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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet
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NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND FUNDS TRUST III
Statement of Additional Information -- PART II
May 3, 1999 as revised January 11, 2000
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 for New England Access Shares (New
England Core Equity Fund, New England Select Fund, New England Stock and Bond
Fund, New England Small Cap Value Fund, New England Small Cap Growth Fund and
New England Total Return Bond Fund), which are not currently being offered to
the public. 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 3, 1999 (the "Prospectus" or
"Prospectuses"). The following Funds are described in this Statement:
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SERIES OF NEW ENGLAND FUNDS TRUST I
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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")
New England Government Securities Fund (the "Government Securities Fund")
New England International Equity Fund (the "International Equity Fund")
New England Growth Fund (the "Growth Fund")
New England Capital Growth Fund (the "Capital Growth Fund")
New England Value Fund (the "Value Fund")
New England Balanced Fund (the "Balanced 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")
SERIES OF NEW ENGLAND FUNDS TRUST II
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New England High Income Fund (the "High Income Fund")
New England Short Term Corporate Income Fund (the "Short Term Corporate Income Fund")
(formerly New England Adjustable Rate U.S. Fund")
Government Fund)
New England Limited Term U.S. Government (the "Limited Term U.S. Government Fund")
Government Fund
New England Massachusetts Tax Free Income Fund (the "Massachusetts Fund")
New England Intermediate Term Tax Free Fund of (the "California Fund")
California
New England Growth and Income Fund (formerly New (the "Growth and Income Fund")
England Growth Opportunities Fund)
Series of New England Funds Trust III
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New England Bullseye Fund
New England Equity Income Fund (the "Bullseye Fund")
(the "Equity Income Fund")
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MISCELLANEOUS INVESTMENT PRACTICES
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The following is a list of certain investment practices in which a Fund may engage as secondary investment strategies. A
Fund's primary strategies are detailed in its prospectus.
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HIGH INCOME FUND STRATEGIC INCOME FUND BOND INCOME FUND
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Various Equity Securities Various Equity Securities Various Equity Securities
U.S. Government Securities When-issued Securities Mortgage-backed Securities
Mortgage-backed Securities Asset-backed Securities Asset-backed Securities
Asset-backed Securities Collateralized Mortgage Obligations Collateralized Mortgage Obligations
Collateralized Mortgage Obligations Repurchase Agreements When-issued Securities
Stripped Securities Foreign Currency Hedging Transactions Convertible Securities
Repurchase Agreements Investments in Closed-end Investment Securities of Emerging Markets
When-issued Securities Companies Foreign Currency Hedging Transactions
Convertible Securities Futures, Options and Swap Contracts Illiquid Securities
Foreign Currency Hedging Transactions Short Sales (including Rule 144A Securities)
Illiquid Securities Illiquid Securities Loans of Portfolio Securities
(including Rule 144A Securities) (including Rule 144A Securities) Short-term Investments
Loans of Portfolio Securities Loans of Portfolio Securities Money Market Instruments
Short-term Investments Borrowing/Reverse Repurchase Foreign Government Bonds
Money Market Instruments Agreements
Structured Notes Short-term Investments
Step Coupon Bonds Money Market Instruments
Step Coupon Bonds
MUNICIPAL INCOME FUND SHORT TERM CORPORATE INCOME FUND LIMITED TERM U.S. GOVERNMENT FUND
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Repurchase Agreements Convertible Bonds Corporate Fixed Income Securities
Stripped Securities Stripped Securities Mortgage-backed Securities
When-issued Securities Repurchase Agreements Collateralized Mortgage Obligations
Futures and Options When-issued Securities Stripped Securities
Short-term Investments Securities in Emerging Markets Repurchase Agreements
Money Market Instruments Foreign Currency Hedging When-issued Securities
Transactions/Forward Commitments Foreign Securities
Futures and Options (Global Markets, Supranational Agencies)
Illiquid Securities Foreign Currency Hedging Transactions
(including Rule 144A Securities) Futures and Options
Short-term Investments Illiquid Securities
Money Market Instruments (including Rule 144A Securities)
Zero Coupon Securities Loans of Portfolio Securities
Foreign Securities Short-term Investments
(Supranational Agencies) Money Market Instruments
Structured Notes Foreign Government Bonds
Non-Convertible Preferred Stocks,
Notes or Bonds
Step Coupon Bonds
GOVERNMENT SECURITIES FUND MASSACHUSETTS FUND CALIFORNIA FUND
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Repurchase Agreements U.S. Government Securities U.S. Government Securities
When-issued Securities Mortgage-related Securities Mortgage-related Securities
Futures and Options Stripped Securities Stripped Securities
Money Market Instruments Repurchase Agreements Repurchase Agreements
When-issued Securities When-issued Securities
Futures and Options Futures and Options
Illiquid Securities Illiquid Securities
(including Rule 144A Securities) (including Rule 144A Securities)
Money Market Instruments Money Market Instruments
Pay-in-kind Securities Pay-in-kind Securities
Borrowing/Reverse Repurchase Agreements Borrowing/Reverse Repurchase Agreements
BULLSEYE FUND INTERNATIONAL EQUITY FUND GROWTH FUND
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Various Equity Securities U.S. Equity Securities Various Equity Securities
U.S. Government Securities U.S. Government Securities Corporate Fixed Income Securities
Repurchase Agreements U.S. Corporate Fixed (investment grade)
When-issued Securities Income Securities (investment grade) U.S. Government Securities
Foreign Securities (Global Markets, Lower-quality Fixed Income Securities Repurchase Agreements
Supranational agencies) (Foreign and U.S.) Zero Coupon Securities
Securities of Emerging Markets Repurchase Agreements Convertible Securities
Foreign Currency Hedging Zero Coupon Securities Futures, Options and Swap Contracts
Transactions When-issued Securities Short Sales Against the Box
Futures, Options and Swap Contracts Foreign Currency Hedging Transactions Illiquid Securities
Short Sales Against the Box Foreign Corporate Bonds (including Rule 144A Securities)
Illiquid Securities Foreign Convertible Bonds Borrowing/Reverse Repurchase Agreements
(including Rule 144A Securities) Foreign Government Bonds Short-term Investments
Loans of Portfolio Securities Supranational Agencies Warrants Money Market Instruments
Borrowing/Reverse Repurchase Agreements Investments in Other Investment
Short-term Investments Companies
Money Market Instruments Futures, Options and Swap Contracts
Foreign Government Bonds Short Sales Against the Box
Illiquid Securities
(including Rule 144A Securities)
Loans of Portfolio Securities
Borrowing/Reverse Repurchase Agreements
Short-term Investments
Money Market Instruments
GROWTH AND INCOME FUND CAPITAL GROWTH FUND BALANCED FUND
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Various Equity Securities Various Equity Securities Vario Various Equity Securities
Corporate Fixed Income Securities Corporate Fixed Income Securities Non-Convertible Preferred Stock
(investment grade) (investment grade) Lowe Lower Quality Corporate Fixed
U.S. Government Securities U.S. Government Securities Income Securities
Zero Coupon Securities Repurchase Agreements Repurchase Agreements
Repurchase Agreements Zero Coupon Securities Investments in Other Investment
Convertible Securities Convertible Securities Companies
Foreign Securities (Global Markets, Foreign Securities (Global markets, Foreign Currency Hedging Transactions
Supranational agencies, Depository Supranational agencies, Depository Futures, Options and Swap Contracts
Receipts) receipts) Short Sales Against the Box
Foreign Currency Hedging Transactions Foreign Currency Hedging Transactions Illiquid Securities
Investments in Other Investment Investments in Other Investment (including Rule 144A Securities)
Companies Companies Loans of Portfolio Securities
Futures, Options and Swap Contracts Futures, Options and Swap Contracts Borrowing/Reverse Repurchase Agreements
Short Sales Against the Box Short Sales Against the Box Short-term Investments
Illiquid Securities Illiquid Securities Money Market Instruments
(including Rule 144A Securities) (including Rule 144A Securities)
Loans of Portfolio Securities Loans of Portfolio Securities
Borrowing/Reverse Repurchase Agreements Borrowing/Reverse Repurchase Agreements
Short-term Investments Short-term Investments
Money Market Instruments Money Market Instruments
Foreign Government Bonds Foreign Government Bonds
VALUE FUND EQUITY INCOME FUND
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Various Equity Securities Various Equity Securities
Corporate Fixed Income Securities (investment grade) Corporate Fixed Income Securities (investment grade)
U.S. Government Securities Lower Quality Corporate Fixed Income Securities
Repurchase Agreements U.S. Government Securities
Zero Coupon Securities Repurchase Agreements
When-issued Securities Zero Coupon Securities
Convertible Securities Convertible Bonds
Foreign Currency Hedging Transactions Securities of Emerging Markets
Investments in Other Investment Companies Foreign Currency Hedging Transactions
Futures, Options and Swap Contracts Investments in Other Investment Companies
Short Sales Against the Box Futures, Options and Swap Contracts
Illiquid Securities (including Rule 144A Securities) Short Sales Against the Box
Loans of Portfolio Securities Illiquid Securities (including Rule 144A Securities)
Borrowing/Reverse Repurchase Agreements Loans of Portfolio Securities
Short-term Investments Borrowing/Reverse Repurchase Agreements
Money Market Instruments Short-term Investments
Foreign Government Bonds Money Market Instruments
Foreign Government Bonds
When-issued Securities
The following is a list of some of the investment practices employed by the various subadvisers of New England Star Funds as
SECONDARY strategies. Due to the multi-subadviser approach of New England Star Funds, investing in a certain security may be a
primary strategy for one segment of the Fund and a secondary strategy for another segment of such Fund.
STAR ADVISERS FUND STAR WORLDWIDE FUND STAR SMALL CAP FUND
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Various Equity Securities Various Equity Securities Various Equity Securities
U.S. Government Securities U.S. Government Securities U.S. Government Securities
Repurchase Agreements Repurchase Agreements Repurchase Agreements
Structured Notes Structured Notes Structured Notes
Zero Coupon; Pay-in Kind; Zero Coupon and Strips When-issued; Forward Commitments
Step Coupon and Strips When-issued; Forward Commitments Foreign Currency Hedging Transactions
When-issued; Forward Commitments Foreign Currency Hedging Transactions Privatizations
Foreign Currency Hedging Transactions Privatizations Investments in Other Investment Companies
Privatizations Investments in Other Investment Futures, Options and Swap Contracts
Investments in Other Investment Companies Short Sales
Companies Futures, Options and Swap Contracts Illiquid Securities
Futures, Options and Swap Contracts Short Sales Against the Box (including Rule 144A Securities
Short Sales Against the Box Illiquid Securities and Section 4(2) Commercial Paper)
Illiquid Securities (including Rule 144A Securities Borrowing/Reverse Repurchase Agreements
(including Rule 144A Securities and Section 4(2) Commercial Paper) Short-term Investments
and Section 4(2) Commercial Paper) Borrowing/Reverse Repurchase Agreements Money Market Instruments
Borrowing/Reverse Repurchase Agreements Short-term Investments Mortgage- and Asset-backed Securities
Short-term Investments Money Market Instruments Loans of Portfolio Securities
Money Market Instruments Loans of Portfolio Securities Foreign Government Bonds
Loans of Portfolio Securities Mortgage- and Asset-backed Securities Collateralized Mortgage Obligations
Mortgage- and Asset backed Securities Foreign Government Bonds Step Coupon Bonds
Foreign Government Bonds Step Coupon Bonds Pay-in-kind Securities
Collateralized Mortgage Obligations Pay-in-kind Securities Foreign Currency Speculation Transactions
Foreign Securities (Global Markets, Foreign Currency Speculation Zero Coupon Securities
Supranational Agencies) Transactions Stripped Securities
Securities of Emerging Markets Collateralized Mortgage Obligations Convertible Bonds
Foreign Depository Receipts Foreign Securities (Supranational Foreign Securities (Global Markets,
Foreign Currency Speculation Agencies, Emerging Markets) Emerging Markets, Depository Receipts,
Transactions Supranational Agencies)
</TABLE>
The following is a description of the various investment practices in which a
Fund may engage, whether as a primary or secondary strategy:
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. A 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. A
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.
o 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.
o Warrants - A Fund 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 plus the
cost thereof. 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 Real estate investment trusts (REITs) - Certain Funds may invest in REITs.
REITs are pooled investment vehicles that invest primarily in either real
estate or real estate related loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs and the ability of the REITs' manager.
REITs are also subject to risks generally associated with the investments in
real estate. A Fund will indirectly bear its proportionate share of expenses,
including management fees, paid by each REIT in which it invests.
Fixed-income Securities A Fund may invest 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
and includes the risk of default. 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 Quality Fixed-income Securities Fixed-income securities rated BB or lower
by Standard & Poor's Ratings Group ("Standard & Poor's" or "S&P") or Ba or lower
by Moody's Investor's Service, Inc. ("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" and "Appendix D - Average Monthly Portfolio
Composition Tables."
Structured Notes Certain 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 Standard & Poor's Composite Index of 500 Stocks ("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 below) apply.
U.S. Government Securities Certain Funds may invest in some or all of the
following U.S. government securities:
o U.S. Treasury Bills - Direct obligations of the United States Treasury which
are issued in maturities of one year or less. No interest is paid on Treasury
bills; instead, they are issued at a discount and repaid at full face value
when they mature. They are backed by the full faith and credit of the United
States government.
o U.S. Treasury Notes and Bonds - Direct obligations of the United States
Treasury issued in maturities that vary between one and 40 years, with
interest normally payable every six months. These obligations are backed by
the full faith and credit of the United States government.
o "Ginnie Maes" - Debt securities issued by a mortgage banker or other mortgagee
which represent an interest in a pool of mortgages insured by the Federal
Housing Administration or the Farmer's Home Administration or guaranteed by
the Veterans Administration. The Government National Mortgage Association
("GNMA") guarantees the timely payment of principal and interest when such
payments are due, whether or not these amounts are collected by the issuer of
these certificates on the underlying mortgages. An assistant attorney general
of the United States has rendered an opinion that the guarantee by GNMA is a
general obligation of the United States backed by its full faith and credit.
Mortgages included in single family or multi-family residential mortgage pools
backing an issue of Ginnie Maes have a maximum maturity of up to 30 years.
Scheduled payments of principal and interest are made to the registered
holders of Ginnie Maes (such as the Fund) each month. Unscheduled prepayments
may be made by homeowners, or as a result of a default. Prepayments are passed
through to the registered holder (such as the Fund, which reinvests any
prepayments) of Ginnie Maes along with regular monthly payments of principal
and interest.
o "Fannie Maes" - The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders that
purchases residential mortgages from a list of approved seller/servicers.
Fannie Maes are pass-through securities issued by FNMA that are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States government.
0 "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.
Tax Exempt Bonds Certain Funds 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.
These Funds 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. The characteristics and methods 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 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 and 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.
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
8%, 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 $40,000 filing a joint return would have to earn a taxable
yield of 7.06% to equal a tax-free yield of 6.0%. This example and the following
table do not take into account the effect of state or local income taxes, if
any, or federal income taxes on social security benefits which may arise as a
result of receiving tax-exempt income, or the federal alternative minimum tax
that may be payable to the extent that Fund dividends are derived from interest
on "private activity" bonds (see the section entitled "Income Dividends, Capital
Gains Distributions and Tax Status"). Also, a portion of the Fund's
distributions may consist of ordinary income or short-term or long-term capital
gains and will be taxable to you as such.
<TABLE>
TAXABLE EQUIVALENT YIELDS - MUNICIPAL INCOME FUND
<CAPTION>
TAXABLE INCOME*
FEDERAL IF TAX EXEMPT YIELD IS
SINGLE RETURN($) JOINT RETURN ($) MARGINAL 4.0% 5.0% 6.0% 7.0% 8.0%
TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 25,750 0 - 43,050 15.00% 4.71% 5.88% 7.06% 8.24% 9.41%
25,751 - 62,450 43,051 - 104,050 28.00% 5.56% 6.94% 8.33% 9.72% 11.11%
62,451 - 130,250 104,051 - 158,550 31.00% 5.80% 7.25% 8.70% 10.14% 11.59%
130,251 - 283,150 158,551 - 283,150 36.00% 6.25% 7.81% 9.38% 10.94% 12.50%
283,151 and over 283,151 and over 39.60% 6.62% 8.28% 9.93% 11.59% 13.25%
* This amount represents taxable income as defined in the Internal Revenue Code of 1986, as amended (the "Code").
** These rates do not reflect any potential state income tax.
</TABLE>
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 Certain Funds 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.
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 tables below illustrate what tax-free investing can mean for you. It does
not take into account the effect of income taxes on social security benefits
which may arise as a result of receiving tax-exempt income, or any alternative
minimum tax. Also, a portion of the Funds' distributions may consist of ordinary
income, short-term capital gain or long-term capital gain and will be taxable to
you as such. The 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 Fund and are not intended as a prediction of future
yields.
<TABLE>
TAX FREE INVESTING
<CAPTION>
MASSACHUSETTS FUND 1999
COMBINED
TAXABLE INCOME* MA AND IF TAX EXEMPT YIELD IS
- ---------------------------------------------- FEDERAL ----------------------------------------------------
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN($) BRACKET** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 25,750 0 - 43,050 20.06% 5.00% 6.25% 7.51% 8.76% 10.01%
25,751 - 62,450 43,051 - 104,050 32.28% 5.91% 7.38% 8.86% 10.34% 11.81%
62,451 - 130,250 104,051 - 158,550 35.11% 6.16% 7.71% 9.25% 10.79% 12.33%
130,251 - 283,150 158,551 - 283,150 39.81% 6.65% 8.31% 9.97% 11.63% 13.29%
283,151 and over 283,151 and over 43.19% 7.04% 8.80% 10.56% 12.32% 14.08%
<CAPTION>
CALIFORNIA FUND 1999
COMBINED
TAXABLE INCOME* FEDERAL AND IF TAX EXEMPT YIELD IS
- ----------------------------------------- CALIFORNIA ----------------------------------------------------------
SINGLE JOINT MARGINAL 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN ($) RETURN ($) TAX RATE** THEN THE EQUIVALENT TAXABLE YIELD WOULD BE:
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 5,131 0 - 10,262 15.85% 4.75% 5.94% 7.13% 8.32% 9.51%
5,132 - 12,161 10,263 - 24,322 16.70% 4.80% 6.00% 7.20% 8.40% 9.60%
12,162 - 19,193 24,323 - 38,386 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
19,194 - 25,750 38,387 - 43,050 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
25,751 - 26,644 43,051 - 53,288 32.32% 5.91% 7.39% 8.87% 10.34% 11.82%
26,645 - 33,673 53,289 - 67,346 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
33,674 - 62,450 67,347 - 104,050 34.70% 6.13% 7.66% 9.19% 10.72% 12.25%
62,451 - 130,250 104,051 - 158,550 37.42% 6.39% 7.99% 9.59% 11.19% 12.78%
130,251 - 283,150 158,551 - 283,150 41.95% 6.89% 8.61% 10.34% 12.06% 13.78%
283,151 and over 283,151 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 the Massachusetts and California tax
law. Note that Massachusetts and 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. These rates include the
effect of deducting state taxes on a federal return.
</TABLE>
These Funds do 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.
Mortgage-Related Securities 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 Adjustable Rate Mortgage security ("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 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 Collateralized Mortgage Obligation 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 ("CMO") 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 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. government 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; Pay-in-Kind and Step Coupon 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. Pay-in-kind securities pay dividends or
interest in the form of additional securities of the issuer, rather than in
cash. These 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 and pay-in-kind 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"), a
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. 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. Market values of these types of 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.
When-Issued or Delayed Delivery Securities; Forward Commitments. Certain Funds
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).
Certain Funds may also enter into a contract with a third party that
provides for the sale of securities held by the Fund at a set price, with a
contingent right for the Fund to receive additional proceeds from the purchaser
upon the occurrence of designated future events, such as a tender offer for the
securities of the subject company by the purchaser, and satisfaction of any
applicable conditions. Under such an arrangement, the amount of contingent
proceeds that the Fund will receive from the purchaser, if any, will generally
not be determinable at the time such securities are sold. The Fund's rights
under such an arrangement will not be secured and the Fund may not receive the
contingent payment if the purchaser does not have the resources to make the
payment. The Fund's rights under such an arrangement also generally will be
illiquid and subject to the limitations on ownership of illiquid securities.
Repurchase Agreements Certain Funds may enter into repurchase agreements, by
which the Fund purchases a security and obtains a simultaneous commitment from
the seller to repurchase the security at an agreed-upon price and date. The
resale price is in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate on the purchased security. Such
transactions afford the Fund the opportunity to earn a return on temporarily
available cash at relatively low market risk. While the underlying security may
be a bill, certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the United States government, the obligation of
the seller is not guaranteed by the United States government and there is a risk
that the seller may fail to repurchase the underlying security. In such event,
the Fund would attempt to exercise rights with respect to the underlying
security, including possible disposition in the market. However, the Fund may be
subject to various delays and risks of loss, including (a) possible declines in
the value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and lack of
access to income during this period and (c) inability to enforce rights and the
expenses involved in the attempted enforcement.
Convertible Securities Certain Funds 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.
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 a 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 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.
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.
Certain 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, certain 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, NEFM or
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.
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.
A Fund may incur costs in connection with conversions between various
currencies. In addition, a Fund 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.
Foreign Currency Hedging Transactions To protect against a change in the foreign
currency exchange rate between the date on which a 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, a Fund
might purchase or sell a foreign currency on a spot ( i.e., cash) basis at the
prevailing spot rate. If conditions warrant, a Fund may also enter into
contracts with banks or broker-dealers to purchase or sell foreign currencies at
a future date ("forward contracts"). A 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" below.
Privatizations 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.
Investments in 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 a Fund to invest
in such countries. In other cases, where a 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.
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 S&P 500 futures trade in
contracts equal to $500 multiplied by the S&P 500.
When a trader, such as a 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 a 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 a 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, a
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.
Certain Funds 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.
A 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.
Certain Funds 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 transaction
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.
Certain Funds 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 a 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.
FUTURES AND OPTIONS ON TAX-EXEMPT BONDS AND BOND INDICES Municipal Income Fund,
Massachusetts Fund and California 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.
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 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. A 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.
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.
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 a 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.
Short Sales and Short Sales "Against the Box" A short sale is a transaction in
which a party borrows a security and then sells the borrowed security to another
party. Certain 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." The Star Small Cap Fund, however, may
engage in short sales that are not against the box (i.e. does not own or have
the right to acquire the security sold). A 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 whom the short sale is
executed, and the broker-dealer delivers such securities, on behalf of the Fund,
to the purchaser of such securities. The Fund is then obligated to replace the
security borrowed by delivering such security to the broker-dealer. Until the
security is replaced, the Fund is required to pay to the lender any accrued
interest or dividends paid on the security sold short and may also be required
to pay a premium to the broker-dealer. The broker-dealer is entitled to retain
the proceeds from the short sale until the Fund delivers to the broker-dealer
the securities sold short. To secure its obligation to deliver to such
broker-dealer the securities sold short, the Fund must deposit and continuously
maintain in a separate account with the Fund's custodian an equivalent amount of
(a) the securities sold short, (b) securities convertible into or exchangeable
for such securities without the payment of additional consideration or (c) cash
or certain liquid assets. The Fund is said to have a short position in the
securities sold until it delivers to the broker-dealer the securities sold, at
which time the Fund receives the proceeds of the sale. The Fund may close out a
short position by purchasing, on the open market, and delivering to the
broker-dealer an equal amount of the securities sold short, or, if such
securities are owned by the Fund, by delivering from its portfolio an equal
amount of the securities sold short.
Short sale transactions involve certain risks. If the price of the
security sold short increases between the time of the short sale and the time
the Fund replaces the borrowed security, the Fund will incur a loss, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. If the price declines during this
period, the Fund will realize a short-term capital gain. Any realized short-term
capital gain will be decreased, and any incurred loss increased, by the amount
of transaction costs and any premium, dividend or interest which the Fund may
have to pay in connection with such short sale. The Fund will also incur
transaction costs in connection with short sales. Certain provisions of the Code
limit tax advantages previously available to the Fund with respect to short
sales. Star Small Cap Fund and Star Worldwide Fund currently expect that no more
than 25% and 20% of their total assets, respectively, would be involved in short
sales.
Illiquid Securities (Rule 144 and Section 4(2) commercial paper) Illiquid
securities are those which are not readily resalable, which may include
securities whose disposition is restricted by federal securities laws.
Rule 144A securities are privately offered securities that can be resold
only to certain qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933. Certain Funds may also purchase commercial paper issued
under Section 4(2) of the Securities Act of 1933. Investing in Rule 144A
securities and Section 4(2) commercial paper 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 and Section 4(2) commercial paper are treated as illiquid,
unless a subadviser has determined, under guidelines established by each Trust's
Board of 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.
Loans of Portfolio Securities Certain Funds may lend up to 33 1/3% of their
total assets (taken at current value) in the form of their portfolio securities
to broker-dealers under contracts calling for collateral equal to at least the
market value of the securities loaned, marked to market on a daily basis. These
Funds will continue to benefit from interest or dividends on the securities
loaned and may 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.
Short-Term Trading Certain Funds may, consistent with their investment
objectives, 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 subadviser's investment discretion in
managing its segment or segments of a Fund's assets.
Money Market Instruments A Fund may seek to minimize risk by investing in money
market instruments, which are high-quality, short-term securities. Although
changes in interest rates can change the market value of a security, a Fund
expects those changes to be minimal and that the Fund will be able to maintain
the net asset value of its shares at $1.00, although this value cannot be
guaranteed.
Money market obligations of foreign banks or of foreign branches or
subsidiaries of U.S. banks may be subject to different risks than obligations of
domestic banks, such as foreign economic, political and legal developments and
the fact that different regulatory requirements apply.
Temporary Strategies A Fund has the flexibility to respond promptly to changes
in market and economic conditions. In the interest of preserving shareholders'
capital, the adviser may employ a temporary defensive strategy if it determines
such a strategy to be warranted. Pursuant to such a defensive strategy a Fund
temporarily may hold cash (U. S. dollars, foreign currencies, or multinational
currency units) and/or invest up to 100% of its assets in high quality debt
securities or money market instruments of U. S. or foreign issuers. It is
impossible to predict whether, when or for how long a Fund will employ defensive
strategies.
In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, a Fund may temporarily hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in money instruments. The use of defensive strategies may
prevent a Fund from achieving its goal.
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUSTS
- --------------------------------------------------------------------------------
The Funds are governed by a Board of Trustees, which is responsible for
generally overseeing the conduct of Fund business and for protecting the
interests of the shareholders. The trustees meet periodically throughout the
year to oversee the Funds' activities, review contractual arrangements with
companies that provide services to the Funds and review the Funds' performance.
Trustees
Trustees of the Trusts and their ages (in parentheses), addresses and
principal occupations during at least the past five years are listed below.
Those marked with an asterisk (*) may be deemed to be an "interested person" of
the Trusts as defined in the Investment Company Act of 1940 (the "1940 Act").
GRAHAM T. ALLISON, JR. -- Trustee (59); 79 John F. Kennedy Street, Cambridge,
Massachusetts 02138; Member of the Contract Review and Governance
Committee for the Trusts; 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 (54); 452 Fifth Avenue, New York, New York 10018;
Member of the Audit and Transfer Agent and Shareholder Services Committee
for the Trusts; President and CEO, Cain Brothers & Company, Incorporated
(investment banking); Trustee, Universal Health Realty Income Trust
(NYSE); Norman Rockwell Museum; Sharon Health Corporation and National
Committee for Quality Healthcare (all not-for-profit organizations);
KENNETH J. COWAN -- Trustee (67); One Beach Drive, S.E. #2103, St. Petersburg,
Florida 33701; Member of the Contract Review and Governance Committee for
the Trusts; 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 (56); 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20004; Member of the Contract Review and Governance Committee for the
Trusts; Partner, The Carlyle Group (investments); Public Service
Professor, Harvard Graduate School of Government; Trustee, Council for
Excellence in Government (not for profit); Director, Frontier Ventures
(personal investment); Director, Telcom Ventures (telecommunications);
Director, Genesis Cable (cable communications); Director, Prime
Communications (cable communications); Director, Neptune Communications
(undersea cable systems); formerly, Director of the U.S. Office of
Management and Budget and a member of President Bush's Cabinet; formerly,
Managing Director, Shearson Lehman Brothers (Investments);
SANDRA O. MOOSE -- Trustee (57); Exchange Place, Boston, Massachusetts 02109;
Member of the Audit and Transfer Agent and Shareholder Services Committee
for the Trusts; Senior Vice President and Director, The Boston Consulting
Group, Inc. (management consulting); Director, GTE Corporation
(communications services); Director, Rohm and Haas Company (specialty
chemicals).
JOHN A. SHANE -- Trustee (66); 200 Unicorn Park Drive, Woburn, Massachusetts
01801; Member of the Audit and Transfer Agent and Shareholder Services
Committee for the Trusts; 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, United Asset Management Corporation (holding company for
institutional money management firms).
*PETER S. VOSS -- Chairman of the Board, Chief Executive Officer and Trustee
(52); 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; Director, Nvest
Services Company; Chairman of the Board and Director, NEF Corporation;
Chairman of the Board and Director, BBAI; formerly, Director, New England
Financial.
PENDLETON P. WHITE -- Trustee (68); 6 Breckenridge Lane, Savannah, Georgia
31411; Member of the Contract Review and Governance Committee for the
Trusts; Retired; formerly, President and Chairman of the Executive
Committee, Studwell Associates (executive search consultants); formerly,
Trustee, The Faulkner Corporation (community hospital corporation).
The Contract Review and Governance Committee of the New England Funds is
comprised solely of disinterested Trustees and considers matters relating to
advisory, subadvisory and distribution arrangements, potential conflicts of
interest between the adviser or subadviser and the Funds, and governance
matters relating to the Funds.
The Audit and Transfer Agent and Shareholders Services Committee of the New
England Funds is comprised solely of disinterested trustees and considers
matters relating to the scope and results of the Funds' audits and serves as a
forum in which the independent accountants can raise any issues or problems
identified in the audit with the Board of Trustees. This Committee also reviews
and monitors compliance with stated investment objectives and polices, SEC and
IRS regulations as well as operational issues relating to the transfer agent.
Officers
Officers of the Trusts, in addition to Mr. Voss, and their ages (in
parentheses) and principal occupations during at least the past five years are
listed below.
BRUCE R. SPECA -- President (43); Director and Executive Vice President, NEF
Corporation; Managing Director, President and Chief Executive Officer, New
England Funds, L.P.; Managing Director, President and Chief Executive
Officer, NEFM;.
THOMAS P. CUNNINGHAM -- Treasurer (53); Senior Vice President, Nvest Services
Company; Senior Vice President, NEFM; formerly, Vice President, Allmerica
Financial Life Insurance and Annuity Company, formerly, Treasurer,
Allmerica Investment Trust; formerly, Vice President, First Data Investor
Services Group.
JOHN E. PELLETIER -- Secretary and Clerk (35); Senior Vice President, General
Counsel, Secretary and Clerk, NEF Corporation; Senior Vice President,
General Counsel, Secretary and Clerk, New England Funds, L.P.; Senior Vice
President, General Counsel, Secretary and Clerk, NEFM; Executive Vice
President and General Counsel, Nvest Services Company; 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 New England Financial 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 Board of Trustees 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,
1999 a total of 27 mutual fund portfolios, a retainer fee at the annual rate of
$40,000 and meeting attendance fees of $3,500 for each meeting of the Board of
Trustees that 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 $6,000 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 relative net assets of each Fund.
During the fiscal year ended December 31, 1998, 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>
Aggregate Aggregate Aggregate Pension or
Compensation Compensation Compensation Retirement
from from from Benefits Total
New New New Accrued as Estimated Compensation
England England England Part of Annual from the
Funds Funds Funds Fund Benefits New England
Trust I Trust II Trust III Expenses Upon Funds Trusts
Name of Trustee in 1998 in 1998 in 1998 in 1998 Retirement in 1998
- --------------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $40,637 $11,555 $1,195 $0 $0 $60,000
Daniel M. Cain $43,528 $12,186 $1,219 $0 $0 $64,000
Kenneth J. Cowan $43,528 $12,186 $1,219 $0 $0 $64,000
Richard Darman $40,637 $11,555 $1,195 $0 $0 $60,000
Sandra O. Moose $40,637 $11,555 $1,195 $0 $0 $60,000
John A. Shane $40,637 $11,555 $1,195 $0 $0 $60,000
Pendleton P. White $38,811 $10,490 $ 891 $0 $0 $56,500
</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 been 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 9, 1999, 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 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.
NEFM is responsible for obtaining and evaluating such economic, statistical and
financial data and information and performing such additional research as is
necessary to manage each Fund's assets in accordance with its investment
objectives and policies.
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, 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
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. In the case of Funds with 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 Class Y shares on the other hand.
Each Fund (except 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 Growth Fund)
each Fund's subadvisory agreement between NEFM and the subadviser that manages
the Fund (or, in the case of Star Advisers Fund, Star Worldwide Fund and Star
Small Cap Fund, 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. Each Fund has received an exemptive order from the
Securities and Exchange Commission which permits NEFM to amend or continue
existing subadvisory agreements when approved by the Fund's Board of Trustees,
without shareholder approval. The exemption also permits NEFM to enter into new
subadvisory agreements with subadvisers that are not affiliated with NEFM, if
approved by the Fund's Board of Trustees. Shareholders will be notified of any
subadviser changes. 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 "NEFM" 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 Nvest Services Company, 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
Services Company has subcontracted certain of its obligations as the transfer
and dividend disbursing agent of the Funds to State Street Bank and Trust
Company (see "Custodial Arrangements".) Nvest Services Company, Inc. will also
do business as Nvest Services Company, Nvest Services Co. and New England Funds
Service Company.
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 company. MetLife
owns approximately 46% (and 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 fourteen principal subsidiary or
affiliated asset management firms of Nvest Companies, collectively, have more
than $136 billion of assets under management or administration as of June 30,
1999.
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 specializes in fixed-income management and provides investment
management services to institutional clients, including other registered
investment companies and accounts of New England Financial and its affiliates.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") was organized in 1926 and
is one of the oldest and largest investment management 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 are
responsible for making investment decisions for the Funds' portfolios as well as
numerous other institutional and individual clients to which Loomis Sayles
provides investment advice. These clients include some accounts of New England
Financial 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, 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 New England Financial 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.
Kobrick Funds LLC ("Kobrick"), a Delaware limited liability company, was
formed in 1998 as the result of a reorganization of its successor,
Kobrick-Cendant Funds, Inc., an investment manager. Kobrick is a wholly owned
subsidiary of Nvest Companies engaged in the business of investment management.
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.
Jurika & Voyles, L.P., ("Jurika & Voyles") founded in 1983, has
discretionary management authority with respect to assets for various clients
including corporations, pension plans, 401(k) plans, profit sharing plans,
trusts and estates, foundations and charities, mutual funds and individuals.
Harris Associates L.P. ("Harris Associates") 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 Associates 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 Associates 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.
RS Investment Management, L.P. ("RS Investment Management") was formed in
1993 and provides investment advisory services to both private and public
investment funds (formerly, Robertson, Stephens & Company Investment Management,
L.P.). On February 26, 1999, Robertson Stephens Investment Management Co. LLC
purchased Robertson Stephens Investment Management Co. Inc. and its subsidiary,
RS Investment Management from BankAmerica Corporation. The trustees of New
England Funds Trust I approved the continuation of the Fund's arrangement with
RS Investment Management following consummation of the transaction.
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 makes the
investment decisions for the Value and Balanced Funds, the Detroit office of
Loomis Sayles makes the investment decisions for the segments of the Star
Advisers and Star Small Cap Funds' portfolios that are managed by Loomis Sayles,
the Boston office makes the investment decisions for Strategic Income Fund and
International Equity Fund and the New York office makes the investment decisions
for High Income Fund and Equity Income Fund. These offices make investment
decisions for the relevant Fund independently of one another. The other
investment companies and clients served by Loomis Sayles sometimes invest in
securities in which 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 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 segment of the Star Advisers Fund managed by Kobrick and one or more
of the other mutual funds or clients to which Kobrick serves as investment
adviser, may from time to time, purchase or sell the same securities or have the
same securities under consideration for purchase or sale. In those instances
where securities transactions are carried on at the same time on behalf of the
Fund and such other mutual funds and accounts may be grouped with securities
transactions carried out on behalf of the Fund. The practice of grouping orders
of various accounts will be followed in order to obtain benefit of best prices
or commission rates. In certain cases where the aggregate order may be executed
in a series of transactions at various prices, the transactions will be
allocated as to amount and price in a manner considered equitable to each
account so that each receives, to the extent practicable, the average price for
such transactions. Transactions will not be grouped unless it is Kobrick's
judgment that such aggregation is consistent with its duty to seek best
execution (which includes the duty to seek best price) for the Fund. The books
and records of the Fund and any such other account will separately reflect, for
each account, the orders of which are aggregated and the securities held by and
bought and sold for that account.
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 Star Advisers Fund and Star Worldwide Fund.
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 Star Advisers Fund and Star Worldwide Fund
outweighs the disadvantages, if any, which might result from these procedures.
Certain officers of Westpeak have responsibility for portfolio management
for other clients (including affiliates of Westpeak), some of which may invest
in securities in which Growth and Income Fund and 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 Jurika & Voyles have responsibility for
portfolio management of other advisory accounts and clients (including other
registered investment companies and accounts of affiliates of Jurika & Voyles)
that may invest in securities in which the Fund may invest. Where Jurika &
Voyles 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 Jurika & Voyles to the participating accounts. Where advisory
accounts have competing interests in a limited investment opportunity, Jurika &
Voyles will allocate investment opportunities based on numerous considerations,
including the time the competing accounts have had funds available for
investment, and the relative amounts of available funds, an account's cash
requirements and the time the competing accounts have had investments available
for sale. It is Jurika & Voyles' 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 Fund to participate in larger volume transactions in this manner will in
some cases produce better executions for the Fund. However, in some cases, this
procedure could have a detrimental effect on the price and amount of a security
available to the Fund or the price at which a security may be sold. The trustees
are of the view that the benefits of retaining Jurika & Voyles as investment
manager outweigh the disadvantages, if any, that might result from participating
in such transactions.
Certain officers and employees of Harris Associates have responsibility
for portfolio management of other advisory accounts and clients (including other
registered investment companies and accounts of affiliates of Harris Associates)
that may invest in securities in which Star Advisers Fund, Star Worldwide Fund
and/or Star Small Cap Fund may invest. Where Harris Associates 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
Associates to the participating accounts. Where advisory accounts have competing
interests in a limited investment opportunity, Harris Associates 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 Associates'
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 Star Advisers Fund, Star Worldwide
Fund and Star Small Cap Fund 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 Associates as a subadviser to Star Advisers Fund,
Star Worldwide Fund and Star Small Cap Fund outweigh the disadvantages, if any,
that might result from participating in such transactions.
In addition to managing segments of Star Worldwide Fund and Star Small Cap
Fund 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 Star Worldwide Fund and/or Star Small Cap Fund 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 Star Worldwide Fund and Star Small Cap Fund outweighs the
disadvantages, if any, which might result from these procedures.
Investment decisions for its segment of Star Small Cap Fund and for other
investment advisory clients of RS Investment Management 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 RS Investment Management's 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. RS Investment Management
employs staffs of portfolio managers who draw upon a variety of resources for
research information. It is the opinion of the trustees of the Trusts that the
desirability of retaining RS Investment Management as a subadviser to Star Small
Cap Fund outweighs the disadvantages, if any, which could result from these
procedures.
NEFM believes that Star Funds' multi-adviser approach to equity investing
- -- one that combines the varied styles of the subadvisers in selecting
securities for the Funds' portfolios -- offers a different investment
opportunity than funds managed by a single adviser using a single style. NEFM
believes that assigning portfolio management responsibility for a Fund to
several subadvisers, whose varying management 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 fund managed by a single adviser. Of course,
past results should not be considered a prediction of future performance, and
there is no assurance that a Fund will in fact achieve superior results over any
period of time.
On a daily basis, capital activity will be allocated equally by NEFM among
the segments of each Star Fund. However, NEFM may, subject to review of the
Trust'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 each Fund will perform differently from the other segments of
the Fund 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 August 23, 1999, the percentages of Star Advisers Fund's net
assets held in the segments of the Fund managed by Harris Associates, Kobrick ,
Janus Capital and Loomis Sayles were 18%, 27%, 35% and 20%, respectively. As of
August 23, 1999, the percentages of Star Worldwide Fund's net assets held in the
segments of the Fund managed by Harris Associates (international segment),
Harris Associates (domestic segment), Montgomery, and Janus Capital were 25%,
25%, 21% and 29 %, respectively. As of August 23, 1999, the percentages of the
Star Small Cap Fund's net assets held in the segment of the Fund managed by RS
Investment Management, Montgomery, Loomis Sayles and Harris Associates were 36%,
18%, 28%, and 18%, respectively.
Although it reserves the right to do so, subject to the review of the
Trust's trustees, NEFM does not intend to reallocate the assets of any Fund
among the segments to reduce these differences in size.
NEFM oversees the portfolio management services provided to the Funds by
each of the subadvisers. Subject to the review of the Trust'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 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 any 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 the 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 its or 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.
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 among the other
segments of the Fund.
Distribution Agreements and Rule 12b-1 Plans. Under a separate agreement
with each Fund, the Distributor serves as the principal 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. 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 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.
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. These fees consist of a service fee and a distribution fee. Any such
fees that are paid by the distributor to securities dealers are known as "trail
commissions." 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").
Under the Plans, each Fund pays the Distributor a monthly service fee at
an annual rate not to exceed 0.25% of the Fund's average daily net assets
attributable to the Class A, Class B and Class C shares. In the case of the
Class B shares, the Distributor pays investment dealers the first year's service
fee at the time of sale, in the amount of up to 0.25% of the amount invested. In
the case of Class C shares, the Distributor retains the first year's service fee
of 0.25% assessed against such shares. After the first year for 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, on a quarterly basis, unless other arrangements are made between the
Distributor and the securities dealer, for providing personal services to
investors in shares of the Fund and/or the maintenance of shareholder accounts.
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. The amounts of unreimbursed Class A expenses carried
over into 1998 from previous plan years for the Stock Funds were as follows:
$563,284 for Capital Growth Fund, $2,041,399 for Balanced Fund, $2,030,882 for
Growth Fund, $514,256 for International Equity Fund and $1,651,994 for Value
Fund. The Class B and C service fees for all Funds which have such classes of
shares, and the Class A service fee for Growth and Income Fund, are payable
regardless of the amount of the Distributor's related expenses. The amounts of
unreimbursed expenses carried over into 1998 from previous plan years with
respect to the Class A shares of the Bond Funds are as follows: $1,583,658 for
Government Securities Fund; $2,272,723 for the Limited Term U.S. Government
Fund; $1,929,283 for Short Term Corporate Income Fund (formerly Adjustable Rate
U.S. Government Fund); $1,919,349 for Bond Income Fund; $0 for Strategic Income
Fund; $1,700,600 for Municipal Income Fund and $0 for High Income Fund. The
Class B service fees for all Funds, and the Class C service fees for Limited
Term U.S. Government Fund, Strategic Income Fund, Bond Income Fund, and High
Income Fund are payable regardless of the amount of the Distributor's related
expenses.
Class A shares of Limited Term U.S. Government Fund and Massachusetts Tax
Free Income Fund pay a monthly distribution fee at an annual rate not to exceed
0.10% of each Fund's average daily net assets. This fee is payable only to
reimburse the Distributor for expenses incurred in connection with the
distribution of each Fund's shares, but unreimbursed expenses can be carried
forward into future years.
Each Fund's Class B and Class C shares also pay the Distributor a monthly
distribution fee at an annual rate not to exceed 0.75% of the average net assets
of the respective Fund's Class B and Class C shares. The Distributor retains the
0.75% distribution fee assessed against both Class B and Class C shares during
the first year of investment. After the first year for Class B shares, the
Distributor retains the annual distribution fee as compensation for its services
as distributor of such shares. After the first year for 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 on a quarterly basis,
unless other arrangements are made between the Distributor and the securities
dealer.
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 or 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 principal distributor of
the Funds' shares, 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 principal
distributor for New England Cash Management Trust and New England Tax Exempt
Money Market Trust.
The portion of the various fees and expenses for Class A, B, and with
respect to certain Funds, C shares that are paid (reallowed) to securities
dealers are shown below:
BOND FUNDS
For Class A shares, the service fee is payable only to reimburse the
Distributor for amounts it pays in connection with providing personal services
to investors and/or maintaining 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, these expenses may be
carried forward for reimbursement in future years as long as the plan remains in
effect. The portion of the various fees and expenses for Class A shares of the
Bond Funds that are paid to securities dealers are shown below:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
ALL FUNDS EXCEPT SHORT TERM CORPORATE INCOME FUND AND LIMITED TERM U.S. GOVERNMENT FUNDS
<CAPTION>
MAXIMUM MAXIMUM MAXIMUM MAXIMUM
SALES CHARGE REALLOWANCE OR FIRST YEAR FIRST YEAR
PAID BY INVESTORS COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.00% 0.25% 4.25%
$100,000 - $249,999 3.50% 3.00% 0.25% 3.25%
$250,000 - $499,999 2.50% 2.15% 0.25% 2.40%
$500,000 - $999,999 2.00% 1.70% 0.25% 1.95%
INVESTMENTS OF $1 MILLION OR MORE
First $3 million none 1.00%(2) 0.25% 1.25%
Excess over $3 million (1) none 0.50%(2) 0.25% 0.75%
INVESTMENTS WITH NO SALES CHARGE (3) none 0.00% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM CORPORATE INCOME AND LIMITED TERM U.S. GOVERNMENT FUNDS
Less than $100,000 3.00% 2.70% 0.25% 2.95%
$100,000 - $249,999 2.50% 2.15% 0.25% 2.40%
$250,000 - $499,999 2.00% 1.70% 0.25% 1.95%
$500,000 - $999,999 1.25% 1.00% 0.25% 1.25%
INVESTMENTS OF $1 MILLION OR MORE
First $3 million none 1.00%(2) 0.25% 1.25%
Excess over $3 million (1) none 0.50%(2) 0.25% 0.75%
INVESTMENTS WITH NO SALES CHARGE (3) none 0.00% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) For investments by Retirement Plans (Plans under Sections 401(a) or 401(k) of the Internal Revenue Code with investments of $1
million or more that have 100 or more eligible employees), the Distributor may pay a 0.50% commission for investments in excess
of $3 million and up to $10 million. Those Plans with investments of over $10 million are eligible to purchase Class Y shares of
the Funds (except Municipal Income Fund), which are described in a separate prospectus.
(2) These commissions are not payable if the purchase represents the reinvestment of a redemption made during the previous 12
calendar months.
(3) Refers to any investments made by municipalities, financial institutions, trusts and affinity group members as described earlier
in the Prospectus under the section entitled "Ways to Reduce or Eliminate Sales Charges."
The Class B and Class C service fees are payable regardless of the amount of the Distributor's related expenses. The portion
of the various fees and expenses for Class B and Class C shares of the Bond Funds that are paid to securities dealers are shown
below:
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH INCOME, STRATEGIC INCOME, BOND INCOME, MUNICIPAL INCOME AND GOVERNMENT SECURITIES FUNDS
(class B only for Municipal Income and Government Securities Funds)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM REALLOWANCE MAXIMUM FIRST YEAR MAXIMUM FIRST YEAR
OR COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C>
All amounts for Class B 3.75% 0.25% 4.00%
All amounts for Class C 1.00% 0.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM CORPORATE INCOME AND LIMITED TERM U.S. GOVERNMENT FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts for Class B 2.75% 0.25% 3.00%
All amounts for Class C 1.00% 0.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS TAX FREE INCOME FUND
For Class A shares, the service fee is payable only to reimburse the Distributor for amounts it pays in connection with
providing personal services to investors and/or maintaining 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, these expenses may be carried
forward for reimbursement in future years as long as the plan remains in effect. The portion of the various fees and expenses for
Class A shares of the Massachusetts Fund that are paid to securities dealers are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM MAXIMUM MAXIMUM MAXIMUM
SALES CHARGE REALLOWANCE OR FIRST YEAR FIRST YEAR
PAID BY INVESTORS COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C> <C>
Less than $50,000 4.25% 3.75% 0.25% 4.00%
$50,000 - $99,999 4.00% 3.50% 0.25% 3.75%
$100,000 - $249,999 3.50% 3.00% 0.25% 3.25%
$250,000 - $499,999 2.50% 2.15% 0.25% 1.40%
$500,000 - $999,999 2.00% 1.70% 0.25% 1.95%
INVESTMENTS OF $1 MILLION OR MORE
First $3 Million none 1.00%(1) 0.25% 1.25%
Excess over $3 Million none 0.50%(1) 0.25% 0.75%
INVESTMENTS WITH NO SALES CHARGE(2) none 0.00% 0.25% 0.25%
(1) These commissions are not payable if the purchase represents the reinvestment of a redemption made during the previous 12
calendar months.
(2) Refers to any investments made by municipalities, financial institutions, trusts and affinity group members as described earlier
in the Prospectus under the section entitled "Ways to Reduce or Eliminate Sales Charges."
The Class B service fees are payable regardless of the amount of the Distributor's related expenses. The portion of the
various fees and expenses for Class B shares of the State Tax Free Funds that are paid to securities dealers are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM REALLOWANCE MAXIMUM FIRST YEAR MAXIMUM FIRST YEAR
OR COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C>
All amounts for Class B 3.75% 0.25% 4.00%
- ------------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
For Class A shares, the service fee is payable only to reimburse the Distributor for amounts it pays in connection with
providing personal services to investors and/or maintaining 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, these expenses may be carried
forward for reimbursement in future years as long as the plan remains in effect. The portion of the various fees and expenses for
Class A shares of the California Fund that are paid to securities dealers are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM MAXIMUM MAXIMUM MAXIMUM
SALES CHARGE REALLOWANCE OR FIRST YEAR FIRST YEAR
PAID BY INVESTORS COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C> <C>
Less than $100,000 2.50% 2.15% 0.25% 2.40%
$100,000 - $249,999 2.00% 1.70% 0.25% 1.95%
$250,000 - $499,999 1.50% 1.25% 0.25% 1.50%
$500,000 - $999,999 1.25% 1.00% 0.25% 1.25%
INVESTMENTS OF $1 MILLION OR MORE
First $3 Million none 1.00%(1) 0.25% 1.25%
Excess over $3 Million none 0.50%(1) 0.25% 0.75%
INVESTMENTS WITH NO SALES CHARGE(2) none 0.00% 0.25% 0.25%
(1) These commissions are not payable if the purchase represents the reinvestment of a redemption made during the previous 12
calendar months.
(2) Refers to any investments made by municipalities, financial institutions, trusts and affinity group members as described earlier
in the Prospectus under the section entitled "Ways to Reduce or Eliminate Sales Charges."
The Class B service fees are payable regardless of the amount of the Distributor's related expenses. The portion of the
various fees and expenses for Class B shares of the Fund that are paid to securities dealers are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM REALLOWANCE MAXIMUM FIRST YEAR MAXIMUM FIRST YEAR
OR COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C>
All amounts for Class B 3.75% 0.25% 4.00%
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK FUNDS AND STAR FUNDS
For Class A shares, the service fee is payable only to reimburse the Distributor for amounts it pays in connection with
providing personal services to investors and/or maintaining 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, these expenses may be carried
forward for reimbursement in future years as long as the plan remains in effect. The portion of the various fees and expenses for
Class A shares of the Stock and Star Funds that are paid to securities dealers are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM MAXIMUM MAXIMUM MAXIMUM
SALES CHARGE REALLOWANCE OR FIRST YEAR FIRST YEAR
PAID BY INVESTORS COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C> <C>
Less than $50,000* 5.75% 5.00% 0.25% 5.25%
$50,000 - $99,999 4.50% 4.00% 0.25% 4.25%
$100,000 - $249,999 3.50% 3.00% 0.25% 3.25%
$250,000 - $499,999 2.50% 2.15% 0.25% 2.40%
$500,000 - $999,999 2.00% 1.70% 0.25% 1.95%
INVESTMENTS OF $1 MILLION OR MORE
First $3 Million none 1.00%(2) 0.25% 1.25%
Excess over $3 Million (1) none 0.50%(2) 0.25% 0.75%
INVESTMENTS WITH NO SALES CHARGE(3) none 0.00% 0.25% 0.25%
* (Growth Fund only) For accounts established prior to February 28, 1997 having a total investment value of between (and
including) $25,000 and $49,000, 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 Growth Fund if the total investment value of Growth Fund account after such sale is between (and including) $25,000 and
$49,000.
(1) For investments by Retirement Plans (Plans under Sections 401(a) or 401(k) of the Internal Revenue Code with investments of $1
million or more that have 100 or more eligible employees), the Distributor may pay a 0.50% commission for investments in excess
of $3 million and up to $10 million. Those Plans with investments of over $10 million are eligible to purchase Class Y shares of
the funds, which are described in a separate prospectus.
(2) These commissions are not payable if the purchase represents the reinvestment of a redemption made during the previous 12
calendar months.
(3) Refers to any investments made by municipalities, financial institutions, trusts and affinity group members as described earlier
in the Prospectus under the section entitled "Ways to Reduce or Eliminate Sales Charges."
The Class B and Class C service fees are payable regardless of the amount of the Distributor's related expenses. The portion
of the various fees and expenses for Class B and Class C shares of the Stock and Star Funds that are paid to securities dealers are
shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM REALLOWANCE MAXIMUM FIRST YEAR MAXIMUM FIRST YEAR
OR COMMISSION SERVICE FEE COMPENSATION
INVESTMENT (% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
<S> <C> <C> <C>
All amounts for Class B 3.75% 0.25% 4.00%
All amounts for Class C 1.00% 0.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALL FUNDS
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
Contingent Deferred Sales Charge (the "CDSC"). 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 Trusts. 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. The Distributor may, at its
discretion, pay (reallow) the entire sales charge imposed on the sale of Class A
shares to investment dealers from time to time.
For new amounts invested at net asset value by an eligible governmental
authority, the Distributor may, at its expense, pay investment dealers a
commission of 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 other
New England Fund or if the account is registered in street name.
The Distributor may at its expense provide additional concessions to
dealers who sell shares of the Funds, including: (i) full reallowance of the
sales charge of Class A shares, (ii) additional compensation with respect to the
sale of Class A, B and C shares and (iii) financial assistance programs to firms
who sell or arrange for the sale of Fund shares including, but not limited to,
remuneration for: the firm's internal sales contests and incentive programs,
marketing and sales fees, expenses related to advertising or promotional
activity and events, and shareholder record keeping or miscellaneous
administrative services. Payment for travel, lodging and related expenses may be
provided for attendance at New England Funds' seminars and conferences, e.g.,
due diligence meetings held for training and educational purposes. The payment
of these concessions and any other compensation offered will conform with state
and federal laws and the rules of any self-regulatory organization, such as the
National Association of Securities Dealers, Inc. The participation of such firms
in financial assistance programs is at the discretion of the firm.
During the fiscal years ended December 31, 1996, 1997, and 1998, the
Distributor received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $10,735,444, $11,172,220, and $8,591,707,
respectively, of which $9,418,244, $9,669,150 and $7,375,844, respectively, was
reallowed to other securities dealers and the balance retained by the
Distributor. During the fiscal years ended December 31, 1996, 1997 and 1998, the
Distributor received contingent deferred sales charges ("CDSCs") on the
redemption of Class A, Class B and Class C shares of New England Funds Trust I
aggregating $1,256,009, $2,391,360 and $3,195,287, respectively, of which
$1,236,000, $2,286,280 and $3,124,921, 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, 1996, 1997 and 1998, the
Distributor received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $1,674,883, $1,493,346 and $2,348,271,
respectively, of which $1,429,970, $1,286,296 and $2,206,752, respectively, was
reallowed to other securities dealers and the balance retained by the
Distributor. During the fiscal years ended December 31, 1996, 1997 and 1998, the
Distributor received CDSCs on the redemption of Class A, Class B and Class C
shares of New England Funds Trust II aggregating $318,167, $375,973 and
$540,167, respectively, of which $313,465, $343,457 and $497,662, 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, 1996, 1997 and 1998, the
Distributor received commissions on the sales of the Class A shares of New
England Funds Trust III aggregating $-0-, $262,310 and $561,929, respectively,
of which $-0-, $236,902 and $502,693, respectively, was reallowed to other
securities dealers and the balance retained by the Distributor. During the
fiscal years ended December 31, 1996, 1997 and 1998, the Distributor received
CDSCs on the redemption of Class A, Class B and Class C shares of New England
Funds Trust III aggregating $-0-, $1,953 and $51,773, respectively, of which
$-0-, $1,953 and $49,553, 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.
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
PricewaterhouseCoopers 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.
Other Arrangements
Pursuant to a contract between the Funds and Nvest Services Company, Nvest
Services Company 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 Nvest Services Company for these services in
the amount of $17.75 for Bullseye Fund, Balanced Fund, Growth Fund, Capital
Growth Fund, Value Fund, International Equity Fund, Star Advisers Fund, Star
Worldwide Fund, Star Small Cap Fund, Growth and Income Fund and Strategic Income
Fund, and $15.95 for High Income Fund, Massachusetts Fund, Limited Term U.S.
Government Fund, Short Term Corporate Income Fund, California Fund, Bond Income
Fund, Municipal Income Fund and Government Securities Fund. Nvest Services
Company 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, Nvest Services Company
pays BFDS a monthly per account fee of $0.95 for California Fund, Bond Income
Fund, Municipal Income Fund, Short Term Corporate Income Fund, Government
Securities Fund and Strategic Income Fund; $0.87 for Massachusetts Fund, High
Income Fund and Limited Term U.S. Government Fund; $0.78 for Bullseye Fund,
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 Growth and Income Fund. Equity Income Fund pays a $250 monthly fee
to Nvest Services Company for these services which Nvest Services Company 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, 1998 Nvest Services
Company performed certain accounting and administrative services for the Funds.
Each Fund reimbursed Nvest Services Company for all or part of Nvest Services
Company's 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, 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, and (iii) registration, filing and other fees
in connection with requirements of regulatory authorities.
During the fiscal year ended December 31, 1996, NEFM received legal and
accounting services fees paid by 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 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.
During the fiscal year ended December 31, 1998, NEFM received legal and
accounting services fees paid by Bullseye Fund, 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, Star Worldwide Fund And Star Small Cap Fund in the amounts of
$13,737, $298,419, $82,246, $90,930, $60,796, $47,566, $34,398, $28,617,
$50,067, $21,298, $191,247, $58,980 and $35,775.
YEAR 2000 PROBLEM
The investment management services provided to each Fund by the adviser
and each subadviser and the services provided to shareholders by Nvest Services
Company, Inc. depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on a Fund's
operations, including the handling of securities trades, pricing and account
services. The adviser, each subadviser and Nvest Services Company, Inc. have
advised each Fund that they have been reviewing all of their computer systems
and actively working on necessary changes to their systems to prepare for the
year 2000 and expect that their systems will be compliant before that date. In
addition, the Adviser has been advised by the Fund's custodian, transfer agent
and accounting service agent that they are also in the process of modifying
their systems with the same goal. There can, however, be no assurance that the
adviser, each subadviser, Nvest Services Company, Inc. or any other service
provider will be successful, or that interaction with other non-complying
computer systems will not impair Fund services at that time. In addition, the
ability of issuers to make timely payments of interest and principal or to
continue their operations or services may be impaired by then adequate
preparation of their computer systems for the year 2000. This may adversely
affect the market values of securities of specific issuers or of securities
generally if the inadequacy of preparation is perceived as wide-spread or as
affecting trading markets.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
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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 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 Star Advisers Fund and Star Worldwide Fund. If Janus
Capital determines that any research product or service has a mixed use, such
that it also serves functions that do not assist in the investment
decision-making process, Janus Capital may allocate the costs of such service or
product accordingly. Only that portion of the product or service that Janus
Capital determines will assist it in the investment decision-making process may
be paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for Janus Capital.
Janus Capital may also consider sales of shares of mutual funds advised by
Janus Capital by a broker-dealer or the recommendation of a broker-dealer to its
customers that they purchase shares of such funds as a factor in the selection
of broker-dealers to execute portfolio transactions for Star Advisers Fund and
Star Worldwide Fund. In placing portfolio business with such broker-dealers,
Janus Capital will seek the best execution of each transaction.
Star Advisers Fund (segment advised by Kobrick). Kobrick's policy is to
seek for its clients, including the segment of the Fund, what in Kobrick's
judgment will be the best overall execution of purchase or sale orders and the
most favorable net prices in securities transactions consistent with its
judgment as to the business qualifications of the various broker or dealer firms
with whom Kobrick may do business, and Kobrick may not necessarily choose the
broker offering the lowest available commission rate. Decisions with respect to
the market where the transaction is to be completed, to the form of transaction
(whether principal or agency) and to the allocation of orders among brokers or
dealers are made in accordance with this policy. In selecting brokers or dealers
to effect portfolio transactions, consideration is given to their proven
integrity and financial responsibility, their demonstrated execution experience
and capabilities both generally and with respect to particular markets or
securities, the competitiveness of their commission rates in agency transactions
(and their net prices in principal transactions), their willingness to commit
capital, and their clearance and settlement capability. Kobrick makes every
effort to keep informed of commission rate structures and prevalent bid/ask
spread characteristics of the markets and securities in which transactions for
the segment of the Fund occurs. Against this background, Kobrick evaluates the
reasonableness of a commission or a net price with respect to a particular
transaction by considering such factors as difficulty of execution or security
positioning by the executing firm. Kobrick may or may not solicit competitive
bids based on its judgment of the expected benefit or harm to the execution
process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon Kobrick's judgment of the rate which
reflects the execution requirements of the transaction without regard to whether
the broker provides services in addition to execution. Among such other services
are the supplying of supplemental investment research; general economic,
political and business information; analytical and statistical data; relevant
market information, quotation equipment and services; reports and information
about specific companies, industries and securities; purchase and sale
recommendations for stocks and bonds; portfolio strategy services; historical
statistical information; market data services providing information on specific
issues and prices; financial publications; proxy voting data and analysis
services; technical analysis of various aspects of the securities markets,
including technical charts; computer hardware used for brokerage and research
purposes; computer software and databases, including those used for portfolio
analysis and modeling; and portfolio evaluation services and relative
performance of accounts. Certain nonexecution services provided by
broker-dealers may in turn be obtained by the broker-dealers from third parties
who are paid for such services by the broker-dealers.
Kobrick regularly reviews and evaluates the services furnished by
broker-dealers. Some services may be used for research and investment
decision-making purposes, and also for marketing or administrative purposes.
Under these circumstances, Kobrick allocates the cost of such services to
determine the appropriate proportion of the cost which is allocable to purposes
other than research or investment decision-making and is therefore paid directly
by Kobrick. Some research and execution services may benefit Kobrick's clients
as a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
Kobrick has no fixed agreements or understanding with any broker-dealer as
to the amount of brokerage business which that firm may expect to receive for
services supplied to Kobrick or otherwise. There may be, however, understandings
with certain firms that in order for such firms to be able to continuously
supply certain services, they need to receive allocation of a specified amount
of brokerage business. These understandings are honored to the extent possible
in accordance with Kobrick's obligation to obtain best execution and the
policies set forth above.
It is not Kobrick's policy to intentionally pay a firm a brokerage
commission higher that that which another firm would charge for handling the
same transaction in recognition of services (other than execution services),
provided, however, that Kobrick is aware that this is an area where differences
of opinion as to fact and circumstances may exist, and in such circumstances, if
any, Kobrick relies on the provisions of Section 28(e) of the Securities Act of
1934, to the extent applicable.
All Equity Funds advised by Loomis Sayles. In placing orders for the
purchase and sale of securities for Balanced Fund, International Equity Fund,
Value Fund, Equity Income Fund and the segments of Star Advisers Fund and 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 and Income 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
Trusts may adopt from time to time.
Bullseye Fund (advised by Jurika & Voyles). In placing orders for the
purchase and sale of portfolio securities for the Fund, Jurika & Voyles 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 Jurika & Voyles,
a more favorable execution can be obtained by carrying out such transactions
through other brokers or dealers.
Jurika & Voyles 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. Jurika & Voyles 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 Jurika & Voyles 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 Jurika & Voyles' expenses. Such services may be used by Jurika &
Voyles in servicing other client accounts and in some cases may not be used with
respect to the Fund. Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking best execution,
Jurika & Voyles may, however, consider purchases of shares of the Fund by
customers of broker-dealers as a factor in the selection of broker-dealers to
execute the Fund's securities transactions.
Jurika & Voyles may cause the Fund to pay a broker-dealer that provides
brokerage and research services to Jurika & Voyles 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. Jurika & Voyles
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 Jurika
& Voyles' overall responsibilities to the Fund and its other clients. Jurika &
Voyles' authority to cause the Fund to pay such greater commissions is also
subject to such policies as the trustees of the Trust may adopt from time to
time.
Star Advisers, Star Worldwide and Star Small Cap Funds (segments advised
by Harris Associates). In placing orders for the purchase and sale of portfolio
securities for the segments of Star Advisers Fund, Star Worldwide Fund and Star
Small Cap Fund advised by Harris Associates, Harris Associates 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 Associates, a more
favorable execution can be obtained by carrying out such transactions through
other brokers or dealers. Subject to the above standard, portfolio transactions
for each Fund may be executed through Harris Associates Securities L.P., a
registered broker-dealer and an affiliate of Harris Associates.
Harris Associates 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 Associates
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 Associates 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 Associates' expenses. Such services may be used by Harris
Associates 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
Associates may, however, consider purchases of shares of Star Advisers Fund,
Star Worldwide Fund and Star Small Cap Fund by customers of broker-dealers as a
factor in the selection of broker-dealers to execute Fund portfolio
transactions.
Harris Associates may cause its segments of Star Advisers Fund, Star
Worldwide Fund and Star Small Cap Fund to pay a broker-dealer that provides
brokerage and research services to Harris Associates 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
Associates 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 Associates' overall responsibilities to the Funds and its
other clients. Harris Associates' 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 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 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 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 Star Worldwide Fund and Star
Small Cap Fund 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' investments 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 RS Investment Management). It is
the policy of RS Investment Management, 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, RS Investment Management may execute transactions with
brokerage firms which provide research services and products to RS Investment
Management. 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 RS Investment Management in
furtherance of its investment advisory responsibilities to its advisory clients.
Such services and products permit RS Investment Management 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. RS Investment Management 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 RS Investment Management
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, RS Investment Management may allocate the cost of such service or
product accordingly. The portion of the product or service that RS Investment
Management 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 RS Investment Management. Subject to the standards
outlined in this and the preceding paragraph, RS Investment Management 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 RS Investment Management 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 RS Investment Management
in providing investment advice to any of the funds or clients it advises.
Likewise, information made available to RS Investment Management 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 RS Investment Management may pay
an executing broker a commission higher than that which might have been charged
by another broker for that transaction. RS Investment Management 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 RS Investment Management 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 RS Investment Management, better prices and execution are
available elsewhere.
Portfolio Trades of All Subadvisers 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.
To the extent permitted by applicable law, and in all instances subject to
the foregoing policy of best execution, the adviser or subadviser may allocate
brokerage transactions in a manner that takes into account the sale of shares of
one or more Funds distributed by New England Funds L.P. In addition, the adviser
or subadviser may allocate brokerage transactions to broker-dealers (including
affiliates of the Distributor) that have entered into arrangements in which the
broker-dealer allocates a portion of the commissions paid by a Fund toward the
reduction of that Fund's expenses, subject to the requirement that the adviser
or subadviser will seek best execution.
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 Fund of the Trust (the Fund now called New
England Government Securities Fund) commenced operations on September 16, 1985.
International Equity Fund commenced operations on May 22, 1992. The Capital
Growth Fund was organized in 1992 and commenced operations on August 3, 1992.
Star Advisers Fund was organized in 1994 and commenced operations on July 7,
1994. Strategic Income Fund was organized in 1995 and commenced operations on
May 1, 1995. Star Worldwide Fund was organized in 1995 and commenced operations
on December 29, 1995. 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.* 1970
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, Inc.**** 1977
* 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 Fund (now the Growth and Income 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." High Income Fund and
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. Limited Term U.S. Government Fund was organized in 1988 and
commenced operations in January 1989. Short Term Corporate Income Fund was
organized in 1991 and commenced operations on October 18 of that year.
Intermediate Term Tax-Free Fund of California Fund was organized in 1993 and
commenced operations on April 23 of that year. Prior to December 1, 1998, the
name of Short Term Corporate Income Fund was "New England Adjustable Rate U.S.
Government Fund." Prior to May 1, 1999, the name of Growth and Income Fund was
"Growth Opportunities Fund."
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
eight separate funds (New England Bullseye Fund, New England Equity Income Fund,
New England Core Equity Fund, New England Stock and Bond Fund, New England
Select Fund, New England Small Cap Value Fund, New England Small Cap Growth Fund
and New England Total Return Bond Fund). New England Equity Income Fund was
organized in 1995 and commenced operations on November 28, 1995. New England
Bullseye Fund, New England Core Equity Fund, New England Stock and Bond Fund,
New England Select Fund, New England Small Cap Value Fund, New England Small Cap
Growth Fund and New England Total Return Bond Fund were organized in 1998. New
England Bullseye Fund commenced operations on March 31, 1998. New England Core
Equity Fund, New England Stock and Bond Fund, New England Select Fund, New
England Small Cap Value Fund, New England Small Cap Growth Fund and New England
Total Return Bond Fund are not currently offered to the public.
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 Board of 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 each Trust's Board of Trustees may
determine. 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 Board of Trustees and to cast a vote for
each share you own at shareholder meetings. 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 Board of 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
Class A, Class B, Class C and Class Y structure could be terminated should
certain IRS rulings be rescinded.
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 Board of 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 each Trust's Board of 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.
Each Trust's Board of 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
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. Each Trust offers only its own Funds' shares for sale, but it is
possible that a Trust might become liable for any misstatements in a Prospectus
that relate to another Trust. The trustees of each Trust have considered this
possible liability and approved the use of the combined Prospectus for Funds of
all three Trusts.
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HOW TO BUY SHARES
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The procedures for purchasing shares of the Funds are summarized in the
Prospectuses. 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. 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. You may also use New
England Funds Personal Access Line(TM) (800-225-5478, press 1) or New England
Funds Web site (www.mutualfunds.com) to purchase Fund shares. For more
information, see the section entitled "Shareholder Services" in this Statement.
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.
If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules as summarized in the
Prospectus may apply.
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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
(the "NYSE") is open for trading. The weekdays that 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 except for securities traded on the
London Stock Exchange ("British Equities"). British Equities will be valued at
the mean between the last bid and last asked prices on the London Stock
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. The
effect of fair value pricing is that securities may not be priced on the basis
of quotations from the primary market in which they are traded but rather, may
be priced by another method that the Board of Trustees believes accurately
reflects fair value.
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 Nvest Services Company or State Street Bank, plus
a sales charge as set forth in the Fund's Prospectus. The public offering price
of a Class B, C or Y share of a Fund is the next-determined net asset value.
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REDUCED SALES CHARGES
CLASS A SHARES ONLY
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The following special purchase plans are summarized in the Prospectuses.
CUMULATIVE PURCHASE DISCOUNT. A Fund shareholder may make an initial or an
additional purchase of Class A shares and be entitled to a discount on the sales
charge payable on that purchase. This discount will be available if the
shareholder's "total investment" in the Fund reaches the breakpoint for a
reduced sales charge in the table under "How Sales Charges are Calculated-Class
A shares" in the Prospectus. The total investment is determined by adding the
amount of the additional purchase, including sales charge, to the current public
offering price of all series and classes of shares of the New England Trusts
held by the shareholder in one or more accounts. If the total investment exceeds
the breakpoint, the lower sales charge applies to the entire additional
investment even though some portion of that additional investment is below the
breakpoint to which a reduced sales charge applies. For example, if a
shareholder who already owns shares of one or more Funds or other of the New
England Funds with a value at the current public offering price of $30,000 makes
an additional purchase of $20,000 of Class A shares of another Fund or New
England Fund, the reduced sales charge of 4.5% of the public offering price will
apply to the entire amount of the additional investment.
LETTER OF INTENT. A Letter of Intent (a "Letter"), which can be effected
at any time, is a privilege available to investors which reduces the sales
charge on investments in Class A shares. Ordinarily, reduced sales charges are
available for single purchases of Class A shares only when they reach certain
breakpoints (e.g., $50,000, $100,000, etc.). By signing a Letter, a shareholder
indicates an intention to invest enough money in Class A shares within 13 months
to reach a breakpoint. If the shareholder's intended aggregate purchases of all
series and classes of the Trusts over a defined 13-month period will be large
enough to qualify for a reduced sales charge, the shareholder may invest the
smaller individual amounts at the public offering price calculated using the
sales load applicable to the 13-month aggregate investment.
A Letter is a non-binding commitment, the amount of which may be
increased, decreased or canceled at any time. The effective date of a Letter is
the date it is received in good order by the Distributor, or, if communicated by
a telephone exchange or order, at the date of telephoning provided a signed
Letter, in good order, reaches the Distributor within five business days.
A reduced sales charge is available for aggregate purchases of all series
and classes of shares of the Trusts pursuant to a written Letter effected within
90 days after any purchase. In the event the account was established prior to 90
days before the effective date of the Letter, the account will be credited with
the Rights of Accumulation ("ROA") towards the breakpoint level that will be
reached upon the completion of the 13 months' purchases. The ROA credit is the
value of all shares held as of the effective dates of the Letter based on the
"public offering price computed on such date."
The cumulative purchase discount, described above, permits the aggregate
value at the current public offering price of Class A shares of any accounts
with the Trusts held by a shareholder to be added to the dollar amount of the
intended investment under a Letter, provided the shareholder lists them on the
account application.
State Street Bank will hold in escrow shares with a value at the current
public offering price of 5% of the aggregate amount of the intended investment.
The amount in escrow will be released when the commitment stated in the Letter
is completed. If the shareholder does not purchase shares in the amount
indicated in the Letter, the shareholder agrees to remit to State Street Bank
the difference between the sales charge actually paid and that which would have
been paid had the Letter not been in effect, and authorizes State Street Bank to
redeem escrowed shares in the amount necessary to make up the difference in
sales charges. Reinvested dividends and distributions are not included in
determining whether the Letter has been completed.
COMBINING ACCOUNTS. Purchases of all series and classes of the New England
Funds (excluding the Money Market Funds unless the shares were purchased through
an exchange another New England Fund) by or for an investor, the investor's
spouse, parents, children, siblings, in-laws, grandparents or grandchildren and
any other account of the investor, including sole proprietorships, in any Trust
may be treated as purchases by a single individual for purposes of determining
the availability of a reduced sales charge. Purchases for a single trust estate
or a single fiduciary account may also be treated as purchases by a single
individual for this purpose, as may purchases on behalf of a participant in a
tax-qualified retirement plan and other employee benefit plans, provided that
the investor is the sole participant in the plan. Any other group of individuals
acceptable to the Distributor may also combine accounts for such purpose. The
values of all accounts are combined to determine the sales charge.
COMBINING WITH OTHER SERIES AND CLASSES OF THE NEW ENGLAND FUNDS. A
shareholder's total investment for purposes of the cumulative purchase discount
includes the value at the current public offering price of any shares of series
and classes of the Trusts that the shareholder owns (which excludes shares of
New England Cash Management Trust and New England Tax Exempt Money Market Trust
(the "Money Market Funds") unless such shares were purchased by exchanging
shares of any other New England Fund). Shares owned by persons described in the
preceding paragraph may also be included.
UNIT HOLDERS OF UNIT INVESTMENT TRUSTS. Unit investment trust
distributions may be invested in Class A shares of any Fund at a reduced sales
charge of 1.50% of the public offering price (or 1.52% of the net amount
invested); for large purchases on which a sales charge of less than 1.50% would
ordinarily apply, such lower charge also applies to investments of unit
investment trust distributions.
CLIENTS OF ADVISERS OR SUBADVISERS. No front-end sales charge or
contingent deferred sales charge applies to investments of $25,000 or more in
Class A shares of 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 spouse, parents, children,
siblings, in-laws, grandparents or grandchildren of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a prototype of an
adviser or subadviser to 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 this arrangement should so indicate in writing at the time of the purchase.
OFFERING TO EMPLOYEES OF METLIFE AND ASSOCIATED ENTITIES. There is no
front-end sales charge, CDSC or initial investment minimum related to
investments in Class A shares of the Funds by any of the Trusts' advisers or
subadvisers, New England Funds, L.P. or any other company affiliated with New
England Financial or MetLife; current and former directors and Trustees of the
Trusts; agents and general agents of New England Financial 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 New England Funds, L.P.; the spouse, parents, children,
siblings, in-laws, grandparents or grandchildren of the persons listed above and
any trust, pension, profit sharing or other benefit plans for any of the
foregoing persons and any separate account of New England Financial or MetLife
or any insurance company affiliated with New England Financial or MetLife.
ELIGIBLE GOVERNMENTAL AUTHORITIES. There is no sales charge or contingent
deferred sales charge related to investments in Class A shares of any Fund by
any state, county or city or any instrumentality, department, authority or
agency thereof that has determined that a Fund is a legally permissible
investment and that is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered investment company.
INVESTMENT ADVISORY ACCOUNTS. Shares of any Fund may be purchased at net
asset value by investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their clients and who
charge a management, consulting or other fee for their services; clients of such
investment advisers, financial planners or other intermediaries who place trades
for their own accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on the books and
records of the broker or agent; and retirement and deferred compensation plans
and trusts used to fund those plans, including, but not limited to, those
defined in Sections 401(a), 403(b), 401(k) and 457 of the Code and "rabbi
trusts." Investors may be charged a fee if they effect transactions through a
broker or agent.
CERTAIN BROKER-DEALERS AND FINANCIAL SERVICES ORGANIZATIONS. Shares of any
Fund also may be purchased at net asset value through certain broker-dealers
and/or financial services organizations without any transaction fee. Such
organizations may also receive compensation based upon the average value of the
Fund shares held by their customers. This compensation may be paid by NEFM,
Loomis Sayles and/or Harris Associates out of its own assets, and/or be paid
indirectly by the Fund in the form of servicing, distribution or transfer agent
fees.
CERTAIN RETIREMENT PLANS. 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
service and/or distribution fees.
BANK TRUST DEPARTMENTS OR TRUST COMPANIES. 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.
SHAREHOLDERS OF REICH AND TANG GOVERNMENT SECURITIES TRUST. Shareholders
of Reich and Tang Government Securities Trust may exchange their shares of that
fund for Class A shares of the Funds at net asset value and without imposition
of a sales charge.
CERTAIN ACCOUNTS OF GROWTH FUND. For accounts established prior to
February 28, 1997 having a total investment value of between (and including)
$25,000 and $49,000, 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 Growth Fund if the total investment value of Growth Fund account after
such sale is between (and including) $25,000 and $49,000.
The reduction or elimination of the sales charges in connection with
special purchase plans described above reflects the absence or reduction of
expenses associated with such sales.
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SHAREHOLDER SERVICES
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Open Accounts
A shareholder's investment is automatically credited to an open account
maintained for the shareholder by State Street Bank. Following each transaction
in the account, a shareholder will receive a confirmation statement disclosing
the current balance of shares owned and the details of recent transactions in
the account. After the close of each calendar year, State Street Bank will send
each shareholder a statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This statement should be
retained as a permanent record. Nvest Services Company 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. Certificates will not be issued for Class B or Class C shares.
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 Nvest Services Company
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 800-225-5478 or your investment dealer.
This program is voluntary and may be terminated at any time by Nvest
Services Company upon notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any time by the
investor by written notice to Nvest Services Company, 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. New England Funds may modify or terminate this program
at any time.
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.
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.
Exchange Privilege
A shareholder may exchange the shares of any Fund (except for 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 New England Fund (subject
to the investor eligibility requirements, if any, of the New England 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. An exchange of shares in one
Fund for shares of another Fund is a taxable event on which gain or loss may be
recognized. In the case of Class A shares of the California Fund 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 shares and the higher sales charge of the Fund into which they are
exchanging at the time of the exchange. Exchanges of Class A shares of Short
Term Corporate Income Fund (formerly Adjustable Rate U.S. Government Fund)
purchased before December 1, 1998 will also pay the difference between any sales
charge already paid on their shares and the higher sales charge of the Fund into
which they are exchanging. 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 or C shares subject to a CDSC and Class B shares into
the Money Market Funds, the exchange stops the aging period relating to the
CDSC, and, for Class B shares only, conversion to Class A shares. The aging
period resumes only when an exchange is made back into Class B shares of a Fund.
In addition, you may also exchange Class A shares of the Money Market Funds that
have not previously paid a sales charge to Class B or Class C shares of any New
England 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 Nvest
Services Company at 800-225-5478 or (2) a written exchange request to the Fund
or Nvest Services Company, 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.
Agents, general agents, directors and senior officers of New England
Financial and its insurance company subsidiaries may, at the discretion of New
England Financial, elect to exchange Class A shares of any series of the Trusts
acquired in connection with deferred compensation plans offered by New England
Financial 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 800-225-5478.
Except as otherwise permitted by SEC rule, shareholders will receive at
least 60 days advance notice of any material change to the exchange privilege.
The investment objectives of the New England Funds and the Money Market Funds as
set forth in the Prospectuses 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 AND INCOME FUND (formerly 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 SHORT TERM CORPORATE INCOME FUND seeks a high level of current
income consistent with preservation of capital.
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.
ACCESS SHARES (NOT CURRENTLY OFFERED):
NEW ENGLAND CORE EQUITY FUND seeks long-term capital appreciation by
investing all or substantially all of its assets in The Oakmark Fund.
NEW ENGLAND STOCK AND BOND FUND seeks high current income as well as
preservation and growth of capital by investing all or substantially all of its
assets in The Oakmark Equity and Income Fund.
NEW ENGLAND SELECT FUND seeks long-term capital appreciation by investing
all or substantially all of its assets in The Oakmark Select Fund.
NEW ENGLAND SMALL CAP VALUE FUND seeks long-term capital appreciation by
investing all or substantially all of its assets in The Oakmark Small Cap Fund.
NEW ENGLAND SMALL CAP GROWTH FUND seeks long-term capital growth by
investing all or substantially all of its assets in the Loomis Sayles Small Cap
Growth Fund.
NEW ENGLAND TOTAL RETURN BOND FUND seeks high total investment return
through a combination of current income and capital appreciation by investing
all or substantially all of its assets in the Loomis Sayles Bond Fund.
MONEY MARKET FUNDS:
NEW ENGLAND CASH MANAGEMENT TRUST - MONEY MARKET SERIES seeks maximum
current income consistent with preservation of capital and liquidity.
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST - seeks current income exempt
from federal income taxes consistent with preservation of capital and liquidity.
As of June 30, 1999, the net assets of the New England 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 "Additional Investor
Services," 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 Nvest Services Company 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 Nvest Services Company or your financial representative
to establish an Automatic Exchange Plan.
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.
Nvest Portfolio Reporting Option ("NvestPRO")
Fund Shareholders who are clients of broker-dealers that have entered into
an agreement with New England Funds and the Distributor, and have total net
assets of $50,000 or more may be eligible to receive NvestPRO Quarterly Reports
in addition to their standard New England Funds quarterly statements. Eligible
clients are defined as clients with a portfolio of regular and IRA accounts that
are assigned to the same social security number having a minimum account value
of: (i) $50,000 in the case of a new account or (ii) $100,000 in the case of an
existing account. NvestPRO Quarterly Reports include graphic performance
illustrations and are designed to provide investors with individualized
performance information on their New England Funds holdings. Individualized
performance illustrated in the NvestPRO reports is determined from the first
date of participation in the NvestPRO product, not the account open date.
Clients who elect to participate in the NvestPRO program are also offered
access to an asset allocation questionnaire that is designed to assist them and
their registered representative in choosing an initial portfolio of New England
Funds based on their financial profile, objectives, and risk tolerance. This is
not an actively managed asset allocation program as described in Rule 3a-4 of
the 1940 Act. The Distributor will charge a fee for this product (currently $35
annually per portfolio), and has the right to determine account minimums for
participation in the product.
Self-Servicing Your Account with New England Funds Personal Access Line(TM) and
Web site
New England Funds shareholders may access account information, including
share balances and recent account activity online, by visiting our Web site at
www.mutualfunds.com. Transactions may also be processed online for certain
accounts (restrictions may apply). Such transactions include purchases,
redemptions and exchanges, and shareholders are automatically eligible for these
features. New England Funds has taken measures to ensure the security of
shareholder accounts, including the encryption of data and the use of personal
identification (PIN) numbers. In addition, you may restrict these privileges
from your account by calling New England Funds at 800-225-5478, or writing to us
at P.O. Box 8551, Boston, MA 02116. More information regarding these features
may be found on our Web site at www.mutualfunds.com.
Investor activity through these mediums are subject to the terms and conditions
outlined in the following NEW ENGLAND FUNDS ONLINE AND TELEPHONIC CUSTOMER
AGREEMENT. This agreement is also posted on our Web site. The initiation of any
activity through the New England Funds Personal Access Line(TM), or Web site at
www.mutualfunds.com by an investor shall indicate agreement with the following
terms and conditions:
NEW ENGLAND FUNDS ONLINE AND TELEPHONIC CUSTOMER AGREEMENT
NOTE: ACCESSING OR REQUESTING ACCOUNT INFORMATION OR TRANSACTIONS THROUGH THIS
SITE CONSTITUTES AND SHALL BE DEEMED TO BE AN ACCEPTANCE OF THE FOLLOWING TERMS
AND CONDITIONS.
The accuracy, completeness and timeliness of all mutual fund information
provided is the sole responsibility of the mutual fund company which provides
the information. No party which provides a connection between this web site and
a mutual fund or its transfer agency system can verify or ensure the receipt of
any information transmitted to or from a mutual fund or its transfer agent, or
the acceptance by, or completion of any transaction with, a mutual fund.
The online acknowledgments or other messages which appear on your screen for
transactions entered do not mean that the transactions have been received,
accepted or rejected by the mutual fund. These acknowledgments are only an
indication that the transactional information entered by you has either been
transmitted to the mutual fund, or that it cannot be transmitted. It is the
responsibility of the mutual fund to confirm to you that it has received the
information and accepted or rejected a transaction. It is the responsibility of
the mutual fund to deliver to you a current prospectus, confirmation statement
and any other documents or information required by applicable law.
NO TRANSACTION SHALL BE DEEMED ACCEPTED UNTIL YOU RECEIVE A WRITTEN CONFIRMATION
FROM THE FUND COMPANY.
You are responsible for reviewing all mutual fund account statements received by
you in the mail in order to verify the accuracy of all mutual fund account
information provided in the statement and transactions entered through this
site. You are also responsible for promptly notifying the mutual fund of any
errors or inaccuracies relating to information contained in, or omitted from
your mutual fund account statements, including errors or inaccuracies arising
from the transactions conducted through this site.
TRANSACTIONS ARE SUBJECT TO ALL REQUIREMENTS, RESTRICTIONS AND FEES AS SET FORTH
IN THE PROSPECTUS OF THE SELECTED FUND.
THE CONDITIONS SET FORTH IN THIS AGREEMENT EXTEND NOT ONLY TO TRANSACTIONS
TRANSMITTED VIA THE INTERNET BUT TO TELEPHONIC TRANSACTIONS INITIATED THROUGH
THE NEW ENGLAND FUNDS PERSONAL ACCESS LINE(TM) (PAL).
You are responsible for the confidentiality and use of your personal
identification numbers, account numbers, social security numbers and any other
personal information required to access the site or transmit telephonically. Any
individual that possesses the information required to pass through all security
measures will be presumed to be you. All transactions submitted by an individual
presumed to be you will be solely your responsibility.
You agree that New England Funds does not have the responsibility to inquire as
to the legitimacy or propriety of any instructions received from you or any
person believed to be you, and is not responsible or liable for any losses that
may occur from acting on such instructions.
New England Funds is not responsible for incorrect data received via the
Internet or telephonically from you or any person believed to be you.
Transactions submitted over the Internet and telephonically are solely your
responsibility and New England Funds makes no warranty as to the correctness,
completeness, or the accuracy of any transmission. Similarly New England Funds
bears no responsibility for the performance of any computer hardware, software,
or the performance of any ancillary equipment and services such as telephone
lines, modems, or Internet service providers.
The processing of transactions over this site or telephonically will involve the
transmission of personal data including social security numbers, account numbers
and personal identification numbers. While New England Funds has taken
reasonable security precautions including data encryption designed to protect
the integrity of data transmitted to and from the areas of our Web site that
relate to the processing of transactions, we disclaim any liability for the
interception of such data.
You agree to immediately notify New England Funds if any of the following
occurs:
1. You do not receive confirmation of a transaction submitted via the Internet
or telephonically within five (5) business days.
2. You receive confirmation of a transaction of which you have no knowledge and
was not initiated or authorized by you.
3. You transmit a transaction for which you do not receive a confirmation
number.
4. You have reason to believe that others may have gained access to your
personal identification number (PIN) or other personal data.
5. You notice an unexplained discrepancy in account balances or other changes to
your account, including address changes, and banking instructions on any
confirmations or statements.
Any costs incurred in connection with the use of the New England Funds Personal
Access Line(TM) or the New England Funds Internet site including telephone line
costs, and Internet service provider costs are solely your responsibility.
Similarly New England Funds makes no warranties concerning the availability of
Internet services, or network availability.
New England Funds reserves the right to suspend, terminate or modify the
Internet capabilities offered to shareholders without notice.
YOU HAVE THE ABILITY TO RESTRICT INTERNET AND TELEPHONIC ACCESS TO YOUR ACCOUNTS
BY NOTIFYING NEW ENGLAND FUNDS OF YOUR DESIRE TO DO SO.
Written notifications to New England Funds should be sent to:
New England Funds
P O Box 8551
Boston, MA 02266-8551
Notification may also be made by calling 800-225-5478 during normal business
hours.
- --------------------------------------------------------------------------------
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
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 Nvest Services Company or 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 Nvest Services Company
or 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.
Checkwriting is available on Class A shares of Limited Term U.S.
Government Fund and Short Term Corporate Income 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 account, please
call 800-225-5478 for our Service Options Form. The Funds 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. Limited Term U.S. Government Fund, Short Term Corporate
Income 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.
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 ten
calendar 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 to 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 be 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. The redemptions in kind will be selected
by the Fund's subadviser in light of the Fund's objective and will not generally
represent a pro rata distribution of each security held in the Fund's portfolio.
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),
although it reserves the right to charge a fee not exceeding 1% of the
redemption price. A redemption constitutes a sale of shares for federal income
tax purposes on which the investor may realize a long- or short-term capital
gain or loss. See also "Income Dividends, Capital Gain Distributions and Tax
Status," below.
The Funds may also close your account and send you the proceeds if the
balance in your account falls below a minimum amount set by each Trust's Board
of Trustees (currently $1,000 for all accounts except Keogh, pension and profit
sharing plans, automatic investment plans and accounts that have fallen below
the minimum solely because of fluctuations in the net asset value per share).
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.
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 Growth, Value, Growth and Income, Star Advisers, Star
Worldwide, Star Small Cap, International Equity, Equity Income, Bullseye 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. For those funds that present yields reflecting an expense
limitation or waiver, its yield would have been lower if no limitation or waiver
were in effect.
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 investments 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, rather than the maximum
offering price, is used to calculate the distribution rate, the rate will be
higher.
The Municipal Income Fund, the Massachusetts Fund and the California 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. To see the
taxable equivalent yield calculation charts for these Funds, see the section
entitled "Miscellaneous Investment Practices of the Funds."
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. Each
Fund may show each class's average annual total return for the one-year,
five-year and ten-year periods (or for the life of the class, if shorter)
through the end of the most recent calendar quarter. 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 $10,000 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. For those funds that
present returns reflecting an expense limitation or waiver, its total return
would have been lower if no limitation or waiver were in effect.
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 capitalization-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 Standard & Poor's Composite Index of 400 Stocks (the "S&P 400") is a
market capitalization-weighted and unmanaged index that includes approximately
10% of the capitalization of U.S. equity securities. This index is comprised of
stocks in the middle capitalization range. Any midcap stocks already included in
the S&P 500 are excluded from this index.
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.
This 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 Aggregate Bond Index is a market capitalization-weighted
aggregate index that includes nearly all debt issued by the U.S. Treasury, U.S.
government agencies, U.S. corporations rated investment grade, and U.S. agency
debt backed by mortgage pools.
The Lehman Government Bond Index (the "Lehman 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 Lehman Government Index.
The Lehman Intermediate Government Bond Index (the "Lehman Int. Government
Index") is a market capitalization-weighted and unmanaged index of bonds issued
by the U.S. government and its agencies having maturities between one and ten
years.
The Lehman Government/Corporate Bond Index (the "Lehman G/C Index") is a
measure of the market value of approximately 5,300 bonds with a face value
currently in excess of $1.3 trillion. To be included in the Lehman G/C 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 such as Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's").
The Lehman Intermediate Government/Corporate Bond Index (the "Lehman Int.
G/C Index") is a market capitalization-weighted and unmanaged index composed of
the Lehman Government and Corporate Bond indices which include bonds with
maturities of up to ten years.
The Lehman High Yield Bond Index is a market capitalization-weighted and
unmanaged index of fixed-rate, noninvestment grade debt. Generally securities in
the index must be rated Ba1 or lower by Moody's Investors Service, including
defaulted issues. If no Moody's rating is available, bonds must be rated BB+ or
lower by S&P; and if no S&P rating is available, bonds must be rated below
investment grade by Fitch Investor's Service. A small number of unrated bonds is
included in the index; to be eligible they must have previously held a high
yield rating or have been associated with a high yield issuer, and must trade
accordingly.
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 Lehman: Mutual Fund Short (1-5) Investment Grade Debt Index is an
unmanaged index composed of publicly issued, fixed-rate, nonconvertible
investment grade domestic corporate debt with maturities of 1 to 5 years.
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, Inc. is an independent service that monitors the performance of
over 10,000 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 market 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 smallest 2,000 companies within the
Russell 3000 Index as measured by market capitalization. The Russell 1000 Index
represents the largest 1,000 companies within the Russell 3000 Index. The
Russell 1000 Growth Index is an unmanaged subset of stocks from the larger
Russell 1000 Index, selected for their greater growth orientation. The Russell
1000 Value Index is an unmanaged subset of stocks from the larger Russell 1000
Index, selected for their greater value orientation.
The Morgan Stanley Capital International Europe, Australasia and Far East
Index (the "EAFE Index") is a market capitalization-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
capitalization-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 Morgan Stanley Capital International World ND Index (the "MSCI World
Index") is a market capitalization-weighted and unmanaged index that includes
common stock from all 23 MSCI developed market countries. The "ND" indicates
that the index is listed in U.S. dollars, with net dividends reinvested.
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.
The current interest rate on many FNMA adjustable rate mortgage securities
("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 to Nvest Companies, its
structure, goals and objectives and the advisory subsidiaries of Nvest
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 regarding Nvest 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.
INVESTMENTS AT 8% RATE OF RETURN
5 YRS. 10 15 20 25 30
------ ------- ------- -------- ------- ---------
$50 3,698 9,208 17,417 29,647 47,868 75,015
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
INVESTMENTS AT 10% RATE OF RETURN
5 YRS. 10 15 20 25 30
------ ------- ------- -------- ------- ---------
$50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
The Funds' advertising and sales literature may refer to historical,
current and prospective political, social, economic and financial trends and
developments that affect domestic and international investment as it relates to
any of the New England Funds. The Funds' advertising and sales literature may
include historical and current performance and total returns of investment
alternatives to the New England Funds. For example, the advertising and sales
literature of any of the New England Funds, but particularly that of Star
Worldwide Fund and 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 and 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.
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. No interest will accrue on amounts represented by
uncashed dividend or redemption checks.
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 in each taxable year 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.
Fund distributions paid to you either in cash or reinvested in additional
shares (other than "exempt-interest dividends" paid by the Municipal Income,
Massachusetts and California Funds, as described in the relevant Prospectuses)
are generally taxable to you either as ordinary income or as capital gains.
Distributions derived from short-term capital gains or investment income are
generally taxable at ordinary income rates. If you are a corporation investing
in a Fund, a portion of these dividends may qualify for the dividends-received
deduction provided that you meet certain holding period requirements.
Distributions of net long-term capital gains (i.e., the excess of net gains from
capital assets held for more than one year over net losses from capital assets
held for not more than one year) that are designated by a Fund as capital gain
dividends will generally be taxable to a shareholder receiving such
distributions as long-term capital gain (generally taxed at a 20% tax rate for
noncorporate shareholders) regardless of how long the shareholder has held Fund
shares. To avoid an excise tax, each Fund intends to distribute dividends prior
to calendar year-end. Some dividends paid in January may be taxable as if they
were received in the previous December.
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 a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when a Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when a Fund's net asset value also reflects unrealized losses.
Under 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 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.
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.
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.
International Equity Fund, Star Advisers Fund, Star Worldwide Fund and
Star Small Cap Fund may be liable to foreign governments for taxes relating
primarily to investment income or capital gains on foreign securities in the
Fund's portfolio. The Fund may in some circumstances be eligible to, and in its
discretion may, make an election under the Code which would allow Fund
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax return. If the Fund
makes the election, the amount of each shareholder's distribution reported on
the information returns filed by the Fund with the Internal Revenue Service must
be increased by the amount of the shareholder's portion of the Fund's foreign
tax paid.
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.
Redemptions and exchanges of each Fund's shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions.
Currently, if shares have been held for more than one year, gain or loss
realized will be taxed at long-term federal tax rates (generally 20% for
noncorporate shareholders), provided the shareholder holds the shares as a
capital asset. Furthermore, no loss will be allowed on the sale of Fund shares
to the extent the shareholder acquired other shares of the same Fund within 30
days prior to the sale of the loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions.
Dividends and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state or local taxes.
Each Fund (possibly excepting Municipal Income Fund, Massachusetts Fund
and California Fund) is required to withhold 31% of all income dividends and
capital gains distributions it pays to you if you do not provide a correct,
certified taxpayer identification number, if a Fund is notified that you have
underreported income in the past or if you fail to certify to a Fund that you
are not subject to such withholding. 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.
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, 1998 are incorporated herein by reference. Each Fund's annual and
semi-annual report 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 by telephone at (800) 225-5478 or by writing to the
Funds at : New England Fund, L.P., 399 Boylston Street, Boston, Massachusetts
02116.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
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 Fitch 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
Adam Smith's Money World
America OnLine
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
B'nai B'rith Jewish Monthly
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorfman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(the) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Reuters
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall St. Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO
<PAGE>
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to 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 Associates, Loomis Sayles, CGM, Westpeak,
Jurika & Voyles, L.P., Vaughan, Nelson, Scarborough & McCullough, L.P. and
Kobrick Funds LLC. Reference also may be made to the Funds of their respective
fund groups, namely, the Loomis Sayles Funds and the Oakmark Family of Funds
advised by Harris Associates.
References may be included in New England Funds' advertising and
promotional literature to other Nvest Companies affiliates including, but not
limited to Nvest Corporation, AEW Capital Management, L.P., Marlborough Capital
Advisors, L.P., Reich & Tang Capital Management, Reich & Tang Funds 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 RS Investment Management.
New England Funds' advertising and promotional material will include, but
is not limited to, discussions of the following information about both
affiliated and unaffiliated entities:
[ ] Specific and general assessments and forecasts regarding U.S. and world
economies, and the economies of specific nations and their impact on the New
England Funds;
[ ] Specific and general investment emphasis, specialties, fields of expertise,
competencies, operations and functions;
[ ] Specific and general investment philosophies, strategies, processes,
techniques and types of analysis;
[ ] Specific and general sources of information, economic models, forecasts and
data services utilized, consulted or considered in the course of providing
advisory or other services;
[ ] The corporate histories, founding dates and names of founders of the
entities;
[ ] Awards, honors and recognition given to the entities;
[ ] The names of those with ownership interest and the percentage of ownership
interest;
[ ] 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;
[ ] Current capitalizations, levels of profitability and other financial and
statistical information;
[ ] Identification of portfolio managers, researchers, economists, principals
and other staff members and employees;
[ ] The specific credentials of the above individuals, including, but not
limited to, previous employment, current and past positions, titles and
duties performed, industry experience, educational background and degrees,
awards and honors;
[ ] Specific and general reference to past and present notable and renowned
individuals including reference to their field of expertise and/or specific
accomplishments;
[ ] 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;
[ ] 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
[ ] 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 including Nvest, 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 $136 billion of assets under management as of June 30, 1999. In addition,
promotional materials may include:
[ ] 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."
Nvest Advisor Services ("NAS") and Nvest Retirement Services ("NRS"),
divisions of Nvest 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, Jurika & Voyles, Back Bay Advisors, Oakmark Funds, Delafield Fund and
Kobrick Funds.
NAS and NRS 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 NAS and NRS and the types
of services it provides which may include: seminars; its 1-800 number, web site,
Internet or other electronic facilities; qualitative information about the
funds' investment methodologies; information about specific strategies and
management techniques; performance data and features of the funds; institutional
oriented research and portfolio manager insight and commentary. Additional
information contained in advertising and promotional literature may include:
rankings and ratings of the funds including, but not limited to, those of
Morningstar and Lipper Analytical Services; statistics about the advisers', fund
groups' or a specific fund's assets under management; the histories of the
advisers and biographical references to portfolio managers and other staff
including, but not limited to, background, credentials, honors, awards and
recognition received by the advisers and their personnel; and commentary about
the advisers, their funds and their personnel from third-party sources including
newspapers, magazines, periodicals, radio, television or other electronic media.
References may be included in New England Funds' advertising and
promotional literature about its 401(k) and retirement plans. The information
may include, but is not limited to:
[ ] Specific and general references to industry statistics regarding 401(k) and
retirement plans including historical information, 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 other organizations involved in 401(k) and
retirement programs with whom New England Funds may or may not have a
relationship.
[ ] 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, Investment Company Institute and other industry authorities,
research organizations and publications.
[ ] Specific and general discussion of economic, legislative, and other
environmental factors affecting 401(k) and retirement plans, including, but
not limited to, statistics, detailed explanations or broad summaries of:
-past, present and prospective tax regulation, Internal Revenue Service
requirements and rules, including, but not limited to, reporting standards,
minimum distribution notices, Form 5500, Form 1099R and other relevant
forms and documents, Department of Labor rules and standards and other
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.
[ ] Specific and general discussion of the benefits of 401(k) investment and
retirement plans, and, in particular, the New England Funds 401(k) and
retirement plans, to the participant and plan sponsor, including
explanations, statistics and other data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but not limited to,
videos, slides, presentation materials, brochures, an investment
calculator, payroll stuffers, quarterly publications, releases and
information on a periodic basis and the availability of wholesalers and
other personnel.
[ ] Specific and general reference to the benefits of investing in mutual funds
for 401(k) and retirement plans, and New England Funds as a 401(k) or
retirement plan funding vehicle.
[ ] 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
For the fiscal year ended December 31, 1998, the Short Term Corporate
Income Fund invested 2.7%, the Balanced Fund invested 2.3%, the Municipal Income
Fund invested 1.9% and the Massachusetts Tax Free Income Fund invested 1.3% of
their respective portfolios in securities rated below investment grade (those
rated "BB" or lower by Standard & Poor's or "Ba" or lower by Moody's). The
Intermediate Term Tax Free Fund of California and the Limited Term U.S.
Government Fund did not invest in securities rated below investment grade for
the fiscal year ended December 31, 1998. The following tables show the portfolio
composition of those funds that invested at least 5% of their respective
portfolios in securities below investment grade for the fiscal year ended
December 31, 1998.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PERCENTAGE
SECURITY OF NET ASSETS
-------- -------------
Common Stock........................................... 0.1%
Preferred Stock........................................ 7.2%
Short-term Obligations and Other Assets................ 5.0%
Debt - Unrated......................................... 4.3%
Debt -- Standard and Poor's Rating
AAA............................................ 0.0%
BBB............................................ 0.0%
BB............................................. 14.5%
B.............................................. 58.9%
CCC............................................ 9.8%
CC............................................. 0.3%
The chart above indicates the composition of the High Income Fund for the fiscal
year ended December 31, 1998, 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, 1998
PERCENTAGE
SECURITY OF NET ASSETS
-------- -------------
Common Stock........................................... 6.0%
Preferred Stock........................................ 2.3%
Short-term Obligations and Other Assets................ 1.8%
Debt - Unrated......................................... 45.6%
Debt - Standard and Poor's Rating
AAA.............................................. 0.5%
AA............................................... 0.7%
A................................................ 1.5%
BBB.............................................. 9.8%
BB............................................... 16.5%
B................................................ 10.8%
CCC and lower.................................... 4.7%
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1998, 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
BOND INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock ............................................ 0.0%
Short-term Obligations and Other Assets .................... 2.1%
Debt-- Unrated ............................................. 7.6%
Debt-- Standard & Poor's Rating
AAA .................................................. 17.3%
AA ................................................... 9.1%
A .................................................... 14.5%
BBB .................................................. 32.9%
BB ................................................... 15.7%
B .................................................... 0.8%
CCC .................................................. 0.0%
C/D .................................................. 0.0%
The chart above indicates the composition of the Bond Income Fund for the fiscal
year ended December 31, 1998, 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
INTERNATIONAL EQUITY FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Common Stock ............................................... 86.6%
Short-term Obligations and Other Assets .................... 5.2%
Debt-- Unrated ............................................. 2.1%
Debt -- Standard & Poor's Rating
AAA .................................................. 0.0%
AA ................................................... 0.0%
A .................................................... 0.0%
BBB .................................................. 1.1%
BB ................................................... 2.7%
B .................................................... 2.1%
CCC .................................................. 0.2%
C/D .................................................. 0.0%
The chart above indicates the composition of International Equity Fund for the
fiscal year ended December 31, 1998, 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.
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