (0.36) (0.37)
----- ----- ----- ----- -----
Net asset value, end of period ..................... $7.45 $7.20 $7.37 $7.36 $7.38
===== ===== ===== ===== =====
Total return (%)(d) ................................ 0.0 0.1 7.8 4.9 5.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) .................... $ 855 $2,056 $2,368 $2,821 $2,961
Ratio of operating expenses to average net
assets (%)(b) .................................... 1.35(c) 1.35 1.41 1.45 1.45
Ratio of net investment income to average
net assets (%) .................................. 3.50(c) 4.10 5.54 5.64 5.52
Portfolio turnover rate (%) ........................ 54 17 73 54 49
(a) Class B shares were first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 1.45% of Class B average net assets. From May 1, 1995 through May
31, 1995 expenses were voluntarily limited to 1.40% of Class B average net assets. From September 13, 1993 through April 30,
1995 expenses were voluntarily limited to 1.35% of Class B average net assets. The ratio of operating expenses to average net
assets without giving effect to these expense limitations would have been 1.61%, 1.63%, 1.65%, 1.69% and 1.73% for the period
ended December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and 1997, respectively.
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge (a "CDSC") is not reflected in total return calculations. Periods of less than one year are
not annualized.
(e) Per share net investment income does not reflect the period's reclassification of permanent differences between book and tax
basis net investment income.
</TABLE>
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------- ------------------------- --------------------------
MAY 1 (A) YEAR ENDED MAY 1 (A) YEAR ENDED MAY 1 (A) YEAR ENDED
THROUGH DEC. 31, THROUGH DEC. 31, THROUGH DEC. 31,
DEC. 31, --------------- DEC. 31, --------------- DEC. 31, ---------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $12.50 $12.99 $13.36 $12.50 $12.99 $13.36 $12.50 $12.99 $13.35
INCOME FROM INVESTMENT OPERATIONS
Net investment income ............................. 0.74 1.05 1.01 0.68 0.95 0.91 0.67 0.95 0.91
Net gains or losses on investments (both realized
and unrealized) ................................. 0.49 0.73 0.21 0.49 0.73 0.21 0.49 0.72 0.21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income from investment operations ........... 1.23 1.78 1.22 1.17 1.68 1.12 1.16 1.67 1.12
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DISTRIBUTIONS FROM NET
investment income ............................... (0.73) (1.05) (1.01) (0.67) (0.95) (0.91) (0.66) (0.95) (0.91)
Distributions from net realized capital gains ..... 0.00 (0.36) (0.15) 0.00 (0.36) (0.15) 0.00 (0.36) (0.15)
Distributions in excess of net investment income .. (0.01) 0.00 0.00 (0.01) 0.00 0.00 (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ............................... (0.74) (1.41) (1.16) (0.68) (1.31) (1.06) (0.67) (1.31) (1.06)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period .................... $12.99 $13.36 $13.42 $12.99 $13.36 $13.42 $12.99 $13.35 $13.41
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) ............................... 10.3 14.5 9.3 9.7 13.7 8.5 9.7 13.6 8.5
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ................... $36,939 $90,729 $144,706 $38,767 $93,408 $146,083 $12,252 $31,746 $56,515
Ratio of operating expenses to average net
assets (%)(d) ................................... 0.93(b) 0.96 1.18 1.68(b) 1.71 1.93 1.68(b) 1.71 1.93
Ratio of net investment income to average
net assets (%) ................................. 8.75(b) 8.23 7.36 8.00(b) 7.48 6.61 8.00(b) 7.48 6.61
Portfolio turnover rate (%) ....................... 22 52 37 22 52 37 22 52 37
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a CDSC in the case of Class B and Class C shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average
net assets without giving effect to the
voluntary expense limitations in effect from
May 1, 1995 through December 31, 1996 would
have been (%): ................................ 1.58(b) 1.31 -- 2.33(b) 2.06 -- 2.33(b) 2.06 --
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR FOUR
ENDED MONTHS YEAR ENDED DEC. 31,
AUGUST 31, ENDED -------------------------------------------------------------------------------------
1988 12/31/88(c) 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ... $13.77 $11.69 $11.08 $10.07 $7.56 $9.07 $ 9.46 $10.06 $8.89 $8.98 $9.42
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income ... 1.53 0.43 1.31 1.30 1.02 0.94 0.90 0.88 0.88 0.84 0.87
Net gains or losses on
investments (both
realized and
unrealized) ........... (1.92) (0.56) (0.93) (2.49) 1.58 0.44 0.61 (1.19) 0.13 0.44 0.52
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Total income (loss) from
investment operations . (0.39) (0.13) (0.38) (1.19) 2.60 1.38 1.51 (0.31) 1.01 1.28 1.39
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income(d) .. (1.53) (0.43) (1.31) (1.30) (1.02) (0.94) (0.90) (0.86) (0.88) (0.83) (0.87)
Distributions in excess
of net investment
income ................ 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 (0.04) (0.01) 0.00
Distributions from net
realized capital
gains ................. (0.13) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
paid-in capital ....... (0.03) (0.05) (0.08) (0.02) (0.07) (0.05) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Total distributions ..... (1.69) (0.48) (1.39) (1.32) (1.09) (0.99) (0.91) (0.86) (0.92) (0.84) (0.87)
------ ------ ------ ------ ----- ----- ------ ------ ----- ----- -----
Net asset value, end
of period ............. $11.69 $11.08 $10.07 $ 7.56 $9.07 $9.46 $10.06 $8.89 $8.98 $9.42 $9.94
====== ====== ====== ====== ===== ===== ====== ===== ===== ===== =====
Total return (%)(e) ..... (2.6) (1.2) 3.3 (13.1) 36.3 15.8 16.5 (3.3) 11.8 14.9 15.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) .......... $14,517 $11,870 $9,070 $6,814 $12,280 $20,992 $31,176 $33,673 $39,148 $42,992 $62,739
Ratio of operating
expenses to average net
assets (%)(a) ......... 1.57 1.50(b) 1.50 1.50 1.50 1.50 1.54 1.60 1.60 1.53 1.36
Ratio of net investment
income to average net
assets (%) ............ 12.45 11.58(b) 12.28 14.00 11.56 9.74 9.17 9.18 9.71 9.32 9.03
Portfolio turnover
rate (%) .............. 29 1 30 7 30 19 43 33 30 134 99
(a) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 1.40% of Class A average net assets. From
October 1, 1993 through June 27, 1996 expenses were voluntarily limited to the annual rate of 1.60% of Class A average net
assets. From May 18, 1989 through September 30, 1993 expenses (including non-recurring items) were voluntarily limited to 1.50%
annually of average daily net assets of Class A shares. From July 27, 1988 through May 17, 1989, and during all periods prior to
May 18, 1988, expenses (excluding certain non-recurring items) were limited to 1.50% annually of average net assets of Class A
shares. Non-recurring expenses excluded for purposes of calculating this expense limitation were $3,267 for the year ended
August 31, 1988, $51,751 for the four months ended December 31, 1988 and $42,482 for the period from January 1 through May 17,
1989. The ratio of operating expenses to average net assets for Class A shares, including all non-recurring expenses and
assuming the foregoing expense limitations had not been in effect, would have been 2.34% for the year ended August 31, 1988,
2.63% (on an annualized basis) for the four months ended December 31, 1988, and 3.08%, 3.02%, 2.63%, 2.00%, 2.00%, 1.83%, 1.72%,
1.69% and 1.36% respectively, for the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997.
Excluding all non-recurring expenses, this ratio would have been 2.32%, 2.23% (on an annualized basis), 2.68%, 2.97%, 2.63%,
2.00%, 1.82%, 1.83%, 1.72%, 1.69% and 1.36% for the year ended August 31, 1988, the four months ended December 31, 1988 and the
years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 respectively.
(b) Computed on an annualized basis.
(c) Fiscal year end changed in 1988 from August 31 to December 31.
(d) Amounts distributed include tax basis distributions from paid-in capital of approximately $0.06 and $0.02 per share for the year
ended August 31, 1988 and the four months ended December 31, 1988, respectively.
(e) A sales charge in the case of the Class A shares are not reflected in total return calculations. Periods of less than one year
are not annualized.
Back Bay Advisors, L.P. was responsible for managing the Fund's portfolio from July 27, 1988 until June 30, 1996. Loomis, Sayles &
Company, L.P., the Fund's current subadviser, assumed that function on July 1, 1996. Results prior to July 1, 1996 reflect
results achieved by Back Bay Advisors, L.P. (and, prior to July 27, 1988, another investment manager) under different investment
policies.
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------
SEPT. 20 (A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ----------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............... $9.87 $10.06 $8.88 $8.98 $9.42
----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income .............................. 0.23 0.79 0.83 0.79 0.80
Net gains or losses on investments (both realized
and unrealized) .................................. 0.20 (1.18) 0.13 0.42 0.51
----- ----- ----- ----- -----
Total income (loss) from investment operations ..... 0.43 (0.39) 0.96 1.21 1.31
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment income ........... (0.23) (0.78) (0.81) (0.76) (0.80)
Distributions in excess of net investment income ... (0.01) (0.01) (0.05) (0.01) 0.00
----- ----- ----- ----- -----
Total distributions ................................ (0.24) (0.79) (0.86) (0.77) (0.80)
----- ----- ----- ----- -----
Net asset value, end of period ..................... $10.06 $8.88 $8.98 $9.42 $9.93
===== ===== ===== ===== =====
Total return (%)(d) ................................ 4.4 (4.0) 11.2 14.1 14.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) .................... $1,232 $5,233 $10,625 $17,767 $42,401
Ratio of operating expenses to average net
assets (%)(b) .................................... 2.25(c) 2.25 2.25 2.19 2.11
Ratio of net investment income to average
net assets (%) ................................... 7.66(c) 8.53 8.96 8.33 8.28
Portfolio turnover rate (%) ........................ 43(c) 33 30 134 99
(a) Commencement of offering of Class B shares.
(b) Commencing June 28, 1996 expenses were voluntarily limited to the annual rate of 2.15% of Class B average net assets. From
October 1, 1993 through June 27, 1996 expenses were voluntarily limited to the annual rate of 2.25% of Class B average net
assets. The ratio of operating expenses to average net assets for Class B shares, assuming the foregoing expense limitations had
not been in effect, would have been 2.53% (on an annualized basis), 2.48%, 2.37%, 2.35% and 2.11% respectively, for the period
September 20, 1993 through December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and 1997.
(c) Computed on an annualized basis.
(d) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
Back Bay Advisors, L.P. was responsible for managing the Fund's portfolio from July 27, 1988 until June 30, 1996. Loomis, Sayles &
Company, L.P., the Fund's current subadviser, assumed that function on July 1, 1996. Results prior to July 1, 1996 reflect
results achieved by Back Bay Advisors, L.P. (and, prior to July 27, 1988, another investment manager) under different investment
policies.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
NEW ENGLAND GOVERNMENT SECURITIES FUND
(the "Government Securities Fund")
The Fund seeks a high level of current income consistent with safety of
principal by investing in U.S. Government securities. Subadviser: Back Bay
Advisors, L.P.(R) ("Back Bay Advisors")
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(the "Limited Term U.S. Government Fund")
The Fund seeks a high current return consistent with preservation of capital.
Subadviser: Back Bay Advisors
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(the "Adjustable Rate Fund")
The Fund seeks a high level of current income consistent with low volatility of
principal. The Fund intends to pursue its objective by investing only in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Subadviser: Back Bay Advisors
NEW ENGLAND STRATEGIC INCOME FUND
(the "Strategic Income Fund")
The Fund seeks high current income with a secondary objective of capital growth.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles")
NEW ENGLAND BOND INCOME FUND
(the "Bond Income Fund")
The Fund seeks a high level of current income consistent with what the Fund
considers reasonable risk. The Bond Income Fund invests primarily in corporate
and U.S. Government bonds. Subadviser: Back Bay Advisors
NEW ENGLAND HIGH INCOME FUND
(the "High Income Fund")
The Fund seeks high current income plus the opportunity for capital appreciation
to produce a high total return. Subadviser: Loomis Sayles
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
the Fund's investment objective and policies. There can be no assurance that any
Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
FUND INVESTMENTS
|_| GOVERNMENT SECURITIES FUND
The Government Securities Fund expects that it will invest primarily in U.S.
Government securities, including U.S. Treasury bills (maturity of one year
or less), U.S. Treasury notes (maturity of one to ten years), and U.S.
Treasury bonds (generally maturity of greater than ten years), and
mortgage-backed securities issued or guaranteed by U.S. Government agencies,
including but not limited to the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Under normal market conditions,
the Fund intends to maintain a dollar-weighted average duration of between
seven and eight years. The Fund may hold individual securities with duration
longer or shorter than seven or eight years (e.g., a security with a
duration of seven years will typically have a maturity of approximately 10
years, given the current interest rate environment) as long as the average
duration remains within these limits. See "Duration" below.
The Fund may invest in securities of any maturity and in zero coupon
securities. In addition to investing directly in U.S. Government securities,
the Fund may purchase "stripped" securities.
For hedging purposes, the Government Securities Fund may also purchase and
sell interest rate futures contracts on U.S. Government securities and may
write and purchase options on such futures and options on U.S. Government
securities. Transactions involving futures and options on futures may help
to reduce the volatility of the Fund's net asset value, but this result
cannot be assured. Options and futures are not backed by the U.S.
Government.
It is a fundamental policy of the Fund that under normal market conditions
it will invest at least 65% of its total assets in "U.S. Government
Securities," which term as used in this Prospectus includes all securities
issued or guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
|_| LIMITED TERM U.S. GOVERNMENT FUND
The Fund seeks to achieve its objective by investing in U.S. Government
Securities. Under normal market conditions, 65% or more of the Fund's total
assets will be invested in U.S. Government Securities (including zero coupon
bonds) and collateralized mortgage obligations ("CMOs"). The Fund limits its
investments in CMOs to those issued by instrumentalities of the U.S.
Government. The Fund may also invest in asset-backed securities rated Aaa by
Moody's Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's
Ratings Group ("S&P") or unrated but determined by the Fund's subadviser to
be of comparable quality to securities in those rating categories. For
hedging purposes, the Fund may purchase and sell financial futures contracts
and options. The Fund may also engage in securities lending.
The Fund's subadviser, Back Bay Advisors, provides a continuous investment
program designed to maximize current return while minimizing fluctuations in
the value of the Fund's portfolio, thus stabilizing the net asset value of
the Fund's shares. Because the market value of fixed-income securities
fluctuates in response to changes in interest rates, there is a risk of a
decline in the value of the Fund's portfolio (and a corresponding decrease
in the value of the Fund's shares) if interest rates increase. To reduce
this risk, the Fund will ordinarily seek to maintain an average
dollar-weighted maturity of three to seven years. The Fund may hold
individual securities with maturities of more than seven years as long as
its average maturity remains within this limit.
|_| ADJUSTABLE RATE FUND
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in adjustable rate mortgage
securities ("ARMs") or other securities collateralized by or representing
interests in mortgages (collectively, "mortgage securities"), which have
interest rates that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. The
Fund also may invest in CMOs issued by instrumentalities of the U.S.
Government, but will not invest in privately issued CMOs. Other securities
purchased by the Fund will be limited to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities but will not include
any stripped securities (such as interest only or principal only
obligations) or zero coupon obligations. When maintaining a temporary
defensive position, the Fund may invest its assets, without limit, in U.S.
Government Securities of any type.
|_| STRATEGIC INCOME FUND
The Fund seeks to achieve its investment objectives by investing at least
65% of its total assets in debt instruments. The Fund may invest in debt
instruments issued by corporations based in the United States or abroad and
debt instruments that are convertible into equity securities. The Fund may
also invest in U.S. Government Securities and in securities issued or
guaranteed by foreign governments (including their political subdivisions,
agencies, authorities and/or instrumentalities) ("Foreign Government
Securities") and securities issued by supranational agencies. The Fund may
invest in securities of emerging markets. The Fund may invest in debt
instruments in any rating category, including debt instruments rated in the
lowest rating categories (C by Moody's and D by S&P) and in instruments that
are unrated. For more information about the risks of investing in low rated,
high risk securities and securities of foreign issuers, see "Investment
Risks -- Lower Rated Fixed-Income Securities" and "-- Foreign Securities."
Under normal market conditions, the Fund will invest in debt instruments of
both domestic and foreign issuers and in corporate as well as government
issues. At any time, however, the Fund may invest up to 100% of its assets
in debt instruments of U.S. issuers, in debt instruments of foreign issuers,
in corporate debt instruments or in government securities. The Fund may
invest up to a total of 35% of its total assets in preferred stocks,
dividend-paying common stocks and shares of closed-end investment companies
(which shares will not exceed 10% of the Fund's total assets).
The proportion of Fund assets invested in corporate bonds, government bonds
and preferred or common stock will vary over time based on changing market
conditions. When Loomis Sayles believes that a particular market presents
more opportunity than other markets, it may increase the proportion of the
Fund's assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes, the Fund
may also purchase and sell options and futures and engage in foreign
currency transactions. The Fund may also invest in mortgage-backed
securities, zero coupon bonds, stripped securities and pay-in-kind
securities. For more information about all these types of investments, see
"Investment Risks" below.
|_| BOND INCOME FUND
The Bond Income Fund invests primarily in corporate and U.S. Government
bonds. At least 80% of its total assets will be invested in bonds carrying
investment grade ratings from one of the recognized rating services. The
Fund may also purchase non-rated or lower-rated bonds. Bonds rated BBB by
S&P or Baa by Moody's (the lowest ratings that are considered investment
grade) have some speculative characteristics, and unfavorable changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of issuers of these bonds to make principal and interest
payments than is the case with higher grade bonds. If an investment rated
BBB or Baa is downgraded by a major rating agency, the Fund's subadviser
will consider whether the investment remains appropriate for the Fund. The
Fund may invest in debt instruments rated in the rating categories of B (by
Moody's or S&P) or higher and in instruments that are unrated. The Fund may
invest in securities of any maturity and in zero coupon securities. The Fund
may also invest in CMOs. The Fund will normally maintain an average
dollar-weighted portfolio maturity of less than ten years. The Fund may
invest in convertible securities and in Rule 144A securities.
The Fund may invest in foreign securities but will do so only when the
Fund's subadviser believes the associated risks are minimal as compared to
similar securities of domestic issuers.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
|_| HIGH INCOME FUND
The High Income Fund under normal market conditions will invest at least 65%
of its total assets in fixed-income securities which are rated BBB or lower
by S&P or Baa or lower by Moody's or are unrated but are of comparable
quality to securities that are so rated. The Fund may invest in debt
instruments in any rating category, including debt instruments rated in the
lowest rating categories (C by Moody's and D by S&P) and instruments that
are unrated. See "Investment Risks -- Lower Rated Fixed-Income Securities"
below. A diversified portfolio of these securities normally provides a
current yield or yield to maturity that is significantly higher than yields
of higher rated fixed-income securities. In addition to high current income,
the Fund seeks capital appreciation through (1) market price appreciation in
periods of declining interest rates and (2) improvement in the credit
standing of issuers.
The Fund's subadviser, Loomis Sayles, provides the Fund with an investment
program that seeks to reduce risks to the Fund by diversification and
analysis of the underlying creditworthiness of issuers and the underlying
value of securities. Loomis Sayles performs its own credit analyses and does
not rely primarily on the ratings assigned by rating services. Loomis
Sayles' analyses, in ascertaining both creditworthiness and potential for
capital appreciation, focus on technical factors as well as fundamental
factors such as the relationship of current market price to anticipated cash
flow and its coverage of interest or dividend requirements, debt as a
percentage of assets, earnings prospects, the experience and perceived
strength of the issuer's management, price responsiveness of the issuer's
securities to changes in interest rates and business conditions, debt
maturity schedules and borrowing requirements and the issuer's liquidation
value.
The Fund will not invest in defaulted issues as a standard practice, but may
from time to time invest in certain defaulted issues that, in the view of
Loomis Sayles, present an attractive opportunity for capital appreciation.
Because defaulted issues are ordinarily not income producing, investment in
such issues would likely reduce the Fund's current yield.
The Fund expects that under normal market conditions at least 80% of the
value of its total assets will be invested in fixed-income securities of
U.S. corporations, including preferred stock and convertible securities, and
U.S. dollar-denominated fixed-income securities issued by foreign
governments or by companies organized in foreign countries. To achieve its
basic investment objective, the Fund from time to time also may invest up to
20% of the value of its total assets in common stocks and up to 20% of the
value of its total assets in non-U.S. dollar-denominated fixed-income
securities issued by foreign governments or by companies organized in
foreign countries. However, investments in both of these types of securities
on a combined basis generally will not exceed 20% of the value of the Fund's
assets. See "Investment Risks -- Foreign Securities" below.
If Loomis Sayles expects a rising trend in interest rates, it may shift the
Fund's portfolio into shorter-term debt securities and domestic money market
instruments whose prices might not be affected as much by an increase in
interest rates. During those periods, or other periods when market
conditions temporarily warrant a more defensive strategy, the Fund may
invest an unlimited portion of its assets in U.S. Government Securities;
certificates of deposit, bankers' acceptances and other obligations of U.S.
banks with deposits of at least $2 billion at the close of the last calendar
year; commercial paper that is rated in the two highest categories by
Moody's or S&P; short-term fixed-income securities that are rated within the
three highest categories by Moody's or S&P; and repurchase agreements with
financial institutions deemed creditworthy by Loomis Sayles. Investment in
such instruments may result in a lower current yield and would tend to limit
appreciation possibilities. The Fund may also invest in Rule 144A
securities.
The Fund may lend portfolio securities amounting to not more than 10% of its
assets to securities dealers. These transactions must be fully
collateralized at all times, but involve some credit risk to the Fund if the
other party should default on its obligations and the Fund is delayed in or
prevented from recovering the collateral.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
|_| U.S. AND FOREIGN GOVERNMENT SECURITIES
Different types of U.S. and Foreign Government Securities have different
kinds of government support. U.S. Government Securities include securities
backed by the full faith and credit of the U.S. Government, as well as many
other securities that are not full faith and credit obligations. For
example, obligations of the Federal Home Loan Banks are supported by the
right of the issuer to borrow from the U.S. Treasury, and obligations of the
FHLMC and the FNMA are supported only by the credit of those corporations.
Similarly, obligations of foreign governmental entities include obligations
issued or guaranteed by governments with taxing power or by their agencies.
Some Foreign Government Securities are supported by the full faith and
credit of a foreign national government or political subdivision (such as a
province of Canada) and some are not. For example, Foreign Government
Securities include securities issued by corporations which have been charged
with a public purpose and a majority of whose outstanding equity securities
are owned by a foreign government or government agency. Such securities may
be supported only by the credit of the issuing corporation and not by that
of the government or agency.
In addition to investing directly in U.S. and Foreign Government Securities,
the Government Securities and Strategic Income Funds may purchase "stripped"
securities evidencing undivided ownership interests in interest payments or
principal payments, or both, on U.S. and Foreign Government Securities.
These investments may be more volatile than other types of U.S. or Foreign
Government Securities.
|_| FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds that may invest in securities denominated in foreign currencies or
traded in foreign markets may engage in related foreign currency exchange
transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Bond Income, High Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward contract is a
contract that obligates parties to the contract to exchange specified
amounts of different currencies at a specified future date. For example, a
party may agree to deliver a specified number of French francs, in exchange
for a specified number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income, High Income or Strategic
Income Fund's assets may be invested in securities that are denominated in
foreign currencies or that are traded in markets where purchase or sale
transactions settle in a foreign currency. Currency forward contracts may be
used both (1) to facilitate settlement of a Fund's transactions in these
securities and (2) to hedge against possible adverse changes in the relative
values of the currencies in which the Fund's portfolio holdings (or intended
future holdings) are denominated.
Currency forward contracts involve transaction costs and the risk that the
banks with which a Fund enters into such contracts will fail financially.
Each Fund's subadviser will, however, monitor the creditworthiness of these
banks on an ongoing basis. Successful use of currency forward contracts for
hedging purposes also depends on the accuracy of the subadviser's forecasts
as to future changes in the relative values of currencies. The accuracy of
such forecasts cannot be assured. The Fund will set aside with its custodian
certain assets to provide for satisfaction of its obligations under currency
forward contracts.
Although the Bond Income, High Income and Strategic Income Funds are
permitted to use currency forward contracts, they are not obligated to do
so. Thus, the Funds will not necessarily be fully (or even partially) hedged
against the risk of adverse currency price movements at any given time.
Foreign currency transactions involve costs and may result in losses. See
Part II of the Statement for more information.
|_| DURATION
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an
interest rate change (i.e., the change in price one can expect from a given
change in interest rates). Many investors and investment analysts consider
duration to be a more useful measure of price sensitivity than "maturity." A
debt instrument's duration is derived by discounting principal and interest
payments to their present value using the instrument's current yield to
maturity and calculating the dollar-weighted average time until these
payments will be received. The Government Securities, Limited Term U.S.
Government and Bond Income Funds will seek to maintain an average portfolio
duration within specified limits as set forth in the "Fund Investments"
section for each Fund; however, each Fund's portfolio may include
fixed-income securities with durations longer or shorter than the stated
duration limits, so long as the Fund maintains an average portfolio duration
that is consistent with its investment strategy.
The values of securities having shorter durations generally fluctuate less
than securities with longer durations. In general, investments in short and
intermediate term debt securities are less sensitive to interest rate
changes and provide more stability than longer term investments. For
example, based on yields of 5.55% for a five-year U.S. Treasury security and
5.88% for a 30-year U.S. Treasury security, a 1% increase in interest rates
would be expected to result in approximately a 4.3% reduction in the value
of the five-year security (duration 4.52) as compared to approximately a
13.6% reduction in the value of the 30-year security (duration 13.56).
Conversely, a 1% decrease in interest rates would be expected to result in
similar increases in value. These expectations represent Back Bay Advisors'
estimate of portfolio volatility based upon historic data collected under a
wide variety of market conditions, but there is no assurance that actual
volatility will be consistent with such expectations.
|_| ADDITIONAL INFORMATION
Each Fund may purchase securities for its portfolio on a "when-issued"
basis. This means that the Fund will enter into the commitment to buy the
security before the security has been issued. The Fund's payment obligation
and the interest rate on the security are determined when the Fund enters
into the commitment. The security is typically delivered to the Fund 15 to
120 days later. No interest accrues on the security between the time the
Fund enters into the commitment and the time the security is delivered.
The Funds, consistent with their investment objectives, attempt to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic market
conditions and trends. The Government Securities and Strategic Income Funds
also invest to take advantage of what are believed to be temporary
disparities in the yields of the different segments of the market for U.S.
Government Securities. These policies may result in higher turnover rates in
the Funds' portfolios, which may produce higher transaction costs and a
higher level of taxable capital gains. Portfolio turnover considerations
will not limit any Fund's subadviser's investment discretion in managing the
Fund's assets. Recent portfolio turnover rates for the Funds are set forth
above under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a Fund buys
securities from a seller, usually a bank or brokerage firm, with the
understanding that the seller will repurchase the securities at a higher
price at a later date. If the seller fails to repurchase the securities, the
Fund has rights to sell the securities to third parties. Repurchase
agreements can be regarded as loans by the Fund to the seller,
collateralized by the securities that are the subject of the agreement.
Repurchase agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund may be
subject to various delays and risks of loss if the seller fails to meet its
obligation to repurchase. The staff of the SEC is currently of the view that
repurchase agreements maturing in more than seven days are illiquid
securities.
<PAGE>
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INVESTMENT RISKS
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It is important to understand the following risks inherent in a Fund before
you invest.
|_| FIXED-INCOME SECURITIES (ALL FUNDS)
The Funds invest principally in fixed-income securities. Because interest
rates vary, it is impossible to predict the income of a Fund for any
particular period. The net asset value of your shares will vary as a result
of changes in the value of the bonds and other securities in a Fund's
portfolio.
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed-income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed
by specific assets (such as mortgages or other receivables) that have been
set aside as collateral for the issuer's obligation. Fixed-income securities
generally involve an obligation of the issuer to pay interest or dividends
on either a current basis or at the maturity of the securities, as well as
the obligation to repay the principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk. Credit risk
relates to the ability of the issuer to make payments of principal and
interest. In the case of municipal bonds, the issuer may make these payments
from money raised through a variety of sources, including (1) the issuer's
general taxing power, (2) a specific type of tax such as a property tax, or
(3) a particular facility or project such as a highway. The ability of an
issuer of municipal bonds to make these payments could be affected by
litigation, legislation or other political events, or the bankruptcy of the
issuer. U.S. Government Securities do not involve the credit risks
associated with other types of fixed-income securities; as a result, the
yields available from U.S. Government Securities are generally lower than
the yields available from corporate fixed-income securities. Market risk is
the risk that the value of the security will fall because of changes in
market rates of interest. (Generally, the value of fixed-income securities
falls when market rates of interest are rising.) Some fixed-income
securities also involve prepayment or call risk. This is the risk that the
issuer will repay a Fund the principal on the security before it is due,
thus depriving the Fund of a favorable stream of future interest payments.
Because interest rates vary, it is impossible to predict the income of a
fund that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income securities
will cause the Fund's net asset value to increase or decrease.
|_| LOWER RATED FIXED-INCOME SECURITIES (STRATEGIC INCOME, BOND INCOME AND HIGH
INCOME FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are of below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities, including U.S. Government and many Foreign
Government Securities. Lower quality fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. Achievement of the investment objective of
a mutual fund investing in lower quality fixed-income securities may be more
dependent on the fund's subadviser's own credit analysis than for a fund
investing in higher quality bonds. The market for lower quality fixed-income
securities may be more severely affected than some other financial markets
by economic recession or substantial interest rate increases, by changing
public perceptions of this market or by legislation that limits the ability
of certain categories of financial institutions to invest in these
securities. In addition, the secondary market may be less liquid for lower
rated fixed-income securities. This lack of liquidity at certain times may
affect the valuation of these securities and may make the valuation and sale
of these securities more difficult. Securities of below investment grade
quality are considered high yield, high risk securities and are commonly
known as "junk bonds." For more information, including a detailed
description of the ratings assigned by S&P and Moody's, please refer to the
Statement's "Appendix A -- Description of Bond Ratings."
During the fiscal year ended December 31, 1997, 20% of the average month-end
net assets of the Bond Income Fund were invested in fixed-income securities
rated in the rating categories below investment grade (BBB/Baa). The
portfolio compositions of the Strategic Income Fund and the High Income Fund
during the fiscal year ended December 31, 1997 are summarized in Appendix B
to this prospectus.
|_| FOREIGN SECURITIES (STRATEGIC INCOME, BOND INCOME AND HIGH INCOME FUNDS)
Foreign Government Securities and foreign corporate securities present risks
not associated with investments in U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Fund may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Strategic Income Fund, the Bond Income Fund
and the High Income Fund may purchase securities denominated in foreign
currencies, a change in the value of any such currency against the U.S.
dollar will result in a change in the U.S. dollar value of the Fund's assets
and the Fund's income available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income
in U.S. dollars. Therefore, if the value of a currency relative to the U.S.
dollar declines after a Fund's income has been earned in that currency,
translated into U.S. dollars and declared as a dividend, but before payment
of such dividend, the Fund could be required to liquidate portfolio
securities to pay such dividend. Similarly, if the value of a currency
relative to the U.S. dollar declines between the time a Fund incurs expenses
in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate
or government issuer than about a U.S. issuer, and foreign corporate issuers
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and other fees in some circumstances may be higher than in the
United States. With respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could affect the
value of investments in those countries. The receipt of interest on foreign
government securities may depend on the availability of tax or other
revenues to satisfy the issuer's obligations. A Fund may have limited legal
recourse should a foreign government be unwilling or unable to repay the
principal or interest owed.
The Strategic Income Fund may invest all or any portion of its assets in the
securities of emerging markets. Investments in emerging markets include
investments in countries whose economies or securities markets are not yet
highly developed. Special considerations associated with these investments
(in addition to the considerations regarding foreign investments as
discussed above) may include, among others, greater political uncertainties,
an economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer restrictions,
highly limited numbers of potential buyers for such securities and delays
and disruptions in securities settlement procedures.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities,
and include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal
and Steel Community and the Inter-American Development Bank.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are
issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored depository receipts are arranged without involvement
by the issuer of the underlying equity securities. Less information about
the issuer of the underlying equity securities may be available in the case
of unsponsored depository receipts.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution
to shareholders.
|_| MORTGAGE-RELATED SECURITIES (ALL FUNDS)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund purchases these
assets at a premium, a faster-than-expected prepayment rate will reduce
yield to maturity, and a slower-than- expected prepayment rate will have the
opposite effect of increasing yield to maturity. If a Fund purchases
mortgage-related securities at a discount, faster-than-expected prepayments
will increase, and slower-than-expected prepayments will reduce, yield to
maturity. Prepayments, and resulting amounts available for reinvestment by
the Fund, are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest rates.
Accelerated prepayments on securities purchased at a premium may result in a
loss of principal if the premium has not been fully amortized at the time of
prepayment. Although these securities will decrease in value as a result of
increases in interest rates generally, they are likely to appreciate less
than other fixed-income securities when interest rates decline because of
the risk of prepayments. In addition, an increase in interest rates would
also increase the inherent volatility of the Fund by increasing the average
life of the Fund's portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or
market interest rate. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because
the interest rates are reset only periodically, changes in the interest rate
on ARMs may lag changes in prevailing market interest rates. Also, some ARMs
(or the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life
of the security. As a result, changes in the interest rate on an ARM may not
fully reflect changes in prevailing market interest rates during certain
periods. Because of the resetting of interest rates, ARMs are less likely
than non-adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
|_| ASSET-BACKED SECURITIES (LIMITED TERM U.S. GOVERNMENT AND BOND INCOME FUNDS)
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts
and special purpose corporations, assets such as automobile and credit card
receivables are being securitized in pass-through structures similar to
mortgage pass-through structures or in a pay-through structure similar to a
CMO structure. Generally the issuers of asset-backed bonds, notes or
pass-through certificates are special purpose entities and do not have any
significant assets other than the receivables securing such obligations. In
general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans. Instruments backed by pools of receivables are
similar to mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the obligations
are prepaid, the Fund will ordinarily reinvest the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the
time. Therefore, the Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the
extent that prepayments of principal must be reinvested in securities which
have lower yields than the prepaid obligations. Moreover, prepayments of
securities purchased at a premium could result in a realized loss.
|_| COLLATERALIZED MORTGAGE OBLIGATIONS (ALL FUNDS)
A CMO is a security backed by a portfolio of mortgages or mortgage
securities held under an indenture. The underlying mortgages or mortgage
securities are issued or guaranteed by the U.S. Government or an agency or
instrumentality thereof. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests in some or
all of the interest or principal on the underlying collateral or a
combination thereof. CMOs of different classes are generally retired in
sequence as the underlying mortgage loans in the mortgage pool are repaid.
In the event of sufficient early prepayments on such mortgages, the class or
series of CMO first to mature generally will be retired prior to its
maturity. Thus, the early retirement of a particular class or series of CMO
held by the Fund would have the same effect as the prepayment of mortgages
underlying a mortgage pass-through security. CMOs may be considered
derivative securities.
|_| "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that
receive different proportions of the interest and principal distribution on
a pool of U.S. or Foreign Government Securities or mortgage assets. In some
cases, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have greater
market volatility than other types of fixed-income securities. In the case
of stripped mortgage securities, if the underlying mortgage assets
experience greater than anticipated payments of principal, a Fund may fail
to recoup fully its investments in IOs. The staff of the SEC has indicated
that it views stripped mortgage securities as illiquid unless the securities
are issued by the U.S. Government or its agencies and are backed by
fixed-rate mortgages. The Funds intend to abide by the staff's position.
Stripped securities may be considered derivative securities.
|_| ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND) AND
PAY-IN-KIND SECURITIES (HIGH INCOME AND STRATEGIC INCOME FUNDS)
Zero coupon securities are issued at a significant discount from face value
and pay interest only at maturity, rather than at intervals during the life
of the security. Pay-in-kind securities pay dividends or interest in the
form of additional securities of the issuer, rather than in cash. The prices
of pay-in-kind or zero coupon securities may react more strongly to changes
in interest rates than the prices of many other securities. The Funds are
required to accrue and distribute income from pay-in-kind and zero coupon
securities on a current basis, even though the Funds will not receive the
income currently in cash. Thus a Fund may have to sell other investments to
obtain cash needed to make income distributions.
|_| WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the
time a Fund commits to buy it and the payment date, the Fund may sustain a
loss. The risk of this loss is in addition to the Fund's risk of loss on the
securities actually in its portfolio at the time. In addition, when a Fund
buys a security on a when-issued basis, it is subject to the risk that
market rates of interest will increase before the time the security is
delivered, with the result that the yield on the security delivered to the
Fund may be lower than the yield available on other, comparable securities
at the time of delivery. Each Fund will set aside with its custodian certain
assets to provide for satisfaction of its obligations under when-issued
transactions.
|_| OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (ALL FUNDS EXCEPT
ADJUSTABLE RATE FUND)
Except as otherwise noted, the following discussion applies to all Funds
except the Adjustable Rate Fund. The Funds may engage in a variety of
transactions involving the use of options and futures with respect to U.S.
or Foreign Government Securities or corporate fixed-income securities (in
the case of the Strategic Income Fund) for purposes of hedging against
changes in interest rates.
A Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. A Fund may buy and sell futures contracts
on securities, securities indexes or currencies. A Fund may also enter into
swap contracts. A Fund may engage in these transactions either for the
purpose of enhancing investment return, or to hedge against changes in the
value of other assets that a Fund owns or intends to acquire. A Fund may
also conduct foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market.
Options, futures and swap contracts fall into the broad category of
financial instruments known as "derivatives" and involve special risks. Use
of options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are involved
in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option the right to sell a security or other asset to, the option writer at
a specified price, on or before a specified date. The buyer of an option
pays a premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results
in a loss if the option expires unexercised. The writer of an option
receives a premium from writing an option, which may increase its return if
the option expires or is closed out at a profit. If a Fund as the writer of
an option is unable to close out an unexpired option, it must continue to
hold the underlying security or other asset until the option expires, to
"cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract
by the Fund exceeds (or is less than) the price of the offsetting purchase,
the Fund will realize a gain (or loss). A Fund may not purchase or sell
futures contracts or purchase related options if immediately thereafter the
sum of the amount of deposits for initial margin or premiums on the existing
futures and related options positions would exceed 5% of the market value of
the Fund's net assets. Transactions in futures and related options involve
the risks of (1) imperfect correlation between the price movement of the
contracts and the underlying securities, (2) significant price movement in
one but not the other market because of different hours, (3) the possible
absence of a liquid secondary market at any point in time, and (4) the risk
that if the subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had not hedged.
Futures transactions involve potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index swaps.
The Funds will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against an increase in the price of securities a Fund anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap is
an agreement to exchange cash flows on a notional amount based on changes in
the relative values of the specified currencies. An index swap is an
agreement to make or receive payments based on the different returns that
would be achieved if a notional amount were invested in a specified basket
of securities (such as the Standard & Poor's Composite Index of 500 Stocks
[the "S&P 500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve
costs and the possible risk of loss to the Fund of all or a significant part
of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Fund's investment. The Fund will be required, however, to
set aside with its custodian bank certain assets in amounts sufficient at
all times to satisfy its obligations under options, futures and swap
contracts.
The successful use of options, futures and swaps will usually depend on a
Fund's subadviser's ability to forecast bond market, currency or other
financial market movements correctly. The Fund's ability to hedge against
adverse changes in the value of securities held in its portfolio through
options, futures and swap transactions also depends on the degree of
correlation between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities. The
successful use of futures and exchange traded options also depends on the
availability of a liquid secondary market to enable the Fund to close its
positions on a timely basis. There can be no assurance that such a market
will exist at any particular time. Trading hours for options may differ from
the trading hours for the underlying securities. Thus, significant price
movements may occur in the securities markets that are not reflected in the
options market. This may limit the effectiveness of options as hedging
devices. In the case of swap contracts and of options that are not traded on
an exchange and not protected by the Options Clearing Corporation
("over-the-counter" options), the Fund is at risk that the other party to
the transaction will default on its obligations, or will not permit the Fund
to terminate the transaction before its scheduled maturity. As a result of
these characteristics, the Funds will treat most swap contracts and
over-the-counter options (and the assets they segregate to cover their
obligations thereunder) as illiquid. Certain regulatory requirements may
limit the Funds' ability to engage in futures, options and swap
transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets
may be subject to less detailed reporting requirements and regulatory
controls than U.S. markets. Furthermore, investments by the Bond Income,
Strategic Income and High Income Funds in options and futures in foreign
markets are subject to many of the same risks as are the Fund's other
foreign investments. See "Foreign Securities" above. For further
information, see "Miscellaneous Investment Practices -- Futures, Options and
Swap Contracts" in Part II of the Statement.
|_| RULE 144A SECURITIES (STRATEGIC INCOME, BOND INCOME AND HIGH INCOME FUNDS)
Rule 144A securities are privately offered securities that can be resold
only to certain qualified institutional buyers. Rule 144A securities are
treated as illiquid, unless the subadviser has determined, under guidelines
established by the trustees of the Trusts, that the particular issue of Rule
144A securities is liquid. Investment in illiquid securities involves the
risk that the Fund may be unable to sell such securities at the desired
time.
|_| SECURITIES LENDING (ALL FUNDS)
The Funds may lend their portfolio securities to broker-dealers or other
parties under contracts calling for the deposit by the borrower with the
Fund's custodian of cash collateral equal to at least the market value of
the securities loaned, marked to market on a daily basis. The Fund will
continue to benefit from interest or dividends on the securities loaned and
will also receive interest through investment of the cash collateral in
short-term liquid investments. No loans will be made if, as a result, the
aggregate amount of such loans outstanding at any time would exceed 33 1/3%
(25% for the Limited Term U.S. Government Fund and 15% for the Government
Securities Fund) of the Fund's total assets (taken at current value). Any
voting rights, or rights to consent, relating to securities loaned pass to
the borrower. However, if a material event affecting the investment occurs,
such loans will be called so that the securities may be voted by the Fund.
The Fund pays various fees in connection with such loans, including shipping
fees and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but involve some
credit risk to the Fund if the borrower defaults on its obligation and the
Fund is delayed or prevented from recovering the collateral.
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
New England Funds Management, L.P. ("NEFM") 399 Boylston Street, Boston,
Massachusetts 02116, serves as the adviser to each of the Funds. NEFM oversees,
evaluates and monitors the subadvisory services provided to each Fund and
furnishes general business management and administration to each Fund. NEFM does
not determine what investments will be purchased by the Funds.
Loomis Sayles, One Financial Center, Boston, Massachusetts 02111, is the
subadviser of the Strategic Income and High Income Funds. Founded in 1926,
Loomis Sayles is one of the country's oldest and largest investment counsel
firms. Daniel Fuss, Managing Partner and Executive Vice President of Loomis
Sayles, has served as the Strategic Income Fund's portfolio manager since the
Fund's inception in May 1995. Mr. Fuss joined Loomis Sayles in 1976. Kathleen C.
Gaffney, Vice President of Loomis Sayles, has been assisting Mr. Fuss as a
portfolio manager of the Fund since April 1996. Ms. Gaffney joined Loomis Sayles
in 1984. Gary L. Goodenough, Vice President of Loomis Sayles, has served as the
High Income Fund's portfolio manager since July 1996. Mr. Goodenough served as a
Managing Director at Bear Stearns and Salomon Brothers prior to joining Loomis
Sayles in 1993.
The subadviser of the other Funds is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Back Bay Advisors provides discretionary investment
management services to mutual funds and other institutional investors. Formed in
1986, Back Bay Advisors now manages 15 mutual fund portfolios and a total of
over $6 billion of securities. Joel A. Damiani, Senior Vice President of Back
Bay Advisors, has served as the Government Securities Fund's portfolio manager
since May 1997. James S. Welch, Senior Vice President of Back Bay Advisors, and
Scott A. Millimet, Executive Vice President of Back Bay Advisors, have served as
the Limited Term U.S. Government Fund's portfolio managers since May 1997. J.
Scott Nicholson, Senior Vice President of Back Bay Advisors, has served as the
Adjustable Rate Fund's portfolio manager since the Fund's inception in October
1991. Catherine L. Bunting, Senior Vice President of Back Bay Advisors, has
served as the Bond Income Fund's portfolio manager since 1989. Each of the
foregoing persons has been employed by Back Bay Advisors for at least five
years, with the exception of Mr. Millimet, who, prior to joining Back Bay
Advisors in 1994, served as a Vice President at BTFutures, Inc. and as a Senior
Vice President of Carroll McEntee & McGinley.
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it acts as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide research services
relating to the Fund.
Each of the Funds pays NEFM a management fee at the annual rate set forth in the
following table, reduced by the amounts of any subadvisory fee payable by the
Fund to the Fund's subadviser (as described below):
Management fee paid by Fund to NEFM
(as a percentage of average
Fund daily net assets of the Fund)
- -------------------- ---------------------------
Adjustable Rate Fund ....... 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of
$500 million
Bond Income Fund ........... 0.500% of the first $100 million
0.375% of amounts in excess of
$100 million
Government Securities Fund . 0.650% of the first $200 million
and Limited Term U.S. 0.625% of the next $300 million
Government Fund 0.600% of amounts in excess of
$500 million
High Income Fund ........... 0.70% of the first $200 million
0.65% of amounts in excess of
$200 million
Strategic Income Fund ...... 0.65% of the first $200 million
0.60% of amounts in excess of
$200 million
Each Fund pays its subadviser a subadvisory fee at the annual rate set forth in
the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable to subadviser
Fund Subadviser as a percentage of average daily net assets of the Fund)
- ---------------------------------- -------- --------------------------------------------------------
<S> <C> <C>
Adjustable Rate Fund ............. Back Bay Advisors 0.275% of the first $200 million
0.255% of the next $300 million
0.235% of amounts in excess of $500 million
Bond Income Fund ................. Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund and ... Back Bay Advisors 0.3250% of the first $200 million
Limited Term U.S. Government Fund 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund and ............. Loomis Sayles 0.35% of the first $200 million
Strategic Income Fund 0.30% of amounts in excess of $200 million
</TABLE>
NEFM has voluntarily agreed, until further notice to the High Income Fund, to
reduce its management fee and, if necessary, to bear certain expenses associated
with operating the Fund in order to limit the Fund's expenses to an annual rate
of 1.15% of the average daily net assets of the Fund's Class Y shares. NEFM may
terminate this voluntary agreement at any time.
NEFM and Back Bay Advisors have voluntarily agreed, until further notice to the
Adjustable Rate Fund, to reduce their fees and, if necessary, to bear certain
expenses associated with operating the Fund in order to limit the Fund's
expenses to the annual rate of 0.45% of the Fund's average daily net assets
attributable to its Class Y shares. NEFM and Back Bay Advisors may terminate
this voluntary agreement at any time.
If any of the voluntary fee reductions described above are terminated, the
prospectus of the affected Fund will be supplemented.
General
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, Massachusetts 02110.
The general partners of each of NEFM, Back Bay Advisors, Loomis Sayles and the
Distributor, and the sole shareholder of NEFSCO, are special purpose
corporations that are indirect, wholly-owned subsidiaries of Nvest Companies,
L.P. ("Nvest Companies"). Nvest Companies' managing general partner, Nvest
Corporation, is an indirect wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife"), a mutual life insurance company. MetLife owns in
the aggregate, directly and indirectly, approximately 47% of the outstanding
limited partnership interests in Nvest Companies. Nvest Companies' advising
general partner, Nvest, L.P., is a publicly-traded company listed on the New
York Stock Exchange. Nvest Corporation is the sole general partner of Nvest,
L.P.
In placing portfolio transactions for the Funds, Back Bay Advisors and Loomis
Sayles seek the most favorable price and execution available. Subject to
applicable regulatory restrictions and such policies as each Trust's trustees
may adopt, Back Bay Advisors and Loomis Sayles may consider sales of shares of
the Funds and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Fund. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with Nvest Companies, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
In addition to overseeing the management of the Funds' portfolios as conducted
by the subadvisers, NEFM provides executive and other personnel for the
management of the Trusts. Each Trust's Board of Trustees supervises the affairs
of that Trust as conducted by NEFM and the subadvisers.
In addition to the management fee paid to NEFM, each Fund pays all expenses not
borne by its adviser, subadviser or the Distributor, including, but not limited
to, the charges and expenses of the Fund's custodian and transfer agent,
independent auditors and legal counsel for the Fund and the Trusts' independent
trustees, all brokerage commissions and transfer taxes in connection with
portfolio transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal and state securities
laws, all expenses of shareholders' and trustees' meetings, preparing, printing
and mailing prospectuses and reports to shareholders and the compensation of
trustees who are not directors, officers or employees of New England Life
Insurance Company ("NELICO") or MetLife or their affiliates, other than
affiliated registered investment companies. Certain expenses may be allocated
differently between each Fund's Class A, Class B and (in the case of the Limited
Term U.S. Government, Strategic Income, High Income and Bond Income Funds) Class
C shares, on one hand, and its Class Y shares, on the other hand. (See
"Additional Facts About the Funds" below.)
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 include the following: (i) expenses
for personnel performing bookkeeping, accounting and financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration statements
and prospectuses, registration of shares in various states, shareholder reports
and notices, proxy solicitation material furnished to shareholders of the Fund
or regulatory authorities and reports and questionnaires for SEC compliance.
The Funds have received an exemptive order from the SEC to permit NEFM, subject
to certain conditions, to enter into subadvisory agreements with subadvisers,
including subadvisers other than the existing subadvisers of the Funds, when
approved by the relevant Trust's Board of Trustees, without obtaining
shareholder approval. The exemptive 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 relevant Trust's Board of Trustees.
Shareholders will be notified of any subadviser changes.
<PAGE>
- --------------------------------------------------------------------------------
BUYING FUND SHARES
- --------------------------------------------------------------------------------
ELIGIBILITY AND MINIMUM INVESTMENT
Class Y shares of the Funds may be purchased by other mutual funds, endowments,
foundations, bank trust departments or trust companies. The minimum initial
investment is $1 million for these entities and $10,000 is the minimum for each
subsequent investment. Class Y shares may also be purchased by plan sponsors of
401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that have total
investment assets of at least $10 million, and by NELICO or MetLife and any
other insurance company affiliated with NELICO or MetLife or any of their
successor entities (purchases by these entities are referred to as "Insurance
Company Accounts"). Plan sponsors' investment assets in multiple Retirement
Plans can be aggregated for purposes of meeting this minimum. Class Y shares may
also be purchased by any separate account of NELICO or MetLife or of any other
insurance company affiliated with NELICO or MetLife ("Separate Accounts"). Class
Y shares may also be purchased by wrap fee programs of certain broker-dealers as
to which no service or marketing fees are paid to such broker-dealers by the
Fund, NEFM or the Distributor ("Wrap Fee Programs"). There is no minimum initial
or subsequent investment amount for Retirement Plans, Separate Accounts,
Insurance Company Accounts or Wrap Fee Programs. Investments in the Funds may
also be made by certain individual retirement accounts if the amounts invested
represent rollover distributions from investments by any of the Retirement Plans
of amounts invested in the Funds. The Distributor serves as the principal
underwriter of the Fund's shares. Shares may be purchased on any day when the
New York Stock Exchange (the "Exchange") is open for business (a "business
day"). Investors should contact New England Funds before attempting to place an
order for Fund shares. The Funds and the Distributor reserve the right at any
time to reject a purchase order.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through Wrap Fee Programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from the
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Service Accounts.
<PAGE>
WAYS TO BUY FUND SHARES
A shareholder may purchase Class Y shares for cash on any business day by the
two methods described below:
[GRAPHIC OMITTED] BY WIRE TRANSFER:
Prior to an initial investment, obtain an account number and wire transfer
instructions by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028, DDA
#99011538 Credit [Fund Name] Class Y shares, Shareholder Name, and Shareholder
Account Number.
[GRAPHIC OMITTED] BY MAIL:
For an initial investment, simply complete the attached application and return
it, with a check payable to New England Funds and mailed to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551. All purchases made by check should be in
U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not be accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
Class Y shares of a Fund may also be purchased by exchanging securities on
deposit with a custodian acceptable to the Fund's subadviser or by a combination
of such securities and cash. Purchase of shares of a Fund in exchange for
securities is subject in each case to the determination by the Fund's subadviser
that the securities to be exchanged are acceptable for purchase by the Fund.
Securities accepted by a Fund's subadviser in exchange for Fund shares will be
valued in the same manner as the Fund's assets (generally the last quoted sales
price), as described below under "Fund Details -- How Fund Share Price Is
Determined," as of the time of the Fund's next determination of net asset value
after such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund upon receipt
by the investor from the issuer. A gain or loss for federal income tax purposes
may be realized upon the exchange by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in exchange
for shares of a Fund it manages unless (1) the subadviser, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933 or otherwise; (3) the securities are eligible to be
acquired under the Fund's investment policies and restrictions; and (4) the
securities have a value which is readily ascertainable (not established by
evaluation procedures alone) as evidenced by a listing on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market System or the
principal securities exchange of countries in which the Fund may invest. No
investor owning 5% or more of the Fund's shares may purchase additional Fund
shares by exchange of securities (other than shares of other New England Funds).
GENERAL
The purchase price of shares of each Fund is the net asset value next determined
after a purchase order is received in good order by New England Funds. For
purposes of calculating the purchase price of Fund shares, a purchase order is
considered received by the Fund on the day that it is "in good order" unless it
is rejected by the Fund. For a purchase order to be in "good order" on a
particular day, in the case of a purchase of Fund shares in exchange for
securities, the investor's securities must be placed on deposit at a depository
acceptable to a Fund's subadviser by 4:00 p.m. (Eastern time), and, in the case
of a cash investment, Federal funds must be wired to the Fund between 9:00 a.m.
and 4:00 p.m. (Eastern time) or a check for the purchase price of the shares,
accompanied by a completed application, must have been received by New England
Funds before 4:00 p.m. (Eastern time) on that day. Orders received after 4:00
p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to three
decimal places. The shareholder will receive a statement of Fund shares owned
following each transaction. Investors will not receive certificates representing
Class Y shares. The Funds and the Distributor reserve the right at any time to
reject a purchase order.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<PAGE>
- --------------------------------------------------------------------------------
OWNING FUND SHARES
- --------------------------------------------------------------------------------
EXCHANGING AMONG NEW ENGLAND FUNDS
You may exchange Class Y shares of the Funds or any other series of the Trusts
for Class Y shares of any other series of the Trusts which offers Class Y shares
or for Class A shares of the New England Cash Management Trust Money Market
Series or New England Tax Exempt Money Market Trust (the "Money Market Funds").
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class Y shares of any series of the Trusts in a NELICO Deferred
Compensation Account for Class A shares of any other series of the Trusts which
do not offer Class Y shares. Class A shares of any series of the Trusts in a
NELICO Deferred Compensation Account may also be exchanged for Class Y shares of
any series of the Trusts. To obtain a prospectus and more information about
Class A shares, please call the Distributor toll free at 1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business or write to New
England Funds. Exchange requests after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be processed at the
net asset value determined at the close of regular trading on the next day that
the Exchange is open. All exchanges are subject to the eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read a current prospectus of the series into which
you are exchanging. The exchange privilege may be exercised only in those states
where shares of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. The
Funds and NEFSCO will employ reasonable procedures to confirm that telephone
instructions are genuine, and, if they do not, they 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 telephone
instructions, will provide shareholders with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
Except as otherwise permitted by SEC rule, shareholders will receive at least 60
days' advance notice of any material change to the exchange privilege.
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 specified
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.
FUND DIVIDEND PAYMENTS
Each Fund declares dividends daily and pays them monthly. Each Fund pays as
dividends substantially all net investment income (tax-exempt and taxable income
other than long- and short-term capital gains) each year and distributes
annually all net realized long- and short-term capital gains (after applying any
available capital loss carryovers). The trustees of the Trusts may adopt a
different schedule as long as payments are made at least annually. If you intend
to purchase shares of a Fund shortly before it declares a capital gain
distribution, you should be aware that a portion of the purchase price may be
returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional Class Y shares
of the Fund or in Class Y shares of other series of the Trusts, to receive
distributions from dividends and interest in cash while reinvesting
distributions from capital gains in additional Class Y shares of the Fund or of
other series of the Trusts, or to receive all distributions in cash. Income
distributions and capital gains distributions will be reinvested in Class Y
shares of the respective Fund at net asset value unless you select another
option. You may change your distribution option by notifying New England Funds
in writing or by calling 1-800-225-5478. If you elect to receive your dividends
in cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested.
- --------------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program, which allows
you to have all dividends and any other distributions automatically
invested in Class Y shares of another New England Fund, subject to the
investor eligibility requirements of that other fund and to state
securities law requirements. Shares will be purchased at the selected
fund's net asset value on the dividend record date. A dividend
diversification account must be in the same registration (shareholder
name) as the distributing fund account and, if a new account in the
purchased fund is being established, the purchased fund's minimum
investment requirements must be met. Before establishing a dividend
diversification program into any other New England Fund, you must obtain
and carefully read a copy of that fund's Prospectus.
- ----------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------------------------------
SELLING FUND SHARES
- ----------------------------------------------------------------------------
WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[GRAPHIC OMITTED] BY TELEPHONE:
You may redeem (sell) shares by telephone for cash by the two methods described
below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business. The proceeds generally will be wired on the next
business day to the bank account previously chosen by you on your application. A
wire fee (currently $5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a correspondent
bank that is a member. If your account is with a savings bank, it must have only
one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business and requesting that a check for the proceeds be
mailed to the address on your account, provided that the address has not changed
over the previous month and that the proceeds are for $100,000 or less.
Generally, the check will be mailed to your address of record on the business
day after your redemption request is received.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that the
Exchange is open.
[GRAPHIC OMITTED] BY MAIL:
You may redeem your shares at their net asset value next determined after
receipt of your request in good order by sending a written request (including
any necessary special documentation) to New England Funds, P.O. Box 8551,
Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, or wired to your bank account. 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.
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
GENERAL
Redemption requests will be effected at the net asset value next determined
after the redemption request is received in proper form by State Street Bank.
Redemption proceeds will normally be mailed to you within seven days after State
Street Bank or the Distributor receives your request in good order. However, in
those cases where you have recently purchased your shares by check and you make
a redemption request within 10 days after such purchase or transfer, the Fund
may withhold redemption proceeds until the Fund knows that the check has cleared
(which may take up to 15 days).
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above.
Requests are processed at the net asset value next determined after the request
is received.
Special rules apply to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency that makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors. The Funds reserve the right to suspend account services or refuse
transaction requests when notice has been received by a 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.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income and
High Income Funds, determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of readily marketable securities held
by the Fund in lieu of cash. Securities used to redeem Fund shares in kind will
be valued in accordance with the Funds' procedures for valuation described under
"Fund Details - How Fund Share Price Is Determined." Securities distributed by a
Fund in kind will be selected by NEFM and the Fund's subadviser, in light of the
Fund's objective and will not generally represent a pro rata distribution of
each security held in the Fund's portfolio. Investors may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. The Funds' right to pay redemptions in kind is limited by an
election made by the Funds under Rule 18f-1 under the Investment Company Act of
1940, as amended. See "Redemptions" in Part II of the Statement.
<PAGE>
- ----------------------------------------------------------------------------
FUND DETAILS
- ----------------------------------------------------------------------------
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (ordinarily 4:00 p.m. Eastern time) on the Exchange on each day
that the Exchange is open for trading. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on the
basis of valuations furnished by a pricing service, authorized by each Trust's
Board of Trustees, which service determines valuations for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Short-term
obligations with a remaining maturity of less than sixty days are valued at
amortized cost, which approximates market value. Securities traded primarily on
an exchange outside the United States which closes before the close of the
Exchange generally will be valued for purposes of calculating the Fund's net
asset value at the last sale or bid price on that non-U.S. exchange, except that
when an occurrence after the closing of that exchange is likely to have
materially changed such a security's value, such security will be valued at fair
value as determined by or under the direction of each Trust's Board of Trustees
as of the close of regular trading on the Exchange. An option that is written by
the Fund generally will be valued at the last sale price or, in the absence of
the last sale price, the last offer price. A futures contract will be valued at
the unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price. A settlement price may not be used if
the market makes a limit move with respect to a particular futures contract or
if the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price is not used, futures contracts will be valued at their fair value as
determined by or under the direction of each Trust's Board of Trustees. All
other securities and assets of each Fund's portfolio are valued at their fair
market value as determined in good faith by the adviser or subadviser of that
Fund (or a pricing service selected by the adviser or subadviser) under the
supervision of each Trust's Board of Trustees. The value of any assets for which
the market price is expressed in terms of a foreign currency will be translated
into U.S. dollars at the prevailing market rate on the date of the net asset
value computation, or, if no such rate is quoted at such time, at such other
appropriate rate as may be determined by or under the direction of each Trust's
Board of Trustees.
The net asset value per share of each class is determined by dividing the value
(determined as explained above) of all securities plus any cash and other assets
(including dividends and interest receivable but not collected) less all
liabilities (including accrued expenses) attributable to such class, by the
number of shares of such class outstanding. The public offering price of each
Fund's Class Y shares is the net asset value per share.
The exact price you pay for a share will be determined by the next set of
calculations made after your order is accepted by NEFSCO. 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.
INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Internal Revenue Code of 1986,
as amended (the "Code") necessary to ensure that it qualifies as a regulated
investment company and thus does not expect to pay any federal income tax on
investment income and capital gains distributed to shareholders in cash or
additional shares. Unless you are a tax-exempt entity, your distributions
derived from a Fund's short-term capital gains and ordinary income are generally
taxable to you 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 (i.e., 28% Rate Gains) and from net gains on securities held for
more than 18 months (i.e., 20% Rate Gains), are taxable to you as such,
regardless of how long you have owned shares in the Fund. Both ordinary income
and capital gains distributions are taxable whether distributed to you in cash
or additional shares.
A Fund's transactions in foreign currency-denominated debt securities and its
hedging activities will likely produce a difference between its book income and
its taxable income. This difference may cause a part or all of a Fund's income
distributions to constitute returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to avoid federal income tax
liability.
Dividends derived from interest on U.S. Government securities may be exempt from
state and local taxes. The Funds intend to advise shareholders of the proportion
of each Fund's dividends that are derived from such interest. Before investing
in any of the Funds, you should check the consequences under your local and
state tax laws, which may be different from the federal tax consequences, and
the consequences for any retirement plan offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year-end virtually all the Fund's ordinary income earned during that calendar
year, and virtually all of the capital gain net income the Fund realized during
the twelve months ending October 31 but has not previously distributed. If
declared in October, November or December to shareholders of record in that
month, and paid the following January, these distributions will be considered
for federal income tax purposes to have been received by shareholders on
December 31 of the year in which they were declared.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you (i) if you do not provide a correct, certified
taxpayer identification number, (ii) if the Fund is notified that you have
underreported income in the past or (iii) if you fail to certify to the Fund
that you are not subject to such withholding. In addition, each Fund will be
required to withhold 31% of the gross proceeds of Fund shares you redeem if you
have not provided a correct, certified taxpayer identification number or if the
Fund is notified that you have underreported income in the past. If you are a
tax-exempt institution, however, these back-up withholding rules will not apply
so long as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations. You
should consult a competent tax adviser as to the effect of an investment in a
Fund on your particular federal, state and local tax situations.
|_| ADJUSTABLE RATE FUND
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by a Fund from direct obligations
of the U.S. Government, less than 20% of the distributions of the Adjustable
Rate Fund during the current fiscal year are expected to qualify for such
tax-free treatment. Investments in mortgage-backed securities (including
GNMA, FNMA and FHLMC securities) and repurchase agreements collateralized by
U.S. Government securities do not qualify as direct federal obligations in
most states.
PERFORMANCE CRITERIA
Each Fund may include total return information in advertisements or other
written sales material. Each Fund may show the average annual total return for
each class of shares for the one-, five- and ten-year periods (or the life of
class, if shorter) through the end of the most recent calendar quarter or, in
the case of the High Income Fund's Class A shares, for the period since July 27,
1988 and July 1, 1996 when there were changes in that Fund's investment adviser.
Total return is measured by comparing the value of a hypothetical $1,000
investment in a class at the beginning of the relevant period to the value of
the investment at the end of the period (assuming deduction of the current
maximum sales charge on Class A shares, automatic reinvestment of all dividends
and capital gains distributions and, in the case of the Class B and C shares,
imposition of the CDSC for the period of time quoted). Total return may be
quoted with or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The classes may
also show total return over other periods, on an aggregate basis for the period
presented, or without deduction of a sales charge. If a sales charge is not
deducted in calculating total return, the class's total return will be higher.
Each Fund may also include the yield, accompanied by the total return, for each
class of shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's standardized formula by dividing the
adjusted net investment income per share earned during a recent 30-day period by
the maximum offering price of a share of the relevant class (reduced by any
earned income expected to be declared shortly as a dividend) on the last day of
the period. Yield calculations will reflect any voluntary expense limitations in
effect for the Fund during the relevant period.
Each Fund may also present one or more distribution rates for each class in its
sales literature. These rates will be determined by annualizing the class's
distributions from net investment income and net short-term capital gains over a
recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value rather than the maximum offering price is used to calculate
the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of the Funds can be
expected to achieve a higher investment return than the Funds' Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
|_| New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Government Securities Fund represents the original series of shares of
the Trust. The Bond Income Fund was organized prior to 1985 and conducted
investment operations as a separate corporation until its reorganization as
a series of the Trust in January 1987. The Strategic Income Fund commenced
investment operations in 1995.
|_| New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple series.
The Limited Term U.S. Government Fund commenced investment operations in
1989. The High Income Fund was organized in 1984 and conducted investment
operations as a separate corporation until its reorganization as a series of
the Trust in 1989. The Adjustable Rate Fund commenced operations in 1991.
|_| When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive dividends as determined by
the relevant Trust's trustees and to cast a vote for each share you own at
shareholder meetings. Shares of each Fund vote separately from shares of
other series of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters relating to a
class's Rule 12b-1 plan, for which only shares of that class are entitled to
vote. No Rule 12b-1 plan applies to the Class Y shares of any Fund.
|_| Class A, Class B and Class C shares are identical to Class Y shares, except
that Class A, Class B and Class C shares are subject to a sales load or
contingent deferred sales charge, bear a service fee at the annual rate of
0.25% of average net assets (and in the case of Class B and Class C shares a
0.75% distribution fee; also, Class A shares of the Limited Term U.S.
Government Fund bear an additional 0.10% distribution fee) and have separate
voting rights in certain circumstances. Class Y shares may bear its own
transfer agency and prospectus printing costs and, if so, will not bear any
portion of those costs relating to other classes of shares.
|_| Except for matters that are explicitly identified as "fundamental" in this
Prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Government
Securities and Bond Income Funds are fundamental. The investment objectives
of the Adjustable Rate and Strategic Income Funds are not fundamental. The
investment objectives of the Limited Term U.S. Government and High Income
Funds are not fundamental but, as a matter of policy, the trustees would not
change those objectives without shareholder approval. If there is a change
in the investment objective of the Adjustable Rate, Strategic Income,
Limited Term U.S. Government or High Income Fund, you should consider
whether the Fund remains an appropriate investment in light of your then
current financial position and needs.
|_| The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees
of that Trust from office by votes cast at a shareholder meeting or by
written consent.
|_| The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each of New England Funds Trust I and New England Funds Trust II
offers only its own funds' shares for sale, but it is possible that New
England Funds Trust I or New England Funds Trust II might become liable for
any misstatements in this prospectus that relate to the other Trust. The
trustees of each Trust have considered this possible liability and approved
the use of this combined prospectus for Funds of both New England Funds
Trust I and New England Funds Trust II.
|_| The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
|_| Each Fund's annual report contains additional performance information and is
made available upon request and without charge. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more than
one shareholder of record with the same last name has indicated that mail is
to be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
|_| The Trusts' trustees have the authority without shareholder approval to
issue other classes of shares of each Fund that represent interests in the
Fund's portfolio but that have different sales load and fee arrangements.
|_| No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
|_| Many of the services provided to the Funds depends on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between
the year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Funds' operations and services provided to shareholders. NEFM, CGM, the
Funds' subadvisers, the Distributor, NEFSCO, State Street Bank and certain
other service providers to the Funds have reported that each expects to
modify its systems, as necessary, prior to January 1, 2000 to address this
so-called "year 2000 problem." However, there can be no assurance that the
problem will be corrected in all respects and that the Funds' operations and
services provided to shareholders will not be adversely affected.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A: RATINGS OF SECURITIES
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa are
rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE STRATEGIC INCOME FUND FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
SECURITY OF NET ASSETS
- ------- ------------
Preferred Stock ........................................ 1.2%
Short-term Obligations and Other Assets ................ 0.2%
Common Stock ........................................... 7.4%
Debt-- Unrated ......................................... 3.7%
Debt-- Standard and Poor's Rating
AAA ............................................. 10.6%
AA .............................................. 5.7%
A ............................................... 9.0%
BBB ............................................. 17.7%
BB .............................................. 28.2%
B ............................................... 13.7%
CCC and lower ................................... 2.6%
The chart above indicates the composition of the Strategic 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
Strategic Income Fund's net assets invested in each category as of the end of
each month during the year. Loomis Sayles does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
SECURITY OF NET ASSETS
- ------- ------------
Common Stock ........................................... 0.9%
Preferred Stock ........................................ 7.9%
Short-term Obligations and Other Assets ................ 3.9%
Debt-- Unrated ......................................... 0.0%
Debt-- Standard and Poor's Rating
AAA ............................................. 0.0%
BBB ............................................. 0.0%
BB .............................................. 6.5%
B ............................................... 67.3%
CCC and lower ................................... 13.5%
The chart above indicates the composition of the High 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 High
Income Fund's net assets invested in each category as of the end of each month
during the year. Loomis Sayles does not rely primarily on ratings designed by
any rating agency in making investment decisions. The chart does not necessarily
indicate what the composition of the Fund's portfolio will be in subsequent
fiscal years.
<PAGE>
[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
PROSPECTUS AND APPLICATION -- MAY 1, 1998
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.
New England Massachusetts Tax Free Income Fund (the "Massachusetts 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
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 Back Bay Advisors(R), L.P. ("Back Bay
Advisors"), the Funds' subadviser, believes is consistent with preservation of
capital. There can be no assurance that either Fund will achieve this objective.
Each Fund offers two classes of shares (Class A and B). 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 Web site
(http://www.sec.gov) that contains the Statement, materials 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.
<PAGE>
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
3 Financial Highlights Historical information on the Funds' performance.
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
6 How the Funds Pursue Their Objectives
- ------------------------------------------------------------------------------------------------------------------
10 INVESTMENT RISKS It is important to understand the risks inherent in
a Fund before you invest.
- ------------------------------------------------------------------------------------------------------------------
13 FUND MANAGEMENT
- ------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
15 Minimum Investment Everything you need to know to open and add to
15 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By Exchange from Another New England Fund
16 Sales Charges
18 Reduced Sales Charges (Class A Shares Only)
- ------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
20 Exchanging Among New England Funds New England Funds offers three convenient ways to
exchange Fund shares.
21 Fund Dividend Payments
- ------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
22 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic
Withdrawal Plan
24 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
- ------------------------------------------------------------------------------------------------------------------
FUND DETAILS
25 How Fund Share Price is Determined Additional information you may find important.
25 Income Tax Considerations
27 The Funds' Expenses
28 Performance Criteria
28 Additional Facts About the Funds
30 Glossary of Terms
- ------------------------------------------------------------------------------------------------------------------
</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>
MASSACHUSETTS FUND NEW YORK FUND
-------------------- -------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(1)(2) .............. 4.25% None 4.25% None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds, as applicable)(2) ................. (3) 5.00% (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying Fund Shares -- Reduced
Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to certain purchases of Class A shares
greater than $1,000,000 redeemed within one year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MASSACHUSETTS 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) ..... 0.29%** 0.29%** 0.00%*** 0.00%***
12b-1 Fees ................... 0.35 1.00* 0.25 1.00*
Other Expenses
(after voluntary fee waiver
and expense reduction
for the New York Fund) ..... 0.36 0.36 0.60*** 0.60***
Total Fund Operating Expenses
(after voluntary fee waiver
and expense reduction) ..... 1.00** 1.65** 0.85*** 1.60***
* 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 by the Fund's adviser, Management Fees would be 0.58% for (Class A
and Class B shares), and Total Fund Operating Expenses would be 1.29% for Class A shares and 1.94%
for Class B shares. These voluntary limitations can be terminated by the Fund's adviser at any time.
See "Fund Management."
*** Without the voluntary fee waiver and expense reduction by the Fund's adviser, Management Fees and
Other Expenses would be 0.52% and 1.07%, respectively, for both classes, and Total Fund Operating
Expenses would be 1.84% for Class A shares and 2.59% for Class B shares. These voluntary limitations
can be terminated by the Fund's adviser at any time. See "Fund Management."
</TABLE>
<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>
MASSACHUSETTS 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 .......................................... $ 52 $ 67 $ 17 $ 51 $ 66 $ 16
3 years ......................................... $ 73 $ 82 $ 52 $ 68 $ 80 $ 50
5 years ......................................... $ 95 $110 $ 90 $ 88 $107 $ 87
10 years* ....................................... $160 $178 $178 $143 $170 $170
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years; therefore, Class B amounts are calculated
using Class A expenses in years 9 and 10.
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees, 12b-1
fees and other expenses, please see "Fund Management," and "The Funds"
Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of the Funds 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,
independent accountants, and, for periods prior to 1997, Coopers & Lybrand
L.L.P., independent accountants, each of whose reports thereon are
incorporated by reference in Part II of the Statement and may be obtained by
shareholders. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto incorporated by reference in Part
II of the Statement. Each Fund's annual report contains additional performance
information and is available upon request and without charge.
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
TEN
MONTHS
ENDED YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------------------------------------------------------
1988(a) 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $16.37 $16.16 $16.27 $16.01 $16.37 $16.62 $17.27 $15.10 $16.85 $16.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.90 1.06 1.04 1.08 1.03 0.97 0.89 0.88 0.87 0.86
Net gains or losses on
investments (both realized
and unrealized) (0.20) 0.19 (0.24) 0.69 0.40 1.05 (2.15) 1.76 (0.35) 0.63
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 0.70 1.25 0.80 1.77 1.43 2.02 (1.26) 2.64 0.52 1.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.90) (1.06) (1.03) (1.07) (1.03) (0.97) (0.89) (0.89) (0.87) (0.86)
Distributions in excess of
net investment income 0.00 0.00 0.00 0.00 0.00 0.00 (0.02) 0.00 0.00 0.00
Distributions from net
realized capital gains (0.01) (0.08) (0.03) (0.34) (0.15) (0.40) (0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.91) (1.14) (1.06) (1.41) (1.18) (1.37) (0.91) (0.89) (0.87) (0.86)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $16.16 $16.27 $16.01 $16.37 $16.62 $17.27 $15.10 $16.85 $16.50 $17.13
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 4.6 8.0 5.2 11.5 9.1 12.4 (7.4) 17.8 3.2 9.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $50,770 $51,269 $55,903 $68,534 $91,932 $128,797 $107,565 $120,229 $112,934 $113,869
Ratio of operating
expenses to average
net assets (%)(d) 1.51(b) 1.41 1.35 1.00 0.85 0.85 0.85 0.85 0.90 1.00
Ratio of net investment
income to average net
assets (%) 6.63(b) 6.54 6.48 6.62 6.25 5.58 5.63 5.46 5.31 5.17
Portfolio turnover rate (%) 18(b) 24 21 86 29 42 48 127 140 132
(a) Fiscal year end changed in 1988 from February 28/29 to December 31.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods of less than one year are not annualized.
(d) Effective September 1, 1996 expenses were voluntarily limited to 1.00% of average net assets of Class A shares and 1.65% of
average net assets of Class B shares. From May 1, 1991 through August 31, 1996, expenses were voluntarily limited to 0.85% of
average netassets of Class A shares and, commencing September 13, 1993, 1.50% of average net assets of Class B shares. From May
18, 1989 through April 30, 1991, expenses were voluntarily limited to 1.35% of average net assets of Class A shares. For all
periods prior to May 18, 1988, expenses were limited to 1.25% of average net assets of Class A shares. The ratio of operating
expenses to average net assets without giving effect to these expense limitations would have been 1.39%, 1.56% (annualized),
1.43%, 1.37%, 1.34%, 1.26%, 1.21%, 1.24%, 1.24%, 1.27% and 1.29% for the year ended February 29, 1988, the period ended
December 31, 1988 and the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively, for
the Fund's Class A shares, and 1.86% (on an annualized basis) for the period from September 13, 1993 through December 31, 1993
and 1.89%, 1.89%, 1.92%, and 1.94% for the year ended December 31, 1994, 1995, 1996 and 1997, respectively, for the Fund's
Class B shares.
</TABLE>
<PAGE>
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND CONTINUED
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, -------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $17.78 $17.26 $15.08 $16.82 $16.47
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.25 0.77 0.78 0.75 0.76
Net gains or losses on investments
(both realized and unrealized) (0.15) (2.14) 1.74 (0.34) 0.62
------ ------ ------ ------ ------
Total income (loss) from investment
operations 0.10 (1.37) 2.52 0.41 1.38
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.22) (0.79) (0.78) (0.76) (0.76)
Distributions in excess of net
investment income 0.00 (0.02) 0.00 0.00 0.00
Distributions from net realized
capital gains (0.40) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total distributions (0.62) (0.81) (0.78) (0.76) (0.76)
------ ------ ------ ------ ------
Net asset value, end of period $17.26 $15.08 $16.82 $16.47 $17.09
====== ====== ====== ====== ======
Total return (%)(d) 0.4 (8.0) 17.0 2.6 8.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $1,289 $4,523 $6,697 $7,442 $7,399
Ratio of operating expenses to average
net assets (%)(b) 1.50(c) 1.50 1.50 1.55 1.65
Ratio of net investment income to
average net assets (%) 4.26(c) 4.98 4.81 4.66 4.52
Portfolio turnover rate (%) 42(c) 48 127 140 132
(a) Class B shares were first offered beginning September 13, 1993.
(b) Effective September 1, 1996 expenses were voluntarily limited to 1.00% of average net assets of Class A shares and
1.65% of Class B shares. From May 1, 1991 through August 31, 1996, expenses were voluntarily limited to 0.85% of
average net assets of Class A shares and, commencing September 13, 1993, 1.50% of average net assets of Class B shares.
From May 18, 1989 through April 30, 1991, expenses were voluntarily limited to 1.35% of average net assets of Class A
shares. For all periods prior to May 18, 1988, expenses were limited to 1.25% of average net assets of Class A shares.
The ratio of operating expenses to average net assets without giving effect to these expense limitations would have
been 1.39%, 1.56% (annualized), 1.43%, 1.37%, 1.34%, 1.26%, 1.21%, 1.24%, 1.24%, 1.27% and 1.29% for the year ended
February 29, 1988, the period ended December 31, 1988 and the years ended December 31, 1989, 1990, 1991, 1992, 1993,
1994, 1995, 1996 and 1997, respectively, for the Fund's Class A shares, and 1.86% (on an annualized basis) for the
period from September 13, 1993 through December 31, 1993 and 1.89%, 1.89%, 1.92%, and 1.94% for the year ended December
31, 1994, 1995, 1996 and 1997, respectively, for the Fund's Class B shares.
(c) Computed on an annualized basis.
(d) A CDSC is not reflected in total return calculations. Periods of less than one year are not annualized.
</TABLE>
<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> <C> <C>
Net asset value, beginning
of period $7.50 $7.76 $7.07 $7.68 $7.64 $7.85 $7.76 $7.06 $7.67 $7.62
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.26 0.37 0.38 0.39 0.37 0.10 0.32 0.33 0.34 0.32
Net gains or losses on investments
(both realized and unrealized) 0.29 (0.68) 0.62 (0.05) 0.27 (0.05) (0.69) 0.62 (0.06) 0.27
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.55 (0.31) 1.00 0.34 0.64 0.05 (0.37) 0.95 0.28 0.59
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net investment
income (0.25) (0.38) (0.39) (0.38) (0.38) (0.10) (0.33) (0.34) (0.33) (0.33)
Distributions in excess of net
investment income (0.04) 0.00 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS (0.29) (0.38) (0.39) (0.38) (0.38) (0.14) (0.33) (0.34) (0.33) (0.33)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of period $7.76 $7.07 $7.68 $7.64 $7.90 $7.76 $7.06 $7.67 $7.62 $7.88
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (%)(d) 7.4 (4.1) 14.5 4.6 8.7 0.5 (4.9) 13.7 3.7 7.9
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $21,122 $15,875 $16,388 $18,854 $20,527 $555 $1,152 $1,718 $2,154 $2,724
Ratio of operating expenses to
average net assets (%)(b) 0.70(c) 0.70 0.70 0.75 0.85 1.45(c) 1.45 1.45 1.50 1.60
Ratio of net investment income
to average net assets (%) 4.88(c) 5.13 5.18 5.15 4.88 3.68(c) 4.38 4.43 4.40 4.13
Portfolio turnover rate (%) 121(c) 219 155 99 40 121(c) 219 155 99 40
(a) The Funds commenced operations on April 23, 1993. Class B shares were first offered on September 13, 1993.
(b) 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. 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 August 31, 1996. The ratio of operating
expenses to average net assets for Class A shares without giving effect to these 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 1.84%, respectively, for the
years ended December 31, 1994, 1995, 1996 and 1997, and 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 2.59%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
Results prior to May 1, 1998 reflect results achieved under different investment policies.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
HOW THE FUNDS PURSUE THEIR INVESTMENT OBJECTIVES
The Funds invest primarily in 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 the Massachusetts Fund that the Fund will
normally invest at least 80% of the value of its net assets in debt
obligations the interest from which is, in the opinion of bond counsel at the
time of issuance, exempt from regular federal income tax and Massachusetts
personal income taxes and is not subject to the federal alternative minimum
tax (the "AMT") for individuals. It is the Massachusetts Fund's intention,
however, that, under normal market conditions, (1) at least 90% of the Fund's
net assets will be invested in debt obligations the interest from which will
be exempt from federal income tax (other than the AMT) and Massachusetts
personal income taxes and (2) no more than 20% of the Fund's net assets will
be invested in debt obligations the interest from which is subject to the AMT
for individuals. Under normal conditions, at least 65% of the Massachusetts
Fund's assets will be invested in Massachusetts State Tax Exempt Securities.
During the fiscal year ended December 31, 1997, 99% of the Massachusetts
Fund's net assets were invested in debt obligations the interest from which is
exempt from Federal income tax (other than the AMT) and Massachusetts personal
income taxes, and on average 20% of the Fund's net assets were invested in
debt obligations the interest from which is subject to the AMT for
individuals.
It is a fundamental policy of the New York Fund that at least 80% of its
income distributions will be exempt from federal income tax, from New York
personal income taxes and from New York City income tax, except during times
of adverse market conditions when the Fund is investing for temporary
defensive purposes (in which case more than 20% of the Fund's income
distributions could be subject to federal income tax and/or New York personal
income taxes and New York City income tax). The New York Fund currently
expects that at least 90% of its income each year will be exempt from federal
income taxes, the New York personal income tax and from New York City income
tax. The Fund may invest in "private activity bonds," which pay interest that,
although exempt from ordinary income taxes, may be subject to federal or New
York alternative minimum taxes. It is a fundamental policy of the 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 AMT), will not normally exceed 20% of
the total amount of the Fund's income distributions. The Fund currently does
not expect such distributions to exceed 17% of the total amount of the Fund's
income distributions.
Securities purchased by the Funds will be largely of investment grade quality.
The Funds will not purchase an investment if, immediately after and as a
result of such purchase, less than 85% of the Fund's assets would consist of
securities rated AAA, AA, A or BBB by Standard & Poor's Ratings Group ("S&P")
or Fitch Investor Services, Inc. ("Fitch") or Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's"), or that are not rated by S&P, Fitch or
Moody's but that are determined by Back Bay Advisors to be of comparable
quality to securities in those rating categories.
Up to 15% of each Fund's assets may be invested in securities rated below
investment grade (below BBB or Baa) or unrated but securities determined by
Back Bay Advisors to be of comparable quality to bonds rated below BBB or Baa.
Bonds rated BBB or Baa are considered investment grade but may have
speculative characteristics. See "Investment Risks -- Lower Quality Fixed-
Income Securities" for more information about these bonds. 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.
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 tables illustrate what tax-free investing can mean for you.
The following tables do 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 Gains or 28% Rate Gains) and will be taxable
to you as such.
The following tables show, for different assumed levels of taxable income and
marginal tax rates, the equivalent taxable yield that would be required to
achieve certain levels of tax exempt yield. Yields shown do not represent
actual yields achieved by the Funds and are not intended as a prediction of
future yields.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
TAXABLE EQUIVALENT YIELDS
MASSACHUSETTS FUND
<CAPTION>
1998
TAXABLE INCOME* COMBINED
MA AND IF TAX EXEMPT YIELD IS
- -------------------------------------------------- FEDERAL ----------------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) BRACKET** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 25,350 0 - 42,350 25.20% 5.35% 6.68% 8.20% 9.36% 10.70%
25,351 - 61,400 42,351 - 102,300 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
61,401 - 128,100 102,301 - 155,950 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
128,101 - 278,450 155,951 - 278,450 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
278,451 and over 278,451 and over 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
NEW YORK FUND
<CAPTION>
1998
COMBINED
FEDERAL AND
TAXABLE INCOME*** NEW YORK
STATE AND IF TAX EXEMPT YIELD IS
- -------------------------------------------------- CITY ----------------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) BRACKET** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 8,000 0 - 16,000 21.02% 5.06% 6.33% 7.60% 8.86% 10.13%
8,001 - 11,000 16,001 - 21,600 21.44% 5.09% 6.36% 7.64% 8.91% 10.18%
20,000 21,601 - 22,000 22.02% 5.13% 6.41% 7.69% 8.98% 10.26%
11,001 - 12,000 22.08% 5.13% 6.42% 7.70% 8.98% 10.27%
12,001 - 13,000 22,001 - 26,000 22.66% 5.17% 6.46% 7.76% 9.05% 10.34%
13,001 - 20,000 26,001 - 40,000 23.21% 5.21% 6.51% 7.81% 9.12% 10.42%
20,001 - 25,000 40,001 - 42,350 24.02% 5.26% 6.58% 7.90% 9.21% 10.53%
25,001 - 25,350 24.07% 5.27% 6.59% 7.90% 9.22% 10.54%
20,000 42,351 - 45,000 35.64% 6.22% 7.77% 9.32% 10.88% 12.43%
25,351 - 50,000 45,001 - 90,000 35.68% 6.22% 7.77% 9.33% 10.88% 12.44%
50,001 - 61,400 90,001 - 102,300 35.72% 6.22% 7.78% 9.33% 10.89% 12.45%
61,401 - 128,100 102,301 - 155,950 34.80% 6.49% 8.12% 9.74% 11.36% 12.99%
128,101 - 278,450 155,951 - 278,450 42.86% 7.00% 8.75% 10.50% 12.25% 14.00%
278,451 and over 278,451 and over 46.08% 7.42% 9.27% 11.13% 12.98% 14.84%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*This amount represents taxable income as defined in the Internal Revenue
Code and the Massachusetts income tax law. Note that Massachusetts taxable
income and federal 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 1998. These rates include the effect of deducting state
taxes on a federal return.
***This amount represents taxable income as defined in the Internal Revenue
Code and the New York State and City tax law. Note that New York taxable
income and federal taxable income may differ due to differences in
exemptions, itemized deductions, and other items.
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 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 the user of the facilities.
Also included within the general category of State Tax Exempt Securities are
participations in lease obligations or installment purchase contract
obligations ("lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing and may not be as marketable as
more conventional securities. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. In addition, the tax treatment of such
obligations in the event of non-appropriation is unclear. The Funds'
investments, if any, in these securities will be subject to procedures adopted
by the trustees of the Trust from time to time.
State Tax Exempt Securities may have fixed or variable interest rates. The
Funds 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.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in the Fund before
you invest.
[] GENERAL
The value of a Fund's investments will change as the general level of
interest rates fluctuates. During periods of falling interest rates, the
values of fixed-income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Changes in the credit ratings of obligations as well as in the ability of an
issuer to make payments of interest and principal will also affect the value
of these investments. The value of a Fund's shares will fluctuate with the
value of its investments.
Certain State Tax Exempt Securities which may be held by each 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 the Fund's "yield," which is computed on a
yield-to- maturity basis in accordance with SEC regulations and which
reflects amortization of market premiums. See "Fund Details -- Performance
Criteria."
[] STATE TAX EXEMPT SECURITIES
A Fund's ability to achieve its investment objective depends on the ability
of the issuers 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 other State Tax Exempt Securities as
well.
The amount of publicly-available information about the financial condition of
an issuer of State Tax Exempt Securities may not be as extensive as that
which is made available by corporations whose securities are publicly traded.
As a result, monitoring the creditworthiness of issuers of State Tax Exempt
Bonds may be more difficult than with corporate bonds.
INVESTING IN MASSACHUSETTS. Like other northeastern states, Massachusetts
suffered significant adverse effects from the recession of the early 1990s,
including the loss of substantial numbers of jobs, declining real estate
values and reduced tax receipts. Weakness in the local or national economy
could adversely affect the credit ratings and creditworthiness of State Tax
Exempt Securities of Massachusetts issuers, which in turn could adversely
affect the value of an investment in the Massachusetts Fund.
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. 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.
[] LOWER QUALITY FIXED-INCOME SECURITIES
Lower quality fixed-income securities generally provide higher yields than
higher quality securities, but are subject to greater credit and market risk.
Lower quality fixed- income securities are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Achievement of the investment objective of a fund
investing in lower quality fixed-income securities may be more dependent on
the fund's subadviser's own credit analysis than is the case for a fund
investing in higher quality bonds. The market for lower quality fixed-income
securities may be more severely affected than some other financial markets by
economic recession or substantial interest rate increases, by changing public
perceptions of this market or by legislation that limits the ability of
certain categories of financial institutions to invest in these securities.
In addition, the secondary market may be less liquid for lower quality fixed-
income securities. This lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as "junk
bonds." During the fiscal year ended December 31, 1997, 7.22% and 4.61% of
the average month-end net assets of the Massachusetts Fund and the New York
Fund, respectively, were invested in fixed-income securities rated in the
rating categories below investment grade (BBB/Baa). For more information,
including a detailed description of the ratings assigned by S&P, Fitch and
Moody's, please refer to the Statement's "Appendix A -- Description of Bond
Ratings."
[] FUTURES AND OPTIONS
Each Fund may purchase and sell financial futures contracts and options for
hedging purposes. Futures contracts on a Municipal Bond Index are traded on
the Chicago Board of Trade. This index is intended to represent a numerical
measure of market performance for long-term tax-exempt bonds. An "index
future" is a contract to buy or sell units of a particular securities index
at an agreed price on a specified future date. Depending on the change in the
value of the index between the time when the Fund enters into and terminates
an index future, the Fund will realize a gain or loss. The 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.
Each Fund may also, for hedging purposes, purchase and sell futures contracts
and options with respect to U.S. Treasury securities, including U.S. Treasury
bills, notes and bonds. Treasury security futures and related options would
be used in a way similar to the 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 whether Back Bay Advisors forecasts 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.
[] 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 a "non-diversified" fund and as such is not required to meet any
diversification requirements under the Investment Company Act of 1940, as
amended (the "1940 Act"), although 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. See "Fund Details -- Income Tax Considerations" below. Under
certain market conditions, the Funds' portfolio turnover rates may be higher
than those of similar mutual funds. Recent portfolio turnover rates for the
Funds are set forth above under "Financial Highlights."
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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 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 the
Funds and recommends what securities should be purchased or sold by the
Funds. Back Bay Advisors provides discretionary investment management
services to mutual funds and other institutional investors. Formed in 1986,
Back Bay Advisors now manages 14 mutual fund portfolios and over 7 billion of
securities. James S. Welch, Vice President of Back Bay Advisors, has served
as the Massachusetts Fund's portfolio manager since May 1995 and the New York
Fund's portfolio manager since the Fund's inception in April 1993.
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, Massachusetts 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 Nvest Companies, L.P. ("Nvest
Companies"). Nvest Companies' managing general partner, Nvest Corporation, is
an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"), a mutual life insurance company. MetLife owns in the aggregate,
directly and indirectly, approximately 47% of the outstanding limited
partnership interests in Nvest Companies. Nvest Companies' advising general
partner, Nvest, L.P., is a publicly-traded company listed on the New York
Stock Exchange. Nvest Corporation is the sole general partner of Nvest, L.P.
The Massachusetts Fund pays NEFM a management fee at the annual rate of 0.60%
of the first $100 million of the Fund's average daily net assets and 0.50% of
such assets in excess of $100 million, and the New York 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, in each case
reduced by the amount of any subadvisory fees paid by the Fund to Back Bay
Advisors (as described below). NEFM and Back Bay Advisors have voluntarily
agreed, however, until further notice to the Massachusetts Fund, to reduce
their management and subadvisory fees and, if necessary, to bear certain
expenses associated with operating the Fund in order to limit the Fund's
expenses to an annual rate of 1.00% of the average daily net assets of the
Fund's Class A shares and 1.65% of the average daily net assets of the Fund's
Class B shares, and until further notice to the New York Fund, to reduce its
fees, and, if necessary, to bear certain expenses associated with operating
the Fund in order to limit the Fund's expenses to an annual rate of 0.85% of
the average daily net assets of the Fund's Class A shares and 1.60% of the
average daily net assets of the Fund's Class B shares. NEFM may terminate
these voluntary limitations at any time. In that event the affected Fund
would supplement its Prospectus.
The Massachusetts Fund pays Back Bay Advisors for providing subadvisory
services to the Fund a subadvisory fee at the annual rate of 0.30% of the
first $100 million of the Fund's average daily net assets and 0.25% of such
assets in excess of $100 million. The New York Fund pays Back Bay Advisors
for providing subadvisory services to the Fund a subadvisory fee at the
annual rate of 0.2625% of the first $200 million of the 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.
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 including subadvisers other than the existing subadviser 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.
<PAGE>
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BUYING FUND SHARES
- --------------------------------------------------------------------------------
CALL NEW ENGLAND FUNDS PERSONAL ACCESS
LINE (TM) AT 1-800-346-5984.
WITH OUR 24 HOUR AUTOMATED CUSTOMER
SERVICE SYSTEM YOU HAVE ACCESS TO YOUR
ACCOUNT. WITH A TOUCH-TONE TELEPHONE,
OBTAIN YOUR CURRENT ACCOUNT BALANCE,
RECENT TRANSACTIONS , FUND PRICES AND
RECENT PERFORMANCE INFORMATION. YOU CAN
ALSO PURCHASE OR EXCHANGE SHARES OF ANY
NEW ENGLAND FUND. FOR MORE INFORMATION
CALL US AT 1-800-225-5478.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in the Funds and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase shares of the Funds in the following ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
[Graphic Omitted]
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with
a check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier,
you can also order personalized investment slips by calling 1-800-225-5478
between 8:00 a.m. and 7:00 p.m. (Eastern time). All purchases made by check
should be in U.S. dollars and made payable to New England Funds. Third party
checks will generally not be accepted except under certain circumstances
approved by the Distributor. When purchases are made by check or periodic
account investment, redemptions may not be allowed until the investment being
redeemed has been in the account for a minimum of ten calendar days.
[Graphic Omitted]
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business to obtain an
account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and Class of shares), Shareholder Name, Shareholder Account Number. Funds may
be transferred between 9:00 a.m. and 4:00 p.m. (Eastern time) on a day when
the Funds are open for business. Your bank may charge a fee for this service.
[Graphic Omitted]
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking
or savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an
automatic investment plan through Investment Builder. Indicate the amount of
the monthly investment on the enclosed application and enclose a check marked
"Void" or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at
1-800-225-5478 for a Service Options Form.
[Graphic Omitted]
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated
Clearing House ("ACH") system as long as your bank or credit union is a member
of the ACH system and you have a completed, approved ACH application on file
with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business. You may
also purchase shares through ACH by calling 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 will be complete only upon the receipt by New England Funds of
funds from your bank and, on the day that funds are received, will be
processed at the net asset value next determined at the close of regular
trading on the Exchange on days that the Exchange is open. Proceeds of
redemptions of Fund shares purchased through ACH may not be available for up
to ten days after the purchase date.
[Graphic Omitted]
BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of the Funds by
exchanging shares from another New England Fund. Please see "Owning Fund
Shares -- Exchanging Among New England Funds" for 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 (or, under limited circumstances, such
other time no later than 8:00 p.m. as may be agreed upon between the dealer
and the Distributor) on the same day, which will be effected at the net asset
value determined on that day. Although the Funds do not anticipate doing so,
they reserve the right to suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to
persons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you
request them in writing from the Distributor. The Funds' "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B
shares.
If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact your
investment dealer or the Distributor for details.
SALES CHARGES
The Funds offer two classes of shares:
CLASS A SHARES Class A shares are offered at net asset value plus a sales
charge which varies depending on the size of your purchase. They are also
subject to a 0.25% annual service fee and, in the case of the Massachusetts
Fund, a 0.10% annual distribution fee. Class A shares are offered subject to
the following sales charges:
- --------------------------------------------------------------------------------
SALES CHARGE AS A % OF DEALER'S
--------------------------------- CONCESSION
NET AS A % OF
VALUE OF TOTAL OFFERING AMOUNT OFFERING
INVESTMENT PRICE INVESTED PRICE
Less than $50,000 4.25% 4.44% 3.75%
$ 50,000 - $ 99,999 4.00% 4.17% 3.50%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
- --------------------------------------------------------------------------------
*The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases a commission of up to 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.
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 Class A
shares of the Funds of $1,000,000 or more, a CDSC of 1% applies to redemptions
of shares purchased within one year of the date of purchase. If an exchange is
made to Class A shares 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. For purposes of the CDSC, it is assumed that
the Class A shares held the longest are the first to be redeemed. If the Money
Market Fund shares are redeemed rather than exchanged back into a series of the
Trusts, then a CDSC applies to the redemption. For purposes of the CDSC, it is
assumed that shares held the longest are the first to be redeemed. The CDSC
applies to redemptions through the day one year after the day on which the
purchase was accepted. No CDSC applies to a redemption of shares followed by a
reinvestment effected within 30 days after the date of the redemption.
CHOOSING BETWEEN CLASS A AND B SHARES
WHETHER YOU PURCHASE CLASS A OR CLASS B
SHARES DEPENDS ON YOUR INVESTING GOALS.
IF YOU QUALIFY FOR A REDUCED SALES
CHARGE, OR INVEST FOR THE LONG TERM, YOU
MIGHT CONSIDER PURCHASING CLASS A
SHARES. CLASS A SHARES HAVE LOWER ANNUAL
FEES AND AS A RESULT, PAY HIGHER
DIVIDENDS PER SHARE. IF YOU ARE MAKING A
SMALLER INVESTMENT, YOU MIGHT CONSIDER
CLASS B SHARES SINCE 100% OF YOUR
PURCHASING DOLLARS ARE INVESTED
IMMEDIATELY AND THE AMOUNT OF YOUR
DEFERRED SALES CHARGE DIMINISHES OVER
TIME. CONSULT YOUR FINANCIAL
REPRESENTATIVE FOR HELP IN DECIDING
WHICH CLASS IS APPROPRIATE FOR YOU.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge, and are subject to a 0.25% annual service fee, a 0.75% annual
distribution fee for eight years (at which time they automatically convert to
Class A shares) and a CDSC if they are redeemed within six years of purchase.
The holding period for purposes of timing the conversion to Class A shares and
determining the CDSC will continue to run after an exchange to Class B shares
of another series of the Trusts. If the exchange is made to Class B shares of
a Money Market Fund, then the holding period stops and will resume only when
an exchange is made back into Class B shares of a series of the Trusts. If the
Money Market Fund shares are redeemed rather than exchanged back into a series
of the Trusts, then a CDSC applies to the redemption, at the same rate as if
the Class B shares of the Fund had been redeemed at the time they were
exchanged for Money Market Fund shares. For the purpose of the CDSC it is
assumed that the shares held the longest are the first to be redeemed.
The 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.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% of the sales price and advances the first year's service fee (up to
0.25%) on sales of Class B shares by such dealers.
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 CDSC 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,
as described in the following paragraph and under "Reduced Sales Charges (Class
A Shares Only)."
NO CDSC ON ANY CLASS OF SHARES APPLIES to redemptions following the death or
disability (as defined in Section 72(m)(7) of the Code) of a shareholder if
the redemption is made within one year after the shareholder's death or
disability. In addition, no CDSC applies to certain withdrawals pursuant to a
Systematic Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund
Shares -- By Systematic Withdrawal Plan" below.
Each Fund receives the net asset value next determined after your order is
received on sales of both classes of shares. The sales charge is allocated
between the investment dealer and the Distributor. The Distributor receives
the CDSC. For purposes of the CDSC, an exchange from one series of the Trusts
to another series of the Trusts is not considered a redemption or a purchase.
For federal tax purposes, however, such an exchange is considered a redemption
and a purchase and, therefore, would be considered a taxable event on which
you may recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge
imposed on the sale of Class A shares to investment dealers from time to time.
The staff of the SEC is of the view that dealers receiving all or
substantially all of the sales charge may be deemed underwriters of the Funds'
shares.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate
of the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who have sold
or may sell significant amounts of shares. Such compensation may include (i)
full reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A 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 broker-dealer firms and their
representatives who have sold or may sell significant amounts of shares, or
have achieved other objectives, may receive gifts of merchandise and/or
incentives of travel and lodging or the payment of these and other expenses
incurred in connection with trips to locations, within or outside the United
States, for educational seminars or meetings of a business nature. Membership
in the New England Funds President's Council is based on sales achievement and
other criteria and may result in the provision of gifts of merchandise, a
subscription to a financial publication and participation in sales assistance
programs and educational seminars. The participation of broker-dealer firms
and their representatives in compensation and incentive programs is at the
discretion of the firm. Compensation and incentives shall conform with the
applicable Rules of the National Association of Securities Dealers, Inc.
REDUCED SALES CHARGES
(CLASS A SHARES ONLY)
[] LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at
which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
[] COMBINING ACCOUNTS -- purchases by qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of the qualifying accounts of a spouse, parents,
children, siblings, grandparents or grandchildren, individual fiduciary
accounts, sole proprietorships and/or single trust estates. The values of all
accounts are combined to determine the sales charge.
[] UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of up to $1 million may be invested in shares of the Funds at a reduced sales
charge of 1.50% of the public offering price (or 1.52% of the net amount
invested). The dealer's concession (as a percentage of the public offering
price) is 1.50% on such sales.
[] CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to
investments of $100,000 or more in the Funds by clients of an adviser or
subadviser to any series of the Trusts; any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts; and the
parents, spouses and children of the foregoing. Any investor eligible for
these arrangements should so indicate in writing at the time of the purchase.
[] Shares of the Funds may be purchased at net asset value by investment
advisers, financial planners or other intermediaries who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services, and clients of such
investment advisers, financial planners or other intermediaries who place
trades for their own accounts if the accounts are linked to the master
account of such investment adviser, financial planner or other intermediary
on the books and records of the broker or agent. Investors may be charged a
fee if they effect transactions through a broker or agent.
[] Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies, but are unavailable if the trust department or institution
is part of an organization not principally engaged in banking or trust
activities.
[] Shares of the Funds also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any
transaction fee. Such organizations may receive compensation, in an amount of
up to 0.25% annually of the average value of the Fund's shares held by their
customers. This compensation may be paid by NEFM and/or Back Bay Advisors out
of their own assets, or may be paid indirectly by the Funds in the form of
servicing, distribution or transfer agent fees.
[] 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.
[] 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.
<PAGE>
- --------------------------------------------------------------------------------
OWNING FUND SHARES
- --------------------------------------------------------------------------------
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE
PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALLY EXCHANGED EACH
MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS. THE MINIMUM
MONTHLY EXCHANGE AMOUNT UNDER THE PLAN
IS $100. THERE IS NO FEE FOR EXCHANGES
MADE PURSUANT TO THIS PROGRAM, BUT THERE
MAY BE A SALES CHARGE AS DESCRIBED ON
THIS PAGE. SHARES OF THE ADJUSTABLE RATE
FUND THAT ARE SUBJECT TO A DIFFERENTIAL
SALES CHARGE AS DESCRIBED ON THIS PAGE
MAY NOT PARTICIPATE IN THIS PROGRAM.
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES.
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California (the
"California Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) may be exchanged for Class A shares of another series
of the Trusts at net asset value only if you have held the California Fund
shares for at least six months; otherwise, you will pay the difference between
any sales charge you have already paid on your California Fund shares and the
higher sales charge of the series into which you are exchanging. If you exchange
Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) for shares of another series of the Trusts that has a
higher sales charge, you will pay the difference between any sales charge you
have already paid on your Adjustable Rate Fund shares and the higher sales
charge of the series into which you are exchanging. In addition, you may redeem
Class A shares of any Money Market Fund that were not acquired through exchanges
from any series of the Trusts and have the proceeds directly applied to the
purchase of shares of a series of the Trusts at the applicable sales charge.
CLASS B SHARES.
You may exchange Class B shares of any series of the Trusts and Class B shares
of the Money Market Funds (or Class A shares of the Money Market Funds that
have not been subject to a previous sales charge) for Class B shares of any
other series of the Trusts. Such exchanges will be made at the next-determined
net asset value of the shares. Class B shares will automatically convert on a
tax-free basis to Class A shares eight years after they are purchased
(excluding the time the shares are held in a Money Market Fund). See "Sales
Charges -- Class B Shares" above.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day where the Funds are open for business, write to 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 your account, whichever
is less) except that, under the Automatic Exchange Plan, the minimum is $100.
All exchanges are subject to the eligibility requirements of the series into
which you are exchanging. In connection with any exchange, you must obtain and
carefully read a current Prospectus of the series into which you are exchanging.
The exchange privilege may be exercised only in those states where shares of
such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone.
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.
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.
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 Funds' other shareholders or would
disrupt the management of the Funds. Without limiting the generality of the
foregoing, the Funds and the Distributor reserve the right to restrict (e.g.
by limiting to a specified 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 Funds' total net assets.
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 in shares of the same class of other series of the Trusts or to receive
all distributions in cash. Income distributions and capital gains distributions
will be reinvested in shares of the same class of the Fund at net asset value
(without a sales charge or CDSC) unless you select another option. You may
change your distribution option by notifying New England Funds in writing or by
calling 1-800-225-5478. If you elect to receive your dividends in cash and the
dividend checks sent to you are returned "undeliverable" to a Fund or remain
uncashed for six months, your cash election will automatically be changed and
your future dividends will be reinvested.
- --------------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION
PROGRAM
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in shares
of the same class of another New England Fund, subject to the investor
eligibility requirements of that other fund and to state securities law
requirements. Shares will be purchased at the selected fund's net asset value
(without a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration (shareholder name) as
the distributing fund account and, if a new account in the purchased fund is
being established, the purchased fund's minimum investment requirements must be
met. Before establishing a dividend diversification program into any other New
England Fund, you must obtain and carefully read a copy of that fund's
prospectus.
- --------------------------------------------------------------------------------
<PAGE>
5 WAYS TO SELL FUND SHARES
You may sell shares of the Funds in the following ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted]
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any of
the three methods described below:
Wired to Your Bank Account-- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when
the Funds are open for business. Class A shares only may also be redeemed or
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.
[Graphic Omitted]
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a
written request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund and class of shares, 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.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds
recommend that certificates be sent by registered mail.
[Graphic Omitted]
BY CHECK:
Checkwriting is available on Class A shares of the Funds. To elect
checkwriting for your account, select the checkwriting option on your
application and complete the attached signature card. To add checkwriting to
an existing Fund account, please call 1-800-225-5478 for our Service Options
Form. The Fund will send you checks drawn on State Street Bank. You will
continue to earn dividends on shares redeemed by check until the check clears.
Each check must be written for $500 or more. The checkwriting privilege does
not apply to shares for which you have requested share certificates to be
issued. Checkwriting is not available for investor accounts containing Class A
or Class B shares subject to a CDSC.
If you use withdrawal checks, you will be subject to State Street Bank's rules
governing checking accounts. The Funds and the Distributor are in no way
responsible for any checkwriting account established with State Street Bank.
You may not close your account by withdrawal check because the exact balance
of your account will not be known until after the check is received by State
Street Bank.
[Graphic Omitted]
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem
shares and receive payments on a regular schedule. In the case of shares
subject to a CDSC, the amount or percentage you specify may not exceed, on an
annualized basis, 10% of the value of your Fund account (based on the day you
establish your plan). Redemption of shares pursuant to the plan will not be
subject to a CDSC. For information, contact the Distributor or your investment
dealer. Since withdrawal payments may have tax consequences, you should
consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer, except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time (or, under limited
circumstances, such other time no later than 8:00 p.m. as may be agreed upon
between the dealer and the Distributor) 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 along
with your request to New England Funds, L.P. before a redemption request can
be honored. See the instructions for redemption by mail above.
The 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 its securities or to determine fairly the value of its net
assets, or during any other period permitted by the SEC for the protection of
investors. The Funds 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 of 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 sales charge) to the repurchase of Class A shares of any series of the
Trusts. To qualify, you must reinvest the entire proceeds within 120 days after
your redemption and notify New England Funds or your investment dealer at the
time of reinvestment that you are taking advantage of this privilege. You may
reinvest the proceeds either by returning the redemption check or by sending
your check for the entire amount. Please note: For federal income tax purposes,
a redemption is a sale that involves tax consequences even if the proceeds are
later reinvested. Please consult your tax adviser.
<PAGE>
- --------------------------------------------------------------------------------
FUND DETAILS
- --------------------------------------------------------------------------------
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on each day that the
Exchange is open for trading. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on
the basis of valuations furnished by a pricing service, authorized by the
Trust's Board of Trustees, which service determines valuations for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Short-term
obligations with a remaining maturity of less than sixty days are valued at
amortized cost, which approximates market value. An option that is written by
a Fund generally will be valued at the last sale price or, in the absence of
the last sale price, the last offer price. A futures contract will be valued
at the unrealized gain or loss on the contract that is determined by marking
the contract to the current settlement price. A settlement price may not be
used if the market makes a limit move with respect to a particular futures
contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement
price. When a settlement price is not used, futures contract will be valued at
their fair value as determined by or under the direction of the Trust's Board
of Trustees. All other securities and assets of each Fund's portfolio are
valued at their fair market value as determined in good faith by Back Bay
Advisors (or a pricing service selected by Back Bay Advisors) under the
supervision of the Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the
value (determined as explained above) of all securities plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses) attributable to such class,
by the number of shares of such class outstanding. The public offering price
of each Fund's Class A shares is determined by adding the applicable sales
charge to the net asset value. See "Buying Fund Shares -- Sales Charges"
above. The public offering price of each Fund's Class B 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 NEFSCO. 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 it is qualified 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 income taxes. For
federal income tax, state personal income tax and, in the case of the New York
Fund, New York City 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 Funds as deriving from net gains on securities held for more
than one year but not more than 18 months (i.e., 28% Rate Gains) and from net
gains on securities held for more than 18 months (i.e., 20% Rate Gains) are
generally taxable as such regardless of how long you have held your Fund
shares. However, certain capital gains distributions may qualify for
exemptions from state personal income taxes of the relevant state, to the
extent designated as such by the Fund. 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 a 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. However, losses incurred on the taxable disposition of shares of a Fund
held for six months or less will be disallowed for federal income tax purposes
to the extent of exempt-interest dividends received with respect to such
shares and thereafter treated as long-term capital losses, rather than short-
term capital losses, 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 AMT 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 AMT. However, it is a fundamental policy
of the Massachusetts Fund that no more than 20% of the Fund's net assets will
normally be invested in debt obligations the interest on which is subject to
the AMT for individuals.
Exempt-interest dividends are included in "adjusted current earnings" for
purposes of computing the AMT applicable to corporations. Seventy-five percent
of the excess of adjusted current earnings over the amount of income otherwise
subject to the AMT is added to the corporation's alternative minimum taxable
income, potentially giving rise to AMT liability.
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 they were
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
should ever drop below 95%, the Fund will be required to withhold 31% of all
ordinary income dividends and capital gain distributions it pays to you (i) if
you do not provide a correct, certified taxpayer identification number, (ii)
if the Fund is notified that you have underreported income in the past, or
(iii) 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 or if the Fund is notified that you
have underreported income in the past. 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 the federal
or state securities laws, all expenses of shareholders' and trustees'
meetings, preparing, printing and mailing prospectuses and reports to
shareholders and the compensation of trustees who are not directors, officers
or employees of MetLife, NELICO, NEFM, Back Bay Advisors or their affiliates,
other than affiliated registered investment companies.
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each
Fund pays the Distributor a monthly service fee at an annual rate not to
exceed 0.25% of the Fund's average daily net assets attributable to its Class
A and Class B shares. The Distributor may pay up to the entire amount of this
fee to securities dealers who are dealers of record with respect to the Fund's
shares, for providing personal services to investors in shares of the Fund
and/or the maintenance of shareholder accounts. Such payments will be made on
a quarterly basis, unless other arrangements are made between the Distributor
and the securities dealer. The Class A service fee is payable only to
reimburse the Distributor for amounts it pays or expends in connection with
the provision of personal services to investors and/or the maintenance of
shareholder accounts. To the extent that the Distributor's reimbursable
expenses in any year exceed the maximum amount payable for that year under the
relevant Service Plan, such expenses may be carried forward for reimbursement
in future years in which the Plan remains in effect.
Under Distribution Plans, adopted pursuant to Rule 12b-1 under the 1940 Act,
each Fund also pays the Distributor a monthly distribution fee at an annual
rate not to exceed 0.75% of the Fund's average daily net assets attributable
to its Class B shares. The Massachusetts Fund's Class A shares also pay the
Distributor a distribution fee not to exceed an annual rate of 0.10% of the
average daily net assets of the Class A shares. The Distributor may pay up to
the entire amount of the distribution fee to securities dealers who are
dealers of record with respect to the Fund's shares, as distribution fees in
connection with the sale of Fund shares. Such payments will be made on a
quarterly basis, unless other arrangements are made between the Distributor
and the securities dealer. The Distributor retains the balance of the fee as
compensation for its 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 and
financial reporting functions and clerical functions relating to the Fund and
(ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance.
PERFORMANCE CRITERIA
Each class of the Funds may include taxable-equivalent yield, yield and total
return information in advertisements or other written sales material. Each
class of shares of the Funds may show its average annual total return for the
one-, five- and ten-year periods (or the life of the class, if shorter)
through the end of the most recent calendar quarter, or in the case of the
Class A shares of the Massachusetts Fund, for the period since July 27, 1988,
when Back Bay Advisors became the Fund's investment adviser. Total return is
measured by comparing the value of an investment in the class at the beginning
of the relevant period to the value of the investment at the end of the period
(assuming deduction of the current maximum sales charge on Class A shares,
automatic reinvestment of all dividends and capital gains distributions, and
imposition of the CDSC relevant to the period of time quoted in the case of
the Class B shares). Each class may also show total return over other periods,
or on an aggregate basis for the period presented, or without deduction of a
sales charge or CDSC. If a sales charge or CDSC is not deducted in calculating
total return, the class's total return will be higher.
Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
30-day period by the maximum offering price of a share of the relevant class
on the last day of the period (reduced by any earned income expected to be
declared shortly as a dividend). For this purpose, net investment income is
calculated in accordance with SEC regulations and may differ from the class's
net investment income as determined for financial reporting purposes. SEC
regulations require that net investment income be calculated on a "yield-to-
maturity" basis, which has the effect of amortizing any premiums or discounts
in the current market value of fixed-income securities. Each class's current
dividend rate is based on the class's net investment income as determined for
financial statement purposes, which reflects amortization only as to the
amount of any premium paid by the Fund for securities.
Taxable-equivalent yield is the taxable yield an investor would have to earn
to receive the equivalent of the class's yield after payment of federal income
tax and state personal income taxes (and New York City taxes for the New York
Fund). Taxable-equivalent yield is calculated by adjusting a class's
standardized yield for a recent thirty day period, using effective combined
federal and state tax rates for individuals.
Each class may also present one or more distribution rates in its sales
literature. These rates will be determined by annualizing the class's
distributions from net investment income and net short-term capital gains over
a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period.
If the net asset value rather than the maximum offering price is used to
calculate the distribution rate, the rate will be higher.
Total return will generally be higher for Class A shares than for Class B
shares of the same Fund, because of the higher levels of expenses borne by the
Class B shares. An investor should balance this expected lower total return
against the benefit gained by 100% immediate investment of the purchase price
of Class B shares.
All performance information is based on past performance and does not predict
future performance.
ADDITIONAL FACTS ABOUT
THE FUNDS
[] The Trust was organized in 1931 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Massachusetts Fund and the New York Fund commenced
operations in March 1984 and April 1993, respectively.
[] 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 each Fund vote
separately from shares of other series of the Trust, except as otherwise
required by law. Shares of all classes of a Fund vote together, except as to
matters relating to Rule 12b-1 plans, on which only shares of the class to
which the particular plan relates are entitled to vote.
[] The Trust does not hold regular shareholder meetings and will do so only when
required by law. Shareholders may remove trustees from office by votes cast
at a shareholder meeting or by written consent.
[] The Trust's trustees have the authority without shareholder approval to issue
other classes of shares of each Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] Except for matters that are explicitly identified as "fundamental" in this
Prospectus or Part I of the Statement, the investment policies of the Funds,
including the investment objectives, may be changed by the trustees of the
Trust without shareholder approval and, in most cases, without prior notice.
As a matter of policy, however, the trustees would not change either Fund's
investment objective without shareholder approval. If there is a change in
either Fund's objective, shareholders of the Fund should consider whether the
Fund remains an appropriate investment in light of their current financial
position and needs.
[] If the balance in your account is less than a minimum dollar amount set by
the Trust's trustees from time to time (currently $1,000 for all accounts,
except for those indicated below), the Funds may close your account and send
the proceeds to you. Shareholders who are affected by this policy will be
notified of the Fund's intention to close the account and will have 60 days
immediately following the notice to bring the account up to the minimum. The
minimum does not apply to automatic investment plans or accounts that have
fallen below the minimum solely because of fluctuations in the Fund's net
asset value per share.
[] Each Fund will send a single copy of its annual and semi-annual reports to an
address at which more than one shareholder of record with the same last name
has indicated that mail is to be delivered. Shareholders may request
additional copies of any annual or semi-annual report in writing or by
telephone.
[] The Class A and Class B structure could be terminated should certain IRS
rulings be rescinded.
[] No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
[] Many of the services provided to the Funds depend on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between the
year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Funds' operations and services provided to shareholders. NEFM, Back Bay
Advisors, the Distributor, NEFSCO, State Street Bank and certain other
service providers to the Funds have reported that each expects to modify its
systems, as necessary, prior to January 1, 2000 to address this so-called
"year 2000 problem." However, there can be no assurance that the problem will
be corrected in all respects and that the Funds' operations and services
provided to shareholders will not be adversely affected.
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
Capital gain distributions -- Payments to shareholders of profits earned from
selling securities in the fund's portfolio. Capital gain distributions are
usually paid once a year.
Contingent Deferred Sales Charge (CDSC) -- A fee that may be charged when a
shareholder sells fund shares.
Distribution fee -- An annual asset-based sales charge that is used to pay for
sales-related expenses.
Income Distributions -- Payments to shareholders resulting from interest or
dividend income earned by a fund's portfolio.
Mutual fund -- The pooled assets of a group of investors, professionally
managed in pursuit of a specific objective.
Net asset value (NAV) -- The market value of one share of a mutual fund on any
given day without sales charge or CDSC. Determined by dividing the fund's
total net assets by the number of fund shares outstanding.
New England Funds, L.P. -- The distributor of the New England Funds.
New England Funds Management, L.P. -- The investment adviser to most of the
New England Funds.
New England Funds Service Corporation -- The transfer and dividend disbursing
agent of the New England Funds.
Open-end investment management company -- A mutual fund that allows investors
to redeem fund shares directly from the fund company on any business day.
Public offering price -- The price of one share of a mutual fund, including
its initial sales charge, if there is one.
Record date -- The date on which mutual fund investors must own a fund's
shares to be eligible to receive specific income or capital gain
distributions.
Service fee -- Payments by a fund to the fund's distributor or a financial
representative for personal services to investors and/or for maintenance of
shareholder accounts.
Total Return -- The change in value of an investment in a fund over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
Yield -- The rate at which a fund earns income, expressed as a percentage.
Yield calculations are standardized among mutual funds, based on a formula
developed by the SEC.
12b-1 fees -- Fees paid by a mutual fund under a plan adopted under 1940 Act
Rule 12b-1. Can include both distribution fees and service fees.
[Recycle Logo] Printed on Recycled Paper XF51-0598
<PAGE>
[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
PROSPECTUS AND APPLICATION -- MAY 1, 1998
FOR GENERAL INFORMATION ON THE FUND OR
ANY OF ITS SERVICES AND FOR ASSISTANCE
IN OPENING AN ACCOUNT, CONTACT YOUR
INVESTMENT DEALER OR CALL THE
DISTRIBUTOR TOLL FREE AT 1-800-225-5478.
New England Intermediate Term Tax Free Fund of California (the "Fund") is a non-
diversified mutual fund. The Fund is a series of New England Funds Trust II (the
"Trust"), a registered open-end management investment company. The Trust, New
England Funds Trust I and New England Funds Trust III are referred to in this
Prospectus as the "Trusts."
The Fund seeks as high a level of current income exempt from federal income tax
and California personal income tax as is consistent with preservation of
capital. There can be no assurance that the Fund will achieve its investment
objective.
The Fund offers two classes of shares (Class A and B). The offering price is
based on the net asset value per share next determined after an order is
received. Class A share purchases generally involve a sales charge at the time
of purchase. No initial sales charge applies to Class B share purchases. A
contingent deferred sales charge (a "CDSC"), however, is imposed upon certain
redemptions of Class B shares, which also bear higher annual 12b-1 fees than
Class A shares. Class B shares automatically convert to Class A shares eight
years after purchase. See "Buying Fund Shares -- Sales Charges."
This Prospectus sets forth information you should know before investing in the
Fund. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Fund dated May
1, 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 Web site
(http://www.sec.gov) that contains the Statement, material incorporated by
reference and other information regarding the Fund. The Statement contains more
detailed information about the Fund and is incorporated into this Prospectus by
reference.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
2 Financial Highlights Historical information on the Fund's performance.
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
3 How the Fund Pursues Its Objective
- ------------------------------------------------------------------------------------------------------------------
7 INVESTMENT RISKS It is important to understand the risks inherent in
the Fund before you invest.
- ------------------------------------------------------------------------------------------------------------------
10 FUND MANAGEMENT
- ------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
11 Minimum Investment Everything you need to know to open and add to
11 6 Ways to Buy Fund Shares a New England Funds account.
[] Through your investment dealer
[] By mail
[] By wire transfer of Federal Funds
[] By Investment Builder
[] By electronic purchase through ACH
[] By exchange from another New England Fund
12 Sales Charges
14 Reduced Sales Charges (Class A Shares Only)
- ------------------------------------------------------------------------------------------------------------------
OWNING FUND SHARES
16 Exchanging Among New England Funds New England Funds offers three convenient ways to
exchange Fund shares.
17 Fund Dividend Payments
- ------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
18 5 Ways to Sell Fund Shares How to withdraw money or close your account.
[] Through your investment dealer
[] By telephone
[] By mail
[] By check
[] By Systematic Withdrawal Plan
20 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption pro-
ceeds within 120 days for no sales charge.
- ------------------------------------------------------------------------------------------------------------------
FUND DETAILS
21 How Fund Share Price is Determined Additional information you may find important.
21 Income Tax Considerations
23 The Fund's Expenses
23 Performance Criteria
24 Additional Facts About the Fund
26 Glossary of Terms
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES AND FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Fund.
The following tables summarize your maximum transaction costs from investing
in the Fund and estimated annual expenses for each class of the Fund's shares.
The Example shows the cumulative expenses attributable to a hypothetical
$1,000 investment in each class of shares of the Fund for the periods
specified.
SHAREHOLDER TRANSACTION EXPENSES
CLASS CLASS
A B
----- -----
Maximum Initial Sales Charge Imposed on a Purchase (as a
percentage of offering price)(1)(2) ........................ 2.50% None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable)(2) ............................................. (3) 5.00%
(1) A reduced sales charge on Class A shares applies in some cases. See
"Buying Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to certain
purchases of Class A shares greater than $1,000,000 redeemed within one
year after purchase, but not to any other purchases or redemptions of
Class A shares. See "Buying Fund Shares -- Sales Charges."
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
CLASS A CLASS B
------- -------
Management Fees (after voluntary fee waiver) ......... 0.04%** 0.04%**
12b-1 Fees ........................................... 0.25 1.00*
Other Expenses ....................................... 0.56 0.56
Total Fund Operating Expenses (after voluntary fee
waiver) ............................................ 0.85** 1.60**
* 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 by the Fund's adviser, Management Fees
would be 0.52% for both classes and Total Fund Operating Expenses would be
1.33% for Class A shares and 2.08% for Class B shares. These voluntary
limitations can be terminated by the Fund's adviser at any time. See "Fund
Management."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at the end of each
time period. The 5% return and expenses in the Example should not be
considered indicative of actual or expected Fund performance or expenses, both
of which may be more or less than those shown.
CLASS A CLASS B
------- --------------
(1) (2)
1 year ............................................ $ 33 $ 66 $ 16
3 years ........................................... $ 51 $ 80 $ 50
5 years ........................................... $ 71 $107 $ 87
10 years* ......................................... $127 $170 $170
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years
9 and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Fund. For additional information about the Fund's management fees and
other expenses, please see "Fund Management" and "The Fund's Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of the Fund outstanding throughout the indicated periods.)
The Financial Highlights presented below have been included in the financial
statements of the Fund, which have been examined by Price Waterhouse LLP,
independent accountants, and, for periods prior to 1997, by Coopers & Lybrand
L.L.P., independent accountants, each of whose report thereon is incorporated
by reference in Part II of the Statement and may be obtained by shareholders.
The Financial Highlights should be read in conjunction with the financial
statements and the notes thereto incorporated by reference in Part II of the
Statement. The Fund's annual report contains additional performance
information and is available upon request and without charge.
<TABLE>
<CAPTION>
CLASS A 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> <C> <C>
Net asset value,
beginning of period $7.50 $7.84 $7.08 $7.65 $7.66 $7.92 $7.84 $7.07 $7.63 $7.64
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.26 0.38 0.39 0.39 0.39 0.10 0.32 0.33 0.33 0.34
Net gains or losses on
investments (both
realized and
unrealized) 0.38 (0.76) 0.57 0.00 0.20 (0.04) (0.77) 0.56 0.01 0.20
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss)
from investment
operations 0.64 (0.38) 0.96 0.39 0.59 0.06 (0.45) 0.89 0.34 0.54
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.26) (0.38) (0.39) (0.38) (0.38) (0.10) (0.32) (0.33) (0.33) (0.33)
Distributions in
excess of net
investment income (0.04) 0.00 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.30) (0.38) (0.39) (0.38) (0.38) (0.14) (0.32) (0.33) (0.33) (0.33)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end
of period $7.84 $7.08 $7.65 $7.66 $7.87 $7.84 $7.07 $7.63 $7.64 $7.85
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total return (%)(d) 8.6 (4.9) 13.9 5.3 8.0 0.8 (5.8) 12.9 4.6 7.2
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000) $28,938 $30,293 $32,707 $35,972 $32,057 $1,849 $5,713 $5,617 $7,590 $8,881
Ratio of operating
expenses to average
net assets (%)(b) 0.70(c) 0.70 0.70 0.75 0.85 1.45(c) 1.45 1.45 1.50 1.60
Ratio of net
investment income to
average net assets(%) 4.88(c) 5.07 5.24 5.18 5.06 3.68(c) 4.32 4.49 4.43 4.31
Portfolio turnover
rate (%) 121(c) 212 167 161 120 121(c) 212 167 161 120
(a) The Fund 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 August 31, 1996. 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. Without giving effect to
these expense limitations, the ratio of operating expenses to average net assets for Class A shares would have been 1.49%
(annualized) for the period April 23, 1993 through December 31, 1993 and 1.33%, 1.31%, 1.34% and 1.33%, respectively, for the
years ended December 31, 1994, 1995, 1996 and 1997, and 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
2.08%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
HOW THE FUND PURSUES ITS OBJECTIVE
The Fund invests primarily in California Tax Exempt Securities (which are
described below). California law provides that to the extent distributions by
the Fund are derived from interest on California Tax Exempt Securities, they
shall be exempt from California personal income taxes. It is a fundamental
policy of the Fund that at least 80% of its income distributions will be
exempt from federal income tax and from California personal income taxes,
except during times of adverse market conditions when the Fund is investing
for temporary defensive purposes (in which case more than 20% of the Fund's
income distributions could be subject to federal income tax and/or California
personal income taxes). The Fund currently expects that at least 90% of its
income each year will be exempt from federal income taxes and California
personal income tax. The Fund 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
the Fund that distributions of interest income on such bonds, together with
distributions of interest income from investments other than California 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 Fund currently does not expect such distributions to exceed
10% of the total amount of the Fund's income distributions. The Fund may
invest up to 5% of its assets in so-called "inverse-floating obligations" or
"residual interest bonds."
Securities purchased by the Fund will be largely of investment grade quality.
The Fund will not purchase an investment if, immediately after and as a result
of such purchases, less than 85% of the Fund's assets would consist of
securities rated AAA, AA, A or BBB by Standard & Poor's Ratings Group ("S&P")
or Fitch Investor Services, Inc. ("Fitch") or Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's"), or that are not rated by S&P, Fitch or
Moody's but that are determined by Back Bay Advisors(R), L.P. ("Back Bay
Advisors"), the Fund's subadviser, to be of comparable quality to securities
in those rating categories.
Up to 15% of the Fund's assets may be invested in securities rated below
investment grade (below BBB or Baa) or unrated but determined by Back Bay
Advisors to be of comparable quality to bonds rated below BBB or Baa.
Bonds rated BBB or Baa are considered investment grade but may have
speculative characteristics. See "Investment Risks -- Lower Quality Fixed-
Income Securities" for more information about these bonds. The Fund may invest
in bonds rated in the lowest rating categories, D by S&P or Fitch or C by
Moody's. These classes of bonds can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
The Fund will ordinarily seek to maintain an average dollar-weighted maturity
of three to ten years.
"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 Fund will seek to maintain an average
portfolio duration of six years or less. The Fund's portfolio may also include
fixed-income securities with durations of more than six years, so long as the
average duration of the portfolio is six years or less. A portfolio with an
average duration of six years or less should provide investors with a reduced
risk of loss due to rising interest rates. For example, a 1% increase in
interest rates would be expected to result in a price decrease of
approximately 6% for a portfolio with an average duration of six years and a
price decrease of 8% for a portfolio with an average duration of eight years.
Conversely, a 1% decrease in interest rates would be expected to result in
similar increases in value. These expectations represent Back Bay Advisors'
estimate of portfolio volatility based upon historic data collected under a
wide variety of market conditions, but there is no assurance that actual
volatility will be consistent with such expectations. By maintaining an
average portfolio duration of six years or less, the Fund seeks to achieve a
lower level of fluctuations of the Fund's per share net asset value than funds
with longer durations, although this result cannot be assured.
For temporary purposes (such as pending new investments), for liquidity
purposes (such as to meet repurchase or redemption obligations, or to pay
expenses) or for temporary defensive purposes, the Fund may invest in taxable
obligations such as obligations of the U.S. Government, its agencies or
instrumentalities, other debt securities rated within the four highest grades
by either Moody's, S&P or Fitch, commercial paper rated in the two highest
grades by either of such rating services, certificates of deposit, bankers
acceptances and repurchase agreements. The Fund may also hold its assets in
other cash equivalents or in cash.
The Fund may also purchase and sell interest rate futures contracts and tax-
exempt bond index futures contracts and may write and purchase related
options. The Fund expects that transactions involving futures and options on
futures will help to reduce the volatility of the Fund's net asset value,
although these results cannot be assured.
The Fund may purchase and sell financial futures contracts and options for
hedging purposes. Futures contracts on a Municipal Bond Index are traded on
the Chicago Board of Trade. This index is intended to represent a numerical
measure of market performance for long-term tax-exempt bonds. An "index
future" is a contract to buy or sell units of a particular securities index at
an agreed price on a specified future date. Depending on the change in the
value of the index between the time when the Fund enters into and terminates
an index future, the Fund will realize a gain or loss. The Fund may purchase
and sell futures contracts on this index (or any other tax-exempt bond index
approved for trading by the Commodity Futures Trading Commission) to hedge
against general changes in market values of California Tax Exempt Securities
which the Fund owns or expects to purchase. The Fund may also purchase and
sell put and call options on index futures, or on an index directly, in
addition to or as an alternative to purchasing and selling financial futures
contracts.
The Fund may also, for hedging purposes, purchase and sell futures contracts
and options with respect to U.S. Treasury securities, including U.S. Treasury
bills, notes and bonds. Treasury security futures and related options would be
used in a way similar to the Fund's use of index futures and related options.
The Fund will purchase or sell Treasury security futures or related options
only when, in the opinion of Back Bay Advisors, price movements in Treasury
security futures and related options are likely to correlate closely with
price movements in the California Tax Exempt Securities which are the subject
of the hedge.
Although the yield of a tax exempt fund generally will be lower than that of a
taxable income fund, the net after-tax return to investors may be greater. The
table below illustrates what tax-free investing can mean for you.
The following table does not take into account the effect of income taxes on
social security benefits which may arise as a result of receiving tax-exempt
income, or any alternative minimum tax. Also, a portion of the Fund's
distributions may consist of ordinary income, 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 Fund and are not intended as a prediction of
future yields.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
TAX FREE INVESTING
CALIFORNIA FUND
<CAPTION>
1998
COMBINED
FEDERAL
TAXABLE INCOME* 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>
0 - 5,016 0 - 10,032 15.85% 4.75% 6.94% 7.13% 8.32% 9.15%
5,017 - 11,888 10,033 - 23,776 16.70% 4.80% 6.00% 7.20% 8.40% 9.60%
11,889 - 18,761 23,777 - 37,522 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
18,762 - 25,350 37,523 - 42,350 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
25,351 - 26,045 42,351 - 52,090 32.32% 5.91% 7.39% 8.87% 10.34% 11.82%
26,046 - 32,916 52,091 - 65,832 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
32,917 - 61,400 65,833 - 102,300 34.70% 6.13% 7.66% 9.19% 10.72% 12.25%
61,401 - 128,100 102,301 - 155,950 37.42% 6.39% 7.99% 9.59% 11.19% 12.78%
128,101 - 278,450 155,951 - 278,450 41.95% 6.89% 8.61% 10.34% 12.06% 13.78%
278,451 and over 278,451 and over 45.22% 7.30% 9.13% 10.95% 12.78% 14.60%
- ----------------------------------------------------------------------------------------------------------------------
*This amount represents taxable income as defined in the Internal Revenue Code and California tax law. California
taxable income and federal 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 1998. 1997 California rates
have been used as 1998 rates have not yet been released. These rates include the effect of deducting state taxes on
a federal return.
</TABLE>
CALIFORNIA TAX EXEMPT SECURITIES
California Tax Exempt Securities are debt obligations issued by California 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 California
personal income taxes (other than the possible incidence of any alternative
minimum taxes). California 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.
California 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 and California personal income taxes.
The two principal classifications of California 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 unlimited revenues of the issuer. Industrial development and
private activity bonds are in most cases limited obligation bonds, the
creditworthiness of which is directly related to the user of the facilities.
Although the Fund will maintain an average portfolio maturity in the
intermediate range, the Fund may be primarily invested in short-term
California Tax Exempt Securities when yields on such securities are greater
than yields available on long-term California Tax Exempt Securities, to
stabilize net asset value or for temporary defensive purposes.
Certain California Tax Exempt Securities which may be held by the Fund may
permit the issuer at its option to "call," or redeem, its securities. If an
issuer were to redeem California Tax Exempt Securities held by the Fund during
a time of declining interest rates, the Fund may not be able to reinvest the
proceeds in tax exempt securities providing as high a level of investment
return as the securities redeemed.
Also included within the general category of California Tax Exempt Securities
are participations in lease obligations or installment purchase contract
obligations ("lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing and may not be as marketable as
more conventional securities. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. In addition, the tax treatment of such
obligations in the event of non-appropriation is unclear. The Fund's
investments, if any, in these securities will be subject to procedures adopted
by the trustees of the Trust from time to time.
California Tax Exempt Securities may have fixed or variable interest rates.
The Fund may purchase floating and variable rate demand notes, which are
securities normally having a stated maturity in excess of one year, but which
permit the holder to tender the notes for purchase at the principal amount
thereof. The interest rate on a floating rate demand note is based on a known
lending rate, such as a bank's prime rate, and is adjusted periodically based
on changes in such lending rate. The interest rate on a variable rate demand
note is adjusted at specified intervals. There generally is no secondary
market for these notes, although they may be tendered for redemption at face
value. In some cases, the Fund must give more than seven days' notice before
tender. Variable rate demand notes with such a notice feature are "illiquid
securities" for purposes of the policy limiting the Fund's investments in
illiquid securities to 15% of net assets.
Although the Fund's investment objective refers to preservation of capital,
the net asset value of Fund shares will fluctuate based on changes in the
prevailing market interest rates and other factors.
During a period of declining interest rates, many of the Fund's portfolio
investments will likely bear coupon rates which are higher than current market
rates, regardless of whether such securities were originally purchased at a
premium. Such securities would generally carry market values greater than the
principal amounts payable on maturity, which would be reflected in the net
asset value of the Fund's shares. The value of such "premium" securities tends
to approach the principal amount as they approach maturity (or call price in
the case of securities approaching a call date). As a result, an investor who
holds shares of the Fund during such periods would initially receive higher
monthly distributions (derived from the higher coupon rates payable on the
Fund's investments) than might be available from alternative investments
bearing current market interest rates, but may face an increased risk of
capital loss as these higher coupon securities approach maturity (or the call
date). In evaluating the potential performance of an investment in the Fund,
investors may find it useful to compare the Fund's current dividend rate with
the Fund's "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization of market
premiums. See "Fund Details -- Performance Criteria."
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in the Fund before
you invest.
[] GENERAL
The Fund's ability to achieve its investment objective depends on the
ability of the issuers of California Tax Exempt Securities to meet their
continuing obligations to pay principal and interest.
Since the Fund invests primarily in California Tax Exempt Securities, the
value of the Fund's shares may be especially affected by factors pertaining
to the economy of California and other factors specifically affecting the
ability of issuers of California Tax Exempt Securities to meet their
obligations. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a portfolio investing in securities
relating to a number of different states. The ability of California 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 California Tax Exempt Securities may be affected
from time to time by economic, political and demographic conditions within
California. 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 California 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 California or a particular
locality. Any reduction in the actual or perceived ability of an issuer of
California 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 other California Tax Exempt Securities as
well.
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 California Tax
Exempt Securities, 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
California Tax Exempt Securities is less liquid than that for many other
fixed-income securities. Accordingly, the ability of the Fund to buy and sell
securities may be limited. The amount of publicly available information about
the financial condition of an issuer of California Tax Exempt Securities may
not be as extensive as that which is made available by corporations whose
securities are publicly traded. As a result, monitoring the creditworthiness
of issuers of California Tax Exempt Securities may be more difficult than
monitoring the creditworthiness of issuers of corporate bonds.
The value of the Fund's investments will change as the general level of
interest rates fluctuates. During periods of falling interest rates, the
values of fixed-income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Changes in the credit ratings of obligations as well as in the ability of an
issuer to make payments of interest and principal will also affect the value
of these investments. The value of the Fund's shares will fluctuate with the
value of its investments.
[] LOWER QUALITY FIXED-INCOME SECURITIES
Lower quality fixed-income securities generally provide higher yields than
higher quality securities, but are subject to greater credit and market risk.
Lower quality fixed- income securities are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Achievement of the investment objective of a fund
investing in lower quality fixed-income securities may be more dependent on
the fund's subadviser's own credit analysis than is the case for a fund
investing in higher quality bonds. The market for lower quality fixed-income
securities may be more severely affected than some other financial markets by
economic recession or substantial interest rate increases, by changing public
perceptions of this market or by legislation that limits the ability of
certain categories of financial institutions to invest in these securities.
In addition, the secondary market may be less liquid for lower quality fixed-
income securities. This lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as "junk
bonds." During the fiscal year ended December 31, 1997, 7.65% of the average
month-end net assets of the Fund were invested in fixed- income securities
rated in the rating categories below investment grade (BBB/Baa). For more
information, including a detailed description of the ratings assigned by S&P,
Fitch and Moody's, please refer to the Statement's "Appendix A -- Description
of Bond Ratings."
[] FUTURES AND OPTIONS
The use of futures and options may result in taxable income or capital gains
and involves certain special risks. Futures and options transactions involve
costs and may result in losses. The successful use of futures and options
will usually depend on whether Back Bay Advisors forecasts interest rate
movements correctly, which cannot be assured. The Fund's ability to hedge its
portfolio positions through Treasury security futures and options also
depends on the degree of correlation between the municipal bond index or U.S.
Treasury security underlying the futures or options purchased and sold by the
Fund and the California 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 Fund to close its
positions on a timely basis. There can be no assurance that such a market
will exist at a particular time. Certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and certain regulatory requirements
may limit the Fund's ability to engage in futures and options transactions.
The Fund will not purchase or sell futures contracts or related options if,
as a result, the sum of initial margin deposits on the Fund's existing
futures contracts and options plus premiums paid for outstanding options on
futures contracts would exceed 5% of the Fund's net assets. (For options that
are "in- the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
A more detailed explanation of futures and options transactions and the risks
associated with them is included in Part II of the Statement.
[] MISCELLANEOUS
In periods of rapidly fluctuating interest rates, there may be frequent
changes in investments. From time to time, consistent with its investment
objective, the Fund may also trade securities for the purpose of seeking
short-term profits. A change in the securities held by the Fund is known as
"portfolio turnover." Portfolio turnover generally involves some expense to
the Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities. To the extent that such sales result in net realized capital
gains, shareholders ordinarily are taxed on such gains at applicable income
tax rates. See "Fund Details -- Income Tax Considerations" below. Back Bay
Advisors expects that the Fund's turnover rate may exceed 100% annually.
Recent portfolio turnover rates for the Fund are set forth above under
"Financial Highlights."
The Fund reserves the right to enter into repurchase agreements. Under a
repurchase agreement, the Fund buys securities from a seller, usually a bank
or brokerage firm, with the understanding that the seller will repurchase the
securities at a higher price at a later date. If the seller fails to
repurchase the securities, the Fund has rights to sell the securities to
third parties. Repurchase agreements can be regarded as loans by the Fund to
the seller, collateralized by the securities that are the subject of the
agreement. Repurchase agreements afford an opportunity for the Fund to earn a
return on available cash at relatively low credit risk, although the Fund may
be subject to various delays and risks of loss if the seller fails to meet
its obligation to repurchase. These transactions must be fully collateralized
at all times, but may involve some credit risk to the Fund. The Fund may also
purchase securities for future delivery (i.e., forward commitments), which
may increase its overall investment exposure. Part II of the Statement
contains more detailed information about these transactions and about
limitations designed to reduce the risks associated with them.
The Fund is a "non-diversified" fund and as such is not required to meet any
diversification requirements under the Investment Company Act of 1940, as
amended (the "1940 Act"), although the Fund must meet certain diversification
standards to qualify as a regulated investment company under the Code. Since
the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, the Fund may be more susceptible
than a more widely-diversified fund to any single economic, political or
regulatory occurrence.
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street, Boston,
Massachusetts 02116, serves as the Fund's adviser. NEFM oversees, evaluates and
monitors Back Bay Advisors' provision of subadvisory services to the Fund and
provides general business management and administration to the Fund. NEFM 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 Fund.
The Fund's subadviser is Back Bay Advisors, 399 Boylston Street, Boston,
Massachusetts 02116. Subject to overall supervision by NEFM and the Trust's
trustees, Back Bay Advisors furnishes a continuous investment program for the
Fund and recommends what securities should be purchased or sold by the Fund.
Back Bay Advisors provides discretionary investment management services to
mutual funds and other institutional investors. Formed in 1986, Back Bay
Advisors now manages 14 mutual fund portfolios and over $7 billion of
securities. James S. Welch, Vice President of Back Bay Advisors, has served as
the portfolio manager of the Fund since its inception in April 1993.
The Fund pays NEFM a management fee at the annual rate of 0.525% of the first
$200 million of the Fund's average daily net assets, 0.500% of the next $300
million of such assets and 0.475% of such assets in excess of $500 million,
reduced by the amount of any subadvisory fees paid by the Fund to Back Bay
Advisors (as described below). NEFM has agreed, however, to reduce its fees,
and, if necessary, to bear certain expenses associated with operating the Fund
in order to limit the Fund's expenses to an annual rate of 0.85% of the
average daily net assets of the Fund's Class A shares and 1.60% of the average
daily net assets of the Fund's Class B shares. NEFM may terminate this
voluntary agreement at any time. In that event the Fund would supplement its
Prospectus.
The Fund pays Back Bay Advisors for providing subadvisory services to the Fund
a subadvisory fee at the annual rate of 0.2625% of the first $200 million of
the 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 transfer and dividend paying agent for the Fund 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, Massachusetts 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 Nvest Companies, L.P. ("Nvest
Companies"). Nvest Companies' managing general partner, Nvest Corporation, is
an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"), a mutual life insurance company. MetLife owns in the aggregate,
directly and indirectly, approximately 47% of the outstanding limited
partnership interests in Nvest Companies. Nvest Companies' advising general
partner, Nvest, L.P. is a publicly-traded company listed on the New York Stock
Exchange. Nvest Corporation is the sole general partner of Nvest, L.P.
In placing portfolio transactions for the Fund, Back Bay Advisors seeks the
most favorable price and execution available. Subject to applicable regulatory
restrictions and such policies as the Trust's trustees may adopt, Back Bay
Advisors may consider sales of shares of the Fund and shares of the other
mutual funds it manages as a factor in the selection of broker-dealers to
effect portfolio transactions for the Fund. See "Portfolio Transactions and
Brokerage" in Part II of the Statement.
The Trust's Board of Trustees supervises the affairs of the Fund as conducted
by NEFM and Back Bay Advisors.
The Fund has 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 subadviser of the Fund 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.
<PAGE>
- --------------------------------------------------------------------------------
BUYING FUND SHARES
- --------------------------------------------------------------------------------
CALL NEW ENGLAND
FUNDS PERSONAL
ACCESS LINE(TM) AT
1-800-346-5984.
WITH OUR 24 HOUR
AUTOMATED CUSTOMER
SERVICE SYSTEM YOU
HAVE ACCESS TO YOUR
ACCOUNT. WITH A
TOUCH-TONE
TELEPHONE, OBTAIN
YOUR CURRENT ACCOUNT
BALANCE, RECENT
TRANSACTIONS , FUND
PRICES AND RECENT
PERFORMANCE
INFORMATION. YOU CAN
ALSO PURCHASE OR
EXCHANGE SHARES OF
ANY NEW ENGLAND
FUND. FOR MORE
INFORMATION CALL US
AT 1-800-225-5478.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in the Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
[] $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
[] $2,000 on initial and $100 on subsequent investments for accounts registered
under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase shares of the Fund in the following ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
[Graphic Omitted]
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with
a check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier,
you can also order personalized investment slips by calling 1-800-225-5478
between 8:00 a.m. and 7:00 p.m. (Eastern time). All purchases made by check
should be in U.S. dollars and made payable to New England Funds. Third party
checks will generally not be accepted except under certain circumstances
approved by the Distributor. When purchases are made by check or periodic
account investment, redemptions may not be allowed until the investment being
redeemed has been in the account for a minimum of ten calendar days.
[Graphic Omitted]
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Fund is open for business to obtain an
account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit New England
Intermediate Term Tax Free Fund of California (Class of shares), Shareholder
Name, Shareholder Account Number. Funds may be transferred between 9:00 a.m.
and 4:00 p.m. (Eastern time) on a day when the Fund is open for business. Your
bank may charge a fee for this service.
[Graphic Omitted]
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking
or savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an
automatic investment plan through Investment Builder. Indicate the amount of
the monthly investment on the enclosed application and enclose a check marked
"Void" or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at
1-800-225-5478 for a Service Options Form.
[Graphic Omitted]
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated
Clearing House ("ACH") system as long as your bank or credit union is a member
of the ACH system and you have a completed, approved ACH application on file
with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Fund is open for business. You may also
purchase shares through ACH by calling 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.
[Graphic Omitted]
BY EXCHANGE FROM ANOTHER NEW ENGLAND
FUND:
You may also purchase shares of the Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for details.
GENERAL
All purchase orders are subject to acceptance by the Fund and will be effected
at the net asset value next determined after the order is received in proper
form by State Street Bank, 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 (or, under limited circumstances, such other time no
later than 8:00 p.m. as may be agreed upon between the dealer and the
Distributor) on the same day, which will be effected at the net asset value
determined on that day. Although the Fund does not anticipate doing so, it
reserves the right to suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to
persons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you
request them in writing from the Distributor. The Fund's "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B
shares.
If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact your
investment dealer or the Distributor for details.
SALES CHARGES
The 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:
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.
TO MAKE INVESTING
EVEN EASIER, YOU CAN
ALSO ORDER
PERSONALIZED
INVESTMENT SLIPS BY
CALLING 1-800-225-54
78 BETWEEN 8:00 A.M.
AND 7:00 P.M.
(EASTERN TIME).
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of Class
A shares of the Fund of $1,000,000 or more, a CDSC of 1% applies to
redemptions of shares within one year of the date of purchase. If an exchange
is made to Class A shares 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. The CDSC
applies to redemptions through the day one year after the day on which the
purchase was accepted. No CDSC applies to a redemption of shares followed by a
reinvestment effected within 30 days after the date of the redemption.
CHOOSING BETWEEN
CLASS A AND B SHARES
WHETHER YOU PURCHASE
CLASS A OR CLASS B
SHARES DEPENDS ON
YOUR INVESTING
GOALS. IF YOU
QUALIFY FOR A
REDUCED SALES
CHARGE, OR INVEST
FOR THE LONG TERM,
YOU MIGHT CONSIDER
PURCHASING CLASS A
SHARES. CLASS A
SHARES HAVE LOWER
ANNUAL FEES AND AS A
RESULT, PAY HIGHER
DIVIDENDS PER SHARE.
IF YOU MAKE A
SMALLER INVESTMENT,
YOU MIGHT CONSIDER
CLASS B SHARES SINCE
100% OF YOUR
PURCHASING DOLLARS
ARE INVESTED
IMMEDIATELY AND THE
AMOUNT OF YOUR
DEFERRED SALES
CHARGE DIMINISHES
OVER TIME. CONSULT
YOUR FINANCIAL
REPRESENTATIVE FOR
HELP IN DECIDING
WHICH CLASS IS
APPROPRIATE FOR YOU.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge, and are subject to a 0.25% annual service fee, a 0.75% annual
distribution fee for eight years (at which time they automatically convert to
Class A shares) and a CDSC if they are redeemed within six years of purchase.
The holding period for purposes of timing the conversion to Class A shares and
determining the CDSC will continue to run after an exchange to Class B shares
of another series of the Trusts. If the exchange is made to Class B shares of
a Money Market Fund, then the holding period will stop and resume only when an
exchange is made back into Class B shares of a series of the Trusts. If the
Money Market Fund shares are redeemed rather than exchanged back into a series
of the Trusts, then a CDSC applies to the redemption, at the same rate as if
the Class B shares of the Fund had been redeemed at the time they were
exchanged for Money Market Fund shares. For the purpose of the CDSC it is
assumed that the shares held the longest are the first to be redeemed.
The 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.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% of the sales price and advances the first year's service fee (up to
0.25%) on sales of Class B shares by such dealers.
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 CDSC 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,
as described in the following paragraph and under "Reduced Sales Charges
(Class A Shares Only)."
NO CDSC ON ANY CLASS OF SHARES APPLIES to redemptions following the death or
disability (as defined in Section 72(m)(7) of the Code) of a shareholder if
the redemption is made within one year after the shareholder's death or
disability. In addition, no CDSC applies to certain withdrawals pursuant to a
Systematic Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund
Shares -- By Systematic Withdrawal Plan" below.
The Fund receives the net asset value next determined after 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 the 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
Fund's 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 broker-dealer firms and their
representatives who have sold or may sell significant amounts of shares, or
have achieved other objectives, may receive gifts of merchandise and/or
incentives of travel and lodging or the payment of these and other expenses
incurred in connection with trips to locations, within or outside the U.S.,
for educational seminars or meetings of a business nature. Membership in the
New England Funds President's Council is based on sales achievement and other
criteria and may result in the provision of gifts of merchandise, a
subscription to a financial publication and participation in sales assistance
programs and educational seminars. The participation of broker-dealer firms
and their representatives in compensation and incentive programs is at the
discretion of the firm. Compensation and incentives shall conform with the
applicable rules of the National Association of Securities Dealers, Inc. then
in effect.
REDUCED SALES CHARGES
(CLASS A SHARES ONLY)
[] LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at
which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
[] COMBINING ACCOUNTS -- purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of the qualifying accounts of a spouse, parents,
children, siblings, grandparents or grandchildren, individual fiduciary
accounts, sole proprietorships and/or single trust estates. The values of all
accounts are combined to determine the sales charge.
[] UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of less than $500,000 may be invested in shares of the 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 1.50%
on these sales.
[] CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to
investments of $100,000 or more in the Funds by clients of an adviser or
subadviser to any series of the Trusts; any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts; and the
parents, spouses and children of the foregoing. Any investor eligible for
these arrangements should so indicate in writing at the time of the purchase.
[] Shares of the Fund may be purchased at net asset value by investment
advisers, financial planners or other intermediaries who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services, and clients of such
investment advisers, financial planners or other intermediaries who place
trades for their own accounts if the accounts are linked to the master
account of such investment adviser, financial planner or other intermediary
on the books and records of the broker or agent. Investors may be charged a
fee if they effect transactions through a broker or agent.
[] Shares of the Fund 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 0.25% annually of the average value of the Fund shares held by their
customers. This compensation may be paid by NEFM and/or Back Bay Advisors out
of their own assets, or may be paid indirectly by the Fund in the form of
servicing, distribution or transfer agent fees.
[] Shares of the Fund are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies, but are unavailable if the trust department or institution
is part of an organization not principally engaged in banking or trust
activities.
[] 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.
[] Shareholders of Reich & Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Fund at net asset value and
without the imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of expenses associated with
such sales.
<PAGE>
- --------------------------------------------------------------------------------
OWNING FUND SHARES
- --------------------------------------------------------------------------------
AUTOMATIC EXCHANGE
PLAN
THE FUND HAS AN AUTOMATIC
EXCHANGE PLAN UNDER WHICH
SHARES OF A CLASS OF THE
FUND ARE AUTOMATICALLY
EXCHANGED EACH MONTH FOR
SHARES OF THE SAME CLASS
OF OTHER SERIES OF THE
TRUSTS. THE MINIMUM
MONTHLY EXCHANGE AMOUNT
UNDER THE PLAN IS $100.
THERE IS NO FEE FOR
EXCHANGES MADE PURSUANT
TO THIS PROGRAM, BUT
THERE MAY BE A SALES
CHARGE AS DESCRIBED ON
THIS PAGE. SHARES OF THE
ADJUSTABLE RATE FUND THAT
ARE SUBJECT TO A
DIFFERENTIAL SALES CHARGE
AS DESCRIBED ON THIS PAGE
MAY NOT PARTICIPATE IN
THIS PROGRAM.
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 Fund (and shares of the Money Market Funds acquired
through exchanges of such shares) may be exchanged for Class A shares of
another series of the Trusts at net asset value only if you have held them for
at least six months; otherwise, sales charges apply to the exchange. If you
exchange 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 Fund is 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 Fund 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 Fund 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 Fund should be
made for investment purposes only. The Fund 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 Fund 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 the Fund are
effected for the account in a calendar quarter or (ii) the account effects one
or more exchange purchases of the 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.
FUND DIVIDEND PAYMENTS
The Fund declares dividends daily and pays them monthly. The Fund pays as
dividends substantially all net investment income (tax-exempt and taxable
income other than long-term capital gains) each year and distributes annually
all net realized long-term capital gains (after applying any available capital
loss carryovers). The Fund distributes net realized short-term capital gains
annually. The trustees of the Trust may adopt a different schedule as long as
payments are made at least annually. If you intend to purchase shares of the
Fund shortly before it declares a capital gain distribution you should be
aware that a portion of the purchase price may be returned to you as a taxable
distribution.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from ordinary income in cash while
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts,
or to receive all distributions in cash. Income distributions and capital
gains distributions will be reinvested in shares of the same class of the Fund
at net asset value (without a sales charge or CDSC) unless you select another
option. You may change your distribution option by notifying the servicing
agent in writing or by calling 1-800-225-5478. If you elect to receive your
dividends in cash and the dividend checks sent to you are returned
"undeliverable" to a Fund or remain uncashed for six months, your cash
election will automatically be changed and your future dividends will be
reinvested.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION
PROGRAM
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in shares
of the same class of another New England Fund, subject to the investor
eligibility requirements of that other fund and to state securities law
requirements. Shares will be purchased at the selected fund's net asset value
(without a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration (shareholder name) as
the distributing fund account and, if a new account in the purchased fund is
being established, the purchased fund's minimum investment requirements must be
met. Before establishing a dividend diversification program into any other New
England Fund, you must obtain and carefully read a copy of that fund's
prospectus.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SELLING FUND SHARES
- --------------------------------------------------------------------------------
5 WAYS TO SELL FUND SHARES
You may sell shares of the Funds in the following ways:
[Graphic Omitted]
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
[Graphic Omitted]
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any
of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Fund is 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 Fund is open for business and requesting that a check for the proceeds
(LESS ANY APPLICABLE CDSC) be mailed to the address on your account, provided
that the address has not changed over the previous month and that the proceeds
are for $100,000 or less. Generally, the check will be mailed to your address
of record on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when
the Fund is open for business or, for Class A shares only, call 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.
[Graphic Omitted]
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a
written request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund and class of shares, 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 Fund and NEFSCO. Signature guarantees by
notaries public are not acceptable.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Fund
recommends that certificates be sent by registered mail.
[Graphic Omitted]
BY CHECK:
Checkwriting is available on Class A shares of the Fund. 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 Fund and the Distributor are in no way
responsible for any checkwriting account established with State Street Bank.
You may not close your account by withdrawal check because the exact balance
of your account will not be known until after the check is received by State
Street Bank.
[Graphic Omitted]
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem
shares and receive payments on a regular schedule. In the case of shares
subject to a CDSC, the amount or percentage you specify may not exceed, on an
annualized basis, 10% of the value of your Fund account (based on the day you
establish your plan). Redemption of shares pursuant to the plan will not be
subject to a CDSC. For information, contact the Distributor or your investment
dealer. Since withdrawal payments may have tax consequences, you should
consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer, except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time (or, under limited
circumstances, such other time no later than 8:00 p.m. as may be agreed upon
between the dealer and the Distributor) 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 Fund may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or
holidays, or if permitted by the rules of the SEC when trading on the Exchange
is restricted or during an emergency which makes it impracticable for the Fund
to dispose of its securities or to determine fairly the value of its net
assets, or during any other period permitted by the SEC for the protection of
investors. The Fund reserves 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 Fund
(without a sales charge) to the repurchase of Class A shares of any series of
the Trusts. To qualify, you must reinvest the entire proceeds within 120 days
after your redemption and notify New England Funds or your investment dealer
at the time of reinvestment that you are taking advantage of this privilege.
You may reinvest the proceeds either by returning the redemption check or by
sending your check for the entire amount. Please note: For federal income tax
purposes, a redemption is a sale that involves tax consequences even if the
proceeds are later reinvested. Please consult your tax adviser.
<PAGE>
- --------------------------------------------------------------------------------
FUND DETAILS
- --------------------------------------------------------------------------------
HOW FUND SHARE PRICE IS
DETERMINED
The net asset value of the Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time on the Exchange on each day
that the Exchange is open for trading. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on
the basis of valuations furnished by a pricing service, authorized by the
Trust's Board of Trustees, which service determines valuations for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Short-term
obligations with a remaining maturity of less than sixty days are valued at
amortized cost, which approximates market value. An option that is written by
the Fund generally will be valued at the last sale price or, in the absence of
the last sale price, the last offer price. A futures contract will be valued
at the unrealized gain or loss on the contract that is determined by marking
the contract to the current settlement price. A settlement price may not be
used if the market makes a limit move with respect to a particular futures
contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement
price. When a settlement price is not used, futures contract will be valued at
their fair value as determined by or under the direction of the Trust's Board
of Trustees. All other securities and assets of the Fund's portfolio are
valued at their fair market value as determined in good faith by Back Bay
Advisors (or a pricing service selected by Back Bay Advisors) under the
supervision of the Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the
value, (determined as explained above), of all securities plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses) attributable to each class,
by the number of shares of such class outstanding. The public offering price
of the Fund's Class A shares is determined by adding the applicable sales
charge to the net asset value. See "Buying Fund Shares -- Sales Charges"
above. The public offering price of Class B shares is the net asset value per
share.
The price you pay for a share will be determined using the next set of
calculations made after your order is accepted by NEFSCO. 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. 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 Fund intends to qualify each year as a regulated investment company for
federal income tax purposes. The Fund also intends to meet all requirements of
the Code necessary to ensure that they qualify to pay "exempt-interest
dividends," which in general means that the Fund can pass on to shareholders
the federal tax-exempt status of interest received by it from obligations
paying tax-exempt interest. Such dividends derived from interest on California
Tax Exempt Securities are also exempt from California personal income taxes.
For federal income tax and California state personal income tax purposes, your
proportionate share of taxable dividends derived from the 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 (i.e., 28%
Rate Gains) and from net gains on securities held for more than 18 months (i.e.,
20% Rate Gains) are taxable as such, regardless of how long you have held your
Fund shares. However, certain capital gain distributions may qualify for
exemption from California personal income taxes. Distributions by the Fund 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. However, losses incurred on the taxable disposition of shares of
the Fund held for six months or less will be disallowed for federal income tax
purposes to the extent of exempt-interest dividends received with respect to
such shares and thereafter treated as long-term capital losses, rather than
short-term capital losses, 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 Fund invests 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, the 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 they were
declared.
If at least 95% of the Fund's dividends are "exempt-interest dividends,"
federal back-up withholding rules do not apply. However, if the percentage for
the Fund should ever drop below 95%, the Fund will be required to withhold 31%
of all ordinary income dividends and capital gain distributions it pays to you
(i) if you do not provide a correct, certified taxpayer identification number,
(ii) if the Fund is notified that you have underreported income in the past,
or (iii) if you fail to certify to the Fund that you are not subject to such
withholding. In addition, the Fund will be required to withhold 31% of the
gross proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number or if the Fund is notified that you
have underreported income in the past. If you are a tax-exempt shareholder,
however, these back-up withholding rules will not apply so long as you furnish
the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from the 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 and state income tax
consequences of an investment in the Fund. Shareholders should consult a
competent tax adviser as to the effect of an investment in the Fund on their
particular federal, state and local tax situations.
THE FUND'S EXPENSES
In addition to the management fee paid to NEFM, the Fund pays all expenses not
borne by NEFM, Back Bay Advisors or the Distributor, including, but not
limited to, the charges and expenses of the Fund's custodian and transfer
agent, independent auditors and legal counsel for the Fund and the Trust's
independent trustees, 12b-1 fees, all brokerage commissions and transfer taxes
in connection with portfolio transactions, all taxes and filing fees, the fees
and expenses for registration or qualification of its shares under 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 Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, the
Fund pays the Distributor a monthly service fee at the annual rate of 0.25% of
the Fund's average daily net assets attributable to its Class A and Class B
shares. The Distributor may pay up to the entire amount of this fee to
securities dealers who are dealers of record with respect to the Fund's
shares, for providing personal services to investors in shares of the Fund
and/or maintenance of shareholder accounts. Such payments will be made 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. To the
extent that the Distributor's reimbursable expenses in any year exceed the
maximum amount payable for that year under the relevant Service Plan, such
expenses may be carried forward for reimbursement in future years in which the
Plan remains in effect. The amount of unreimbursed Class A expenses carried
over into 1998 from previous plan years was $179,456.
Under a Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act,
the Fund also pays the Distributor a monthly distribution fee at an annual
rate not to exceed 0.75% of the Fund's average daily net assets attributable
to Class B shares. The Distributor may pay up to the entire amount of the
distribution fee to securities dealers who are dealers of record with respect
to the Fund's shares, as distribution fees in connection with the sale of the
Fund's shares. Such payments will be made 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 Fund. For those services the 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 and
financial reporting functions and clerical functions relating to the Fund and
(ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation materials
furnished to shareholders of the Fund or regulatory authorities and reports
and questionnaires for SEC compliance.
PERFORMANCE CRITERIA
Each class may include taxable-equivalent yield, current yield and total
return information in advertisements or other written sales material. Each
class may show its average annual total return for the one-, five- and ten-
year periods (or the life of the class, if shorter) through the end of the
most recent calendar quarter. Total return is measured by comparing the value
of an investment in a class at the beginning of the relevant period to the
value of the investment at the end of the period (assuming deduction of the
current maximum sales charge on Class A shares, automatic reinvestment of all
dividends and capital gains distributions, and imposition of the CDSC relevant
to the period of time quoted in the case of Class B shares). Each class may
also show total return over other periods, or on an aggregate basis for the
period presented, or without deduction of a sales charge or CDSC. If a sales
charge or CDSC is not deducted in calculating total return, the class's total
return will be higher.
Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
30 day period by the maximum offering price of a share of the relevant class
on the last day of the period (reduced by any earned income expected to be
declared shortly as a dividend). For this purpose, net investment income is
calculated in accordance with SEC regulations and may differ from the class's
net investment income as determined for financial reporting purposes. SEC
regulations require that net investment income be calculated on a "yield-to-
maturity" basis, which has the effect of amortizing any premiums or discounts
in the current market value of fixed-income securities. Each class's current
dividend rate is based on the class's net investment income as determined for
financial statement purposes, which reflects amortization only as to the
amount of any premium paid by the Fund for securities.
Taxable-equivalent yield is the taxable yield an investor would have to earn
to receive the equivalent of the class's yield after payment of federal income
tax and state personal income taxes. Taxable-equivalent yield is calculated by
adjusting a class's standardized yield for a recent 30 day period, using
effective combined federal and state tax rates for individuals.
Each class may also present one or more distribution rates in its sales
literature. These rates will be determined by annualizing the class's
distributions from net investment income and net short-term capital gains over
a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period.
If the net asset value rather than the maximum offering price is used to
calculate the distribution rate, the rate will be higher.
Total return will generally be higher for Class A shares than for Class B
shares of the 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 FUND
[] The Trust was organized in 1931 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Fund commenced operations in April 1993.
[] When you invest in the Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive dividends and to cast a vote
for each share you own at shareholder meetings. Shares of the Fund vote
separately from shares of other series of the Trust, except as otherwise
required by law. Shares of all classes of the Fund vote together, except as
to matters relating to Rule 12b-1 plans, on which only shares of the class to
which the particular plan relates are entitled to vote.
[] The Trust does not hold regular shareholder meetings and will do so only when
required by law. Shareholders may remove trustees from office by votes cast
at a shareholder meeting or by written consent.
[] The Trust's trustees have the authority without shareholder approval to issue
other classes of shares of the Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] Except for matters that are explicitly identified as "fundamental" in this
Prospectus or Part I of the Statement, the investment policies of the Fund
may be changed by the trustees of the Trust without shareholder approval and,
in most cases, without prior notice. The investment objective of the Fund is
not fundamental. If there is a change in the Fund's objective, shareholders
of the Fund should consider whether the Fund remains an appropriate
investment in light of their current financial position and needs.
[] If the balance in your account is less than a minimum dollar amount set by
the Trust's trustees from time to time (currently $1,000 for all accounts,
except for those indicated below), the Fund may close your account and send
the proceeds to you. Shareholders who are affected by this policy will be
notified of the Fund's intention to close the account and will have 60 days
immediately following the notice to bring the account up to the minimum. The
minimum does not apply to automatic investment plans or to accounts that have
fallen below the minimum solely because of fluctuations in a Fund's net asset
value.
[] The Fund will send a single copy of its annual and semi-annual reports to an
address at which more than one shareholder of record with the same last name
has indicated that mail is to be delivered. Shareholders may request
additional copies of any annual or semi-annual report in writing or by
telephone.
[] The Class A and Class B structure could be terminated should certain IRS
rulings be rescinded.
[] No interest will accrue on amounts represented by uncashed dividend or
redemption checks.
[] Many of the services provided to the Fund depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the
year 1900 and the year 2000. Should any of the service systems fail to
process information properly, such failure could have an adverse impact on
the Fund's operations and services provided to shareholders. NEFM, Back Bay
Advisors, the Distributor, NEFSCO, State Street Bank and certain other
service providers to the Fund have reported that each expects to modify its
systems, as necessary, prior to January 1, 2000 to address this so-called
"year 2000 problem." However, there can be no assurance that the problem will
be corrected in all respects and that the Fund's operations and services
provided to shareholders will not be adversely affected.
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
Capital gain distributions -- Payments to shareholders of profits earned from
selling securities in the fund's portfolio. Capital gain distributions are
usually paid once a year.
Contingent Deferred Sales Charge (CDSC) -- A fee that may be charged when a
shareholder sells fund shares.
Distribution fee -- An annual asset-based sales charge that is used to pay for
sales-related expenses.
Income Distributions -- Payments to shareholders resulting from interest or
dividend income earned by a fund's portfolio.
Mutual fund -- The pooled assets of a group of investors, professionally
managed in pursuit of a specific objective.
Net asset value (NAV) -- The market value of one share of a mutual fund on any
given day without sales charge or CDSC. Determined by dividing the fund's
total net assets by the number of fund shares outstanding.
New England Funds, L.P. -- The distributor of the New England Funds.
New England Funds Management, L.P. -- The investment adviser to most of the
New England Funds.
New England Funds Service Corporation -- The transfer and dividend disbursing
agent of the New England Funds.
Open-end investment management company -- A mutual fund that allows investors
to redeem fund shares directly from the fund company on any business day.
Public offering price -- The price of one share of a mutual fund, including
its initial sales charge, if there is one.
Record date -- The date on which mutual fund investors must own a fund's
shares to be eligible to receive specific income or capital gain
distributions.
Service fee -- Payments by a fund to the fund's distributor or a financial
representative for personal services to investors and/or for maintenance of
shareholder accounts.
Total Return -- The change in value of an investment in a fund over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
Yield -- The rate at which a fund earns income, expressed as a percentage.
Yield calculations are standardized among mutual funds, based on a formula
developed by the SEC.
12b-1 fees -- Fees paid by a mutual fund under a plan adopted under 1940 Act
Rule 12b-1. Can include both distribution fees and service fees.
[Recycle Logo] Printed on Recycled Paper XT51-0598
<PAGE>
[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND EQUITY INCOME FUND
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 the New England Funds listed above (the "Funds" and each a
"Fund"). This Statement is not a prospectus and is authorized for distribution
only when accompanied or preceded by the Prospectus of the Funds dated May 1,
1998 for Class A, Class B and Class C shares or the Prospectus of the Funds
dated May 1, 1998 for Class Y shares (the "Prospectus" or "Prospectuses"). The
Statement should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus from New England Funds, L.P., Prospectus Fulfillment
Desk, 399 Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds.
New England Growth Fund, New England Capital Growth Fund, New England
Balanced Fund, New England International Equity Fund and New England Value Fund
are series of New England Funds Trust I, a registered open-end management
investment company that offers a total of twelve series; New England Growth
Opportunities Fund is a series of New England Funds Trust II, a registered
open-end management investment company that offers a total of seven series; and
New England Equity Income Fund is a series of New England Funds Trust III, a
registered open-end management investment company that offers a total of two
series. New England Funds Trust I, New England Funds Trust II and New England
Funds Trust III are collectively referred to in this Statement as the "Trusts"
and are each referred to as a "Trust."
T a b l e o f C o n t e n t s
Part I Page
Investment Restrictions ii
Fund Charges and Expenses viii
Ownership of Fund Shares xv
Investment Performance of the Funds xviii
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
Description of the Trusts and Ownership of Shares 32
How to Buy Shares 35
Net Asset Value and Public Offering Price 35
Shareholder Services 36
Redemptions 41
Standard Performance Measures 43
Income Dividends, Capital Gain Distributions and Tax Status 47
Financial Statements 49
Appendix A - Description of Bond Ratings 50
Appendix B - Publications That May Contain Fund Information 52
Appendix C - Advertising and Promotional Literature 54
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds 59
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of restrictions marked with a
dagger (+) below, the percentages set forth below and the percentage limitations
set forth in the Prospectus will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
NEW ENGLAND GROWTH FUND, NEW ENGLAND VALUE FUND AND NEW ENGLAND BALANCED FUND
New England Growth Fund (the "Growth Fund"), New England Value Fund (the "Value
Fund") and New England Balanced Fund (the "Balanced Fund") each will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry;
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
New England Funds Trust I or of the investment adviser of the Fund who
individually own more than 1/2 of 1% of the shares or securities of that
issuer together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are a part
of an issue to the public or to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts. Also, the
Value Fund will not buy or sell real estate or interests in real estate
which are not readily marketable. (This restriction does not prevent
such Funds from purchasing securities of companies investing in the
foregoing);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Purchase options or warrants if, as a result, more than 1% of its total
assets (taken at current value) would be invested in such securities;
*(14) Write options or warrants;
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions. (Under the 1940 Act, the Growth Fund, the Value Fund and
the Balanced Fund each may not (a) invest more than 10% of its total
assets [taken at current value] in such securities, (b) own securities
of any one investment company having a value in excess of 5% of the
total assets of such Fund [taken at current value], or (c) own more than
3% of the outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (4) above; any pledge or other encumbrance of assets
permitted by restriction (5) above; any collateral arrangements with
respect to options, forward contracts, futures contracts, swap contracts
and other similar contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts and other
similar contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration of
Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom; or
+(17) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust I's trustees.)
NEW ENGLAND CAPITAL GROWTH FUND
New England Capital Growth Fund (the "Capital Growth Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government [together
with subdivisions thereof] will be considered to be a separate
industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(7) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's
portfolio securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the Securities and
Exchange Commission (the "SEC"), participate on a joint or joint and
several basis in any trading account in securities. (The "bunching" of
orders for the purchase or sale of portfolio securities with the Fund's
adviser or subadviser or accounts under its management to reduce
brokerage commissions, to average prices among them or to facilitate
such transactions is not considered a trading account in securities for
purposes of this restriction.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities or securities
indexes and (b) enter into currency forward contracts;
+(12) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities and certain Section
4(2) commercial paper deemed to be liquid under guidelines established
by New England Funds Trust I's trustees); or
*(13) Issue senior securities. (For the purpose of this restriction, none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.)
NEW ENGLAND INTERNATIONAL EQUITY FUND
New England International Equity Fund (the "International Equity Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government (together
with subdivisions thereof) will be considered to be a separate
industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(7) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's
portfolio securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the SEC, participate
on a joint or joint and several basis in any trading account in
securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with the Fund's adviser or subadviser or accounts
under its management to reduce brokerage commissions, to average prices
among them or to facilitate such transactions is not considered a
trading account in securities for purposes of this restriction.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities
indexes, currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(12) Purchase any illiquid security if, as a result, more than 15% of its
total assets (taken at current value) would be invested in such
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust I's trustees); or
*(13) Issue senior securities. For the purpose of this restriction none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.
NEW ENGLAND GROWTH OPPORTUNITIES FUND
New England Growth Opportunities Fund (the "Growth Opportunities Fund") will
not:
*(1) Purchase securities of an issuer if such purchase would cause more than
5% of the market value of the total Fund assets to be invested in the
securities of such issuer (exclusive of United States or Canadian
government obligations), or if such purchase would cause more than 10%
of the securities of such issuer to be held by the Fund;
*(2) Purchase or retain the securities of any issuer if the officers and
trustees of New England Funds Trust II owning beneficially 1/2 of 1% of
the securities of such issuer together own beneficially more than 5% of
the securities of such issuer;
*(3) Purchase the securities issued by any other investment company, except
that a purchase involving no commission or profit to a sponsor or dealer
(other than a customary broker's commission) is permitted and except
that a purchase that is part of a plan of merger or consolidation is
permitted;
*(4) Purchase securities issued by companies with a record (including that of
their predecessors) of less than three years' continuous operation;
*(5) Purchase securities for the portfolio on margin, make short sales or
make loans to persons affiliated with New England Funds Trust II;
*(6) Act as underwriter of securities of other issuers, or invest directly in
real estate or in commodities or commodity contracts; or
*(7) Make loans to other persons, provided, however, that this restriction
shall not prohibit the Fund from entering into repurchase agreements
with respect to not more than 25% of the Fund's total assets taken at
current value. The purchase of a portion of an issue of bonds, notes or
debentures publicly distributed or of a type customarily purchased by
institutional investors does not constitute the making of loans within
the meaning of this restriction;
*(8) Borrow money, except that the Fund may make secured or unsecured bank
borrowings, provided that an asset coverage of at least 300% for all
such borrowings (including the amount then being borrowed) is maintained
as required by the 1940 Act;
*(9) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security; any borrowing permitted
by restriction (8) above; any collateral arrangements with respect to
options, futures contracts, swap contracts and other similar contracts
and options on futures contracts and with respect to initial and
variation margin; the purchase or sale of options, forward contracts,
futures contracts, swap contracts and other similar contracts or options
on futures contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds Trust
II's Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom;
+(10) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust II's trustees).
It is a fundamental policy of the Fund that it will not concentrate its
assets in the securities of issuers in the same industry. The Fund intends to
abide by the views of the SEC staff on what constitutes industry concentration.
Accordingly, the Fund will not make an investment if, immediately thereafter,
the Fund would hold more than 25% of its total assets in securities of issuers
in any one industry. This limitation does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund has no present intention of borrowing money except on a
temporary basis, as may be needed, to cover redemptions of shares. Should this
intention change, the Prospectus will be amended.
NEW ENGLAND EQUITY INCOME FUND
New England Equity Income Fund (the "Equity Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more that 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government (together
with subdivisions thereof) will be considered to be a separate
industry);
(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
considerations, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
*(3) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(4) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts, options on futures contracts and swap
contracts and with respect to initial and variation margin are not
deemed to be a pledge of assets);
*(5) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's
portfolio securities;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts, swap contracts and
related options. (This restriction does not prevent the Fund from
purchasing securities of companies investing in the foregoing);
*(7) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(8) 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 the Fund's adviser or subadviser 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;
(9) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indexes
or futures contracts and (b) enter in to currency forward contracts;
+(10) Purchase any illiquid security is, as a result, more than 15% of its net
assets (taken at current value) would be invested in such securities
(excluding Rule 144A securities and certain Section 4(2) commercial
paper deemed to be liquid under guidelines established by New England
Funds Trust III's trustees);
*(11) Issue senior securities. (For the purpose of this restriction none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restrictions (2) or (4) above; any
borrowing permitted by restriction (3) above; any collateral
arrangements with respect to forward contracts, options, futures
contracts, swap contracts and options on futures contracts or swap
contracts and with respect to initial and variation margin, the purchase
or sale of options, forward contracts, future contracts, swap contracts
or options on futures contracts or swap contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of the New England Funds Trust III's Agreement and
Declaration of Trust and by the 1940 Act, the rules thereunder, or any
exemption therefrom.)
- -------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 1996, Capital Growth
Management Limited Partnership ("CGM") has agreed to manage the investment and
reinvestment of the assets of the Growth Fund, subject to the supervision of the
Board of Trustees of New England Funds Trust I. Under the advisory agreement,
the Fund pays CGM an advisory fee at the annual rate of 0.75% of the first $200
million of the Fund's average daily net assets, 0.70% of the next $300 million
of such assets and 0.65% of such assets in excess of $500 million. Prior to
August 30, 1996, CGM served as adviser to the Growth Fund pursuant to an
advisory agreement providing for an advisory fee at the same rate as currently
in effect for such Fund.
Pursuant to separate advisory agreements, each dated August 30, 1996,
New England Funds Management, L.P. ("NEFM") has agreed, subject to the
supervision of the Board of Trustees of the relevant Trust, to manage the
investment and reinvestment of the assets of the Capital Growth, Value,
Balanced, International Equity, Growth Opportunities and Equity Income Funds and
to provide a range of administrative services to such Funds. For the services
described in the advisory agreements, each such Fund has agreed to pay NEFM a
management fee at the annual rate set forth in the following table:
Management fee payable by Fund to NEFM
(as a percentage of average daily
Fund net assets of the Fund)
- ------------------------- ---------------------------------------------
Balanced Fund, 0.75% of the first $200 million
Capital Growth Fund and 0.70% of the next $300 million
Value Fund 0.65% of amounts in excess of $500 million
Growth Opportunities Fund 0.70% of the first $200 million
and Equity Income Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500 million
International Equity Fund 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of $500 million
The advisory agreements for the Capital Growth, Value, Balanced,
International Equity, Growth Opportunities and Equity Income Funds each provide
that NEFM may delegate its responsibilities thereunder to other parties.
Pursuant to separate subadvisory agreements, each dated August 30, 1996
(February 14, 1997 and April 17, 1998 in the case of the International Equity
Fund and the Capital Growth Fund, respectively), NEFM has delegated
responsibility for managing the investment and reinvestment of each of these
Funds' assets to a subadviser. The subadviser is Loomis Sayles & Company, L.P.
("Loomis Sayles"), in the case of the International Equity, Balanced, Value and
Equity Income Funds, and Westpeak Investment Advisors, L.P. ("Westpeak"), in the
case of the Growth Opportunities and Capital Growth Funds. The Funds pay no
direct fees to the subadvisers. For providing such subadvisory services to the
Funds, NEFM pays each subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- -------------------------------------- ------------------ ---------------------------------------------------------
<S> <C> <C>
Balanced Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Westpeak 0.60% of the first $25 million
0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of $500 million
Growth Opportunities Fund Westpeak 0.50% of the first $25 million
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200 million
International Equity Fund Loomis Sayles 0.40% of the first $200 million
0.35% of amounts in excess of $200 million
Value Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Equity Income Fund Loomis Sayles 0.400% of the first $200 million
0.325% of the next $300 million
0.275% of amounts in excess of $500 million
</TABLE>
From August 30, 1996 to January 30, 1998, Loomis Sayles served as
subadviser to the Capital Growth Fund pursuant to a subadvisory agreement
between NEFM and Loomis Sayles providing for the same subadvisory fee as is
currently payable by NEFM to Westpeak for such Fund.
From January 2, 1996 (November 28, 1995 in the case of the Equity
Income Fund) to August 30, 1996, NEFM served as adviser and Loomis Sayles served
as subadviser to the Capital Growth, Balanced, Value and Equity Income Funds
pursuant to separate advisory and subadvisory agreements providing for the same
management and subadvisory fees as are currently in effect for these Funds.
Prior to January 2, 1996, Loomis Sayles served as adviser to the Capital Growth,
Balanced and Value Funds pursuant to separate advisory agreements, each of which
provided for an advisory fee payable by such Fund to Loomis Sayles at the same
rate as the management fee currently payable by such Fund to NEFM.
From May 1, 1995 until August 30, 1996, NEFM served as adviser and
Westpeak served as subadviser to the Growth Opportunities Fund pursuant to
advisory and subadvisory agreements providing for the same management and
subadvisory fee rates as are currently in effect for the Fund. Prior to May 1,
1995, Back Bay Advisors, L.P. ("Back Bay Advisors") served as adviser to the
Growth Opportunities Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Back Bay Advisors at the annual rate of
0.50% of the Fund's average daily net assets.
From December 29, 1995 until February 14, 1997, Draycott Partners, Ltd.
("Draycott") served as subadviser to the International Equity Fund pursuant to
successive subadvisory agreements providing for a subadvisory fee payable by
NEFM to Draycott at the annual rate of 0.54% of the first $200 million of the
Fund's average daily net assets, 0.49% of the next $300 million of such assets
and 0.44% of such assets in excess of $500 million. From December 29, 1995 to
August 30, 1996, NEFM served as adviser to the International Equity Fund
pursuant to an advisory agreement providing for a management fee at the same
rate as is currently in effect for such Fund.
Prior to December 29, 1995, Draycott served as adviser to the
International Equity Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Draycott at the annual rate of 0.80% of the
first $200 million of the Fund's average daily net assets, 0.75% of the next
$300 million of such assets and 0.70% of such assets in excess of $500 million.
Prior to December 29, 1995, short-term cash management services were
provided to the International Equity Fund by Back Bay Advisors, as subadviser to
Draycott. For these services, Draycott had agreed to compensate Back Bay
Advisors at the annual rate of 0.08% of average daily net assets of the Fund.
Back Bay Advisors voluntarily agreed to waive this fee in its entirety.
Prior to December 29, 1995, New England Funds, L.P. (the
"Distributor"), of which Draycott was then an affiliate, furnished or paid the
expenses of the International Equity Fund for office space, facilities and
equipment, services of executive and other personnel of New England Funds Trust
I and certain administrative services, pursuant to an administrative services
agreement. Under this agreement, the Fund paid the Distributor a fee at the
annual rate of 0.10% of the average daily net assets attributable to the Fund's
Class A, Class B and Class C shares and 0.05% of the average daily net assets
attributable to the Fund's Class Y shares. The International Equity Fund's
current management fee rate represents, with respect to the Fund's Class A,
Class B and Class C shares, the sum of the fee rates under the prior advisory
and administrative services agreements.
Since May 1, 1998 and until further notice to the International Equity
Fund, NEFM and Loomis Sayles have voluntarily agreed to reduce their fees and,
if necessary, to bear certain expenses related to operating the Fund in order to
limit the Fund's expenses to an annual rate of 2.00% of the average daily net
assets of the Fund's Class A shares, 2.75% of the average daily net assets of
the Fund's Class B shares, 2.75% of the average daily net assets of the Fund's
Class C shares and 1.40% (prior to December 31, 1996, 1.00%) of the average
daily net assets of the Fund's Class Y shares. NEFM and Loomis Sayles may
terminate this voluntary limitation at any time. Loomis Sayles voluntarily
agreed to waive in its entirety its subadvisory fee for the International Equity
Fund from February 14, 1997 through February 13, 1998. From December 29, 1995
until April 30, 1998, NEFM had voluntarily agreed to reduce its fees and if
necessary, to bear certain operating expenses in order to limit the Fund's
expenses to an annual rate of 1.75% for Class A shares, 2.50% for Class B
shares, 2.50% for Class C shares and 1.15% for Class Y shares (prior to December
31, 1996, 1.00%) of the Fund's average daily net assets and prior to December
29, 1995, similar voluntary limitations were in effect with respect to Draycott,
the Distributor and the Fund.
Since September 1, 1997, Loomis Sayles has voluntarily agreed, until
further notice to the Equity Income Fund, to waive its entire subadvisory fee
for such Fund. This waiver by Loomis Sayles does not reduce the Fund's expenses.
This agreement may be terminated by Loomis Sayles at any time. In addition,
since September 1, 1997 under an expense deferral arrangement, which NEFM may
terminate at any time, NEFM has agreed to defer its management fee for the Fund
until further notice and, if necessary, to bear certain expenses associated with
operating the Fund to the extent necessary to limit the Fund's expenses to the
annual rate of 1.50% of average daily net assets for Class A shares, 2.25% for
Class B shares, 2.25% for Class C shares and 1.25% for Class Y shares, subject
to the obligation of the Fund to pay NEFM such deferred fees in later periods to
the extent that the Fund's expenses fall below the annual rate of 1.50% of
average daily net assets for Class A shares, 2.25% for Class B shares, 2.25% for
Class C shares and 1.25% for Class Y shares; provided, however, that the Fund is
not obligated to pay any such deferred fees more than two years after the end of
the fiscal year in which the fee was deferred.
For the period January 30, 1998 to April 17, 1998, Westpeak served as
subadviser to the Capital Growth Fund under an interim subadvisory agreement
dated January 30, 1998 providing for the same fee that was paid to Loomis
Sayles.
For the last three fiscal years, the advisory or management fees
payable by the Funds (before any voluntary fee reductions) were as follows:
<TABLE>
<CAPTION>
Fund 1995 1996** 1997***
-------------------------------- ---- ------ -------
<S> <C> <C> <C>
Growth Fund $7,631,203 $8,300,884 $9,757,792
Capital Growth Fund $ 989,864 $1,245,009 $1,436,893
Value Fund $1,811,567 $2,241,498 $3,030,220
Balanced Fund $1,906,665 $2,355,084 $2,830,754
International Equity Fund* $2,025,005 $2,439,442 $1,241,968
Growth Opportunities Fund**** $ 856,469 $1,414,997 $1,809,523
Equity Income Fund***** $ 1,277 $ 16,222 $ 41,756
</TABLE>
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $1,756,405, $2,183,655 and $734,003,
respectively, in advisory or management fees for the fiscal years ended
December 31, 1995, 1996 and 1997.
** For the fiscal year ended December 31, 1996, NEFM paid subadvisory fees of
$1,497,544, $882,259 and $1,440,747 to Loomis Sayles for the Balanced,
Capital Growth and Value Funds, respectively. For the fiscal year ended
December 31, 1996, NEFM paid subadvisory fees of $1,296,747 to Draycott
(after the waiver) and $781,353 to Westpeak for the International Equity
and Growth Opportunities Funds, respectively. Without the voluntary fee
waiver, NEFM would have paid Draycott a subadvisory fee of $1,448,652 for
the International Equity Fund for the fiscal year ended December 31, 1996.
*** For the fiscal year ended December 31, 1997, NEFM paid subadvisory fees of
$1,735,375, $1,020,031 and $1,835,110 to Loomis Sayles for the Balanced,
Capital Growth and Value Funds, respectively. For the fiscal year ended
December 31, 1997, NEFM paid subadvisory fees of $0 to Loomis Sayles
(after the waiver) and $964,009 to Westpeak for the Equity Income and
Growth Opportunities Funds, respectively. For the period January 1 to
February 13, 1997, NEFM paid subadvisory fees of $77,259 to Draycott for
the International Equity Fund, and for the period February 14 to December
31, 1997, no subadvisory fees were paid by NEFM to Loomis Sayles as a
result of the voluntary fee waiver by Loomis Sayles. Without the
voluntary fee waiver, NEFM for the International Equity Fund, would have
paid Draycott a subadvisory fee for the International Equity Fund of
$128,701 for the period January 1 to February 13, 1997 and a subadvisory
fee of $347,719 to Loomis Sayles for the period February 14 to December
31, 1997.
**** For the fiscal year ended December 31, 1995, the Growth Opportunities Fund
paid a management fee of $856,469 (of which $188,175 was paid to Back Bay
Advisors and $678,294 was paid to NEFM). For the period May 1, 1995 to
December 31, 1995, NEFM paid a subadvisory fee of $384,489 to Westpeak.
***** The Equity Income Fund commenced operations on November 28, 1995. As a
result of the voluntary expense limitations in effect, the Fund paid no
management fees to NEFM and NEFM paid no subadvisory fees to Loomis Sayles
for the period November 28, 1995 to December 31, 1995 or the fiscal years
ended December 31, 1996 and 1997. Without the voluntary fee waiver, NEFM
would have paid Loomis Sayles a subadvisory fee of $730 for the period
ended December 31, 1995 and $9,155 and $23,861 for the fiscal years ended
December 31, 1996 and 1997.
On March 27, 1998, the Trusts and certain of the Fund's subadvisers
which are affiliated with NEFM submitted a request to the staff of the SEC (the
"Staff") for a letter from the Staff which would permit such Funds and NEFM to
enter into certain amended Advisory Agreements and would also permit such Funds,
NEFM and the such affiliated subadvisers to enter into certain amended
Sub-Advisory Agreements, in each case without obtaining a vote of the
shareholders of the affected Funds (the "Request"). The amended Advisory and
Subadvisory Agreements, taken together, would not result in any increase or
decrease of fees payable by the Funds; however, the amended Advisory and
Subadvisory Agreements would permit for the payment of the Fund's subadvisory
fee directly by the Fund to the subadviser, with the amount of the Fund's
management fee payable by the Fund to NEFM reduced by the amount of such payment
to the subadviser by the Fund. If the Staff acts favorably on the Request, then
NEFM and each affected Fund will enter into a separate amended Advisory
Agreement, and NEFM, each affected Fund and its subadviser will also enter into
a separate amended Subadvisory Agreement pursuant to any terms and conditions as
may be prescribed by the Staff.
For more information about the Funds' advisory and subadvisory
agreements, see "Management of the Trusts" in Part II of this Statement.
BROKERAGE COMMISSIONS
In 1995, 1996 and 1997, brokerage transactions for the Growth Fund
aggregating $608,932,282, $729,976,367 and $782,645,000 respectively, were
allocated to brokers providing research services, and $525,823, $804,468 and
$782,645, respectively, in commissions were paid on these transactions in such
years. During 1995, 1996 and 1997 the Fund paid total brokerage commissions of
$5,784,166, $6,700,404 and $6,669,194, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Value Fund
aggregating $14,560,184, $27,447,729 and $19,208,488, respectively, were
allocated to brokers providing research services, and $28,143, $42,841 and
$29,690, respectively, in commissions were paid on these transactions in such
years. During 1995, 1996 and 1997, the Fund paid total brokerage commissions of
$658,975, $563,181 and $618,342, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Balanced Fund
aggregating $12,187,184, $17,564,632 and $17,718,990, respectively, were
allocated to brokers providing research services, and $30,368, $26,139 and
$24,900, respectively, in commissions were paid on these transactions in such
years. During 1995, 1996 and 1997, the Fund paid total brokerage commissions of
$415,773, $373,304 and $376,805, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Growth
Opportunities Fund aggregating $43,047,123, $180,664,244 and $531,986,567,
respectively, were allocated to brokers providing research services and $41,640,
$157,185 and $162,980, respectively, in commissions were paid on these
transactions in such years. During 1995, 1996 and 1997, the Fund paid total
brokerage commissions of $138,878, $352,661 and $351,050, respectively.
For the fiscal year ended December 31, 1995, brokerage transactions for
the International Equity Fund aggregating $593,996,591 were allocated to brokers
providing research services, and $1,522,463 in commissions were paid on these
transactions. During 1995, the International Equity Fund paid total brokerage
commissions of $1,522,463. For the fiscal year ended December 31, 1995,
brokerage transactions for the International Equity Fund aggregating
$375,687,256 were allocated to brokers providing research services and $836,718
in commissions were paid on these transactions. During 1996, the International
Equity Fund paid total brokerage commissions of approximately $836,718. For the
fiscal year ended December 31, 1997, brokerage transactions for the
International Equity Fund aggregating $462,898,584 were allocated to brokers
providing research services, and $0 in commissions were paid on these
transactions. During 1997, the International Equity Fund paid total brokerage
commissions of $1,222,767.
For the fiscal year ended December 31, 1995, brokerage transactions for
the Capital Growth Fund aggregating $8,522,526 were allocated to brokers
providing research services, and $9,427 in commissions were paid on these
transactions. During 1995, the Capital Growth Fund paid total brokerage
commissions of $157,512. For the fiscal year ended December 31, 1996, brokerage
transactions for the Capital Growth Fund aggregating $7,402,475 were allocated
to brokers providing research services and $4,500 in commissions were paid on
these transactions. During 1996, the Capital Growth Fund paid total brokerage
commissions of approximately $174,585. For the fiscal year ended December 31,
1996, brokerage transactions for the Capital Growth Fund aggregating $7,402,475
were allocated to brokers providing research services, and $4,000 in commissions
were paid on these transactions. During 1996, the Capital Growth Fund paid total
brokerage commissions of approximately $174,585. For the fiscal year ended
December 31, 1997, brokerage transactions for the Capital Growth Fund
aggregating $105,213,412 were allocated to brokers transactions for the Capital
Growth Fund; $4,500 in commissions were paid on these transactions. During 1997,
the Capital Growth Fund paid total brokerage commissions of $103,244.
For the period from November 28, 1995 through December 31, 1995,
brokerage transactions for the Equity Income Fund aggregating $1,999,812 were
allocated to brokers providing research services, and $624 in commissions were
paid on these transactions. During this period, the Equity Income Fund paid
total brokerage commissions of $3,150. For the fiscal year ended December 31,
1996, brokerage transactions for the Equity Income Fund aggregating $1,981,029
were allocated to brokers providing research services, and $48 in commissions
were paid on these transactions. During 1996, the Equity Income Fund paid total
brokerage commissions of $3,140. For the fiscal year ended December 31, 1997,
brokerage transactions for the Equity Income Fund aggregating $0 were allocated
to brokers providing research services, and $0 in commissions were paid on these
transactions. During 1997, the Equity Income Fund paid total brokerage
commissions of $29,840.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and
Class C shares of each Fund pay fees under plans adopted pursuant to Rule 12b-1
under the 1940 Act. The following table shows the amounts of Rule 12b-1 fees
paid by each Fund during the fiscal years ended December 31, 1995, 1996 and
1997:
Fund 1995 1996 1997
----------------------- ---- ---- ----
Growth Fund*** $2,800,465 $3,058,031 $3,600,444 (Class A)
$71,751 (Class B)
Value Fund $545,439 $646,962 $819,873 (Class A)
$206,005 $359,799 $661,091 (Class B)
$3,915 $21,301 $52,413 (Class C)*
Balanced Fund $445,951 $510,417 $567,385 (Class A)
$301,592 $486,789 $680,895 (Class B)
$3,017 $15,702 $36,277 (Class C)*
Growth Opportunities Fund $340,216 $397,330 $487,914 (Class A)
$107,138 $389,526 $626,147 (Class B)
$3,589 $45,844 $52,226 (Class C)**
International Equity Fund $346,710 $316,834 $197,567 (Class A)
$476,345 $513,700 $347,996 (Class B)
$5,831 $10,445 $8,625 (Class C)*
Capital Growth Fund $277,682 $333,455 $370,087 (Class A)
$207,706 $321,106 $426,954 (Class B)
$1,362 $5,079 $9,279 (Class C)*
Equity Income Fund**** $0 $0 $11,355 (Class A)
$0 $0 $12,154 (Class B)
$0 $0 $2,076 (Class C)
* Class C shares were first offered on January 3, 1995.
** Growth Opportunities Fund Class C shares were first offered on May 1, 1995.
*** The Growth Fund offered only Class A shares during 1995 and 1996.
Class B shares were first offered on February 28, 1997. The Growth
Fund does not offer Class C shares.
**** The Equity Income Fund commenced operations on November 25, 1995
with an initial distribution of its Class A shares. Class B and C
shares first became available on September 1, 1997.
During the fiscal year ended December 31, 1997, expenses relating to
each Fund's 12b-1 plans were as follows:
GROWTH FUND
(Class A shares)
Compensation to Investment Dealers $3,594,936
Compensation to Distributor's Sales Personnel and Other Related Costs $270,055
TOTAL $3,864,991
(Class B shares)
Compensation to Investment Dealers $606,739
Compensation to Distributor's Sales Personnel and Other Related Costs $145,529
TOTAL $752,268
VALUE FUND
(Class A shares)
Compensation to Investment Dealers $819,230
Compensation to Distributor's Sales Personnel and Other Related Costs $131,139
TOTAL $950,369
(Class B shares)
Compensation to Investment Dealers $1,072,831
Compensation to Distributor's Sales Personnel and Other Related Costs $115,919
TOTAL $1,118,750
(Class C shares)
Compensation to Investment Dealers $52,413
Compensation to Distributor's Sales Personnel and Other Related Costs $86,939
TOTAL $139,352
BALANCED FUND
(Class A shares)
Compensation to Investment Dealers $567,218
Compensation to Distributor's Sales Personnel and Other Related Costs $109,369
TOTAL $676,587
(Class B shares)
Compensation to Investment Dealers $785,841
Compensation to Distributor's Sales Personnel and Other Related Costs $103,483
TOTAL $889,324
(Class C shares)
Compensation to Investment Dealers $36,278
Compensation to Distributor's Sales Personnel and Other Related Costs $82,924
TOTAL $119,202
GROWTH OPPORTUNITIES FUND
(Class A shares)
Compensation to Investment Dealers $485,783
Compensation to Distributor's Sales Personnel and Other Related Costs $110,549
TOTAL $596,332
(Class B shares)
Compensation to Investment Dealers $946,221
Compensation to Distributor's Sales Personnel and Other Related Costs $111,145
TOTAL $1,057,366
(Class C shares)
Compensation to Investment Dealers $52,227
Compensation to Distributor's Sales Personnel and Other Related Costs $84,033
TOTAL $136,260
INTERNATIONAL EQUITY FUND
(Class A shares)
Compensation to Investment Dealers $196,696
Compensation to Distributor's Sales Personnel and Other Related Costs $87,975
TOTAL $284,671
(Class B shares)
Compensation to Investment Dealers $198,910
Compensation to Distributor's Sales Personnel and Other Related Costs $84,525
Other Distribution Costs $55,746
TOTAL $339,181
(Class C shares)
Compensation to Investment Dealers $8,626
Compensation to Distributor's Sales Personnel and Other Related Costs $80,848
TOTAL $89,474
CAPITAL GROWTH FUND
(Class A shares)
Compensation to Investment Dealers $370,137
Compensation to Distributor's Sales Personnel and Other Related Costs $96,505
TOTAL $466,642
(Class B shares)
Compensation to Investment Dealers $410,109
Compensation to Distributor's Sales Personnel and Other Related Costs $92,037
TOTAL $502,146
(Class C shares)
Compensation to Investment Dealers $9,244
Compensation to Distributor's Sales Personnel and Other Related Costs $81,066
TOTAL $90,310
EQUITY INCOME FUND
(Class A shares)
Compensation to Investment Dealers $6,790
Compensation to Distributor's Sales Personnel and Other Related Costs $30,911
TOTAL $37,701
(Class B shares)
Compensation to Investment Dealers $327,632
Compensation to Distributor's Sales Personnel and Other Related Costs $31,294
TOTAL $358,926
(Class C shares)
Compensation to Investment Dealers $2,076
Compensation to Distributor's Sales Personnel and Other Related Costs $24,448
TOTAL $23,524
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor: $2,741,737 relating to the Class A shares and $414,051 relating to
the Class B shares of the Growth Fund; $641,294 relating to the Class A shares,
$849,786 relating to the Class B shares and $12,592 relating to the Class C
shares of the Value Fund; $460,233 relating to the Class A shares, $599,204
relating to the Class B shares and $10,362 relating to the Class C shares of the
Balanced Fund; $190,891 relating to the Class A shares, $660,764 relating to the
Class B shares and $6,225 relating to the Class C shares of the Growth
Opportunities Fund; $134,784 relating to the Class A shares, $125,310 relating
to the Class B shares and $1,877 relating to the Class C shares of the
International Equity Fund; and $278,383 relating to the Class A shares, $346,685
relating to the Class B shares and $5,374 relating to the Class C shares of the
Capital Growth Fund; and $2,180 relating to the Class A shares, $225,417
relating to the Class B shares and $405 relating to the Class C shares of the
Equity Income Fund. New England Securities paid substantially all of the fees it
received from the Distributor (a) in commissions to its sales personnel and (b)
to defray sales-related overhead costs.
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of April 1, 1998, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the following Funds:
CAPITAL GROWTH FUND
Class C shares Larry A. Minnick 10.06%
8105 Bromlay Place
Indianapolis, IN 46219-2851
NFSC FEBO # OBV-655821 6.41%
Diana Piscopo
59 Silver Lake Road
Staten Island, NY 10301-3012
BALANCED FUND
Class C shares John W. Perdue III 12.08%
Renee F. Perdue TTEE
Nova Enterprises, Inc. 401(k) Plan
P.O. Box 5594
Asheville, NC 28813-5594
CNA Trust Corp. 9.00%
FBO Dimension One Spas Inc.
PSP DTD 1/13/87
A/C #1050504559/68/77/76
P.O. Box 5024
Costa Mesa, CA 92628-5024
Class Y shares New England Mutual Life Insurance Co. 73.39%
Separate Investment Accounting
Attn: Victor SooHoo
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
GROWTH OPPORTUNITIES
Class C shares FTC & Co. 6.38%
Attn: Datalynx #231
P.O. Box 173736
Denver, CO 80217-3736
INTERNATIONAL EQUITY FUND
Class C shares NFSC FEBO # 041-717169 8.68%
Advanced Data Systems Corp.
Attn: David Barzillai
255 Spring Valley Ave.
Maywood, NJ 07601-1643
State Street Bank and Trust Company 7.76%
Cust. for the IRA of
Roy O Der Miner
2236 Abbottwoods Lane
Orange City, FL 32763-9214
Class Y shares NEIC Master Retirement Trust 59.29%
c/o Defined Contribution Svcs - T
P.O. Box 755
Boston, MA 02119-0755
Metropolitan Life Insurance Co. 39.65%
c/o GADC-Gerald Hart - Agency
Operations NELICO
501 Boylston Street - 10th Floor
Boston, MA 02116-3706
VALUE FUND
Class Y shares New England Mutual Life Insurance Co. 62.72%
Separate Investment Accounting
Attn: Victor SooHoo
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
Hawaii Sheet Metal Workers 18.55%
Health & Welfare Fund
c/o Melvyn T. Murakami
1405 North King Street -
Room 403 Honolulu,
HI 96817-4227
New England Life Insurance Co. 8.29%
Debbie Milliner
c/o Financial Admin.
501 Boylston Street
Boston, MA 02116-3706
Metropolitan Life Insurance Co. 8.27%
c/o GADC-Gerald Hart - Agency
Operations NELICO
501 Boylston Street - 10th Floor
Boston, MA 02116-3706
EQUITY INCOME FUND
Class A shares Loomis Sayles Funded Pension Plan 14.96%
FBO Loomis Sayles & Co., LP
Attn: Paul Sherba - Comptroller
One Financial Center
Boston, MA 02111-2621
Class C shares Wexford Clearing Services Corp. 7.64%
Prudential Securities C/F Doris
McGinnis Butler IRA Rollover
DTD 07/07/97 P.O. Box
84 Scott, AR 72142-0084
State Street Bank and Trust Co. 5.26%
Cust. for the IRA of
William D. McCarthy
401 Bounty Way #221
Avon Lake, OH 44012-2480
Dorothy Spencer 5.11%
34829 Fairview Road
Oconomowoc, WI 53066-3310
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE*
For The Periods Ended 12/31/97
GROWTH FUND**
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 23.54 113.27 306.93 16.35 15.07
Maximum Offering Price 16.43 101.10 283.67 15.00 14.39
<CAPTION>
Aggregate Average Annual
Total Return Total Return
Since Since Inception
2/28/97*** 2/28/97***
--------------------------- ------------------------
Class B shares: As a % of
- -------------------------------
<S> <C> <C>
Net Asset Value 14.40 17.37
Redemption at End of Period 10.26 12.34
<CAPTION>
VALUE FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 20.95 133.18 257.99 18.45 13.60
Maximum Offering Price 13.94 119.89 237.40 17.07 12.93
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 19.99 105.78 18.27
Redemption at End of Period 14.99 103.78 18.00
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 20.22 97.71 25.51
Redemption at End of Period 19.22 97.71 25.51
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 21.34 108.51 21.62
<CAPTION>
BALANCED FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------- -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 17.53 93.22 208.78 14.08 11.94
Maximum Offering Price 10.78 82.13 191.02 12.74 11.27
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 16.67 69.66 13.08
Redemption at End of Period 11.67 67.66 12.77
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 16.64 69.69 19.28
Redemption at End of Period 15.64 69.69 19.28
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/8/94*** 3/8/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 18.11 71.27 15.13
<CAPTION>
GROWTH OPPORTUNITIES FUND****
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 33.43 130.31 341.14 18.16 16.80
Maximum Offering Price 25.73 117.14 315.77 16.77 15.31
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 32.44 109.38 18.75
Redemption at End of Period 27.44 107.38 18.49
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95*** 5/1/95***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 32.63 85.28 25.98
Redemption at End of Period 31.63 85.28 25.98
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value n/a n/a n/a
<CAPTION>
INTERNATIONAL EQUITY FUND*****
Aggregate Average Annual
Total Return Total Return
------------------------------------- -------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Year 5/21/92*** 5 Year 5/21/92***
- ------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value (7.56) 47.09 34.17 8.02 5.37
Maximum Offering Price (12.90) 38.59 26.46 6.74 4.27
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value (7.97) 6.65 1.51
Redemption at End of Period (12.25) 4.84 1.11
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value (7.95) (0.75) (0.25)
Redemption at End of Period (8.81) (0.75) (0.25)
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Since Since
Class Y shares: As a % of 1 Year 9/9/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value (6.74) 13.35 2.95
<CAPTION>
CAPITAL GROWTH FUND******
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class A shares: As a % of 1 Year 8/3/92*** 5 Years 8/3/92***
- ------------------------------- ------ -------- ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value 17.23 118.68 16.07 15.57
Maximum Offering Price 10.47 106.11 14.70 14.32
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 15.89 76.80 14.17
Redemption at End of Period 10.89 74.80 13.87
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 15.94 74.76 20.45
Redemption at End of Period 14.94 74.76 20.45
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value n/a n/a n/a
<CAPTION>
EQUITY INCOME FUND*******
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class A shares: As a % of 1 Year 11/28/95*** 11/28/95***
- ------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Net Asset Value 22.64 60.28 25.32
Maximum Offering Price 15.62 51.07 21.83
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class B shares: As a % of 9/1/97*** 9/1/97***
- ------------------------------- ----------------------- -----------------------
<S> <C> <C>
Net Asset Value 3.72 3.72
Redemption at End of Period (1.28) (1.28)
<CAPTION>
Aggregate Total Return Annualized Total Return
Class C shares: As a % of Since 9/1/97*** Since 9/1/97***
- ------------------------------- ----------------------- -----------------------
<S> <C> <C>
Net Asset Value 3.72 3.72
Redemption at End of Period 2.72 2.72
</TABLE>
* Federal regulations require this example to be calculated using a $1,000
investment. The normal minimum initial investment in shares of the Funds
is $2,500, however.
** The numbers presented for Class A shares reflect the maximum initial
sales charge currently in effect. Prior to March 3, 1997, a higher
maximum initial sales charge was in effect, so that the total returns
achieved by investors may have been lower than those shown above.
*** Commencement of Fund operations or offering of specified class of
shares.
**** Assuming deduction of the current maximum sales load, the Growth
Opportunities Fund's Class A shares' ten-year average annual total
return would have been 15.31%, had a voluntary expense limitation by the
Fund's former investment adviser not been in effect, and their ten-year
aggregate total return would have been 315.52%. Based on net asset
values, the Fund's Class A shares' ten-year average annual total return
would have been 16.00%, had this limitation not been in effect, and
their ten-year aggregate total return would have been 340.96%.
***** Assuming deduction of the current maximum sales load, the International
Equity Fund's Class A shares' since-inception average annual total
return would have been 3.90%, and their aggregate one-year, five-year
and since-inception aggregate total returns would have been (13.29)%,
31.84% and 23.97%, respectively, had a voluntary expense limitation not
been in effect. Based on net asset values, the Fund's Class A shares'
since-inception average annual total return would have been 5.02%, and
their one-year, five-year and since-inception aggregate total returns
would have been (7.95)%, 39.95% and 31.66%, respectively, without the
voluntary limitation. Assuming redemption at the end of the period, the
Fund's Class B shares' since-inception average annual total return would
have been 0.79%, had a voluntary expense limitation not been in effect,
and their aggregate total returns for the one-year and since-inception
periods would have been 12.64% and 3.43%, respectively. Based on net
asset values, the Fund's Class B shares' average annual total return for
the since-inception period would have been 1.20%, and their aggregate
total returns for the one-year, five-year and since-inception periods
would have been (8.36)%, 0% and 5.24%, respectively, without the
voluntary limitation. The Fund's Class C and Class Y shares' annualized
total returns for the one year and since-inception period would have
been (0.42)% and 2.73%, respectively, and their one year and
since-inception aggregate total returns would have been (8.34)% and
(1.26)% for the Class C shares and (7.00)% and 12.30% for the Class Y
shares, without the voluntary limitation.
****** Assuming deduction of the current maximum sales load, the Capital Growth
Fund's Class A shares' five-year and since-inception average annual
total return would have been 12.36% and 14.23%, and their aggregate
five-year and since-inception total returns would have been 79.10% and
104.71%, respectively, had a voluntary expense limitation not been in
effect. Based on net asset values, their since-inception average annual
total return would have been 15.50%, and their since inception aggregate
total return would have been 117.25% without the voluntary limitation.
******* Assuming deduction of the current maximum sales load, the Equity Income
Fund's Class A shares' since inception average annual total return would
have been 18.60% had the voluntary expense limitation not been in
effect, and their aggregate one year and since-inception total returns
would have been 14.02% and $42.84%, respectively, had the voluntary
expense limitation not been in effect. Based on net asset values, their
since-inception average annual total return would have been 22.18%, and
their since-inception aggregate total return would have been 52.02%
without the voluntary limitation. Assuming redemption at the end of the
period, the Fund's Class B shares' since-inception average annual total
return would have been (9.82)%, had a voluntary limitation not been in
effect, and their since-inception aggregate total return would have been
(2.88)%. Based on net asset values, the Fund's Class B shares' average
annual total return for the since-inception period would have been
3.72%, and their since-inception aggregate total return would have been
2.12%. The Fund's Class C shares' since-inception average annual total
return would have been 3.72%, and their since-inception aggregate
average annual total return would have been 2.12% without the voluntary
limitation. The Equity Income Fund first became available to the public
on September 15, 1997.
The foregoing data represent past performance only and are not a
prediction as to the future returns of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than this original
cost.
<PAGE>
[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
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 the New England Funds listed above (the "Funds" and each a
"Fund"). This Statement is not a prospectus and is authorized for distribution
only when accompanied or preceded by the Prospectus of the Funds dated May 1,
1998 for Class A, Class B or Class C shares, or the Prospectus of the Funds
dated May 1, 1998 for Class Y shares (the "Prospectus" or "Prospectuses"). The
Statement should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus from New England Funds, L.P., Prospectus Fulfillment
Desk, 399 Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds.
New England Government Securities Fund, New England Strategic Income
Fund, New England Bond Income Fund and New England Municipal Income Fund are
series of New England Funds Trust I, a registered open-end management investment
company that offers a total of twelve series, and New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government Fund and New
England High Income Fund are series of New England Funds Trust II, a registered
open-end management investment company that offers a total of seven series. New
England Funds Trust I, New England Funds Trust II and New England Funds Trust
III are collectively referred to in this Statement as the "Trusts" and are each
referred to as a "Trust."
T a b l e o f C o n t e n t s
Part I Page
Investment Restrictions ii
Fund Charges and Expenses x
Ownership of Fund Shares xvi
Investment Performance of the Funds xviii
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
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 59
<PAGE>
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INVESTMENT RESTRICTIONS
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The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of those restrictions marked with
a dagger (+) below, the percentages set forth below and the percentage
limitations set forth in the Prospectus will apply at the time of the purchase
of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security.
GOVERNMENT SECURITIES FUND
New England Government Securities Fund (the "Government Securities Fund") will
not:
*(1) Invest in any securities other than U.S. Government securities, put and
call options thereon, futures contracts, options on futures contracts
and repurchase agreements;
*(2) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related
options;
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(4) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the present
intention of management to make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes;
such sales would not be made with respect to securities subject to
outstanding options.);
*(5) Make loans to other persons (except as provided in restriction (6)
below); provided that for purposes of this restriction the investment in
repurchase agreements shall not be deemed to be the making of a loan;
*(6) Lend its portfolio securities in excess of 15% of its total assets,
taken at market value;
*(7) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate futures contracts, options on interest
rate futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures or related
options are deemed to be the issuance of a senior security.);
*(8) Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities;
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to U.S. Government Securities and with respect to
interest rate futures contracts; or
*(10) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.
+(11) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust I's trustees).
Although the Government Securities Fund may from time to time loan its
portfolio securities and issue senior securities, borrow money or pledge its
assets to the extent permitted by investment restrictions (5), (6) and (7)
above, the Fund has no current intention of engaging in such investment
techniques.
LIMITED TERM U.S. GOVERNMENT FUND
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government
Fund") will not:
*(1) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or options transactions is not considered the purchase
of a security on margin.);
*(2) Make short sales of securities unless at all times when a short position
is open it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount
to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at current value) is held as collateral for
such sales at any one time;
*(3) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the current value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, futures contracts and options on futures contracts,
and collateral arrangements with respect to initial and variation
margin, are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or options are deemed
to be the issuance of a senior security.);
*(4) Invest more than 25% of its total assets (taken at current value) in
securities of businesses in the same industry (for this purpose,
telephone, electric, water and gas utilities are considered separate
industries);
*(5) Make loans, except by the purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness that are a
part of an issue to the public or to financial institutions, or by
lending portfolio securities to the extent set forth in Part II of this
Statement of Additional Information under "Miscellaneous Investment
Practices -- Loans of Portfolio Securities" provided that for purposes
of this restriction, investment in repurchase agreements shall not be
deemed to be the making of a loan;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts. (This restriction does not prevent the Fund from purchasing
securities of companies investing or dealing in the foregoing.);
*(7) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(8) Make investments for the purpose of exercising control or management; or
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to financial instruments or indices thereof and
currencies and with respect to futures contracts on financial
instruments or indices thereof.
+(10) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by
New England Funds Trust II's trustees)
Although the Fund may from time to time make short sales, issue senior
securities, borrow money or pledge its assets to the extent permitted by the
above investment restrictions, the Fund has no current intention of engaging in
such investment techniques.
ADJUSTABLE RATE FUND
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(3) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the current
intention of the Fund, which may change without shareholder approval, to
make such sales only for the purpose of deferring realization of gain or
loss for federal income tax purposes; such sales would not be made with
respect to securities covering outstanding options.);
*(4) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(5) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate future contracts, and options on
interest rate futures contracts, collateral arrangements with respect to
interest rate caps, floors or swap arrangements, and collateral
arrangements with respect to initial and variation margin are not deemed
to be a pledge of assets and neither (i) such arrangements, (ii) the
purchase or sale of futures or related options, (iii) interest rate caps
and floors nor (iv) interest rate swap agreements, where assets are
segregated to cover the Fund's obligations thereunder, are deemed to be
the issuance of a senior security.);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
the Trust or officers and directors of the investment adviser of the
Fund who individually own more than 1/2 of 1% of the shares or
securities of that issuer, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, that are a part
of an issue to the public or to financial institutions, or by lending
portfolio securities to the extent set forth under "Miscellaneous
Investment Practices - Loans of Portfolio Securities" in Part II of this
Statement. (This restriction 8 does not limit the Fund's ability to
engage in repurchase agreement transactions.);
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts, and may purchase interest rate caps and floors and enter into
interest rate swap agreements. (This restriction does not prevent the
Fund from purchasing securities of companies investing or dealing in the
foregoing.);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to fixed income securities and currencies and with
respect to futures contracts on fixed income securities or currencies;
*(14) Purchase any illiquid security, including securities that are not
readily marketable, if, as a result, more than 10% of the Fund's total
net assets (based on current value) would then be invested in such
securities. (The staff of the Securities and Exchange Commission (the
"SEC") is presently of the view that repurchase agreements maturing in
more than seven days are subject to this restriction. Until that
position is revised, modified or rescinded, the Fund will conduct its
operations in a manner consistent with this view); or
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets (taken at current value), or (c) own more
than 3% of the outstanding voting stock of any one investment company.
Although the Fund may loan its portfolio securities and issue senior
securities, borrow money, pledge its assets, and invest in the securities of
other investment companies to the extent permitted by investment restrictions
(5), (8) and (15) above, the Fund has no current intention of engaging in such
investment activities.
In addition, as a matter of current operating policy that may be
changed without shareholder approval, the Fund intends to limit certain of its
investments in accordance with the provisions of the Federal Credit Union Act
and Regulation 703 thereunder.
STRATEGIC INCOME FUND
New England Strategic Income Fund (the "Strategic Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if , as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government (together
with subdivisions thereof) will be considered to be a separate
industry);
(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(3) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or acquire more than 10% of the outstanding voting securities of
an issuer;
*(4) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(6) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's
portfolio securities;
*(7) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(8) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(9) Except to the extent permitted by rule or order of the SEC, participate
on a joint or joint and several basis in any trading account in
securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with any investment adviser or subadviser of the
Fund or accounts under any such investment adviser's or subadviser's
management to reduce brokerage commissions, to average prices among them
or to facilitate such transactions is not considered a trading account
in securities for purposes of this restriction.);
(10) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities
indexes, currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(11) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities and certain Section
4(2) commercial paper deemed to be liquid under guidelines established
by New England Funds Trust I's trustees);
*(12) Issue senior securities. (For the purpose of this restriction none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restrictions (2) or (5) above; any
borrowing permitted by restriction (4) above; any collateral
arrangements with respect to forward contracts, options, futures
contracts, swap contracts or other similar contracts and options on
futures contracts, swap contracts or other similar contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts or other
similar contracts or options on futures contracts, swap contracts or
other similar contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New England
Funds Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.)
BOND INCOME FUND
New England Bond Income Fund (the "Bond Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities); or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 10% of its total
assets (taken at cost) or 5% of its total assets (taken at current
value), whichever is lower;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any company if officers and trustees of
New England Funds Trust I or of any investment adviser or subadviser of
the Bond Income Fund who individually own more than 1/2 of 1% of the
shares or securities of that company, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are part of
an issue to the public, or by lending portfolio securities to the extent
set forth under "Miscellaneous Investment Practices -- Loans of
Portfolio Securities" in Part II of this Statement;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or commodity contracts or real estate (except
that the Bond Income Fund may buy and sell marketable securities of
companies, including real estate investment trusts, which may represent
indirect interests in real estate; may buy and sell futures contracts on
securities or on securities indexes and may write, purchase or sell put
or call options on such futures contracts or indexes; and may enter into
currency forward contracts);
*(10) Act as underwriter;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with any adviser or subadviser or accounts under
its management to reduce brokerage commissions, to average prices among
them, or to facilitate such transactions is not considered participating
in a trading account in securities.);
*(13) Write, purchase or sell options or warrants, except that the Fund may
(a) acquire warrants or rights to subscribe to securities of companies
issuing such warrants or rights or of parents or subsidiaries of such
companies, provided that such warrants or other rights to subscribe are
attached to, or part of a unit offering involving, other securities, and
(b) write, purchase or sell put or call options on securities,
securities indexes or futures contracts; or
*(14) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. (Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets [taken at current value] in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.)
*(15) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (4) above; any pledge or other encumbrance of assets
permitted by restriction (5) above; any collateral arrangements with
respect to options, forward contracts, futures contracts, swap contracts
and other similar contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts and other
similar contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration of
Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom.
+(16) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust I's trustees.)
HIGH INCOME FUND
New England High Income Fund (the "High Income Fund") will not:
*(1) Buy more than 10% of the voting securities or more than 10% of all of
the securities of any issuer, or invest to control or manage any
company;
*(2) Purchase securities on "margin," except for short-term credits as needed
to clear securities purchases;
*(3) Invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization,
or by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer commission or profit, other
than a customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of the value of its total
assets would be invested in such securities;
*(4) Purchase securities, other than shares of the Fund, from or sell
portfolio securities to its directors or officers, or firms they are
affiliated with as principals, except as permitted by the regulations of
the SEC;
*(5) Purchase or sell commodities or commodity contracts, or write, purchase
or sell options, except that the Fund may (a) buy or sell futures
contracts on securities or on securities indexes and (b) write, purchase
or sell put or call options on securities, on securities indexes or on
futures contracts of the type referred to in clause (a) of this
restriction;
*(6) Make loans, except loans of portfolio securities and except to the
extent that the purchase of notes, repurchase agreements, bonds, or
other evidences of indebtedness or deposits with banks or other
financial institutions may be considered loans;
*(7) Make short sales of securities or maintain a short position;
*(8) Purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or in securities
issued by companies which invest in real estate or interests therein;
*(9) Purchase or sell interests in oil and gas or other mineral exploration
or development programs, provided that the Fund may invest in securities
issued by companies which do invest in or sponsor such programs;
*(10) Underwrite the securities of other issuers; or
*(11) Invest more than 10% of the value of its total assets, in the aggregate,
in repurchase agreements maturing in more than seven days and restricted
securities.
*(12) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water, and telephone companies will be considered as
being in separate industries);
*(13) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 33 1/3% of its
total assets; or
*(14) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (13) above; any collateral arrangements with respect to
options, forward contracts, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts, futures contracts, swap contracts or similar contracts or
options on futures contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New England
Funds Trust II's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
+(15) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust II's trustees.)
MUNICIPAL INCOME FUND
New England Municipal Income Fund (the "Municipal Income Fund") will not:
*(1) Purchase any security if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in securities of
a single issuer. This limitation does not apply to U.S. Government
securities. (The Fund will treat each state and each separate political
subdivision, agency, authority or instrumentality of such state, each
multistate agency or authority, and each guarantor, if any, as a
separate issuer);
(2) Invest more than 25% of its total assets (taken at current value) in
industrial development revenue bonds that are based, directly or
indirectly, on the credit of private entities in any one industry or in
securities of private issuers in any one industry. (For the purpose of
this restriction, "private activity bonds" under the Internal Revenue
Code of 1986, as amended [the "Code"], will be treated as industrial
revenue bonds.) (In the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities, or make short sales. For this purpose, the
deposit or payment by the Fund of initial or variation margin in
connection with interest rate futures contracts or tax exempt bond index
futures contracts is not considered the purchase of a security on
margin;
*(4) Purchase more than 10% of the total value of the outstanding securities
of an issuer;
*(5) Borrow money, except as a temporary measure for extraordinary or
emergency purposes (but not for the purpose of investment) up to an
amount not in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower;
*(6) Pledge, mortgage or hypothecate more than 15% of its total assets (taken
at cost). In order to comply with certain state requirements, as a
matter of operating policy subject to change without shareholder
approval, the Fund will not pledge, mortgage or hypothecate more than 5%
of such assets;
*(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses less than three years old and industrial
development revenue bonds where the private entity on whose credit the
security is based, directly or indirectly, is less than three years old
(including predecessor businesses and entities);
*(8) Purchase or retain securities of any issuer if, to the knowledge of the
Fund, officers and trustees of New England Funds Trust I or of any
investment adviser or subadviser of the Fund who individually own
beneficially more than 1/2 of 1% of the securities of that issuer,
together own beneficially more than 5% of such securities;
*(9) Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies. This limitation does not
apply to repurchase agreements;
*(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or real estate (except that the Fund may buy tax
exempt bonds or other permitted investment secured by real estate or an
interest therein);
*(11) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(12) Purchase voting securities or make investments for the purpose of
exercising control or management;
*(13) Participate on a joint or joint and several basis in any trading account
in securities;
*(14) Write, purchase, or sell puts, calls or combinations thereof, except
that the Fund may write, purchase and sell puts, calls or combinations
thereof with regard to futures contracts;
*(15) Invest in the securities of other investment companies, except in
connection with a merger, consolidation or similar transaction. (Under
the 1940 Act, the Fund may not (a) invest more than 10% of its total
assets (taken at current value) in such securities, (b) own securities
of any one investment company having a value in excess of 5% of the
Fund's total assets (taken at current value), or (c) own more than 3% of
the outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (5) above; any collateral arrangements with respect to
forward contracts, options, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts or options on futures contracts; and the issuance of shares of
beneficial interest permitted from time to time by the provisions of New
England Funds Trust I's Agreement and Declaration of Trust and by the
1940 Act, the rules thereunder, or any exemption therefrom.
+(17) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities and certain Section 4(2)
commercial paper deemed to be liquid under guidelines established by New
England Funds Trust I's trustees.)
The Fund may invest more than 25% of its assets in industrial
development revenue bonds, subject to limitation (2) above.
- --------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- --------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to separate advisory agreements, each dated August 30, 1996,
New England Funds Management, L.P. ("NEFM") has agreed, subject to the
supervision of the Board of Trustees of the relevant Trust, to manage the
investment and reinvestment of the assets of each Fund and to provide a range of
administrative services to each Fund. For the services described in the advisory
agreements, each Fund pays NEFM a management fee at the annual rate set forth in
the following table:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ------------------------------------- ---------------------------------------------------------
<S> <C>
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of $500 million
Bond Income Fund and 0.50% of the first $100 million
Municipal Income Fund 0.375% of amounts in excess of $100 million
Government Securities Fund and 0.65% of the first $200 million
Limited Term U.S. Government Fund 0.625% of the next $300 million
0.60% of amounts in excess of $500 million
High Income Fund 0.70% of the first $200 million
0.65% of amounts in excess of $200 million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of $200 million
</TABLE>
Each advisory agreement provides that NEFM may delegate its
responsibilities thereunder to another party. Pursuant to separate subadvisory
agreements, each dated August 30, 1996, NEFM has delegated responsibility for
managing the investment and reinvestment of the Strategic Income Fund's and the
High Income Fund's assets to Loomis Sayles & Company, L.P. ("Loomis Sayles"), as
subadviser. Pursuant to separate subadvisory agreements, each dated August 30,
1996, NEFM has delegated responsibility for managing the investment and
reinvestment of the other Funds' assets to Back Bay Advisors, as subadviser. The
Funds pay no direct fees to Loomis Sayles or Back Bay Advisors. For providing
such subadvisory services to the Funds, NEFM pays each subadviser a subadvisory
fee at the annual rate set forth in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- ------------------------------------- ------------------ ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Fund Back Bay Advisors 0.275% of the first $200 million
0.255% of the next $300 million
0.235% of amounts in excess of $500 million
Bond Income Fund Back Bay Advisors 0.250% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund Back Bay Advisors 0.325% of the first $200 million
0.3125% of the next $300 million
0.300% of amounts in excess of $500 million
High Income Fund Loomis Sayles 0.350% of the first $200 million
0.300% of amounts in excess of $200 million
Limited Term U.S. Government Fund Back Bay Advisors 0.325% of the first $200 million
0.3125% of the next $300 million
0.300% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.350% of the first $200 million
0.300% of amounts in excess of $200 million
Municipal Income Fund Back Bay Advisors 0.250% of the first $100 million
0.1875% of amounts in excess of $100 million
</TABLE>
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to the Adjustable Rate, Bond Income,
Government Securities, Limited Term U.S. Government and Municipal Income Funds
purusant to separate advisory agreements and separate subadvisory agreements
providing for management and subadvisory fees at the same rates as are currently
in effect for these Funds.
From July 1, 1996 to August 30, 1996, NEFM served as adviser and Loomis
Sayles served as subadviser to the High Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund. From January 2, 1996 to June 30,
1996, NEFM served as adviser to the High Income Fund pursuant to an advisory
agreement which provided for a management fee payable by the Fund to NEFM at the
annual rate of 0.75% of the Fund's average daily net assets, and Back Bay
Advisors served as subadviser to the High Income Fund pursuant to a subadvisory
agreement which provided for a subadvisory fee payable by NEFM to Back Bay
Advisors at the annual rate of 0.375% of the Fund's average daily net assets.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the High Income
Fund pursuant to an advisory agreement providing for an advisory fee payable by
the Fund to Back Bay Advisors at the annual rate of 0.75% of the Fund's average
daily net assets. Back Bay Advisors' compensation under its advisory agreement
with the High Income Fund was subject to reduction to the extent that, for any
calendar month, the Fund's expenses, including the management fee, but exclusive
of brokerage, taxes, interest, distribution fees and extraordinary items, exceed
an annual rate of 1.50% of the Fund's average daily net assets.
Prior to August 30, 1996, NEFM served as adviser and Loomis Sayles
served as subadviser to the Strategic Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the
Bond Income, Government Securities, Limited Term U.S. Government and Municipal
Income Funds pursuant to separate advisory agreements each of which provided for
an advisory fee payable by such Fund to Back Bay Advisors at the same rate as
the management fee currently payable by such Fund to NEFM.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the
Adjustable Rate Fund, pursuant to an advisory agreement which provided for an
advisory fee payable by the Fund to Back Bay Advisors at an annual rate of 0.40%
of the first $200 million of the Fund's average daily net assets, 0.375% of the
next $300 million of such assets and 0.35% of such assets in excess of $500
million.
Prior to January 2, 1996, New England Funds, L.P. (the "Distributor"),
an affiliate of Back Bay Advisors, provided the Adjustable Rate Fund with office
space, facilities and equipment, services of executive and other personnel and
certain administrative services, pursuant to an administrative services
agreement. Under this agreement, the Adjustable Rate Fund paid the Distributor a
fee at the annual rate of 0.15% of the first $200 million of the Fund's average
daily net assets, 0.135% of the next $300 million of such assets and 0.12% of
such assets in excess of $500 million. The Adjustable Rate Fund's current
management fee rate represents the sum of the fee rates under the prior advisory
and administrative services agreements.
Until further notice to the Adjustable Rate Fund, NEFM and Back Bay
Advisors have voluntarily agreed to reduce their fees and, if necessary, to bear
certain expenses related to operating the Fund in order to limit the Fund's
expenses to an annual rate of 0.70%, 1.45% and 0.45% of the average daily net
assets of the Fund's Class A, Class B and Class Y shares, respectively. Such fee
waiver and/or expense reimbursement, if any, will be borne equally by NEFM and
Back Bay Advisors. Prior to January 2, 1996, similar voluntary limitations were
in effect with respect to Back Bay Advisors, the Distributor and the Fund.
Back Bay Advisors was paid $911,184 for investment management services
it rendered to the Adjustable Rate Fund during the fiscal year ended December
31, 1995 and NEFM was paid $866,836 and $604,848 for the fiscal years ended
December 31, 1996 and 1997, respectively, after reduction pursuant to the
expense limitation arrangements. For the fiscal years ended December 31, 1996
and 1997, NEFM paid Back Bay Advisors $433,418 and $302,424, respectively, for
subadvisory services it rendered to the Adjustable Rate Fund. Had the voluntary
expense limitation not been in effect, Back Bay Advisors would have been paid
$1,619,477 for investment management services it rendered to the Adjustable Rate
Fund during the fiscal year ended December 31, 1995, and NEFM would have been
paid $1,572,103 and $1,230,235 for services rendered during the fiscal years
ended December 31, 1996 and 1997, respectively.
For the fiscal year ended December 31, 1995, the Government Securities
Fund paid advisory fees to Back Bay Advisors of $1,008,846. For the fiscal years
ended December 31, 1996 and 1997, the Government Securities Fund paid management
fees to NEFM of $933,063 and $784,478, respectively. For the fiscal years ended
December 31, 1996 and 1997, NEFM paid subadvisory fees of $466,531 and $392,239,
respectively, to Back Bay Advisors for the Fund.
The Limited Term U.S. Government Fund paid Back Bay Advisors $2,560,201
in advisory fees for the fiscal year ended December 31, 1995. For the fiscal
years ended December 31, 1996 and 1997, the Limited Term U.S. Government Fund
paid NEFM $2,230,443 and $1,802,343, respectively, in advisory fees. For the
fiscal years ended December 31, 1996 and 1997, NEFM paid subadvisory fees of
$1,115,221 and $901,171, respectively, to Back Bay Advisors for the Fund.
For the fiscal year ended December 31, 1995, the Bond Income Fund paid
advisory fees to Back Bay Advisors of $872,560; and the Municipal Income Fund
paid advisory fees to Back Bay Advisors of $890,150. For the fiscal years ended
December 31, 1996 and 1997, the Bond Income Fund paid management fees to NEFM of
$962,307 and $971,242, respectively, and the Municipal Income Fund paid
management fees to NEFM of $862,741 and $832,144, respectively. For the fiscal
years ended December 31, 1996 and 1997, NEFM paid subadvisory fees of $481,153
and $485,621, respectively, to Back Bay Advisors for the Bond Income Fund. For
the fiscal years ended December 31, 1996 and 1997, NEFM paid subadvisory fees of
$431,370 and $416,072, respectively, to Back Bay Advisors for the Municipal
Income Fund.
Prior to July 1, 1995, the advisory agreement for the Municipal Income
Fund included a provision under which Loomis Sayles served as a subadviser and
furnished regularly to Back Bay Advisors, without additional cost to the Fund,
statistical and research information and advice relating to the Fund's
investments. For its services, Loomis Sayles received a fee, paid by Back Bay
Advisors not less often than quarterly, equal to 40% of the compensation paid by
the Fund to Back Bay Advisors on the first $10 million of the Fund's average
daily net assets, 30% of the compensation paid on the next $10 million of such
assets and 20% of the compensation paid on such assets in excess of $20 million.
For the period from January 1 to June 30, 1995, the compensation from Back Bay
Advisors to Loomis Sayles under this agreement was $94,978.
Until further notice to the Fund, NEFM has voluntarily agreed to reduce
its management fee and, if necessary, to bear certain expenses related to
operating the High Income Fund in order to limit the Fund's expenses to an
annual rate of 1.40% of the average daily net assets attributable to its Class A
shares, 2.15% of such assets attributable to its Class B shares and (since March
1, 1998, 2.15% of such assets attributable to its Class C shares. Prior to July
1, 1996, these expense limits were 1.60% for the Fund's Class A shares and 2.25%
for the Fund's Class B shares. Prior to January 2, 1996, similar voluntary
limitations were in effect with respect to Back Bay Advisors and the Fund. In
addition, Loomis Sayles agreed to waive 50% of the subadvisory fee payable by
NEFM to Loomis Sayles for the High Income Fund for the period from July 1, 1996
to June 30, 1997.
Back Bay Advisors was paid $288,711 in advisory fees by the High Income
Fund for the fiscal year ended December 31, 1995, and NEFM was paid $301,178 and
$561,521, respectively, in management fees by the High Income Fund for the
fiscal years ended December 31, 1996 and 1997, after reduction pursuant to the
foregoing voluntary expense limitations. Had the voluntary expense limitations
not been in effect, Back Bay Advisors would have been paid $342,554, in advisory
fees by the High Income Fund for the fiscal year ended December 31, 1995, and
NEFM would have been paid $383,464 and $561,521, respectively, in management
fees by the High Income Fund for the fiscal years ended December 31, 1996 and
1997. For the period from January 2, 1996 to June 30, 1996, NEFM paid
subadvisory fees of $75,941 to Back Bay Advisors for the Fund. For the period
from July 1, 1996 to December 31, 1996 and the fiscal year ended December 31,
1997, NEFM paid subadvisory fees of $48,636 and $221,232, respectively, to
Loomis Sayles for the High Income Fund, after reduction pursuant to the
voluntary fee waiver by Loomis Sayles described above. Had this waiver not been
in effect, NEFM would have paid subadvisory fees of $97,272 and $280,760 to
Loomis Sayles for the Fund for the period from July 1, 1996 to December 31, 1996
and the fiscal year ended December 31, 1997, respectively.
Loomis Sayles voluntarily agreed, until December 31, 1996, to waive its
entire subadvisory fee for the Strategic Income Fund (which is paid by NEFM),
and NEFM agreed to reduce its management fee (which is paid by the Fund) by an
equal amount. In addition, under an expense deferral arrangement, which was in
effect until December 31, 1996, NEFM agreed to defer its management fee (to the
extent not waived as provided in the preceding sentence) for the Strategic
Income Fund, to the extent necessary to limit the Fund's expenses to the annual
rate of 1.40% for Class A shares, 2.15% for Class B shares and 2.15% for Class C
shares, subject to the obligation of the Fund to pay NEFM such deferred fees in
later periods to the extent that the Fund's expenses fall below the annual rate
of 1.40% for Class A shares, 2.15% for Class B shares and 2.15% for Class C
shares; provided, however, that, the Fund is not obligated to pay any such
deferred fees more than two years after the end of the fiscal year in which such
fee was deferred.
For the period May 1, 1995 (commencement of operations) to December 31,
1995, the Strategic Income Fund paid no management fees to NEFM, and NEFM paid
no subadvisory fees to Loomis Sayles for the Fund. Had the voluntary waiver and
expense deferral arrangements described above not been in effect, the Fund would
have paid NEFM $241,019 and $902,997 in management fees for the period ended
December 31, 1995 and the fiscal year ended December 31, 1996, respectively, and
NEFM would have paid $129,779 and $472,789 in subadvisory fees to Loomis Sayles
for the period ended December 31, 1995 and the fiscal year ended December 31,
1996, respectively. NEFM paid Loomis Sayles $0 in subadvisory fees for the
fiscal period ended December 31, 1996. In 1996, NEFM received $30,735 in
management fees deferred from 1995 and $399,473 in 1996 management fees. In
1997, NEFM received $0 in management fees deferred from 1995, $0 in management
fees deferred from 1996 and $1,855,972 in 1997 management fees; NEFM paid Loomis
Sayles $974,943 in subadvisory fees for the fiscal period ended December 31,
1997.
On March 27, 1998, the Trusts and certain of the Fund's subadvisers
which are affiliated with NEFM submitted a request with the staff of the SEC
(the "Staff") for a letter from the Staff which would permit certain Funds and
NEFM to enter into certain amended Advisory Agreements and would also permit
such Funds, NEFM and such affiliated subadvisors to enter into certain
Sub-Advisory Agreements, in each case without obtaining a vote of the
shareholders of the Fund (the "Request"). The amended Advisory and Subadvisory
Agreements, taken together, would not result in any increase or decrease of fees
payable by the Funds; however, the amended Advisory and Subadvisory Agreements
would permit for the payment of each Fund's subadvisory fee directly to is
subadviser, with the amount of the management fee payable by such Fund to NEFM
reduced by the amount of such payment to the subadviser by that Fund. If the
Staff acts favorably on the Request, then NEFM and each affected Fund will enter
into an amended separate Advisory Agreement, and NEFM, each affected Fund and
each subadviser will also enter into a separate amended Subadvisory Agreement,
pursuant to any terms and conditions as may be prescribed by the staff.
BROKERAGE COMMISSIONS
In 1995, 1996 and 1997, the Funds paid no commissions on brokerage
transactions.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and, in
the case of the Limited Term U.S. Government, Bond Income, High Income and
Strategic Income Funds, Class C shares of each Fund pay a fee pursuant to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act. The following table shows the
amounts of Rule 12b-1 fees paid by the Class A, Class B and Class C shares of
each Fund during the fiscal year ended Decembers 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Fund 1995 1996 1997
- ----------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Government Securities Fund $366,630 $327,097 $272,781 (Class A)
$37,075 $53,314 $52,308 (Class B)
Limited Term U.S. Government Fund $1,332,412 $1,105,672 $851,990 (Class A)
$147,768 $182,790 $170,466 (Class B)
$15,410 $93,928 $146,913 (Class C)*
Adjustable Rate Fund $1,040,897 $724,984 $556,721 (Class A)
$21,684 $25,756 $28,482 (Class B)
Bond Income Fund $453,844 $480,362 $467,790 (Class A)
$158,962 $273,249 $329,490 (Class B)
$2,428 $16,367 $30,386 (Class C)*
High Income Fund** $130,876 $118,046 $127,503 (Class A)
$82,798 $134,657 $292,153 (Class B)
Municipal Income Fund $483,317 $460,994 $439,054 (Class A)
$107,048 $123,404 $129,507 (Class B)
Strategic Income Fund*** $39,090 $143,965 $305,860 (Class A)
$155,887 $598,801 $1,241,850 (Class B)
$58,847 $184,185 $451,186 (Class C)
</TABLE>
* Class C shares were first offered on January 3, 1995.
** The High Income Fund first offered Class C shares on March 2, 1998.
*** The Strategic Income Fund commenced operations on May 1, 1995.
During the fiscal year ended December 31, 1997, the Distributor's
expenses relating to each Fund's 12b-1 plans were as follows:
GOVERNMENT SECURITIES FUND
(Class A shares)
Compensation to Investment Dealers $272,406
Compensation to Distributor's Sales Personnel and Other Related Costs $130,340
TOTAL $402,746
(Class B shares)
Compensation to Investment Dealers $49,368
Compensation to Distributor's Sales Personnel and Other Related Costs $120,761
TOTAL $170,129
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Compensation to Investment Dealers $607,541
Compensation to Distributor's Sales Personnel and Other Related Costs $114,364
Other Distribution Costs $177,583
TOTAL $899,488
(Class B shares)
Compensation to Investment Dealers $111,166
Compensation to Distributor's Sales Personnel and Other Related Costs $86,765
TOTAL $197,931
(Class C shares)
Compensation to Investment Dealers $146,913
Compensation to Distributor's Sales Personnel and Other Related Costs $113,100
TOTAL $260,013
ADJUSTABLE RATE FUND
(Class A shares)
Compensation to Investment Dealers $556,048
Compensation to Distributor's Sales Personnel and Other Related Costs $203,427
TOTAL $759,475
(Class B shares)
Compensation to Investment Dealers $27,036
Compensation to Distributor's Sales Personnel and Other Related Costs $121,123
TOTAL $148,159
STRATEGIC INCOME FUND
(Class A shares)
Compensation to Investment Dealers $306,141
Compensation to Distributor's Sales Personnel and Other Related Costs $144,369
TOTAL $450,510
(Class B shares)
Compensation to Investment Dealers $2,551,646
Compensation to Distributor's Sales Personnel and Other Related Costs $165,830
TOTAL $2,717,476
(Class C shares)
Compensation to Investment Dealers
Compensation to Distributor's Sales Personnel and Other Related Costs $451,185
TOTAL $134,692
$585,877
BOND INCOME FUND
(Class A shares)
Compensation to Investment Dealers $467,660
Compensation to Distributor's Sales Personnel and Other Related Costs $112,343
TOTAL $580,003
(Class B shares)
Compensation to Investment Dealers $452,503
Compensation to Distributor's Sales Personnel and Other Related Costs $93,746
TOTAL $546,249
(Class C shares)
Compensation to Investment Dealers $30,388
Compensation to Distributor's Sales Personnel and Other Related Costs $84,969
TOTAL $115,357
HIGH INCOME FUND
(Class A shares)
Compensation to Investment Dealers $127,658
Compensation to Distributor's Sales Personnel and Other Related Costs $153,166
TOTAL $280,824
(Class B shares)
Compensation to Investment Dealers $937,206
Compensation to Distributor's Sales Personnel and Other Related Costs $156,291
TOTAL $1,093,497
MUNICIPAL INCOME FUND
(Class A shares)
Compensation to Investment Dealers $439,324
Compensation to Distributor's Sales Personnel and Other Related Costs $137,291
TOTAL $576,615
(Class B shares)
Compensation to Investment Dealers $120,156
Compensation to Distributor's Sales Personnel and Other Related Costs $125,257
TOTAL $245,413
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor: $223,395 relating to the Class A shares and $28,239 relating to the
Class B shares of the Government Securities Fund; $147,298 relating to the Class
A shares and $24,664 relating to the Class B shares of the Adjustable Rate Fund;
$337,817 relating to the Class A shares, $319,666 relating to the Class B shares
and $10,413 relating to the Class C shares of the Bond Income Fund; $68,362
relating to the Class A shares and $267,875 relating to the Class B shares of
the High Income Fund; $347,161 relating to the Class A shares and $40,790
relating to the Class B shares of the Municipal Income Fund; $389,808 relating
to the Class A shares, $78,751 relating to Class B shares and $10,422 relating
to the Class C shares of the Limited Term U.S. Government Fund; and $176,346 to
the Class A shares, $1,202,955 relating to the Class B shares and $43,790
relating to the Class C shares of the Strategic Income Fund. New England
Securities paid substantially all of the fees it received from the Distributor
(a) in commissions to its sales personnel and (b) to defray sales-related
overhead costs.
- --------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- --------------------------------------------------------------------------------
As of April 1, 1998, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the indicated classes of the
following Funds:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
<S> <C> <C>
Class Y shares New England Mutual Life Insurance Co. 100%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
LIMITED TERM U.S. GOVERNMENT FUND
Class C shares US Clearing Corp. 5.60%
FBO 102-65259-13
26 Broadway
New York, NY 10004-1798
Class Y shares NEIC Master Retirement Trust 61.86%
c/o Defined Contribution Svcs - T
P.O. Box 755
Boston, MA 02117-1755
New England Mutual Life Insurance Co. 31.87%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
ADJUSTABLE RATE U.S. GOVERNMENT FUND
Class A shares San Bernardino County 35.86%
Treasurer
172 W 3rd Street 1st Floor
San Bernardino County, CA 92415-1001
National Auto Dealers Association 5.71%
8400 Westpark Drive
McClean, VA 22102-3522
Class B shares Smith Barney Inc. 5.50%
00167338643
388 Greenwich Street
New York, NY 10013-2339
STRATEGIC INCOME
Class B shares MLPF&S for the Sole Benefit of It's Customers 6.92%
Attn: Fund Admnistrator
4800 Deer Lake Drive East - 3rd Floor
Jacksonville, FL 32246-6484
Class C shares Southtrust Bank of Georgia NA 6.49%
Attn: Trust Dept FAO
Atlanta Regional Commission
Retirement Plan
79 W Paces Ferry Road
Atlanta, GA 30305-1350
BOND INCOME FUND
Class C shares Southtrust Bank of Georgia NA 31.05%
Attn: Trust Dept FAO
Atlanta Regional Commission
Retirement Plan
79 W Paces Ferry Road
Atlanta, GA 30305-1350
Resources Trust Co. TR IRA 6.38%
U/A 10/17/94
BBO Barabara J. Scioscia
I-152-24-3322
P.O. Box 5900
Denver, CO 80217-5900
CNA Trust Corp. 5.97%
FBO Dimension One Spas Inc.
PSP DTD 1/13/97
A/C #1050504559/68/77/76
P.O. Box 5024
Costa Mesa, CA 92628-5024
Class Y shares NEIC Master Retirement Trust 44.60%
c/o Defined Contribution Svcs - T
P.O. Box 755
Boston, MA 02117-1755
Metropolitan Life Insurance Co. 26.83%
c/o GADC - Gerald Hart - Agency
Operations NELICO
501 Boylston Street - 10th Floor
Boston, MA 02116-3706
Chase Manhattan Bank Directed Trustee 11.38%
Metlife Defined Contribution GR
770 Broadway - 10th Floor
Boston, MA 02116-3706
Parbanc Co. 11.21%
514 Market Street
Parkersburgh, WV 26101-5144
New England Life Insurance Co. 5.99%$
Debbie Milliner
c/o Financial Admin. - 6th Floor
501 Boylston Street
Boston, MA 02116-3706
HIGH INCOME FUND
Class A shares Deferred Compensation Plan for General Agents of the New 7.20%
England
The New England Investment ACC
Attn: Roel Kromhout
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
Class B shares MLPF&S for the Sole Benefit of It's Customers 6.36%
Attn: Fund Admnistrator
4800 Deer Lake Drive East - 3rd Floor
Jacksonville, FL 32246-6484
Class C shares PaineWebber for the Benefit of Southeast Anesthesia 19.76%
Association PA
Money Purchase Plan DTD 1/1/81
P.O. Box 37415
Charlotte, NC 28237-7415
JC Bradford & Co. Cust FBO 12.86%
Carol K. Bryant
330 Commerce Street
Nashville, TN 37201-1899
JC Bradford & Co. Cust FBO 9.81%
Martin P. Thorensen
330 Commerce Street
Nashville, TN 37201-1899
MUNICIPAL INCOME FUND
Class B shares Smith Barney Inc. 5.20%
00156116485
388 Greenwhich Street
New York, NY 10013-2339
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/97*
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 10.31 37.46 113.45 6.57 7.88
Maximum Offering Price 5.36 31.30 103.85 5.60 7.38
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/23/93** 9/23/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 9.49 20.92 4.55
Redemption at End of Period 4.49 19.04 4.17
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 10.50 31.67 7.59
<CAPTION>
LIMITED TERM U.S. GOVERNMENT FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 1/3/89** 5 Years 1/3/89**
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 7.25 29.07 89.41 5.24 7.36
Maximum Offering Price 4.01 25.18 83.72 4.59 7.00
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/27/93** 9/27/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 6.48 17.61 3.87
Redemption at End of Period 1.48 15.78 3.49
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 12/30/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 6.57 20.61 6.44
Redemption at End of Period 5.57 20.61 6.44
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.52 24.86 6.08
<CAPTION>
ADJUSTABLE RATE FUND***
Aggregate Average Annual
Total Return Total Return
------------------------------------- ------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 10/18/91** 5 Years 10/18/91**
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 6.21 27.97 35.92 5.06 5.07
Maximum Offering Price 5.21 26.61 34.48 4.83 4.89
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 5.42 19.23 4.17
Redemption at End of Period 0.42 17.26 3.77
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value n/a n/a n/a
<CAPTION>
STRATEGIC INCOME FUND****
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5/1/95** 5/1/95**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 9.33 38.04 12.84
Maximum Offering Price 4.40 31.83 10.90
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 5/1/95** 5/1/95**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 8.51 35.35 12.01
Redemption at End of Period 3.51 32.35 11.07
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95** 5/1/95**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 8.52 35.16 11.95
Redemption at End of Period 7.52 35.15 11.95
<CAPTION>
BOND INCOME FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 11.04 50.50 146.61 8.52 9.45
Maximum Offering Price 6.02 43.74 135.51 7.53 8.94
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 10.31 29.34 6.17
Redemption at End of Period 5.31 27.45 5.80
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 12/30/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 10.21 35.24 10.59
Redemption at End of Peiod 9.21 35.24 10.59
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 11.39 40.95 12.12
<CAPTION>
HIGH INCOME FUND*****
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 15.35 66.92 142.52 10.79 9.26
Maximum Offering Price 10.20 59.30 131.60 9.76 8.76
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/20/93** 9/20/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 14.39 45.37 9.13
Redemption at End of Period 9.39 43.37 8.78
<CAPTION>
MUNICIPAL INCOME FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 8.57 37.91 116.38 6.64 8.02
Maximum Offering Price 3.74 31.62 106.65 5.65 7.53
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- -------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.76 20.06 4.34
Redemption at End of Period 2.76 18.13 3.95
</TABLE>
* Federal regulations require this example to be calculated using a $1,000
investment. The normal minimum initial investment in shares of the Funds
is $2,500, however.
** Commencement of Fund operations or offering of indicated class of shares.
*** Assuming deduction of current maximum sales load, the Adjustable Rate
Fund's Class A shares' average one-year, five-year and since-inception
aggregate total returns would have been 4.93%, 25.32% and 32.04%,
respectively, and their average annual five-year and since-inception total
returns would have been 4.62% and 4.58%, respectively, had a voluntary
expense limitation not been in effect. Based on net asset values, the
Fund's Class A shares' one-year, five-year and since-inception aggregate
total returns would have been 5.93%, 26.68% and 33.48%, respectively, and
their five-year and since-inception average annual total returns would
have been 4.84% and 4.77%, respectively, without the voluntary limitation.
Assuming redemption at the end of the period, the Fund's Class B shares'
one-year and since-inception aggregate total returns would have been 0.14%
and 15.96%, respectively, had a voluntary expense limitation not been in
effect, and their average annual total return for the since-inception
period would have been 3.50%. Based on net asset values, the Fund's Class
B shares' aggregate total returns for the one-year and since-inception
periods would have been 5.14% and 17.93%, respectively, and their average
annual total returns for the since-inception period would have been 3.91%,
without the voluntary limitation.
**** Assuming deduction of the current maximum sales load, the Strategic Income
Fund's Class A, Class B and Class C shares' aggregate total returns for
the since-inception period would have been 30.83%, 31.36% and 34.17%,
respectively, had a voluntary expense deferral arrangement not been in
effect, and their annualized total returns for the since-inception period
would have been 10.59%, 10.76% and 11.64%, respectively.
***** Assuming deduction of current maximum sales load, the High Income Fund's
Class A shares' one-year, five-year and ten-year aggregate total returns
would have been 10.20%, 59.30% and 123.16%, respectively, had a voluntary
expense limitation for certain periods not been in effect, and their
five-year and ten-year average annual total returns would have been 9.60%
and 8.41%, respectively. Based on net asset values, the High Income Fund's
Class A shares' one-year, five-year and ten-year aggregate total returns
would have been 15.23%, 65.75% and 135.05%, respectively, without the
voluntary limitation, and their five-year and ten-year average annual
total returns would have been 10.63% and 8.92%, respectively. Assuming
redemption at the end of the period, the Fund's Class B shares' aggregate
total returns for the one-year and since-inception periods would have been
9.39% and 42.58%, respectively, had a voluntary expense limitation not
been in effect, and their average annual total return for the
since-inception period would have been 8.64%. Based on net asset values,
the Fund's Class B shares' aggregate total returns for the one-year and
since-inception periods would have been 14.39% and 44.58%, respectively,
without the voluntary limitation, and their average annual total return
for the since-inception period would have been 8.99%.
YIELD FOR THE 30-DAY PERIOD
ENDED 12/31/97*
<TABLE>
<CAPTION>
Fund Class A Class B Class C Class Y
- -------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Government Securities Fund............................. 6.03 5.56 6.58
Limited Term U.S. Government Fund...................... 5.28 4.79 4.78 5.76
Adjustable Rate U.S. Government Fund................... 5.97 5.28
Strategic Income Fund.................................. 7.64 7.23 7.14
Bond Income Fund....................................... 6.21 5.72 5.65 6.71
High Income Fund....................................... 6.87 6.43
Municipal Income Fund.................................. 4.90 4.38
* Yields for the Class A shares of the Funds are based on the public offering price of a Class A share of the
Funds and yields for the Class B, Class C and Class Y shares are based on the net asset value of a share of
the Funds.
</TABLE>
Distribution Rate. The Government Securities, Limited Term U.S.
Government, Adjustable Rate, Bond Income and High Income Funds may include in
their written sales material distribution rates based on the Funds'
distributions from net investment income and short-term capital gains for a
recent 30 day, three month or one year period.
Distributions of less than one year are annualized by multiplying by
the factor necessary to produce twelve months of distributions. The distribution
rates are determined by dividing the amount of the particular Fund's
distributions per share over the relevant period by either the maximum offering
price or the net asset value of a share of the Fund on the last day of the
period.
<PAGE>
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/97
As a % of 1 month
-------
GOVERNMENT SECURITIES FUND
(Class A shares)
Net Asset Value.......................... 4.67
Maximum Offering Price................... 4.46
(Class B shares)
Net Asset Value.......................... 3.92
(Class Y shares)
Net Asset Value.......................... 4.93
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Net Asset Value.......................... 6.19
Maximum Offering Price................... 6.00
(Class B shares)
Net Asset Value.......................... 5.55
(Class C shares)
Net Asset Value.......................... 5.54
(Class Y shares)
Net Asset Value.......................... 6.52
ADJUSTABLE RATE FUND
(Class A shares)
Net Asset Value.......................... 6.19
Maximum Offering Price................... 6.13
(Class B shares)
Net Asset Value.......................... 5.39
(Class Y shares)
Net Asset Value.......................... none
STRATEGIC INCOME FUND
(Class A shares)
Net Asset Value.......................... 7.51
Maximum Offering Price................... 7.17
(Class B shares)
Net Asset Value.......................... 6.74
(Class C shares)
Net Asset Value.......................... 6.75
(Class Y shares)
Net Asset Value.......................... none
BOND INCOME FUND
(Class A shares)
Net Asset Value.......................... 6.49
Maximum Offering Price................... 6.20
(Class B shares)
Net Asset Value.......................... 5.74
(Class C shares)
Net Asset Value.......................... 5.74
(Class Y shares)
Net Asset Value.......................... 6.73
HIGH INCOME FUND
(Class A shares)
Net Asset Value.......................... 8.76
Maximum Offering Price................... 8.37
(Class B shares)
Net Asset Value.......................... 8.01
MUNICIPAL INCOME FUND
(Class A shares)
Net Asset Value.......................... 4.95
Maximum Offering Price................... 4.73
(Class B shares)
Net Asset Value.......................... 4.21
The foregoing data represent past performance only, and are not a
representation as to the future results of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than the original
cost.
<PAGE>
[graphic omitted]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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 Massachusetts Tax Free Income Fund (the "Massachusetts
Fund") and New England Tax Free Income Fund of New York (the "New York Fund")
(collectively, the "Funds" and each a "Fund"). This Statement is not a
prospectus and is authorized for distribution only 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, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds.
The Funds are series of New England Funds Trust II (the "Trust"), a
registered open-end management investment company that offers a total of seven
series.
TABLE OF CONTENTS
Page
----
PART I
Investment Restrictions ii
Fund Charges and Expenses v
Ownership of Fund Shares vii
Investment Performance of the Funds vix
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
Description of the Trusts and Ownership of Shares 32
How to Buy Shares 35
Net Asset Value and Public Offering Price 35
Shareholder Services 36
Redemptions 41
Standard Performance Measures 43
Income Dividends, Capital Gain Distributions and Tax Status 47
Financial Statements 49
Appendix A - Description of Bond Ratings 50
Appendix B - Publications That May Contain Fund Information 52
Appendix C - Advertising and Promotional Literature 54
Appendix D - Portfolio Composition of the Municipal Income,
Income and California Funds 59
<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 the
relevant 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 (11) for the Massachusetts Fund and restriction (12) for the New
York Fund 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 Massachusetts Fund may not:
*(1) Borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of its total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as
a temporary measure to facilitate the meeting of redemption requests
(not for leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or emergency
purposes. (Such borrowings will be repaid before any additional
investments are made);
*(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 10% of the value of its total assets (taken at the lower of cost or
current value) and then only to secure borrowings permitted by
restriction (1) above;
*(3) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities;
*(4) Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
*(5) Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;
*(6) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate;
*(7) Purchase or sell commodities or commodity contracts, or write or
purchase options, except that the Fund may (a) buy or sell futures
contracts on securities or on securities indexes and (b) write, purchase
or sell put or call options on securities, on securities indexes or on
futures contracts of the type referred to in clause (a) of this
restriction;
*(8) Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, and through repurchase
agreements;
*(9) Invest in securities of any issuer if, to the knowledge of the Fund,
officers and trustees of the Trust or officers and directors of Back Bay
Advisors, L.P. ("Back Bay Advisors"), the Fund's subadviser, who
beneficially own more than 1/2 of 1% of the securities of that issuer
together own more than 5%;
*(10) Invest in the securities of any issuer if, immediately after such
investment, more than 5% of the value of the total assets of the Fund
taken at current value would be invested in the securities of such
issuer; provided that this limitation does not apply either to
obligations issued or guaranteed as to interest and principal by the U.
S. Government or its agencies or instrumentalities or to Massachusetts
Tax Exempt Bonds (as defined in the Prospectus);
*(11) Purchase securities restricted as to resale, if, as a result, such
investments would exceed 5% of the value of the Fund's net assets;
*(12) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities or Massachusetts Tax Exempt Securities,
except obligations backed only by the assets and revenues of
nongovernmental users) if as a result of such purchases more than 25% of
the value of the Fund's total assets would be invested in any one
industry. Governmental issuers of Massachusetts Tax Exempt Bonds are not
considered part of any "industry." However, Massachusetts Tax Exempt
Bonds backed only by the assets and revenues of nongovernmental users
may for this purpose be deemed to be issued by such nongovernmental
users, and this 25% limitation would apply to such obligations. Thus, no
more than 25% of the Fund's assets will be invested in obligations
deemed to be issued by nongovernmental users in any one industry and in
taxable obligations of issuers in the same industry;
(13) Acquire more than 10% of the voting securities of any issuer; or
(14) Issue any class of securities which is senior to the Fund's shares of
beneficial interest except to the extent that borrowings permitted by
investment restriction (1) are deemed to involve the issuance of such
securities.
The New York Fund may not:
(1) With respect to 50% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase 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 the Fund's total assets would be invested in
any one industry. Governmental issuers of New York 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 the Fund's assets will be
invested in obligations deemed to be issued by nongovernmental users in
any one industry and in taxable obligations of issuers in the same
industry;
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (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 the Fund's
portfolio securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the Securities and
Exchange Commission (the "SEC"), participate on a joint or joint and
several basis in any trading account in securities (the "bunching" of
orders for the purchase or sale of portfolio securities with the Fund's
adviser or subadviser or accounts under its management to reduce
brokerage commissions, to average prices among them or to facilitate
such transactions is not considered a trading account in securities for
purposes of this restriction);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indices
or financial futures contracts and (b) enter into currency forward
contracts;
(12) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities and certain Section
4(2) commercial paper deemed to be liquid under guidelines established
by the Trust's trustees).
*(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 (11)
above for the Massachusetts Fund and restriction (12) for the New York Fund.
<PAGE>
- -------------------------------------------------------------------------------
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 set forth
in the followingtable:
Management fee paid by the Fund
(as a percentage of average daily
Fund net assets of the Fund)
Massachusetts Fund 0.60% of the first $100 million
0.50% of amounts in excess of $100 million
New York Fund 0.525% of the first $200 million
0.50% of the next $300 million
0.475% of amounts in excess of $500 million
The advisory agreements provide that NEFM may delegate its
responsibilities thereunder to other parties. Pursuant to separate subadvisory
agreements, eachdated August 30, 1996, NEFM has delegated responsibility for
managing the investment and reinvestment of the Funds' assets to Back Bay
Advisors, L.P. ("Back Bay Advisors"), as subadviser. The Funds pay no direct
fees to Back Bay Advisors. For providing such subadvisory services to the Funds,
NEFM pays Back Bay Advisors a subadvisory fee at the annual rate set forth in
the following table:
Fund Subadvisory Fees
Massachusetts Fund 0.30% of the first $100 million
0.25% of amounts in excess of $100 million
New York Fund 0.2625% of the first $200 million
0.25% of the next $300 million
0.2375% of amounts in excess of $500 million
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to each Fund pursuant to separate
advisory and subadvisory agreements providing for the same management and
subadvisory fees as are currently in effect for each Fund. Prior to January 2,
1996, Back Bay Advisors served as adviser to each Fund pursuant to separate
advisory agreements, each of which provided for an advisory fee payable to Back
Bay Advisors. In the case of the Massachusetts Fund, the advisory fee payable to
Back Bay Advisors was at the same rate as the management fee currently payable
by the Fund to NEFM; and, for the New York Fund, the advisory fee payable to
Back Bay Advisors was at an annual rate of 0.2625% of the first $200 million of
the 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. 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 (or, in the case of
the Massachusetts Fund, the lesser of such limitation or 1.50% of the Fund's
average daily net assets). See "Management of the Trusts" in Part II of this
Statement.
NEFM and Back Bay Advisors has voluntarily agreed for an indefinite
period to reduce its management fee and, if necessary, to bear certain expenses
associated with operating the Funds in order to limit the Massachusetts Fund's
expenses to an annual rate of 1.00% of the Fund's average daily net assets
attributable to its Class A shares and 1.65% of such assets attributable to its
Class B shares, and in order to limit the New York Fund's expenses to an annual
rate of 0.85% of the Fund's average daily net assets attributable to its Class A
shares and 1.60% of such assets attributable to its Class B shares. Prior to
September 1, 1996, these limits were 0.85% and 1.50% for Class A shares and
Class B shares, respectively, for the Massachusetts Fund, and 0.70% and 1.45%
for Class A and B shares, respectively, for the New York Fund. Prior to January
2, 1996, similar voluntary limitations were in effect with respect to Back Bay
Advisors and the Funds, in addition to the contractual expense limitations
described above.
For the fiscal year ended December 31, 1995, the Massachusetts Fund
paid advisory fees to Back Bay Advisors of $235,210, and for the fiscal years
ended December 31, 1996 and 1997, paid management fees of $251,461 and $345,223,
respectively, to NEFM (in each case after reductions pursuant to voluntary
expense limitations in effect). Had the voluntary expense limitations described
above not been in effect, the Massachusetts Fund's advisory or management fees
for the fiscal years ended December 1995, 1996 and 1997 would have been
$697,878, $705,303 and $691,920, respectively. For the fiscal years ended
December 31, 1996 and 1997, NEFM paid subadvisory fees to Back Bay Advisors of
$125,730 and $172,512, respectively, (after the voluntary limitation). Had the
voluntary limitations not been in effect, Back Bay Advisors' subadvisory fees
would have been $352,651 and 345,960, respectively.
As a result of voluntary expense limitations in effect, the New York
Fund 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 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 $116,330,
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 no subadvisory fees for the New York Fund as a result of the
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 $58,165, respectively, for the fiscal years ended December 31, 1996
and 1997.
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. Each
Fund's current management fee rate represents the sum of the fee rates payable
under the prior advisory and administrative services agreements.
On March 27, 1998, the Funds and Back Bay Advisors which is affiliated
with NEFM submitted a request to the staff of the SEC (the "Staff") for a letter
from the Staff which would permit each Fund and NEFM to enter into certain
amended Advisory Agreements and would also permit each Fund, NEFM and Back Bay
Advisors to enter into certain amended Sub-Advisory Agreements without obtaining
a vote of the shareholders of the Funds (the "Request"). The amended Advisory
and Subadvisory Agreements, taken together, will not result in any increase or
decrease of fees payable by the Funds; however, the amended Advisory and
Subadvisory Agreements would permit for the payment of each Fund's subadvisory
fee directly by the Fund to Back Bay Advisors and the amount of the management
fee payable by such Fund to NEFM would be reduced by the amount of such payment
to Back bay Advisors by the Fund. If the Staff acts favorably on the Request,
then NEFM and the Funds will each enter into a separate amended Advisory
Agreement and NEFM, the Funds and Back Bay Advisors will also enter into new
separate Subadvisory Agreements pursuant to any terms and conditions as may be
prescribed by the Staff.
<PAGE>
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1995, 1996 and 1997, the
Massachusetts Fund paid brokerage commissions of $0, $48,887 and $0,
respectively, and the New York Fund paid $0, $5,990 and $5,150, respectively, 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, each Fund pays the
Distributor fees under separate plans adopted pursuant to Rule 12b-1 under the
1940 Act relating to its Class A and Class B shares. For the fiscal years ended
December 31, 1995, 1996 and 1997, these fees amounted to $399,216, $399,198 and
$390,024, respectively, for the Massachusetts Fund's Class A shares $55,139,
$70,055 and $69,485, respectively, for the Massachusetts Fund's Class B shares.
For the fiscal years ended December 31, 1995, 1996 and 1997, these fees amounted
to $40,660, $42,803 and $49,187, respectively, for the New York Fund's Class A
shares, and $14,352, $20,550 and $24,839, respectively, for the New York Fund's
Class B shares.
During the fiscal year ended December 31, 1997, on sales of the
Massachusetts Fund's and the New York Fund's Class A shares the Distributor paid
$279,416 and $49,200, respectively, as compensation to investment dealers,
$101,998 and $99,137, respectively, as compensation to its sales personnel and
other related costs and $129,997 and $ 0, respectively, as other distribution
costs. During the fiscal year ended December 31, 1997, on sales of the
Massachusetts Fund's and the New York Fund's Class B shares, the Distributor
paid $69,096 and $31,067, respectively, as compensation to investment dealers
and $94,795 and $95,644, respectively, as compensation to sales personnel. Of
the amount paid to investment dealers, $43,365 and $35,367 was paid to New
England Securities Corporation ("New England Securities"), a broker-dealer
affiliate of the Distributor, for the Massachusetts 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 and Class B shares, respectively. New
England Securities paid substantially all of the fees it received from the
Distributor (a) in commissions to its sales personnel and (b) to defray
sales-related overhead costs.
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of April 1, 1998, to the Trust's knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding Class A shares or
Class B shares of the Funds:
New York Fund
Class A Attn: Mutual Funds 7.71%
BHC Securities Inc.
FAO 74572704
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7042
MLPF&S for the Sole Benefit 5.80%
of It's Customers
Attn: Fund Administration
4800 Deer Lake Drive East - 3rd Floor
Jacksonville, FL 32246-6484
Class B NFSC FEBO # OBV-692891 7.51%
Michael J & James V. Cardito TT
The Michael J. Cardito Personal
TR, U/A 4/1/96
400 East 56th Street
New York, NY 10022-4147
Class B Rose Eannone 6.89%
19 Carldon Road
Commack, NY 11725-1610
Painewebber for the Benefit of 5.60%
Nathan R. Lorman and
Vivian Lorman JTWROS
130 East 63rd Street
New York, NY 10021-7334
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUND
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
FOR THE PERIODS ENDED 12/31/97*
<TABLE>
<CAPTION>
Massachusetts Fund ***
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 9.30 38.38 109.74 6.71 7.69
Maximum Offering Price 4.68 32.48 100.82 5.79 7.22
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 8.56 20.45 4.42
Redemption at End of Period 3.56 18.53 4.03
<CAPTION>
New York Fund ****
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 4/23/93** 4/23/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 8.65 34.14 6.46
Redemption at End of Period 5.88 30.83 5.90
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.87 21.62 4.66
Redemption at End of Period 2.87 19.62 4.25
* Federal regulations require this example to be calculated using a $1,000 investment. The minimum initial investment in
shares of the Fund is $2,500, however.
** Commencement of offering of Class B shares.
*** Assuming deduction of current maximum sales load, the Massachusetts Fund's Class A shares' five-year and ten-year
average annual total returns would have been 5.50% and 7.08%, respectively, had a voluntary expense limitation for
certain periods not been in effect, and their aggregate one-year, five-year and ten-year total returns would have been
4.39%, 30.68% and 98.28%, respectively. Based on net asset values, the Massachusetts Fund's Class A shares' five-year
and ten-year average annual total returns would have been 6.43% and 7.56%, respectively, without the voluntary
limitation, and their aggregate one-year, five-year and ten-year total returns would have been 9.01%, 36.58% and
107.19%, respectively. Assuming redemption at the end of the period, the Massachusetts Fund's Class B shares' average
annual total return for the since-inception period would have been 3.66%, 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 3.27% and
16.73%, respectively. Based on net asset values, the Massachusetts Class B shares' average annual total return for the
since-inception period would have been 4.06%, without the voluntary limitation, and their aggregate total returns for
the one-year and since-inception periods would have been 8.27% and 18.65%, respectively.
**** Assuming deduction of current maximum sales load, the New York Fund's Class A shares' since-inception average annual
total returns would have been 4.87%, 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 4.89% and 24.98%, respectively. Based on net
asset values, the New York Fund's Class A shares' since-inception average annual total return would have been 5.45%,
and their aggregate one-year and since-inception total returns would have been 7.66 and 28.29, respectively, without
the voluntary limitation. Assuming redemption at the end of the period, the New York Fund's Class B shares' average
annual total return for the since-inception period would have been 3.05% had a voluntary expense limitation not been in
effect, and their aggregate total returns for the one-year and since-inception periods would have been 1.88% and
13.77%, respectively. Based on net asset values, the New York Fund's Class B shares' average annual total return for
the since-inception period would have been 3.47%, and their aggregate total returns for the one-year and
since-inception periods would have been 6.88% and 15.77%, respectively.
</TABLE>
<PAGE>
YIELD AND TAXABLE EQUIVALENT YIELDS
FOR THE 30-DAY PERIOD ENDED 12/31/97*
Massachusetts Fund
30-day yield:
Class A 4.75%
Class B 4.32%
Taxable equivalent yields:
Combined Tax Rate** Taxable Equivalent Yield
Class A 46.85% Class A 8.94%
Class B 46.85% Class B 8.13%
New York Fund
30-day yield:
Class A 4.09%
Class B 3.45%
Taxable equivalent yields:
Combined Tax Rate*** Taxable Equivalent Yield
Class A 46.08% Class A 7.59%
Class B 46.08% Class B 6.40%
* Yields for Class A shares are based on the public offering price of a share
of the Fund and yields for Class B shares are based on the net asset value
of a share of the Fund.
** Based on combined federal and Massachusetts marginal tax rates for
individuals, assuming deduction of state income taxes for purposes of
calculating federal taxable income.
*** Based on combined federal and New York State and City marginal tax rates for
individuals, assuming deduction of state income taxes for purposes of
calculating federal taxable income.
DISTRIBUTION RATE OF RETURN
Each class of the Funds may include in its written sales material rates
of return for each class based on that class's distributions from net investment
income and short-term capital gains for a recent 30-day, three-month or one-year
period. Distributions of less than one year are annualized by multiplying the
factor necessary to produce 12 months of distributions. The distribution rates
are determined by dividing the amount of a class's distributions per share over
the relevant period by either the maximum offering price in the case of the
Class A shares or the price assuming redemption at the end of the period in the
case of Class B shares or the net asset value of a share of Class A and Class B
on the last day of the period.
<PAGE>
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/97
AS A % OF 1MONTH
- -------------------------------------------- ------
Massachusetts Fund
(Class A shares)
Net Asset 4.55
Value..................................
Maximum Offering Price................... 4.36
(Class B shares)
Net Asset 3.92
Value..................................
New York Fund
(Class A shares)
Net Asset 4.86
Value..................................
Maximum Offering Price................... 4.74
(Class B shares)
Net Asset 4.13
Value..................................
<PAGE>
[Graphic omitted]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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
"Fund"). This Statement is not a prospectus and is authorized for distribution
only when accompanied or preceded by the Prospectus of the Fund 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 Fund.
Part II includes information about the Fund and other New England Funds.
The Fund is a series of New England Funds Trust II (the "Trust"), a
registered open-end 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 Fund vi
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
Description of the Trusts and Ownership of Shares 32
How to Buy Shares 35
Net Asset Value and Public Offering Price 35
Shareholder Services 36
Redemptions 41
Standard Performance Measures 43
Income Dividends, Capital Gain Distributions and Tax Status 47
Financial Statements 49
Appendix A - Description of Bond Ratings 50
Appendix B - Publications That May Contain Fund Information 52
Appendix C - Advertising and Promotional Literature 54
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds 59
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Fund. The restrictions marked with an asterisk may not be changed
without the vote of a majority of the outstanding voting securities of the 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 the 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 Fund may not:
(1) With respect to 50% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities or California 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 the Fund's total assets would be invested
in any one industry. Governmental issuers of California Tax Exempt
Securities are not considered part of any "industry." However,
California 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 the Fund's assets will be
invested in obligations deemed to be issued by nongovernmental users in
any one industry and in taxable obligations of issuers in the same
industry;
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (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 the Fund's
portfolio securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the Securities and
Exchange Commission (the "SEC") participate on a joint or joint and
several basis in any trading account in securities (the "bunching" of
orders for the purchase or sale of portfolio securities with the Fund's
adviser or subadviser or accounts under its management to reduce
brokerage commissions, to average prices among them or to facilitate
such transactions is not considered a trading account in securities for
purposes of this restriction);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indices
or financial futures contracts and (b) enter into currency forward
contracts;
(12) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities and certain Section
4(2) commercial paper deemed to be liquid under guidelines established
by the Trust's trustees); or
*(13) Issue senior securities (for the purpose of this restriction none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of 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 an advisory agreement dated August 30, 1996, New England
Funds Management, L.P. ("NEFM") has agreed, subject to the supervision of the
Board of Trustees of the Trust, to manage the investment and reinvestment of the
assets of the Fund and to provide a range of administrative services to the
Fund. For the services described in the advisory agreements, the 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 agreement provides that NEFM may delegate its
responsibilities thereunder to other parties. Pursuant to a subadvisory
agreement dated August 30, 1996, NEFM has delegated responsibility for managing
the investment and reinvestment of the Fund's assets to Back Bay Advisors, L.P.
("Back Bay Advisors"), as subadviser. For providing such subadvisory services to
the Fund, NEFM pays Back Bay Advisors a subadvisory fee at the annual rate of
0.2625% of the first $200 million of the 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 Fund pays no direct fees to Back Bay Advisors.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to the Fund under advisory and
subadvisory agreements providing for management fees and subadvisory fees at the
same rates as are currently in effect for the Fund. Prior to January 2, 1996,
Back Bay Advisors served as adviser to the Fund pursuant to a an advisory
agreement which provided for an advisory fee payable by the Fund to Back Bay
Advisors at the annual rate of 0.40% of the first $200 million of the Fund's
average daily net assets, 0.375% of the next $300 million of such assets and
0.35% of such assets in excess of $500 million. Back Bay Advisors' compensation
under such advisory agreement was subject to reduction to the extent that in any
year the Fund's expenses, including Back Bay Advisors' fee, but exclusive of
brokerage commissions, taxes, interest, distribution expenses and extraordinary
items, exceeded 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 an administrative services agreement
between the Fund and New England Funds, L.P. (the "Distributor"), the Fund's
distributor, the Distributor provided the Fund with office space, facilities and
equipment, services of executive and other personnel and certain administrative
services. Under this agreement, the Fund paid the Distributor a fee at the
annual rate of 0.125% of the Fund's average daily net assets. The Fund's current
management fee rate represents the sum of the fee rates payable under the prior
advisory and administrative services agreement.
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 Fund in order to limit the 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 the Fund, in addition to the contractual expense limitations
described above.
As a result of voluntary expense limitations in effect, the Fund 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
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 $107,354, respectively, in management fees for
the fiscal years ended December 31, 1996 and 1997. For the fiscal year ended
December 31, 1997, NEFM paid Back Bay Advisors no subadvisory fees for the Fund,
after voluntary expense limitations. Had the voluntary limitations not been in
effect, Back Bay Advisors' subadvisory fees for the Fund would have been
$107,354.
On March 27, 1998, the Fund and Back Bay Advisors, which is affiliated
with NEFM, submitted a request to the staff of the SEC (the "Staff") for a
letter from the Staff which would permit the Fund and NEFM to enter into a
certain amended Advisory Agreement and would also permit the Fund, NEFM and Back
Bay Advisors to enter into a certain amended Sub-Advisory Agreement, without
obtaining a vote of the shareholders of the Fund (the "Request"). The amended
Advisory and Subadvisory Agreements, taken together, will not result in any
increase or decrease of fees payable by the Fund; however, the amended Advisory
and Subadvisory Agreements would permit for the payment of the Fund's
subadvisory fee directly by the Fund to Back Bay Advisors and the amount of the
management fee payable by the Fund to NEFM reduced by the amount of such payment
to Back Bay Advisors by the Fund. If the Staff acts favorably on the Request,
then NEFM and the Fund will enter into an amended Advisory Agreement and NEFM,
the Fund and Back Bay Advisors will also enter into a separate amended
Subadvisory Agreement pursuant to any terms and conditions as may be prescribed
by the Staff.
BROKERAGE COMMISSIONS
For the fiscal years ended December 31, 1995, 1996 and 1997, the Fund
paid no brokerage commissions on portfolio transactions.
For more information about Fund portfolio transactions, see "Portfolio
Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Fund pays the
Distributor fees under a separate plan adopted pursuant to Rule 12b-1 under the
1940 Act relating to its Class A and Class B shares. For the fiscal years ended
December 31, 1995, 1996 and 1997, these fees amounted to $79,473, $84,706 and
$81,788, respectively, for the Fund's Class A shares, and $57,947, $63,402 and
$81,885, respectively, for the Fund's Class B shares.
During the fiscal year ended December 31, 1997, on sales of the Fund's
Class A shares, the Distributor paid $81,788 as compensation to investment
dealers and $104,521 as compensation to its sales personnel and other related
costs. During the fiscal year ended December 31, 1997, on sales of the Fund's
Class B shares, the Distributor paid $56,571 as compensation to investment
dealers and $61,414 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 Fund's Class A shares and Class B shares,
respectively. New England Securities paid substantially all of the fees it
received from the Distributor (a) in commissions to its sales personnel and (b)
to defray sales-related overhead costs.
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of April 1, 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 Fund:
Class B shares Marie S. Black 7.30%
1710 Birchwood Drive
San Marcos, CA 92069-9608
Everen Clearing Corp. 7.20%
A/C 4141-2237
David Duane Johnson
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
Everen Clearing Corp. 6.38%
A/C 7420-0445
William L. Spangler &
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUND
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
FOR THE PERIODS ENDED 12/31/97*
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Since Since
Class A shares: As a % of 1 Year 4/23/93** 4/23/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.96 33.67 6.38
Maximum Offering Price 5.21 30.32 5.82
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Since Since
Class B shares: ****As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.17 20.06 4.34
Redemption at End of Period 2.17 18.07 3.94
* 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 Fund's Class A shares' since-inception average annual total
return would have been 5.27% 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 4.73% and 27.26%, respectively. Based on net asset
values, the Fund's Class A shares' since-inception average annual total return would have been 5.85%, and their
aggregate one-year and since-inception total returns would have been 7.48% and 30.57%, respectively, without the
voluntary limitation.
**** Assuming redemption at the end of the period, the Fund's Class B shares' average annual total return for the
since-inception period would have been 3.30%, had a voluntary expense limitation not been in effect, and their
aggregate total returns for the one-year and since-inception periods would have been 1.69% and 14.97%, respectively.
Based on net asset values, the Fund's Class B shares' average annual total return for the since-inception period would
have been 3.71%, and their aggregate total returns for the one-year and since-inception periods would have been 6.69%
and 16.96%, respectively, without the voluntary limitation.
</TABLE>
<PAGE>
YIELD AND TAXABLE EQUIVALENT YIELDS
FOR THE 30-DAY PERIOD ENDED 12/31/97*
30-day yield:
Class A 4.44%
Class B 3.82%
Taxable equivalent yields:
Combined Tax Rate*** Taxable Equivalent Yield
Class A 45.22% Class A 8.11%
Class B 45.22% Class B 6.97%
* Yields for Class A shares are based on the public offering price of a share
of the Fund and yields for Class B shares are based on the net asset value
of a share of the Fund.
** Based on combined federal and California marginal tax rates for individuals,
assuming deduction of state income taxes for purposes of calculating federal
taxable income.
DISTRIBUTION RATE OF RETURN
Each class of the Fund 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
- -----------------------------------------
(Class A shares)
Net Asset Value.......................... 4.88
Maximum Offering Price................... 4.76
(Class B shares)
Net Asset Value.......................... 4.14
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
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") except New England Bullseye Fund, which is
described in a separate Statement of Additional Information. In certain cases,
the discussion applies to some but not all of the Funds. Certain data applicable
to particular Funds is found in Part I of this Statement of Additional
Information (the "Statement") as well as in the Prospectuses of the Funds dated
May 1, 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>
SERIES OF NEW ENGLAND FUNDS TRUST I
<S> <C>
New England Capital Growth Fund (the "Capital Growth Fund")
New England Balanced Fund (the "Balanced Fund")
New England Growth Fund (the "Growth Fund")
New England International Equity Fund (the "International Equity Fund")
New England Star Advisers Fund (the "Star Advisers Fund")
New England 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 of California (the "California Fund')
New England Tax Free Income Fund of New York (the "New York Fund")
(formerly New England Intermediate Term Tax Free Fund
of New York)
SERIES OF NEW ENGLAND FUNDS TRUST III
New England Equity Income Fund (the "Equity Income Fund")
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENT PRACTICES
- -------------------------------------------------------------------------------
The following information relates to certain investment practices in
which certain Funds may engage. The table below indicates which Funds may engage
in each of these practices.
Practices Funds
- --------- -----
Loans of Portfolio Securities Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
High Income Fund
Adjustable Rate Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Equity Income Fund
Capital Growth 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
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Short Sales Star Worldwide Fund
Star Small Cap Fund
Star Advisers 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:
* U.S. Treasury Bills - Direct obligations of the United States Treasury
which are issued in maturities of one year or less. No interest is paid on
Treasury bills; instead, they are issued at a discount and repaid at full
face value when they mature. They are backed by the full faith and credit
of the United States Government.
* U.S. Treasury Notes and Bonds - Direct obligations of the United States
Treasury issued in maturities that vary between one and 40 years, with
interest normally payable every six months. These obligations are backed by
the full faith and credit of the United States Government.
* "Ginnie Maes" - Debt securities issued by a mortgage banker or other
mortgagee which represent an interest in a pool of mortgages insured by the
Federal Housing Administration or the Farmer's Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association ("GNMA") guarantees the timely payment of principal and
interest when such payments are due, whether or not these amounts are
collected by the issuer of these certificates on the underlying mortgages.
An assistant attorney general of the United States has rendered an opinion
that the guarantee by GNMA is a general obligation of the United States
backed by its full faith and credit. Mortgages included in single family or
multi-family residential mortgage pools backing an issue of Ginnie Maes
have a maximum maturity of up to 30 years. Scheduled payments of principal
and interest are made to the registered holders of Ginnie Maes (such as the
Fund) each month. Unscheduled prepayments may be made by homeowners, or as
a result of a default. Prepayments are passed through to the registered
holder (such as the Fund, which reinvests any prepayments) of Ginnie Maes
along with regular monthly payments of principal and interest.
* "Fannie Maes" - The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Fannie Maes are pass-through securities issued by FNMA
that are guaranteed as to timely payment of principal and interest by FNMA
but are not backed by the full faith and credit of the United States
Government.
* "Freddie Macs" - The Federal Home Loan Mortgage Corporation ("FHLMC") is a
corporate instrumentality of the United States Government. Freddie Macs are
participation certificates issued by FHLMC that represent an interest in
residential mortgages from FHLMC's National Portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but
Freddie Macs are not backed by the full faith and credit of the United
States Government.
U.S. Government securities generally do not involve the credit risks
associated with investments in other types of fixed-income securities, although,
as a result, the yields available from U.S. Government securities are generally
lower than the yields available from corporate fixed-income securities. Like
other fixed-income securities, however, the values of U.S. Government securities
change as interest rates fluctuate. Fluctuations in the value of portfolio
securities will not affect interest income on existing portfolio securities but
will be reflected in the Fund's net asset value. Since the magnitude of these
fluctuations will generally be greater at times when the Fund's average maturity
is longer, under certain market conditions the Fund may, for temporary defensive
purposes, accept lower current income from short-term investments rather than
investing in higher yielding long-term securities.
When-Issued Securities. 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 segregate 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 date. The resale price is
in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
relatively low market risk. While the underlying security may be a bill,
certificate of indebtedness, note or bond issued by an agency, authority or
instrumentality of the United States Government, the obligation of the seller is
not guaranteed by the United States Government and there is a risk that the
seller may fail to repurchase the underlying security. In such event, the Fund
would attempt to exercise rights with respect to the underlying security,
including possible disposition in the market. However, the Fund may be subject
to various delays and risks of loss, including (a) possible declines in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and lack of
access to income during this period and (c) inability to enforce rights and the
expenses involved in the attempted enforcement.
Zero Coupon Securities. Zero coupon securities are debt obligations that do not
entitle the holder to any periodic payments of interest either for the entire
life of the obligation or for an initial period after the issuance of the
obligations. Such securities are issued and traded at a discount from their face
amounts. The amount of the discount varies depending on such factors as the time
remaining until maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
securities having similar maturities and credit quality. In order to satisfy a
requirement for qualification as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), the Fund must distribute
each year at least 90% of its net investment income, including the original
issue discount accrued on zero coupon securities. Because the Fund will not on a
current basis receive cash payments from the issuer of a zero coupon security in
respect of accrued original issue discount, in some years the Fund may have to
distribute cash obtained from other sources in order to satisfy the 90%
distribution requirement under the Code. Such cash might be obtained from
selling other portfolio holdings of the Fund. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Fund to sell such securities at such time.
Convertible Securities. The Fund may invest in convertible securities, including
corporate bonds, notes or preferred stocks of U.S. or foreign issuers that can
be converted into (that is, exchanged for) common stocks or other equity
securities. Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally vary in some proportion with those of the underlying equity
securities. Convertible securities usually provide a higher yield than the
underlying equity, however, so that the price decline of a convertible security
may sometimes be less substantial than that of the underlying equity security.
Tax Exempt Bonds. The Fund may invest in tax exempt bonds. Tax exempt bonds
include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as bridges,
highways, hospitals, housing, mass transportation, schools, streets, and water
and sewer works. Other public purposes for which tax exempt bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to lend to other public institutions and
facilities. In addition, prior to the Tax Reform Act of 1986, certain debt
obligations known as industrial development bonds could be issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Such obligations are included
within the term "tax exempt bonds" if the interest paid thereon is, in the
opinion of bond counsel, exempt from federal income tax. Interest on certain
industrial development bonds used to fund the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities may also
be exempt from federal income tax. The Tax Reform Act of 1986 eliminated some
types of tax exempt industrial revenues bonds but retains others under the
general category of "private activity bonds." The interest on so-called "private
activity bonds" is exempt from ordinary federal income taxation but is treated
as a tax preference item in computing a shareholder's alternative minimum tax
liability, as noted in the Prospectus.
The Fund may not be a desirable investment for "substantial users" of
facilities financed by industrial development bonds or for "related persons" of
substantial users.
The two principal classifications of tax exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon an appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities, or in some cases from
the proceeds of a special excise or other specific revenue source such as the
user of the facility. Tax exempt industrial development bonds and private
activity bonds are in most cases revenue bonds and generally are not payable
from the unrestricted revenues of the issuer. The credit and quality of such
bonds is usually directly related to the credit standing of the corporate user
of the facilities. Principal and interest on such bonds is the responsibility of
the corporate user (and any guarantor).
Prices and yields on tax exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the tax exempt bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of tax exempt bonds may not be as extensive as that made available
by corporations whose securities are publicly traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
and Poor's Ratings Group ("Standard & Poor's" or "S&P") represent their opinions
and are not absolute standards of quality. Tax exempt bonds with the same
maturity, interest rate and rating may have different yields while tax exempt
bonds of the same maturity and interest rate with different ratings may have the
same yield.
Obligations of issuers of tax exempt bonds are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Bankruptcy
Reform Act of 1978, affecting the rights and remedies of creditors. Congress or
state legislatures may seek to extend the time for payment of principal or
interest, or both, or to impose other constraints upon enforcement of such
obligations. There is also the possibility that, as a result of litigation or
other conditions, the power or ability of issuers to meet their obligations for
the payment of interest and principal on their tax exempt bonds may be
materially affected, or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax exempt bonds or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's tax exempt bonds in the
same manner.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on debt obligations issued by states and their political subdivisions
and similar proposals may well be introduced in the future. If such a proposal
were enacted, the availability of tax exempt securities for investment by the
Fund and the value of the Fund's portfolio could be materially affected, in
which event the Fund would reevaluate its investment objective and policies and
consider changes in the structure of the Fund or dissolution.
All debt securities, including tax exempt bonds, are subject to credit
and market risk. Generally, for any given change in the level of interest rates,
prices for longer maturity issues tend to fluctuate more than prices for shorter
maturity issues. The ability of the Fund to invest in securities other than tax
exempt bonds is limited by a requirement of the Code that at least 50% of the
Fund's total assets be invested in tax exempt bonds at the end of each calendar
quarter.
State Tax Exempt Securities. The Fund may invest in "State Tax Exempt
Securities" which term refers to debt securities the interest from which is, in
the opinion of bond counsel, exempt from federal income tax and State personal
income taxes (other than the possible incidence of any alternative minimum
taxes). State Tax Exempt Securities consist primarily of bonds of the Fund's
named state, their political subdivisions (for example, counties, cities, towns,
villages and school districts) and authorities issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which certain State Tax Exempt Securities may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses, or obtaining funds to lend to public or private institutions for the
construction of facilities such as educational, hospital and housing facilities.
In addition, certain types of industrial development bonds and private activity
bonds have been or may be issued by public authorities or on behalf of state or
local governmental units to finance privately operated housing facilities,
sports facilities, convention or trade facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Other types of industrial
development and private activity bonds are used to finance the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities. Industrial development bonds and private activity bonds are included
within the term "State Tax Exempt Securities" if the interest paid thereon is,
in the opinion of bond counsel, exempt from federal income tax and State
personal income taxes (other than the possible incidence of any alternative
minimum taxes). The Fund may invest more than 25% of the value of its total
assets in such bonds, but not more than 25% in bonds backed by non-governmental
users in any one industry (see "Investment Restrictions" in Part I of this
Statement). However, as described in the Fund's Prospectus, the income from
certain private activity bonds is an item of tax preference for purposes of the
federal alternative minimum tax, and it is a fundamental policy of the Fund that
distributions from interest income on such private activity bonds, together with
distributions of interest income on investments other than State Tax Exempt
Securities, will normally not exceed 10% of the total amount of the Fund's
income distributions.
In addition, the term "State Tax Exempt Securities" includes debt
obligations issued by other governmental entities (for example, U. S.
territories) if such debt obligations generate interest income which is exempt
from federal income tax and State personal income taxes (other than any
alternative minimum taxes).
There are, of course, variations in the quality of State Tax Exempt
Securities, both within a particular classification and between classifications,
depending on numerous factors (see Appendix A).
The yields on State Tax Exempt Securities are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the State Tax Exempt Securities market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The ratings of Moody's and Standard and Poor's represent their
opinions as to the quality of the State Tax Exempt Securities which they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, State Tax Exempt
Securities with the same maturity, interest rate and rating may have different
yields while State Tax Exempt Securities of the same maturity and interest rates
with different ratings may have the same yield. Subsequent to its purchase by
the Fund, an issue of State Tax Exempt Securities or other investments may cease
to be rated or the rating may be reduced below the minimum rating required for
purchase by the Fund. Neither event will require the elimination of an
investment from the Fund's portfolio, but the Fund's subadviser will consider
such an event as part of its normal, ongoing review of all the Fund's portfolio
securities.
The Fund does not currently intend to invest in so-called "moral
obligation" bonds, where repayment is backed by a moral commitment of an entity
other than the issuer, unless the credit of the issuer itself, without regard to
the "moral obligation," meets the investment criteria established for
investments by the Fund.
Securities in which the Fund may invest, including State Tax Exempt
Securities, are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or the State
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations. There is also
the possibility that as a result of litigation or other conditions the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their State Tax Exempt Securities may be materially affected or
that their obligations may be found to be invalid and unenforceable.
The Fund's named state and certain of its cities and towns and public
bodies have from time to time encountered financial difficulties which have
adversely affected their respective credit standings and borrowing abilities.
Such difficulties could, of course, affect outstanding obligations of such
entities, including obligations held by the Fund.
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
Taxpayer Relief Act of 1997 may limit tax advantages previously available to the
Fund with respect to 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
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity and with the same delivery date. Similarly,
the closing out of a futures purchase is closed by the purchaser selling an
offsetting futures contract.
Gain or loss on a futures position is equal to the net variation margin
received or paid over the time the position is held, plus or minus the amount
received or paid when the position is closed, minus brokerage commissions.
OPTIONS. An option on a futures contract obligates the writer, in return for the
premium received, to assume a position in a futures contract (a short position
if the option is a call and a long position if the option is a put), at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option generally will be accompanied by delivery
of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option. The premium paid by the purchaser of an option
will reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying contract, the remaining term of
the option, supply and demand and interest rates. Options on futures contracts
traded in the United States may only be traded on a United States board of trade
licensed by the Commodity Futures Trading Commission (the "CFTC").
An option on a security entitles the holder to receive (in the case of
a call option) or to sell (in the case of a put option) a particular security at
a specified exercise price. An "American style" option allows exercise of the
option at any time during the term of the option. A "European style" option
allows an option to be exercised only at the end of its term. Options on
securities may be traded on or off a national securities exchange.
A call option on a futures contract written by the Fund is considered
by the Fund to be covered if the Fund owns the security subject to the
underlying futures contract or other securities whose values are expected to
move in tandem with the values of the securities subject to such futures
contract, based on historical price movement volatility relationships. A call
option on a security written by the Fund is considered to be covered if the Fund
owns a security deliverable under the option. A written call option is also
covered if the Fund holds a call on the same futures contract or security as the
call written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash or
liquid securities eligible for purchase by the Fund in a segregated account with
its custodian.
A put option on a futures contract written by the Fund, or a put option
on a security written by the Fund, is covered if the Fund maintains cash or
liquid securities eligible for purchase by the Fund with a value equal to the
exercise price in a segregated account with the Fund's custodian, or else holds
a put on the same futures contract (or security, as the case may be) as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the writer of an option wishes to terminate its position, it may
effect a closing purchase transaction by buying an option identical to the
option previously written. The effect of the purchase is that the writer's
position will be canceled. Likewise, the holder of an option may liquidate its
position by selling an option identical to the option previously purchased.
Closing a written call option will permit the Fund to write another
call option on the portfolio securities used to cover the closed call option.
Closing a written put option will permit the Fund to write another put option
secured by the segregated assets used to secure the closed put option. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any futures contract or securities subject to the option to
be used for other Fund investments. If the Fund desires to sell particular
securities covering a written call option position, it will close out its
position or will designate from its portfolio comparable securities to cover the
option prior to or concurrent with the sale of the covering securities.
The Fund will realize a profit from closing out an option if the price
of the offsetting position is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from closing out an option transaction if the price of the
offsetting option position is more than the premium received from writing the
option or is less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the covering securities, any loss resulting from the
closing of a written call option position is expected to be offset in whole or
in part by appreciation of such covering securities.
Since premiums on options having an exercise price close to the value
of the underlying securities or futures contracts usually have a time value
component (i.e., a value that diminishes as the time within which the option can
be exercised grows shorter) an option writer may profit from the lapse of time
even though the value of the futures contract (or security in some cases)
underlying the option (and of the security deliverable under the futures
contract) has not changed. Consequently, profit from option writing may or may
not be offset by a decline in the value of securities covering the option. If
the profit is not entirely offset, the Fund will have a net gain from the
options transaction, and the Fund's total return will be enhanced. Likewise, the
profit or loss from writing put options may or may not be offset in whole or in
part by changes in the market value of securities acquired by the Fund when the
put options are closed.
As an alternative to purchasing call and put options on index futures,
the Fund may purchase or sell call or put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant; if the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at a time when, in
the case of a call warrant, the exercise price is less than the value of the
underlying index, or in the case of a put warrant, the exercise price is less
than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to its
use of options on securities indices. The risks of the Fund's use of index
warrants are generally similar to those relating to its use of index options.
Unlike most index options, however, index warrants are issued in limited amounts
and are not obligations of a regulated clearing agency, but are backed only by
the credit of the bank or other institution which issues the warrant. Also,
index warrants generally have longer terms than index options. Although the Fund
will normally invest only in exchange-listed warrants, index warrants are not
likely to be as liquid as certain index options backed by a recognized clearing
agency. In addition, the terms of index warrants may limit the Fund's ability to
exercise the warrants at such time, or in such quantities, as the Fund would
otherwise wish to do.
The Fund may buy and write options on foreign currencies in a manner
similar to that in which futures or forward contracts on foreign currencies will
be utilized. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
the portfolio securities, the Fund may buy put options on the foreign currency.
If the value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in
part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund from purchases of foreign currency
options will be reduced by the amount of the premium and related transactions
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Fund could sustain losses on transactions in foreign
currency options that would require the Fund to forego a portion or all of the
benefits of advantageous changes in those rates.
The Fund may also write options on foreign currencies. For example, to
hedge against a potential decline in the U.S. dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates, the Fund
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities be offset at least
in part by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move in
the manner projected, will expire unexercised and allow the Fund to hedge the
increased cost up to the amount of the premium. If exchange rates do not move in
the expected direction, the option may be exercised and the Fund would be
required to buy or sell the underlying currency at a loss, which may not be
fully offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may lose all or a portion of the benefits
which might otherwise have been obtained from favorable movements in exchange
rates.
All call options written by the Fund on foreign currencies will be
"covered." A call option written on a foreign currency by the Fund is "covered"
if the Fund owns the foreign currency underlying the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currencies held
in its portfolio. A call option is also covered if the Fund has a call on the
same foreign currency in the same principal amount as the call written if the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written, if the difference is maintained by the Fund in cash or liquid
securities eligible to be purchased by the Fund in a segregated account with the
Fund's custodian. For this purpose, a call option is also considered covered if
the Fund owns securities denominated in (or which trade principally in markets
where settlement occurs in) the same currency, which securities are readily
marketable, and the Fund maintains in a segregated account with its custodian
cash or liquid securities eligible to be purchased by the Fund in an amount that
at all times at least equals the excess of (x) the amount of the Fund's
obligation under the call option over (y) the value of such securities.
SWAP CONTRACTS. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest (for example,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the relative values of the
specified currencies. An index swap is an agreement to make or receive payments
based on the different returns that would be achieved if a notional amount were
invested in a specified basket of securities (such as the Standard & Poor's
Composite Index of 500 Stocks [the "S&P 500"]) or in some other investment (such
as U.S. Treasury securities). The Fund will maintain at all times in a
segregated account with its custodian cash or liquid securities eligible to be
purchased by the Fund in amounts sufficient to satisfy its obligations under
swap contracts.
RISKS. The use of futures contracts, options and swap contracts involves risks.
One risk arises because of the imperfect correlation between movements in the
price of futures contracts and movements in the price of the securities that are
the subject of the hedge. The Fund's hedging strategies will not be fully
effective unless the Fund can compensate for such imperfect correlation. There
is no assurance that the Fund will be able to effect such compensation.
The correlation between the price movement of the futures contract and
the hedged security may be distorted due to differences in the nature of the
markets. For example, to the extent that the Municipal Income Fund enters into
futures contracts on securities other than tax exempt bonds, the value of such
futures may not vary in direct proportion to the value of tax exempt bonds that
the Fund owns or intends to acquire, because of an imperfect correlation between
the movement of taxable securities and tax exempt bonds. If the price of the
futures contract moves more than the price of the hedged security, the relevant
Fund would experience either a loss or a gain on the future that is not
completely offset by movements in the price of the hedged securities. In an
attempt to compensate for imperfect price movement correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the price movement volatility of the hedged securities is
historically greater than the volatility of the futures contract. Conversely,
the Fund may purchase or sell fewer contracts if the volatility of the price of
hedged securities is historically less than that of the futures contracts.
The price of index futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. In addition, trading hours for
foreign stock index futures may not correspond perfectly to hours of trading on
the foreign exchange to which a particular foreign stock index future relates.
This may result in a disparity between the price of index futures and the value
of the relevant index due to the lack of continuous arbitrage between the index
futures price and the value of the underlying index. Finally, hedging
transactions using stock indices involve the risk that movements in the price of
the index may not correlate with price movements of the particular portfolio
securities being hedged.
Price movement correlation also may be distorted by the illiquidity of
the futures and options markets and the participation of speculators in such
markets. If an insufficient number of contracts are traded, commercial users may
not deal in futures contracts or options because they do not want to assume the
risk that they may not be able to close out their positions within a reasonable
amount of time. In such instances, futures and options market prices may be
driven by different forces than those driving the market in the underlying
securities, and price spreads between these markets may widen. The participation
of speculators in the market enhances its liquidity. Nonetheless, speculators
trading spreads between futures markets may create temporary price distortions
unrelated to the market in the underlying securities.
Positions in futures contracts and options on futures contracts may be
established or closed out only on an exchange or board of trade. There is no
assurance that a liquid market on an exchange or board of trade will exist for
any particular contract or at any particular time. The liquidity of markets in
futures contracts and options on futures contracts may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which limit
the amount of fluctuation in a futures or options price during a single trading
day. Once the daily limit has been reached in a contract, no trades may be
entered into at a price beyond the limit, which may prevent the liquidation of
open futures or options positions. Prices have in the past exceeded the daily
limit on a number of consecutive trading days. If there is not a liquid market
at a particular time, it may not be possible to close a futures or options
position at such time, and, in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin.
However, if futures or options are used to hedge portfolio securities, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid secondary
market for an option of the same series. If a liquid secondary market for an
exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund would have to exercise the option in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction in a secondary market,
it will be not be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise. Reasons for the absence of
a liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing Corporation
or other clearing organization may not at all times be adequate to handle
current trading volume or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
Because the specific procedures for trading foreign stock index futures
on futures exchanges are still under development, additional or different margin
requirements as well as settlement procedures may be applicable to foreign stock
index futures at the time the International Equity Fund purchases foreign stock
index futures.
The successful use of transactions in futures and options depends in
part on the ability of a Fund's adviser or subadviser(s) to forecast correctly
the direction and extent of interest rate movements within a given time frame.
To the extent interest rates move in a direction opposite to that anticipated,
the Fund may realize a loss on the hedging transaction that is not fully or
partially offset by an increase in the value of portfolio securities. In
addition, whether or not interest rates move during the period that the Fund
holds futures or options positions, the Fund will pay the cost of taking those
positions (i.e., brokerage costs). As a result of these factors, the Fund's
total return for such period may be less than if it had not engaged in the
hedging transaction.
Options trading involves price movement correlation risks similar to
those inherent in futures trading. Additionally, price movements in options on
futures may not correlate with price movements in the futures underlying the
options. Like futures, options positions may become less liquid because of
adverse economic circumstances. The securities covering written option positions
are expected to offset adverse price movements if those options positions cannot
be closed out in a timely manner, but there is no assurance that such offset
will occur. Also, an option writer may not effect a closing purchase transaction
after it has been notified of the exercise of an option.
OVER-THE-COUNTER OPTIONS. An over-the-counter option (an option not traded on a
national securities exchange) may be closed out only with the other party to the
original option transaction. While the Fund will seek to enter into
over-the-counter options only with dealers who agree to or are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an over-the-counter option at
a favorable price at any time prior to its expiration. Accordingly, the Fund
might have to exercise an over-the-counter option it holds in order to realize
any profit thereon and thereby would incur transactions costs on the purchase or
sale of the underlying assets. If the Fund cannot close out a covered call
option written by it, it will not be able to sell the underlying security until
the option expires or is exercised. Furthermore, over-the-counter options are
not subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation or other clearing organizations.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that over-the-counter options on U.S. Government securities
and the assets used as cover for written over-the-counter options on U.S.
Government securities should generally be treated as illiquid securities for
purposes of the investment restrictions prohibiting the Government Securities
Fund from investing more than 15% of its net assets in illiquid securities.
However, if a dealer recognized by the Federal Reserve Bank of New York as a
"primary dealer" in U.S. Government securities is the other party to an option
contract written by the Fund, and the Fund has the absolute right to repurchase
the option from the dealer at a formula price established in a contract with the
dealer, the SEC staff has agreed that the Fund only needs to treat as illiquid
that amount of the "cover" assets equal to the amount at which (i) the formula
price exceeds (ii) any amount by which the market value of the securities
subject to the options exceeds the exercise price of the option (the amount by
which the option is "in-the-money"). Although Back Bay Advisors, L.P. ("Back Bay
Advisors"), the Government Securities Fund's subadviser, does not believe that
over-the-counter options on U.S. Government securities are generally illiquid,
the Fund has agreed that pending resolution of this issue it will conduct its
operations in conformity with the views of the SEC staff on such matters.
Back Bay Advisors has established standards for the creditworthiness of
the primary dealers with which the Government Securities Fund may enter into
over-the-counter option contracts having the formula-price feature referred to
above. Those standards, as modified from time to time, are implemented and
monitored by Back Bay Advisors. Such contracts will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, by
which the option is "in-the-money." The formula will also include a factor to
account for the difference between the price of the securities and the exercise
price of the option if the option is written out-of-the-money. Although each
agreement will provide that the Fund's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined pursuant to the
formula), the formula price will not necessarily reflect the market value of the
option written, and therefore the Fund might pay more to repurchase the option
contract than the Fund would pay to close out a similar exchange-traded option.
ECONOMIC EFFECTS AND LIMITATIONS. Income earned by the Fund from its hedging
activities will be treated as capital gain and, if not offset by net recognized
capital losses incurred by the Fund, will be distributed to shareholders in
taxable distributions. Although gain from futures and options transactions may
hedge against a decline in the value of the Fund's portfolio securities, that
gain, to the extent not offset by losses, will be distributed in light of
certain tax considerations and will constitute a distribution of that portion of
the value preserved against decline. If the Municipal Income Fund is required to
use taxable fixed-income securities as margin, the portion of the Fund's
dividends that is taxable to shareholders will be larger than if that Fund is
permitted to use tax exempt bonds for that purpose.
The Fund intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" adopted by the CFTC
and the National Futures Association, which regulate trading in the futures
markets. The Fund will use futures contracts and related options primarily for
bona fide hedging purposes within the meaning of CFTC regulations. To the extent
that the Fund holds positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions, the aggregate
initial margin and premiums required to establish such positions will not exceed
5% of the fair market value of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into.
FUTURE DEVELOPMENTS. The above discussion relates to the Fund's proposed use of
futures contracts, options and options on futures contracts currently available.
The relevant markets and related regulations are still in the developing stage.
In the event of future regulatory or market developments, the Fund may also use
additional types of futures contracts or options and other investment techniques
for the purposes set forth above.
FOREIGN CURRENCY HEDGING TRANSACTIONS. To protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell a security and the settlement date for the purchase or sale, or
to "lock in" the equivalent of a dividend or interest payment in another
currency, the Fund might purchase or sell a foreign currency on a spot ( i.e.,
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 other liquid assets eligible for purchase by the Fund in a
segregated account with the custodian in an amount at least equal to the lesser
of (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
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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 (58); 79 John F. Kennedy Street, Cambridge,
Massachusetts 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 (53); 452 Fifth Avenue, New York, New York 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 (66); 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.;
formerly, 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); Director,
Sequana Therapeutics (biotechnology); formerly, Director of the U.S.
Office of Management and Budget and a member of President Bush's
Cabinet; formerly, Director, HighwayMaster Communications (mobile
communications).
SANDRA O. MOOSE -- Trustee (56); 135 E. 57th Street, New York, New York 10022;
Senior Vice President and Director, The Boston Consulting Group, Inc.
(management consulting); Director, GTE Corporation (communications
services); Director, 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"); Chief
Executive Officer, New England Funds Service Corporation ("NEFSCO");
Director, Back Bay Advisors, Inc. ("BBAI"); Director, Maine Bank &
Trust Company; formerly, Director, New England Securities Corporation
("New England Securities").
JOHN A. SHANE -- Trustee (65); 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.
(publisher of medical magazines); Director, Eastern Bank Corporation;
Director, Gensym Corporation (developer of expert system software);
Director, Overland Data, Inc. (manufacturer of computer tape drives);
Director, Summa Four, Inc. (manufacturer of telephone switching
equipment); Director, United Asset Management Corporation (holding
company for institutional money management).
PETER S. VOSS* -- Chairman of the Board, Chief Executive Officer and Trustee
(51); President and Chief Executive Officer, Nvest, L.P. and Nvest
Companies, L.P. ("Nvest Companies"); Chairman of the Board and
Director, President and Chief Executive Officer, Nvest Corporation;
Chairman of the Board and Director, NEF Corporation; Chairman of the
Board and Director, BBAI; formerly, Director, New England Life
Insurance Company ("NELICO").
PENDLETON P. WHITE -- Trustee (67); 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).
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* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
Officers
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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 (42); Executive Vice President, NEF
Corporation; Executive Vice President, New England Funds, L.P.;
Executive Vice President, NEFM; Executive Vice President and Chief
Operating Officer, NEFSCO.
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.
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; Senior Vice President and General Counsel, NEFSCO;
formerly, Senior Vice President and General Counsel, Funds Distributor,
Inc. (mutual funds service company); formerly, Counsel, The Boston
Company Advisors, Inc.; formerly, Associate, Ropes & Gray (law firm).
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. As indicated below under "Trustee Fees," 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
$40,000and meeting attendance fees of $3,500for each meeting of the boards he or
she attends. Each committee member receives an additional retainer fee at the
annual rate of $6,000. Furthermore, each committee chairman receives an
additional retainer fee (beyond the committee member retainer fee) at the annual
rate of $4,000. These fees are allocated among the mutual fund portfolios in the
New England Funds Trusts based on a formula that takes into account, among other
factors, the net assets of each fund.
During the fiscal year ended December 31, 1997, the 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 as trustees 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. $30,115 $15,041 $353 $0 $0 $52,000
Daniel M. Cain $34,037 $16,735 $353 $0 $0 $58,500
Kenneth J. Cowan $35,673 $17,690 $353 $0 $0 $61,500
Richard Darman $31,514 $15,857 $287 $0 $0 $54,500
Sandra O. Moose $32,297 $16,313 $353 $0 $0 $56,000
John A. Shane $33,115 $16,791 $353 $0 $0 $57,500
Pendleton P. White $33,115 $16,791 $353 $0 $0 $57,500
</TABLE>
The Funds provide no pension or retirement benefits to trustees, but
have adopted a deferred payment arrangement under which each trustee may elect
not to receive fees from the Funds on a current basis but to receive in a
subsequent period an amount equal to the value that such fees would have if they
had been invested in each Fund on the normal payment date for such fees. As a
result of this method of calculating the deferred payments, each Fund, upon
making the deferred payments, will be in the same financial position as if the
fees had been paid on the normal payment dates.
At April 10, 1998, the officers and trustees of the Trusts as a group
owned less than 1% of the outstanding shares of each Fund.
Advisory and Subadvisory Agreements
Each Fund's advisory agreement between the Fund and NEFM (between the
Fund and Capital Growth Management Limited Partnership ("CGM"), in the case of
the Growth Fund) provides that the adviser (NEFM or CGM) will furnish or pay the
expenses of the applicable Fund for office space, facilities and equipment,
services of executive and other personnel of the Trust and certain
administrative services.
Each Fund pays all expenses not borne by its adviser or subadviser(s)
including, but not limited to, the charges and expenses of the Fund's custodian
and transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees and
expenses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders and the compensation of
trustees who are not directors, officers or employees of the Fund's adviser,
subadviser(s) or their affiliates, other than affiliated registered investment
companies. Each Fund (except the Growth Fund) also pays NEFM for certain legal
and accounting services provided to the Fund by NEFM.
Each Fund's advisory agreement and (except in the case of the Growth
Fund) each Fund's subadvisory agreement between NEFM and the subadviser that
manages the Fund (or, in the case of the Star Advisers, Star Worldwide and Star
Small Cap Funds, each subadvisory agreement between NEFM and the subadviser that
manages a segment or segments of the Fund's portfolio) provides that it will
continue in effect for two years from its date of execution and thereafter from
year to year if its continuance is approved at least annually (i) by the board
of trustees of the relevant Trust or by vote of a majority of the outstanding
voting securities of the relevant Fund and (ii) by vote of a majority of the
trustees who are not "interested persons" of the relevant Trust, as that term is
defined in the 1940 Act, cast in person at a meeting called for the purpose of
voting on such approval. Any amendment to an advisory or subadvisory agreement
must be approved by vote of a majority of the outstanding voting securities of
the relevant Fund and by vote of a majority of the trustees of the relevant
Trust who are not such interested persons, cast in person at a meeting called
for the purpose of voting on such approval. Each advisory and subadvisory
agreement may be terminated without penalty by vote of the board of trustees of
the relevant Trust or by vote of a majority of the outstanding voting securities
of the relevant Fund, upon 60 days' written notice, or by the Fund's adviser
upon 90 days' written notice, and each terminates automatically in the event of
its assignment. Each subadvisory agreement also may be terminated by the
subadviser upon 90 days' notice and automatically terminates upon termination of
the related advisory agreement. In addition, each advisory agreement will
automatically terminate if the Trust or the Fund shall at any time be required
by New England Funds. L.P. 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 Nvest Holdings, L.P.
("Nvest Holdings"), which in turn is a wholly-owned subsidiary of Nvest
Companies. NEF Corporation is also the sole general partner of New England
Funds, L.P. (the "Distributor") and the sole shareholder of NEFSCO, the transfer
and dividend disbursing agent of the Funds. Nvest Companies owns the entire
limited partnership interest in each of NEFM and New England Funds, L.P.
Nvest Companies' managing general partner, Nvest Corporation, is a
wholly-owned subsidiary of MetLife New England Holdings, Inc., which in turn is
a wholly-owned subsidiary of MetLife, a mutual life insurance. MetLife owns
approximately 46% (and in the aggregate, directly and indirectly, approximately
47%) of the outstanding limited partnership interests inNvest Companies. Nvest
Companies' advising general partner, Nvest, L.P., is a publicly-traded company
listed on the New York Stock Exchange. Nvest Corporation is the sole general
partner of Nvest, L.P.. Nvest Companies' 14 principal subsidiary or affiliated
asset management firms, collectively, had more than $125billion of assets under
management as ofDecember 31, 1997.
Back Bay Advisors, formed in 1986, is a limited partnership whose sole
general partner, BBAI, is a wholly-owned subsidiary of Nvest Holdings. Nvest
Companies owns the entire limited partnership interest in Back Bay Advisors.
Back Bay Advisors provides investment management services to institutional
clients, including other registered investment companies and accounts of NELICO
and its affiliates. Back Bay Advisors specializes in fixed-income management and
currently manages over $7 billion in total assets.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") was organized in 1926
and is one of the oldest and largest investment counsel firms in the country. An
important feature of the Loomis Sayles investment approach is its emphasis on
investment research. Recommendations and reports of the Loomis Sayles research
department are circulated throughout the Loomis Sayles organization and are
available to the individuals in the Loomis Sayles organization who have been
assigned the responsibility for making investment decisions for the Funds'
portfolios. Loomis Sayles provides investment advice to numerous other
institutional and individual clients. These clients include some accounts of
NELICO and MetLife and their affiliates. Loomis Sayles is a limited partnership
whose sole general partner, Loomis, Sayles & Company, Incorporated, is a
wholly-owned subsidiary of Nvest Holdings. Nvest Companies 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.
Nvest Companies 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 Nvest Holdings. Nvest Companies owns the entire limited
partnership interest in Westpeak.
Founders Asset Management LLC ("Founders") serves as an investment
adviser to the Founders mutual funds as well as to other mututal funds and
private accounts. Founders is a 90% owned subsidiary of Mellon Bank, N.A., which
is a whooly-owned subsidiary of Mellon Bank Corporation ("MBC"), a publicily
owned multibank holding company. MBC provides a comprehensive range of financial
products and services in domestic and selected international markets. Founders
is the successor to Founders Asset Management, Inc., which was organized in
1938.
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. Kansas City Southern Industries,
Inc. ("KCSI"), a publicly traded holding company, owns approximately 83% of the
outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately 12% of Janus
Capital's voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's board.
Harris Associates L.P. ("Harris") was organized in 1995 to succeed to
the business of a predecessor limited partnership also named Harris Associates
L.P., which together with its predecessor had advised and managed mutual funds
since 1970. Harris is a limited partnership whose sole general partner is Harris
Associates Inc., a wholly-owned subsidiary of Nvest Holdings. Nvest Companies
owns the entire limited partnership interest in Harris Associates. 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. 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. The general
partner of Robertson Stephens, Robertson, Stephens & Company, Inc., and the
principal limited partner of Robertson Stephens, Robertson, Stephens & Company
Group, L.L.C., are wholly-owned subsidiaries of BankAmerica Corporation, a
global financial services company. Robertson Stephens and its affiliates have in
excess of $24 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 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 respective funds and clients in a manner deemed equitable
to all by Founders. To the extent that transactions on behalf of more than one
client during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on the price and amount of the security being purchased or sold for the Funds.
However, the ability of the Funds to participate in volume transactions may
possibly produce better executions for the Funds in some cases. It is the
opinion of the trustees of the Trusts that the desirability of retaining
Founders as a subadviser to the Star Advisers and Star Worldwide Funds outweighs
the disadvantages, if any, which might result from these procedures.
Janus Capital performs investment advisory services for other mutual
funds, individual, charitable, corporate and retirement accounts, as well as for
its segments of the portfolios of the Star Advisers and Star Worldwide Funds.
Although the overall investment objectives of the Funds may differ from the
objectives of the other investment accounts and other funds served by Janus
Capital, there may be securities that are suitable for the portfolio of the
Funds as well as for one or more of the other funds or the other investment
accounts. Therefore, purchases and sales of the same investment securities may
be recommended for the Funds and for one or more of the other funds or other
investment accounts. To the extent that the Funds and one or more of the other
funds or other investment accounts seek to acquire or sell the same security at
the same time, either the price obtained by the Funds or the amount of
securities that may be purchased or sold by the Funds at one time may be
adversely affected. In such cases, the purchase and sale transactions are
allocated among the Funds, the other funds and the other investment accounts in
a manner believed by the management of Janus Capital to be equitable to each. It
is the opinion of the trustees of the Trusts that the desirability of retaining
Janus Capital as a subadviser to the Star Advisers and Star Worldwide Funds
outweighs the disadvantages, if any, which might result from these procedures.
Certain officers of Westpeak have responsibility for portfolio
management for other clients (including affiliates of Westpeak), some of which
may invest in securities in which the Growth Opportunities Fund 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 Funds.
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
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, the Distributor serves as the general distributor of
each class of shares of the Funds. Under these agreements, the Distributor is
not obligated to sell a specific number of shares. The Distributor 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.
The Distributor 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.
The Distributor has entered into selling agreements with investment
dealers, including New England Securities, an affiliate of the Distributor, for
the sale of the Funds' shares. The Distributor may at its expense pay an amount
not to exceed 0.50% of the amount invested to dealers who have selling
agreements with the Distributor. 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 Nvest Companies. 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 the Distributor 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 the Distributor, New England Securities and their
direct and indirect parent companies, 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.
The Distributor 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. The Distributor also acts as general distributor for New England Cash
Management Trust and New England Tax Exempt Money Market Trust.
During the fiscal years ended December 31, 1995, 1996 and 1997, the
Distributor received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $8,779,918, $10,735,444 and $11,172,220, respectively,
of which $7,706,937, $9,418,244 and $9,669,150, respectively, was reallowed to
other securities dealers and the balance retained by the Distributor. During the
fiscal years ended December 31, 1995, 1996 and 1997, the Distributor received
contingent deferred sales charges ("CDSCs") on the redemption of Class A and
Class B shares of New England Funds Trust I aggregating $899,482, $1,256,009 and
$2,391,360, respectively, of which $879,085, $1,236,000 and $2,286,280,
respectively, was paid to FEP Capital, L.P. and the balance retained by the
Distributor. See "Other Arrangements" for information about amounts received by
the Distributor 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 fiscal years ended December 31, 1995, 1996 and 1997, the
Distributor received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $1,913,291, $1,674,883 and $1,493,346,
respectively, of which $1,752,050, $1,429,970 and $1,286,296, respectively, was
reallowed to other securities dealers and the balance retained by the
Distributor. During the fiscal years ended December 31, 1995, 1996 and 1997, the
Distributor received CDSCs on the redemption of Class A and Class B shares of
New England Funds Trust II aggregating $234,390, $318,167 and $375,973,
respectively, of which $173,421, $313,465 and $343,457, respectively, was paid
to FEP Capital, L.P. and the balance retained by the Distributor. See "Other
Arrangements" for information about amounts received by the Distributor 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.
During the fiscal years ended December 31, 1995, 1996 and 1997, the
Distributor received commissions on the sales of the Class A shares of New
England Funds Trust III aggregating $-0-, $-0- and $262,310, respectively, of
which $-0-, $-0- and $236,902, respectively, was reallowed to other securities
dealers and the balance retained by the Distributor. During the fiscal years
ended December 31, 1995, 1996 and 1997, the Distributor received CDSCs on the
redemption of Class A and Class B shares of New England Funds Trust III
aggregating $-0-, $-0- and $1,953, respectively, of which $-0-, $-0- and $1,953,
respectively, was paid to FEP Capital, L.P. and the balance retained by the
Distributor. See "Other Arrangements" for information about amounts received by
the Distributor 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 and C shares are paid to the
Distributor and are used by the Distributor to defray the expenses for services
the Distributor provides the Trust. Proceeds from the CDSC on Class B shares are
paid to the Distributor 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 the Distributor 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 conduct an annual audit of each 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.
Prior to fiscal year ended 12/31/97, Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts 12109, conducted the annual audit of the financial
statement for the Trust II's fund, assisted in the preparation of federal and
state income tax returns and consulted with the Trusts as to matters of
accounting and federal and state income taxation.
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 the Distributor, 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 year ended December 31, 1995, New
England Securities received $1,369,323 from the Fund's advisers under these
agreements. In the case of the Capital Growth Fund, the Distributor provided
similar services prior to January 2, 1996 under a service agreement with Loomis
Sayles. For the years ended December 31, 1994 and 1995, the Distributor received
$278,333 and $323,029, respectively, from Loomis Sayles under this agreement. In
the case of the Star Advisers Fund, the Distributor provided similar services
prior to January 2, 1996 under a service agreement with Nvest, L.P., then known
as New England Investment Companies, L.P. For the years ended December 31, 1994
and 1995, the Distributor received $269,302 and $1,715,899, respectively, from
Nvest, L.P. under this agreement. In the case of the International Equity Fund,
the Distributor provided similar services prior to December 29, 1995 under an
administrative services agreement with the Fund under which the International
Equity Fund paid a fee at the annual rate of 0.10% of the average daily net
assets attributable to the Fund's Class A, Class B and Class C shares and 0.05%
of such assets attributable to the Fund's Class Y shares. For the fiscal years
ended December 31, 1994 and 1995, the Distributor received $167,715 and
$192,366, respectively, from the International Equity Fund for these services.
Prior to January 2, 1996, the Distributor 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 year ended
December 31, 1995, the Distributor received $1,511,359 from Back Bay Advisors
under this agreement. In the case of the Adjustable Rate Fund, the Distributor
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, the Distributor 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, the Distributor 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, the Distributor 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, the Distributor 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 NEFSCO, NEFSCO 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 NEFSCO 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. NEFSCO 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, NEFSCO 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 NEFSCO for these services which NEFSCO pays in full
to State Street Bank for it to provide through 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.
During the fiscal year ended December 31, 1995, 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, Star Advisers Fund, Strategic
Income Fund and Growth Opportunities Fund in the amounts of $50,953, $49,574,
$48,646, $51,226, $49,539, $50,822, $49,248, $47,876, $53,185, $35,874 and
$27,466, respectively.
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 $194,847, $63,400,
$66,675, $43,165, $38,598, $30,213, $32,743, $38,845, $3,543, $129,628 and
$43,298.
- -------------------------------------------------------------------------------
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 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 and Star Worldwide Funds. 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 at the most favorable prices.
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 that
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 obtaining
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 will allocate in
good faith 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 with Fund brokerage commissions, i.e.
with "soft dollars." The non-research part must be paid for in "hard dollars,"
i.e. from Founders, own Funds. Any such allocation may create a conflict of
interest for Founders.
Neither the research services nor the amount of brokerage given to a
particular broker-dealer are made pursuant to any agreement or commitment with
any of the selected broker-dealers that would bind Founders to compensate the
selected broker-dealer for research provided. However, Founders maintains an
internal allocation procedure to identify those broker-dealers that have
provided it with research and endeavors to direct sufficient commissions to them
to ensure continued receipt of research Founders believes is useful.
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 at the
most favorable prices, 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 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.
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.
Purchases of portfolio securities for the segments also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which this segment will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, Montgomery will use its best efforts
to choose a broker-dealer capable of providing the services necessary generally
to obtain the most favorable execution available. The full range and quality of
services available will be considered in making these determinations, such as
the firm's ability to execute trades in a specific market required by the
segment of the Fund, such as in an emerging market, the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors.
Montgomery may also consider the sale of the Star Worldwide and Star
Small Cap Funds' shares as a factor in the selection of broker-dealers to
execute portfolio transactions for its segments. The placement of portfolio
transactions with broker-dealers who sell shares of the Funds is subject to
rules adopted by the National Association of Securities Dealers, Inc.
While Montgomery's general policy is to seek first to obtain the most
favorable execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to Montgomery, even if the
specific services were not imputed just to the Fund and may be lawfully and
appropriately used by Montgomery in advising other clients. Montgomery considers
such information, which is in addition to, and not in lieu of, the services
required to be performed by it under its subadvisory agreements with NEFM, to be
useful in varying degrees, but of indeterminable value. In negotiating any
commissions with a broker or evaluating the spread to be paid to a dealer, the
segments of the Funds may therefore pay a higher commission or spread than would
be the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by Montgomery to be reasonable in relation to the value
of the brokerage and/or research services provided by such broker-dealer, which
services either produce a direct benefit to the segments of the Funds or assist
Montgomery in carrying out its responsibilities to the segments of the Funds.
The standard of reasonableness is to be measured in light of Montgomery's
overall responsibilities to its segments. The trustees of the Trusts review all
brokerage allocations where services other than best execution capabilities are
a factor to ensure that the other services provided meet the criteria outlined
above and produce a benefit to the Fund.
On occasion, situations may arise in which legal and regulatory
considerations will preclude trading for the segments' accounts by reason of
activities of Montgomery Securities, a broker-dealer affiliated with Montgomery,
or its affiliates. It is the judgment of the trustees that the Funds will not be
materially disadvantaged by any such trading preclusion and that the
desirability of continuing their subadvisory arrangements with Montgomery and
Montgomery's affiliation with Montgomery Securities and other affiliates of
Montgomery Securities outweigh any disadvantages that may result from the
foregoing.
Montgomery's sell discipline for the segments' investment in issuers is
based on the premise of a long-term investment horizon; however, sudden changes
in valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by Montgomery in determining the appropriate investment horizon.
At the company level, sell decisions are influenced by a number of
factors, including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and
declining financial flexibility, may also signal a sell.
Star Small Cap Fund (segment advised by Robertson Stephens). It is the
policy of Robertson Stephens, in effecting transactions in portfolio securities,
to seek the best execution of orders. The determination of what may constitute
best execution in a securities transaction involves a number of judgmental
considerations, including, without limitation, the overall direct net economic
result to this segment of the Fund (involving both price paid or received and
any commissions and other costs), the efficiency with which the transaction is
effected, the ability to effect the transaction at all when a large block is
involved, the availability of the broker to stand ready to execute possibly
difficult transactions for this segment in the future, and the financial
strength and stability of the broker.
Subject to the policy of seeking best execution of orders at the most
favorable prices, Robertson Stephens may execute transactions with brokerage
firms which provide research services and products to Robertson Stephens. The
phrase "research services and products" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
the availability of securities or purchasers or sellers of securities, the
furnishing of analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts,
and the obtainment of products such as third-party publications, computer and
electronic access equipment, software programs, and other information and
accessories that may assist Robertson Stephens in furtherance of its investment
advisory responsibilities to its advisory clients. Such services and products
permit Robertson Stephens to supplement its own research and analysis
activities, and provide it with information from individuals and research staffs
of many securities firms. Generally, it is not possible to place a dollar value
on the benefits derived from specific research services and products. Robertson
Stephens may receive a benefit from these research services and products which
is not passed on, in the form of a direct monetary benefit, to this segment of
the Fund. If Robertson Stephens determines that any research product or service
has a mixed use, such that it also serves functions that do not assist in the
investment decision-making process, Robertson Stephens may allocate the cost of
such service or product accordingly. The portion of the product or service that
Robertson Stephens determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Any such allocation may
create a conflict of interest for Robertson Stephens. Subject to the standards
outlined in this and the preceding paragraph, Robertson Stephens may arrange to
execute a specified dollar amount of transactions through a broker that has
provided research products or services. Such arrangements do not constitute
commitments by Robertson Stephens to allocate portfolio brokerage upon any
prescribed basis, other than upon the basis of seeking best execution of orders.
Research services and products may be useful to Robertson Stephens in
providing investment advice to any of the funds or clients it advises. Likewise,
information made available to Robertson Stephens from brokers effecting
securities transactions for such other funds and clients may be utilized on
behalf of another fund. Thus, there may be no correlation between the amount of
brokerage commissions generated by a particular fund or client and the indirect
benefits received by that fund or client.
Subject to the policy of seeking the best execution of orders, sales of
shares of the Fund may also be considered as a factor in the selection of
brokerage firms to execute portfolio transactions for this segment of the Fund.
Because selection of executing brokers is not based solely on net
commissions, the segment of the Fund advised by Robertson Stephens may pay an
executing broker a commission higher than that which might have been charged by
another broker for that transaction. Robertson Stephens will not knowingly pay
higher mark-ups on principal transactions to brokerage firms as consideration
for receipt of research services or products. While it is not practicable for
Robertson Stephens to solicit competitive bids for commissions on each portfolio
transaction, consideration is regularly given to available information
concerning the level of commissions charged in comparable transactions by
various brokers. Transactions in over-the-counter securities are normally placed
with principal market makers, except in circumstances where, in the opinion of
Robertson Stephens, better prices and execution are available elsewhere.
Subject to the overriding objective of obtaining the best possible
execution of orders, each of the subadvisers may allocate brokerage transactions
to affiliated brokers. In order for the affiliated broker to effect portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by the affiliated broker must be reasonable and fair compared to the
commissions, fees and other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period. Furthermore, the
trustees of the Trusts, including a majority of those trustees who are not
"interested persons" of the Trusts as defined in the 1940 Act have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.
General
Portfolio turnover is not a limiting factor with respect to investment
decisions. The Funds anticipate that their portfolio turnover rates will vary
significantly from time to time depending on the volatility of economic and
market conditions.
Subject to procedures adopted by the Board of Trustees of the Trusts,
the Funds' brokerage transactions may be executed by brokers that are affiliated
with Nvest Companies 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 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. Until September 1986,
the name of the Trust was "New England Life Government Securities Trust"; from
September 1986 to April 1994, its name was "The New England Funds." Prior to
January 5, 1996, the name of the Municipal Income Fund was "New England Tax
Exempt Income Fund." The initial portfolio of the Trust (the Fund now called New
England Government Securities Fund) commenced operations on September 16, 1985.
The International Equity Fund commenced operations on May 22, 1992. The Capital
Growth Fund was organized in 1992 and commenced operations on August 3, 1992.
The Star Advisers Fund was organized in 1994 and commenced operations on July 7,
1994. The Strategic Income Fund was organized in 1995 and commenced operations
on May 1, 1995. The Star Worldwide Fund was organized in 1995 and commenced
operations on December 29, 1995. The Star Small Cap Fund was organized in 1996
and commenced operations on December 31, 1996. The remaining Funds in the Trust
are successors to the following corporations which commenced operations in the
years indicated:
Corporation Date of Commencement
----------- --------------------
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, Inc.* 1969
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, Inc.**** 1976
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income Fund
**** Predecessor of the Municipal Income Fund
New England Funds Trust II is organized as a Massachusetts business
trust pursuant to a Declaration of Trust dated May 6, 1931, as amended, and
consisted of a single investment portfolio (now the Growth Opportunities Fund)
until January 1989, when the Trust was reorganized as a "series" company as
described in Section 18(f)(2) of the 1940 Act. The Trust has seven separate
portfolios. 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. Prior to May 1, 1998,
the name of the New York Fund was "New England Intermediate Term Tax Free Fund
of New York."
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 (New England Bullseye Fund and the Equity Income Fund).
The Declarations of Trust of New England Funds Trust I, New England
Funds Trust II and New England Funds Trust III 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 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. Any 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 there is a vacancy on the Board of Trustees, such
vacancy may be filled only by a vote of the shareholders unless, after filing
such vacancy by other means, at least two-thirds of the trustees holding office
shall have been elected by the shareholders. In addition, trustees may be
removed from office by a written consent signed by the holders of two-thirds of
the outstanding shares and filed with a Trust's custodian or by a vote of the
holders of two-thirds of the outstanding shares at a meeting duly called for
that purpose, which meeting shall be held upon the written request of the
holders of not less than 10% of the outstanding shares.
Upon written request by the holders of shares having a net asset value
of at least $25,000 or at least 1% of the outstanding shares stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
trustee, the Trusts have undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders).
Except as set forth above, the trustees shall continue to hold office
and may appoint successor trustees. Shareholder voting rights are not
cumulative.
No amendment may be made to a Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the relevant Trust
except (i) to change the Trust's or a Fund's name or to cure technical problems
in the Declaration of Trust, (ii) to establish and designate new series or
classes of Trust shares and (iii) to establish, designate or modify new and
existing series or classes of Trust shares or other provisions relating to Trust
shares in response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Trust.
However, the Declarations of Trust disclaim shareholder liability for acts or
obligations of a Trust and require that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by a Trust or
the trustees. The Declarations of Trust provide for indemnification out of each
Fund's property for all loss and expense of any shareholder held personally
liable for the obligations of the Fund by reason of owning shares of such Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and a Fund itself would be unable to meet
its obligations.
The Declarations of Trust further provide that the relevant Board of
Trustees will not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declarations of Trust protects a trustee against any
liability to which the trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. The By-Laws of each Trust provide
for indemnification by the Trust of trustees and officers of the relevant Trust,
except with respect to any matter as to which any such person did not act in
good faith in the reasonable belief that his or her action was in or not opposed
to the best interests of the Trust. Such persons may not be indemnified against
any liability to the Trust or the Trust's shareholders to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
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HOW TO BUY SHARES
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The procedures for purchasing shares of the Funds are summarized in the
Prospectus. Banks may charge a fee for transmitting funds by wire. With respect
to shares purchased by federal funds, shareholders should bear in mind that wire
transfers may take two or more hours to complete.
For purchase of Fund shares by mail, the settlement date is the first
business day after receipt of the check by the transfer agent so long as it is
received by the close of regular trading of the New York Stock Exchange on a day
when the Exchange is open; otherwise the settlement date is the following
business day. For telephone orders, the settlement date is the third business
day after the order is made.
Shares may also be purchased either in writing, by phone or, in the
case of Class A, B and C shares, by electronic funds transfer using Automated
Clearing House ("ACH"), or by exchange as described in the Prospectuses through
firms that are members of the National Association of Securities Dealers, Inc.
and that have selling agreements with the Distributor.
The Distributor 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 the Distributor within three business days following the transaction
date or the order will be subject to cancellation. Telephone orders must be
placed through the Distributor or your investment dealer.
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NET ASSET VALUE AND PUBLIC OFFERING PRICE
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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 (the "NYSE")
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 NYSE. 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 NYSE, 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 NYSE, 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 NYSE 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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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 the Distributor 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 the
Distributor 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.
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 the Distributor.
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 the Distributor.
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 the Distributor make no recommendations or representations in this
regard. It may be appropriate for a shareholder to consult a tax adviser before
establishing such a plan.
It may be disadvantageous for a shareholder to purchase on a regular
basis additional Fund shares with a sales charge while redeeming shares under a
Systematic Withdrawal Plan. Accordingly, the Funds and the Distributor 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
Fund, 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 or California
Fund shares held less than six months, 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 the 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. 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 NEFSCO at
1-800-225-5478 or (2) a written exchange request to the Fund orNEFSCO, 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.
For the purpose of the foregoing paragraph, New England Bullseye Fund
(a series of New England Funds Trust III) is considered a "Fund."
Broker Trading Privileges
The Distributor may, from time to time, enter into agreements with one or more
brokers or other intermediaries to accept purchase and redemption orders for
Fund shares until the close of regular trading on the NYSE (normally, 4:00 p.m.
Eastern Time on each day that the Exchange is open for trading); such purchase
and redemption orders will be deemed to have been received by the Fund when the
authorized broker or intermediary accepts such orders; and such orders will be
priced using that Fund's net asset value next computed after the orders are
placed with and accepted by such brokers or intermediaries. Any purchase and
redemption orders received by a broker or intermediary under these agreements
will be transmitted daily to the Distributor no later than the time specified in
such agreement; but, in any event, no later than 6:00 a.m. following the day
that such purchase or redemption orders are received by the broker or
intermediary.
The investment objectives of the Funds, New England Bullseye Fund and the Money
Market Funds are as follows:
STOCK FUNDS:
NEW ENGLAND GROWTH FUND seeks long-term growth of capital through
investments in equity securities of companies whose earnings are expected to
grow at a faster rate than the United States economy.
NEW ENGLAND CAPITAL GROWTH FUND seeks long-term growth of capital.
NEW ENGLAND VALUE FUND seeks a reasonable long-term investment return
from a combination of market appreciation and dividend income from equity
securities.
NEW ENGLAND BALANCED FUND seeks a reasonable long-term investment
return from a combination of long-term capital appreciation and moderate current
income.
NEW ENGLAND GROWTH OPPORTUNITIES FUND seeks opportunities for long-term
growth of capital and income.
NEW ENGLAND INTERNATIONAL EQUITY FUND seeks total return from long-term
growth of capital and dividend income primarily through investment in a
diversified portfolio of marketable international equity securities.
NEW ENGLAND STAR ADVISERS FUND seeks long-term growth of capital.
NEW ENGLAND STAR WORLDWIDE FUND seeks long-term growth of capital.
NEW ENGLAND STAR SMALL CAP FUND seeks capital appreciation.
NEW ENGLAND EQUITY INCOME FUND seeks current income and capital growth.
NEW ENGLAND BULLSEYE FUND seeks long-term growth of capital.
BOND FUNDS:
NEW ENGLAND GOVERNMENT SECURITIES FUND seeks a high level of current
income consistent with safety of principal by investing in U.S. Government
securities and engaging in transactions involving related options, futures and
options on futures.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND seeks a high current
return consistent with preservation of capital.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND seeks a high level of
current income consistent with low volatility of principal.
NEW ENGLAND STRATEGIC INCOME FUND seeks high current income with a
secondary objective of capital growth.
NEW ENGLAND BOND INCOME FUND seeks a high level of current income
consistent with what the Fund considers reasonable risk.
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.
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 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.
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 April 10, 1998, the net assets of the Funds and the Money Market
Funds totaled over $7 billion.
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.
- --------------------------------------------------------------------------------
REDEMPTIONS
- --------------------------------------------------------------------------------
The procedures for redemption of shares of a Fund are summarized in the
Prospectus. As described in the Prospectus, a CDSC may be imposed on certain
purchases of Class A, Class B and Class C 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 A, 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 and Class A shares subject to CDSC, 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 Class B 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).
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. Class C shares purchased prior to March 1,
1998 are not subject to a CDSC on redemption.
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 NYSE. Requests made after that time or on a day when the NYSE is not open
for business cannot be accepted and a new request on a later day will be
necessary. The proceeds of a telephone withdrawal will normally be sent on the
first business day following receipt of a proper redemption request.
In order to redeem shares by telephone, a shareholder must either
select this service when completing the Fund application or must do so
subsequently on the Service Options Form, available from your investment dealer.
When selecting the service, a shareholder must designate a bank account to which
the redemption proceeds should be sent. Any change in the bank account so
designated may be made by furnishing to your investment dealer a completed
Service Options Form with a signature guarantee. Whenever the Service Options
Form is used, the shareholder's signature must be guaranteed as described above.
Telephone redemptions may only be made if the designated bank is a member of the
Federal Reserve System or has a correspondent bank that is a member of the
System. If the account is with a savings bank, it must have only one
correspondent bank that is a member of the System.
The redemption price will be the net asset value per share (less any
applicable CDSC) next determined after the redemption request and any necessary
special documentation are received by State Street Bank or your investment
dealer in proper form. Payment normally will be made by State Street Bank on
behalf of the Fund within seven days thereafter. However, in the event of a
request to redeem shares for which the Fund has not yet received good payment,
the Funds reserve the right to withhold payments of redemption proceeds if the
purchase of shares was made by a check which was deposited less than fifteen
days prior to the redemption request (unless the Fund is aware that the check
has cleared).
The CDSC may be waived on redemptions made from IRA accounts due to
attainment of age 59 1/2 for IRA shareholders who established accounts prior to
January 3, 1995. The CDSC may also be waived on redemptions made from IRA
accounts due to death, disability, return of excess contribution, required
minimum distributions at age 70 1/2 (waivers apply only to amounts necessary to
meet the required minimum amount), certain withdrawals pursuant to a systematic
withdrawal plan, not be exceed 10% annually of the value of the account, and
redemptions made from the account to pay custodial fees.
The CDSC may be waived on redemptions made from 403(b)(7) custodial
accounts due to attainment of age 59 1/2 for shareholders who established
custodial accounts prior to January 3, 1995.
The CDSC may also by waived on redemptions necessary to pay plan
participants or beneficiaries from qualified retirement plans under Section 401
of the Code, including profit sharing plans, money purchase plans, 401(k) and
custodial accounts under Section 403(b)(7) of the Code. Distributions necessary
to pay plan participants and beneficiaries include payment made due to death,
disability, separation from service, normal or early retirement as defined in
the plan document, loans from the plan and hardship withdrawals, return of
excess contributions, required minimum distributions at age 70 1/2 (waivers only
apply to amounts necessary to meet the required minimum amount), certain
withdrawals pursuant to a systematic withdrawal plan, not to exceed 10% annually
of the value of your account, and redemptions made from qualified retirement
accounts or Section 403(b)(7) custodial accounts necessary to pay custodial
fees.
A CDSC will apply in the event of plan level transfers, including
transfers due to changes in investment where assets are transferred outside of
New England Funds, including IRA and 403(b)(7) participant-directed transfers of
assets to other custodians (except for the reasons given above) or qualified
transfers of assets due to trustee-directed movement of plan assets due to
merger, acquisition or addition of additional funds to the plan.
The Funds will normally redeem shares for cash; however, the Funds
reserve the right to pay the redemption price wholly or partly in kind if the
relevant Trust's Board of Trustees determines it to be advisable and in the
interest of the remaining shareholders of a Fund. If portfolio securities are
distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Funds have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to
which the Funds are obligated to redeem shares solely in cash for any
shareholder during any 90-day period up to the lesser of $250,000 or 1% of the
total net asset value of the relevant Fund 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). A redemption constitutes a sale of
shares for federal income tax purposes on which the investor may realize a long-
or short-term capital gain or loss. See also "Income Dividends, Capital Gain
Distributions and Tax Status," below.
Reinstatement Privilege (Class A shares only)
The Prospectus describes redeeming shareholders' reinstatement
privileges for Class A shares. Written notice and the investment check from
persons wishing to exercise this reinstatement privilege must be received by
your investment dealer within 120 days after the date of the redemption. The
reinstatement or exchange will be made at net asset value next determined after
receipt of the notice and the investment check and will be limited to the amount
of the redemption proceeds or to the nearest full share if fractional shares are
not purchased.
Even though an account is reinstated, the redemption will constitute a
sale for federal income tax purposes. Investors who reinstate their accounts by
purchasing shares of the Funds should consult with their tax advisers with
respect to the effect of the "wash sale" rule if a loss is realized at the time
of the redemption.
- -------------------------------------------------------------------------------
STANDARD PERFORMANCE MEASURES
- -------------------------------------------------------------------------------
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 Fund
and the New York Fund each may also advertise a taxable equivalent yield,
calculated as described above except that, for any given tax bracket, net
investment income will be calculated using as gross investment income an amount
equal to the sum of (i) any taxable income of the Fund plus (ii) the tax-exempt
income of the Fund divided by the difference between 1 and the effective federal
(or combined federal and state) income tax rate for taxpayers in that tax
bracket.
At any time in the future, yields and total return may be higher or
lower than past yields and there can be no assurance that any historical results
will continue.
Investors in the Funds are specifically advised that share prices,
expressed as the net asset values per share, will vary just as yield will vary.
An investor's focus on the yield of a Fund to the exclusion of the consideration
of the share price of that Fund may result in the investor's misunderstanding
the total return he or she may derive from the Fund.
Calculation of Total Return. Total return is a measure of the change in
value of an investment in a Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in shares
of the same class of that Fund rather than paid to the investor in cash. The
formula for total return used by the Funds is prescribed by the SEC and includes
three steps: (1) adding to the total number of shares of the particular class
that would be purchased by a hypothetical $1,000 investment in the Fund (with or
without giving effect to the deduction of sales charge or CDSC, if applicable)
all additional shares that would have been purchased if all dividends and
distributions paid or distributed during the period had been automatically
reinvested; (2) calculating the value of the hypothetical initial investment as
of the end of the period by multiplying the total of shares owned at the end of
the period by the net asset value per share of the relevant class on the last
trading day of the period; (3) dividing this account value for the hypothetical
investor by the amount of the initial investment, and annualizing the result for
periods of less than one year. Total return may be stated with or without giving
effect to any expense limitations in effect for a Fund.
Performance Comparisons
Yield and Total Return. Yields and total returns will generally be
higher for Class A shares than for Class B and Class C shares of the same Fund,
because of the higher levels of expenses borne by the Class B and Class C
shares. Because of its lower operating expenses, Class Y shares of each Fund can
be expected to achieve a higher yield and total return than the same Fund's
Class A, Class B and Class C shares. The Funds may from time to time include
their yield and total return in advertisements or in information furnished to
present or prospective shareholders. The Funds may from time to time include in
advertisements its total return and the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by Lipper
Analytical Services as having similar investment objectives.
Total return may also be used to compare the performance of the Fund
against certain widely acknowledged standards or indices for stock and bond
market performance or against the U.S. Bureau of Labor Statistics' Consumer
Price Index.
The Standard & Poor's Composite Index of 500 Stocks (the "S&P 500") is
a market value-weighted and unmanaged index showing the changes in the aggregate
market value of 500 stocks relative to the base period 1941-43. The S&P 500 is
composed almost entirely of common stocks of companies listed on the NYSE,
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 379 industrial, 10 transportation and 74 financial services concerns and
37 utilities. The S&P 500 represents about 92% (as of March 31, 1998) of the
market value of all issues traded on the NYSE.
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 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 Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,876 bonds with a face value currently in excess of $3.5 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 42,000 bonds.
The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the NYSE.
The Merrill Lynch High Yield Index includes over 951 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 1,400 issues and
represents all public debt greater than $100 million (original issuance and
rated BBB/BB and below).
The Salomon Brothers Broad Investment Grade Bond Index is a price
composite of a broad range of institutionally based U.S. Government
mortgage-backed and corporate debt securities of investment outstanding of at
least $1 million and with a remaining period to maturity of at least one year.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices of
goods and services in major expenditure groups.
Lipper Analytical Services, Inc. is an independent service that
monitors the performance of over 8,000 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
comprises 3,000 of the largest capitalized U.S. companies whose common stock is
traded in the United States on the NYSE, the American Stock Exchange and NASDAQ.
The Russell 2000 Index represents the top 2,000 stocks traded on the NYSE,
American Stock Exchange and NASDAQ, by market capitalizations.
The Morgan Stanley Capital International Europe, Australasia and Far
East Index (the "EAFE Index") is a market-value weighted and unmanaged index of
common stocks traded outside the United States. 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 values (market price per share
times the number of shares outstanding).
The Morgan Stanley Capital International Europe, Australasia and Far
East(Gross Domestic Product) Index (the "EAFE (GDP) Index") is a market-value
weighted and unmanaged index of common stocks traded outside the United States.
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 adjustable rate mortgage
securites ("ARMs") is set by reference to the 11th District Cost of Funds Index
published monthly by the Federal Reserve. Since June 1987, the current interest
rate on these ARMs, measured on a monthly basis, has been higher than the
average yield of taxable money market funds represented by Donoghue's Taxable
Money Fund Average and current rates on newly issued one year bank certificates
of deposit. The interest rates on other ARMs and the yield on the Adjustable
Rate Fund's portfolio may be higher or lower than the interest rates on FNMA
ARMs and there is also no assurance that historical yield relationships among
different types of investments will continue.
Advertising and promotional materials may refer to the maturity and
duration of the Bond Funds. Maturity refers to the period of time before a bond
or other debt instrument becomes due. Duration is a commonly used measure of the
price responsiveness of a fixed-income security to an interest rate change
(i.e., the change in price one can expect from a given change in yield).
Articles and releases, developed by the Funds and other parties, about
the Funds regarding performance, rankings, statistics and analyses of the
individual Funds' and the fund group's asset levels and sales volumes, numbers
of shareholders by Fund or in the aggregate for New England Funds, statistics
and analyses of industry sales volumes and asset levels, and other
characteristics may appear in advertising, promotional literature, publications,
including, but not limited to, those publications listed in Appendix B to this
Statement, and on various computer networks, for example, the Internet. In
particular, some or all of these publications may publish their own rankings or
performance reviews of mutual funds, including, but not limited to, Lipper
Analytical Services and Morningstar. 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 toNvest
Companies, its structure, goals and objectives and the advisory subsidiaries
ofNvest Companies, 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 regardingNvest Companies, its
advisory subsidiaries and their personnel. For additional information about the
Funds' advertising and promotional literature, see Appendix C.
The Funds may use the accumulation charts below in their advertisements
to demonstrate the benefits of monthly savings at an 8% and 10% rate of return,
respectively.
<TABLE>
<CAPTION>
INVESTMENTS AT 8% RATE OF RETURN
5 YRS. 10 15 20 25 30
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 50 3,698 9,208 17,417 29,647 47,868 75,015
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
<CAPTION>
INVESTMENTS AT 10% RATE OF RETURN
5 YRS. 10 15 20 25 30
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
</TABLE>
The Funds' advertising and sales literature may refer to historical,
current and prospective political, social, economic and financial trends and
developments that affect domestic and international investment as it relates to
any of the New England Funds. The Funds' advertising and sales literature may
include historical and current performance and total returns of investment
alternatives to the New England Funds. For example, the Adjustable Rate Fund's
advertising and sales literature may include the historical and current
performance and total returns of bank certificates of deposits, bank and mutual
fund money market accounts and other income investments; and the advertising and
sales literature of any of the New England Funds, but particularly that of the
Star Worldwide Fund and the International Equity Fund, may discuss all of the
above international developments, including, but not limited to, international
developments involving Europe, North and South America, Asia, the Middle East
and Africa, as well as events and issues affecting specific countries that
directly or indirectly may have had consequences for the New England Funds or
may have influenced past performance or may influence current or prospective
performance of the New England Funds. Articles, releases, advertising and
literature may discuss the range of services offered by the Trusts, 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.
The Distributor may 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 the
Distributor's selection including, but not limited to, the scores and categories
in which the Distributor excelled, the names of funds and fund companies that
have previously won the award and comparative information and data about those
against whom the Distributor competed for the award, honor or citation.
The Distributor 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 the Distributor
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 the New England Funds and the
Distributor 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.
Ordinary 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 NYSE on the record
date for each dividend or distribution. Shareholders, however, may elect to
receive their ordinary income dividends or capital gain distributions, or both,
in cash. The election may be made at any time by submitting a written request
directly to New England Funds. In order for a change to be in effect for any
dividend or distribution, it must be received by New England Funds on or before
the record date for such dividend or distribution.
As required by federal law, detailed federal tax information will be
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code. In order to qualify, each Fund must,
among other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, gains from 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 is so permitted to elect and 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 investment 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, i.e. 28% Rate Gain, and
from net gains on securities held for more than 18 months, i.e. 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 disallowed for federal income tax purposes to the
extent of exempt-interest dividends received with respect to such shares and
thereafter 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.
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 more
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.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-); The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well 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 a 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.
<PAGE>
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
<PAGE>
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
<PAGE>
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to Nvest Companies and its affiliates that perform
advisory and subadvisory functions for New England Funds also including, but not
limited to: Back Bay Advisors, Harris, Loomis Sayles, CGM, Westpeak and Jurika &
Voyles, L.P. Reference also may be made to the Funds of their respective fund
groups, namely, the Loomis Sayles Funds and the Oakmark Funds advised by Harris.
References may be included in New England Funds' advertising and
promotional literature to other Nvest Companies affiliates including, but not
limited toNvest Corporation, AEW Capital Management, L.P., Marlborough Capital
Advisors, L.P., Reich & Tang Capital Management, Reich and Tang Mutual Funds
Group and Jurika & Voyles, L.P. and their fund groups.
References to subadvisers unaffiliated with Nvest Companies 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 economies 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;
o The specific credentials of the above individuals, including, but not
limited to, previous employment, current and past positions, titles and
duties performed, industry experience, educational background and degrees,
awards and honors;
o Specific and general reference to past and present notable and renowned
individuals including reference to their field of expertise and/or specific
accomplishments;
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; and
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 Nvest Companies and
its affiliates:
Nvest Companies is part of an affiliated group includingNvest, L.P. a
publicly traded company listed on the NYSE. Nvest Companies has 14 principal
subsidiary or affiliated asset management firms, which collectively had more
than $125 billion of assets under management as of December 31, 1997. In
addition, promotional materials may include:
o Specific and general references to New England Funds multi-manager approach
through Nvest Companies 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 Nvest Companies 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."
Financial Adviser Services ("FAS"), a division ofNvest Companies, may
be referenced in Fund advertising and promotional literature concerning the
marketing services it provides to Nvest Companies affiliated fund groups
including: New England Funds, Loomis Sayles Funds, Oakmark Funds and Reich &
Tang Funds.
FAS will provide marketing support to Nvest Companies 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
-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.
<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 & Poor's Rating
AAA .................................... 17%
AA ..................................... 5.0%
A ...................................... 11%
BBB..................................... 52.6%
BB...................................... 7.8%
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
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 & Poor's Rating
AAA .................................... 24.5%
AA ..................................... 12.7%
A ...................................... 11.8%
BBB..................................... 30.5%
BB...................................... 20%
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
Fund's net assets invested in each category as of the end of each month during
the year. Back Bay Advisors does not rely primarily on ratings designed by any
rating agency in making investment decisions. The chart does not necessarily
indicate what the composition of the Fund's portfolio will be in subsequent
fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
CALIFORNIA FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock ..................................... ---%
Short-term Obligations and Other Assets ............. 3.15%
Debt-- Unrated ..................................... 0%
Debt-- Standard & Poor's Rating
AAA ....................................... 32.0%
AA ........................................ 4.5%
A ......................................... 20.2%
BBB........................................ 32.5%
BB......................................... 7.65%
B.......................................... 0%
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
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
MASSACHUSETTS FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock ..................................... ---%
Short-term Obligations and Other Assets ............. ---%
Debt-- Unrated ..................................... ---%
Debt-- Standard & Poor's Rating
AAA ....................................... 48.8%
AA ........................................ 7.6%
A ......................................... 26.3%
BBB........................................ 10.08%
BB......................................... 3.59%
B.......................................... 3.63%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the Massachusetts 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
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
INTERNATIONAL EQUITY FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Common Stock ...................................... 82.9%
Short-term Obligations and Other Assets ............. 9.3%
Convertible Securities .............................. 0.2%
Debt-- Unrated ..................................... 0.3%
Debt -- Standard & Poor's Rating
AAA ....................................... 0%
AA ........................................ 0%
A ......................................... 0%
BBB........................................ 1.0%
BB......................................... 6.0%
B.......................................... 0.3%
CCC........................................ 0%
C/D........................................ 0%
The chart above indicates the composition of the International Equity 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
Fund's net assets invested in each category as of the end of each month during
the year. Loomis Sayles does not rely primarily on ratings designed by any
rating agency in making investment decisions. The chart does not necessarily
indicate what the composition of the Fund's portfolio will be in subsequent
fiscal years.
<PAGE>
Registration Nos. 2-11101
811-242
NEW ENGLAND FUNDS TRUST II
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Highlights for all series of the Registrant are included in
Part A hereof. The following financial statements are incorporated in
Part II of the statement of additional information filed as Part B
hereof by reference to the annual reports to shareholders of the series
of the Registrant listed below for the fiscal year ended December 31,
1997, which were filed with the Commission on the dates appearing in
parentheses below:
(1) New England Adjustable Rate U.S. Government Fund
(March 5, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(2) New England Growth Opportunities Fund (March 5, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(3) New England High Income Fund (March 6, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(4) New England Massachusetts Tax Free Income Fund (March 5, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(5) New England Limited Term U.S. Government Fund (March 4, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(6) New England Intermediate Term Tax Free Fund of California
(March 5, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(7) New England Intermediate Term Tax Free Fund of New York
(March 5, 1998)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(b) Exhibits:
1.(a) Second Amended and Restated Agreement and Declaration
of Trust of the Registrant is incorporated herein by
reference to Post-Effective Amendment No. 104 to this
Registration Statement, filed on April 19, 1996.
(b) Amendment No. 8 to Second Amended and Restated
Agreement and Declaration of Trust of the
Registrant is filed herein.
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:
(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) 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.
(b) Form of Dealer Agreement of New England Funds, L.P.,
the Registrant's principal underwriter, is filed
herein.
(c) 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.
(d) 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.
(e) 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.
(f) 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 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.
(c) 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.
(d) Opinion and consent of counsel with respect to the
Registrant's Rule 24e-2 Notice is incorporated herein
to Post-Effective Amendment No. 104 to this
Registration Statement filed on April 19, 1996.
11. Consents of Price Waterhouse LLP and Coopers & Lybrand
L.L.P. are filed herewith.
12. None.
13. Not applicable.
14. Model Retirement Plans.
(a) Keogh Plan is incorporated herein by reference to
Exhibit 14(a) to Post-Effective Amendment No. 78 to
this Registration Statement, filed on August 1, 1985.
(b) IRA Plan is incorporated herein by reference to
Exhibit 14(b) to Post-Effective Amendment No. 78 to
this Registration Statement, filed on August 1, 1985.
15.(a) Rule 12b-1 Plans relating to Class A shares of the
Registrant's New England Massachusetts Tax Free Income
Fund, New England Intermediate Term Tax Free Fund of
California, New England Intermediate Term Tax Free Fund
of New York, New England High Income Fund, New England
Growth Opportunities Fund, New England Limited Term
U.S. Government Fund and New England Adjustable Rate
U.S. Government Fund are incorporated herein by
reference to Exhibit 15(a) to Post-Effective Amendment
No. 105 to this Registration Statement, filed on August
15, 1996.
(b) Form of Rule 12b-1 Plan relating to the Class B shares
of each series of the Registrant is incorporated by
reference to Post-Effective Amendment No. 104 to this
Registration Statement, filed on April 19, 1996.
(c) Rule 12b-1 Plan relating to the Class C shares of New
England Limited Term U.S. Government Fund is
incorporated herein by reference to Exhibit 15(a) to
Post-Effective Amendment No. 105 to this Registration
Statement, filed on August 15, 1996.
(d) Rule 12b-1 Plan relating to Class C shares of New
England Growth Opportunities Fund is incorporated
herein by reference to Exhibit 15(a) to Post-Effective
Amendment No. 105 to this Registration Statement, filed
on August 15, 1996.
16. Schedule for computation of performance quotations is
incorporated herein by reference to Exhibit 16 to
Post-Effective Amendment No. 83 to this Registration
Statement, filed on November 4, 1988.
17. Financial Data Schedule is filed herein.
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 incorporated by reference
to Post-Effective Amendment No. 108 to this
Registration Statement filed on February 27, 1998.
(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 incorporated by reference to
Post-Effective Amendment No. 108 to this Registration
Statement filed on February 27, 1998.
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 February 28, 1998:
<TABLE>
<CAPTION>
Number of Record Holders
------------------------
Title of Series Class A Class B Class C Class Y
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
New England Adjustable Rate U.S. Government Fund 5,945 643 --- ---
New England Growth Opportunities Fund 21,721 16,260 876 ---
New England Limited Term U.S. Government Fund 20,694 2,569 1,015 14
New England High Income Fund 5,733 4,182 --- ---
New England Massachusetts Tax Free Income Fund 5,685 600 --- ---
New England Intermediate Term Tax Free Fund of
California 1,082 329 --- ---
New England Tax Free Income Fund of New York 1,099 236 --- ---
</TABLE>
Item 27. Indemnification
See Article 4 of the Trust's Amended and Restated By-Laws, filed as Exhibit 2(B)
to Post-Effective Amendment No. 83 to Registration Statement, filed on November
4, 1988, which is incorporated herein by reference.
In addition, Nvest, L.P., 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 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 Nvest
Companies, L.P. ("Nvest Companies"). Back Bay Advisors serves as
investment adviser to a number of other registered investment
companies. Back Bay Advisors' general partner, directors and officers
have been engaged during the past two fiscal years in the following
businesses, professions, vocations or employments of a substantial
nature (former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Back Bay Advisors Other Affiliations Connection
------------------ ------------------- -----------
<S> <C> <C>
Back Bay Advisors, Inc. None None
General Partner
Charles T. Wallis, NEF Corporation Director
President and Chief Executive Officer 399 Boylston Street
Boston, MA 02116
Back Bay Advisors, Inc. President, Chief Executive
399 Boylston Street Officer and Director
Boston, MA 02116
Scott A. Millimet, Back Bay Advisors, Inc. Executive Vice President
Executive Vice President
Edgar M. Reed, Aetna Capital Management* Head of Fixed Income Management
Executive Vice President and Chief 151 Farmington Avenue Group
Investment Officer Hartford, CT 06156
J. Scott Nicholson, None None
Senior Vice President
Catherine Bunting, None None
Senior Vice President
Nathan R. Wentworth, None None
Vice President
Paul Zamagni, None None
Vice President and Treasurer
Harold B. Bjornson, None None
Vice President
Peter Palfrey, None None
Vice President
Eric Gutterson, None None
Vice President
</TABLE>
(b) NEFM, a registered investment adviser that is wholly owned by Nvest
Companies, 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 Funds Trust III. NEFM's general partner, directors and
officers have been engaged during the past two fiscal years in the
following businesses, professions, vocations or employments of a
substantial nature (former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
NEFM Other Affiliations Connection
-------------------- ------------------- ----------
<S> <C> <C>
NEF Corporation New England Funds, L.P. General Partner
General Partner 399 Boylston Street
Boston, MA 02116
Henry L.P. Schmelzer, New England Funds, L.P. Managing Director, President and Chief
Managing Director, President and Chief Executive Officer
Executive Officer
NEF Corporation President, Chief Executive Officer and
Director
New England Funds Service Corporation Chief Executive Officer
("NEFSCO")
399 Boylston Street
Boston, MA 02116
Back Bay Advisors, Inc. Director
New England Securities Corporation* Director
399 Boylston Street
Boston, MA 02116
Frank Nesvet, New England Funds, L.P. Managing Director, Senior Vice
Managing Director, Senior Vice President and Fund Treasurer
President and Fund Treasurer
NEF Corporation Senior Vice President and Fund
Treasurer
NEFSCO Senior Vice President and Fund
Treasurer
John E. Pelletier, NEF Corporation Senior Vice President, General
Managing Director, Senior Vice Counsel, Secretary and Clerk
President, General Counsel, Assistant
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 General Counsel
Boston, MA
Bruce R. Speca, NEF Corporation Executive Vice President
Managing Director and Executive Vice
President
New England Funds, L.P. Managing Director and Executive Vice
President
NEFSCO Executive Vice President and Chief
Operating Officer
Scott E. Wennerholm New England Funds, L.P. Managing Director, Senior Vice
Managing Director, Senior Vice President and Chief Financial Officer
President and Chief Financial Officer
NEF Corporation Senior Vice President and Chief
Financial Officer
NEFSCO Senior Vice President and Chief
Financial Officer
Christopher Wilson New England Funds, L.P. Managing Director and Senior Vice
Managing Director and Senior Vice President
President
NEF Corporation Senior Vice President
NEFSCO Senior Vice President
James H. Davis New England Funds, L.P. Managing Director and Senior Vice
Managing Director and Senior Vice President
President
NEF Corporation Senior Vice President
NEFSCO Senior Vice President
Caren I. Leedom New England Funds, L.P. Managing Director and Senior Vice
Managing Director and Senior Vice President
President
NEF Corporation Senior Vice President
NEFSCO Senior Vice President
Raymond K. Girouard New England Funds, L.P. Senior Vice Precedent, Comptroller and
Senior Vice President and Assistant Assistant Treasurer
Treasurer
NEF Corporation Senior Vice President, Comptroller and
Assistant Treasurer
NEFSCO Senior Vice President, Comptroller and
Assistant Treasurer
Robert E. O'Hare New England Funds, L.P. Vice President, Senior Counsel,
Vice President, Senior Counsel, Assistant Secretary and Assistant Clerk
Assistant Secretary and Assistant Clerk
NEF Corporation Vice President, Senior Counsel,
Assistant Secretary and Assistant Clerk
NEFSCO Vice President, Senior Counsel,
Assistant Secretary and Assistant Clerk
Martin G. Dyer, NEF Corporation Vice President and Assistant Secretary
Vice President and Assistant Secretary
New England Funds, L.P. Vice President and Assistant Secretary
NEFSCO Vice President and Assistant Secretary
Ralph M. Greggs, None None
Senior Vice President
Beatriz A. Pina-Smith NEF Corporation Vice President and Assistant Treasurer
Vice President and Assistant Treasurer and Assistant Controller
New England Funds, L.P. Vice President and Assistant Treasurer
and Assistant Controller
</TABLE>
(c) Westpeak serves as subadviser to the Registrant's New England Growth
Opportunities Fund, and is wholly owned by Nvest Companies. Organized
in 1991, Westpeak provides investment management services to other
mutual funds and institutional clients. Westpeak's general partner,
directors and officers have been engaged during the past two fiscal
years in the following businesses, professions, vocations or
employments of a substantial nature (former affiliations are marked
with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Westpeak Other Affiliations Connection
-------------------- ------------------- ------------
<S> <C> <C>
Westpeak Investment Advisors, Inc. None None
General Partner
Gerald H. Scriver None None
President, Chief Executive Officer and
Chief Investment Officer
Edward N. Wadsworth NEIC Executive Vice President, Clerk,
Clerk, Secretary, Chief Legal Officer 399 Boylston Street Secretary and General Counsel
Boston, MA 02116
NEIC Inc. Executive Vice President, Clerk,
399 Boylston Street Secretary and General Counsel
Boston, MA 02116
Marlborough Capital Advisors, Inc. Assistant Clerk
399 Boylston Street
Boston, MA 02116
New England Investment Associates, Secretary
Inc. ("NEIA")
399 Boylston Street
Boston, MA 02116
Robert A. Franz None None
Senior Vice President
Philip J. Cooper None None
Vice President Portfolio Management
</TABLE>
(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:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Loomis Sayles Other Affiliations Connection
-------------------- ------------------- -----------
<S> <C> <C>
Loomis Sayles & Company, Incorporated None None
("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
</TABLE>
Item 29. Principal Underwriter
(a) New England Funds, L.P., the Registrant's principal underwriter, also serves
as principal underwriter for:
New England Funds Trust I
New England Funds Trust III
New England Tax Exempt Money Market Trust
New England Cash Management Trust
(b) The general partner and officers of the Registrant's principal
underwriter, New England Funds, L.P., and their address are as
follows:
<TABLE>
<CAPTION>
Positions and Offices with Positions and Offices
Name Principal Underwriter with Registrant
---- -------------------------- ----------------------
<S> <C> <C>
NEF Corporation General Partner None
Henry L.P. Schmelzer Managing Director, President and Chief President and Trustee
Executive Officer
Bruce R. Speca Managing Director and Executive Vice Executive Vice President
President
John E. Pelletier Managing Director, Senior Vice President, Secretary and Clerk
General Counsel, Secretary and Clerk
Frank Nesvet Managing Director, Senior Vice President Treasurer
and Chief Financial Officer
James H. Davis Managing Director and Senior Vice President None
Caren I. Leedom Managing Director and Senior Vice President None
Scott Wennerholm Managing Director, Chief Financial Officer None
and Senior Vice President
Christopher L. Wilson Managing Director and Senior Vice None
President
Robert E. O'Hare Vice President, Senior Counsel, Assistant None
Secretary and Assistant Clerk
Raymond K. Girouard Senior Vice President, Comptroller and None
Assistant Treasurer
Martin G. Dyer Vice President and Assistant Secretary None
Beatriz A. Pina-Smith Vice President and Assistant Comptroller None
and Assistant Treasurer
Frank S. Maselli Senior Vice President None
Rayonna T. Bennett Vice President None
Philip J. Graham Vice President None
</TABLE>
The principal business address of all the above persons or entities
is 399 Boylston Street, Boston, MA 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents required by the
specified rules:
(a) Registrant
Rule 31a-1(b)(4)
Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a)
Rule 31a(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(c) (i) For series of the Registrant managed by Back Bay Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
Back Bay Advisors, L.P.
New England Funds Management L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
(ii) For New England Growth Opportunities Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
Westpeak Investment Advisors, L.P.
1011 Walnut Street
Boulder, Colorado 80302
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
(iii) For New England High Income Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d), (e)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02110
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f);
Rule 31a-2(d), (e)
(d) New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(d)
Rule 31a-2(c)
Item 31. Management Services
None.
Item 32. Undertakings
The Registrant undertakes to provide the annual report of any of its series to
any person who receives a prospectus for such series and who requests the annual
report.
<PAGE>
NEW ENGLAND FUNDS TRUST II
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment No. 109 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 30th day of April, 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
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature
- ---------
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
PETER S. VOSS* Chairman of the Board; Chief Executive April 30, 1998
- ------------- Officer; Principal Executive Officer;
Peter S. Voss Trustee
/s/FRANK NESVET
- ----------------------
Frank Nesvet Treasurer April 30, 1998
HENRY L. P. SCHMELZER* Trustee April 30, 1998
- ----------------------
Henry L. P. Schmelzer
GRAHAM T. ALLISON, JR.* Trustee April 30, 1998
- -----------------------
Graham T. Allison, Jr.
DANIEL M. CAIN* Trustee April 30, 1998
- -----------------------
Daniel M. Cain
KENNETH J. COWAN* Trustee April 30, 1998
- -----------------------
Kenneth J. Cowan
RICHARD DARMAN* Trustee April 30, 1998
- -----------------------
Richard Darman
SANDRA O. MOOSE* Trustee April 30, 1998
- -----------------------
Sandra O. Moose
JOHN A. SHANE* Trustee April 30, 1998
- -----------------------
John A. Shane
PENDLETON P. WHITE* Trustee April 30, 1998
- -----------------------
Pendleton P. White
*By: /s/JOHN E. PELLETIER
------------------
John E. Pelletier
Attorney-In-Fact
April 30, 1998
</TABLE>
<PAGE>
NEW ENGLAND FUNDS TRUST II
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
- -------------- -------
EX - 1(b) Amendment to Amended and Restated Declaration of Trust
EX - 9(b) Form of Dealer Agreement
EX - 11 Consents of Price Waterhouse, LLP and Coopers & Lybrand, L.L.P.
EX - 17 Financial Data Schedule
<PAGE>
EXHIBIT 99.1(B)
NEW ENGLAND FUNDS TRUST II
Amendment No. 8 to Amended and Restated Agreement
and Declaration of Trust
The undersigned, being at least a majority of the Trustees of New
England Funds Trust II (the "Trust"), having determined it to be consistent with
the fair and equitable treatment of all shareholders of the Trust, hereby amend
the Trust's Second Amended and Restated Agreement and Declaration of Trust, as
amended by Amendments Nos. 1, 2, 3, 4, 5, 6, and 7 thereto (the "Declaration of
Trust"), a copy of which is on file in the office of the Secretary of State of
The Commonwealth of Massachusetts, as follows:
1. The first sentence of Section 6 of Article III of the Declaration of
Trust is hereby amended to read in its entirety as follows:
Without limiting the authority of the Trustees set forth in Section 5,
inter alia, to establish and designate any further Series or classes or
to modify the rights and preferences of any Series or class, each of
the following Series shall be, and is hereby, established and
designated: (1) New England Massachusetts Tax Free Income Fund, (2) New
England High Income Fund, (3) New England Limited Term U.S. Government
Fund, (4) New England Adjustable Rate U.S. Government Fund, (5) New
England Growth Opportunities Fund, (6) New England Intermediate Term
Tax Free Fund of California, and (7) New England Tax Free Income Fund
of New York; and the following Series shall be, and hereby are,
designated Multi-Class Series: New England Massachusetts Tax Free
Income Fund, New England High Income Fund, New England Limited Term
U.S. Government Fund, New England Adjustable Rate U.S. Government Fund,
New England Growth Opportunities Fund, New England Intermediate Term
Tax Free Fund of California, and New England Tax Free Income Fund of
New York.
The foregoing amendment shall become effective as of the time it is
filed with the Secretary of State of the Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hand for ourselves and for
our successors and assigns as of the day of February, 1998.
- ----------------------------- -----------------------------
Graham T. Allison, Jr. Kenneth J. Cowan
- ----------------------------- -----------------------------
Sandra O. Moose Henry L.P. Schmelzer
- ----------------------------- -----------------------------
Daniel M. Cain John A. Shane
- ----------------------------- -----------------------------
Peter S. Voss Pendleton P. White
- -----------------------------
Richard Darman
<PAGE>
EXHIBIT 99.9(B)
NEW ENGLAND FUNDS, L.P.
399 Boylston Street
Boston, Massachusetts 02116
DEALER AGREEMENT
As dealer for our own account, we offer to sell to you shares of each of the
Funds listed on Exhibit A hereto as from time to time revised by us (the "Funds"
and each a "Fund"), of each which Funds we are a principal underwriter as
defined in the Investment Company Act of 1940 (the "Act") and from which we have
the right to purchase shares.
With respect to each of the Funds (except for paragraph 4, which applies only
with respect to each Fund having in effect from time to time a service plan or
service and distribution plan adopted pursuant to Rule 12b-1 under the Act):
1. In all sales of shares of the Fund to the public you shall act as dealer for
your own account, and in no transaction shall you have any authority to act as
agent for any of the Funds or for us.
2. Orders received from you will be accepted by us only at the public offering
price applicable to each order, except for transactions to which a reduced
offering price applies as provided in the then current Prospectus (which term as
used herein shall include the Statement of Additional Information) of the Fund.
The minimum dollar purchase of shares of each Fund by any investor shall be the
applicable minimum amount described in the then current Prospectus of the fund
and no order for less than such amount will be accepted hereunder. The public
offering price shall be the net asset value per share plus the sales charge, if
any, applicable to the transaction, expressed as a percentage of the public
offering price, as determined and effective as of the time specified in the then
current Prospectus of the Fund. The procedures relating to the handling of
orders shall be subject to any instructions that we shall forward from time to
time to you. All orders are subject to acceptance or rejection by us in our sole
discretion. You hereby agree to comply with the attached Policies and Procedures
with Respect to the Sales of Shares of New England Funds Offering Multiple
Classes of Shares.
3. The sales charge applicable to any sale of Fund shares by you and the dealer
concession or commission applicable to any order from you for the purchase of
Fund shares accepted by us shall be set forth in the then current Prospectus of
the Fund. You may be deemed to be an underwriter in connection with sales by you
of shares of the fund where you receive all or substantially all of the sales
charge as set forth in the Fund's Prospectus, and therefore you may be subject
to applicable provisions of the Securities Act of 1933.
We are entitled to a contingent deferred sales charge ("CDSC") on redemptions
within five years of purchase on any Class B shares sold and within one year of
purchase of certain Class A shares sold as described in the Prospectus. You
agree that you will sell shares subject to a CDSC and that are to be held in
omnibus accounts only if you are a NETWORKING participant with the National
Securities Clearing Corporation and if such accounts are pursuant to a
NETWORKING Agreement.
Reduced sales charges or no sales charge may apply to certain transactions under
letter of intent, combined purchases or investments, reinvestment of dividends
and distributions, repurchase privilege, unit investment trust distribution
reinvestment or other programs, as described in the then current Prospectus of
the Fund.
4. RULE 12B-1 PLANS. The substantive provisions of this Paragraph 4 have been
adopted pursuant to Rule 12-b1 under the Act by certain funds, under plans
pursuant to such Rule (each a "Plan")
(a) You agree to provide (i) for the Funds with a Service Plan, personal
services to investors in shares of the Funds and/or the maintenance of
shareholder accounts and (ii) for those Funds with a Service and Distribution
Plan, both personal services to investors in shares of the funds and/or the
maintenance of shareholder accounts and also distribution and marketing services
in the promotion of Fund shares. As compensation for these services, we shall
pay you, with respect to Fund shares which are owned of record by your firm as
nominee for your customers or which are owned by those shareholders whose
records, as maintained by the Fund or its agent, designate your firm as the
shareholder's dealer of record, a quarterly services fee or services fee and
distribution fee based on the average daily net asset value of such Fund shares
at the rate set forth with respect to the Fund in Exhibit A hereto as from time
to time revised by us. No such fee will be paid to you with respect to shares
purchased by you and redeemed or repurchased by the Fund or by us as an agent
within seven (7) business days after the date of our confirmation of such
purchase. No such fee will be paid to you with respect to any of your customers
if the amount of such fee based upon the value of such customer's Fund shares
will be less than $5.00 Normally, payment of such fee to you shall be made
within forty-five(45) days after the close of each quarter for which such fee is
payable.
(b) You shall furnish us and the Fund with such information as shall reasonably
be requested by the Trustees or Directors of the Fund with respect to the fees
paid to you pursuant to this paragraph 4.
(c) The provisions of this Paragraph 4 may be terminated by the vote of a
majority of the Trustees or Directors of the Fund who are not interested persons
of the fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to the Plan, or by a vote of
a majority of the Fund's outstanding shares, on sixty (60) days' written notice,
without payment of any penalty. Such provisions will be terminated also by any
act that terminates either the Fund's Distributor's Contract or Underwriting
Agreement with us or this Dealer Agreement and shall terminate automatically in
the event of the assignment (as that term is defined in the Act) of this dealer
Agreement.
(d) The provisions of the Distributor's Contract or Underwriting Agreement
between the Fund and us, insofar as they relate to the Plan, are incorporated
herein by reference. The provisions of this paragraph of this paragraph 4 shall
continue in full force and effect only so long as the continuance of the Plan,
the Distributor's Contract or Underwriting Agreement and these provisions is
approved at least annually by a vote of the Trustees or Directors, including a
majority of the Trustees or Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in he operation of the
plan or in any agreements related tot he plan, cast in person at a meeting
called for the purpose of voting thereon.
5. You agree to purchase shares only from us or from your customers. If you
purchase shares from us, you agree that all such purchases shall be made only:
(a) to cover orders already received by you from your customers; (b) for shares
being acquired by your customers pursuant to either Exchange privilege or the
Reinvestment Privilege, as described in the then current prospectus of the Fund;
(c) for your own bona fide investment; or (d) for investments by any IRS
qualified pension, profit sharing or other trust established for the benefit of
your employees or for investments in Individual Retirement Accounts established
by your employees, and if you so advise us in writing prior to any sale of Fund
shares pursuant to this subparagraph (d), you agree to waive all your dealer
concessions to all sales of Fund shares pursuant to this subparagraph (d). If
you purchase shares from your customers, you agree to pay such customers not
less than the applicable redemption price as established by the then current
Prospectus of the Fund. We agree that we will not purchase any securities from
the Fund except for our own bona fide investment purposes for the purpose of
covering purchase orders that we have already received or for shares to be
acquired by our customers pursuant to either exchange privilege or the
repurchase privilege, as described in the then current prospectus of the Fund.
6. You sell shares only:(a) to customers at the applicable public offering
price, except for shares being acquired by your customers at net asset value
pursuant to either the exchange privilege or the repurchase privilege as
described in the then current Prospectus of the Fund, and (b) to us agent for
the Fund at the redemption price. In such a sale to us, you may act as either as
principal for your own account or as agent for your customer. If you act as
principal for your own account in purchasing shares for resale to us, you agree
to pay your customer not less than the price that you receive from us. If you
act as an agent for your customer in selling shares to us, you agree not to
charge your customer more than a fair commission for handling the transaction,
except that you agree to receive no compensation of any kind based on the
reinvestment of redemption or repurchase proceeds pursuant to the repurchase
privilege, as described in the current Prospectus of the Fund.
7. You hereby certify that all of your customers' taxpayer identification
numbers ("TIN") or social security numbers ("SSN") furnished to us by you are
correct and that you will not open an account without providing the customer's
TIN or SSN.
8. You shall not withhold placing with us orders received from your customers so
as to profit yourself as a result of such withholding; e.g., by a change in the
net asset value from that used in determining the public offering price to your
customers.
9. We will not accept from you any conditional orders for shares.
10. If any Fund shares sold to you under the terms of this Agreement are
redeemed by the Fund or repurchased by us as agent for the Fund within seven (7)
business days after the date of our confirmation of the original purchase by
you, it is agreed that you shall forfeit your right to the dealer concession or
commission received by you on such Fund shares.
We will notify you of any such repurchase or redemption within ten (10) business
days after the date thereof and you shall forthwith refund to us the entire
concession or commission allowed or paid to you on such sale. We agree, in the
event of any such repurchase or redemption, to refund to the Fund the shares of
the sales charge if any, retained by us an upon receipt from you of the
concession allowed to you on Class A Shares, to pay such refund forthwith to the
Fund.
11. Payment for Fund shares sold to you shall be made on or before the
settlement date specified in our confirmation, at the office of our clearing
agent, and by check payable to the order or the Fund, which reserves the right
to delay issuance, redemption or transfer of shares until such check has
cleared. If such payment is not received by us, we reserve the right, without
notice, forthwith either to cancel the sale, or at our option, to sell the
shares ordered back to the Fund, resulting your failure to make payment as
aforesaid.
12. You will also act as principal in all purchases by a shareholder for whom
you are the dealer of record of fund shares with payments sent directly by such
shareholder by such shareholder to the Shareholder Services and Transfer agent
(the "Agent") specified in the then current Prospectus of the Fund, and you
authorize and appoint the Agent to execute and confirm such purchases to such
shareholder on your behalf. The Agent will remit monthly to you the amount of
any concessions due with respect to such purchases, except that no concessions
will be paid to you on any transaction for which your net sales concession is
less than the total of $5.00 in any one month. You also represent that with
respect to all such direct purchases by such shareholder, you may lawfully sell
shares of such Fund in the state designated as such shareholder's record
address.
13. Stock certificates for shares sold to you shall be issued only if
specifically requested and upon terms specified from time-to-time by the
Trustees of the Fund. If no open account registration or transfer instructions
are received by the Agent within 20 days after payment by you for shares sold to
you, an open account for such shares will be established in your name. You agree
to hold harmless and indemnify us, the Agent and the Fund, for any loss or
expenses resulting from such open account registration of such shares.
14. No person is authorized to make any representations concerning shares of the
Fund except those contained in the then current Prospectus of the Fund and in
sales literature issued by us supplemental to such Prospectus. In purchasing
shares from us, you shall rely solely on the representations contained in such
Prospectus and such sales literature. We will furnish you with additional copies
such Prospectus and such sales literature and other releases and information
issued by us in reasonable quantities upon request.
If, with permission from us, you use any advertisement or sales literature which
has not been supplied by us, you are responsible for ensuring that the material
complies with all applicable regulations and has been filed with the appropriate
authorities. Also, you will send us copies of all such materials within (10)
days of first use.
15. The Fund reserves the right in its discretion and we reserve the right in
our discretion, without notice, to suspend sales or withdraw the offering of
Fund shares entirely. We reserve the right, by written notice to you, to amend,
modify or cancel this Dealer Agreement. Notice for all purposes shall be deemed
to be given when mailed or electronically transmitted to you.
16. This Dealer Agreement shall replace any prior agreement between you and us
and is conditioned upon your representation and warranty that you are a member
of the National Association of Securities Dealers, Inc. Or, in the alternative,
that you are a foreign sealer not eligible for membership in that Association,
in which case you agree that, in making any sales to purchasers within the
United States of securities acquired from us, you will conform to the provisions
of paragraphs (a) and (b) of Rule 25 of Article III of that Association's Rules
of Fair Practice. You and we agree to abide by the Rules and Regulations of the
National Association of Securities Dealers, Inc. Including without limitation
Rules 2,21, and 26 of Article III of its Rules of Fair Practice, and all
applicable state and federal laws, rules and regulations.
You will not offer Fund shares for sale in any state (a) where they are not
qualified for sale under the blue sky laws and regulations of such state of (b)
where you are not qualified to act as a dealer.
In the event that you offer fund shares outside the United States, you agree to
comply with the applicable laws, rules and regulations of the foreign government
having jurisdiction over such sales, including any regulations of United States
military authorities applicable to solicitations to military personnel.
17. All communications to us should be sent to the above address. Any notice to
you shall be duly given if mailed or telegraphed to you at the address specified
by you below. This Agreement shall be effective when accepted by you below and
shall be construed under the laws of the Commonwealth of Massachusetts.
Accepted: New England Funds, L.P.
By:
- -------------------------------------- -----------------------------------
Dealer's Name
Address
- --------------------------------------
By:
- --------------------------------------
Authorized Signature of Dealer
- --------------------------------------
(Please print name)
Date:
- --------------------------------------
<PAGE>
DEALER AGREEMENT ADDENDUM I
The following is a supplement to item number 3 in your current Agreement with
New England Funds, L.P.
We are entitled to a contingent deferred sales charge ("CDSC") on redemptions
within five years of purchase on any Class B shares sold and within one year of
purchase of certain Class A shares sold as described in the prospectus. You
agree that you will sell shares subject to CDSC and that are to be held in
omnibus accounts only if you are a NETWORKING participant with the National
Securities Clearing Corporation and if such accounts are pursuant to a
NETWORKING Agreement.
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 109 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated February 12, 1998, relating to financial
statements and the financial highlights appearing in the December 31, 1997
Annual Reports to Shareholders of New England Funds Trust II, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Independent Accountants" and "Financial
Statements" in the Statements of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 24, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
New England Funds Trust II:
We consent to the incorporation by reference in Post-Effective Amendment No. 109
to the Registration Statement of New England Funds Trust II (comprising,
respectively, the New England Limited Term U.S. Government Fund, New England
Growth Opportunities Fund, New England Adjustable Rate U.S. Government Fund, New
England High Income Fund, New England Massachusetts Tax Free Income Fund, New
England Intermediate Term Tax Free Fund of New York and New England Intermediate
Term Tax Free Fund of California - the "Series") on Form N-1A of our reports
dated February 7, 1997 and February 10, 1997 on our audits of the financial
statements and financial highlights of the respective Series, which reports are
included in the Annual Report to Shareholders for the year ended December 31,
1996, which are incorporated by reference in the Registration Statement. We also
consent to the reference to our Firm under the caption "Financial Highlights".
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
April 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000052136
<NAME> NEW ENGLAND FUNDS TRUST II
<SERIES>
<NUMBER> 011
<NAME> NEW ENGLAND GROWTH OPPORTUNITIES FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 255,231,172
<INVESTMENTS-AT-VALUE> 308,001,722
<RECEIVABLES> 1,216,257
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 14,000
<TOTAL-ASSETS> 309,231,979
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 519,210
<TOTAL-LIABILITIES> 519,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 243,099,477
<SHARES-COMMON-STOCK> 14,388,146
<SHARES-COMMON-PRIOR> 12,089,922
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5,113)
<ACCUMULATED-NET-GAINS> 12,847,855
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,770,550
<NET-ASSETS> 308,712,769
<DIVIDEND-INCOME> 4,306,594
<INTEREST-INCOME> 193,160
<OTHER-INCOME> 0
<EXPENSES-NET> 3,788,029
<NET-INVESTMENT-INCOME> 711,725
<REALIZED-GAINS-CURRENT> 52,507,998
<APPREC-INCREASE-CURRENT> 20,723,726
<NET-CHANGE-FROM-OPS> 73,943,449
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 742,082
<DISTRIBUTIONS-OF-GAINS> 35,442,350
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,195,156
<NUMBER-OF-SHARES-REDEEMED> 29,197,625
<SHARES-REINVESTED> 31,642,573
<NET-CHANGE-IN-ASSETS> 34,640,104
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2,484
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,809,523
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,788,029
<AVERAGE-NET-ASSETS> 236,511,427
<PER-SHARE-NAV-BEGIN> 13.87
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 4.40
<PER-SHARE-DIVIDEND> 0.06
<PER-SHARE-DISTRIBUTIONS> 2.93
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.35
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000052136
<NAME> NEW ENGLAND FUNDS TRUST II
<SERIES>
<NUMBER> 012
<NAME> NEW ENGLAND GROWTH OPPORTUNITIES CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 255,231,172
<INVESTMENTS-AT-VALUE> 308,001,722
<RECEIVABLES> 1,216,257
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 14,000
<TOTAL-ASSETS> 309,231,979
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 519,210
<TOTAL-LIABILITIES> 519,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 243,099,477
<SHARES-COMMON-STOCK> 5,304,921
<SHARES-COMMON-PRIOR> 3,818,125
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5,113)
<ACCUMULATED-NET-GAINS> 12,847,855
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,770,550
<NET-ASSETS> 308,712,769
<DIVIDEND-INCOME> 4,306,594
<INTEREST-INCOME> 193,160
<OTHER-INCOME> 0
<EXPENSES-NET> 3,788,029
<NET-INVESTMENT-INCOME> 711,725
<REALIZED-GAINS-CURRENT> 52,507,998
<APPREC-INCREASE-CURRENT> 20,723,726
<NET-CHANGE-FROM-OPS> 73,943,449
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21,007
<DISTRIBUTIONS-OF-GAINS> 12,117,349
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,245,821
<NUMBER-OF-SHARES-REDEEMED> 7,468,164
<SHARES-REINVESTED> 11,550,122
<NET-CHANGE-IN-ASSETS> 29,327,779
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2,484
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,809,523
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,788,029
<AVERAGE-NET-ASSETS> 236,511,427
<PER-SHARE-NAV-BEGIN> 13.87
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 4.40
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 2.93
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.28
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000052136
<NAME> NEW ENGLAND FUNDS TRUST II
<SERIES>
<NUMBER> 013
<NAME> NEW ENGLAND GROWTH OPPORTUNITIES FUND CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 255,231,172
<INVESTMENTS-AT-VALUE> 308,001,722
<RECEIVABLES> 1,216,257
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 14,000
<TOTAL-ASSETS> 309,231,979
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 519,210
<TOTAL-LIABILITIES> 519,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 243,099,477
<SHARES-COMMON-STOCK> 440,771
<SHARES-COMMON-PRIOR> 335,575
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5,113)
<ACCUMULATED-NET-GAINS> 12,847,855
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,770,550
<NET-ASSETS> 308,712,769
<DIVIDEND-INCOME> 4,306,594
<INTEREST-INCOME> 193,160
<OTHER-INCOME> 0
<EXPENSES-NET> 3,788,029
<NET-INVESTMENT-INCOME> 711,725
<REALIZED-GAINS-CURRENT> 52,507,998
<APPREC-INCREASE-CURRENT> 20,723,726
<NET-CHANGE-FROM-OPS> 73,943,449
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