NEW ENGLAND FUNDS - BOND FUNDS
Class Y Shares of:
New England Government Securities Fund
New England Limited Term U.S. Government Fund
New England Adjustable Rate U.S. Government Fund
New England Strategic Income Fund
New England Bond Income Fund
May 1, 1995
as Revised October 2, 1995
New England Government Securities Fund, New England Strategic
Income Fund, New England Bond Income Fund, series of New England
Funds Trust I, and New England Limited Term U.S. Government Fund
and New England Adjustable Rate U.S. Government Fund, series of
New England Funds Trust II, are separate mutual funds (the
"Funds" and each a "Fund"). New England Funds Trust I and New
England Funds Trust II are referred to in this prospectus as the
"Trusts."
The Funds offer Class Y shares (for qualified institutional
investors). New England Limited Term U.S. Government, New
England Strategic Income Fund and New England Bond Income Fund
offer Class A, B and C shares (for other investors). New England
Government Securities Fund and New England Adjustable Rate U. S.
Government Fund offer Class B and C shares (for other investors).
This prospectus sets forth information investors should know
before investing in Class Y shares. Please read it carefully and
keep it for future reference. A Statement of Additional
Information in two parts (the "Statement") about the Funds dated
May 1, 1995 has been filed with the Securities and Exchange
Commission (the "SEC") and is available free of charge. Write to
New England Funds, L.P. (the "Distributor"), SAI Fulfillment
Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at
1-800-225-7670. The Statement contains more detailed information
about the Funds and is incorporated into this prospectus by
reference. Class A, B and C shares are described in a separate
prospectus.
New England Strategic Income Fund may invest up to all of its
assets in lower rated bonds commonly known as junk bonds. This
type of investment is subject to greater risk than higher rated
bonds with respect to principal and interest payments, including
the risk of default. Investors should assess carefully the risks
associated with investment in this fund. See "Investment Risks--
Lower Rated Fixed-Income Securities."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
Schedule of Fees 3
Financial Highlights 4
Investment Objectives 9
How the Funds Pursue Their Objectives 9
Fund Investments 9
Investment Risks 12
Fund Management 16
Minimum Investment 18
Ways to Buy Fund Shares 18
Exchanging Among New England Funds 19
Ways to Sell Fund Shares 19
Determination of Net Asset Value 20
Dividends 20
Federal Income Taxes 21
Performance Criteria 21
Additional Facts About the Funds 22
Appendix A 25
<PAGE>
FUND EXPENSE AND FINANCIAL INFORMATION
Schedule of Fees
Expenses are one of several factors to consider when you invest in the
Funds. The following table summarizes your maximum transaction costs from
investing in the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in Class Y shares of the Funds for the
periods specified.
Shareholder transaction expenses
New England Government Securities Fund
New England Limited Term U.S.
Government Fund
New England Adjustable Rate U.S.
Government Fund
New England Strategic Income Fund
New England Bond Income Fund
-------------------------------------
Maximum Initial Sales Charge None
Imposed on a Purchase
(as a percentage of offering
price)
Maximum Contingent Deferred Sales None
Charge
(as a percentage of original
purchase price or
redemption proceeds, as
applicable)
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
Annual operating expenses +
(as a percentage of net assets)
New New New New New
England England England England England
Government Limited Adjustable Strategic Bond
Securities Term U.S. Rate U.S. Income Income
Fund Government Government Fund Fund
Fund Fund
-------- -------- -------- -------- --------
Management 0.65% 0.63% 0.25%* 0.00%** 0.45%
Fees
12b-1 Fees None None None None None
Administrative None None 0.09%* None None
Services
Fees
Other Expenses 0.28% 0.20% 0.11% 1.00% 0.38%
Total Expenses 0.93% 0.83% 0.45%* 1.00%** 0.83%
* After fee waiver and expense reduction by the Fund's adviser and/or
Distributor. Without the expense limitations, New England Adjustable
Rate U.S. Government Fund's Management Fees, Administrative Services Fees
and Total Fund Operating Expenses would be 0.38%, 0.14% and 0.63%,
respectively.
** After fee waiver and expense reduction by the Fund's adviser and
subadviser. Without the voluntary limitations, Management Fees and
estimated Total Expenses would be 0.65% and 1.65%, respectively.
+ The percentages shown for Management Fees, Administrative Service Fees
(in the case of New England Adjustable Rate U.S. Government Fund) and
Other Expenses are annualized amounts based in the Distributor's
estimates of the average combined net assets of the Class A, B, C and Y
shares of each Fund for the Class Y shares' first fiscal year.
Example
A $1,000 investment would incur the following dollar amount of transaction
costs and operating expenses assuming a 5% annual return and, unless
otherwise noted, redemption at period end. The 5% return and expenses in
the Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which will vary.
New New New New New
England England England England England
Government Limited Adjustable Strategic Bond
Securities Term U.S. Rate U.S. Income Income
Fund Government Government Fund Fund
Fund Fund
-------- -------- -------- -------- --------
1 year $ 9 $ 8 $ 5 $ 10 $ 8
3 years $ 30 $ 26 $14 $ 32 $ 26
5 years $ 51 $ 46 $25 $ 55 $ 46
10 years $114 $103 $57 $122 $103
The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly if you
invest in the Funds.
For information about the expenses of the Funds' Class A, B and C shares,
which differ from the expenses of the Class Y shares, see "Additional Facts
About the Funds." To obtain more information about Class A, B and C
shares, please call the Distributor toll-free at 1-800-225-5478.
For additional information about the Funds' fees and other expenses, please
see "Fund Management," "Additional Facts about the Funds" and "The Funds'
Expenses."
A wire fee (currently $5.00) will be deducted from your proceeds if you
elect to receive redemption proceeds by wire.
Please keep in mind that the Example shown above is hypothetical. The
information above should not be considered a representation of past or
future return or expenses; actual return or expenses may be more or less
than those shown.
FINANCIAL HIGHLIGHTS
(For a Class Y share of New England Limited Term U.S. Government Fund and
New England Government Securities Fund outstanding throughout the indicated
period. In the case of New England Adjustable Rate U.S. Government Fund
and New England Bond Income Fund, which had no Class Y shares outstanding
during 1994, financial highlights are presented for a Class A and Class B
share of each Fund outstanding throughout the indicated period.)
The Financial Highlights presented on pages 5 through 8 have been included
in financial statements for the Funds. The financial Statements for the
New England Government Securities Fund and New England Bond Income Fund for
periods through December 31, 1994 have been examined by Price Waterhouse
LLP, independent accountants, and the financial statements for the New
England Limited Term U.S. Government Fund and New England Adjustable Rate
U.S. Government Fund for periods through December 31, 1994 have been
examined by Coopers & Lybrand LLP, independent accountants. The Financial
Highlights should be read in conjunction with the financial statements and
the notes thereto incorporated by reference in the Statement.
<PAGE>
New England Government Securities Fund
Class Y
shares
-----------
March 31,(a)
through
December 31,
1994
------------
Net asset value, beginning of 11.20
period
Income from investment operations
Net investment income 0.54
Net gains or losses on
investments (0.77)
(both realized and unrealized)
Total income from investment
operations (0.23)
Less distributions
Distributions
(from net investment income) (0.53)
Total distributions (0.53)
Net asset value, end of period $10.44
Total return (%) (2.0) (c)
Ratios/Supplemental data
Net assets, end of period (000) 4,104
Ratio of operating expenses to
average net assets (%) 0.93 (b)
Ratio of net investment income to
average net assets (%) 7.25 (b)
Portfolio turnover rate (%) 809
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
<PAGE>
New England Limited Term U.S. Government Fund
Class Y shares
-------------
March 31, (a)
through
December 31,
1994
-------------
Net asset value, beginning of $12.11
period
Income from investment operations
Net investment income 0.71
Net gains or losses on investments
(both realized and unrealized) (0.74)
Total income from investment
operations (0.03)
Less distributions
Distributions
(from net investment income) (0.57)
Total distributions (0.57)
Net asset value, end of period $11.51
Total return (%) (c) (0.80)
Ratios/Supplemental data
Net assets, end of period (000) $1,822
Ratio of operating expenses to
average net assets (%) 0.83 (b)
Ratio of net investment income to
average net assets (%) 7.15 (b)
Portfolio turnover rate (%) 244 (b)
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
<PAGE>
New England Adjustable Rate U.S. Government Fund
Class A Class B
-------------------------------------- -----------------
Oct. Sept. Year
18, (a) 13, (a) Ended
through Year Ended December 31, through Dec.
Dec. Dec. 31,
31, 31,
------ --------------------------- ------- ------
1991 1992 1993 1994 1993 1994
------- -------- -------- ------- ------- ------
Net asset value, $7.50 $7.50 $7.46 $7.45 $7.52 $7.45
beginning of period
Income from
investment operations
Net investment 0.09 0.42 0.33 0.37 0.08 0.29
income
Net gains or losses
on investments
(both realized and 0.00 (0.06) (0.03) (0.31) (0.08) (0.29)
unrealized)
Total income from
investment 0.09 0.36 0.30 0.06 0.00 0.00
operations
Less distributions
Distributions (from
net investment (0.09) (0.40) (0.31) (0.31) (0.07) (0.25)
income)
Total distributions (0.09) (0.40) (0.31) (0.31) (0.07) (0.25)
Net asset value, $7.50 $7.46 $7.45 $7.20 $7.45 $7.20
end of period
Total return (%) 1.2 4.9 4.0 0.8 0.0 0.10
(d)
Ratios/Supplemental
data
Net assets, end of $60,684 $294,687 $734,251 $489,637 $855 $2,056
period (000)
Ratio of operating 0.50(c) 0.57 0.60 0.60 1.35(c) 1.35
expenses to average
net assets (%) (b)
Ratio of net 6.43(c) 5.39 4.39 4.85 3.50(c) 4.1
investment income
to average net
assets (%)
Portfolio turnover 52(c) 49 54 17 54(e) 17
rate (%)
(a) The Fund commenced operations on October 18, 1991. Class B shares
were first offered on September 13, 1993.
(b) From October 19, 1991 through March 20, 1992 expenses were voluntarily
limited to 0.50% of average daily net assets. Commencing April 1, 1992
expenses were voluntarily limited to 0.60% of Class A average daily net
assets, and, effective September 13, 1993, 1.35% of Class B average daily
net assets. The ratio of operating expenses to average net assets without
giving effect to these expense limitations would have been 1.26%
(annualized), 0.96%, 0.86% and 0.88% for Class A shares for the period
ended December 31, 1991 and the years ended December 31, 1992, 1993 and
1994, respectively, and 1.61% (annualized) and 1.63% for Class B shares for
the period September 13, 1993 through December 31, 1993 and the year ended
December 31, 1994, respectively.
(c) Computed on an annualized basis.
(d) A sales charge of 1.00% (maximum) in the case of Class A shares and a
contingent deferred sales charges in the case of Class B shares are not
reflected in total return calculations. Periods of less than one year are
not annualized.
(e) Represents portfolio turnover rate for the Fund as a whole for the
entire fiscal year.
<PAGE>
<TABLE>
New England Bond Income Fund
Class A Class B
-------------------------------------------------------------------- -------------
July 1, Sept.
through 13, (a) Year
Year Ended June Dec. Year Ended December 31, through Ended
30, 31, Dec. Dec.
31, 31,
--------------- ------- ----------------------------------------------------------------------------- ------ ----
1985 1986 1986 1987 1988 1989 1990 1991 1992 1993 1994 1993 1994
(d)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net $9.78 $10.93 $11.45 $11.73 $10.98 $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $13.06 12.18
asset
value,
begin-
ning of
period
Income from
investment
operations
Net 1.09 0.98 0.49 0.90 0.85 0.91 0.89 0.88 0.85 0.77 0.72 0.20 0.63
invest-
ment
income
Net 1.14 0.71 0.26 (0.75) (0.06) 0.34 (0.10) 1.04 0.01 0.66 (1.23) (0.30) (1.23)
gains or
losses
on
invest-
ments
both
realized
and
unrealiz-
ed)
Total 2.23 1.69 0.75 0.15 0.79 1.25 0.79 1.92 0.86 1.43 (0.51) (0.10) (0.60)
income
from
invest-
ment
opera-
tions
Less
distribu-
tions
Dis (1.08) (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.86) (0.78) (0.72) (0.19) (0.63)
- -tributions
(from
net
invest-
ment
income)
Dis 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.02) (0.59) 0.00 (0.59) 0.00
- -tributions
(from
net
realized
capital
gains)
To (1.08) (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.88) (1.37) (0.72) (0.78) (0.63)
- -tal
distribu-
tions
Net $10.93 $11.45 $11.73 $10.98 $10.89 $11.23 $11.12 $12.14 $12.12 $12.18 $10.95 $12.18 10.95
asset
value,
end of
period
Total 24.2 16.6 6.7 1.4 7.4 11.9 7.5 18.1 7.5 12.1 (4.2) (0.8) (4.9)
return
(%) (c)
Ratios/Supplemental data
Net $37,379 $46,175 $54,210 $60,071 $67,548 $76,662 $85,372 $113,759 $145,184 $179,264 $155,362 $2,661 $9,435
assets,
end of
period
(000)
Ratio 0.85 0.92 1.02(b) 1.31 1.20 1.18 1.18 1.15 1.08 1.04 1.08 1.81(b) 1.83
of operat-
ing
expenses
to
average
net
assets
(%)
Ratio 10.63 8.80 8.29(b) 8.03 7.68 8.27 8.05 7.69 7.08 6.10 6.46 4.79(b) 5.71
of net
invest-
ment
income
to
average
net
assets
(%)
Port 217 242 352(b) 307 88 77 126 218 89 202 77 202(e) 77
- -folio
turnover
rate (%)
</TABLE>
(a) Commencement of offering of Class B shares.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) Fiscal year end changed in 1986 from June 30 to December 31.
(e) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
INVESTMENT OBJECTIVES
New England Government Securities Fund (the "Government Securities Fund")
seeks a high level of current income consistent with safety of principal by
investing in U.S. Government securities.
New England Limited Term U.S. Government Fund (the "Limited Term U.S.
Government Fund"), formerly New England Premium Income Fund, seeks a high
current return consistent with preservation of capital.
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate
Fund") seeks a high level of current income consistent with low volatility
of principal. The Fund intends to pursue its objective by investing only
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
New England Strategic Income Fund (the "Strategic Income Fund") seeks high
current income with a secondary objective of capital growth.
New England Bond Income Fund (the "Bond Income Fund") seeks a high level of
current income consistent with what the Fund considers reasonable risk.
The Bond Income Fund invests primarily in corporate and U.S. Government
bonds.
Each Fund is a "diversified" mutual fund.
There can be no assurance that the Funds will achieve their investment
objectives.
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in
that Fund to invest in a managed portfolio consisting of securities
appropriate to the Fund's investment objective and policies, as described
below. There can be no assurance that any Fund will achieve its objective.
Except for matters that are explicitly identified as "fundamental" in this
prospectus or the Statement, the investment policies of each Fund may be
changed without shareholder approval or prior notice. The investment
objectives of the Bond Income and Government Securities Funds are
fundamental. The investment objectives of the Adjustable Rate Fund and the
Strategic Income Fund are not fundamental. The investment objectives of
the Limited Term U.S. Government Fund are not fundamental but, as a matter
of policy, the trustees would not change those objectives without
shareholder approval. If there is a change in the investment objective of
the Strategic Income, Adjustable Rate or Limited Term U.S. Government
Funds, you should consider whether the Fund remains an appropriate
investment in light of your then current financial position and needs.
FUND INVESTMENTS
[] Government Securities Fund
The Government Securities Fund expects that under normal market conditions
it will invest 100% of its net assets in securities issued or guaranteed by
the U.S. Government or its agencies, authorities or instrumentalities that
are backed by the full faith and credit of the U.S. Government. These
securities include, for example, U.S. Treasury bills, bonds and notes,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA") and Federal Housing Administration
debentures.
The Fund may invest in securities of any maturity and in zero coupon
securities. In addition to investing directly in U.S. Government
Securities, the Fund may purchase "stripped" securities.
The Government Securities Fund may also purchase and sell interest rate
futures contracts on U.S. Government Securities and may write and purchase
related options and options on U.S. Government Securities for hedging
purposes. Transactions involving futures and options on futures may help
to reduce the volatility of the Fund's net asset value, but this result
cannot be assured.
It is a fundamental policy of the Fund that under normal market conditions
it will invest at least 65% of its total assets in U.S. Government
Securities.
[] Limited Term U.S. Government Fund
The Fund will seek to achieve its objective by investing in U.S. Government
Securities, which term as used in this prospectus includes all securities
issued or guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities. Under normal market conditions, 65% or more of the
Fund's total assets will be invested in U.S. Government Securities
(including zero coupons bonds) and collateralized mortgage obligations
("CMOs") issued by instrumentalities of the U.S. Government. The Fund may
also invest in asset-backed securities rated Aaa by Moody's Investors
Service, Inc. ("Moody's") or AAA by Standard & Poor's Corporation (S&P") or
unrated by determined by the Fund's adviser to be of comparable quality to
securities in those in those rating catergories. The Fund may purchase and
sell financial futures contracts and options for hedging purposes. The
Fund limits its investments in CMOs to those issued by instrumentalities of
the U.S. Government.
The Fund's investment adviser, Back Bay Advisors, L.P. ("Back Bay
Advisors") provides a continuous investment program designed to maximize
current return while minimizing fluctuations in the value of the Fund's
portfolio, thus stabilizing the net asset value of the Fund's shares.
Because the market value of fixed-income securities fluctuates in response
to changes in interest rates, there is a risk of a decline in the value of
the Fund's portfolio (and a corresponding decrease in the value of the
Fund's shares) if interest rates increase. To reduce this risk, the Fund
will ordinarily seek to maintain an average dollar-weighted maturity of
three to seven years. The Fund may hold individual securities with
maturities of more than ten years as long as its average maturity remains
within this limit.
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an
interest rate change (i.e., the change in price one can expect from a given
change in yield). Many investors and investment analysts consider duration
to be a more useful measure of price sensitivity than "maturity." A debt
instrument's duration is derived by discounting principal and interest
payments to their present value using the instrument's current yield to
maturity and calculating the dollar-weighted average time until these
payments will be received. The Fund will seek to maintain an average
portfolio duration of four years or less. The Fund's portfolio may include
fixed-income securities with durations of more than four years, so long as
the Fund seeks to maintain an average portfolio duration of four years or
less.
The values of securities having shorter durations generally fluctuate less
than securities with longer durations. A portfolio with an average
duration of four years or less should provide investors with a reduced risk
of loss due to rising interest rates. For example, based on yields of
6.90% for a five-year U.S. Treasury security and 7.30% for a 30-year U.S.
Treasury security, a 1% increase in interest rates would be expected to
result in approximately a 4.30% reduction in the value of the five-year
security (duration 4.3) as compared to approximately a 12.40% reduction in
the value of the 30-year security (duration 12.4). Conversely, a 1%
decrease in interest rates would be expected to result in similar increases
in value. These expectations represent Back Bay Advisors' estimate of
portfolio volatility based upon historic data collected under a wide
variety of market conditions, but there is no assurance that actual
volatility will be consistent with such expectations.
The Fund may lend portfolio securities amounting to not more than 25% of
its assets to securities dealers and may enter into repurchase agreements
on up to 25% of its assets. These transactions must be fully
collateralized at all times, but involve some credit risk to the Fund if
the other party should default on its obligations and the Fund is delayed
or prevented from recovering the collateral. Part II of the Statement
provides more detail on these transactions.
[] Adjustable Rate Fund
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in adjustable rate mortgage
securities ("ARMs") or other securities collateralized by or representing
interests in mortgages (collectively, "mortgage securities"), which have
interest rates that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
The Fund also may invest in CMOs issued by instrumentalities of the U.S.
Government but will not invest in privately issued CMOs. Other securities
purchased by the Fund will be limited to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities but will not include
any stripped securities (such as interest only or principal only
obligations) or zero coupon obligations. As described in Part II of the
Statement, the Fund also intends to limit its investments to those that
would be permissible investments for federal credit unions and national
banks. When maintaining a temporary defensive position, the Fund may
invest its assets, without limit, in U.S. Government securities of any
type.
[] Strategic Income Fund
The Fund seeks to achieve its investment objectives by investing at least
65% of its total assets in debt instruments. The Fund may invest in debt
instruments issued by corporations based in the United States or abroad and
debt instruments that are convertible into equity securities. The Fund may
also invest in U.S. Government Securities and in securities issued or
guaranteed by foreign governments (including their political subdivisions,
agencies, authorities and/or instrumentalities, ("Foreign Government
Securities") and securities issued by supranational agencies. The Fund may
invest in debt instruments in any rating category including debt
instruments rated in the lowest rating category (C by Moody's and D by
S&P) and in instruments that are unrated. Securities rated below
investment grade quality are considered high yield, high risk securities
and are commonly known as "junk bonds." For more information about the
risks of investing in high yield, high risk securities and securities of
foreign issuers, see "Investment Risks -- Lower Rated Fixed-Income
Securities" and "Foreign Securities."
Under normal market conditions, the Fund will invest in debt instruments of
both domestic and foreign issuers and in corporate as well as government
issues. At any time, however, the Fund may invest up to 100% of its assets
in debt instruments of U.S. issuers, in debt instruments of foreign
issuers, in corporate debt instruments or in government securities. The
Fund may invest up to a total of 35% of its total assets in preferred
stocks, dividend-paying common stocks and shares of closed-end investment
companies (which shares will not exceed 10% of the Fund's total assets).
The proportion of Fund assets invested in corporate bonds, government
bonds, preferred or common stock will vary over time based on changing
market conditions. When Loomis Sayles believes that a particular market
presents more opportunity than other markets, it may increase the
proportion of the Fund's assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes, the
Fund may also purchase and sell options and futures and engage in foreign
currency transactions. The Fund may also invest in mortgage-backed
securities, zero coupon bonds, stripped securities and pay-in-kind
securities.
[] Bond Income Fund
The Fund invests primarily in corporate and U.S. Government bonds. At
least 80% of its total assets will be invested in bonds carrying investment
grade ratings from one of the recognized rating services. The Fund may
also purchase non-rated or lower-rated bonds. Bonds rated BBB or Baa (the
lowest ratings that are considered investment grade) may have speculative
characteristics and unfavorable changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of issuers of
these bonds to make principal and interest payments than is the case with
higher grade bonds. If an investment rated BBB or Baa is down-graded by a
major rating agency, Back Bay Advisors will consider whether the investment
remains appropriate for the Fund. The Fund may invest in securities of any
maturity and in zero coupon securities. The Fund may also invest in CMOs.
The Fund will normally maintain an average dollar-weighted maturity of its
portfolio of less than ten years. Formerly, it normally maintained an
average maturity of between five and fifteen years.
The Fund may invest in foreign securities but will do so only when Back Bay
Advisors believes the associated risks are minimal.
[] U.S. and Foreign Government Securities
Different types of U.S. and Foreign Government Securities have different
kinds of government support. U.S. Government Securities include securities
backed by the full faith and credit of the U.S. Government, as well as many
other securities that are not full faith and credit obligations. For
example, obligations of the Federal Home Loan Banks are supported by the
right of the issuer to borrow from the U.S. Treasury, and obligations of
the Federal Home Loan Mortgage Corporation (the "FHLMC") and the Federal
National Mortgage Association (the "FNMA") are supported only by the credit
of those corporations. Similarly, obligations of foreign governmental
entities include obligations issued or guaranteed by governments with
taxing power or by their agencies. Some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision (such as a province of Canada) and some are not. For
example, Foreign Government Securities include securities issued by
corporations which have been charged with a public purpose and a majority
of whose outstanding equity securities are owned by a foreign government or
government agency. Such securities may be supported only by the credit of
the issuing corporation and not by that of the government or agency.
In addition to investing directly in U.S. and Foreign Government
Securities, the Government Securities and Strategic Income Funds may
purchase "stripped" securities evidencing undivided ownership interests in
interest payments or principal payments, or both, on U.S. and Foreign
Government Securities. These investments may be more volatile than other
types of U.S. or Foreign Government Securities.
[] Foreign Currency Exchange Transactions
The Funds that may invest in securities denominated in foreign currencies
or traded in foreign markets may engage in related foreign currency
exchange transactions to protect the value of specific portfolio positions
or in anticipation of changes in relative values of currencies in which
current or future portfolio holdings are denominated or quoted.
Foreign currency transactions involve costs and may result in losses. See
Part II of the Statement for more information.
[] Additional Information
Each Fund may purchase securities for its portfolio on a "when-issued"
basis. This means that the Fund will enter into the commitment to buy the
security before the security has been issued. The Fund's payment
obligation and the interest rate on the security are determined when the
Fund enters into the commitment. The security is typically delivered to
the Fund 15 to 120 days later. No interest accrues on the security between
the time the Fund enters into the commitment and the time the security is
delivered.
The Funds, consistent with their investment objectives, attempt to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic market
conditions and trends. The Government Securities Fund also invests to take
advantage of what are believed to be temporary disparities in the yields of
the different segments of the market for U.S. Government Securities. These
policies may result in higher turnover rates in the Fund's portfolios which
may produce higher transaction costs and a higher level of taxable capital
gains. Portfolio turnover considerations will not limit any Fund's
adviser's or subadviser's investment discretion in managing the Fund's
assets.
Although it is not possible to predict the portfolio turnover rate with
certainty, Loomis, Sayles & Company, L.P. ("Loomis Sayles"), the Fund's
subadviser expects the Strategic Income Fund's portfolio turnover rate will
usually not exceed an annual rate of 150%. A turnover rate in excess of
100% may be considered high.
Each Fund may enter into repurchase agreements, under which a Fund buys
securities from a seller, usually a bank or brokerage firm, with the
understanding that the seller will repurchase the securities at a higher
price at a later date. Such transactions afford an opportunity for the
Fund to earn a return on available cash at minimal market risk, although
the Fund may be subject to various delays and risks of loss if the seller
is unable to meet its obligation to repurchase. The staff of the SEC is
currently of the view that repurchase agreements maturing in more than
seven days are illiquid securities.
INVESTMENT RISKS
[] Fixed-Income Securities (All Funds)
The Funds invest principally in fixed-income securities. Because interest
rates vary, it is impossible to predict the income of a Fund for any
particular period. The net asset value of your shares will vary as a
result of changes in the value of the bonds and other securities in a
Fund's portfolio.
Fixed-income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. Generally, rising interest rates correlate with falling
share values. Credit risk relates to the ability of the issuer to make
payments of principal and interest. In the case of tax exempt 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 tax exempt 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, although, as a result, the yields available from
U.S. Government Securities are generally lower than the yields available
from corporate fixed-income securities.
[] Lower Rated Fixed-Income Securities (Strategic Income Fund and Bond
Income Fund)
Lower rated fixed-income securities and corporate fixed-income securities
generally provide higher yields than U.S. Government and many Foreign
Government Securities, but are subject to greater credit and market risk
than higher quality fixed-income securities. Lower rated fixed-income
securities are considered predominantly speculative with respect to the
ability of the issuer to meet principal and interest payments. Securities
of below investment grade quality are commonly known as "junk bonds."
Achievement of the investment objective of a fund investing in lower rated
fixed-income securities may be more dependent on the investment adviser's
own credit analysis than is the case for higher quality bonds. The market
for lower rated fixed-income securities may be more severely affected than
some other financial markets by economic recession or substantial interest
rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary
market may be less liquid for lower rated fixed-income securities. This
lack of liquidity at certain times may affect the valuation of these
securities and may make the valuation and sale of these securities more
difficult. During the fiscal year ended December 31, 1994, 15% of the
average month-end net assets of the Bond Income Fund was invested in fixed-
income securities rated in the rating category just below investment grade
(BB/Ba).
[] Foreign Securities (Strategic Income Fund and Bond Income Fund)
Foreign Government Securities and foreign corporate securities present
risks not associated with investments in U.S. Government or corporate
securities.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Fund may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. Because the Strategic Income Fund and the Bond Income
Fund may purchase securities denominated in foreign currencies, a change in
the value of any such currency against the U.S. dollar will result in a
change in the U.S. dollar value of the Fund's assets and the Fund's income
available for distribution.
In addition, although a Fund's income may be received or realized in
foreign currencies, a Fund will be required to compute and distribute its
income in U.S. dollars. Therefore, if the value of a currency relative to
the U.S. dollar declines after a Fund's income has been earned in that
currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the
amount of such currency required to be converted into U.S. dollars in order
to pay such expenses in U.S. dollars will be greater than the equivalent
amount in such currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate
or government issuer than about a U.S. issuer, and foreign corporate
issuers are not generally subject to accounting, auditing and financial
reporting standards and practices comparable to those in the United States.
The securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and other fees in some circumstances may be higher than in the
United States. With respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could affect the
value of investments in those countries. The receipt of interest on
foreign government securities may depend on the availability of tax or
other revenues to satisfy the issuer's obligations. A Fund may have
limited legal recourse should a foreign government be unwilling or unable
to repay the principal or interest owed.
The Strategic Income Fund will invest all or any portion of its assets in
the securities of emerging markets. Investments in emerging markets
include investments in countries whose economies or securities markets are
not yet highly developed. Special considerations associated with these
investments (in addition to the considerations regarding foreign
investments as discussed above) may include, among others, greater
political uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development assistance,
currency transfer restrictions, highly limited numbers of potential buyers
for such securities and delays and disruptions in securities settlement
procedures.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies'
activities, and include such entities as the International Bank for
Reconstruction and Development (the World Bank), the Asian Development
Bank, the European Coal and Steel Community and the Inter-American
Development Bank.
In determining whether to invest in securities of foreign issuers, the
adviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution
to shareholders.
[] Mortgage-Related Securities (All Funds)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund purchases
these assets at a premium, a faster-than-expected prepayment rate will
reduce yield to maturity, and a slower-than-expected prepayment rate will
have the opposite effect of increasing yield to maturity. If a Fund
purchases mortgage-related securities at a discount, faster-than-expected
prepayments will increase, and slower-than-expected prepayments will
reduce, yield to maturity. Prepayments, and resulting amounts available
for reinvestment by the Fund, are likely to be greater during a period of
declining interest rates and, as a result, are likely to be reinvested at
lower interest rates. Accelerated prepayments on securities purchased at a
premium may result in a loss of principal if the premium has not been fully
amortized at the time of prepayment. Although these securities will
decrease in value as a result of increases in interest rates generally,
they are likely to appreciate less than other fixed-income securities when
interest rates decline because of the risk of prepayments.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool
are paid off by the borrowers. ARMs have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or
market interest rate. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because
the interest rates are reset only periodically, changes in the interest
rate on ARMs may lag changes in prevailing market interest rates. Also,
some ARMs (or the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified period or over
the life of the security. As a result, changes in the interest rate on an
ARM may not fully reflect changes in prevailing market interest rates
during certain periods. Because of the resetting of interest rates, ARMs
are less likely than non-adjustable rate securities of comparable quality
and maturity to increase significantly in value when market interest rates
fall.
[] Asset-Backed Securities (Limited Term U.S. Government Fund)
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts
and special purpose corporations, assets such as automobile and credit card
receivables are being securitized in pass-through structures similar to
mortgage pass-through structures or in a pay-through structure similar to
the CMO structure. Generally the issuers of asset-backed bonds, notes or
pass-through certificates are special purpose entities and do not have any
significant assets other than the receivables securing such obligations.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans. Instruments backed by pools of receivables
are similar to mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the Fund will ordinarily reinvest the prepaid
amounts in securities the yields of which reflect interest rates prevailing
at the time. Therefore, the Fund's ability to maintain a portfolio which
includes high-yielding asset-backed securities will be adversely affected
to the extent that prepayments of principal must be reinvested in
securities which have lower yields than the prepaid obligations. Moreover,
prepayments of securities purchased at a premium could result in a realized
loss.
[] Collateralized Mortgage Obligations (All Funds)
A CMO is a security backed by a portfolio of mortgages or mortgage
securities held under an indenture. The underlying mortgages or mortgage
securities are issued or guaranteed by the U.S. Government or an agency or
instrumentality thereof. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests in some
or all of the interest or principal on the underlying collateral or a
combination thereof. CMOs of different classes are generally retired in
sequence as the underlying mortgage loans in the mortgage pool are repaid.
In the event of sufficient early prepayments on such mortgages, the class
or series of CMO first to mature generally will be retired prior to its
maturity. Thus, the early retirement of a particular class or series of
CMO held by the Fund would have the same effect as the prepayment of
mortgages underlying a mortgage pass-through security. CMOs may be
considered derivative securities.
[] "Stripped" Securities (Government Securities Fund and Strategic
Income Fund)
Stripped securities are usually structured with two classes that receive
different proportions of the interest and principal distribution on a pool
of U.S. or Foreign Government Securities or mortgage assets. In some
cases, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). Stripped securities commonly have greater
market volatility than other types of fixed-income securities. In the case
of stripped mortgage securities, if the underlying mortgage assets
experience greater than anticipated payments of principal, a Fund may fail
to recoup fully its investments in IOs. The staff of the SEC has indicated
that it views stripped mortgage securities as illiquid unless the
securities are issued by the U.S. Government or its agencies, are backed by
fixed-mortgages and are determined by the Board of Trustees to be liquid.
The Fund intends to abide by the staff's position. Stripped securities
may be considered derivative securities.
[] Zero Coupon Securities (All Funds except Adjustable Rate Fund); Pay-
In-Kind Securities (Strategic Income Fund)
Zero coupon securities are issued at a significant discount from face value
and pay interest only at maturity, rather than at intervals during the life
of the security. Pay-in-kind securities pay dividends or interest in the
form of additional securities of the issuer, rather than in cash. The
prices of pay-in-kind or zero coupon securities may react more strongly to
changes in interest rates than the prices of many other securities. The
Funds are required to accrue and distribute income from pay-in-kind and
zero coupon securities on a current basis, even though the Funds may not
receive the income currently in cash. Thus a Fund may have to sell other
investments to obtain cash needed to make income distributions.
[] When-Issued Securities (All Funds)
If the value of a "when-issued" security being purchased falls between the
time a Fund commits to buy it and the payment date, the Fund may sustain a
loss. The risk of this loss is in addition to the Fund's risk of loss on
the securities actually in its portfolio at the time. In addition, when
the Fund buys a security on a when-issued basis, it is subject to the risk
that market rates of interest will increase before the time the security is
delivered, with the result that the yield on the security delivered to the
Fund may be lower than the yield available on other, comparable securities
at the time of delivery. Each Fund will maintain liquid high grade assets
in a segregated account in an amount sufficient to satisfy its outstanding
obligations to buy securities on a "when-issued" basis.
[] Options and Futures (Government Securities, Strategic Income and
Limited Term U.S. Government Funds)
Except as otherwise noted, the following discussion applies to the
Government Securities Fund, the Strategic Income Fund and the Limited Term
U.S. Government Fund. The Government Securities, the Strategic Income and
the Limited Term U.S. Government Funds may engage in a variety of
transactions involving the use of options and futures with respect to U.S.
or Foreign Government Securities for purposes of hedging against changes in
interest rates. There is no assurance that these hedging strategies will
be effective. Futures are subject to potentially unlimited loss. Expenses
and losses resulting from hedging strategies will reduce the Funds' current
returns.
No Fund will engage in options and futures transactions for leverage. No
Fund will purchase or sell futures contracts or related options if as a
result the sum of the initial margin deposits on the Fund's existing
futures and related options positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Fund's assets.
As described in Part II of the Statement, over-the-counter options involve
certain special risks (including liquidity and credit risks) not
necessarily present with exchange-listed options. The staff of the SEC
takes the position that over-the-counter options and assets used to cover
such options written by a Fund are "illiquid" except in certain limited
circumstances.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets
may be subject to less detailed reporting requirements and regulatory
controls than U.S. markets. Furthermore, investments by the Strategic
Income Fund in options and futures in foreign markets are subject to many
of the same risks as are the Fund's other foreign investments. See
"Foreign Securities" above.
For further information, see "Options and Futures" in Part II of the
Statement.
[] Rule 144A Securities (Strategic Income Fund)
Rule 144A securities are privately offered securities that can be resold
only to certain qualified institutional buyers. Rule 144A securities are
treated as illiquid, unless the Fund's subadviser has determined, under
guidelines established by the trustees of New England Funds Trust I, that
the particular issue of Rule 144A securities is liquid. Investment in
illiquid securities involves the risk that the Fund may be unable to sell
such a security at the desired time.
FUND MANAGEMENT
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street, Boston,
Massachusetts 02116, a newly organized investment adviser, is the
investment adviser of the Strategic Income Fund and has entered into
subadvisory arrangements for this Fund with Loomis Sayles. Founded in
1926, Loomis Sayles, One Financial Center, Boston, Massachusetts 02116 is
one of the country's oldest and largest investment counsel firms. Daniel
Fuss, Managing Partner, Executive Vice President and Director of Loomis
Sayles and Vice President of New England Funds Trust I, has served as the
Strategic Income Fund's portfolio manager since the Fund's inception in May
1995. Mr. Fuss joined Loomis Sayles in 1976. NEFM oversees, evaluates and
monitors the investment advisory services provided to the Fund and
furnishes general business management and administration to the Fund. NEFM
has not previously served as investment adviser to a mutual fund.
The adviser of all other Funds is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Back Bay Advisors provides discretionary
investment management services to mutual funds and other institutional
investors. Principals of Back Bay Advisors began managing mutual funds in
1978 for New England Mutual Life Insurance Company ("The New England"). A
successor to a company formed in 1986, Back Bay Advisors now manages 15
mutual fund portfolios and over $6 billion of securities. Eric N.
Gutterson, Vice President of Back Bay Advisors and Vice President of each
of the Trusts, has served as the portfolio manager of the Government
Securities Fund and the Limited Term U.S. Government Fund since April 1994.
J. Scott Nicholson, Senior Vice President of Back Bay Advisors and Vice
President of the Trusts, has served as the Adjustable Rate Fund's portfolio
manager since the Fund's inception in October 1991. Catherine L. Bunting,
Senior Vice President of Back Bay Advisors and Vice President of New
England Funds Trust I, has served as the Bond Income Fund's portfolio
manager since 1989. Each of the foregoing persons has been employed by
Back Bay Advisors for at least five years.
The Strategic Income Fund pays NEFM a management fee at the annual rate of
0.65% of the first $200 million of the Fund's average daily net assets and
0.60% of such assets in excess of $200 million. NEFM pays Loomis Sayles
for providing subadvisory services to the Fund 0.35% of the first $200
million of the average daily net assets of the Fund and 0.30% of such
assets in excess of $200 million.
Under an expense deferral arrangement which NEFM and Loomis Sayles may
terminate at any time, NEFM and Loomis Sayles have agreed to waive advisory
and subadvisory fees until further notice, subject to the obligation of the
Fund to pay NEFM such fees to the extent that, the Fund's expenses fall
below the annual rate of 1.15% for Class Y Shares ; provided however in any
period, that the Fund is not obligated to pay any fees waived by NEFM and
Loomis Sayles more than two years after the end of the fiscal year in which
such fee was waived. Any expenses deferred while the voluntary waiver was
in place can never be charged to the Fund unless the Fund's expenses fall
below the 1.15% limit for Class Y Shares .
In 1994, the Government Securities Fund, the Limited Term U.S. Government
Fund and the Bond Income Fund paid Back Bay Advisors for its services as
investment adviser 0.65%, 0.63% and 0.45%, respectively, of the Fund's
average daily net assets.
The Adjustable Rate Fund pays Back Bay Advisors at the annual rate of 0.40%
of the first $200 million of the average daily net asset value of the Fund,
0.375% of the next $300 million of such assets and 0.35% of assets in
excess of $500 million. Back Bay Advisors and the Distributor have
voluntarily agreed, until further notice to the Adjustable Rate Fund, to
reduce the management and administrative services fees and, if necessary,
to bear certain expenses associated with operating the Fund, in order to
limit the Adjustable Rate Fund's expenses to an annual rate of 0.70% of the
Fund's average daily net assets for Class A shares, 1.45% for Class B
shares and 0.45% for Class Y shares.
If any of the voluntary fee reductions described above are terminated, the
prospectus of the Fund affected will be supplemented.
The general partners of each of Back Bay Advisors, Loomis Sayles, NEFM and
the Distributor are special purpose organizations that are wholly-owned
subsidiaries of NEIC. NEIC's sole general partner, New England Investment
Companies, Inc. is a wholly-owned subsidiary of The New England.
In placing portfolio transactions for the Funds, Back Bay Advisors, or
Loomis Sayles in the case of the Strategic Income Fund, seeks the most
favorable price and execution available. Subject to this policy, Back Bay
Advisors may consider sales of shares of the Trusts as a factor in the
selection of broker dealers.
In addition to selecting and reviewing the investments of the respective
Funds, Back Bay Advisors, or Loomis Sayles in the case of the Strategic
Income Fund, provides executive and other personnel for the management of
the Trusts. Each Trust's Board of Trustees supervises the affairs of the
Trust as conducted by Back Bay Advisors or Loomis Sayles in the case of the
Strategic Income Fund.
Under agreements between Back Bay Advisors and, in the case of the
Strategic Income Fund, NEFM and either the Distributor or New England
Securities Corporation ("New England Securities"), an affiliate of the
Distributor, Back Bay Advisors or NEFM pays the Distributor or New England
Securities to provide certain administrative services to all of the Funds
except the Adjustable Rate Fund. The Distributor provides the Adjustable
Rate Fund with office space, facilities and equipment, services of
executive and other personnel and certain administrative services, all
under an Administrative Services Agreement with the Fund. Under this
agreement, the Fund pays the Distributor a fee at the annual rate of 0.15%
of the first $200 million of the Fund's average daily net assets, 0.135% of
the next $300 million of such assets and 0.12% of such assets in excess of
$500 million (before any voluntary fee waiver). In addition, pursuant to
rules of the SEC, the Funds (except the Adjustable Rate Fund) may pay
brokerage commissions to New England Securities on purchases and sales of
securities for the Funds.
In addition to the management fee paid to Back Bay Advisors, and NEFM in
the case of the Strategic Income Fund, and the fees paid to the
Distributor, each Fund pays all expenses not borne by the Fund's adviser,
subadviser or the Distributor, including, but not limited to, the charges
and expenses of the Fund's custodian and transfer agent, independent
auditors and legal counsel, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees
and expenses for registration or qualification of its shares under the
federal or state securities laws, all expenses of shareholders' and
trustees' meetings and of preparing, printing and mailing reports to
shareholders and the compensation of trustees who are not directors,
officers or employees of Back Bay Advisors, NEFM or their affiliates, other
than affiliated registered investment companies.
All expenses of the Funds are borne by the Class A, Class B, Class C and
Class Y shares on a pro rata basis, except for the administrative services
fee (which applies only to the Adjustable Rate Fund and is charged at a
separate rate to each class), 12b-1 fees (which are borne only by Class A,
Class B and Class C are charged separately to those classes) and transfer
agency fees and expenses of printing and mailing prospectuses to
shareholders are separately allocated to each class.
MINIMUM INVESTMENT
Class Y shares of the Funds may be purchased by endowments and foundations.
The minimum initial investment is $1 million for these entities and
$100,000 is the minimum for each subsequent investment. Class Y shares may
also be purchased by plan sponsors of 401(a), 401(k), 457 or 403(b) plans
("Retirement Plans") that have total investment assets in these plans of at
least $10 million. Plan sponsors' investment assets in multiple Retirement
Plans can be aggregated for purposes of meeting this minimum. Class Y
shares may also be purchased by any separate account of The New England or
of any other insurance company affiliated with The New England ("Separate
Accounts"). There is no minimum initial or subsequent investment amount
for these Retirement Plans or Separate Accounts. Investments in the Funds
may also be made by certain individual retirement accounts if the amounts
invested represent rollover distributions from investments by any of the
foregoing plans of amounts invested in the Funds.
WAYS TO BUY FUND SHARES
A shareholder may purchase Class Y shares for cash on any business day by
the two methods described below:
BY WIRE: Prior to an initial investment, obtain an account number and wire
transfer instructions by calling 1-800-225-5478 between 8:00 a.m. and 6:00
p.m. (Eastern time). All funds should be transmitted to State Street Bank
and Trust Company, ABA #011000028, DDA #99011538 Credit [Fund Name] Class Y
shares, Shareholder Name, and Shareholder Account Number.
BY MAIL: For an initial investment, complete the attached application and
return it with a check payable to New England Funds, L.P. and mailed to New
England Funds, L.P., P.O. Box 8551, Boston, MA 02266-8551. Proceeds of
redemptions of Fund shares purchased by check may not be available for up
to ten days after the purchase date.
Class Y shares may also be purchased by exchanging securities on deposit
with a custodian acceptable to a Fund's adviser or by a combination of such
securities and cash. Purchase of shares of the Funds in exchange for
securities is subject in each case to the determination by a Fund's adviser
or subadviser that the securities to be exchanged are acceptable for
purchase by the Fund. Securities accepted by a Fund's adviser or
subadviser in exchange for Fund shares will be valued in the same manner as
the Fund's assets (generally the last quoted sales price), as described
below under "Determination of Net Asset Value," as of the time of the
Fund's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the
market price of accepted securities at the time of valuation become the
property of the Funds and must be delivered to the Funds upon receipt by
the investor from the issuer. A gain or loss for federal income tax
purposes would be realized upon the exchange by an investor that is subject
to federal income taxation, depending upon the investor's basis in the
securities tendered. A shareholder who wishes to purchase shares by
exchanging securities on deposit with a custodian and acceptable to a
Fund's adviser or subadviser should obtain instructions by calling 1-800-
225-5478.
A Fund's adviser or subadviser will not approve the acceptance of
securities in exchange for shares of a Fund it advises unless (1) a Fund's
adviser or subadviser, in its sole discretion, believes the securities are
appropriate investments for the Fund; (2) the investor represents and
agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933,
or otherwise; (3) the securities are eligible to be acquired under the
Fund's investment policies and restrictions; and (4) the securities have a
value which is readily ascertainable (not established by evaluation
procedures alone) as evidenced by a listing on the New York Stock Exchange,
the American Stock Exchange, NASDAQ or the principal securities exchange of
countries in which the Fund may invest. No investor owning 5% or more of
the Fund's shares may purchase additional Fund shares by exchange of
securities (other than shares of other funds in the New England Funds).
General
The purchase price of shares of each Fund is the net asset value next
determined after a purchase order is received in good order by New England
Funds, L.P. For purposes of calculating the purchase price of Fund shares,
a purchase order is considered received by the Fund on the day that it is
"in good order" unless it is rejected by the Fund. For a purchase order to
be in "good order" on a particular day, the investor's securities must be
placed on deposit at a depository acceptable to a Fund's adviser or, in the
case of cash investments, Federal funds must be wired to the Fund between
9:00 a.m. and 4:00 p.m. (Eastern Time) or a check for the purchase price of
the shares, accompanied by a completed application, must have been received
by New England Funds, L.P. before 4:00 p.m. (Eastern Time) on that day. In
the case of an order being paid for by exchange of other securities, the
deadline for transferring securities to a depository acceptable to the
Fund's adviser is 4:00 p.m. (Eastern Time). Orders received after 4:00
p.m. (Eastern Time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to
three decimal places. The shareholder will receive a statement of Fund
shares owned following each transaction. Investors will not receive
certificates representing Class Y shares. The Trusts and the Distributor
reserve the right at any time to reject a purchase order.
EXCHANGING AMONG NEW ENGLAND FUNDS
A shareholder may exchange investments from the Class Y shares of one
series of the Trusts to the Class Y shares of another series of the Trusts
or to the Class A shares of New England Cash Management Trust or New
England Tax Exempt Money Market Trust (the "Money Market Funds").
WAYS TO SELL FUND SHARES
BY TELEPHONE: A shareholder may redeem shares of the Funds on any business
day in cash by the two methods described below:
1. Mailed to your address of record - Shares may be redeemed by calling 1-
800-225-5478.
2. Wired to your bank account - If you have previously selected the
telephone redemption privilege, shares may be redeemed by calling 1-800-
225-5478 between 8 a.m. and 6 p.m. (Eastern Time). The proceeds generally
will be wired on the next business day to the bank account previously
designated on a shareholder's account application. A wire fee (currently
$5.00) will be deducted from the proceeds. A telephone redemption request
must be received by the close of regular trading on the New York Stock
Exchange. If the request is received after that time or on a day when the
Exchange is not open for business, the request will be processed on the
next business day.
New England Funds, L.P. will employ reasonable procedures to confirm that a
shareholder's telephone instructions are genuine, and, if it does not, it
may be liable for any losses due to unauthorized or fraudulent
instructions. New England Funds, L.P. will require a form of
identification prior to acting upon telephone instructions, will provide
shareholders with written confirmations of such transactions and will
record a shareholders' instructions.
BY MAIL: A shareholder may also redeem shares at their net asset value
next determined after receipt of the request in good order by sending a
written request (including any necessary special documentation) to New
England Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, the account number, the
exact name in which the shares are registered and the number of shares or
the dollar amount to be redeemed and must be signed exactly in accordance
with the form of registration. Persons acting in a fiduciary capacity, or
on behalf of a corporation, partnership or trust, must specify the capacity
in which they are acting. The signature must be guaranteed by an eligible
institution in accordance with procedures established by New England Funds,
L.P. Signature guarantees by notaries public are not acceptable.
General
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income
Fund, determines, in its sole discretion, that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of readily marketable securities
held by the Fund in lieu of cash. Securities used to redeem Fund shares in
kind will be valued in accordance with the Funds' procedures for valuation
described under "Determination of Net Asset Value." Securities distributed
by a Fund in kind will be selected by Back Bay Advisors, or Loomis Sayles
in the case of the Strategic Income Fund, in light of the Fund's objective
and will not generally represent a pro rata distribution of each security
held in the Fund's portfolio. Investors may incur brokerage charges on the
sale of any such securities so received in payment of redemptions. The
Funds' right to pay redemptions in kind is limited by an election made by
the Funds under Rule 18f-1 under the Investment Company Act of 1940. See
Part II of the Statement.
Payment on redemption will be made as promptly as possible and in any event
within seven days after a written request for redemption is received by the
Fund in good order. The Trusts may suspend the right of redemption and may
postpone payment for more than seven days when the Exchange is closed for
other than weekends or holidays, or if permitted by the rules of the SEC
during periods when trading on the Exchange is restricted or during an
emergency which makes it impracticable for the Fund to dispose of its
securities or to determine fairly the value of the net assets of the Fund,
or during any other period permitted by the SEC for the protection of
investors.
DETERMINATION OF NET ASSET VALUE
Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income
Fund, under the supervision of each Trust's board of trustees, determines
the value of the total net assets of each Fund as of the close of regular
trading (ordinarily 4:00 p.m. Eastern time) each day the Exchange is open.
The Boards of Trustees have authorized Back Bay Advisors, or Loomis Sayles
in the case of the Strategic Income Fund, to delegate certain price
determination functions to pricing services or facilities selected by Back
Bay Advisors, or Loomis Sayles in the case of the Strategic Income Fund.
Securities for which market quotations are readily available are generally
valued at market value on the basis of the market quotations. Options,
interest rate futures and options thereon which are traded on exchanges are
valued at their last sale price as of the close of the exchange. All money
market instruments with a maturity of more than 60 days are valued at
current market value. The value of debt securities with remaining
maturities of 60 days or less shall be their amortized cost value, unless
conditions indicate otherwise. In all other cases, the value of a Fund's
assets is determined in good faith by Back Bay Advisors, or Loomis Sayles
in the case of the Strategic Income Fund, or a pricing service selected by
Back Bay Advisor or Loomis Sayles, under the supervision of the boards of
trustees.
The net asset value per share of each class is determined by dividing the
value of each class's net assets (the current U.S. dollar value, in the
case of securities prinicpally traded outside the United States) plus any
cash and other assets (including dividends and interest receivable but not
collected) less all liabilities (including accrued expenses) by the number
of shares of such class outstanding. The public offering price of the
Fund's Class A shares is determined by adding the applicable sales charge
to the net asset value. The public offering price of Class B, C and Y
shares is the net asset value per share.
DIVIDENDS
Each Fund declares dividends and pays them monthly. Each Fund pays as
dividends substantially all of its net investment income, including
dividends and interest, pays short-term capital gains either periodically
throughout the year or once annually and distributes annually all long-term
realized capital gains, if any, after applying any available capital loss
carryovers. The trustees of the Trusts may adopt a different schedule as
long as payments are made at least annually. If you intend to purchase
shares of a Fund shortly before it declares a dividend you should be aware
that a portion of the purchase price may be returned to you as a taxable
dividend.
The Government Securities and Limited Term U.S. Government Funds will each
pay monthly income distributions consisting of ordinary income and short-
term capital gains.
A shareholder has the option to reinvest all distributions in additional
Class Y shares of the Fund in which it has invested, to receive
distributions in cash or to receive distributions from dividends and
interest in cash while reinvesting distributions from capital gains in
additional Class Y shares of the Fund.
FEDERAL INCOME TAXES
[] In General
Each Fund intends to qualify as a regulated investment company and thus
does not expect to pay any federal income tax on investment income and
capital gains distributed. Unless a shareholder is a tax exempt entity,
its distributions derived from a Fund's short-term capital gains and
ordinary income are taxable as ordinary income. Distributions derived from
a Fund's long-term capital gains ("capital gains distributions"), if
designated as such by a Fund, are taxable to a shareholder as long-term
capital gains, regardless of how long it has owned shares in the Fund.
Both dividends and capital gains distributions are taxable whether
distributed to a shareholder in cash or additional shares.
A Fund's transactions in foreign currency-dominated debt securities and its
hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a part or all of a
Fund's income distributions to constitute returns of capital for tax
purposes or require the Fund to make distributions exceeding book income to
avoid federal income tax liability.
Dividends derived from interest on U.S. Government securities may be exempt
form state and local taxes.
The Trusts intend to advise shareholders of the proportion of each Fund's
dividends that are derived from such interest. Before investing in any of
the Funds, shareholders should check the consequences of your local and
state tax laws, which may be different from the federal tax consequences,
and the consequences for any retirement plan offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year end virtually all the Fund's ordinary income earned during that
calendar year, and virtually all of the capital gain net income the Fund
realized in the 12-month period ending December 31 but has not previously
distributed. If declared in December to shareholders of record in that
month, and paid the following January, these distributions will be
considered for federal income tax purposes to have been received by
shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital
gains distributions it pays to a shareholder if that shareholder does not
provide a correct, certified taxpayer identification number, if the Fund is
notified that the shareholder has underreported income in the past or if
the shareholder fails to certify to the Fund that it is not subject to such
withholding. In addition, each Fund will be required to withhold 31% of
the gross proceeds of Fund shares redeemed if the shareholder has not
provided a correct, certified taxpayer identification number. These back-
up withholding rules will not apply to tax-exempt institutions, so long as
the Fund is furnished with an appropriate certification.
Annually, shareholders will receive a Form 1099 from the Funds to assist
them in reporting the prior calendar year's distributions on their federal
income tax returns. Shareholders should consult their tax advisers about
any state or local taxes that may apply to such distributions.
Shareholders should be sure to keep the Form 1099 as a permanent records.
A fee may be charged for any duplicate information requested.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund. Shareholders should consult a competent tax adviser
as to the effect of an investment in a Fund on your particular federal,
state and local tax situations.
PERFORMANCE INFORMATION
The Funds may include total return information in advertisements or other
written sales material. The Funds will show their average annual total
return for the one-, five- and ten-year periods (or the life of the
particular Fund, if shorter) through the end of the most recent calendar
quarter. Total return is measured by comparing the value of an investment
in a Fund at the beginning of the relevant period to the value of the
investment at the end of the period (assuming automatic reinvestment of all
dividends and capital gains distributions). The Funds may also show total
return over other periods.
Each Class may also include its yield, accompanied by its total return, in
advertising and other written material. Yield will be computed in
accordance with the SEC's standardized formula by dividing the adjusted net
investment income per share earned during a recent 30-day period by the
maximum offering price of a Class share (reduced by any earned income
expected to be declared shortly as a dividend) on the last day of the
period.
Each Class may also present one or more distribution rates in its sales
literature. These rates will be determined by annualizing the Class's
distributions from net investment income and net short-term capital gains
over a recent 12-month, three-month or 30-day period and dividing that
amount by the maximum offering price (Class A shares) or the net asset
value on the last day of such period. All performance information is based
on past performance and does not predict future performance. See Part II
of the Statement for more detail. As a result of their lower operating
expenses, Class Y shares of each Fund can be expected to achieve a higher
investment return than the same Fund's Class A, Class B and Class C shares.
For Class A shares, if the sales charge is excluded in calculating the
total return, yield or distribution rate, the rate or rates will be higher.
All performance information is based on past results and is not an
indication of likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[]The transfer and dividend paying agent for the Funds is New England
Funds, L.P., 399 Boylston Street, Boston, MA 02116. New England Funds,
L.P. has subcontracted certain responsibilities to State Street Bank and
Trust Company, 225 Franklin Street, Boston, MA 02110.
[]New England Funds Trust II was organized in 1931 as a Massachusetts
business trust and is authorized to issue an unlimited number of full
and fractional shares in multiple series. The Limited Term U.S.
Government Fund commended investment operations in 1989. The Adjustable
Rate Fund commenced operations in 1991.
[]New England Funds Trust I was organized in 1985 as a Massachusetts
business trust and is authorized to issue an unlimited number of full
and fractional shares in multiple series. The Government Securities
Fund represents the original series of shares of shares of New England
Funds Trust I. The Bond Income Fund was organized prior to 1985 and
conducted investment operations as a separate corporation until its
reorganization as series of New England Funds Trust I in January 1987.
The Strategic Income Fund commenced operations in 1995.
[]An investor in a Fund acquires freely transferable shares of beneficial
interest that entitle the investor to receive dividends as determined by
the Trust's trustees and to cast a vote for each share owned at
shareholder meetings. Shares of each series of the Trust vote
separately from shares of other series of the Trust, except as otherwise
required by law. Shares of each class of a Fund vote together, except
that only Class A, Class B and Class C shares may vote with respect to
the Rule 12b-1 plans that apply to those classes. No Rule 12b-1 plan
applies to the Class Y shares of any Fund.
[]Class A, Class B and Class C shares are identical to Class Y shares,
except that Class A and Class B shares are subject to a sales load or
CDSC, Class A, B and C shares bear a service fee at the annual rate of
.25% of average net assets (and in the case of Class B and Class C
shares a .75% distribution fee; also Class A shares of the Limited Term
U.S. Government Fund bear an additional 0.10% distribution fee) and have
separate voting rights in certain circumstances. Class Y bears its own
transfer agency and prospectus printing costs. The minimum investment
in Class A, Class B and Class C shares is $2,500 (but lower minimums
apply to purchases under certain special programs).
Sales charges for Class A and Class B shares are as follows:
Class A Shares
The sales charge imposed on purchases of Class A shares of the
Government Securities and Bond Income Funds is 4.50% of investments less
than $100,000, 3.50% on investments of $100,000 or more but less than
$250,000, 2.50% on investments of $250,000 or more but less than
$500,000 and 2.00% on investments more than $500,000 but less than
$1,000,000. No sales charge applies at the time of purchase to
purchases of $1,000,000 or more, but certain redemptions by such
purchasers within one year after purchase are subject to a contingent
deferred sales charge ("CDSC") of 1%.
The sales charge imposed on purchases of Class A shares of the Limited
Term U.S. Government and Adjustable Rate Funds is 3.00% of investments
less than $100,000, 2.50% on investments of $100,000 or more but less
than $250,000, 2.00% on investments more than $250,000 but less than
$500,000 and 1.25% on investments more than $500,000 but less than
$1,000,000. No sales charge applies at the time of purchase to
purchases of $1,000,000 or more, but certain redemptions by such
purchasers within one year after purchase are subject to a CDSC of 1%.
Also, the Class A shares of the Limited Term U.S. Government Fund are
subject to a 0.10% annual distribution fee.
The sales charge imposed on purchases of Class A Shares of the
Adjustable Rate Fund is 1.00% on investments of less than $1,000,000.
No sales charge applies at the time of purchase to purchases of
$1,000,000 or more, but certain redemptions by such purchasers within
one year after purchase are subject to a CDSC.
Class B Shares
Class B shares of the Funds are offered at net asset value, without an
initial sales charge, subject to a 0.75% annual distribution fee for 8
years (at which time they automatically convert to Class A shares) and
to a CDSC if they are redeemed within 5 years of purchase. The CDSC is
4% on redemptions made within the first year of investment, 3% in the
second and third years, 2% in the fourth year and 1% in the fifth year.
Class C Shares
Class C shares are offered at net asset value, without an initial sales
change or CDSC; are subject to a 0.25% annual service fee and a 0.75%
annual distribution fee; and do not convert into another class.
Class A shares of a Fund may be purchased without paying a sales charge
by exchanging (i) Class A shares of any other series of the Trusts or
(ii) Class A shares of the Money Market Funds acquired through exchanges
from any of the series of the Trusts. Class A shares of New England
Intermediate Term Tax Free Funds of California and New York (and shares
of the Money Market Funds acquired through exchanges of such shares) may
be exchanged for Class A shares of the Funds at net asset value only if
they have been held for at least six months; otherwise, sales charges
apply to the exchange. If you exchange your Class A shares of New
England Adjustable Rate U.S. Government Fund (the Adjustable Rate Fund)
for shares of another fund that has a higher sales charge , you will pay
the difference between any sales charge you have already paid on your
Adjustable Rate Fund shares and the higher sales charge of the Fund into
which you are exchanging. In addition, shares redeemed from any Money
Market Fund that were not acquired through exchanges from any series of
the Trusts may be redeemed and the proceeds applied directly to the
purchase of Class A shares of the Funds at the applicable sales charge.
Class B shares of a Fund may be purchased by exchanging Class B shares
of any other series of the Trusts, Class B shares of the Money Market
Funds or Class A shares of the Money Market Funds (which have not been
subject to a sales charge). Such exchanges will be made at the next
determined net asset value of the shares. The holding period for the
purposes of timing the conversion to Class A shares and determining the
CDSC will continue to run after the exchange to the Class B shares of
series of the Trusts. If the exchange is made to the Class B shares of
a Money Market Fund, then the holding period will stop and resume only
when an exchange is made back into Class B shares of a series of the
Trusts.
Class C shares of a Fund may be purchased by exchanging Class C shares
of any other series of the Trusts which offer Class C shares or Class A
shares of the Money Market Funds.
All exchanges of Class A, B and C shares must be for a minimum of $500
or the total net asset value of the shareholder's account, whichever is
less, except that, under an Automatic Exchange Privilege, the minimum is
$50.
Class A, Class B and Class C Fund shares may be purchased by mail, by
wire transfer, by automatic investment plan, by electronic purchase
through Automated Clearing House (ACH) and by exchange as described
above. Class A, Class B and Class C shares may be redeemed by mail and
by telephone. Class A shares and Class C shares may also be redeemed
under a systematic withdrawal program.
[]The Trusts generally do not hold shareholder meetings and will do so
only when required by law. Shareholders may remove the trustees of the
Trusts from office by votes cast at a shareholder meeting or by written
consent.
[]The Distributor has entered into a selling agreement with investment
dealers, including a broker-dealer that is an affiliate of the
Distributor, for the sale of the Funds' Class Y Shares. The Distributor
may at its expense pay an amount not to exceed 0.50% of the amount
invested to dealers who have selling agreements with the Distributor.
Registered representatives of the affiliated broker-dealer are also
employees of New England Investment Associates, Inc. ("NEIA"), an
indirect, wholly owned subsidiary of NEIC. NEIA may receive
compensation with respect to certain sales of each Fund's Class Y shares
from Back Bay Advisors.
[]The Funds' annual reports contain additional performance information and
will be made available upon request and without charge.
[]The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded. See Part II of the Statement
for more details.
[]Each Trust offers only its own Funds' shares for sale, but it is
possible that a Trust might become liable for any misstatements in this
prospectus that relate to the other Trust. The trustees of each Trust
have considered this possible liability and approved the use of this
combined prospectus for Funds of both Trusts.
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. bond ratings:
Aaa, Aa, A -- Bonds which are rated AAA or Aa are judged to be of high
quality by all standards and are generally known as high grade bonds.
Bonds rated Aa are rated lower than Aaa securities because margins of
protection may not be as large as in the latter or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities. Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well secured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Description of Standard & Poor's Corporation bond ratings:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity
to pay interest and repay principal and differ from the highest rated
issues only in small degree. Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions
than bonds in high rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
