<PAGE>
FOR GENERAL INFORMATION ON THE FUNDS OR ANY OF THEIR SERVICES AND FOR ASSIS-
TANCE IN OPENING AN ACCOUNT, CONTACT YOUR INVESTMENT DEALER OR CALL THE DIS-
TRIBUTOR TOLL FREE AT 1-800-225-5478.
[LOGO OF NEW ENGLAND FUNDS WHERE THE BEST MINDS MEET APPEARS HERE]
- --------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1996
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund, New England Star Advisers Fund and
New England Value Fund, series of New England Funds Trust I, and New England
Growth Opportunities Fund, a series of New England Funds Trust II, are separate
mutual funds (the "Funds" and each a "Fund"). New England Funds Trust I and New
England Funds Trust II are referred to in this prospectus as the "Trusts."
Each Fund offers three classes of shares to the general public (Classes A, B
and C), except as described in the next paragraph. The offering price is based
on the net asset value per share next determined after an order is received.
Class A share purchases generally involve a sales charge at the time of pur-
chase. No initial sales charge applies to Class B share purchases. A contingent
deferred sales charge (a "CDSC"), however, is imposed upon certain redemptions
of Class B shares. Class B shares automatically convert to Class A shares eight
years after purchase. No initial sales charge or CDSC applies to purchases or
redemptions of Class C shares, which do not have a conversion feature. Class B
shares and Class C shares bear higher annual 12b-1 fees than Class A shares.
See "Buying Fund Shares -- Sales Charges." Through a separate prospectus, New
England Capital Growth Fund, New England Balanced Fund, New England Interna-
tional Equity Fund, New England Star Advisers Fund, New England Value Fund and
New England Growth Opportunities Fund also offer an additional class of shares,
Class Y shares, to certain institutional investors. To obtain more information
about Class Y shares, please call New England Funds, L.P. (the "Distributor")
toll-free at 1-800-225-5478.
New England Growth Fund currently offers only Class A shares, but may at a
later date offer Class B and Class C shares to the general public and Class Y
shares to certain institutional investors. If and when New England Growth Fund
offers such additional classes of shares for sale, the Fund will supplement its
prospectus.
This prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement
of additional information in two parts (the "Statement") about the Funds dated
May 1, 1996 has been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England Funds, L.P., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at 1-
800-225-5478. The Statement contains more detailed information about the Funds
and is incorporated into this prospectus by reference.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating
3 Financial Highlights expenses.
Historical information on the
Funds' performance.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
12 Investment Objectives The investment goal for each
12 New England Investment Companies and Fund.
the Funds' Advisers and Subadvisers
13 How the Funds Pursue Their Objectives
13 Fund Investments
- --------------------------------------------------------------------------------
17 INVESTMENT RISKS It is important to understand
the risks inherent in a Fund
before you invest.
- --------------------------------------------------------------------------------
24 FUND MANAGEMENT
- --------------------------------------------------------------------------------
BUYING FUND SHARES
28 Minimum Investment Everything you need to know to
28 6 Ways to Buy Fund Shares open and add to a New England
. Through your investment Funds account.
dealer
. By mail
. By wire transfer
. By Investment Builder
. By electronic purchase
through ACH
. By exchange from another
New England Fund
29 Sales Charges
32 Reduced Sales Charges (Class A Shares Only)
- --------------------------------------------------------------------------------
OWNING FUND SHARES
New England Funds offers three
34 Exchanging Among New England Funds convenient ways to exchange
35 Fund Dividend Payments Fund shares.
- --------------------------------------------------------------------------------
SELLING FUND SHARES
36 4 Ways to Sell Fund Shares How to withdraw money or close
. Through your investment your account.
dealer
. By telephone
. By mail
. By Systematic Withdrawal
Plan
37 Repurchase Option (Class A Shares Only)
An opportunity to reinvest your
redemption proceeds within 120
days for no sales charge.
- --------------------------------------------------------------------------------
FUND DETAILS
38 How Fund Share Price is Determined
39 Income Tax Considerations Additional information you may
39 The Funds' Expenses find important.
40 Performance Criteria
41 Additional Facts About the Funds
<PAGE>
Fund Expenses and Financial Information
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
the Funds and estimated annual expenses for each class of the Funds' shares.
The Example on the following page shows the cumulative expenses attributable to
a hypothetical $1,000 investment in each class of shares of the Funds for the
periods specified.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
ALL FUNDS
(EXECPT NEW ENGLAND
GROWTH FUND)
-----------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase (as
a percentage of offering price)(1)(2)................. 5.75% None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)(2)........................... (3) 4.00% None
<CAPTION>
NEW ENGLAND
GROWTH FUND
-----------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase (as
a percentage of offering price)(1)(2)................. 6.50% None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)(2)........................... (3) 4.00% None
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying
Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any por-
tion of certain purchases of Class A shares greater than $1,000,000 re-
deemed within 1 year after purchase, but not to any other purchases or re-
demptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND
------------------------ ------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees................ 0.75% 0.75% 0.75% 0.74% 0.74% 0.74%
12b-1 Fees..................... 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses................. 0.61% 0.61% 0.61% 0.37% 0.37% 0.37%
Total Fund Operating Expenses.. 1.61% 2.36% 2.36% 1.36% 2.11% 2.11%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
INTERNATIONAL EQUITY FUND***
------------------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Management Fees (after voluntary fee
waiver and expense reduction)**......... 0.81% 0.81% 0.81%
12b-1 Fees............................... 0.25% 1.00%* 1.00%*
Other Expenses........................... 0.69% 0.69% 0.69%
Total Fund Operating Expenses (after
voluntary fee waiver and expense
reduction)**............................ 1.75% 2.50% 2.50%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STAR ADVISERS FUND VALUE FUND
------------------------ ------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees................ 1.05% 1.05% 1.05% 0.74% 0.74% 0.74%
12b-1 Fees..................... 0.25% 1.00%* 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses................. 0.52% 0.52% 0.52% 0.38% 0.38% 0.38%
Total Fund Operating Expenses.. 1.82% 2.57% 2.57% 1.37% 2.12% 2.12%
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH NEW ENGLAND
OPPORTUNITIES FUND*** GROWTH FUND
------------------------ -----------
CLASS A CLASS B CLASS C CLASS A
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees........................... 0.70% 0.70% 0.70% 0.68%
12b-1 Fees................................ 0.25% 1.00%* 1.00%* 0.25%
Other Expenses............................ 0.46% 0.46% 0.46% 0.27%
Total Fund Operating Expenses............. 1.41% 2.16% 2.16% 1.20%
</TABLE>
* Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
** Without the voluntary fee waiver and expense reduction by the Fund's advis-
er, Management Fees would be 0.89% for all classes and Total Fund Operating
Expenses would be 1.83% for Class A shares, 2.58% for Class B shares and
2.58% for Class C shares. These voluntary limitations can be terminated by
the Fund's adviser at any time. See "Fund Management."
*** The expense information contained in this table and its footnotes for New
England International Equity Fund and New England Growth Opportunities Fund
has been restated to reflect fees and expenses currently in effect for
those Funds.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of ac-
tual or expected Fund performance or expenses, both of which may be more or
less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND
------------------------- -------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year...................... $ 73 $ 64 $ 24 $ 24 $ 71 $ 61 $ 21 $ 21
3 years..................... $105 $104 $ 74 $ 74 $ 98 $ 96 $ 66 $ 66
5 years..................... $140 $136 $126 $126 $128 $123 $113 $113
10 years*................... $238 $251 $251 $270 $212 $225 $225 $244
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
INTERNATIONAL EQUITY FUND
-------------------------
CLASS A CLASS B CLASS C
------- --------- -------
<S> <C> <C> <C> <C>
(1) (2)
1 year................................................ $ 74 $ 65 $ 25 $ 25
3 years............................................... $109 $108 $ 78 $ 78
5 years............................................... $147 $143 $133 $133
10 years*............................................. $252 $265 $265 $284
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND
STAR ADVISERS FUND VALUE FUND
------------------------- -------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2)
1 year...................... $ 75 $ 66 $ 26 $ 26 $ 71 $ 62 $ 22 $ 22
3 years..................... $111 $110 $ 80 $ 80 $ 98 $ 96 $ 66 $ 66
5 years..................... $150 $147 $137 $137 $128 $124 $114 $114
10 years*................... $259 $272 $272 $290 $213 $226 $226 $245
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH NEW ENGLAND
OPPORTUNITIES FUND GROWTH FUND
------------------------- -----------
CLASS A CLASS B CLASS C CLASS A
------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
(1) (2)
1 year.................................... $ 71 $ 62 $ 22 $ 22 $ 76
3 years................................... $100 $ 98 $ 68 $ 68 $101
5 years................................... $130 $126 $116 $116 $127
10 years*................................. $217 $230 $230 $249 $201
</TABLE>
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years 9
and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' fees and other expenses,
please see "Fund Management," "The Funds' Expenses" and "Additional Facts About
the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
2
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A, B and C shares of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 3 through 11 have been included in
financial statements for the Funds. The financial statements for the Class A, B
and C shares of New England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund, New England Star Advisers Fund and New En-
gland Value Fund and the financial statements for the Class A shares of New En-
gland Growth Fund (which had only one class of shares outstanding through 1995)
have been examined by Price Waterhouse LLP, independent accountants. The finan-
cial statements for New England Growth Opportunities Fund's Class A, B and C
shares 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 Part II of the
Statement. Each Fund's annual report contains additional performance informa-
tion and is available upon request and without charge.
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------- ------------------------------ -------------------
YEAR ENDED
AUGUST 3(A) YEAR ENDED DECEMBER 31, SEPT. 13(A) DEC. 31, YEAR
THROUGH -------------------------- THROUGH ---------------- ENDED
DEC. 31, DEC. 31, DEC. 31,
1992 1993 1994 1995 1993 1994 1995 1995(A)
----------- ------- ------- -------- ----------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 12.50 $ 14.23 $ 15.27 $ 15.02 $14.79 $ 15.24 $ 14.89 $14.89
------- ------- ------- -------- ------ ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss)................. 0.02 0.00 (0.08) (0.11)(e) 0.00 (0.08) (0.16)(e) (0.09)(e)
Net gain (loss) on
investments (both
realized and
unrealized)............ 1.84 1.12 (0.17) 4.74 0.53 (0.27) 4.60 4.52
------- ------- ------- -------- ------ ------- ------- ------
Total income (loss) from
investment operations.. 1.86 1.12 (0.25) 4.63 0.53 (0.35) 4.44 4.43
------- ------- ------- -------- ------ ------- ------- ------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net
realized capital
gains)................. (0.11) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24) (1.24)
------- ------- ------- -------- ------ ------- ------- ------
Total distributions..... (0.13) (0.08) 0.00 (1.24) (0.08) 0.00 (1.24) (1.24)
------- ------- ------- -------- ------ ------- ------- ------
Net asset value, end of
period................. $ 14.23 $ 15.27 $ 15.02 $ 18.41 $15.24 $ 14.89 $ 18.09 $18.08
------- ------- ------- -------- ------ ------- ------- ------
Total return (%) (c).... 14.9 7.9 (1.6) 30.7 3.6 (2.3) 29.7 29.7
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000)............. $34,772 $98,735 $95,803 $123,504 $6,748 $15,390 $26,234 $ 354
Ratio of operating ex-
penses to average net
assets (%) (d)......... 1.00(b) 1.23 1.63 1.61 2.29(b) 2.38 2.36 2.36
Ratio of net investment
income (loss) to aver-
age net assets (%)..... 0.74(b) (0.03) (0.45) (0.67) (1.15)(b) (1.20) (1.42) (1.42)
Portfolio turnover rate
(%).................... 15 77 82 69 77 82 69 69
</TABLE>
(a) The Fund commenced operations on August 3, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on January
3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations in effect from August 3, 1992 through
September 30, 1993 would have been: (%)
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------
8/3/92 - YEAR ENDED 9/13/93 -
12/31/92 12/31/93 12/31/93
-------- ---------- ---------
<S> <C> <C>
2.20(b) 1.58 2.97(b)
</TABLE>
(e) Per share net investment income (loss) does not reflect current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
3
<PAGE>
NEW ENGLAND BALANCED FUND (a)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 10.97 $ 10.30 $ 8.94 $ 9.50 $ 9.47 $ 8.11 $ 10.15 $ 11.16 $ 12.13 $ 11.27
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income......... 0.34 0.23 0.39 0.34 0.35 0.30 0.30 0.31 0.33 0.42
Net gains or
losses on
investments
(both realized
and
unrealized).... 1.87 (0.11) 0.50 0.65 (1.34) 2.05 1.10 1.26 (0.65) 2.49
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total income
(loss) from
investment
operations..... 2.21 0.12 0.89 0.99 (0.99) 2.35 1.40 1.57 (0.32) 2.91
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
LESS
DISTRIBUTIONS
Distributions
(from net
investment
income)........ (0.37) (0.39) (0.33) (0.41) (0.35) (0.30) (0.30) (0.31) (0.33) (0.40)
Distributions
(from net
realized
capital gains). (2.51) (1.09) 0.00 (0.61) 0.00 0.00 (0.09) (0.29) (0.21) (0.64)
Distributions
(from paid-in
capital)....... 0.00 0.00 0.00 0.00 (0.02) (0.01) 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total
distributions.. (2.88) (1.48) (0.33) (1.02) (0.37) (0.31) (0.39) (0.60) (0.54) (1.04)
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Net asset value
end of period.. $ 10.30 $ 8.94 $ 9.50 $ 9.47 $ 8.11 $ 10.15 $ 11.16 $ 12.13 $ 11.27 $ 13.14
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total return (%)
(d)............ 22.1 0.8 10.0 10.4 (10.6) 29.2 13.9 14.2 (2.7) 26.3
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(000).......... $33,332 $46,632 $51,902 $59,405 $52,134 $67,467 $90,527 $158,308 $158,332 $196,514
Ratio of
operating
expenses to
average net
assets (%)..... 1.19 1.52(e) 1.52 1.52 1.58 1.53 1.48 1.40 1.40 1.36
Ratio of net
investment
income to
average net
assets (%)..... 3.25 2.33 4.19 3.35 4.00 3.18 2.84 2.66 2.91 3.37
Portfolio
turnover rate
<CAPTION>(%)............ 91 63 58 111 68 51 38 50 36 54
CLASS B CLASS C
------------------------------ --------
SEPT. 13(B) YEAR ENDED YEAR
THROUGH DEC. 31, ENDED
DEC. 31, ----------------- DEC. 31,
1993 1994 1995 1995(B)
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $12.16 $ 12.11 $ 11.24 $11.24
------------ -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income......... 0.16 0.26 0.34 0.35
Net gains or
losses on
investments
(both realized
and
unrealized).... 0.24 (0.66) 2.46 2.44
------------ -------- -------- --------
Total income
(loss) from
investment
operations..... 0.40 (0.40) 2.80 2.79
------------ -------- -------- --------
LESS
DISTRIBUTIONS
Distributions
(from net
investment
income)........ (0.16) (0.26) (0.32) (0.34)
Distributions
(from net
realized
capital gains). (0.29) (0.21) (0.64) (0.64)
Distributions
(from paid-in
capital)....... 0.00 0.00 0.00 0.00
------------ -------- -------- --------
Total
distributions.. (0.45) (0.47) (0.96) (0.98)
------------ -------- -------- --------
Net asset value
end of period.. $12.11 $ 11.24 $ 13.08 $13.05
------------ -------- -------- --------
Total return (%)
(d)............ 3.3 (3.4) 25.3 25.2
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(000).......... $4,691 $21,607 $40,361 $ 718
Ratio of
operating
expenses to
average net
assets (%)..... 2.36(c) 2.15 2.11 2.11
Ratio of net
investment
income to
average net
assets (%)..... 1.92(c) 2.16 2.62 2.62
Portfolio
turnover rate
(%)............ 50 36 54 54
</TABLE>
(a) The Fund was changed from an "equity income" fund to a "balanced" fund on
March 1, 1990. Results for periods prior to March 1, 1990 reflect former
investment policies and are not necessarily representative of results that
would have been achieved had the Fund's current investment policies then
been in effect.
(b) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(e) In 1987, the Fund's adviser and principal underwriter voluntarily agreed to
waive a portion of their fees in order to limit the Fund's expenses (exclu-
sive of trustees' fees) to 1.50% of the Fund's average daily net assets.
The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitation would have been 1.64%.
4
<PAGE>
NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............. $ 8.77 $ 8.88 $ 7.59 $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income.............. 0.05 (0.01)(a) 0.28 0.09 0.07 0.10 0.09 0.02 0.11
Net gains or losses
on investments (both
realized and
unrealized)......... 1.45 1.62 (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84)
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
Total income from
investment
operations.......... 1.50 1.61 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73)
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
LESS DISTRIBUTIONS
Distributions (from
net investment
income)............. (0.07) (0.05) (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11)
Distributions (from
net realized capital
gains).............. (1.32) (2.85) 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73)
Distributions (from
paid-in capital).... 0.00 0.00 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
Total distributions.. (1.39) (2.90) (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84)
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
Net asset value, end
of period........... $ 8.88 $ 7.59 $ 7.46 $ 8.49 $ 8.85 $ 11.19 $ 10.08 $ 10.44 $ 8.87
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
Total return (%) (b). 18.6 18.5 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1)
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000)........ $304,381 $440,851 $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430
Ratio of operating
expenses to average
net assets (%)...... 0.84 1.29 1.26 1.22 1.23 1.14 1.15 1.18 1.19
Ratio of net
investment income to
average net assets
(%)................. 0.62 (0.06) 3.64 1.19 0.77 0.89 0.89 0.16 1.05
Portfolio turnover
rate (%)............ 153 154 283 203 185 186 218 145 141
<CAPTION>
----------
1995
----------
<S> <C>
Net asset value, beginning of
period............. $ 8.87
----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income.............. 0.05
Net gains or losses
on investments (both
realized and
unrealized)......... 3.30
----------
Total income from
investment
operations.......... 3.35
----------
LESS DISTRIBUTIONS
Distributions (from
net investment
income)............. (0.05)
Distributions (from
net realized capital
gains).............. (1.62)
Distributions (from
paid-in capital).... 0.00
----------
Total distributions.. (1.67)
----------
Net asset value, end
of period........... $ 10.55
----------
Total return (%) (b). 38.1
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000)........ $1,201,110
Ratio of operating
expenses to average
net assets (%)...... 1.20
Ratio of net
investment income to
average net assets
(%)................. 0.42
Portfolio turnover
rate (%)............ 235
</TABLE>
(a) Net investment income per share has been calculated based upon the averages
of monthly shares outstanding.
(b) A sales charge was not reflected in total return calculations.
5
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------- ------------------------------ ------------
YEAR ENDED YEAR
MAY 21(A) YEAR ENDED DECEMBER 31, SEPT. 13(A) DEC. 31, ENDED
THROUGH --------------------------- THROUGH ---------------- DECEMBER 31,
DEC. 31, DEC. 31,
1992 1993 1994 1995 1993 1994 1995 1995(A)
--------- ------- -------- -------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.50 $ 11.80 $ 14.85 $ 15.50 $15.19 $ 14.81 $ 15.35 $15.35
------- ------- -------- -------- ------ ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.01 0.11 0.00 0.27 0.12 0.00 0.19 0.19
Net gains or losses on
investments (both
realized and
unrealized)............ (0.63) 3.37 1.19 0.63 (0.06) 1.08 0.58 0.61
------- ------- -------- -------- ------ ------- ------- ------
Total income from
investment operations.. (0.62) 3.48 1.19 0.90 0.06 1.08 0.77 0.80
------- ------- -------- -------- ------ ------- ------- ------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.01) (0.11) 0.00 (0.27) (0.12) 0.00 (0.19) (0.19)
Distributions (from net
realized capital
gains)................. 0.00 (0.32) (0.53) 0.00 (0.32) (0.53) 0.00 0.00
Distributions (from
paid-in capital)....... (0.07) 0.00 (0.01) 0.00 0.00 (0.01) 0.00 0.00
------- ------- -------- -------- ------ ------- ------- ------
Total distributions..... (0.08) (0.43) (0.54) (0.27) (0.44) (0.54) (0.19) (0.19)
------- ------- -------- -------- ------ ------- ------- ------
Net asset value, end of
period................. $ 11.80 $ 14.85 $ 15.50 $ 16.13 $14.81 $ 15.35 $ 15.93 $15.96
------- ------- -------- -------- ------ ------- ------- ------
Total return (%) (c).... (5.0) 29.4 8.1 5.8 0.3 7.3 5.0 5.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $21,731 $80,937 $142,917 $136,848 $9,176 $41,601 $52,895 $1,066
Ratio of operating
expenses to average net
assets
(%) (d)................ 1.50(b) 1.60 1.75 1.75 2.50(b) 2.50 2.50 2.50
Ratio of net investment
income to average net
assets (%)............. 0.10(b) 0.24 0.01 1.24 (1.69)(b) (0.74) 0.49 0.49
Portfolio turnover rate
(%).................... 62 101 123 119 101 123 119 119
</TABLE>
(a) The Fund commenced operations on May 21, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on January
3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations would have been: (%)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------- -------------------------------- ----------
5/21/92 - YEAR ENDED YEAR ENDED YEAR ENDED 9/13/93 - YEAR ENDED YEAR ENDED YEAR ENDED
12/31/92 12/31/93 12/31/94 12/31/95 12/31/94 12/31/94 12/31/95 12/31/95
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
2.89(b) 2.16 1.79 1.83(b) 3.36(b) 2.54 2.58 2.58
</TABLE>
6
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- --------------------- ---------------------
JULY 7 (A) YEAR JULY 7 (A) YEAR JULY 7 (A) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1995 1994 1995 1994 1995
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 12.50 $ 13.25 $ 12.50 $ 13.23 $ 12.50 $ 13.24
------- -------- ------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.05 0.00 0.02 0.00 0.02 0.00
Net gains or losses on
investments (both real-
ized and unrealized)... 0.75 4.52 0.73 4.39 0.74 4.40
------- -------- ------- -------- ------- -------
Total income from in-
vestment operations.... 0.80 4.52 0.75 4.39 0.76 4.40
------- -------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.05) 0.00 (0.02) 0.00 (0.02) 0.00
Distributions (from cap-
ital gains)............ 0.00 (0.99) 0.00 (0.99) 0.00 (0.99)
------- -------- ------- -------- ------- -------
Total distributions..... (0.05) (0.99) (0.02) (0.99) (0.02) (0.99)
------- -------- ------- -------- ------- -------
Net asset value, end of
period................. $ 13.25 $ 16.78 $ 13.23 $ 16.63 $ 13.24 $ 16.65
------- -------- ------- -------- ------- -------
Total return (%) (c).... 6.4 34.4 6.0 33.4 6.0 33.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000)............. $91,218 $223,596 $72,889 $220,017 $20,096 $45,672
Ratio of operating ex-
penses to average net
assets (%) (d)......... 1.94(b) 1.82 2.69(b) 2.57 2.69(b) 2.57
Ratio of net investment
income to average net
assets (%)............. 1.06(b) (0.33) 0.31(b) (1.08) 0.31(b) (1.08)
Portfolio turnover rate
(%).................... 100 142 100 142 100 142
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets (computed on an
annualized basis) for Class A, B and C shares without giving effect to the
voluntary expense limitations in effect from July 7, 1994 through December
31, 1994 would have been 1.98%, 2.75% and 2.75%, respectively.
7
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 8.06 $ 8.73 $ 6.42 $ 6.07 $ 6.51 $ 5.44 $ 6.69 $ 7.28 $ 7.87 $ 7.27
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.10 0.04 0.20 0.12 0.16 0.13 0.09 0.07 0.08 0.10
Net gains or losses on
investments (both
realized and
unrealized)............ 1.62 0.90 (0.34) 1.25 (1.04) 1.35 1.02 1.16 (0.19) 2.21
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income from
investment operations.. 1.72 0.94 (0.14) 1.37 (0.88) 1.48 1.11 1.23 (0.11) 2.31
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.14) (0.14) (0.21) (0.12) (0.16) (0.13) (0.09) (0.07) (0.08) (0.09)
Distributions (from net
realized capital
gains)................. (0.91) (3.11) 0.00 (0.80) 0.00 (0.10) (0.43) (0.57) (0.41) (0.71)
Distributions (from
paid-in capital)....... 0.00 0.00 0.00 (0.01) (0.03) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions..... (1.05) (3.25) (0.21) (0.93) (0.19) (0.23) (0.52) (0.64) (0.49) (0.80)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 8.73 $ 6.42 $ 6.07 $ 6.51 $ 5.44 $ 6.69 $ 7.28 $ 7.87 $ 7.27 $ 8.78
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return (%) (c).... 24.2 11.6 (2.2) 22.6 (13.6) 27.1 16.6 17.0 (1.4) 32.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $104,002 $141,775 $136,443 $146,831 $139,248 $145,790 $156,240 $189,779 $190,869 $241,038
Ratio of operating
expenses to average net
assets (%)............. 0.90 1.29 1.29 1.29 1.31 1.28 1.32 1.34 1.37 1.37
Ratio of net investment
income to average net
assets (%)............. 1.28 0.55 3.13 1.69 2.87 1.84 1.26 0.83 1.00 1.22
Portfolio turnover rate
(%).................... 164 202 243 111 68 51 38 40 29 52
</TABLE>
8
<PAGE>
NEW ENGLAND VALUE FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------- --------
SEPT. 13(A) YEAR ENDED YEAR
THROUGH DEC. 31, ENDED
DEC. 31, ---------------- DEC. 31,
1993 1994 1995 1995(A)
----------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 7.97 $ 7.85 $ 7.23 $ 7.23
------ ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.11 0.04 0.05 0.05
Net gains or losses on investments
(both realized and unrealized)......... 0.39 (0.20) 2.18 2.18
------ ------- ------- ------
Total income from investment
operations............................. 0.50 (0.16) 2.23 2.23
------ ------- ------- ------
LESS DISTRIBUTIONS
Distributions (from net investment
income)................................ (0.05) (0.05) (0.05) (0.05)
Distributions (from net realized capital
gains)................................. (0.57) (0.41) (0.71) (0.71)
Distributions (from paid-in capital).... 0.00 0.00 0.00 0.00
------ ------- ------- ------
Total distributions..................... (0.62) (0.46) (0.76) (0.76)
------ ------- ------- ------
Net asset value, end of period.......... $ 7.85 $ 7.23 $ 8.70 $ 8.70
------ ------- ------- ------
Total return (%) (c).................... 6.5 (2.0) 31.3 31.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)......... $2,182 $13,830 $27,941 $1,224
Ratio of operating expenses to average
net assets (%)......................... 2.16(b) 2.12 2.12 2.12
Ratio of net investment income to
average net assets (%)................. 0.05(b) 0.25 0.47 0.47
Portfolio turnover rate (%)............. 40 29 52 52
</TABLE>
(a) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
9
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR
ENDED SEVEN
MAY 31, MONTHS YEAR ENDED DECEMBER 31,
------------------------- ENDED ----------------------------------------------------------------
1986 1987 1988(B) 12/31/88(B) 1989 1990 1991 1992 1993* 1994 1995
------- ------- ------- ----------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.. $ 10.77 $ 12.70 $ 11.92 $ 10.37 $ 9.55 $ 10.88 $ 9.54 $ 11.79 $ 12.20 $ 12.67 $ 12.41
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income. 0.35 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18
Net gains or losses on
investments (both
realized and
unrealized).......... 2.97 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total income from
investment
operations........... 3.32 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from
net investment
income).............. (0.34) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18)
Distributions (in
excess of net
investment income)... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
Distributions (from
net realized capital
gains)............... (1.05) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03)
Distributions (from
paid-in capital)..... 0.00 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total distributions... (1.39) (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21)
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Net asset value, end
of period............ $ 12.70 $ 11.92 $ 10.37 $ 9.55 $ 10.88 $ 9.54 $ 11.79 $ 12.20 $ 12.67 $ 12.41 $ 14.39
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total return (%)(f)... 31.3 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000)......... $72,862 $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693
Ratio of operating
expenses to average
net assets (%)....... 1.00 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38
Ratio of net
investment income to
average net assets
(%).................. 3.01 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31
Portfolio turnover
rate (%)............. 21 25 8 83(e) 17 6 12 10 4 6 69
</TABLE>
10
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (a) (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------- --------
SEPT. 13(C) YEAR ENDED MAY 1(C)
THROUGH DEC. 31, THROUGH
DEC. 31, --------------- DEC. 31,
1993 1994 1995 1995
----------- ------ ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period................................. $12.95 $12.66 $ 12.42 $13.84
------ ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.06 0.16 0.10 0.06
Net gains or losses on investments
(both realized and unrealized)......... 0.01 (0.09) 4.01 2.58
------ ------ ------- ------
Total income from investment
operations............................. 0.07 0.07 4.11 2.64
------ ------ ------- ------
LESS DISTRIBUTIONS
Distributions (from net investment
income)................................ (0.03) (0.14) (0.10) (0.06)
Distributions (in excess of net
investment income)..................... (0.06) 0.00 0.00 0.00
Distributions (from net realized
capital gains)......................... (0.27) (0.17) (2.03) (2.03)
Distributions (from paid-in capital).... 0.00 0.00 0.00 0.00
------ ------ ------- ------
Total distributions..................... (0.36) (0.31) (2.13) (2.09)
------ ------ ------- ------
Net asset value, end of period.......... $12.66 $12.42 $ 14.40 $14.39
------ ------ ------- ------
Total return (%)(f)..................... 0.60 0.60 34.3 20.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)......... $1,498 $5,185 $29,026 $4,707
Ratio of operating expenses to
average net assets (%)................. 2.08(e) 1.93 2.11 2.11(e)
Ratio of net investment income to
average net assets (%)................. 0.71(e) 1.10 0.56 0.56(e)
Portfolio turnover rate (%)............. 4 6 69 69
</TABLE>
(a) Information shown for all years is audited. The accountants' report incor-
porated by reference in the Statement covers years ended May 31, 1987
through December 31, 1995. The accountants' report for the year ended May
31, 1986 is on file with the SEC.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's for-
mer adviser, Back Bay Advisors, L.P., assumed that function on July 27,
1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P.,
voluntarily agreed to limit total Fund expenses to 1.25% of the Fund's av-
erage annual net assets. Without such limitation, the ratio of operating
expenses to average net assets for the year ended May 31, 1988 would have
been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of the Class B shares are not reflected in total
return calculations. Unless otherwise indicated, periods of less than one
year are not annualized.
* As of January 1, 1993, the Fund discontinued the use of equalization account-
ing.
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. The financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
11
<PAGE>
Investment Strategy
INVESTMENT OBJECTIVES
NEW ENGLAND CAPITAL GROWTH FUND (THE "CAPITAL GROWTH FUND")
The Fund seeks long-term growth of capital.
Subadviser: Loomis, Sayles & Company, L.P., Chicago, IL
NEW ENGLAND BALANCED FUND (THE "BALANCED FUND")
The Fund seeks a reasonable long-term investment return from a combination of
long-term capital appreciation and moderate current income. Subadviser: Loomis,
Sayles & Company, L.P., Pasadena, CA
NEW ENGLAND GROWTH FUND (THE "GROWTH FUND")
The Fund seeks long-term growth of capital through investment in equity securi-
ties of companies whose earnings are expected to grow at a faster rate than the
United States economy. Shares of the Growth Fund are currently offered for sale
only to certain eligible investors. See "Growth Fund Eligibility" on page 29.
Adviser: Capital Growth Management Limited Partnership
NEW ENGLAND INTERNATIONAL EQUITY FUND (THE "INTERNATIONAL EQUITY FUND")
The Fund seeks total return from long-term growth of capital and dividend in-
come, primarily through investment in international equity securities.
Subadviser: Draycott Partners, Ltd.
NEW ENGLAND STAR ADVISERS FUND (THE "STAR ADVISERS FUND")
The Fund seeks long-term growth of capital.
Subadvisers: Berger Associates, Inc., Founders Asset Management, Inc., Janus
Capital Corporation and Loomis, Sayles & Company, L.P., Detroit, MI
NEW ENGLAND VALUE FUND (THE "VALUE FUND")
The Fund seeks a reasonable long-term investment return from a combination of
market appreciation and dividend income from equity securities.
Subadviser: Loomis, Sayles & Company, L.P., Pasadena, CA
NEW ENGLAND GROWTH OPPORTUNITIES FUND (THE "GROWTH OPPORTUNITIES FUND")
The Fund seeks opportunities for long-term growth of capital and income.
Subadviser: Westpeak Investment Advisors, L.P.
NEW ENGLAND INVESTMENT COMPANIES AND THE FUNDS' ADVISERS AND SUBADVISERS
The subadvisers of each of the Funds, except the International Equity and Star
Advisers Funds, are independently operated subsidiaries of New England Invest-
ment Companies, L.P. ("NEIC"), the fifth-largest publicly traded investment
management firm in the United States. New England Funds Management, L.P.
("NEFM"), the adviser to each of the Funds except the Growth Fund, is also a
independently operated subsidiary of NEIC. NEIC is listed on the New York Stock
Exchange and through its subsidiaries or an affiliate manages over $81 billion
in assets for individuals and institutions. Each subadviser operates indepen-
dently and is staffed by experienced investment professionals. All the
subadvisers apply specialized knowledge and careful analysis to the pursuit of
each Fund's objectives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. is the adviser to each of the Funds except
the Growth Fund, as well as most of the other New England Funds.
LOOMIS, SAYLES & COMPANY, L.P. ("Loomis Sayles"), with over $44 billion of as-
sets under management, manages portfolios for mutual funds and other institu-
tional investors and individuals. Loomis Sayles serves as the subadviser to the
Capital Growth, Balanced and Value Funds, and as one of the subadvisers to the
Star Advisers Fund.
12
<PAGE>
DRAYCOTT PARTNERS, LTD. ("Draycott"), a London-based firm, manages the Interna-
tional Equity Fund as well as other international equity portfolios.
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP ("CGM"), manager of the Growth
Fund, has $6 billion of assets under management. CGM specializes in managing
aggressive growth-oriented equity portfolios for mutual funds and other insti-
tutions.
BERGER ASSOCIATES, INC. ("Berger") is one of the subadvisers to the Star Advis-
ers Fund, in addition to managing portfolios for other mutual funds, pension
and profit sharing plans and other institutional and private investors.
FOUNDERS ASSET MANAGEMENT, INC. ("Founders"), is one of the subadvisers to the
Star Advisers Fund. Established in 1938, Founders manages a family of no-load,
growth-style mutual funds and offers asset management for private clients and
institutions.
JANUS CAPITAL CORPORATION ("Janus Capital") is one of the subadvisers to the
Star Advisers Fund and has managed mutual funds since 1970. Janus Capital also
advises individual, corporate, charitable and retirement accounts.
WESTPEAK INVESTMENT ADVISORS, L.P. ("Westpeak") acts as subadviser to the
Growth Opportunities Fund and also provides investment management services to
other mutual funds and institutional clients, including accounts of New England
Mutual Life Insurance Company ("The New England").
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund,
except for the Star Advisers Fund.
FUND INVESTMENTS
. CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing substan-
tially all of its assets in equity securities. Investments are selected based
on their growth potential; current income is not a consideration. The Fund
normally will invest primarily in equity securities of companies with medium
or large market capitalization (capitalization of $1 billion to $5 billion
and over $5 billion, respectively), but will also invest a portion of its as-
sets in equity securities of companies with relatively small market capital-
ization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research and
analysis of individual companies and industries. The subadviser selects in-
vestments for the Fund based on qualitative and quantitative criteria includ-
ing, among others, industry dominance and competitive position, consistent
earnings growth, a history of high profitability, the subadviser's expecta-
tion of continued high profitability and overall financial strength, although
not every investment will have all of these characteristics. The Fund may in-
vest in foreign securities.
. GROWTH FUND
Most of the Growth Fund's investments are normally in common stocks, although
the Fund may invest in any type of equity securities. The Fund does not con-
sider current income as a factor in selecting its investments. The Fund may
invest in foreign securities.
. VALUE FUND
Substantially all of the Value Fund's investments are normally in equity se-
curities. In selecting investments for the Fund, the emphasis is ordinarily
placed on undervalued securities. Although long-term market appreciation is
ordinarily the basis for security selection, current income may be a signifi-
cant consideration when yields appear to be favorable compared to overall op-
portunities for capital appreciation. The Fund may invest in foreign securi-
ties.
13
<PAGE>
. BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of the Fund's equity investments are
normally in dividend-paying common stocks of recognized investment quality
that are expected to achieve growth in earnings and dividends over the long
term. In selecting equity investments for the Fund, an emphasis is ordinarily
placed on undervalued securities. Fixed-income securities include notes,
bonds, non-convertible preferred stock and money market instruments. The Fund
invests at least 25% of its assets in fixed-income senior securities and, un-
der normal market conditions, more than 50% of its assets in equity securi-
ties. The Fund may invest in foreign securities.
. INTERNATIONAL EQUITY FUND
The International Equity Fund seeks to achieve its objective by investing
primarily in common stocks, although the Fund may invest in any type of eq-
uity securities. Normally the Fund will invest at least 65% of its total as-
sets in equity securities of issuers headquartered outside the United States,
and substantially all of its assets (other than cash and short-term invest-
ments) in such equity securities or equity securities of issuers (including
closed-end investment companies) that derive a substantial part of their rev-
enues or profits from countries outside the United States. Under normal con-
ditions the Fund's portfolio will contain equity securities of issuers from
at least three countries outside the United States. The Fund may also engage
in certain options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of the Fund
by, first, selecting countries where it anticipates sustainable growth that
will exceed current market expectations. Within the selected countries, the
subadviser will identify economic sectors that appear to present the most po-
tential for risk- adjusted growth and, finally, within the chosen economic
sectors, the subadviser will select securities that are expected to offer the
best value.
. GROWTH OPPORTUNITIES FUND
It is normally the policy of the Growth Opportunities Fund to invest in a di-
versified portfolio of common stocks considered by the Fund's subadviser to
have possibilities for long-term appreciation of capital and income. Emphasis
will be given to both undervalued securities ("value" style) and securities
of companies with growth potential ("growth" style). The Fund will ordinarily
invest substantially all of its assets in equity securities. The Fund may in-
vest in foreign securities that are traded in U.S. markets.
. STAR ADVISERS FUND
The Star Advisers Fund seeks to attain its objective by investing primarily
in equity securities. The Fund may also invest in other securities, as de-
scribed below. Under normal market conditions, however, at least 65% of the
Fund's assets will be invested in equity securities. Capital invested in the
Fund will be allocated on an equal basis among four different subadvisers.
Each subadviser will manage its segment of the Fund's assets in accordance
with that subadviser's own investment style and strategy. The Fund, in the
discretion of each subadviser, may invest without limit in securities of com-
panies with smaller capitalization. The Fund may in the discretion of each of
its subadvisers invest without limit in securities of foreign issuers (in-
cluding issuers in emerging markets) as well as in securities of U.S. is-
suers.
NEFM, the adviser of the Star Advisers Fund, believes that a multi-adviser
approach to equity investing--one that combines the varied styles of a number
of subadvisers in selecting securities for the Fund's portfolio--offers a
different investment opportunity than equity funds run by a single adviser
using a single style.
Any given management style tends to produce better returns than other styles
under certain market and economic conditions, and to perform less well under
other conditions. Therefore, most single-adviser funds have not consist-
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<PAGE>
ently maintained superior performance rankings relative to their peers over
long periods. NEFM believes that consistency of results, minimizing under-
performance even at the cost of out-performance at times, is likely to pro-
duce higher performance over time.
NEFM believes that assigning portfolio management responsibility for the Star
Advisers Fund to four subadvisers, whose varying styles have resulted in rec-
ords of success, may increase the likelihood that the Fund may produce supe-
rior long-term results for its shareholders, with less variability of return
and less risk of persistent under-performance than a single-adviser fund. Of
course, past results should not be considered a prediction of future perfor-
mance, and there is no assurance that the Fund will in fact achieve superior
results over any time period. The investment styles described below will be
those applied by each of the subadvisers to the segment of the Fund's portfo-
lio for which that subadviser is responsible.
BERGER places primary emphasis on established companies which it believes
have favorable growth prospects, regardless of the company's size. Berger em-
phasizes stocks with potential for rapid earnings expansion. Berger seeks
companies with the capability to perform well under varying economic condi-
tions, including the ability to compete in the global marketplace. Berger
also seeks companies with the ability to market increasing amounts of prod-
ucts or services, in order to increase shareholder equity at an above-average
rate. Berger also places considerable emphasis on the quality of the corpo-
rate leadership of companies under consideration. Common stocks will gener-
ally constitute all or most of the segment of the Fund managed by Berger, but
this segment of the portfolio may from time to time take substantial posi-
tions in securities convertible into common stocks, and may also purchase
preferred stocks, government securities, zero-coupon securities and other se-
nior securities when Berger believes it is appropriate to do so. This segment
of the portfolio may also invest in Rule 144A securities (see "Investment
Risks--Miscellaneous" below) and may purchase put and call options on stock
indices and futures contracts and options thereon for the purpose of hedging.
FOUNDERS' segment of the portfolio will invest primarily in common stocks of
well-established, high-quality growth companies with mid or high market capi-
talization. Founders manages its segment of the Fund's portfolio by investing
primarily in established companies with above-average prospects for growth in
earnings per share. This segment will invest primarily in mid-cap and large
capitalization stocks. Founders believes that mid-cap companies (companies
with between $1.0 billion and $5.0 billion of market capitalization) can pro-
duce returns close to those of smaller-cap companies, but with less risk be-
cause of their stronger infrastructures and performance records and more
solid market positions, and that large-capitalization stocks add stability to
the portfolio. These companies tend to have strong performance records, with
solid continuous operating records of three years or more. Founders' approach
to investment management gives greater emphasis to the fundamental financial,
marketing and operating characteristics of individual companies, and is less
concerned with the short-term impact of changes in macroeconomics and market
conditions, than some other investment firms. This segment of the portfolio
may invest in bonds, debentures and other corporate obligations when Founders
believes that these investments offer opportunity for growth of capital. This
segment of the portfolio may also invest in Rule 144A securities and may en-
ter into futures contracts or options thereon for hedging purposes.
JANUS CAPITAL pursues the Fund's investment objective by investing substan-
tially all of Janus Capital's segment of the portfolio in common stocks when
its portfolio manager believes that the relevant market environment favors
profitable investing in such securities. Janus Capital manages its segment of
the portfolio to seek long-term capital growth primarily from investing in
common stocks of companies of any size, including large, well-established
companies and smaller, emerging growth companies. Janus Capital's analysis
and selection process focus on stocks with earnings growth potential
15
<PAGE>
that may not be recognized by the market. This segment of the portfolio may
also invest in preferred stocks, warrants, government securities, corporate
bonds and debentures or other debt securities or repurchase agreements when
its portfolio manager perceives an opportunity for capital growth from such
securities or to receive a return on idle cash. Janus Capital's segment may
also invest in Rule 144A securities and may enter into options, futures and
forward contracts.
LOOMIS SAYLES manages its segment of the portfolio by investing primarily in
stocks of small cap companies with good earnings growth potential, that Loo-
mis Sayles believes are undervalued by the market. Typically, such companies
range in size from $100 million to $500 million in market capitalization,
have better than average growth rates at below average price/earnings ratios
and have strong balance sheets and cash flow. Loomis Sayles seeks to build a
core small cap portfolio of solid growth company stocks, with a smaller
emphasis on special situations and turnarounds (companies that have experi-
enced significant business problems but which Loomis Sayles believes have fa-
vorable prospects for recovery), as well as unrecognized stocks.
Under unusual market conditions as determined by any of the four subadvisers,
all or any portion of the segment of the portfolio managed by that subadviser
may be invested, for temporary, defensive purposes, in short-term debt in-
struments or in cash. In addition, under normal conditions, a portion of each
segment's assets may be invested in short-term assets for liquidity purposes
or pending investment in other securities. Short-term investments may include
U.S. Government securities, certificates of deposit, commercial paper and
other obligations of corporate issuers rated in the top two rating categories
by a major rating agency or, if unrated, determined to be of comparable qual-
ity by the subadviser, and repurchase agreements that are fully collateral-
ized by cash, U.S. Government securities or high-quality money market instru-
ments.
. ADDITIONAL INFORMATION
Equity securities are securities that represent an ownership interest (or the
right to acquire such an interest) in a company, and include common and pre-
ferred stocks and securities exercisable for or convertible into common or
preferred stocks (such as warrants, convertible debt securities and convert-
ible preferred stock). The Capital Growth, Growth, Growth Opportunities, In-
ternational Equity, Star Advisers and Value Funds seek to attain their objec-
tives by normally investing substantially all of their assets in equity secu-
rities. When the particular Fund's adviser or subadviser deems it appropri-
ate, however, the Capital Growth, Growth, Growth Opportunities and Value
Funds may, for temporary defensive purposes, hold a substantial portion of
their assets in cash or fixed-income investments, including U.S. Government
obligations, investment grade (and comparable unrated) corporate bonds or
notes, money market instruments and repurchase agreements. Corporate obliga-
tions in the lowest investment grade category (rated BBB by Standard & Poor's
Ratings Group ["S&P"] or Baa by Moody's Investors Service, Inc. ["Moody's"])
have some speculative characteristics and may be more adversely affected by
changing economic conditions than are higher grade obligations. The Interna-
tional Equity Fund may, for temporary purposes, hold all or any portion of
its assets in cash, repurchase agreements, short-term debt obligations of
U.S. or foreign corporate issuers or U.S. or foreign government obligations
of any maturity rated AAA, AA, A or BBB by S&P, Aaa, Aa, A or Baa by Moody's
or unrated but determined by the Fund's subadviser to be of comparable qual-
ity to securities in those rating categories. No estimate can be made as to
when or for how long a Fund will employ defensive strategies. Under some mar-
ket conditions, the Balanced Fund may, for temporary purposes, invest less
than 50% of its assets in equity securities and the balance in cash and
fixed-income investments.
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<PAGE>
Investment Risks
It is important to understand the following risks inherent in a Fund before you
invest.
. EQUITY SECURITIES
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 in-
crease. Each Fund may invest in equity securities of companies with rela-
tively small market capitalization. Securities of such companies may be more
volatile than the securities of larger, more established companies and the
broad equity market indices. See "Small Companies" below. Each Fund's invest-
ments may include securities traded "over-the-counter" as well as those
traded on a securities exchange. Some over-the-counter securities may be more
difficult to sell under some market conditions.
Each Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or other
equity securities. Convertible securities also include other securities, such
as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally increase or decrease as the values of the underlying equity se-
curities increase or decrease. The movements in the prices of convertible se-
curities, however, may be smaller than the movements in the value of the un-
derlying equity securities. The value of convertible securities that pay div-
idends or interest, like the value of other fixed-income securities, gener-
ally fluctuates inversely with changes in interest rates. Warrants have no
voting rights, pay no dividends and have no rights with respect to the assets
of the corporation issuing them. They do not represent ownership of the secu-
rities for which they are exercisable, but only the right to buy such securi-
ties at a particular price. Less than 35% of each Fund's respective net as-
sets will be invested in convertible securities rated below investment grade
and unrated convertible securities of comparable quality.
. SMALL COMPANIES
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed those
of companies with larger capitalization. Such growth rates may in turn be re-
flected in more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets or financial
resources and they 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 the market averages in general. The net asset value of
funds that invest in companies with smaller capitalization therefore may
fluctuate more widely than market averages.
. FOREIGN SECURITIES
Investments in foreign securities present risks not typically associated with
investments in comparable securities of U.S. issuers.
There may be less information publicly available about a foreign corporate or
governmental issuer than about a U.S. issuer, and foreign corporate issuers
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The securi-
ties of some foreign issuers are less liquid and at times more volatile than
securities of comparable U.S. issuers. Foreign brokerage commissions and se-
curities 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 fi-
nancial instability and diplomatic developments that could affect the value
of investments in those countries. The receipt of interest on foreign govern-
ment securities may depend on the availability of tax or other revenues to
satisfy the issuer's obligations.
The International Equity and Star Advisers Funds' investments in foreign se-
curities may
17
<PAGE>
include investments in emerging or developing countries, whose economies or
securities markets are not yet highly developed. Special considerations asso-
ciated 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 commodi-
ties or on international aid or development assistance, currency transfer re-
strictions, highly limited numbers of potential buyers for such securities
and delays and disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository re-
ceipts are instruments issued by a bank that represent an interest in equity
securities held by arrangement with the bank. Depository receipts can be ei-
ther "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 is-
suer 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.
. FOREIGN CURRENCY (CAPITAL GROWTH, BALANCED, INTERNATIONAL EQUITY, STAR ADVIS-
ERS AND VALUE FUNDS)
Most foreign securities in the Capital Growth, Balanced, International Equi-
ty, Star Advisers and Value 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 fa-
vorable or unfavorable.
The Capital Growth, Balanced, International Equity, Star Advisers and Value
Funds may incur costs in connection with conversions between various curren-
cies. In addition, those Funds may be required to liquidate portfolio assets,
or may incur increased currency conversion costs, to compensate for a decline
in the dollar value of a foreign currency occurring between the time when the
Fund declares and pays a dividend, or between the time when the Fund accrues
and pays an operating expense in U.S. dollars.
. FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or interna-
tional 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 as-
sets (such as mortgages or other receivables) that have been set aside as
collateral for the issuer's obligation. Fixed-income securities generally in-
volve an obligation of the issuer to pay interest or dividends on either a
current basis or at the maturity of the security, as well as the obligation
to repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk. Credit risk
is the risk that the security's issuer will fail to fulfill its obligation to
pay interest, dividends or principal on the security. Market risk is the risk
that the value of the security will fall because of changes in market rates
of interest. (Generally, the value of fixed-income securities falls when mar-
ket rates of interest are rising.) Some fixed-income securities also involve
prepayment or call risk. This is the risk that the issuer will repay a Fund
the principal on the security before it is due, thus depriving the Fund of a
favorable stream of future interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in
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<PAGE>
fixed-income securities for any particular period. Fluctuations in the value
of a Fund's investments in fixed-income securities will cause a Fund's net
asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the Funds other than
the Balanced and Star Advisers Funds, will, at the time of purchase, either
be rated investment grade by at least one major rating agency or be unrated
but determined to be of investment grade quality by the Fund's adviser or
subadviser.
. LOWER QUALITY FIXED-INCOME SECURITIES (BALANCED AND STAR ADVISERS FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are 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-in-
come securities. Lower quality fixed-income securities are considered predom-
inantly speculative with respect to the ability of the issuer to meet princi-
pal and interest payments. Achievement of the investment objective of a mu-
tual fund investing in lower quality fixed-income securities may be more de-
pendent 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 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, 1995,
the Balanced and Star Advisers Funds had on average 1.2% and 0% of their as-
sets, respectively, invested in fixed-income securities rated below invest-
ment grade. Securities of below investment grade quality are considered high
yield, high risk securities and are commonly known as "junk bonds." For more
information, including a detailed description of the ratings assigned by S&P
and Moody's, please refer to the Statement's "Appendix A -- Description of
Bond Ratings."
. ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES AND "STRIPS" (STAR ADVIS-
ERS FUND)
The Star Advisers Fund may invest in zero coupon, pay-in-kind and step coupon
securities and in "strips." Zero coupon bonds do not make regular interest
payments; rather, they are sold at a discount from face value. Principal and
accrued discount (representing interest accrued but not paid) are paid at ma-
turity. "Strips" are debt securities that are stripped of their interest cou-
pon after the securities are issued, but otherwise are comparable to zero
coupon bonds. Step coupon bonds trade at a discount from their face value and
pay coupon interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. Pay-in-kind bonds normally give
the issuer an option to pay cash at a coupon payment date or give the holder
of the security a similar bond with the same coupon rate and a face value
equal to the amount of the coupon payment that would have been made. The mar-
ket values of "strips" and zero coupon, pay-in-kind and step coupon securi-
ties 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 securi-
ties may be illiquid, making it difficult for the Fund to dispose of them or
determine their current value.
. REPURCHASE AGREEMENTS
Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will repur-
chase the securities at a higher price at a later date. If the seller fails
to repurchase the securities, the Fund has rights to sell the securities to
third parties. Repurchase agreements can be regarded as loans by the Fund to
the seller, collateralized by the securities that are the subject of the
agreement. Repurchase agreements afford an opportunity for the Fund to earn a
return on available cash at relatively low market risk, although the Fund may
be
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<PAGE>
. OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (INTERNATIONAL EQ-
UITY, STAR ADVISERS AND GROWTH OPPORTUNITIES FUNDS)
The International Equity and Star Advisers Funds may buy, sell or write op-
tions on securities, securities indexes, currencies or futures contracts.
These Funds may buy and sell futures contracts on securities, securities in-
dexes or currencies. These Funds may also enter into swap contracts. These
Funds may engage in these transactions either for the purpose of enhancing
investment return, or to hedge against changes in the value of other assets
that the Fund owns or intends to acquire. These Funds may also conduct for-
eign currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market. These Funds may en-
ter into interest rate, currency and securities index swaps. These Funds will
enter into these transactions primarily to seek to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to pro-
tect against an increase in the price of securities the Fund anticipates pur-
chasing at a later date.
The Growth Opportunities Fund may buy and sell futures contracts on a variety
of stock indexes. The Fund would buy such a futures contract only when the
Fund is experiencing significant cash inflows, and then only for the purpose
of maintaining the Fund's exposure to the equity markets during the time be-
fore the Fund has fully invested incoming cash in equity securities directly.
Similarly, the Fund would sell stock index futures only during periods of
cash outflows from the Fund, for the purpose of reducing equity market expo-
sure before holdings of stock are liquidated. The Fund will not use futures
contracts for speculative purposes or to hedge against changes in the value
of the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be consid-
subject to various delays and risks of loss if the seller fails to meet its
obligation to repurchase. The staff of the SEC is currently of the view that
repurchase agreements maturing in more than 7 days are illiquid securities.
. INVESTMENTS IN OTHER INVESTMENT COMPANIES (INTERNATIONAL EQUITY FUND)
The International Equity Fund may invest up to 10% of its total assets in se-
curities of other investment companies. Because of restrictions on direct in-
vestment by U.S. entities in certain countries, investing indirectly in such
countries (by purchasing shares of another fund that is permitted to invest
in such countries) may be the most practical or efficient way for the Fund to
invest in such countries. In other cases, where the Fund's subadviser desires
to make only a relatively small investment in a particular country, investing
through another fund that holds a diversified portfolio in that country may
be more effective than investing directly in issuers in that country. As an
investor in another investment company, the Fund will indirectly bear its
share of the expenses of that investment company. These expenses are in addi-
tion to the Fund's own costs of operations. In some cases, investing in an
investment company may involve the payment of a premium over the value of the
assets held in that investment company's portfolio.
. SHORT-TERM TRADING
Although each Fund seeks long-term growth or return, each Fund may, consis-
tent with its investment objective, engage in portfolio trading in anticipa-
tion of, or in response to, changing economic or market conditions and
trends. These policies may result in higher turnover rates in the Fund's
portfolio, which may produce higher transaction costs and a higher level of
taxable capital gains. Portfolio turnover considerations will not limit any
adviser's or subadviser's investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund are set forth above under "Fi-
nancial Highlights."
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<PAGE>
ered a speculative activity, involving greater risks than are involved in
hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the "buy-
er." A call option gives the buyer the right to buy a security or other asset
(such as an amount of currency or a futures contract) from, and a put option
the right to sell a security or other asset to, the option writer at a speci-
fied price, on or before a specified date. The buyer of an option pays a pre-
mium when purchasing the option, which reduces the return on the underlying
security or other asset if the option is exercised, and results in a loss if
the option expires unexercised. The writer of an option receives a premium
from writing an option, which may increase its return if the option expires
or is closed out at a profit. If a Fund as the writer of an option is unable
to close out an unexpired option, it must continue to hold the underlying se-
curity or other asset until the option expires, to "cover" its obligations
under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or receipt) of the specified instrument, futures are usu-
ally closed out before the settlement date through the purchase (or sale) of
a comparable contract. If the price of the sale of the futures contract by a
Fund exceeds (or is less than) the price of the offsetting purchase, the Fund
will realize a gain (or loss).
Interest rate swaps involve the exchange by a Fund with another party of
their respective commitments to pay or receive interest (for example, an ex-
change 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 Stan-
dard & Poor's Composite Index of 500 Stocks [the "S&P 500"]) or in some other
investment (such as U.S. Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve costs
and the possible risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may exceed the
amount of the Fund's investment. The Fund will be required, however, to set
aside with its custodian bank certain assets in amounts sufficient at all
times to satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse changes
in the value of securities held in its portfolio through options, futures and
swap transactions also depends on the degree of correlation between the
changes in the value of futures, options or swap positions and changes in the
values of the portfolio securities. The successful use of futures and ex-
change-traded options also depends on the availability of a liquid secondary
market to enable the Fund to close its positions on a timely basis. There can
be no assurance that such a market will exist at any particular time. In the
case of swap contracts and of options that are not traded on an exchange
("over-the-counter" options), the Fund is at risk that the other party to the
transaction will default on its obligations, or will not permit the Fund to
terminate the transaction before its scheduled maturity. As a result of these
characteristics, the Fund will treat most swap contracts and over-the-counter
options (and the assets it segregates to cover its obligations thereunder) as
illiquid. Certain provisions of the Internal Revenue Code (the "Code") and
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<PAGE>
The International Equity and Star Advisers Funds may purchase securities on a
"when-issued" or "delayed-delivery" basis. This means that a Fund enters into
a commitment to buy the security before the security has been issued, or, in
the case of a security that has already been issued, to accept delivery of
the security on a date beyond the usual settlement period. If the value of a
security purchased on a "when-issued" or "delayed delivery" basis falls or
market rates of interest increase between the time a Fund commits to buy the
security and the delivery date, the Fund may sustain a loss in value of or
yield on the security. For more information on "when-issued" and "delayed de-
livery" securities, see Part II of the Statement.
To the extent the Star Advisers Fund may invest in derivative securities for
other than bona fide hedging purposes, such investments may be speculative in
nature and may involve additional risks.
The Star Advisers Fund is a "non-diversified" fund and as such is not re-
quired to meet any diversification requirements under the Investment Company
Act of 1940 (the "1940 Act"), although the Fund must meet certain diversifi-
cation standards to qualify as a "regulated investment company" under the
Code. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more suscep-
tible than a more widely-diversified fund to any single economic, political
or regulatory occurrence.
. SPECIAL CONSIDERATIONS REGARDING THE MULTI-ADVISER APPROACH (STAR ADVISERS
FUND)
NEFM, the adviser of the Star Advisers Fund, oversees the portfolio manage-
ment services provided to the Fund by each of the four subadvisers. NEFM does
not, however, determine what investments will be purchased or sold for any
segment of the portfolio. Because each subadviser will be managing its seg-
ment of the portfolio independently from the other subadvisers, the same se-
curity may be held in two different segments of the portfolio, or may
certain regulatory requirements may limit a Fund's ability to engage in
futures, options and swap transactions.
. CURRENCY HEDGING TRANSACTIONS (INTERNATIONAL EQUITY AND STAR ADVISERS FUNDS)
The International Equity and Star Advisers Funds may, at the discretion of
their subadvisers, engage in foreign currency exchange transactions, in con-
nection with the purchase and sale of portfolio securities, to protect the
value of specific portfolio positions or in anticipation of changes in rela-
tive values of currencies in which current or future Fund portfolio holdings
are denominated or quoted. Currency hedging transactions may include forward
contracts (contracts with another party to buy or sell a currency at a speci-
fied price on a specified date), futures contracts (which are similar to for-
ward contracts but are traded on an exchange) and swap contracts. For more
information on foreign currency hedging transactions, see Part II of the
Statement.
. MISCELLANEOUS
No Fund will invest more than 15% of its net assets in "illiquid securities,"
that is, securities which are not readily resalable, which may include secu-
rities whose disposition is restricted by federal securities laws.
The Balanced, International Equity and Star Advisers Funds may purchase Rule
144A securities. These are privately offered securities that can be resold
only to certain qualified institutional buyers. The Star Advisers Fund may
also purchase commercial paper issued under Section 4(2) of the Securities
Act of 1933. Rule 144A securities and Section 4(2) commercial paper are
treated as illiquid, unless a subadviser has determined, under guidelines
established by New England Funds Trust I's trustees, that the particular is-
sue of Rule 144A securities or commercial paper is liquid. Investment in re-
stricted 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 securi-
ties prior to resale.
22
<PAGE>
be acquired for one segment of the portfolio at a time when the subadviser of
another segment deems it appropriate to dispose of the security from that
other segment. Similarly, under some market conditions, one or more of the
subadvisers may believe that temporary, defensive investments in short-term
instruments or cash are appropriate when another subadviser or subadvisers
believe continued exposure to the equity markets is appropriate for their
segments of the portfolio. Because each subadviser directs the trading for
its own segment of the portfolio, and does not aggregate its transactions
with those of the other subadvisers, the Fund may incur higher brokerage
costs than would be the case if a single adviser or subadviser were managing
the entire portfolio. Also, because each segment of the portfolio will per-
form differently from the other segments depending upon the investments it
holds and changing market conditions, one segment may be larger or smaller at
various times than other segments. For example, as of December 31, 1995, the
percentages of the Fund's net assets held in the segments of the Fund managed
by Berger, Founders, Janus Capital and Loomis Sayles were 24%, 27%, 25% and
24%, respectively. Net cash inflows or outflows resulting from sales and re-
demptions of the Fund's shares will, however, continue to be allocated on an
equal basis among the four segments of the portfolio without regard to the
relative size of the segments. The Fund does not intend to reallocate assets
among the segments to reduce these differences in size.
NEFM may, at its discretion, terminate its agreement with a segment's
subadviser. In such case, NEFM will either enter into an agreement with an-
other subadviser to manage the segment or will allocate the segment's assets
equally among the other segments of the Fund.
23
<PAGE>
Fund Management
NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves as the adviser
to each Fund except the Growth Fund (for which CGM serves as adviser). NEFM
oversees, evaluates and monitors the subadvisory services provided to each Fund
(except the Growth Fund) and furnishes general business management and adminis-
tration to each such Fund (except the Growth Fund). NEFM does not determine
what investments will be purchased by the Funds.
The subadviser of the Capital Growth Fund, the Balanced Fund and the Value Fund
is Loomis Sayles. Founded in 1926, Loomis Sayles, One Financial Center, Boston,
Massachusetts 02111, is one of the country's oldest and largest investment
counsel firms. Richard W. Hurckes and Scott S. Pape, Vice Presidents of Loomis
Sayles, have served as the portfolio managers of the Capital Growth Fund since
its inception in 1992. As of June 30, 1996, Bruce A. Ebel, Vice President of
Loomis Sayles, will replace Mr. Hurckes as co-portfolio manager of the Capital
Growth Fund. Carol C. McMurtrie, Vice President and Managing Partner of Loomis
Sayles, and Tricia H. Mills and Douglas D. Ramos, Vice Presidents of Loomis
Sayles, have served as portfolio managers of the Value Fund since March 1993.
Douglas D. Ramos and Meri Anne Beck have served as portfolio managers of the
Balanced Fund since 1990; Ms. Beck is also a Vice President of Loomis Sayles.
All of the foregoing persons have been employed by Loomis Sayles for five years
except Mr. Pape and Mr. Ebel who, prior to the time they joined Loomis Sayles,
were Equity Portfolio Manger of the Illinois State Board of Investment and Se-
nior Vice President of Kemper Asset Management, respectively.
The adviser of the Growth Fund is CGM, One International Place, Boston, Massa-
chusetts 02110. CGM, organized in 1989, serves as investment adviser to seven
mutual funds and to other institutional investors. The general partner of CGM
is a corporation owned in equal shares by Robert L. Kemp and G. Kenneth Heeb-
ner. Mr. Heebner, Senior Portfolio Manager of CGM, has served as portfolio man-
ager of the Growth Fund since 1976. NEIC owns a majority limited partnership
interest in CGM. In 1995, the Growth Fund paid 0.68% of its net assets in advi-
sory fees to CGM. The Distributor has agreed to provide certain administrative
services to the Growth Fund at CGM's expense.
The subadviser of the Growth Opportunities Fund is Westpeak, 1011 Walnut
Street, Boulder, Colorado 80302. The portfolio manager of the Growth Opportuni-
ties Fund is Gerald H. Scriver, President and Chief Executive Officer of
Westpeak. Mr. Scriver has been with Westpeak since its inception in 1991. Mr.
Scriver was Director of Quantitative Strategies of INVESCO from 1989 through
1991.
The subadviser of the International Equity Fund is Draycott, 66 Buckingham
Gate, London SW1E 6AU, England (prior to May 10, 1996 the address was: 8 City
Road, London EC2Y 1HE, England). Draycott was organized in 1991 to provide in-
vestment advice and management services to institutional investors' accounts
and to mutual funds distributed to both institutional and retail customers.
Draycott is a member of the Investment Management Regulatory Organization
Limited (IMRO), the U.K. regulator of investment advisers. Nicholas D.P. Carn,
Chief Investment Officer, President and Chief Executive Officer of Draycott,
Timothy S. Griffen, Senior Portfolio Manager and Pacific Rim Specialist of
Draycott, Gregory D. Eckersley, Portfolio Manager and United Kingdom Specialist
of Draycott, and Nigel Hankin, Portfolio Manager and European Specialist of
Draycott, have served as the portfolio managers of the International Equity
Fund since the Fund's inception in 1992. Prior to Draycott's organization in
1991, Mr. Carn was Managing Director, International Equities Group, Mr. Griffen
was a Vice President and Portfolio Manager, Mr. Eckersley was Investment Man-
ager and Mr. Hankin was European Fund Manager, all at CIGNA International In-
vestment Advisors, Ltd.
24
<PAGE>
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID BY FUND TO NEFM
(AS A PERCENTAGE OF AVERAGE DAILY
FUND NET ASSETS OF THE FUND)
---- -----------------------------------
<S> <C> <C>
of the first $200
Balanced Fund... 0.75% million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
Capital Growth of the first $200
Fund........... 0.75% million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
Growth of the first $200
Opportunities Fund 0.70% million
0.65% of the next $300 million
0.60% of amounts in excess of
$500 million
International of the first $200
Equity Fund 0.90% million
0.85% of the next $300 million
0.80% of amounts in excess of
$500 million
Star Advisers
Fund........... 1.05% of all assets
of the first $200
Value Fund...... 0.75% million
0.70% of the next $300 million
0.65% of amounts in excess of
$500 million
</TABLE>
The advisory fee rates payable by the Balanced, Capital Growth, International
Equity, Star Advisers and Value Funds are higher than those paid by most other
mutual funds but are comparable to fee rates paid by some mutual funds with
similar investment objectives and policies to these Funds. In the case of the
Star Advisers Fund, this difference in the fee rate is partially due to the
multi-adviser format.
Subject to the supervision of NEFM, each subadviser manages the portfolio(s) of
the Fund(s) to which it serves as subadviser (in the case of the Star Advisers
Fund, its segment of such Fund's portfolio) in accordance with the Fund's in-
vestment objective and policies, makes investment decisions for that Fund or
segment, places orders to purchase and sell securities for that Fund or seg-
ment, and employs professional advisers and securities analysts who provide
research services to that Fund or segment. The Funds pay no direct fees to any
of their subadvisers.
Below is a brief description of the subadvisers of the Star Advisers Fund.
BERGER, 210 University Boulevard, Suite 900, Denver, Colorado 80206. Rodney L.
Linafelter, Vice President of Berger, has day-to-day responsibility for the
management of the segment of the Fund managed by Berger. Kansas City Southern
Industries, Inc. ("KCSI"), a publicly traded holding company, owns approxi-
mately 80% of the outstanding shares of Berger.
FOUNDERS, 2930 East Third Avenue, Denver, Colorado 80206. To facilitate day-to-
day investment management, Founders employs a unique team-and-lead-manager sys-
tem. The management team for a portfolio or fund is comprised of Founders'
Chief Investment Officer Bjorn K. Borgen, a lead portfolio manager, assistant
portfolio managers, portfolio traders and research analysts. Team members share
responsibility for providing ideas, information, knowledge and expertise in the
management of Founders' segment of the Fund. Each team member has one or more
areas of expertise that is applied to the management of Founders' segment of
the Fund. Daily decisions on portfolio selection rest with the lead portfolio
manager, who, through participation in the team process, utilizes the input of
other team members in making purchase and sale determinations. Edward F. Keely
is lead portfolio manager for the segment of the Fund that is managed by Found-
ers. Mr. Borgen has served as Founders' Chief Investment Officer since 1969 and
owns all of Founders' outstanding shares.
JANUS CAPITAL, 100 Fillmore Street, Denver, Colorado 80206. Warren B. Lammert
has day-to-day management responsibility for those assets of the Fund allocated
to Janus Capital, where he serves as a portfolio manager and Vice President of
Investments. KCSI owns approximately 83% of the outstanding voting stock of Ja-
nus Capital. Thomas H. Bailey, President and Chairman of the Board of Janus
Capital, owns approximately 12% of Janus Capital's voting stock and, by agree-
ment with KCSI, selects a majority of Janus Capital's board of directors.
25
<PAGE>
LOOMIS SAYLES. Jeffrey C. Petherick and Mary Champagne, Vice Presidents of Loo-
mis Sayles, have day-to-day management responsibility for the segment of the
Fund that is allocated to Loomis Sayles. Mr. Petherick, who joined Loomis
Sayles in 1990, has co-managed the Loomis Sayles segment of the Fund since the
Fund's inception. Ms. Champagne has co-managed the Loomis Sayles segment of the
Fund since July 1995. Prior to joining Loomis Sayles in 1993, Ms. Champagne
served as a portfolio manager at NBD Bank for 10 years.
NEFM pays each subadviser of the Star Advisers Fund a subadvisory fee at the
annual rate of 0.55% of the first $50 million of the average daily net assets
of the segment of the Fund that the subadviser manages and 0.50% of such assets
in excess of $50 million. The Distributor in its discretion may, but is not ob-
ligated to, pay an incentive bonus to the subadviser whose segment of the
Fund's portfolio has the highest relative total return for the prior year ver-
sus that segment's investment peer group as tracked by a major independent mu-
tual fund reporting service.
NEFM pays the subadvisers of the following Funds a subadvisory fee at the an-
nual rate set forth in the following table:
<TABLE>
<CAPTION>
SUBADVISORY FEE PAYABLE BY NEFM
TO SUBADVISER
(AS A PERCENTAGE OF
FUND SUBADVISER AVERAGE DAILY NET ASSETS OF THE FUND)
---- ------------- -------------------------------------------
<S> <C> <C> <C>
Balanced Fund........... Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund..... Loomis Sayles 0.60% of the first $25 million
0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of $500 million
Growth Opportunities 0.50% of the first $25 million
Fund................... Westpeak
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200 million
International Equity 0.54% of the first $200 million
Fund................... Draycott
0.49% of the next $300 million
0.44% of amounts in excess of $500 million
Value Fund.............. Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
</TABLE>
Prior to January 2, 1996 (December 29, 1995, in the case of the International
Equity Fund), the current subadvisers to the Balanced, Capital Growth, Interna-
tional Equity and Value Funds served as those Funds' respective advisers, and
NEIC served as adviser to the Star Advisers Fund. Prior to May 1, 1995, the
Growth Opportunities Fund was advised by a different adviser and paid a lower
rate of advisory fees.
The general partners of each of NEFM, the Distributor, Loomis Sayles and
Westpeak are special purpose corporations. These corporations are indirect
wholly-owned subsidiaries of NEIC, whose sole general partner, New England In-
vestment Companies, Inc. ("NEIC Inc."), is a wholly-owned subsidiary of The New
England. The New England and Metropolitan Life Insurance Company ("MetLife")
have entered into an agreement to merge, with MetLife to be the survivor of the
merger. The merger is conditioned upon, among other things, approval by the
policyholders of The New England and MetLife and receipt of certain regulatory
approvals. After such merger, NEIC Inc. will be a wholly-owned subsidiary of
MetLife.
Draycott is an indirect, wholly-owned subsidiary of Cursitor Alliance LLC,
which in turn is indirectly controlled by The Equitable Life Assurance Society
of the United States, the parent company of which is controlled by AXA, a
French insurance holding company.
26
<PAGE>
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers or subadvisers may consider sales of
shares of the Funds and other mutual funds they manage as a factor in the se-
lection of broker-dealers to effect portfolio transactions for the Funds. Sub-
ject to procedures adopted by the trustees of the Trusts, Fund brokerage trans-
actions may be executed by brokers that are affiliated with NEIC, NEFM, CGM or
any subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM and CGM provide 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 the Funds' advisers and subadvisers.
NEFM and the Distributor have voluntarily agreed to reduce their fees and to
bear certain operating expenses charged to the International Equity Fund to the
extent that the total of such fees and expenses would exceed 1.75% annually of
the average daily net assets of the Fund's Class A shares and 2.50% annually of
the average daily net assets of the Fund's Class B and Class C shares. NEFM and
the Distributor may terminate these voluntary limitations at any time. In such
event, the Fund would supplement its prospectus.
27
<PAGE>
Buying Fund Shares
USING TELE#FACTS1-800-346-5984
TELE#FACTS IS NEW ENGLAND FUNDS' AUTOMATED SERVICE SYSTEM THAT GIVES YOU 24-
HOUR ACCESS TO YOUR ACCOUNT. THROUGH YOUR TOUCH-TONE TELEPHONE, YOU CAN RECEIVE
YOUR ACCOUNT BALANCE, YOUR LAST FIVE TRANSACTIONS, FUND PRICES AND RECENT PER-
FORMANCE INFORMATION. YOU CAN ALSO PURCHASE, SELL OR EXCHANGE CLASS A SHARES OF
ANY NEW ENGLAND FUND. FOR A FREE BROCHURE ABOUT TELE#FACTS INCLUDING A CONVE-
NIENT WALLET CARD, CALL US AT 1-800-225-5478.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in any Fund and $50 is the min-
imum for each subsequent investment. There are special initial investment mini-
mums for the following plans:
. $25 (for initial and subsequent investments) for payroll deduction investment
programs for 401(k), SARSEP, 403(b)(7) retirement plans and certain other re-
tirement plans.
. $50 for automatic investing through the Investment Builder program.
. $250 for retirement plans with tax benefits such as corporate pension and
profit sharing plans, IRAs and Keogh plans.
. $1,000 for accounts registered under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and Class C shares of the Funds in the fol-
lowing ways:
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with a
check payable to New England Funds, P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an addi-
tional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or trust-
ee. Third party checks will not be accepted. When purchases are made by check
or periodic account investment, redemptions will not be allowed until the in-
vestment being redeemed has been in the account for 10 calendar days.
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time), on a day when the Funds are open for business, to obtain
an account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and class of shares), Shareholder Name, Shareholder Account Number. Funds may
be transferred between 9:00 a.m. and 4:00 p.m. (Eastern time). Your bank may
charge a fee for this service.
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may au-
thorize automatic monthly transfers of $50 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an au-
tomatic investment plan through Investment Builder on the enclosed application.
Indicate the amount of the monthly investment and enclose a check marked "Void"
or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at 1-800-225-
5478 for a Service Options Form.
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clear-
ing House ("ACH") system as long as your bank or credit union is a member of
the ACH system and you
28
<PAGE>
TO MAKE INVESTING EVEN EASIER, YOU CAN ALSO ORDER PERSONALIZED INVESTMENT
SLIPS BY CALLING 1-800-225-5478 BETWEEN 8:00 A.M. AND 7:00 P.M. (EASTERN
TIME).
have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time). You may purchase shares through ACH by calling Tele#Facts at
1-800-346-5984 twenty-four hours a day. Under normal circumstances, the New
York Stock Exchange (the "Exchange") closes at 4:00 p.m. (Eastern time). Pur-
chase orders through ACH or Tele#Facts will be complete only upon receipt by
New England Funds of funds from your bank and, on the day that funds are re-
ceived, will be processed at the net asset value next determined at the close
of regular trading on the Exchange on days that the Exchange is open. Proceeds
of redemptions of Fund shares purchased through ACH may not be available for
up to ten days after the purchase date.
BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares--Exchanging Among New England
Funds" for complete details.
GENERAL
All purchase orders are subject to acceptance by the Funds and will be ef-
fected at the net asset value next determined after the order is received in
proper form by State Street Bank and Trust Company ("State Street Bank") (ex-
cept orders received by your investment dealer before the close of trading on
the Exchange and transmitted to the Distributor by 5:00 p.m. [Eastern time] on
the same day, which will be effected at the net asset value determined on that
day). Although the Funds do not anticipate doing so, they reserve the right to
suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to per-
sons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you re-
quest them in writing from the Distributor. The Funds' "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B
shares or Class C shares. If you wish transactions in your account to be ef-
fected by another person under a power of attorney from you, special rules ap-
ply. Please contact your investment dealer or the Distributor for details.
GROWTH FUND ELIGIBILITY: Shares of the Growth Fund are currently available for
purchase by the following categories of investors only:
(1) Shareholders of any fund in the New England Funds (and participants in re-
tirement or salary savings plans that invest in such funds, as such partici-
pants) who have accounts established on or before August 3, 1992;
(2) Current and retired employees of The New England, its subsidiaries, gen-
eral agencies or any company affiliated with The New England;
(3) Current and former directors and trustees of the Trusts, The New England
or its affiliates;
(4) Registered representatives of broker-dealers that have selling arrange-
ments with the Distributor relating to the New England Funds;
(5) The spouses, parents, children, siblings, grandparents or grandchildren of
any of the above persons; and
(6) 401(k) retirement plans and any pension plan that invests $5 million or
more.
The Growth Fund currently offers only one class of shares, Class A shares, but
may offer additional classes of shares in the future. In such event, the Fund
would supplement its prospectus.
SALES CHARGES
Except as otherwise indicated in this prospectus, each Fund offers three
classes of shares to the general public:
CLASS A SHARES
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% an-
nual service fee. Class A shares are offered subject to the following initial
sales charges:
29
<PAGE>
CAPITAL GROWTH FUND
VALUE FUND
BALANCED FUND
INTERNATIONAL EQUITY FUND
STAR ADVISERS FUND
GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
VALUE OF OFFERING AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$50,000 5.75% 6.10% 5.00%
$50,000 -
$99,999 4.50% 4.71% 4.00%
$100,000 -
$249,999 3.50% 3.63% 3.00%
$250,000 -
$499,999 2.50% 2.56% 2.15%
$500,000 -
$999,999 2.00% 2.04% 1.70%
$1,000,000 or
more None None *
</TABLE>
GROWTH FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
VALUE OF OFFERING AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$25,000 6.50% 6.95% 5.75%
$25,000 -
$49,999 5.50% 5.82% 4.75%
$50,000 -
$99,999 4.50% 4.71% 4.00%
$100,000 -
$249,999 3.50% 3.63% 3.00%
$250,000 -
$499,999 2.50% 2.56% 2.15%
$500,000 -
$999,999 2.00% 2.04% 1.70%
$1,000,000 or
more None None *
</TABLE>
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases (except investments by plans under
Sections 401(a) or 401(k) of the Code whose total investments amount to $1
million or more or that have 100 or more eligible employees ["Retirement
Plans"]) a commission of up to the following amounts: 1% on the first $3 mil-
lion invested; 0.50% on the next $2 million; and 0.25% on the excess over $5
million. For investments by Retirement Plans, the Distributor may, at its
discretion, pay investment dealers who initiate and are responsible for such
purchases a commission of up to the following amounts: 1% on the first $3
million invested; and 0.50% on amounts over $3 million and up to $10 million.
These commissions are not payable if the purchase represents the reinvestment
of a redemption made during the previous 12 calendar months. Section 401(a),
401(k), 457 and 403(b) plans that have total investment assets of at least
$10 million are eligible to purchase Class Y shares of certain Funds, which
are described in a separate prospectus.
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of
$1,000,000 or more of Class A shares of the Funds or purchases by Retirement
Plans as defined above, a CDSC, at the rate of 1% of the lesser of the purchase
price or the net asset value at the time of redemption, applies to redemptions
of shares within one year after purchase. If an exchange is made to Class A
shares of any of New England Cash Management Trust Money Market Series or U.S.
Government Series or New England Tax Exempt Money Market Trust (the "Money Mar-
ket Funds"), then the one-year holding period for purposes of determining the
expiration of the CDSC will stop and will resume only when an exchange is made
back into Class A shares of a series of the Trusts. If the Money Market Fund
shares are redeemed rather than exchanged back into a series of the Trusts,
then a CDSC applies to the redemption. For purposes of the CDSC, it is assumed
that the shares held the longest are the first to be redeemed. No CDSC applies
to a redemption of shares followed by a reinvestment effected within 30 days
after the date of the redemption.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
subject to a 0.25% annual service fee, a 0.75% annual distribution fee for 8
years (at which time they automatically convert to Class A shares) and a CDSC
if they are redeemed within 5 years of purchase. The holding period for pur-
poses of timing the conversion to Class A shares and determining the CDSC will
continue to run after an exchange to Class B shares of a series of the Trusts.
If the exchange is made to Class B shares of a Money Market Fund, then the
holding period stops and will resume only when an exchange is made back into
Class B shares of a series of the Trusts. If the Money Market Fund shares are
redeemed rather than exchanged back into a series of the Trusts, then a CDSC
applies to the redemption, at the same rate as if the Class B shares of the
Fund had been redeemed at the time they were exchanged for Money Market Fund
shares. For the purpose of the CDSC it is assumed that the shares held the
longest are the first to be redeemed.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption. Ac-
cordingly, no CDSC will be im-
30
<PAGE>
A, B OR C SHARES -- WHICH SHOULD YOU CHOOSE?
YOUR CHOICE OF SHARE CLASS DEPENDS ON THE SIZE OF YOUR INVESTMENT AND HOW LONG
YOU INTEND TO HOLD YOUR SHARES. IN GENERAL, THERE ARE ONLY MINOR DIFFERENCES IN
PERFORMANCE RESULTS FOR THE DIFFERENT CLASSES IF HELD FOR THE LONG TERM. CON-
SULT YOUR FINANCIAL REPRESENTATIVE FOR HELP IN DECIDING WHICH CLASS IS APPRO-
PRIATE FOR YOU.
posed on increases in net asset value above the initial purchase price. In ad-
dition, no CDSC will be assessed on shares of the same Fund purchased with re-
invested dividends or capital gains distributions. The amount of the CDSC, if
any, will vary depending on the number of years from the time of payment for
the purchase of Class B shares until the time of redemption of such shares. The
CDSC equals the following percentages of the dollar amounts subject to the
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ------------------- ------------------------
<S> <C>
1st............. 4%
2nd............. 3%
3rd............. 3%
4th............. 2%
5th............. 1%
thereafter...... 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted, and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount re-
maining in the account, unless otherwise requested, and is paid to the Distrib-
utor. The CDSC may be eliminated for certain persons and organizations. See
"Sales Charges--General" below. At the time of sale, the Distributor pays in-
vestment dealers a commission of 3.75% and advances the first year's service
fee (up to 0.25%) on purchases of Class B shares.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales charge
or CDSC; are subject to a 0.25% annual service fee and a 0.75% annual distribu-
tion fee; and do not convert into another class.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or Class C shares are more appro-
priate for an investor depends on the amount and intended length of the invest-
ment. Investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because Class A shares have lower
12b-1 fees and pay correspondingly higher dividends per share. For these rea-
sons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the rel-
evant section of your application that you have been informed of the relative
advantages and disadvantages of Class A and C shares. Investors making smaller
investments might consider Class B or Class C shares because 100% of the pur-
chase is invested immediately. Investors making smaller investments who antici-
pate redeeming their shares within five years may find Class C shares more fa-
vorable than Class B shares, because Class B shares are subject to a CDSC on
redemptions made within five years after purchase. Class B shares are more fa-
vorable than Class C shares for investors who anticipate holding their invest-
ment for more than eight years, since Class B shares convert to Class A shares
(and thus bear lower ongoing fees) after eight years. Consult your investment
dealer for advice applicable to your particular circumstances.
GENERAL
NO CDSC ON ANY CLASS OF SHARES APPLIES in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2) dis-
tributions from an IRA due to death, disability or a tax-free return of an ex-
cess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability
(as defined in Section 72(m)(7) of the Code) of a shareholder if the redemption
is made within one year after the shareholder's death or disability. In addi-
tion, there is no CDSC on certain withdrawals pursuant to a Systematic With-
drawal Plan. See "Selling Fund
31
<PAGE>
Shares--4 Ways to Sell Fund Shares--By Systematic Withdrawal Plan" below.
Each Fund receives the net asset value next determined after an order is re-
ceived on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a pur-
chase and, therefore, would be considered a taxable event on which you may rec-
ognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares of each Fund to investment dealers from time to
time. The staff of the SEC is of the view that dealers receiving all or sub-
stantially all of the sales charge may be deemed underwriters of a Fund's
shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible govern-
mental authority .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 of
the Funds or any series of the Trusts or if the account is registered in street
name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds. In some instances these
incentives are provided to certain dealers who achieve sales goals or who have
sold or may sell significant amounts of shares. The Distributor from time to
time may provide financial assistance programs to dealers in connection with
conferences, sales or training programs, seminars, advertising and sales cam-
paigns and/or shareholder services arrangements. Certain dealers who have sold
or may sell significant amounts of shares also may receive compensation in the
form of payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives to locations, within or
outside of the U.S., for educational seminars or meetings of a business nature.
The Distributor may provide non-cash incentives for achievement of specified
sales levels by representatives of participating broker-dealers and financial
institutions. Such incentives include, but are not limited to, merchandise from
gift catalogues or other sources. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or financial in-
stitution with which the representative is associated.
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
. LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at which
a lower sales charge applies), smaller individual amounts can be invested at
the sales charge applicable to that breakpoint.
. COMBINING ACCOUNTS -- purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of qualifying accounts of a spouse, parents, children,
siblings, grandparents or grandchildren, individual fiduciary accounts, sole
proprietorships and/or single trust estates. The values of all accounts are
combined to determine the sales charge.
. UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of less than $1 million may be invested in Class A shares of any Fund at a re-
duced sales charge of 1.50% of the public offering price (or 1.52% of the net
amount invested).
. ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to in-
vestments by any state, county or city or any instrumentality, department, au-
thority or agency thereof that has determined that a Fund is a legally permis-
sible investment and that is prohibited by applicable investment laws from pay-
ing a sales charge or commission in connection with the purchase of shares of
any registered investment company.
32
<PAGE>
. CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to in-
vestments of $25,000 or more in the Funds by (1) clients of an adviser or
subadviser to any series of the Trusts; any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts; and the par-
ents, spouses and children of the foregoing; (2) any individual who is a par-
ticipant in a Keogh or IRA Plan under a prototype Plan document of an adviser
or subadviser to any series of the Trusts if at least one participant in the
plan qualifies under category (1) above; and (3) an individual who invests
through an IRA and is a participant in an employee benefit plan that is a cli-
ent of an adviser or subadviser to any series of the Trusts. Any investor eli-
gible for these arrangements should so indicate in writing at the time of the
purchase.
. Shares of the Funds may be purchased at net asset value by investment advis-
ers, financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management, consult-
ing or other fee for their services; clients of such investment advisers, fi-
nancial planners or other intermediaries who place trades for their own ac-
counts if the accounts are linked to the master account of such investment ad-
viser, financial planner or other intermediary on the books and records of the
broker or agent; and retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in Sections
401(a), 403(b), 401(k) and 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or agent.
. Shares of the Funds are available at net asset value for investments in par-
ticipant-directed 401(a) and 401(k) plans that have 100 or more eligible em-
ployees.
. Shares of the Funds are available at net asset value for investments by non-
discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part
of an organization not principally engaged in banking or trust activities.
. Current shareholders of the Growth Opportunities Fund who were participants
in a certain Trust Securities Program, administered through State Street Bank,
may purchase additional shares of the Growth Opportunities Fund at net asset
value.
. Shares of the Funds also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any transaction
fee. Such organizations may receive compensation, in an amount up to 0.35% an-
nually of the average value of the Fund shares held by their customers. This
compensation may be paid by NEFM and/or a Fund's subadviser out of their own
assets, or may be paid indirectly by the Fund in the form of servicing, distri-
bution or transfer agent fees.
. There is no sales charge, CDSC or initial investment minimum related to in-
vestments by certain current and retired employees of the Trusts' investment
advisers or subadvisers, the Distributor, The New England or any other company
affiliated with The New England; current and former directors and trustees of
the Trusts, The New England or their predecessor companies; agents and general
agents of The New England and its insurance company subsidiaries; current and
retired employees of such agents and general agents; registered representatives
of broker-dealers who have selling arrangements with the Distributor; the
spouse, parents, children, siblings, grandparents or grandchildren of the per-
sons listed above; any trust, pension, profit sharing or other benefit plan for
any of the foregoing persons; and any separate account of The New England or of
any insurance company affiliated with The New England.
. Shareholders of Reich and Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Funds at net asset value and
without imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales de-
scribed above reflects the absence or reduction of sales expenses associated
with such sales.
33
<PAGE>
Owning Fund Shares
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALLY EXCHANGED EACH MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS (OTHER THAN THE GROWTH FUND, WHICH IS AVAILABLE ONLY
TO CERTAIN ELIGIBLE INVESTORS). THE MINIMUM MONTHLY EXCHANGE AMOUNT UNDER THE
PLAN IS $50. THERE IS NO FEE FOR EXCHANGES MADE PURSUANT TO THIS PROGRAM, BUT
THERE MAY BE A SALES CHARGE AS DESCRIBED ON THIS PAGE. SHARES OF THE ADJUSTABLE
RATE FUND THAT ARE SUBJECT TO A DIFFERENTIAL SALES CHARGE AS DESCRIBED ON THIS
PAGE MAY NOT PARTICIPATE IN THIS PROGRAM.
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds ac-
quired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts (except the Growth Fund, which is subject to
special eligibility restrictions) without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California and New En-
gland Intermediate Term Tax Free Fund of New York (and shares of the Money Mar-
ket Funds acquired through exchanges of such shares) may be exchanged for Class
A shares of another series of the Trusts at net asset value only if you have
held them for at least six months; otherwise, sales charges apply to the ex-
change. If you exchange your Class A shares of New England Adjustable Rate U.S.
Government Fund (the "Adjustable Rate Fund") for shares of another series of
the Trusts that has a higher sales charge, you will pay the difference between
any sales charge you have already paid on your Adjustable Rate Fund shares and
the higher sales charge of the series into which you are exchanging. In addi-
tion, you may redeem Class A shares of any Money Market Fund that were not ac-
quired through exchanges from any series of the Trusts and have the proceeds
directly applied to the purchase of shares of a series of the Trusts at the ap-
plicable sales charge.
CLASS B SHARES
You may exchange Class B shares of any Fund or series of the Trusts (and Class
B shares of the Money Market Funds or Class A shares of the Money Market Funds
which have not been subject to a previous sales charge) for Class B shares of
any other series of the Trusts which offers Class B shares. Such exchanges will
be made at the next-determined net asset value of the shares. Class B shares
will automatically convert on a tax-free basis to Class A shares eight years
after they are purchased (excluding the time the shares are held in a Money
Market Fund). See "Sales Charges--Class B Shares" above.
CLASS C SHARES
You may exchange Class C shares of the Funds or any other series of the Trusts
for Class C shares of any other series of the Trusts which offers Class C
shares or for Class A shares of the Money Market Funds.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business, call Tele#Facts
at 1-800-346-5984 twenty-four hours a day or write to New England Funds. Ex-
change requests after 4:00 p.m. (Eastern time), or after the Exchange closes if
it closes earlier than 4:00 p.m., will be processed at the net asset value de-
termined at the close of regular trading on the next day that the Exchange is
open. The exchange must be for a minimum of $500 (or the total net asset value
of your account, whichever is less), except that under the Automatic Exchange
Plan the minimum is $50. All exchanges are subject to the minimum investment
and eligibility requirements of the series into which you are exchanging. In
connection with any exchange, you must receive a current prospectus of the se-
ries into which you are exchanging. The exchange privilege may be exercised
only in those states where shares of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. New
England Funds, L.P. will employ reasonable procedures to confirm that your tel-
ephone instructions are genuine, and, if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions. New England Funds, L.P.
will require a form of personal identification prior to acting upon your tele-
phone instructions, will provide you with written confirmations of such trans-
actions and will record your instructions. Except as otherwise permitted by SEC
rule, shareholders will receive at least 60 days' advance notice of any mate-
rial change to the exchange privilege.
34
<PAGE>
FUND DIVIDEND PAYMENTS
The Capital Growth Fund, the Growth Fund, the International Equity Fund, the
Value Fund and the Star Advisers Fund pay dividends annually and the Balanced
Fund and the Growth Opportunities Fund pay dividends quarterly. Each Fund pays
as dividends substantially all net investment income (other than long-term cap-
ital gains) each year and distributes annually all net realized long-term capi-
tal gains (after applying any available capital loss carryovers). The trustees
of the Trusts may adopt a different schedule as long as payments are made at
least annually. If you intend to purchase shares of a Fund shortly before it
declares a dividend, you should be aware that a portion of the purchase price
may be returned to you as a taxable dividend.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from dividends and interest in cash while re-
investing distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in writ-
ing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically
be changed and your future dividends will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a
dividend diversification
program that allows you to
have all dividends and any
other distributions automat-
ically invested in shares of
the same class of another
New England Fund, subject to
the investor eligibility re-
quirements of that other
fund and to state securities
law requirements. Shares
will be purchased at the se-
lected fund's net asset
value (without a sales
charge or CDSC) on the divi-
dend 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 es-
tablished, the purchased
fund's minimum investment
requirements must be met.
Before establishing a divi-
dend diversification program
into any other New England
Fund, you must obtain a copy
of that fund's prospectus.
35
<PAGE>
Selling Fund Shares
4 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any
of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone re-
demption privilege on your account, shares may be redeemed by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the Funds
are open for business or by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. The proceeds (LESS ANY APPLICABLE CDSC) generally will be wired on
the next business day to the bank account previously chosen by you on your ap-
plication. A wire fee (currently $5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a correspon-
dent bank that is a member. If your account is with a savings bank, it must
have only one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) and requesting that a
check for the proceeds (LESS ANY APPLICABLE CDSC ) be mailed to the address on
your account, provided that the address has not changed over the previous month
and that the proceeds are for $100,000 or less. Generally, the check will be
mailed to you on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (East-
ern time) or call Tele#Facts at 1-800-346-5984 twenty-four hours a day. The
proceeds (LESS ANY APPLICABLE CDSC) generally will arrive at your bank within
three business days; their availability will depend on your bank's particular
rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the Ex-
change closes if it closes before 4:00 p.m., will be processed at the net asset
value determined at the close of regular trading on the next day that the Ex-
change is open.
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a writ-
ten request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any spe-
cial capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your signa-
ture guaranteed by an eligible guarantor institution in accordance with proce-
dures established by New England Funds, L.P. Signature guarantees by notaries
public are not acceptable.
Additional written information may be required for redemptions by certain bene-
fit plans and IRAs. Contact the Distributor or your investment dealer for de-
tails.
36
<PAGE>
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recom-
mend that certificates be sent by registered mail.
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized ba-
sis, 10% of the value of your Fund account. Redemption of shares pursuant to
the Plan will not be subject to a CDSC. For information, contact the Distribu-
tor or your investment dealer. Since withdrawal payments may have tax conse-
quences, you should consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next de-
termined after your redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your in-
vestment dealer before the close of regular trading on the Exchange and trans-
mitted to the Distributor by 5:00 p.m. Eastern time on the same day will re-
ceive that day's net asset value). Redemption proceeds (LESS ANY APPLICABLE
CDSC) will normally be mailed to you within seven days after State Street Bank
or the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10
days after such purchase or transfer, the Fund may withhold redemption proceeds
until the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in per-
son to the Distributor or by mail as described above. Requests are processed at
the net asset value next determined after the request is received.
Special rules apply with respect to redemptions under powers of attorney.
Please call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your re-
quest before a redemption request can be honored. See the instructions for re-
demption by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holi-
days, or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net as-
sets, or during any other period permitted by the SEC for the protection of in-
vestors.
REPURCHASE OPTION (CLASS A SHARES ONLY)
You may apply your Class A share redemption proceeds (without a sales charge)
to the repurchase of Class A shares of any series of the Trusts. To qualify,
you must reinvest some or all of the proceeds within 120 days after your re-
demption and notify New England Funds or your investment dealer at the time of
reinvestment that you are taking advantage of this privilege. You may reinvest
the proceeds either by returning the redemption check or by sending your check
for some or all of the redemption amount. Please note: For federal income tax
purposes, a redemption is a sale that involves tax consequences (even if the
proceeds are later reinvested). Please consult your tax adviser.
37
<PAGE>
Fund Details
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of reg-
ular trading (normally 4:00 p.m. [Eastern time]) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity securi-
ties are valued at the most recent sales prices on an applicable exchange or
NASDAQ, or, in the case of unlisted securities (or listed securities which were
not traded during the day), at the last quoted bid prices. Price information on
listed securities is generally taken from the closing price on the exchange
where the security is primarily traded. Securities traded primarily on an ex-
change outside the United States which closes before the close of the Exchange
generally will be valued for purposes of calculating the Fund's net asset value
at the last sale or bid price on that non-U.S. exchange, except that when an
occurrence after the closing of that exchange is likely to have materially
changed such a security's value, such security will be valued at fair value as
of the close of regular trading on the Exchange. An option that is written by
the Fund generally will be valued at the last sale price or, in the absence of
the last sale price, the last offer price. The value of a futures contract will
be equal to the unrealized gain or loss on the contract that is determined by
marking the contract to the current settlement price. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the futures contract experi-
ence significant price fluctuations after the determination of the settlement
price. When a settlement price is not used, futures contracts will be valued at
their fair value as determined by or under the direction of each Trust's Board
of Trustees. Short-term notes are valued at cost, or, where applicable, amor-
tized cost, which method is intended to approximate market value. All other se-
curities and assets of each Fund's portfolio (or, in the case of the Star Ad-
visers Fund, each segment of the Fund's portfolio) are valued at their fair
market value as determined in good faith by the adviser or subadviser of that
Fund or segment (or a pricing service selected by the adviser or subadviser)
under the supervision of each Trust's Board of Trustees. The value of any as-
sets for which the market price is expressed in terms of a foreign currency
will be translated into U.S. dollars at the prevailing market rate on the date
of the net asset value computation, or, if no such rate is quoted at such time,
at such other appropriate rate as may be determined by or under the direction
of each Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (determined as explained above) plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number of shares of
such class outstanding. The public offering price of each Fund's Class A shares
is determined by adding the applicable sales charge to the net asset value. See
"Buying Fund Shares--Sales Charges" above. The public offering price of each
Fund's Class B and Class C shares is the net asset value per share.
The price you pay for a share will be determined using the next set of calcula-
tions made after your order is accepted by New England Funds, L.P. In other
words, if, on a Tuesday morning, your properly completed application is re-
ceived, your wire is received or your dealer places your trade for you, the
price you pay will be determined by the calculations made as of the close of
regular trading on the Exchange on Tuesday. If you buy shares through your in-
vestment dealer, the dealer must receive your order by the close of regular
CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets - Liabilities
-------------------------------------------------- = Net Asset Value (NAV)
Total Number of Outstanding Shares in a Class
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS
THE APPLICABLE SALES CHARGE. THE PUBLIC OFFERING PRICE FOR
CLASS B AND CLASS C SHARES IS THE NAV.
38
<PAGE>
trading on the Exchange and transmit it to the Distributor by 5:00 p.m. (East-
ern time) to receive that day's public offering price.
INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to qualify as
a "regulated investment company" and thus does not expect to pay any federal
income tax on investment income and capital gains distributed to shareholders
in cash or in additional shares. Unless you are a tax-exempt entity, your dis-
tributions derived from a Fund's short-term capital gains and ordinary income
are taxable to you as ordinary income. (A portion of these distributions may
qualify for the dividends-received deduction for corporations.) Distributions
derived from a Fund's long-term capital gains ("capital gains distributions"),
if designated as such by a Fund, are taxable to you as long-term capital gains,
regardless of how long you have owned shares in the Fund. Both income distribu-
tion and capital gains distributions are taxable whether you elected to receive
them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar year
end virtually all the Fund's ordinary income and net capital gains earned dur-
ing that calendar year. If declared in December to shareholders of record in
that month, and paid the following January, these distributions will be consid-
ered for federal income tax purposes to have been received by shareholders on
December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified tax-
payer identification number, if a Fund is notified that you have underreported
income in the past or if you fail to certify to a Fund that you are not subject
to such withholding. In addition, each Fund will be required to withhold 31% of
the gross proceeds of Fund shares you redeem if you have not provided a cor-
rect, certified taxpayer identification number. If you are a tax-exempt share-
holder, however, these backup withholding rules will not apply so long as you
furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will re-
ceive a Form 1099 to assist you in reporting the prior calendar year's distri-
butions on your federal income tax return. You should consult your tax adviser
about any state or local taxes that may apply to such distributions. Be sure to
keep the Form 1099 as a permanent record. A fee may be charged for any dupli-
cate information requested.
The International Equity Fund may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in the Fund's portfolio. The Fund may in some circumstances be eligible to, and
in its discretion may, make an election under the Code which would allow Fund
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax return. If the Fund
makes the election, the amount of each shareholder's distribution reported on
the information returns filed by the Fund with the Internal Revenue Service
must be increased by the amount of the shareholder's portion of the Fund's for-
eign tax paid.
The foregoing is a summary of certain federal income tax consequences of an in-
vestment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an in-
vestment in a Fund on their particular federal, state and local tax situations.
Shareholders of the International Equity Fund should also consult their tax ad-
visers about consequences of their investment under foreign laws.
THE FUNDS' EXPENSES
In addition to the management fee paid to its adviser, each Fund pays all ex-
penses not borne by its adviser, subadviser(s) or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, 12b-1 fees, all brokerage commissions and trans-
fer taxes in connection with portfolio transactions, all taxes and filing fees,
the fees and expenses for registration or qualification of its
39
<PAGE>
shares under federal and state securities laws, all expenses of shareholders'
and trustees' meetings, preparing, printing and mailing prospectuses and re-
ports to shareholders and the compensation of trustees who are not directors,
officers or employees of The New England or its affiliates, other than affili-
ated registered investment companies. In the case of Funds that offer Class Y
shares, certain expenses are allocated differently between the Fund's Class A,
Class B and Class C shares, on the one hand, and its Class Y shares, on the
other hand. (See "Additional Facts about the Funds" below.)
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each
Fund pays the Distributor a service fee at an annual rate not to exceed 0.25%
of the Fund's average daily net assets attributable to the Class A, Class B
and Class C shares. The Distributor may pay up to the entire amount of this
fee to securities dealers who are dealers of record with respect to the Fund's
shares, for providing personal services to investors in shares of the Fund
and/or the maintenance of shareholder accounts. In the case of the Class B
shares, the Distributor pays investment dealers at the time of sale the first
year's service fee, in the amount of up to 0.25% of the amount invested. In
the case of each Fund except the Growth Opportunities Fund, the Class A serv-
ice fee is payable only to reimburse the Distributor for amounts it pays or
expends in connection with the provision of personal services to investors
and/or the maintenance of shareholder accounts. In the case of the Class A
shares of the Growth, Value and Balanced Funds, reimbursable expenses may in-
clude such expenses incurred by those Funds' former distributor (an affiliate
of the Distributor) in prior years. To the extent that the Distributor's reim-
bursable expenses in any year exceed the maximum amount payable under the rel-
evant Service Plan for that year, such expenses may be carried forward for re-
imbursement in future years in which the Plan remains in effect. The amounts
of unreimbursed Class A expenses carried over into 1996 from previous plan
years were $563,284 for the Capital Growth Fund, $2,041,399 for the Balanced
Fund, $2,030,882 for the Growth Fund, $514,256 for the International Equity
Fund and $1,651,994 for the Value Fund. The Class B and Class C service fees
for all Funds which have such classes of shares, and the Class A service fee
for the Growth Opportunities Fund, are payable regardless of the amount of the
Distributor's related expenses.
Each Fund's Class B and Class C shares also pay the Distributor a monthly dis-
tribution fee at an annual rate not to exceed 0.75% of the average net assets
of the respective Fund's Class B and Class C shares. The Distributor may pay
up to the entire amount of this fee to securities dealers who are dealers of
record with respect to the Fund's shares, as distribution fees in connection
with the sale of the Fund's shares. The Distributor retains the balance of the
fee as compensation for its services as distributor of the Class B and Class C
shares.
PERFORMANCE CRITERIA
Each Fund may include total return information for each class of shares in ad-
vertisements or other written sales material. Each Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter, or, in the case of the Growth Opportunities Fund's Class A shares,
from July 27, 1988, when there was a change in that Fund's investment adviser,
to the end of the most recent calendar quarter. Total return is measured by
comparing the value of a hypothetical $1,000 investment in a class at the be-
ginning of the relevant period to the value of the investment at the end of
the period (assuming deduction of the current maximum sales charge on Class A
shares, automatic reinvestment of all dividends and capital gains distribu-
tions and, in the case of Class B shares, imposition of the CDSC relevant to
the period quoted). Total return may be quoted with or without giving effect
to any voluntary expense limitations in effect for the class in question dur-
ing the relevant period. The class may also show total return over other peri-
ods, on an aggregate basis for the period presented, or without deduction of a
sales charge. If a sales charge is not deducted in calculating total return,
the class's total return will be higher.
40
<PAGE>
The Balanced Fund may also include the yield of its Class A, Class B and Class
C shares, accompanied by the total return, in advertising and other written ma-
terial. Yield will be computed in accordance with the SEC's standardized for-
mula by dividing the adjusted net investment income per share earned during a
recent thirty-day period by the maximum offering price of a share of the rele-
vant class (reduced by any earned income expected to be declared shortly as a
dividend) on the last day of the period. Yield calculations will reflect any
voluntary expense limitations in effect for the Fund during the relevant peri-
od.
The Balanced Fund may also present one or more distribution rates for each
class in its sales literature. These rates will be determined by annualizing
the class's distributions from net investment income and net short-term capital
gain over a recent 12-month, 3-month or 30-day period and dividing that amount
by the maximum offering price or the net asset value on the last day of such
period. If the net asset value, rather than the maximum offering price, is used
to calculate the distribution rate, the rate will be higher.
Total return will generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of expenses borne
by the Class B and Class C shares. An investor should balance this expected
lower total return against the benefit gained by 100% immediate investment of
the purchase price of Class B or Class C shares. As a result of lower operating
expenses, Class Y shares of each Fund that offers such shares can be expected
to achieve a higher investment return than the Fund's Class A, Class B or Class
C shares.
All performance information is based on past results and is not an indication
of likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
. New England Funds Trust I was organized in 1985 as a Massachusetts business
trust and is authorized to issue an unlimited number of full and fractional
shares in multiple series. The Growth, Value and Balanced Funds were orga-
nized prior to 1985 and conducted investment operations as separate corpora-
tions until their reorganization as series of New England Funds Trust I in
January 1987. The International Equity Fund and the Capital Growth Fund were
organized in 1992 and the Star Advisers Fund was organized in 1994.
. New England Funds Trust II was organized in 1931 as a Massachusetts business
trust and is authorized to issue an unlimited number of full and fractional
shares in multiple series. The Growth Opportunities Fund is the original se-
ries of shares of the Trust and has been in operation since 1931.
. When you invest in a Fund, you acquire freely transferable shares of benefi-
cial interest that entitle you to receive annual or quarterly dividends as
determined by the respective Trust's trustees and to cast a vote for each
share you own at shareholder meetings. Shares of each Fund vote separately
from shares of other series of the same Trust, except as otherwise required
by law. Shares of all classes of a Fund vote together, except as to matters
relating to a class's Rule 12b-1 plan, on which only shares of that class are
entitled to vote.
. Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Growth,
Value and Balanced Funds are fundamental. The investment objectives of the
Capital Growth, International Equity and Star Advisers Funds are not funda-
mental. The investment objective of the Growth Opportunities Fund is not fun-
damental but, as a matter of policy, the trustees would not change the objec-
tive without shareholder approval. If there is a change in the objective of
the Capital Growth, International Equity, Star Advisers or Growth Opportuni-
ties Funds, shareholders should consider whether these Funds remain appropri-
ate investments in light of their current financial position and needs.
41
<PAGE>
. Each Fund (except the Growth Fund) also offers a Class Y shares to certain
qualified investors. Class Y shares are identical to Class A, Class B and
Class C shares, except that Class Y shares have no sales charge or CDSC, bear
no Rule 12b-1 fees and have separate voting rights in certain circumstances.
Class Y bears its own transfer agency and prospectus printing costs and does
not bear any portion of those costs relating to other classes of shares.
. The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
. The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has sub-
contracted certain of its obligations as such to State Street Bank, 225 Frank-
lin Street, Boston, MA 02110.
. If the balance in your account with a Fund is less than a minimum amount set
by the trustees of the Trusts from time to time (currently $500 for all ac-
counts, except for those indicated below and for individual retirement ac-
counts, which have a $25 minimum), that Fund may close your account and send
the proceeds to you. Shareholders who are affected by this policy will be no-
tified of the Fund's intention to close the account and will have 60 days im-
mediately following the notice to bring the account up to the minimum. The
minimum does not apply to Keogh, pension and profit sharing plans, automatic
investment plans or accounts that have fallen below the minimum solely because
of fluctuations in a Fund's net asset value per share.
. The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is possi-
ble that a Trust might become liable for any misstatements in this prospectus
that relate to the other Trust. The trustees of each Trust have considered
this possible liability and approved the use of this combined prospectus for
Funds of both Trusts.
. Each Fund's annual report contains additional performance information and is
available upon request and without charge. Each Fund will send a single copy
of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to be
delivered. Shareholders may request additional copies of any annual or semi-
annual report in writing or by telephone.
. The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
. Summit Cash Reserves Fund (the "Cash Fund"), a series of Financial Institu-
tions Series Trust, is related to the Funds for purposes of investment and in-
vestor services. Shares of all classes of the Funds may be exchanged for
shares of the Cash Fund at net asset value. If shares of the Funds that are
exchanged for shares of the Cash Fund are subject to a CDSC, the holding pe-
riod for purposes of determining the expiration of the CDSC will stop and re-
sume only when an exchange is made back into shares of a series of the Trusts.
If Fund shares subject to a CDSC are exchanged for Cash Fund shares and the
Cash Fund shares are later redeemed rather than being exchanged back into
shares of a series of the Trusts, then a CDSC will apply at the same rate as
if the Fund shares were redeemed at the time of the exchange.
[LOGO OF RECYCLED PAPER APPEARS HERE]
42
<PAGE>
FOR GENERAL INFORMATION ON THE FUNDS OR ANY OF THEIR SERVICES AND FOR ASSIS-
TANCE IN OPENING AN ACCOUNT, CONTACT YOUR INVESTMENT DEALER OR CALL THE DIS-
TRIBUTOR TOLL FREE: 1-800-225-5478.
[NEW ENGLAND FUNDS LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
(FORMERLY NAMED NEW ENGLAND TAX EXEMPT INCOME FUND)
PROSPECTUS AND APPLICATION -- MAY 1, 1996
New England Government Securities Fund, New England Strategic Income Fund, New
England Bond Income Fund and New England Municipal Income Fund, series of New
England Funds Trust I, and New England Limited Term U.S. Government Fund, New
England Adjustable Rate U.S. Government Fund and New England High Income Fund,
series of New England Funds Trust II, are separate mutual funds (the "Funds"
and each a "Fund"). New England Funds Trust I and New England Funds Trust II
are referred to in this prospectus as the "Trusts."
Each Fund offers two classes of shares to the general public (Classes A and B),
except New England Limited Term U.S. Government Fund, New England Strategic In-
come Fund and New England Bond Income Fund, each of which offer three classes
of shares (Classes A, B and C) to the general public. The offering price is
based on the net asset value per share next determined after an order is re-
ceived. Class A share purchases generally involve a sales charge at the time of
purchase. No initial sales charge applies to Class B share purchases. A contin-
gent deferred sales charge (a "CDSC"), however, is imposed upon certain redemp-
tions of Class B shares. Class B shares automatically convert to Class A shares
eight years after purchase. No initial sales charge or CDSC applies to pur-
chases or redemptions of Class C shares, which do not have a conversion fea-
ture. Class B and Class C shares bear higher 12b-1 fees than Class A shares.
See "Buying Fund Shares -- Sales Charges." Through a separate prospectus, New
England Government Securities Fund, New England Limited Term U.S. Government
Fund, New England Adjustable Rate U.S. Government Fund, New England Strategic
Income Fund and New England Bond Income Fund also offer an additional class of
shares, Class Y shares, to certain institutional investors. To obtain more in-
formation about Class Y shares, please call New England Funds, L.P. (the "Dis-
tributor") toll free at 1-800-225-5478.
This prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement
of additional information in two parts (the "Statement") about the Funds dated
May 1, 1996 has been filed with the Securities and Exchange Commission (the
"SEC") and is available free of charge. Write to New England Funds, L.P., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at 1-
800-225-5478. The Statement contains more detailed information about the Funds
and is incorporated into this prospectus by reference.
NEW ENGLAND HIGH INCOME FUND INVESTS PRIMARILY IN AND NEW ENGLAND STRATEGIC IN-
COME FUND MAY INVEST UP TO ALL OF ITS ASSETS IN LOWER RATED BONDS COMMONLY
KNOWN AS "JUNK BONDS." THIS TYPE OF INVESTMENT IS SUBJECT TO GREATER RISK THAN
HIGHER RATED BONDS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS, INCLUDING
THE RISK OF DEFAULT. INVESTORS SHOULD ASSESS CAREFULLY THE RISKS ASSOCIATED
WITH INVESTMENT IN THESE FUNDS. SEE "INVESTMENT RISKS--LOWER RATED FIXED-INCOME
SECURITIES."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating
expenses.
3 Financial Highlights Historical information on the
Funds' performance.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
17 Investment Objectives The investment goal for each Fund.
17 New England Investment The Funds' adviser and subadvisers
Companies and the are affiliates of NEIC.
Funds' Adviser and Subadvisers
18 How the Funds Pursue Their Objectives
18 Fund Investments
- --------------------------------------------------------------------------------
25 INVESTMENT RISKS It is important to understand the
risks inherent in a Fund before
you invest.
- --------------------------------------------------------------------------------
32 FUND MANAGEMENT
- --------------------------------------------------------------------------------
BUYING FUND SHARES
35 Minimum Investment Everything you need to know to
35 6 Ways to Buy Fund Shares open and add to a New England
. Through your investment Funds account.
dealer
. By mail
. By wire transfer
. By Investment Builder
. By electronic purchase
through ACH
. By exchange from another
New England Fund
36 Sales Charges
39 Reduced Sales Charges (Class A Shares Only)
- --------------------------------------------------------------------------------
OWNING FUND SHARES
42 Exchanging Among New England Funds
43 Fund Dividend Payments New England Funds offers three
convenient ways to exchange Fund
shares.
- --------------------------------------------------------------------------------
SELLING FUND SHARES
44 5 Ways to Sell Fund Shares How to withdraw money or close
your account.
. Through your investment
dealer
. By telephone
. By mail
. By check
. By Systematic Withdrawal
Plan
46 Repurchase Option (Class A Shares Only)
An opportunity to reinvest your
redemption proceeds within 120
days for no sales charge.
- --------------------------------------------------------------------------------
FUND DETAILS
47 How Fund Share Price is Determined
Additional information you may
find important.
47 Income Tax Considerations
49 The Funds' Expenses
50 Performance Criteria
51 Additional Facts About the Funds
53 Appendix A Ratings of Securities.
Portfolio Composition of the High
54 Appendix B Income and Strategic Income Funds.
<PAGE>
Fund Expenses and Financial Information
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
the Funds and estimated annual expenses for each class of the Funds' shares.
The Example on the following page shows the cumulative expenses attributable to
a hypothetical $1,000 investment in each class of shares of the Funds for the
periods specified.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND NEW ENGLAND NEW ENGLAND
NEW ENGLAND MUNICIPAL INCOME FUND LIMITED TERM ADJUSTABLE RATE U.S.
NEW ENGLAND STRATEGIC INCOME FUND U.S. GOVERNMENT FUND GOVERNMENT FUND
---------------------------------------------- ----------------------- ------------------------
CLASS A CLASS B CLASS C(4) CLASS A CLASS B CLASS C CLASS A CLASS B
------------ ------------ -------------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Initial Sales
Charge Imposed on a
Purchase (as a
percentage of offering
price)(1)(2).......... 4.50% None None 3.00% None None 1.00% None
Maximum Contingent
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, as
applicable)(2)........ (3) 4.00% None (3) 4.00% None (3) 4.00%
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying
Fund Shares--Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any por-
tion of certain purchases of Class A shares greater than $1,000,000 re-
deemed within 1 year after purchase, but not to any other purchases or re-
demptions of Class A shares. See "Buying Fund Shares--Sales Charges."
(4) Applies to New England Bond Income Fund and New England Strategic Income
Fund only.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
NEW ENGLAND
GOVERNMENT
SECURITIES NEW ENGLAND LIMITED TERM
FUND U.S. GOVERNMENT FUND
--------------- ---------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fees............. 0.65% 0.65% 0.64% 0.64% 0.64%
12b-1 Fees.................. 0.25% 1.00%* 0.35% 1.00%* 1.00%*
Other Expenses.............. 0.45% 0.45% 0.23% 0.23% 0.23%
Total Fund Operating Ex-
penses..................... 1.35% 2.10% 1.22% 1.87% 1.87%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
MUNICIPAL NEW ENGLAND
INCOME FUND BOND INCOME FUND
--------------- ------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees........................ 0.44% 0.44% 0.44% 0.44% 0.44%
12b-1 Fees............................. 0.25% 1.00%* 0.25% 1.00%* 1.00%*
Other Expenses......................... 0.24% 0.24% 0.45% 0.45% 0.45%
Total Fund Operating Expenses.......... 0.93% 1.68% 1.14% 1.89% 1.89%
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND
ADJUSTABLE RATE
U.S. GOVERNMENT NEW ENGLAND
FUND***** HIGH INCOME FUND
----------------- -----------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- -------- --------
<S> <C> <C> <C> <C>
Management Fees (after voluntary
fee waiver and expense
reduction)...................... 0.34%** 0.34%** 0.63%*** 0.63%***
12b-1 Fees....................... 0.25% 1.00%* 0.35% 1.00%*
Other Expenses................... 0.11% 0.11% 0.62% 0.62%
Total Fund Operating Expenses
(after voluntary fee waiver and
expense reduction).............. 0.70%** 1.45%** 1.60%*** 2.25%***
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND
STRATEGIC INCOME FUND*****
----------------------------------------
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Management Fees (after voluntary
fee waiver)...................... 0.30%**** 0.30%**** 0.30%****
12b-1 Fees........................ 0.25% 1.00%* 1.00%*
Other Expenses.................... 0.68% 0.68% 0.68%
Total Fund Operating Expenses (af-
ter voluntary fee waiver)........ 1.23%**** 1.98%**** 1.98%****
</TABLE>
* Because of the higher 12b-1 fees, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charge per-
mitted by rules of the National Association of Securities Dealers, Inc.
** Without the voluntary fee waiver and expense reduction by the Fund's ad-
viser, Management Fees would be 0.53% for both classes and Total Fund Op-
erating Expenses would be 0.89% for Class A shares and 1.65% for Class B
shares. These voluntary limitations can be terminated by the Fund's ad-
viser at any time. See "Fund Management."
*** Without the voluntary fee waiver and expense reduction by the Fund's ad-
viser, Management Fees would be 0.75% for both classes and Total Fund Op-
erating Expenses would be 1.72% for Class A shares and 2.37% for Class B
shares. These voluntary limitations can be terminated by the Fund's ad-
viser at any time. See "Fund Management."
**** Without the voluntary fee waiver by the Fund's adviser, Management Fees
would be 0.65% for all classes and Total Fund Operating Expenses would be
1.58% for Class A shares, 2.33% for Class B shares and 2.33% for Class C
shares. This voluntary limitation can be terminated by the Fund's adviser
at any time. See "Fund Management."
***** The expense information contained in this table and its footnotes for New
England Strategic Income Fund and New England Adjustable Rate U.S. Gov-
ernment Fund has been restated to reflect fees and expenses currently in
effect for those Funds.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of ac-
tual or expected Fund performance or expenses, both of which may be more or
less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT SECURITIES LIMITED TERM U.S. ADJUSTABLE RATE U.S.
FUND GOVERNMENT FUND GOVERNMENT FUND
------------------------------------------------- ----------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
--------- --------------------- --------- ------- ----------------------
(1) (2) (1) (2) (1) (2)
-------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year.................. $ 58 $ 61 $ 21 $ 42 $ 59 $ 19 $ 19 $ 17 $ 55 $ 15
3 years................. $ 86 $ 96 $ 66 $ 68 $ 89 $ 59 $ 59 $ 32 $ 76 $ 46
5 years................. $ 116 $ 123 $ 113 $ 95 $111 $101 $101 $ 49 $ 89 $ 79
10 years*............... $ 200 $ 224 $ 224 $ 173 $202 $202 $219 $ 96 $ 153 $ 153
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND STRATEGIC NEW ENGLAND BOND
INCOME FUND INCOME FUND
------------------------- -------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- --------- ------- ------- --------- -------
(1) (2) (1) (2)
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year...................... $ 57 $ 60 $ 20 $ 20 $ 56 $ 59 $ 19 $ 19
3 years..................... $ 82 $ 92 $ 62 $ 62 $ 80 $ 89 $ 59 $ 59
5 years..................... $110 $117 $107 $107 $105 $112 $102 $102
10 years*................... $187 $211 $211 $231 $177 $202 $202 $221
</TABLE>
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND MUNICIPAL
HIGH INCOME FUND INCOME FUND
----------------- ------------------------
CLASS A CLASS B CLASS A CLASS B
------- --------- --------- --------------
(1) (2) (1) (2)
---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
1 year............................... $ 61 $ 63 $ 23 $ 54 $ 57 $ 17
3 years.............................. $ 93 $100 $ 70 $ 73 $ 83 $ 53
5 years.............................. $128 $130 $120 $ 94 $ 101 $ 91
10 years*............................ $226 $242 $242 $ 154 $ 179 $ 179
</TABLE>
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years; there-
fore, Class B amounts are calculated using Class A expenses in years 9 and
10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees, 12b-1
fees and other expenses, please see "Fund Management," "The Funds' Expenses"
and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
2
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A and B shares of each Fund and Class C shares of New England Lim-
ited Term U.S. Government Fund, New England Strategic Income Fund and New En-
gland Bond Income Fund outstanding throughout the indicated periods.)
The Financial Highlights presented on pages 3 through 16 have been included in
financial statements for the Funds' Class A, B and C shares. The financial
statements for New England Government Securities Fund, New England Bond Income
Fund, New England Municipal Income Fund and New England Strategic Income Fund
have been examined by Price Waterhouse LLP, independent accountants, and the
financial statements for New England Limited Term U.S. Government Fund, New En-
gland Adjustable Rate U.S. Government Fund and New England High Income Fund
have been examined by Coopers & Lybrand LLP, independent accountants. The Fi-
nancial Highlights should be read in conjunction with the financial statements
and the notes thereto incorporated by reference in Part II of the Statement.
Each Fund's annual report contains additional performance information and is
available upon request and without charge.
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
YEAR NOV. 30
ENDED THROUGH YEAR ENDED DEC. 31,
NOV. 30, DEC. 31, ----------------------------
1986 1986(A) 1987 1988 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 12.72 $ 13.51 $ 13.48 $ 12.10 $ 11.85
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income........ 1.07 0.08 0.89 0.93 0.90
Net gains or losses on in-
vestments (both realized and
unrealized)................. 0.82 (0.04) (0.93) (0.18) 0.52
-------- -------- -------- -------- --------
Total income from investment
operations.................. 1.89 0.04 (0.04) 0.75 1.42
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net in-
vestment income)............ (1.07) (0.07) (0.89) (0.85) (0.95)
Distributions (from net real-
ized capital gains)......... (0.03) 0.00 (0.45) (0.15) 0.00
Distributions (from paid-in
capital).................... 0.00 0.00 0.00 0.00 (0.33)
-------- -------- -------- -------- --------
Total distributions.......... (1.10) (0.07) (1.34) (1.00) (1.28)
-------- -------- -------- -------- --------
Net asset value, end of peri-
od.......................... $ 13.51 $ 13.48 $ 12.10 $ 11.85 $ 11.99
-------- -------- -------- -------- --------
Total return (%)(c).......... 15.5 0.3 (0.1) 6.8 12.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000)....................... $186,040 $190,416 $192,250 $179,130 $183,669
Ratio of operating expenses
to average net assets(%).... 0.94(d) 1.21(b) 1.30 1.24 1.21
Ratio of net investment in-
come to average net assets
(%)......................... 7.82 6.85(b) 7.20 7.69 7.50
Portfolio turnover rate(%)... 66 0(b) 178 150 389
</TABLE>
(a) Fiscal year end changed from November 30 to December 31 in 1986.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods of
less than one year are not annualized.
(d) The ratio of expenses to average net assets without giving effect to volun-
tary expense limitations would have been 1.21% for the year ended November
30, 1986.
3
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 11.99 $ 11.38 $ 11.92 $ 11.73 $ 11.75 $ 10.43
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.86 0.82 0.70 0.72 0.69 0.74
Net gains or losses on
investments (both real-
ized and unrealized)... (0.27) 0.75 0.07 0.32 (1.32) 1.29
-------- -------- -------- -------- -------- --------
Total income from in-
vestment operations.... 0.59 1.57 0.77 1.04 (0.63) 2.03
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.89) (0.82) (0.68) (0.72) (0.69) (0.73)
Distributions (from net
realized capital
gains)................. 0.00 (0.21) (0.28) (0.30) 0.00 0.00
Distributions (from
paid-in capital)....... (0.31) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions..... (1.20) (1.03) (0.96) (1.02) (0.69) (0.73)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 11.38 $ 11.92 $ 11.73 $ 11.75 $ 10.43 $ 11.73
-------- -------- -------- -------- -------- --------
Total return (%) (c).... 5.7 14.9 6.8 9.0 (5.5) 20
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000)............. $181,343 $180,198 $178,030 $182,436 $147,986 $147,503
Ratio of operating ex-
penses to average net
assets (%) (d)......... 1.21 1.21 1.23 1.22 1.29 1.35
Ratio of net investment
income to average net
assets (%)............. 7.63 7.28 5.92 5.70 6.66 6.69
Portfolio turnover rate
(%).................... 737 305 730 276 809 559
</TABLE>
(a) Fiscal year end changed from November 30 to December 31 in 1986.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods of
less than one year are not annualized.
(d) The ratio of expenses to average net assets without giving effect to volun-
tary expense limitations would have been 1.21% for the year ended November
30, 1986.
4
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
---------------------------
SEPT. 23(A) YEAR ENDED
THROUGH DECEMBER 31,
DEC. 31, --------------
1993 1994 1995
----------- ------ ------
<S> <C> <C> <C>
Net asset value, beginning of period............... $12.26 $11.75 $10.43
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.16 0.60 0.65
Net gains or losses on investments (both realized
and unrealized)................................... (0.30) (1.32) 1.30
------ ------ ------
Total income from investment operations............ (0.14) (0.72) 1.95
------ ------ ------
LESS DISTRIBUTIONS
Distributions (from net investment income)......... (0.16) (0.60) (0.64)
Distributions (from net realized capital gains).... (0.21) 0.00 0.00
Distributions (from paid-in capital)............... 0.00 0.00 0.00
------ ------ ------
Total distributions................................ (0.37) (0.60) (0.64)
------ ------ ------
Net asset value, end of period..................... $11.75 $10.43 $11.74
------ ------ ------
Total return (%) (c)............................... (1.2) (6.2) 19.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).................... $1,255 $2,760 $4,858
Ratio of operating expenses to average net assets
(%) (d)........................................... 1.97(b) 2.04 2.10
Ratio of net investment income to average net
assets (%)........................................ 5.03(b) 5.91 5.94
Portfolio turnover rate (%)........................ 276(d) 809 559
</TABLE>
(a) Class B shares were first offered on September 23, 1993.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calcu-
lations. Period of less than one year are not annualized.
(d) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
5
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
JAN. 3(A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, ---------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995
--------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $12.50 $ 12.53 $ 12.44 $ 12.86 $ 12.54 $ 12.49 $ 11.49
------ ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.97 0.94 0.93 0.80 0.71 0.82 0.86
Net gains or losses on
investments (both
realized and
unrealized)............ 0.27 0.29 0.69 (0.11) 0.08 (1.10) 0.59
------ ------- -------- -------- -------- -------- --------
Total income from
investment operations.. 1.24 1.23 1.62 0.69 0.79 (0.28) 1.45
------ ------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.96) (0.94) (0.94) (0.80) (0.71) (0.72) (0.84)
Distributions (from net
realized capital
gains)................. 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00
Distributions (from
paid-in capital)....... (0.25) (0.38) (0.26) (0.21) (0.12) 0.00 0.00
------ ------- -------- -------- -------- -------- --------
Total distributions..... (1.21) (1.32) (1.20) (1.01) (0.84) (0.72) (0.84)
------ ------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $12.53 $ 12.44 $ 12.86 $ 12.54 $ 12.49 $ 11.49 $ 12.10
------ ------- -------- -------- -------- -------- --------
Total return (%)(d)..... 10.4 10.5 13.8 5.7 6.4 (2.3) 13.0
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $8,430 $50,062 $271,966 $477,396 $562,164 $412,399 $361,520
Ratio of operating
expenses to average net
assets(%)(b)........... 1.31 1.25 1.25 1.16 1.14 1.18 1.22
Ratio of net investment
income to average net
assets(%).............. 7.92 7.95 7.24 6.24 5.64 6.80 7.18
Portfolio turnover
rate(%)................ 731 55 277 323 124 244 247
</TABLE>
6
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------- --------
SEPT. 27(A) YEAR ENDED YEAR
THROUGH, DEC. 31, ENDED
DEC. 31, ---------------- DEC. 31,
1993 1994 1995 1995(A)
----------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.... $12.76 $ 12.49 $ 11.48 $11.48
------ ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.17 0.71 0.76 0.64
Net gains or losses on investments (both
realized and unrealized)............... (0.24) (1.08) 0.61 0.64
------ ------- ------- ------
Total income from investment operations. (0.07) (0.37) 1.37 1.28
------ ------- ------- ------
LESS DISTRIBUTIONS
Distributions (from net investment
income)................................ (0.16) (0.64) (0.76) (0.65)
Distributions (from net realized capital
gains)................................. (0.01) 0.00 0.00 0.00
Distributions (in excess of net
investment income)..................... (0.03) 0.00 0.00 (0.01)
Distributions (from paid-in capital).... 0.00 0.00 0.00 0.00
------ ------- ------- ------
Total distributions..................... (0.20) (0.64) (0.76) (0.66)
------ ------- ------- ------
Net asset value, end of period.......... $12.49 $ 11.48 $ 12.09 $12.10
------ ------- ------- ------
Total return (%)(d)..................... (0.6) (2.9) 12.3 11.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)......... $6,221 $11,891 $18,056 $5,936
Ratio of operating expenses to average
net assets(%)(b)....................... 1.96(c) 1.83 1.87 1.87
Ratio of net investment income to
average net assets (%)................. 4.30(c) 6.15 6.53 6.53
Portfolio turnover rate(%).............. 124(e) 244 247 247
</TABLE>
(a) The Fund commenced operations on January 3, 1989. Class B shares were first
offered beginning September 27, 1993. Class C shares were first offered be-
ginning January 3, 1995.
(b) Commencing May 18, 1989 through March 31, 1992, expenses were voluntarily
limited to 1.25% of average daily net assets. The ratio of operating
expenses to average net assets without giving effect to this expense
limitation would have been 3.47% for the period ended December 31, 1989 and
1.62% for the year ended December 31, 1990.
(c) Computed on an annualized basis.
(d) A sales charge 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 re-
turn 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.
7
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
OCT. 18 (A)
THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, --------------------------------------
1991 1992 1993 1994 1995
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 7.50 $ 7.50 $ 7.46 $ 7.45 $ 7.20
------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... 0.09 0.42 0.33 0.37 0.47
Net gains or losses on
investments (both realized
and unrealized)........... 0.00 (0.06) (0.03) (0.31) 0.14
------- -------- -------- -------- --------
Total income from
investment operations..... 0.09 0.36 0.30 0.06 0.61
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net
investment income)........ (0.09) (0.40) (0.31) (0.31) (0.44)
------- -------- -------- -------- --------
Total distributions........ (0.09) (0.40) (0.31) (0.31) (0.44)
------- -------- -------- -------- --------
Net asset value, end of
period.................... $ 7.50 $ 7.46 $ 7.45 $ 7.20 $ 7.37
------- -------- -------- -------- --------
Total return (%)(d)........ 1.2 4.9 4.0 0.8 8.6
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000)..................... $60,684 $294,687 $734,251 $489,637 $331,112
Ratio of operating expenses
to average net assets
(%)(b).................... 0.50(c) 0.57 0.60 0.60 0.66
Ratio of net investment
income to average net
assets (%)................ 6.43(c) 5.39 4.39 4.85 6.29
Portfolio turnover rate
(%)....................... 52(c) 49 54 17 73
</TABLE>
8
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
---------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, --------------------
1993 1994 1995
----------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period......... $ 7.52 $ 7.45 $ 7.20
------ --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ 0.08 0.29 0.41
Net gains or losses on investments (both
realized and unrealized).................... (0.08) (0.29) 0.14
------ --------- ---------
Total income from investment operations...... 0.00 0.00 0.55
------ --------- ---------
LESS DISTRIBUTIONS
Distributions (from net investment income)... (0.07) (0.25) (0.38)
------ --------- ---------
Total distributions.......................... (0.07) (0.25) (0.38)
------ --------- ---------
Net asset value, end of period............... $ 7.45 $ 7.20 $ 7.37
------ --------- ---------
Total return (%)(c).......................... 0.0 0.1 7.8
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............. $ 855 $ 2,056 $ 2,368
Ratio of operating expenses to average net
assets (%)(d)............................... 1.35(c) 1.35 1.41
Ratio of net investment income to average net
assets (%).................................. 3.50(c) 4.10 5.54
Portfolio turnover rate (%).................. 54(e) 17 73
</TABLE>
(a) The Fund commenced operations on October 18, 1991. Class B shares were
first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class
A average net assets. From May 1, 1995 through June 1, 1995 expenses were
voluntarily limited to 0.65% of Class A average net assets. The ratio of
operating expenses to average net assets without giving effect to this ex-
pense limitation would have been 0.89% for the year ended December 31,
1995. From April 1, 1992 through May 1, 1995 expenses were voluntarily lim-
ited to 0.60% of Class A average net assets. The ratio of operating ex-
penses to average net assets without giving effect to this expense limita-
tion would have been 0.96%, 0.86% and 0.88% for the years ended December
31, 1992, 1993 and 1994, respectively. From October 19, 1991 through March
31, 1992, expenses were voluntarily limited to 0.50% of average net assets.
The ratio of operating expenses to average net assets without giving effect
to this expense limitation would have been 1.26% for the period ended De-
cember 31, 1991. Commencing June 1, 1995 expenses were voluntarily limited
to 1.45% of Class B average net assets. From May 1, 1995 through June 1,
1995 expenses were voluntarily limited to 1.40% of Class B average net as-
sets. The ratio of operating expenses to average net assets without giving
effect to this expense limitation would have been 1.65% for the year ended
December 31, 1995. From September 13, 1993 through May 1, 1995 expenses
were voluntarily limited to 1.35% of Class B average net assets. The ratio
of operating expenses for Class B shares would have been 1.61% for the pe-
riod ended December 31, 1993 and 1.63% for the year ended December 31,
1994.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn 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.
9
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR JULY 1
ENDED THROUGH YEAR ENDED DECEMBER 31,
JUNE 30, DEC. 31, ------------------------------------------------------------------------------------
1986 1986(D) 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- ------- ------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.. $ 10.93 $ 11.45 $ 11.73 $ 10.98 $ 10.89 $ 11.23 $ 11.12 $ 12.14 $ 12.12 $ 12.18 $ 10.95
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income. 0.98 0.49 0.90 0.85 0.91 0.89 0.88 0.85 0.77 0.72 0.81
Net gains or losses on
investments (both
realized and
unrealized).......... 0.71 0.26 (0.75) (0.06) 0.34 (0.10) 1.04 0.01 0.66 (1.23) 1.40
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total income from
investment
operations........... 1.69 0.75 0.15 0.79 1.25 0.79 1.92 0.86 1.43 (0.51) 2.21
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from
net investment
income).............. (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.86) (0.78) (0.72) (0.80)
Distributions (from
net realized capital
gains)............... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.02) (0.59) 0.00 0.00
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total distributions... (1.17) (0.47) (0.90) (0.88) (0.91) (0.90) (0.90) (0.88) (1.37) (0.72) (0.80)
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end
of period............ $ 11.45 $ 11.73 $ 10.98 $ 10.89 $ 11.23 $ 11.12 $ 12.14 $ 12.12 $ 12.18 $ 10.95 $ 12.36
------- ------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total return (%)(c)... 16.6 6.7 1.4 7.4 11.9 7.5 18.1 7.5 12.1 (4.2) 20.8
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000)......... $46,175 $54,210 $60,071 $67,548 $76,662 $85,372 $113,759 $145,184 $179,264 $155,362 $200,285
Ratio of operating
expenses to average
net assets(%)........ 8.80 1.02(b) 1.31 1.20 1.18 1.18 1.15 1.08 1.04 1.08 1.14
Ratio of net
investment income to
average net assets
(%).................. 0.92 8.29(b) 8.03 7.68 8.27 8.05 7.69 7.08 6.10 6.46 6.81
Portfolio turnover
rate(%).............. 242 352(b) 307 88 77 126 218 89 202 77 81
</TABLE>
10
<PAGE>
NEW ENGLAND BOND INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- -------
SEPT. 13(A) YEAR
THROUGH YEAR ENDED DEC. 31, ENDED
DEC. 31, --------------------- DEC. 31,
1993 1994 1995 1995(A)
----------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................. $13.06 $ 12.18 $ 10.95 $10.95
------ --------- ---------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... 0.20 0.63 0.72 0.56
Net gains or losses on
investments (both realized
and unrealized)........... (0.30) (1.23) 1.40 1.40
------ --------- ---------- ------
Total income from
investment operations..... (0.10) (0.60) 2.12 1.96
------ --------- ---------- ------
LESS DISTRIBUTIONS
Distributions (from net
investment income)........ (0.19) (0.63) (0.71) (0.55)
Distributions (from net
realized capital gains)... (0.59) 0.00 0.00 0.00
------ --------- ---------- ------
Total distributions........ (0.78) (0.63) (0.71) (0.55)
------ --------- ---------- ------
Net asset value, end of
period.................... $12.18 $ 10.95 $ 12.36 $12.36
------ --------- ---------- ------
Total return (%)(c)........ (0.8) (4.9) 19.9 18.1
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000)..................... $2,661 $ 9,435 $ 23,398 $1,009
Ratio of operating expenses
to average net assets(%).. 1.81(b) 1.83 1.89 1.89
Ratio of net investment
income to average net
assets (%)................ 4.79(b) 5.71 6.06 6.06
Portfolio turnover rate(%). 202(e) 77 81 81
</TABLE>
(a) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn 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.
11
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------
FOUR
MONTHS
YEAR ENDED AUGUST 31, ENDED YEAR ENDED DECEMBER 31,
--------------------------- DEC. 31, -----------------------------------------------------------
1986 1987 1988 1988(D) 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- -------- ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 14.56 $ 14.52 $ 13.77 $ 11.69 $11.08 $10.07 $ 7.56 $ 9.07 $ 9.46 $ 10.06 $ 8.89
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 1.54 1.50 1.53 0.43 1.31 1.30 1.02 0.94 0.90 0.88 0.88
Net gains or losses on
investments (both
realized and
unrealized)............ 1.72 1.24 (0.39) (0.13) 0.38 (2.49) 1.58 0.44 0.61 (1.19) 0.13
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
Total income from
investment operations.. (1.56) (1.56) (1.53) (0.43) (1.31) (1.19) 2.60 1.38 1.51 (0.31) 1.01
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions (from net
investment income)(e).. 0.00 0.00 0.00 0.00 0.00 (1.30) (1.02) (0.94) (0.90) (0.86) (0.88)
Distributions (in excess
of net investment
income)................ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 (0.04)
Distributions (from net
realized capital
gains)................. (0.20) (0.43) (0.13) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from
paid-in capital)....... 0.00 0.00 (0.03) (0.05) (0.08) (0.02) (0.07) (0.05) 0.00 0.00 0.00
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
Total distributions..... (1.76) (1.99) (1.69) (0.48) (1.39) (1.32) (1.09) (0.99) (0.91) (0.86) (0.92)
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
Net asset value, end of
period ................ $ 14.52 $ 13.77 $ 11.69 $ 11.08 $10.07 $ 7.56 $ 9.07 $ 9.46 $ 10.06 $ 8.89 $ 8.98
------- ------- ------- ------- ------ ------ ------- ------- ------- ------- -------
Total return (%)(g)..... 12.4 9.0 (2.6) (1.2) 3.3 (13.1) 36.3 15.8 16.5 (3.3) 11.8
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $22,080 $20,439 $14,517 $11,870 $9,070 $6,814 $12,280 $20,992 $31,176 $33,673 $39,148
Ratio of operating
expenses to average net
assets (%)(b).......... 1.50 1.50(f) 1.57 1.50(c) 1.50 1.50 1.50 1.50 1.54 1.60 1.60
Ratio of net investment
income to average net
assets (%)............. 10.53 10.60 12.45 11.58(c) 12.28 14.00 11.56 9.74 9.17 9.18 9.71
Portfolio turnover rate
(%).................... 86 39 29 1(c) 30 7 30 19 43 33 30
</TABLE>
12
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SEPT. 20(A) YEAR ENDED DEC.
THROUGH 31,
DEC. 31, -----------------
1993 1994 1995
----------- ------- --------
<S> <C> <C> <C>
Net asset value, beginning of period............ $ 9.87 $ 10.06 $ 8.88
------ ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................... 0.23 0.79 0.83
Net gains or losses on investments (both
realized and unrealized)....................... 0.20 (1.18) 0.13
------ ------- --------
Total income from investment operations......... 0.43 (0.39) 0.96
------ ------- --------
LESS DISTRIBUTIONS
Distributions (from net investment income)(e)... (0.23) (0.78) (0.81)
Distributions (in excess of net investment
income)........................................ (0.01) (0.01) (0.05)
Distributions (from net realized capital gains). 0.00 0.00 0.00
Distributions (from paid-in capital)............ 0.00 0.00 0.00
------ ------- --------
Total distributions............................. (0.24) (0.79) (0.86)
------ ------- --------
Net asset value, end of period.................. $10.06 $ 8.88 $ 8.98
------ ------- --------
Total return (%)(g)............................. 4.4 (4.0) 11.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)................. $1,232 $ 5,233 $ 10,625
Ratio of operating expenses to average net
assets (%)(b).................................. 2.25(c) 2.25 2.25
Ratio of net investment income to average net
assets (%)..................................... 7.66(c) 8.53 8.96
Portfolio turnover rate (%)..................... 43(h) 33 30
</TABLE>
(a) Commencement of offering of Class B shares.
(b) Commencing October 1, 1993 expenses were voluntarily limited to the annual
rate of 1.60% of Class A average net assets and 2.25% of Class B average
net assets. From May 18, 1989 through September 30, 1993, expenses
(including non-recurring items) were voluntarily limited to 1.50% of
average daily net assets of Class A shares. From July 27, 1988 through May
17, 1989, and during all periods prior to May 18, 1988, expenses (excluding
certain non-recurring items) were limited to 1.50% of average net assets of
Class A shares. Non-recurring expenses excluded for purposes of calculating
this expense limitation were $3,267 for the year ended August 31, 1988,
$51,751 for the four months ended December 31, 1988 and $42,482 for the
period from January 1 through May 17, 1989. The ratios of operating
expenses to average net assets for Class A shares, including all non-
recurring expenses and assuming the foregoing expense limitations had not
been in effect, would have been 2.34% and 2.34%, respectively, for the
years ended August 31, 1987 and 1988, 2.63% (on an annualized basis) for
the four months ended December 31, 1988, and 3.08%, 3.02%, 2.63%, 2.00%,
1.82%, 1.83% and 1.72%, respectively, for the years ended December 31,
1989, 1990, 1991, 1992, 1993, 1994 and 1995. Excluding all non-recurring
expenses, these ratios would have been 2.07%, 2.32%, 2.23% (on an
annualized basis), 2.68%, 2.97%, 2.63%, 2.00%, 1.82%, 1.83% and 1.72% for
Class A shares for the years ended August 31, 1987 and 1988, the period
ended December 31, 1988 and the years ended December 31, 1989, 1990, 1991,
1992, 1993, 1994 and 1995, respectively. The ratio of expenses to average
net assets for Class B shares, assuming the foregoing expense limitation
had not been in effect, would have been 2.53% (on an annualized basis),
2.48% and 2.37%, respectively, for the period September 20, 1993 through
December 31, 1993 and the years ended December 31, 1994 and 1995.
(c)Computed on an annualized basis.
(d) Fiscal year end changed in 1988 from August 31 to December 31. Back Bay Ad-
visors, the Fund's current subadviser, became the Fund's adviser on July
27, 1988.
(e) Amounts distributed include tax basis distributions from paid in capital of
approximately $0.06 and $0.02 per share for the year ended August 31, 1988
and the four months ended December 31, 1988, respectively.
(f) One-time litigation settlement costs of $56,920 (0.27% of average net as-
sets) were incurred in fiscal 1987. The ratio of operating expenses to av-
erage net assets, if calculated including these non-recurring costs, would
have been 1.77%, after giving effect to the expense limitation in effect
during such period and described above.
(g) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn calculations. Periods of less than one year are not annualized.
(h) Represents portfolio turnover rate for the Fund as a whole for the entire
fiscal year.
13
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND (FORMERLY NAMED NEW ENGLAND TAX EXEMPT INCOME
FUND)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 7.53 $ 7.74 $ 6.79 $ 7.10 $ 7.29 $ 7.21 $ 7.53 $ 7.54 $ 7.87 $ 6.85
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.53 0.46 0.46 0.47 0.46 0.45 0.44 0.40 0.39 0.42
Net gains or losses on
investments (both
realized and
unrealized)............ 0.96 (0.67) 0.29 0.20 (0.08) 0.35 0.21 0.53 (1.01) 0.74
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income from
investment operations.. 1.49 (0.21) 0.75 0.67 0.38 0.80 0.65 0.93 (0.62) 1.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.68) (0.42) (0.44) (0.48) (0.46) (0.43) (0.46) (0.42) (0.40) (0.41)
Distributions (from net
realized capital
gains)................. (0.60) (0.32) 0.00 0.00 0.00 (0.01) (0.18) (0.18) 0.00 0.00
Distributions (from
paid-in capital)....... 0.00 0.00 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions..... (1.28) (0.74) (0.44) (0.48) (0.46) (0.48) (0.64) (0.60) (0.40) (0.41)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.74 $ 6.79 $ 7.10 $ 7.29 $ 7.21 $ 7.53 $ 7.54 $ 7.87 $ 6.85 $ 7.60
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return (%)(c)..... 21.2 (2.9) 11.5 9.8 5.5 11.6 8.9 12.7 (8.0) 17.2
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $116,503 $125,661 $131,776 $142,976 $146,232 $162,991 $183,276 $226,881 $184,202 $195,301
Ratio of operating
expenses to average net
assets (%)(d).......... 0.85 1.04 0.98 0.96 0.97 0.95 0.95 0.91 0.92 0.93
Ratio of net investment
income to average net
assets (%)............. 6.81 6.56 6.67 6.58 6.46 6.18 5.80 5.27 5.44 5.52
Portfolio turnover
rate(%)................ 156 196 97 89 85 126 85 86 88 93
</TABLE>
14
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND (CONTINUED)
(FORMERLY NAMED NEW ENGLAND TAX EXEMPT INCOME FUND)
<TABLE>
<CAPTION>
CLASS B
----------------------------------
SEPT. 13(A)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ---------------------
1993 1994 1995
----------- --------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period........ $ 8.03 $ 7.86 $ 6.85
------ --------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................... 0.07 0.34 0.36
Net gains or losses on investments (both
realized and unrealized)................... 0.01 (1.01) 0.74
------ --------- ----------
Total income from investment operations..... 0.08 (0.67) 1.10
------ --------- ----------
LESS DISTRIBUTIONS
Distributions (from net investment income).. (0.07) (0.34) (0.35)
Distributions (from net realized capital
gains)..................................... (0.18) 0.00 0.00
------ --------- ----------
Total distributions......................... (0.25) (0.34) (0.35)
------ --------- ----------
Net asset value, end of period.............. $ 7.86 $ 6.85 $ 7.60
------ --------- ----------
Total return(%)(c).......................... 1.0 (8.6) 16.3
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............. $3,395 $ 7,997 $ 12,069
Ratio of operating expenses to average net
assets(%).................................. 1.65(b) 1.67 1.68
Ratio of net investment income to average
net assets(%).............................. 3.91(b) 4.69 4.77
Portfolio turnover rate(%).................. 86(d) 88 93
</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 re-
turn calculations. Periods of less than one year are not annualized.
(d) Represents portfolio turnover rate for the Fund as a whole for the entire
year.
15
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------- -------- --------
MAY 1(A) MAY 1(A) MAY 1(A)
THROUGH THROUGH THROUGH
DEC. 31, DEC. 31, DEC. 31,
1995 1995 1995
-------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period.......... $12.50 $12.50 $12.50
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.74 0.68 0.67
Net gains or losses on investments (both
realized and unrealized)..................... 0.49 0.49 0.49
------- ------- -------
Total income from investment operations....... 1.23 1.17 1.16
------- ------- -------
LESS DISTRIBUTIONS
Distributions (from net investment income).... (0.73) (0.67) (0.66)
Distributions (in excess of net investment
income)...................................... (0.01) (0.01) (0.01)
------- ------- -------
Total distributions........................... (0.74) (0.68) (0.67)
------- ------- -------
Net asset value, end of period................ $12.99 $12.99 $12.99
------- ------- -------
Total return (%)(c)........................... 10.3 9.7 9.7
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $36,939 $38,767 $12,252
Ratio of operating expenses to average net
assets (%) .................................. 0.93(b) 1.68(b) 1.68(b)
Ratio of net investment income to average net
assets (%)................................... 8.75(b) 8.00(b) 8.00(b)
Portfolio turnover rate (%)................... 22(b) 22(b) 22(b)
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary
expense limitations would have been (%):
1.58(b) 2.33(b) 2.33(b)
</TABLE>
16
<PAGE>
Investment Strategy
INVESTMENT OBJECTIVES
NEW ENGLAND GOVERNMENT SECURITIES FUND (THE "GOVERNMENT SECURITIES FUND")
The Fund seeks a high level of current income consistent with safety of princi-
pal by investing in U.S. Government securities.Subadviser: Back Bay Advisors,
L.P.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND (THE "LIMITED TERM U.S.
GOVERNMENT FUND")
The Fund seeks a high current return consistent with preservation of
capital.Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND(THE "ADJUSTABLE RATE FUND")
The Fund seeks a high level of current income consistent with low volatility of
principal. The Fund intends to pursue its objective by investing only in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND STRATEGIC INCOME FUND(THE "STRATEGIC INCOME FUND")
The Fund seeks high current income with a secondary objective of capital
growth.Subadviser: Loomis, Sayles & Company, L.P.
NEW ENGLAND BOND INCOME FUND(THE "BOND INCOME FUND")
The Fund seeks a high level of current income consistent with what the Fund
considers reasonable risk. The Bond Income Fund invests primarily in corporate
and U.S. Government bonds. Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND HIGH INCOME FUND(THE "HIGH INCOME FUND")
The Fund seeks high current income plus the opportunity for capital apprecia-
tion to produce a high total return.Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND MUNICIPAL INCOME FUND[FORMERLY NAMED NEW ENGLAND TAX EXEMPT INCOME
FUND] (THE "MUNICIPAL INCOME FUND")
The Fund seeks as high a level of current income exempt from federal income
taxes as is consistent with reasonable risk and protection of shareholders'
capital. The Municipal Income Fund invests primarily in debt securities of mu-
nicipal issuers, the interest of which is exempt from regular federal income
tax but may be subject to the federal alternative minimum tax ("municipal secu-
rities"), and may engage in transactions in financial futures contracts and op-
tions on futures. Subadviser: Back Bay Advisors, L.P.
NEW ENGLAND INVESTMENT COMPANIES AND THE FUNDS' ADVISER AND SUBADVISERS
The investment adviser and subadvisers of each of the Funds are independently-
operated subsidiaries of New England Investment Companies, L.P. ("NEIC"), the
fifth-largest publicly traded investment management firm in the United States.
NEIC is listed on the New York Stock Exchange and through its subsidiaries or
an affiliate manages over $81 billion in assets for individuals and institu-
tions. Each adviser and subadviser operates independently and is staffed by ex-
perienced investment professionals. All the advisers and subadvisers apply spe-
cialized knowledge and careful analysis to the pursuit of each Fund's objec-
tives.
NEW ENGLAND FUNDS MANAGEMENT, L.P. ("NEFM") is investment adviser of each of
the Funds, as well as most of the other New England Funds.
BACK BAY ADVISORS, L.P. ("BACK BAY ADVISORS"), subadviser of all the Funds ex-
cept the Strategic Income Fund, manages over $6 billion in assets, primarily
mutual fund and institutional fixed-income portfolios.
LOOMIS, SAYLES & COMPANY, L.P. ("LOOMIS SAYLES"), subadviser to the Strategic
Income Fund, has over $44 billion of assets under management. Loomis Sayles
manages portfolios for mutual funds and other institutional investors and indi-
viduals.
17
<PAGE>
. LIMITED TERM U.S GOVERNMENT FUND
The Fund seeks to achieve its objective by investing in U.S. Government Secu-
rities. Under normal market conditions, 65% or more of the Fund's total as-
sets will be invested in U.S. Government Securities (including zero coupon
bonds) and collateralized mortgage obligations ("CMOs"). The Fund limits its
investments in CMOs to those issued by instrumentalities of the U.S. Govern-
ment. 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 Rat-
ings Group ("S&P") or unrated but determined by the Fund's subadviser to be
of comparable quality to securities in those rating categories. For hedging
purposes, the Fund may purchase and sell financial futures contracts and op-
tions. The Fund may also engage in securities lending.
The Fund's subadviser, Back Bay Advisors, provides a continuous investment
program designed to maximize current return while minimizing fluctuations in
the value of the Fund's portfolio, thus stabilizing the net asset value of
the Fund's shares. Because the market value of fixed-income securities fluc-
tuates 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 maturi-
ties of more than seven 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 in-
terest rates). Many investors and investment analysts consider duration to be
a more useful measure of price sensitivity than "maturity." A debt instru-
ment's duration is derived by discounting principal and interest payments to
their present value using the instrument's current yield to maturity and cal-
culating the dollar-weighted average time until these payments will be
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
the Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
FUND INVESTMENTS
. GOVERNMENT SECURITIES FUND
The Government Securities Fund expects that 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 partici-
pation certificates guaranteed by the Government National Mortgage Associa-
tion ("GNMA") and Federal Housing Administration debentures.
The Fund may invest in securities of any maturity and in zero coupon securi-
ties. In addition to investing directly in U.S. Government securities, the
Fund may purchase "stripped" securities.
For hedging purposes, the Government Securities Fund may also purchase and
sell interest rate futures contracts on U.S. Government securities and may
write and purchase options on such futures and options on U.S. Government se-
curities. Transactions involving futures and options on futures may help to
reduce the volatility of the Fund's net asset value, but this result cannot
be assured. Options and futures are not backed by the U.S. Government.
It is a fundamental policy of the Fund that under normal market conditions it
will invest at least 65% of its total assets in "U.S. Government Securities,"
which term as used in this prospectus includes all securities issued or guar-
anteed by the U.S. Government or its agencies, authorities or instrumentali-
ties.
18
<PAGE>
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 5.2% for a
five-year U.S. Treasury security and 6.05% for a 30-year U.S. Treasury secu-
rity, a 1% increase in interest rates would be expected to result in approxi-
mately a 4.3% reduction in the value of the five-year security (duration 4.3)
as compared to approximately a 13% reduction in the value of the 30-year se-
curity (duration 13). Conversely, a 1% decrease in interest rates would be
expected to result in similar increases in value. These expectations repre-
sent Back Bay Advisors' estimate of portfolio volatility based upon historic
data collected under a wide variety of market conditions, but there is no as-
surance that actual volatility will be consistent with such expectations.
. 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 se-
curities ("ARMs") or other securities collateralized by or representing in-
terests in mortgages (collectively, "mortgage securities"), which have inter-
est rates that are reset at periodic intervals and which are issued or guar-
anteed 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. Gov-
ernment, its agencies or instrumentalities but will not include any stripped
securities (such as interest only or principal only obligations) or zero cou-
pon obligations. As more fully described in Part I of the Statement, the Fund
also intends to limit its investments to those that would be permissible in-
vestments 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 instru-
ments 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, au-
thorities and/or instrumentalities) ("Foreign Government Securities") and se-
curities issued by supranational agencies. The Fund may invest in debt in-
struments in any rating category including debt instruments rated in the low-
est rating categories (C by Moody's and D by S&P) and in instruments that are
unrated. For more information about the risks of investing in low rated, high
risk securities and securities of foreign issuers, see "Investment Risks --
Lower Rated Fixed-Income Securities" and "Foreign Securities."
Under normal market conditions, the Fund will invest in debt instruments of
both domestic and foreign issuers and in corporate as well as government is-
sues. 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 in-
struments 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).
19
<PAGE>
The Fund may invest in foreign securities but will do so only when the Fund's
subadviser believes the associated risks are minimal as compared to similar
securities of domestic issuers.
The Fund may engage in a variety of options and futures transactions with re-
spect to U.S. or Foreign Government Securities and corporate fixed-income se-
curities. See "Investment Risks-- Options, Futures, Swap Contracts and Cur-
rency Transactions" for information about these kinds of transactions.
. HIGH INCOME FUND
The High Income Fund invests primarily in long-term corporate fixed-income
securities, the majority of which are rated BBB or lower by S&P or Baa or
lower by Moody's or are unrated. The Fund may invest in debt instruments in
any rating category including debt instruments rated in the lowest rating
categories (C by Moody's and D by S&P) and instruments that are unrated. See
"Investment Risks-- Lower Rated Fixed-Income Securities" below. A diversified
portfolio of these securities normally provides a current yield or yield to
maturity that is significantly higher than yields of higher rated fixed-in-
come securities. In addition to high current income, the Fund seeks capital
appreciation through (1) market price appreciation in periods of declining
interest rates and (2) improvement in the credit standing of issuers.
The Fund's subadviser, Back Bay Advisors, provides the Fund with a management
program that seeks to reduce risks to the Fund by diversification and analy-
sis of the underlying creditworthiness of issuers and the underlying value of
securities. Back Bay Advisors performs its own credit analyses and does not
rely primarily on the ratings assigned by rating services. Back Bay Advisors'
analyses, in ascertaining
both creditworthiness and potential for capital appreciation, focus on tech-
nical factors as well as fundamental factors such as the relationship of cur-
rent market price to anticipated cash
The proportion of Fund assets invested in corporate bonds, government bonds
and preferred or common stock will vary over time based on changing market
conditions. When Loomis Sayles believes that a particular market presents
more opportunity than other markets, it may increase the proportion of the
Fund's assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes, the Fund
may also purchase and sell options and futures and engage in foreign currency
transactions. The Fund may also invest in mortgage-backed securities, zero
coupon bonds, stripped securities and pay-in-kind securities. For more infor-
mation about all these types of investments, see "Investment Risks" below.
. BOND INCOME FUND
The Bond Income Fund invests primarily in corporate and U.S. Government
bonds. At least 80% of its total assets will be invested in bonds carrying
investment grade ratings from one of the recognized rating services. The Fund
may also purchase non-rated or lower-rated bonds. Bonds rated BBB by S&P or
Baa by Moody's (the lowest ratings that are considered investment grade) have
some speculative characteristics, and unfavorable changes in economic condi-
tions or other circumstances are more likely to lead to a weakened capacity
of issuers of these bonds to make principal and interest payments than is the
case with higher grade bonds. If an investment rated BBB or Baa is downgraded
by a major rating agency, the Fund's subadviser will consider whether the in-
vestment remains appropriate for the Fund. The Fund may invest in debt in-
struments rated in the rating categories of B (by Moody's and S&P) or higher
and instruments that are unrated. The Fund may invest in securities of any
maturity and in zero coupon securities. The Fund may also invest in CMOs. The
Fund will normally maintain an average dollar-weighted portfolio maturity of
less than ten years. The Fund may invest in convertible securities and in
Rule 144A securities.
20
<PAGE>
flow and its coverage of interest or dividend requirements, debt as a per-
centage of assets, earnings prospects, the experience and perceived strength
of the issuer's management, price responsiveness of the issuer's securities
to changes in interest rates and business conditions, debt maturity schedules
and borrowing requirements and the issuer's liquidation value.
The Fund will not invest in defaulted issues as a standard practice, but may
from time to time invest in certain defaulted issues that, in the view of
Back Bay Advisors, present an attractive opportunity for capital apprecia-
tion. Because defaulted issues are ordinarily not income producing, invest-
ment in such issues would likely reduce the Fund's current yield.
The Fund expects that under normal market conditions at least 80% of the
value of its total assets will be invested in long-term fixed-income securi-
ties of U.S. corporations, including preferred stock and convertible securi-
ties. To achieve its basic investment objective, the Fund from time to time
also may invest up to 20% of the value of its total assets in common stocks
and up to 10% of the value of its total assets in fixed-income securities is-
sued by foreign governments or by companies organized in foreign countries.
However, investments in both of these types of securities on a combined basis
generally will not exceed 20% of the value of the Fund's assets. See "Invest-
ment Risks--Foreign Securities" below.
If Back Bay Advisors expects a rising trend in interest rates, it may shift
the Fund's portfolio into shorter-term debt securities and domestic money
market instruments whose prices might not be affected as much by an increase
in interest rates. During those periods, or other periods when market condi-
tions temporarily warrant a more defensive strategy, the Fund may invest an
unlimited portion of its assets in U.S. Government Securities; certificates
of deposit, bankers' acceptances and other obligations of U.S. banks with de-
posits of at least $2 billion at the close of the last calendar year; commer-
cial paper that is rated in the two highest categories of Moody's or S&P;
short-term fixed-income securities that are rated within the three highest
categories of Moody's or S&P; and repurchase agreements with financial insti-
tutions deemed creditworthy by Back Bay Advisors. Investment in such instru-
ments may result in a lower current yield and would tend to limit apprecia-
tion possibilities.
The Fund may lend portfolio securities amounting to not more than 10% of its
assets to securities dealers. These transactions must be fully collateralized
at all times, but involve some credit risk to the Fund if the other party
should default on its obligations and the Fund is delayed in or prevented
from recovering the collateral.
The Fund may engage in a variety of options and futures transactions with re-
spect to U.S. or Foreign Government Securities and corporate fixed-income se-
curities. See "Investment Risks--Options, Futures, Swap Contracts and Cur-
rency Transactions" for information about these kinds of transactions.
. MUNICIPAL INCOME FUND
The Fund will normally invest at least 80% of its net assets in debt securi-
ties of Municipal Issuers, the interest from which is exempt from regular
federal income tax but may be subject to the federal alternative minimum tax.
For this purpose, "Municipal Issuers" means states and other political subdi-
visions of the United States, local governments, and agencies, authorities
and other instrumentalities of the foregoing. Securities purchased by the
Fund will be largely of investment grade quality. Immediately after the pur-
chase of any investment, at least 85% of the Fund's assets will consist of
securities rated AAA, AA, A or BBB by S&P or Aaa, Aa, A or Baa by Moody's or
unrated but determined by the Fund's subadviser to be of comparable quality
to securities in those rating categories. The other 15% of the Fund's assets
may be invested in securities rated below investment grade (below BBB or Baa)
or unrated but determined by the subadviser to be of comparable quality.
Bonds rated BBB or
21
<PAGE>
Baa are considered investment grade but may have some speculative character-
istics. Unfavorable changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity of issuers of these bonds to make
principal and interest payments than is the case with higher grade bonds. If
an investment rated BBB or Baa is downgraded by a major rating agency, the
subadviser will consider whether the investment remains appropriate for the
Fund. The Fund may invest in bonds rated in the lowest rating categories, D
by S&P or C by Moody's. These classes of bonds can be regarded as having ex-
tremely poor prospects of ever attaining any real investment standing. The
Fund may invest in securities of any maturity.
The Fund may also purchase and sell interest rate futures contracts and tax
exempt bond index futures contracts and may write and purchase related op-
tions. Transactions involving futures and options on futures may help to re-
duce the volatility of the Fund's net asset value and the writing of options
on futures may yield additional income for the Fund, but these results cannot
be assured. Income from options and futures transactions is not tax-exempt.
Although the yield of a tax exempt fund generally will be lower than that of
a taxable income fund, the net after-tax return to investors may be greater.
The table below illustrates what tax free investing can mean. It shows what
you must earn from a taxable investment to equal a tax-free yield ranging
from 4% to 6%, under current federal tax rates. You can see that as your tax
rate goes up, so do the benefits of tax-free income. For example, a married
couple with a taxable income of $40,000 filing a joint return would have to
earn a taxable yield of 8.33% to equal a tax-free yield of 6.0%. This example
and the following table do not take into account the effect of state or local
income taxes, if any, or federal income taxes on social security benefits
which may arise as a result of receiving tax exempt income, or the federal
alternative minimum tax that may be payable to the extent that Fund dividends
are derived from interest on "private activity" bonds (see below). Also, a
portion of the Fund's distributions may consist of ordinary income or short-
term or long-term capital gains and will be taxable to you as such.
TAX FREE INVESTING
TAXABLE EQUIVALENT YIELDS
<TABLE>
<CAPTION>
TAXABLE INCOME IF TAX EXEMPT YIELD IS
- ------------------------------------ FEDERAL -----------------------------
4.0% 4.5% 5.0% 5.5% 6.0%
----- ----- ----- ----- -----
MARGINAL THEN THE EQUIVALENT TAXABLE
SINGLE RETURN ($) JOINT RETURN ($) TAX RATE YIELD WOULD BE:
- ----------------- ----------------- -------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 24,000 0 - 40,100 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
24,001 - 58,150 40,101 - 96,900 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
58,151 - 121,300 96,901 - 147,700 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
121,301 - 263,750 147,701 - 263,750 36.00% 6.25% 7.03% 7.81% 8.59% 9.38%
263,751 and over 263,751 and over 39.60% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
Under the Internal Revenue Code (the "Code"), the interest on so-called "pri-
vate activity" bonds is an item of tax preference, which, depending on the
shareholder's particular tax situation, might subject the shareholder to an al-
ternative minimum tax with a maximum rate of 28%. The Fund may to invest all or
any portion of its assets in "private activity" bonds.
The interest on tax exempt bonds issued after certain dates in 1986 is retroac-
tively 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.
22
<PAGE>
. 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 As-
sociation (the "FNMA") are supported only by the credit of those corpora-
tions. Similarly, obligations of foreign governmental entities include obli-
gations 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 Secu-
rities 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 Govern-
ment 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 an-
ticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Bond Income and Strategic Income Funds may engage in transactions in cur-
rency forward contracts. A currency forward contract is a contract with a ma-
jor international bank that obligates the bank and the other party to the
contract to exchange specified amounts of different currencies at a specified
future date. For example, the bank may agree to deliver a specified number of
French francs, in exchange for a specified number of U.S. dollars on a cer-
tain date.
From time to time, a portion of the Bond Income or Strategic Income Fund's
assets may be invested in securities that are denominated in foreign curren-
cies or that are traded in markets where purchase or sale transactions settle
in a foreign currency. Currency forward contracts may be used both (1) to fa-
cilitate settlement of a Fund's transactions in these securities and (2) to
hedge against possible adverse changes in the relative values of the curren-
cies in which the Fund's portfolio holdings (or intended future holdings) are
denominated.
Currency forward contracts involve transaction costs and the risk that the
banks with which a Fund enters into such contracts will fail financially.
Each Fund's subadviser will, however, monitor the creditworthiness of these
banks on an ongoing basis. Successful use of currency forward contracts for
hedging purposes also depends on the accuracy of the subadviser's forecasts
as to future changes in the relative values of currencies. The accuracy of
such forecasts cannot be assured. The Fund will set aside with its custodian
certain assets to provide for satisfaction of its obligations under currency
forward contracts.
Although both Funds are permitted to use currency forward contracts, they are
not obligated to do so. Thus, the Funds will not necessarily be fully (or
even partially) hedged against the risk of adverse currency price movements
at any given time.
Foreign currency transactions involve costs and may result in losses. See
Part II of the Statement for more information.
23
<PAGE>
. ADDITIONAL INFORMATION
Each Fund may purchase securities for its portfolio on a "when-issued" basis.
This means that the Fund will enter into the commitment to buy the security
before the security has been issued. The Fund's payment obligation and the
interest rate on the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15 to 120 days
later. No interest accrues on the security between the time the Fund enters
into the commitment and the time the security is delivered.
The Funds, consistent with their investment objectives, attempt to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic market
conditions and trends. The Government Securities and Strategic Income Funds
also invest to take advantage of what are believed to be temporary dispari-
ties in the yields of the different segments of the market for U.S. Govern-
ment Securities. These policies may result in higher turnover rates in the
Funds' portfolios, which may produce higher transaction costs and a higher
level of taxable capital gains. Portfolio turnover considerations will not
limit any Fund's subadviser's investment discretion in managing the Fund's
assets. Recent portfolio turnover rates for the Funds are set forth above un-
der "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a Fund buys secu-
rities from a seller, usually a bank or brokerage firm, with the understand-
ing that the seller will repurchase the securities at a higher price at a
later date. If the seller fails to repurchase the securities, the Fund has
rights to sell the securities to third parties. Repurchase agreements can be
regarded as loans by the Fund to the seller, collateralized by the securities
that are the subject of the agreement. Repurchase agreements afford an oppor-
tunity for the Fund to earn a return on available cash at relatively low
credit risk, although the Fund may be subject to various delays and risks of
loss if the seller fails to meet its obligation to repurchase. The staff of
the SEC is currently of the view that repurchase agreements maturing in more
than seven days are illiquid securities.
24
<PAGE>
Investment Risks
It is important to understand the following risks inherent in a Fund before you
invest.
. FIXED-INCOME SECURITIES (ALL FUNDS)
The Funds invest principally in fixed-income securities. Because interest
rates vary, it is impossible to predict the income of a Fund for any particu-
lar 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 interna-
tional 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 as-
sets (such as mortgages or other receivables) that have been set aside as
collateral for the issuer's obligation. Fixed-income securities generally in-
volve 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 inter-
est. 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, leg-
islation 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 cor-
porate fixed-income securities. Market risk is the risk that the value of the
security will fall because of changes in market rates of interest. (General-
ly, 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 if is due, thus depriving the Fund of a favorable stream of
future interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period. Fluctua-
tions in the value of a Fund's investments in fixed-income securities will
cause the Fund's net asset value to increase or decrease.
. LOWER RATED FIXED-INCOME SECURITIES (STRATEGIC INCOME FUND, BOND INCOME FUND,
HIGH INCOME FUND AND MUNICIPAL INCOME FUND)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are of below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality fixed-in-
come securities, including U.S. Government and many Foreign Government Secu-
rities. 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 in-
vesting 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 cer-
tain categories of financial institutions to invest in these securities. In
addition, the secondary market may be less liquid for lower rated fixed-in-
come securities. This lack of liquidity at certain times may affect the valu-
ation of these securities and may make the valuation and sale of these secu-
rities more difficult. Securities of below investment grade quality are con-
sidered high yield, high risk securities and are commonly known as "junk
bonds." For more information, including a de-
25
<PAGE>
tailed description of the ratings assigned by S&P and Moody's, please refer
to the Statement's "Appendix A--Description of Bond Ratings."
During the fiscal year ended December 31, 1995, 18% and 14% of the average
month-end net assets of the Bond Income Fund and Municipal Income Fund, re-
spectively, were invested in fixed-income securities rated in the rating cat-
egories below investment grade (BBB/Baa). The portfolio compositions of the
High Income Fund and the Strategic Income Fund during the fiscal year ended
December 31, 1995 are summarized in Appendix B to this prospectus.
. FOREIGN SECURITIES (STRATEGIC INCOME FUND, BOND INCOME FUND AND HIGH INCOME
FUND)
Foreign Government Securities and foreign corporate securities present risks
not associated with investments in U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign cur-
rencies, the value of these investments and the net investment income avail-
able for distribution to shareholders of a Fund may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control regula-
tions. Because the Strategic Income Fund, the Bond Income Fund and the High
Income Fund may purchase securities denominated in foreign currencies, a
change in the value of any such currency against the U.S. dollar will result
in a change in the U.S. dollar value of the Fund's assets and the Fund's in-
come 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. dol-
lar declines after a Fund's income has been earned in that currency, trans-
lated 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 stan-
dards and practices comparable to those in the United States. The securities
of some foreign issuers are less liquid and at times more volatile than secu-
rities of comparable U.S. issuers. Foreign brokerage commissions and other
fees in some circumstances may be higher than in the United States. With re-
spect to certain foreign countries, there is a possibility of expropriation
of assets, confiscatory taxation, political or financial instability and dip-
lomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may de-
pend on the availability of tax or other revenues to satisfy the issuer's ob-
ligations. 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 in-
vestments 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 interna-
tional aid or development assistance, currency transfer restrictions, highly
limited numbers of potential buyers for such securities and delays and dis-
ruptions in securities settlement procedures.
26
<PAGE>
In addition, the Funds may invest in securities issued by supranational agen-
cies. Supranational agencies are those agencies whose member nations deter-
mine to make capital contributions to support the agencies' activities, and
include such entities as the International Bank of Reconstruction and Devel-
opment (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
subadviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution
to shareholders.
. MORTGAGE-RELATED SECURITIES (ALL FUNDS EXCEPT MUNICIPAL INCOME FUND)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if a Fund purchases these
assets at a premium, a faster-than-expected prepayment rate will reduce yield
to maturity, and a slower-than-expected prepayment rate will have the oppo-
site effect of increasing yield to maturity. If a Fund purchases mortgage-re-
lated securities at a discount, faster-than-expected prepayments will in-
crease, 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 prepay-
ment. Although these securities will decrease in value as a result of in-
creases 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 prin-
cipal 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 in-
tervals, 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 under-
lying 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 re-
ceivables are being securitized in pass-through structures similar to mort-
gage pass-through structures or in a pay-through structure similar to a CMO
structure. Generally the issuers of asset-backed bonds, notes or pass-through
certificates are special purpose entities and do not have any significant as-
sets 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 prepay-
ments of prin-
27
<PAGE>
cipal prior to maturity. When the obligations are prepaid, the Fund will or-
dinarily reinvest the prepaid amounts in securities the yields of which re-
flect 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 obliga-
tions. Moreover, prepayments of securities purchased at a premium could re-
sult in a realized loss.
. COLLATERALIZED MORTGAGE OBLIGATIONS (ALL FUNDS EXCEPT MUNICIPAL INCOME FUND)
A CMO is a security backed by a portfolio of mortgages or mortgage securities
held under an indenture. The underlying mortgages or mortgage securities are
issued or guaranteed by the U.S. Government or an agency or instrumentality
thereof. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage securities. CMOs
are issued with a number of classes or series which have different maturities
and which may represent interests in some or all of the interest or principal
on the underlying collateral or a combination thereof. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. In the event of sufficient early prepayments on
such mortgages, the class or series of CMO first to mature generally will be
retired prior to its maturity. Thus, the early retirement of a particular
class or series of CMO held by the Fund would have the same effect as the
prepayment of mortgages underlying a mortgage pass-through security. CMOs may
be considered derivative securities.
. "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that re-
ceive 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 princi-
pal-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 is-
sued 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 secu-
rities may be considered derivative securities.
. ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND) PAY-IN-KIND
SECURITIES (HIGH INCOME AND STRATEGIC INCOME FUNDS)
Zero coupon securities are issued at a significant discount from face value
and pay interest only at maturity, rather than at intervals during the life
of the security. Pay-in-kind securities pay dividends or interest in the form
of additional securities of the issuer, rather than in cash. The prices of
pay-in-kind or zero coupon securities may react more strongly to changes in
interest rates than the prices of many other securities. The Funds are re-
quired to accrue and distribute income from pay-in-kind and zero coupon secu-
rities on a current basis, even though the Funds will not receive the income
currently in cash. Thus a Fund may have to sell other investments to obtain
cash needed to make income distributions.
. WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the
time a Fund commits to buy it and the payment date, the Fund may sustain a
loss. The risk of this loss is in addition to the Fund's risk of loss on the
securities actually in its portfolio at the time. In addition, when a Fund
buys a security on a when-issued basis, it is subject to the risk that market
rates of interest will increase before the time the security is delivered,
with the result that the yield on the security delivered to the Fund may be
lower than the yield available on
28
<PAGE>
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" ba-
sis.
. OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (ALL FUNDS EXCEPT
ADJUSTABLE RATE FUND)
Except as otherwise noted, the following discussion applies to all Funds ex-
cept the Adjustable Rate Fund. The Funds may engage in a variety of transac-
tions involving the use of options and futures with respect to U.S. or For-
eign Government Securities, corporate fixed-income securities (in the case of
the Strategic Income Fund) or municipal bonds or indices thereof (in the case
of the Municipal Income Fund) for purposes of hedging against changes in in-
terest rates.
A Fund may buy, sell or write options on securities, securities indexes, cur-
rencies or futures contracts. A Fund may buy and sell futures contracts on
securities, securities indexes or currencies. A Fund may also enter into swap
contracts. A Fund may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the value of
other assets that a Fund owns or intends to acquire. A Fund may also conduct
foreign currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial instru-
ments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be considered a specula-
tive activity, involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the "buyer."
A call option gives the buyer the right to buy a security or other asset
(such as an amount of currency or a futures contract) from, and a put option
the right to sell a security or other asset to, the option writer at a
specified price, on or before a specified date. The buyer of an option pays a
premium when purchasing the option, which reduces the return on the underlying
security or other asset if the option is exercised, and results in a loss if
the option expires unexercised. The writer of an option receives a premium from
writing an option, which may increase its return if the option expires or is
closed out at a profit. If a Fund as the writer of an option is unable to close
out an unexpired option, it must continue to hold the underlying security or
other asset until the option expires, to "cover" its obligations under the
option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract by
the Fund exceeds (or is less than) the price of the offsetting purchase, the
Fund will realize a gain (or loss). A Fund may not purchase or sell futures
contracts or purchase related options if immediately thereafter the sum of
the amount of deposits for initial margin or premiums on the existing futures
and related options positions would exceed 5% of the market value of the
Fund's net assets. Transactions in futures and related options involve the
risks of (1) imperfect correlation between the price movement of the con-
tracts and the underlying securities, (2) significant price movement in one
but not the other market because of different hours, (3) the possible absence
of a liquid secondary market at any point in time, and the risk that if the
subadviser's prediction on interest rates or other economic factors is inac-
curate, the Fund may be worse off than if it had not hedged. Futures transac-
tions involve potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index swaps.
The Funds will enter into these transactions primarily to
29
<PAGE>
seek to preserve a return or spread on a particular investment or portion of
its portfolio, to protect against currency fluctuations, as a duration man-
agement technique or to protect against an increase in the price of securi-
ties a Fund anticipates purchasing at a later date. Interest rate swaps in-
volve the exchange by the Fund with another party of their respective commit-
ments to pay or receive interest (for example, an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of princi-
pal). 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 dif-
ferent returns that would be achieved if a notional amount were invested in a
specified basket of securities (such as the Standard & Poor's Composite Index
of 500 Stocks [the "S&P 500"]) or in some other investment (such as U.S.
Treasury securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on a
variety of market and economic factors. In some cases, the fluctuations may
offset (or be offset by) changes in the value of securities held in the
Fund's portfolio. All transactions in options, futures or swaps involve costs
and the possible risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may exceed the
amount of the Fund's investment. The Fund will be required, however, to set
aside with its custodian bank certain assets in amounts sufficient at all
times to satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on a
Fund's subadviser's ability to forecast bond market, currency or other finan-
cial market movements correctly. The Fund's ability to hedge against adverse
changes in the value of securities held in its portfolio through options,
futures and swap transactions also depends on the degree of correlation be-
tween the changes in the value of futures, options or swap positions and
changes in the values of the portfolio securities. The successful use of
futures and exchange traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a timely
basis. There can be no assurance that such a market will exist at any partic-
ular time. Trading hours for options may differ from the trading hours for
the underlying securities. Thus, significant price movements may occur in the
securities markets that are not reflected in the options market. This may
limit the effectiveness of options as hedging devices. In the case of swap
contracts and of options that are not traded on an exchange and not protected
by the Options Clearing Corporation ("over-the-counter" options), the Fund is
at risk that the other party to the transaction will default on its obliga-
tions, or will not permit the Fund to terminate the transaction before its
scheduled maturity. As a result of these characteristics, the Funds will
treat most swap contracts and over-the-counter options (and the assets they
segregate to cover their obligations thereunder) as illiquid. Certain provi-
sions of the Code and certain regulatory requirements may limit the Funds'
ability to engage in futures, options and swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases
by less liquidity than are the U.S. markets. In addition, foreign markets may
be subject to less detailed reporting requirements and regulatory controls
than U.S. markets. Furthermore, investments by the 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 "Miscellaneous Investment Practices--Futures,
Options and Swap Contracts" in Part II of the Statement.
.Rule 144A Securities (strategic Income and Bond Income Funds)
Rule 144A securities are privately offered securities that can be resold only
to certain qualified buyers. Rule 144A securities
30
<PAGE>
are treated as illiquid, unless the subadviser has determined, under guide-
lines established by the trustees of New England Funds Trust I, that the par-
ticular issue of Rule 144A securities is liquid. Investment in illiquid secu-
rities involves the risk that the Fund may be unable to sell such a security
at the desired time.
. SECURITIES LENDING (LIMITED TERM U.S. GOVERNMENT FUND)
The Limited Term U.S. Government Fund may lend its portfolio securities to
broker-dealers or other parties under contracts calling for the deposit by
the borrower with the Fund's custodian of cash collateral equal to at least
the market value of the securities loaned, marked to market on a daily basis.
The Fund will continue to benefit from interest or dividends on the securi-
ties loaned and will also receive interest through investment of the cash
collateral in short-term liquid investments. No loans will be made if, as a
result, the aggregate amount of such loans outstanding at any time would ex-
ceed 25% of the Fund's total assets (taken at current value). Any voting
rights, or rights to consent, relating to securities loaned pass to the bor-
rower. However, if a material event affecting the investment occurs, such
loans will be called so that the securities may be voted by the Fund. The
Fund pays various fees in connection with such loans, including shipping fees
and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but involve some
credit risk to the Fund if the borrower defaults on its obligation and the
Fund is delayed or prevented from recovering the collateral.
31
<PAGE>
Fund Management
NEFM, 399 Boylston Street, Boston, Massachusetts 02116, serves as the adviser
to each of the Funds. NEFM oversees, evaluates and monitors the subadvisory
services provided to each Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
Loomis Sayles, One Financial Center, Boston, Massachusetts 02111, is the
subadviser of the Strategic Income Fund. Founded in 1926, Loomis Sayles is one
of the country's oldest and largest investment counsel firms. Daniel Fuss, Man-
aging Partner and Executive Vice President of Loomis Sayles, has served as the
Strategic Income Fund's lead portfolio manager since the Fund's inception in
May 1995. Mr. Fuss joined Loomis Sayles in 1976. Kathleen C. Gaffney, Vice
President of Loomis Sayles, has been assisting Mr. Fuss as a portfolio manager
of the Fund since April 1996. Ms. Gaffney joined Loomis Sayles in 1984.
The subadviser of the other Funds is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Back Bay Advisors provides discretionary invest-
ment management services to mutual funds and other institutional investors.
Formed in 1986, Back Bay Advisors now manages 15 mutual fund portfolios and a
total of over $6 billion of securities. Eric N. Gutterson, Vice President of
Back Bay Advisors, has served as the portfolio manager of the Government Secu-
rities Fund and Limited Term U.S. Government Fund since April 1994. J. Scott
Nicholson, Senior Vice President of Back Bay Advisors, has served as the Ad-
justable Rate Fund's portfolio manager since the Fund's inception in October
1991. Catherine L. Bunting, Senior Vice President of Back Bay Advisors, has
served as the Bond Income Fund's portfolio manager since 1989. Charles G.
Glueck, Jr., Senior Vice President of Back Bay Advisors, has served as the High
Income Fund's portfolio manager since 1988. Nathan R. Wentworth, Vice President
of Back Bay Advisors, has served as the Municipal Income Fund's portfolio man-
ager since 1983. Each of the foregoing persons has been employed by Back Bay
Advisors for at least five years.
NEFM intends to recommend to the trustees of New England Funds Trust II that
Loomis Sayles be approved as subadviser to the High Income Fund, replacing Back
Bay Advisors. This change is contingent upon the approval of the trustees and
the vote of the shareholders of the Fund. A proxy statement containing more de-
tailed information regarding this proposed change will be sent to the share-
holders of the Fund and, if such change is effected, the prospectus will be
supplemented at such time.
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it acts as subadviser in accordance with the Fund's invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities for the Fund and employs professional
advisers and securities analysts who provide research services relating to the
Fund. The Funds pay no direct fees to the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate set forth in
the following table:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID BY FUND TO NEFM
FUND (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS OF THE FUND)
- ------------------------------------ ---------------------------------------------------------
<S> <C>
Adjustable Rate Fund.............. 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of $500 million
Bond Income Fund.................. 0.500% of the first $100 million
0.375% of amounts in excess of $100 million
Government Securities Fund........ 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of $500 million
High Income Fund.................. 0.75% of all assets
Limited Term U.S. Government Fund. 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of $500 million
Strategic Income Fund............. 0.65% of the first $200 million
0.60% of amounts in excess of $200 million
Municipal Income Fund............. 0.500% of the first $100 million
0.375% of amounts in excess of $100 million
</TABLE>
32
<PAGE>
The rate of the management fee payable by the High Income Fund is higher than
that paid by most mutual funds, but is comparable to fee rates paid by some mu-
tual funds with similar investment objectives and policies to the Fund.
NEFM pays each Fund's subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
SUBADVISORY FEE PAYABLE BY NEFM TO SUBADVISER
FUND SUBADVISER (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS OF THE FUND)
- ------------------------ ---------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Fund.... Back Bay 0.275% of the first $200 million
Advisors 0.255% of the next $300 million
0.235% of amounts in excess of $500 million
Bond Income Fund........ Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of $100 million
Government Securities Back Bay 0.3250% of the first $200 million
Fund................... Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund........ Back Bay 0.375% of all assets
Advisors
Limited Term U.S. Back Bay 0.3250% of the first $200 million
Government Fund........ Advisors 0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund... Loomis 0.35% of the first $200 million
Sayles 0.30% of amounts in excess of $200 million
Municipal Income Fund... Back Bay 0.2500% of the first $100 million
Advisors 0.1875% of amounts in excess of $100 million
</TABLE>
Prior to January 2, 1996, Back Bay Advisors served as adviser to each Fund
other than the Strategic Income Fund.
Loomis Sayles has voluntarily agreed, until further notice to the Strategic In-
come Fund, to waive its entire subadvisory fee (which is paid by NEFM), and
NEFM has agreed to reduce its management fee (which is paid by the Fund) by an
equal amount. These agreements may be terminated by Loomis Sayles or NEFM at
any time. In addition, under an expense deferral arrangement, which NEFM may
terminate at any time, NEFM has agreed to defer its management fee (to the ex-
tent not waived as provided in the preceding sentences) for the Strategic In-
come Fund until further notice, to the extent necessary to limit the Fund's ex-
penses to the annual rate of 1.40% for Class A shares, 2.15% for Class B shares
and 2.15% for Class C shares, subject to the obligation of the Fund to pay NEFM
such deferred fees in later periods to the extent that the Fund's expenses fall
below the annual rate of 1.40% for Class A shares, 2.15% for Class B shares and
2.15% for Class C shares; provided, however, that the Fund is not obligated to
pay any such deferred fees more than two years after the end of the fiscal year
in which such fee was deferred.
NEFM has voluntarily agreed, until further notice to the High Income Fund, to
reduce its management fee and, if necessary, to bear certain expenses associ-
ated with operating the Fund in order to limit the Fund's expenses to an annual
rate of 1.60% of the average daily net assets of the Fund's Class A shares and
2.25% of the Fund's Class B shares.
NEFM and Back Bay Advisers have voluntarily agreed, until further notice to the
Adjustable Rate Fund, to reduce their fees and, if necessary, to bear certain
expenses associated with operating the Fund, in order to limit the Fund's ex-
penses to the annual rate of 0.70% of the Fund's average
33
<PAGE>
daily net assets for Class A shares and 1.45% for Class B shares.
If any of the voluntary fee reductions described above are terminated, the pro-
spectus of the affected Fund will be supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM and the Distrib-
utor are special purpose corporations that are indirect, wholly-owned subsidi-
aries of NEIC. NEIC's sole general partner, New England Investment Companies,
Inc. ("NEIC Inc."), is a wholly-owned subsidiary of New England Mutual Life In-
surance Company ("The New England"). The New England and Metropolitan Life In-
surance Company ("MetLife") have entered into an agreement to merge, with
MetLife to be the survivor of the merger. The merger is conditioned upon, among
other things, approval by the policyholders of The New England and MetLife and
receipt of certain regulatory approvals. After such merger, NEIC Inc. will be a
wholly-owned subsidiary of MetLife.
In placing portfolio transactions for the Funds, Back Bay Advisors and Loomis
Sayles seek the most favorable price and execution available. Subject to appli-
cable regulatory restrictions and such policies as each Trust's trustees may
adopt, Back Bay Advisors and Loomis Sayles may consider sales of shares of the
Funds and other mutual funds they manage as a factor in the selection of bro-
ker-dealers to effect portfolio transactions for the Funds. Subject to proce-
dures adopted by the trustees of the Trusts, the Funds may pay brokerage com-
missions to New England Securities Corporation, an affiliate of NEFM, on pur-
chases and sales of securities for the portfolios of the Funds. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
In addition to overseeing the management of the Funds' portfolios as conducted
by the subadvisers, NEFM provides executive and other personnel for the manage-
ment of the Trusts. Each Trust's Board of Trustees supervises the affairs of
that Trust as conducted by NEFM and the subadvisers.
34
<PAGE>
Buying Fund Shares
USING TELE#FACTS 1-800-346-5984
TELE#FACTS IS NEW ENGLAND FUNDS' AUTOMATED SERVICE SYSTEM THAT GIVES YOU 24-
HOUR ACCESS TO YOUR ACCOUNT. THROUGH YOUR TOUCH-TONE TELEPHONE, YOU CAN RECEIVE
YOUR CURRENT ACCOUNT BALANCE, YOUR LAST FIVE TRANSACTIONS, FUND PRICES AND RE-
CENT PERFORMANCE INFORMATION. YOU CAN ALSO PURCHASE, SELL OR EXCHANGE CLASS A
SHARES OF ANY NEW ENGLAND FUND. FOR A FREE BROCHURE ABOUT TELE#FACTS INCLUDING
A CONVENIENT WALLET CARD, CALL US AT 1-800-225-5478.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in any Fund and $50 is the min-
imum for each subsequent investment. There are special initial investment mini-
mums for the following plans:
. $25 (for initial and subsequent investments) for payroll deduction investment
programs for 401(k), SARSEP, 403(b) retirement plans and certain other retire-
ment plans.
. $50 for automatic investing through the Investment Builder program.
. $250 for retirement plans with tax benefits such as corporate pension and
profit sharing plans, IRAs and Keogh plans.
. $1,000 for accounts registered under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income and Bond Income Funds) Class C shares of the Funds
in the following ways:
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with a
check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an addi-
tional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or trust-
ee. Third party checks will not be accepted. When purchases are made by check
or periodic account investment, redemptions will not be allowed until the in-
vestment being redeemed has been in the account for 10 calendar days.
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call us at 1-800-225- 5478 between 8:00 a.m. and
7:00 p.m. (Eastern time) to obtain an account number and wire transfer instruc-
tions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and Class of shares), Shareholder Name, Shareholder Account Number. Funds may
be transferred between 9:00 a.m. and 4:00 p.m. (Eastern time). Your bank may
charge a fee for this service.
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may au-
thorize automatic monthly transfers of $50 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an au-
tomatic investment plan through Investment Builder. Indicate the amount of the
monthly investment on the enclosed application and enclose a check marked
"Void" or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at 1-800-225-
5478 for a Service Options Form.
35
<PAGE>
TO MAKE INVESTING EVEN EASIER, YOU CAN ALSO ORDER PERSONALIZED INVESTMENT
SLIPS BY CALLING 1-800-225-5478 BETWEEN 8:00 A.M. AND 7:00 P.M. (EASTERN
TIME).
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clear-
ing House ("ACH") system as long as your bank or credit union is a member of
the ACH system and you have a completed, approved ACH application on file with
the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) for instructions or call Tele#Facts at 1-800-346-5984 twenty-
four hours a day. Under normal circumstances, the New York Stock Exchange (the
"Exchange") closes at 4:00 p.m. (Eastern time). Purchase orders through ACH or
Tele#Facts will be complete only upon receipt by New England Funds of funds
from your bank and, on the day that funds are received, will be processed at
the net asset value next determined at the close of regular trading on the Ex-
change on days that the Exchange is open. Proceeds of redemptions of Fund
shares purchased through ACH may not be available for up to ten days after the
purchase date.
BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares--Exchanging Among New England
Funds" for complete details.
GENERAL
All purchase orders are subject to acceptance by the Funds and will be ef-
fected at the net asset value next determined after the order is received in
proper form by State Street Bank and Trust Company ("State Street Bank") (ex-
cept orders received by your investment dealer before the close of trading on
the Exchange and transmitted to the Distributor by 5:00 p.m. [Eastern time] on
the same day, which will be effected at the net asset value determined on that
day). Although the Funds do not anticipate doing so, they reserve the right to
suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to per-
sons whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you re-
quest them in writing from the Distributor. The Funds' "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B or
Class C shares.
If you wish transactions in your account to be effected by another person un-
der a power of attorney from you, special rules apply. Please contact your in-
vestment dealer or the Distributor for details.
SALES CHARGES
Each Fund offers two (or, in the case of the Limited Term U.S. Government
Fund, Strategic Income Fund and Bond Income Fund, three) classes of shares to
the general public:
CLASS A SHARES
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% an-
nual service fee and, in the case of the High Income and Limited Term U.S.
Government Funds, a 0.10% annual distribution fee. Class A shares are offered
subject to the following sales charges:
GOVERNMENT SECURITIES FUND
STRATEGIC INCOME FUND
BOND INCOME FUND
MUNICIPAL INCOME FUND
HIGH INCOME FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
VALUE OF OFFERING AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
$100,000 -
$249,999 3.50% 3.63% 3.00%
$250,000 -
$499,999 2.50% 2.56% 2.15%
$500,000 -
$999,999 2.00% 2.04% 1.70%
$1,000,000 or
more None None *
</TABLE>
36
<PAGE>
LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
VALUE OF OFFERING AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$100,000 3.00% 3.09% 2.70%
$100,000 -
$249,999 2.50% 2.56% 2.15%
$250,000 -
$499,999 2.00% 2.04% 1.70%
$500,000 -
$999,999 1.25% 1.27% 1.00%
$1,000,000 or
more None None *
</TABLE>
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF DEALER'S
----------------------- CONCESSION
NET AS % OF
VALUE OF OFFERING AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Up to - $999,999 1.00% 1.01% 0.85%
$1,000,000 or
more None None *
</TABLE>
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases of the Funds (except the Adjustable
Rate Fund and investments by plans under Sections 401(a) or 401(k) of the
Code whose total investments amount to $1 million or more or that have 100 or
more eligible employees ["Retirement Plans"]) a commission of up to the fol-
lowing amounts: 1% on the first $3 million invested; 0.50% on the next $2
million; and 0.25% on the excess over $5 million. The Distributor may, at its
discretion, pay investment dealers who initiate and are responsible for such
purchases of the Adjustable Rate Fund, including purchases by Retirement
Plans, a commission of up to the following amounts: 0.50% on the first $3
million invested; 0.20% on the next $2 million; and 0.08% on the excess over
$5 million. For investments by Retirement Plans, the Distributor may, at its
discretion, pay investment dealers who initiate and are responsible for such
purchases a commission of up to the following amounts: 1% on the first $3
million invested; and 0.50% on amounts over $3 million and up to $10 million.
These commissions are not payable if the purchase represents the reinvestment
of a redemption from any New England Fund during the previous 12 calendar
months. Section 401(a), 401(k), 457 and 403(b) plans that have total invest-
ment assets of at least $10 million are eligible to purchase Class Y shares
of certain Funds, which are described in a separate prospectus.
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of
$1,000,000 or more of Class A shares of the Funds or purchases by Retirement
Plans as defined above, a CDSC at the rate of 1% of the lesser of the purchase
price or the net asset value at the time of redemption, applies to redemptions
of Class A shares purchased within one year before the redemption. If an ex-
change is made to Class A shares of any of New England Cash Management Trust
Money Market Series or U.S. Government Series or New England Tax Exempt Money
Market Trust (the "Money Market Funds"), then the one-year holding period for
purposes of determining the expiration of the CDSC will stop and will resume
only when an exchange is made back into Class A shares of a series of the
Trusts. If the Money Market Fund shares are redeemed rather than exchanged back
into a series of the Trusts, then a CDSC applies to the redemption. For pur-
poses of the CDSC, it is assumed that the Class A shares held the longest are
the first to be redeemed. No CDSC applies to a redemption of Class A shares
followed by a reinvestment effected within 30 days after the date of redemp-
tion.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
subject to a 0.25% annual service fee, a 0.75% annual distribution fee for
eight years (at which time they automatically convert to Class A shares) and a
CDSC if they are redeemed within five years of purchase. The holding period for
purposes of timing the conversion to Class A shares and determining the CDSC
will continue to run after an exchange to Class B shares of a series of the
Trusts. If the exchange is made to Class B shares of a Money Market Fund, then
the holding period stops and will resume only when an exchange is made back
into Class B shares of a series of the Trusts. If the Money Market Fund shares
are redeemed rather than exchanged back into a series of the Trusts, then a
CDSC applies to the redemption, at the same rate as if the Class B shares of
the Fund had been redeemed at the time they were exchanged for Money Market
Fund shares. For the purposes of the CDSC, it is assumed that the shares held
the longest are the first to be redeemed.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption. Ac-
cordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no charge will be assessed on shares of
the same Fund purchased with reinvested dividends or capital gains distribu-
tions. The amount of the CDSC, if any, will vary depending on the number of
years from the time
37
<PAGE>
A, B OR C SHARES-WHICH SHOULD YOU CHOOSE?
YOUR CHOICE OF SHARE CLASS DEPENDS ON THE SIZE OF YOUR INVESTMENT AND HOW LONG
YOU INTEND TO HOLD YOUR SHARES. IN GENERAL, THERE ARE ONLY MINOR DIFFERENCES IN
PERFORMANCE RESULTS FOR THE DIFFERENT CLASSES IF HELD FOR THE LONG TERM. CON-
SULT YOUR FINANCIAL REPRESENTATIVE FOR HELP IN DECIDING WHICH CLASS IS APPRO-
PRIATE FOR YOU.
of payment for the purchase of Class B shares until the time of redemption of
such shares. The CDSC equals the following percentages of the dollar amounts
subject to the charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ------------------- ------------------------
<S> <C>
1st............. 4%
2nd............. 3%
3rd............. 3%
4th............. 2%
5th............. 1%
thereafter...... 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount re-
maining in the account, unless otherwise requested, and is paid to the Distrib-
utor. The CDSC may be eliminated for certain persons and organizations. See
"Sales Charges--General" below. At the time of sale, the Distributor pays in-
vestment dealers a commission of 3.75% on purchases of Class B shares of the
Government Securities, Strategic Income, Bond Income, High Income and Municipal
Income Funds and 2.75% on purchases of the Class B shares of the Limited Term
U.S. Government and Adjustable Rate Funds and advances the first year's service
fee (up to 0.25%) on purchases of the Funds' Class B shares.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales charge
or CDSC; are subject to a 0.25% annual service fee and a 0.75% annual distribu-
tion fee; and do not convert into another class.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or (in the case of the Limited Term
U.S. Government, Strategic Income and Bond Income Funds) Class C shares are
more appropriate for an investor depends on the amount and intended length of
the investment. Investors making large investments, qualifying for a reduced
initial sales charge, might consider Class A shares because Class A shares have
lower 12b-1 fees and pay correspondingly higher dividends per share. For these
reasons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the rel-
evant section of your application that you have been informed of the relative
advantages and disadvantages of Class A and Class C shares. Investors making
smaller investments might consider Class B or Class C shares because 100% of
the purchase is invested immediately. Investors making smaller investments who
anticipate redeeming their shares within five years may find Class C shares
more favorable than Class B shares, because Class B shares are subject to a
CDSC on redemptions made within five years after purchase. Class B shares are
more favorable than Class C shares for investors who anticipate holding their
investment for more than eight years since Class B shares convert to Class A
shares (and thus bear lower ongoing fees) after eight years. Consult your in-
vestment dealer for advice applicable to your particular circumstances.
GENERAL
NO CDSC ON ANY CLASS OF SHARES APPLIES in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2) dis-
tributions from an IRA due to death, disability or a tax-free return of an ex-
cess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability
(as defined in Section 72(m)(7) of the Code) of a shareholder if the redemption
is made within one year after the shareholder's death or disability. In addi-
tion,
38
<PAGE>
there is no CDSC on certain withdrawals pursuant to a Systematic Withdrawal
Plan. See "Selling Fund Shares--5 Ways to Sell Fund Shares--By Systematic With-
drawal Plan" below.
Each Fund receives the net asset value next determined after an order is re-
ceived on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a pur-
chase and, therefore, would be considered a taxable event on which you may rec-
ognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares of each Fund to investment dealers from time to
time. The staff of the SEC is of the view that dealers receiving all or sub-
stantially all of the sales charge may be deemed underwriters of a Fund's
shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible govern-
mental authority .025% of the average daily net assets of an account at the end
of each calendar quarter for up to one year. The same compensation schedule ap-
plies to sales of $250,000 or more of shares of the Adjustable Rate Fund and $5
million or more of shares of the Limited Term U.S. Government Fund to trust
companies, bank trust departments, corporations and credit unions as described
below under "Reduced Sales Charges (Class A Shares Only)." These commissions
are not payable if the purchase represents the reinvestment of redemption pro-
ceeds from any of the Funds series of the Trusts or if the account is regis-
tered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds. In some instances these
incentives are provided to certain dealers who achieve sales goals or who have
sold or may sell significant amounts of shares. The Distributor from time to
time may provide financial assistance programs to dealers in connection with
conferences, sales or training programs, seminars, advertising and sales cam-
paigns and/or shareholder services arrangements. Certain dealers who have sold
or may sell significant amounts of shares also may receive compensation in the
form of payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives to locations, within or
outside of the U.S., for educational seminars or meetings of a business nature.
The Distributor may provide non-cash incentives for achievement of specified
sales levels by representatives of participating broker-dealers and financial
institutions. Such incentives include, but are not limited to, merchandise from
gift catalogues or other sources. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or financial in-
stitution with which the representative is associated.
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
. LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at which
a lower sales charge applies), smaller individual amounts can be invested at
the sales charge applicable to that breakpoint.
. COMBINING ACCOUNTS -- Purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of qualifying accounts of a spouse, parents, children,
siblings, grandparents or grandchildren, individual fiduciary accounts, sole
proprietorships and/or single trust estates. The values of all accounts are
combined to determine the sales charge.
. UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of less than $1 million may be invested in shares of any Fund at a
39
<PAGE>
reduced sales charge of 1.50% of the public offering price (or 1.52% of the net
amount invested).
. SHARES OF THE ADJUSTABLE RATE FUND AND THE LIMITED TERM U.S. GOVERNMENT FUND
MAY BE PURCHASED AT NET ASSET VALUE, without payment of sales charge or CDSC,
by trust companies and bank trust departments for funds over which they exer-
cise discretionary investment authority and which they hold in a fiduciary,
agency, custodial or similar capacity, by corporations that purchase shares for
their own account and by credit unions, provided that the amount invested is
$250,000 or more in the case of the Adjustable Rate Fund and $5 million or more
in the case of the Limited Term U.S. Government Fund.
. ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to in-
vestments by any state, county or city or any instrumentality, department, au-
thority or agency thereof that has determined that a Fund is a legally permis-
sible investment and that is prohibited by applicable investment laws from pay-
ing a sales charge or commission in connection with the purchase of shares of
any registered investment company.
. CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to in-
vestments of $25,000 or more in the Funds by (1) clients of an adviser or
subadviser to any series of the Trusts; any director, officer or partner of a
client of an adviser or subadviser to any series of the Trusts; and the par-
ents, spouses and children of the foregoing; (2) any individual who is a par-
ticipant in a Keogh or IRA Plan under a prototype Plan document of an adviser
or subadviser to any series of the Trusts if at least one participant in the
plan qualifies under category (1) above; and (3) an individual who invests
through an IRA and is a participant in an employee benefit plan that is a cli-
ent of an adviser or subadviser to any series of the Trusts. Any investor eli-
gible for these arrangements should so indicate in writing at the time of the
purchase.
. Shares of the Funds may be purchased at net asset value by investment advis-
ers, financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management, consult-
ing or other fee for their services; clients of such investment advisers, fi-
nancial planners or other intermediaries who place trades for their own ac-
counts if the accounts are linked to the master account of such investment ad-
viser, financial planner or other intermediary on the books and records of the
broker or agent; and retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in Sections
401(a), 403(b), 401(k) and 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or agent.
. Shares of the Funds are available at net asset value for investments in par-
ticipant-directed 401(a) and 401(k) plans that have 100 or more eligible em-
ployees.
. Shares of the Funds are available at net asset value for investments by non-
discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part
of an organization not principally engaged in banking or trust activities.
. Shares of the Funds also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any transaction
fee. Such organizations may receive compensation, in an amount up to 0.35% an-
nually of the average value of the Fund shares held by their customers. This
compensation may be paid by NEFM and/or a Fund's subadviser out of their own
assets, or may be paid indirectly by the Fund in the form of servicing, distri-
bution or transfer agent fees.
. There is no sales charge, CDSC or initial investments minimum on investments
by certain current
and retired employees of the Trusts' investment advisers, subadvisers, the Dis-
tributor, The New England or any other company affiliated with The New England;
current and former directors and trustees of the Trusts, The New England or
their predecessor companies; agents and general agents of The New England and
its insurance company subsidiaries; current and retired employees of such
agents and general agents; registered representatives of broker-dealers who
have selling
40
<PAGE>
arrangements with the Distributor; the spouse, parents, children, siblings,
grandparents or grandchildren of any of the persons listed above; any trust,
pension, profit sharing or other benefit plan for any of the foregoing persons
and any separate account of The New England or of any insurance company affili-
ated with The New England.
.Shareholders of Reich and Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Funds at net asset value and
without the imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales de-
scribed above reflects the absence or reduction of sales expenses associated
with such sales.
41
<PAGE>
Owning Fund Shares
AUTOMATIC EXCHANGE PLAN
THE FUNDS HAVE AN AUTOMATIC EXCHANGE PLAN UNDER WHICH SHARES OF A CLASS OF A
FUND ARE AUTOMATICALLY EXCHANGED EACH MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS (OTHER THAN NEW ENGLAND GROWTH FUND, WHICH IS AVAIL-
ABLE ONLY TO CERTAIN ELIGIBLE INVESTORS). THE MINIMUM MONTHLY EXCHANGE AMOUNT
UNDER THE PLAN IS $50. THERE IS NO FEE FOR EXCHANGES MADE PURSUANT TO THIS PRO-
GRAM, BUT THERE MAY BE A SALES CHARGE AS DESCRIBED ON THIS PAGE. SHARES OF THE
ADJUSTABLE RATE FUND THAT ARE SUBJECT TO A DIFFERENTIAL SALES CHARGE AS DE-
SCRIBED ON THIS PAGE MAY NOT PARTICIPATE IN THIS PROGRAM.
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds ac-
quired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts (except New England Growth Fund, which is sub-
ject to special eligibility restrictions) without paying a sales charge; such
exchanges will be made at the next-determined net asset value of the shares.
Class A shares of New England Intermediate Term Tax Free Fund of California and
New England Intermediate Term Tax Free Fund of New York (and shares of the
Money Market Funds acquired through exchanges of such shares) may be exchanged
for Class A shares of another series of the Trusts at net asset value only if
you have held them for at least six months; otherwise, sales charges apply to
the exchange. If you exchange your Class A shares of the Adjustable Rate Fund
for shares of another series of the Trusts that has a higher sales charge, you
will pay the difference between any sales charge you have already paid on your
Adjustable Rate Fund shares and the higher sales charge of the series into
which you are exchanging. In addition, you may redeem Class A shares of any
Money Market Fund that were not acquired through exchanges from any series of
the Trusts and have the proceeds directly applied to the purchase of shares of
a series of the Trusts at the applicable sales charge.
CLASS B SHARES
You may exchange Class B shares of any Fund or series of the Trusts (and Class
B shares of the Money Market Funds or Class A shares of the Money Market Funds
which have not been subject to a previous sales charge) for Class B shares of
any other series of the Trusts which offers Class B shares. Such exchanges will
be made at the next-determined net asset value of the shares. Class B shares
will automatically convert on a tax-free basis to Class A shares eight years
after they are purchased (excluding the time the shares are held in a Money
Market Fund). See "Sales Charges--Class B Shares" above.
CLASS C SHARES
You may exchange Class C shares of any Fund or series of the Trusts for Class C
shares of any other series of the Trusts which offers Class C shares or for
Class A shares of the Money Market Funds.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time), write to New England Funds or call Tele#Facts at 1-800-346-5984
twenty-four hours a day. Exchange requests after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes earlier than 4:00 p.m., will be proc-
essed at the net asset value determined at the close of regular trading on the
next day that the Exchange is open. The exchange must be for a minimum of $500
(or the total net asset value of your account, whichever is less), except that
under the Automatic Exchange Plan, the minimum is $50. All exchanges are sub-
ject to the minimum investment and eligibility requirements of the series into
which you are exchanging. In connection with any exchange, you must receive a
current prospectus of the series into which you are exchanging. The exchange
privilege may be exercised only in those states where shares of such other se-
ries may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. New
England Funds, L.P. will employ reasonable procedures to confirm that your tel-
ephone instructions are genuine, and, if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions. New England Funds, L.P.
will require a form of personal identification prior to acting upon your tele-
phone instructions, will provide you with written confirmations of such trans-
actions and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive at least
60 days' advance notice of any material change to the exchange privilege.
42
<PAGE>
FUND DIVIDEND PAYMENTS
Each Fund declares dividends daily and pays them monthly. Each Fund pays as
dividends substantially all net investment income (tax-exempt and taxable in-
come other than long-term capital gains) each year and distributes annually all
net realized long-term capital gains (after applying any available capital loss
carryovers). Each Fund pays short-term capital gains annually. The trustees of
the Trusts may adopt a different schedule as long as payments are made at least
annually. If you intend to purchase shares of a Fund shortly before it declares
a dividend you should be aware that a portion of the purchase price may be re-
turned to you as a taxable dividend.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from ordinary income in cash while reinvesting
distributions from capital gains in additional shares of the same class of the
Fund or the same class of other series of the Trusts, or to receive all distri-
butions in cash. Income distributions and capital gains distributions will be
reinvested in shares of the same class of the Fund at net asset value (without
a sales charge or CDSC) unless you select another option. You may change your
distribution option by notifying New England Funds in writing or by calling 1-
800-225-5478. If you elect to receive your dividends in cash and the dividend
checks sent to you are returned "undeliverable" to the Fund or remain uncashed
for six months, your cash election will automatically be changed and your fu-
ture dividends will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a
dividend diversification
program that allows you to
have all dividends and any
other distributions automat-
ically invested in shares of
the same class of another
New England Fund, subject to
the investor eligibility re-
quirements of that other
fund and to state securities
law requirements. Shares
will be purchased at the se-
lected fund's net asset
value (without a sales
charge or CDSC) on the divi-
dend 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 es-
tablished, the purchased
fund's minimum investment
requirements must be met.
Before establishing a divi-
dend diversification program
into any other New England
Fund, you must obtain a copy
of that fund's prospectus.
43
<PAGE>
Selling Fund Shares
5 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any
of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone re-
demption privilege on your account, Class A, Class B and Class C shares may be
redeemed by calling 1-800-225- 5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business or by calling Tele#Facts at
1-800-346-5984 twenty-four hours a day. The proceeds (LESS ANY APPLICABLE CDSC)
generally will be wired on the next business day to the bank account previously
chosen by you on your application. A wire fee (currently $5.00) will be de-
ducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a correspon-
dent bank that is a member. If your account is with a savings bank, it must
have only one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) and requesting that a
check for the proceeds (LESS ANY APPLICABLE CDSC) be mailed to the address on
your account, provided that the address has not changed over the previous month
and that the proceeds are for $100,000 or less. Generally, the check will be
mailed to you on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (East-
ern time) or call Tele#Facts at 1-800-346-5984 twenty-four hours a day. The
proceeds (LESS ANY APPLICABLE CDSC) generally will arrive at your bank within
three business days; their availability will depend on your bank's particular
rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the Ex-
change closes if it closes before 4:00 p.m., will be processed at the net asset
value determined at the close of regular trading on the next day that the Ex-
change is open.
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a writ-
ten request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any spe-
cial capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your signa-
ture guaranteed by an eligible guarantor institution in accordance with proce-
dures established by New England Funds, L.P. Signature guarantees by notaries
public are not acceptable.
44
<PAGE>
Additional written information may be required for redemptions by certain bene-
fit plans and IRAs. Contact the Distributor or your investment dealer for de-
tails.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recom-
mend that certificates be sent by registered mail.
BY CHECK:
Checkwriting is available on Class A shares of the Limited Term U.S. Government
and Adjustable Rate Funds only. To elect checkwriting for your account, select
the checkwriting option on your application and complete the attached signature
card. To add checkwriting to an existing account, please call 1-800-225-5478
for our Service Options Form. The Fund will send you checks drawn on State
Street Bank. You will continue to earn dividends on shares redeemed by check
until the check clears. Each check must be written for $500 or more. The
checkwriting privilege does not apply to shares for which you have requested
share certificates to be issued. Checkwriting is not available for investor ac-
counts containing Class A shares subject to a CDSC.
If you use withdrawal checks, you will be subject to State Street Bank's rules
governing checking accounts. The Limited Term U.S. Government Fund, the Adjust-
able Rate Fund and the Distributor are in no way responsible for any
checkwriting account established with State Street Bank.
You may not close your account by withdrawal check because the exact balance of
your account will not be known until after the check is received by State
Street Bank.
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized ba-
sis, 10% of the value of your Fund account. Redemption of shares pursuant to
the Plan will not be subject to a CDSC. For information, contact the Distribu-
tor or your investment dealer. Since withdrawal payments may have tax conse-
quences, you should consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time on the same day will
receive that day's net asset value). Redemption proceeds (LESS ANY APPLICABLE
CDSC) will normally be mailed to you within seven days after State Street Bank
or the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10
days after such purchase or transfer, the Fund may withhold redemption proceeds
until the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in per-
son to the Distributor or by mail as described above. Requests are processed at
the net asset value next determined after the request is received.
Special rules apply to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request be-
fore a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven
45
<PAGE>
days when the Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the SEC when trading on the Exchange is restricted or
during an emergency that makes it impracticable for the Funds to dispose of
their securities or to determine fairly the value of their net assets, or dur-
ing any other period permitted by the SEC for the protection of investors.
REPURCHASE OPTION (CLASS A SHARES ONLY)
You may apply your redemption proceeds (without a sales charge) to the repur-
chase of Class A shares of any series of the Trusts. To qualify, you must rein-
vest some or all of the proceeds within 120 days after your redemption and no-
tify New England Funds or your investment dealer at the time of reinvestment
that you are taking advantage of this privilege. You may reinvest the proceeds
either by returning the redemption check or by sending your check for some or
all of the redemption amount. Please note: for federal income tax purposes, a
redemption is a sale that involves tax consequences (even if the proceeds are
later reinvested). Please consult your tax adviser.
46
<PAGE>
Fund Details
HOW FUND SHARE PRICE IS DETERMINED
Back Bay Advisors or, in the case of the Strategic Income Fund, Loomis Sayles,
under the supervision of each Trust's Board of Trustees, determines the value
of the total net assets of each Fund as of the close of regular trading (ordi-
narily 4:00 p.m. Eastern time) each day the Exchange is open. The Boards of
Trustees have authorized Back Bay Advisors or, in the case of the Strategic In-
come Fund, Loomis Sayles, to delegate certain price determination functions to
pricing services or facilities selected by Back Bay Advisors or Loomis Sayles,
as the case may be. Securities for which market quotations are readily avail-
able are generally valued at market value on the basis of market quotations.
Options and futures which are traded on exchanges are valued at their last sale
price as of the close of the Exchange. All money market instruments with a ma-
turity 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 am-
ortized cost value, unless conditions indicate otherwise. In all other cases,
the value of a Fund's assets is determined in good faith by Back Bay Advisors
or, in the case of the Strategic Income Fund, Loomis Sayles, or a pricing serv-
ice selected by Back Bay Advisors or Loomis Sayles, under the supervision of
the Boards of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (the current U.S. dollar value, in the case of secu-
rities principally traded outside the United States) plus any cash and other
assets (including dividends and interest receivable but not collected) less all
liabilities (including accrued expenses), by the number of shares of such class
outstanding. The public offering price of each Fund's Class A shares is deter-
mined by adding the applicable sales charge to the net asset value. See "Buying
Fund Shares--Sales Charges" above. The public offering price of Class B and (in
the case of the Limited Term U.S. Government, Strategic Income and Bond Income
Funds) Class C shares is the net asset value per share.
The exact price you pay for a share will be determined by the next set of cal-
culations made after your order is accepted by New England Funds, L.P. In other
words, if, on a Tuesday morning, your properly completed application is re-
ceived, your wire is received or your dealer places your trade for you, the
price you pay will be determined by the calculations made as of the close of
regular trading on the Exchange on Tuesday. If you buy shares through your in-
vestment dealer, the dealer must receive your order by the close of regular
trading on the Exchange and transmit it to the Distributor by 5:00 p.m. (East-
ern time) to receive that day's public offering price.
INCOME TAX CONSIDERATIONS
Each Fund intends to meet all requirements of the Code necessary to ensure that
it qualifies as a regulated investment company and thus does not expect to pay
any federal income tax on investment income and capital gains distributed to
shareholders in cash or additional shares. Unless you are a tax-exempt entity,
your distributions derived from a Fund's short-term capital gains and, except
for the Municipal Income Fund, ordinary income are taxable to you as ordinary
income. Distributions derived from a Fund's long-term capital gains ("capital
gains distributions"), if designated as such by a Fund, are taxable to you as
long-term capital gains, regardless of how long you have owned shares in the
Fund. Both dividends and capital gains distributions are taxable whether dis-
tributed to you in cash or additional shares.
A Fund's transactions in foreign currency-denominated debt securities and its
hedging activities will likely produce a difference between its book income and
its taxable income. This difference may cause a part or all of a Fund's income
distributions to constitute returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to avoid federal income tax
liability.
DIVIDENDS DERIVED FROM INTEREST ON U.S. GOVERNMENT SECURITIES MAY BE EXEMPT
FROM STATE AND LOCAL TAXES. The Trusts intend to advise shareholders of the
proportion of each Fund's dividends
47
<PAGE>
that are derived from such interest. Before investing in any of the Funds, you
should check the consequences of your local and state tax laws, which may be
different from the federal tax consequences, and the consequences for any re-
tirement 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 (possibly excepting the Municipal Income Fund, as described below) is
required to withhold 31% of all income dividends and capital gains distribu-
tions it pays to you if you do not provide a correct, certified taxpayer iden-
tification number, if the Fund is notified that you have underreported income
in the past or if you fail to certify to the Fund that you are not subject to
such withholding. In addition, each Fund will be required to withhold 31% of
the gross proceeds of Fund shares you redeem if you have not provided a cor-
rect, certified taxpayer identification number. If you are a tax-exempt insti-
tution, however, these back-up withholding rules will not apply so long as you
furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will re-
ceive a Form 1099 to assist you in reporting the prior calendar year's distri-
butions on your federal income tax return. You should consult your tax adviser
about any state or local taxes that may apply to such distributions. Be sure to
keep the Form 1099 as a permanent record. A fee may be charged for any dupli-
cate information requested.
The foregoing is a summary of certain federal income tax consequences of an in-
vestment in a Fund. You should consult a competent tax adviser as to the effect
of an investment in a Fund on your particular federal, state and local tax
situations.
.ADJUSTABLE RATE FUND
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by a Fund from direct obligations of
the U.S. Government, none of the distributions of the Adjustable Rate Fund
during the current fiscal year are expected to qualify for such tax-free
treatment. Investments in mortgage-backed securities (including GNMA, FNMA and
FHLMC securities) and repurchase agreements collateralized by U.S. Government
securities do not qualify as direct federal obligations in most states.
.MUNICIPAL INCOME FUND
Dividends paid to you as a shareholder of the Municipal Income Fund that are
derived from interest on tax-exempt bonds are "exempt-interest dividends" and
may be excluded from gross income on your federal tax return. However, if you
receive social security benefits, you may be taxed on a portion of those bene-
fits as a result of receiving tax exempt income. Also, if the Municipal Income
Fund invests in "private activity" bonds, a portion of the Fund's dividends
may constitute a tax preference item subject to the alternative minimum tax.
See "Fund Investments" for further information.
Other dividends and short-term capital gains, if any, paid by the Municipal
Income Fund are taxable to you as ordinary income, whether received in cash or
additional shares. Distributions of long-term capital gains are taxable to you
as long-term capital gains, whether distributed in cash or additional shares,
regardless of how long you have held your shares.
If at least 95% of the Fund's dividends are "exempt-interest dividends," fed-
eral back-up withholding rules do not apply. However, if the percentage should
ever drop below 95%, the Fund will be required to withhold 31% of all income
dividends that are not "exempt-interest dividends" and 31% of all capital gain
distributions it pays to you if you do not provide a correct, certified tax-
payer identification number, if the Fund is notified that you have
underreported income in the past, or if you fail to certify to the Fund that
you are not subject
48
<PAGE>
to such withholding. The federal exemption for "exempt-interest dividends"
does not necessarily result in exemption from state and local taxes. Distribu-
tions of "exempt-interest dividends" may be exempt from local and state taxa-
tion to the extent they are derived from the state or locality in which you
reside. Before investing in the Fund, you should check the consequences of
your local and state tax laws. The Fund will report annually on a state-by-
state basis the source of income the Fund receives on tax-exempt bonds that
was paid out as dividends during the preceding year.
THE FUNDS' EXPENSES
In addition to the management fee paid to NEFM, each Fund pays all expenses not
borne by its adviser, subadviser or the Distributor, including, but not limited
to, the charges and expenses of the Fund's custodian and transfer agent, inde-
pendent auditors and legal counsel for the Fund and the Trusts' independent
trustees, all brokerage commissions and transfer taxes in connection with port-
folio transactions, all taxes and filing fees, the fees and expenses for regis-
tration or qualification of its shares under federal and state securities laws,
all expenses of shareholders' and trustees' meetings, preparing, printing and
mailing prospectuses and reports to shareholders and the compensation of trust-
ees who are not directors, officers or employees of The New England, NEFM, Back
Bay Advisors, Loomis Sayles or their affiliates, other than affiliated regis-
tered investment companies. In the case of Funds that offer Class Y shares,
certain expenses are allocated differently between the Fund's Class A, Class B
and (in the case of the Limited Term U.S. Government, Strategic Income and Bond
Income Funds) Class C shares, on one hand, and its Class Y shares, on the other
hand. (See "Additional Facts About the Funds" below.)
Under Plans adopted pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "1940 Act"), each Fund pays the Distributor a monthly service fee at
an annual rate not to exceed 0.25% of the Fund's average daily net assets at-
tributable to the Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income and Bond Income Funds) Class C shares. The Dis-
tributor may pay up to the entire amount of this fee to securities dealers who
are dealers of record with respect to the Fund's shares, for providing personal
services to investors in shares of the Fund and/or maintenance of shareholder
accounts. In the case of the Class B shares, the Distributor pays investment
dealers at the time of sale the first year's service fee in the amount of up to
0.25% of the amount invested.
In addition to the 0.25% service fee, the High Income Fund and the Limited Term
U.S. Government Fund pay the Distributor a monthly distribution fee at an an-
nual rate not to exceed 0.10% of the Fund's average daily net assets of the re-
spective Funds' Class A shares. Also, each Fund's Class B shares and (in the
case of the Limited Term U.S. Government, Strategic Income and Bond Income
Funds) Class C shares pay the Distributor a monthly distribution fee at an an-
nual rate not to exceed 0.75% of the average net assets of the Fund's Class B
shares and Class C shares. The Distributor may pay up to the entire amount of
the distribution fee to securities dealers who are dealers of record with re-
spect to the Fund's shares, as distribution fees in connection with the sale of
the Fund's shares. Except in the case of the Class A shares of the Limited Term
U.S. Government Fund, the Distributor retains the balance of the fee as compen-
sation for its services as distributor of the relevant class of shares. In the
case of the Class A shares of the Limited Term U.S. Government Fund, the Dis-
tributor may also use all or any portion of the distribution fee to pay its ex-
penses in connection with the distribution of shares, including, without limi-
tation, expenses of printing and distributing prospectuses to persons other
than shareholders of the Funds, expenses of preparing, printing and distribut-
ing advertising and sales literature and reports to shareholders used in con-
nection with the sales of shares, expenses of personnel and communication
equipment used in connection with prospective shareholder inquiries, and over-
head expenses relating to any of the foregoing.
In the case of each Fund except the High Income Fund, the Class A service fee
is payable only to
49
<PAGE>
reimburse the Distributor for amounts it pays or expends in connection with
the provision of personal services to investors and/or the maintenance of
shareholder accounts, and may be used to reimburse such expenses incurred by
the Funds' former distributor (an affiliate of the Distributor) in prior
years. To the extent that the Distributor's reimbursable expenses in any year
exceed the maximum amount payable under the relevant Plan for that year, such
expenses may be carried forward for reimbursement in future years in which the
Plan remains in effect. Similarly, the distribution fee of the Limited Term
U.S. Government Fund is payable only to reimburse the Distributor for expenses
in connection with the distribution of the Fund's shares, but unreimbursed
expenses can be carried forward into future years. The amounts of unreimbursed
expenses carried over into 1996 from previous plan years with respect to the
Class A shares are as follows: $1,583,658 for the Government Securities Fund;
$2,272,725 for the Limited Term U.S. Government Fund; $1,929,283 for the Ad-
justable Rate Fund; $1,919,349 for the Bond Income Fund; and $1,700,600 for
the Municipal Income Fund. The Class B service fees for all Funds, the Class C
service fees for the Limited Term U.S. Government Fund, the Strategic Income
Fund and the Bond Income Fund, and the Class A service fee of the High Income
Fund are payable regardless of the amount of the Distributor's related ex-
penses.
PERFORMANCE CRITERIA
Each Fund may include total return information in advertisements or other
written sales material. Each Fund may show the average annual total return for
each class of shares for the one-, five- and ten-year periods through the end
of the most recent calendar quarter (or, if shorter, the period since the com-
mencement of the class's operations) or, in the case of the High Income Fund's
Class A shares, for the period since July 27, 1988, when Back Bay Advisors be-
came the High Income Fund's investment adviser. Total return is measured by
comparing the value of a hypothetical $1,000 investment in a class at the be-
ginning of the relevant period to the value of the investment at the end of
the period (assuming deduction of the current maximum sales charge on Class A
shares, automatic reinvestment of all dividends and capital gains distribu-
tions and, in the case of the Class B shares, imposition of the CDSC for the
period of time quoted). Total return may be quoted with or without giving ef-
fect to any voluntary expense limitations in effect for the class in question
during the relevant period. The classes may also show total return over other
periods, on an aggregate basis for the period presented, or without deduction
of a sales charge. If a sales charge is not deducted in calculating total re-
turn, the class's total return will be higher.
Each Fund may also include the yield, accompanied by the total return, for
each class of shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's standardized formula by dividing the ad-
justed net investment income per share earned during a recent 30-day period by
the maximum offering price of a share of the relevant class (reduced by any
earned income expected to be declared shortly as a dividend) on the last day
of the period. Yield calculations will reflect any voluntary expense limita-
tions in effect for the Fund during the relevant period.
In addition, the Municipal Income Fund may include the taxable-equivalent
yield for each class of shares in advertising and other written material. Tax-
able-equivalent yield is calculated by adjusting the class's tax exempt yield
by a factor designed to show the approximate yield that a taxable investment
would have to earn to produce an after-tax yield equal, for a shareholder in a
specified tax bracket, to the class's tax exempt yield.
Each Fund may also present one or more distribution rates for each class in
its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital
gains over a recent 12-month, 3-month or 30-day period and dividing that
amount by the maximum offering price or the net asset value on the last day of
such period. If the net asset value rather than the maximum offering price is
used to calculate the distribution rate, the rate will be higher.
50
<PAGE>
Total return will generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of expenses borne
by the Class B and Class C shares. However, this difference may be offset in
whole or in part by the benefit gained by 100% immediate investment of the pur-
chase price of Class B shares or Class C shares. As a result of lower operating
expenses, Class Y shares of the Government Securities, Limited Term U.S. Gov-
ernment, Adjustable Rate, Strategic Income and Bond Income Funds can be ex-
pected to achieve a higher investment return than the Funds' Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication
of likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
. New England Funds Trust I was organized in 1985 as a Massachusetts business
trust and is authorized to issue an unlimited number of full and fractional
shares in multiple series. The Government Securities Fund represents the
original series of shares of New England Funds Trust I. The Bond Income and
Municipal Income Funds were organized prior to 1985 and conducted investment
operations as separate corporations until their reorganization as series of
New England Funds Trust I in January 1987. The Strategic Income Fund com-
menced investment operations in 1995.
. 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 commenced
investment operations in 1989. The High Income Fund was organized in 1984 and
conducted investment operations as a separate corporation until its reorgani-
zation as a series of New England Funds Trust II in 1989. The Adjustable Rate
Fund commenced operations in 1991.
. When you invest in a Fund, you acquire freely transferable shares of benefi-
cial interest that entitle you to receive dividends as determined by the re-
spective Trust's trustees and to cast a vote for each share you own at share-
holder meetings. Shares of each Fund vote separately from shares of other se-
ries of the same Trust, except as otherwise required by law. Shares of all
classes of a Fund vote together, except as to matters relating to a class's
Rule 12b-1 plan, for which only shares of that class are entitled to vote.
. Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each Fund
may be changed by the relevant Trust's trustees without shareholder approval
or prior notice. The investment objectives of the Government Securities, Bond
Income and Municipal Income Funds are fundamental. The investment objectives
of the Adjustable Rate Fund and Strategic Income Fund are not fundamental.
The investment objectives of the Limited Term U.S. Government and High Income
Funds are not fundamental but, as a matter of policy, the trustees would not
change those objectives without shareholder approval. If there is a change in
the investment objective of the Adjustable Rate or Strategic Income Fund, you
should consider whether the Fund remains an appropriate investment in light
of your then current financial position and needs.
. The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
. The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has sub-
contracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
. The Government Securities Fund, the Limited Term U.S. Government Fund, the
Adjustable Rate Fund, the Strategic Income Fund and the
51
<PAGE>
Bond Income Fund offer Class Y shares to qualified investors. Class Y shares
are identical to Class A, Class B and Class C shares, except that Class Y
shares have no sales charge or CDSC, bear no Rule 12b-1 fees and have separate
voting rights in certain circumstances. Class Y bears its own transfer agency
and prospectus printing costs.
. If the balance in your account with a Fund is less than a minimum dollar
amount set by the trustees of the Trusts from time to time (currently $500
for all accounts, except for those indicated below and for individual retire-
ment accounts, which have a $25 minimum), that Fund may close your account
and send the proceeds to you. Shareholders who are affected by this policy
will be notified of the Fund's intention to close the account and will have
60 days immediately following the notice to bring the account up to the mini-
mum. The minimum does not apply to Keogh, pension and profit sharing plans,
automatic investment plans or accounts that have fallen below the minimum
solely because of fluctuations in net asset value per share.
. The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is pos-
sible that a Trust might become liable for any misstatements in this prospec-
tus that relate to the other Trust. The trustees of each Trust have consid-
ered this possible liability and approved the use of this combined prospectus
for Funds of both Trusts.
. The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
. Each Fund's annual report contains additional performance information and is
available upon request and without charge. Each Fund will send a single copy
of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to
be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
. Summit Cash Reserves Fund (the "Cash Fund"), a series of Financial Institu-
tions Series Trust, is related to the Funds for purposes of investment and
investor services. Shares of all classes of the Funds may be exchanged for
shares of the Cash Fund at net asset value. If shares of the Funds that are
exchanged for shares of the Cash Fund are subject to a CDSC, the holding pe-
riod for purposes of determining the expiration of the CDSC will stop and re-
sume only when an exchange is made back into shares of a series of the
Trusts. If Fund shares subject to a CDSC are exchanged for Cash Fund shares
and the Cash Fund shares are later redeemed rather than being exchanged back
into shares of a series of the Trusts, then a CDSC will apply at the same
rate as if the Fund shares were redeemed at the time of the exchange.
52
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa
are rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are con-
sidered 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 ele-
ments 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 charac-
terizes 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 shortcom-
ings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be re-
garded as having extremely poor prospects of ever attaining any real investment
standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay in-
terest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB -- indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk ex-
posures 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.
53
<PAGE>
Appendix B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THEHIGH INCOME FUND FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ----------
<S> <C>
Preferred Stock...................................................... 0%
Short-term Obligations and Other Assets.............................. 4.0%
Debt--Unrated........................................................ 1.2%
Debt--Standard and Poor's Rating
AAA................................................................ 1.8%
BBB................................................................ 0%
BB................................................................. 18.9%
B.................................................................. 66.9%
CCC................................................................ 6.6%
CC................................................................. 0.6%
</TABLE>
The chart above indicates the composition of the High Income Fund for the fis-
cal year ended December 31, 1995, with the debt securities rated by S&P sepa-
rated into the indicated categories. The percentages were calculated on a dol-
lar-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. Back Bay Advisors does not rely primarily on ratings designed
by any rating agency in making investment decisions. The chart does not neces-
sarily indicate what the composition of the Fund's portfolio will be in subse-
quent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE STRATEGIC INCOME FUND FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ----------
<S> <C>
Preferred Stock...................................................... 4.6%
Short-term Obligations and Other Assets.............................. 0.2%
Common Stock......................................................... 9.3%
Debt--Unrated........................................................ 17.1%
Debt--Standard and Poor's Rating
AAA................................................................ 8.2%
AA................................................................. 3.4%
A.................................................................. 5.4%
BBB................................................................ 11.1%
BB................................................................. 15.9%
B.................................................................. 16.1%
CCC................................................................ 8.4%
C/D................................................................ 0.3%
</TABLE>
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1995, with the debt securities rated by S&P sep-
arated into the indicated categories. The percentages were calculated on a dol-
lar-weighted average basis by determining monthly the percentage of the Strate-
gic 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 de-
signed 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.
XB51-0596
LOGO
54
<PAGE>
FOR GENERAL INFORMATION ON THE FUND OR ANY OF ITS SERVICES AND FOR ASSISTANCE
IN OPENING AN ACCOUNT, CONTACT YOUR INVESTMENT DEALER OR CALL THE DISTRIBUTOR
TOLL FREE AT 1-800-225-5478.
[NEW ENGLAND FUNDS LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
NEW ENGLAND STAR ADVISERS FUND
PROSPECTUS AND APPLICATION -- MAY 1, 1996
New England Star Advisers Fund (the "Fund") is a multi-manager, non-diversified
mutual fund that allocates its investment capital on an equal basis among mul-
tiple segments of the Fund advised by independent investment management organi-
zations that employ different investment styles and strategies. The Fund is a
series of New England Funds Trust I (the "Trust"), a registered open-end man-
agement investment company. Other series of the Trust are described in separate
prospectuses.
The Fund's investment objective is long-term growth of capital. There can be no
assurance that the Fund will achieve its objective, which may be changed with-
out shareholder approval.
The Fund offers three classes of shares to the general public (Classes A, B and
C). The offering price is based on the net asset value per share next deter-
mined after an order is received. Class A share purchases generally involve a
sales charge at the time of purchase. No initial sales charge applies to Class
B share purchases. A contingent deferred sales charge (a "CDSC"), however, is
imposed upon certain redemptions of Class B shares. Class B shares automati-
cally convert to Class A shares eight years after purchase. No initial sales
charge or CDSC applies to purchases or redemptions of Class C shares, which do
not have a conversion feature. Class B shares and Class C shares bear higher
annual 12b-1 fees than Class A shares. See "Buying Fund Shares -- Sales
Charges." Through a separate prospectus, the Fund also offers Class Y shares to
certain institutional investors. To obtain more information about Class Y
shares, please call New England Funds, L.P. (the "Distributor") toll-free at
1-800-225-5478.
This prospectus sets forth information you should know before investing in the
Fund. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Fund dated May
1, 1996 has been filed with the Securities and Exchange Commission (the "SEC")
and is available free of charge. Write to New England Funds, L.P., SAI Fulfill-
ment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at 1-800-
225-5478. The Statement contains more detailed information about the Fund and
is incorporated into this prospectus by reference.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Page
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating
expenses.
2 Financial Highlights Historical information on the
Fund's performance.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
3 How the Fund Pursues Its Objective
- --------------------------------------------------------------------------------
5 INVESTMENT RISKS It is important to understand
the risks inherent in the Fund
before you invest.
- --------------------------------------------------------------------------------
11 SUBADVISERS' INVESTMENT STYLES
- --------------------------------------------------------------------------------
12 FUND MANAGEMENT
- --------------------------------------------------------------------------------
BUYING FUND SHARES
14 Minimum Investment Everything you need to know to
open and add to a New England
14 6 Ways to Buy Fund Shares Funds account.
. Through your investment dealer
. By mail
. By wire transfer
. By Investment Builder
. By electronic purchase through ACH
. By exchange from another New England Fund
15 Sales Charges
18 Reduced Sales Charges (Class A Shares Only)
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OWNING FUND SHARES
20 Exchanging Among New England Funds
New England Funds offers three
21 Fund Dividend Payments convenient ways to exchange
Fund shares.
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SELLING FUND SHARES
22 4 Ways to Sell Fund Shares How to withdraw money or close
your account.
. Through your investment dealer
. By telephone
. By mail
. By Systematic Withdrawal Plan
23 Repurchase Option (Class A Shares Only)
An opportunity to reinvest your
redemption proceeds within 120
days for no sales charge.
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FUND DETAILS
24 How Fund Share Price is Determined
Additional information you may
find important.
25 Income Tax Considerations
25 The Fund's Expenses
26 Performance Criteria
26 Additional Facts About the Fund
28 Glossary of Terms
<PAGE>
Fund Expenses and Financial Information
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Fund.
The following table summarizes your maximum transaction costs from investing in
the Fund and estimated annual expenses for each class of the Fund's shares. The
Example shows the cumulative expenses attributable to a hypothetical $1,000 in-
vestment in each class of shares of the Fund for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase (as
a percentage of offering price) (1) (2)............... 5.75% None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) (2).......................... (3) 4.00% None
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See "Buying
Fund Shares--Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any por-
tion of certain purchases of Class A shares greater than $1,000,000 re-
deemed within 1 year after purchase, but not to any other purchases or re-
demptions of Class A shares. See "Buying Fund Shares--Sales Charges."
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management Fees....................................... 1.05% 1.05% 1.05%
12b-1 Fees............................................ 0.25% 1.00%* 1.00%*
Other Expenses........................................ 0.52% 0.52% 0.52%
Total Fund Operating Expenses......................... 1.82% 2.57% 2.57%
</TABLE>
* Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of
actual or expected Fund performance or expenses, both of which may be more or
less than those shown.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- --------- -------
(1) (2)
---- ----
<S> <C> <C> <C> <C>
1 year................................................ $ 75 $ 66 $ 26 $ 26
3 years............................................... $111 $110 $ 80 $ 80
5 years............................................... $150 $147 $137 $137
10 years*............................................. $259 $272 $272 $290
</TABLE>
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years 9
and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Fund. For additional information about the Fund's fees and other expenses,
please see "Fund Management," "The Fund's Expenses" and "Additional Facts about
the Fund."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect
to transfer redemption proceeds by wire.
1
<PAGE>
FINANCIAL HIGHLIGHTS
(For Class A, B and C shares of the Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented below have been included in the financial
statements for the Fund, and have been examined by Price Waterhouse LLP, inde-
pendent accountants. The Financial Highlights should be read in conjunction
with the financial statements and the notes thereto incorporated by reference
in Part II of the Statement. The Fund's annual report contains additional per-
formance information and is available upon request and without charge.
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------- -------------------- --------------------
JULY 7(A) YEAR JULY 7(A) YEAR JULY 7(A) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1995 1994 1995 1994 1995
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.50 $ 13.25 $ 12.50 $ 13.23 $ 12.50 $ 13.24
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.05 0.00 0.02 0.00 0.02 0.00
Net gains or losses on
investments (both
realized and
unrealized)............ 0.75 4.52 0.73 4.39 0.74 4.40
------- -------- ------- -------- ------- -------
Total income from
investment operations.. 0.80 4.52 0.75 4.39 0.76 4.40
------- -------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions (from net
investment income)..... (0.05) 0.00 (0.02) 0.00 (0.02) 0.00
Distributions (from
capital gains)......... 0.00 (0.99) 0.00 (0.99) 0.00 (0.99)
------- -------- ------- -------- ------- -------
Total distributions.... (0.05) (0.99) (0.02) (0.99) (0.02) (0.99)
------- -------- ------- -------- ------- -------
Net asset value, end of
period................. $ 13.25 $ 16.78 $ 13.23 $ 16.63 $ 13.24 $ 16.65
------- -------- ------- -------- ------- -------
Total return (%) (c).... 6.4 34.4 6.0 33.4 6.0 33.4
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)........... $91,218 $223,596 $72,889 $220,017 $20,096 $45,672
Ratio of operating
expenses to average net
assets (%) (d)......... 1.94(b) 1.82 2.69(b) 2.57 2.69(b) 2.57
Ratio of net investment
income to average net
assets (%)............. 1.06(b) (0.33) 0.31(b) (1.08) 0.31(b) (1.08)
Portfolio turnover rate
(%).................... 100 142 100 142 100 142
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total re-
turn calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets (computed on an
annualized basis) for Class A, B and C shares without giving effect to the
voluntary expense limitations in effect from July 7, 1994 through December
31, 1994 would have been 1.98%, 2.75% and 2.75%, respectively.
2
<PAGE>
Investment Strategy
The Fund's objective is long-term growth of capital.
HOW THE FUND PURSUES ITS INVESTMENT OBJECTIVE
The Fund seeks to attain its objective by investing primarily in equity securi-
ties. The Fund may also invest in other securities, as described below. Under
normal market conditions, however, at least 65% of the Fund's assets will be
invested in equity securities. The Fund, in the discretion of each subadviser,
may invest without limit in the securities of companies with smaller capital-
ization. The Fund, in the discretion of each of its subadvisers, may invest
without limit in securities of foreign issuers (including issuers in emerging
markets) as well as in securities of U.S. issuers. For more information about
investments in foreign securities, see "Investment Risks--Foreign Securities."
Capital invested in the Fund will be allocated on an equal basis among four
different subadvisers. Each subadviser will manage its segment of the Fund's
assets in accordance with that subadviser's own investment style and strategy.
The subadvisers' styles and strategies are as follows:
BERGER ASSOCIATES, INC. ("BERGER") places primary emphasis on established com-
panies which it believes have favorable growth prospects, regardless of the
company's size. Common stocks will generally constitute all or most of the seg-
ment of the Fund managed by Berger, but this segment of the portfolio may from
time to time take substantial positions in securities convertible into common
stocks, and may also purchase preferred stocks, government securities, zero-
coupon securities and other senior securities when Berger believes it is appro-
priate to do so. This segment of the portfolio may also invest in Rule 144A
securities (see "Investment Risks--Miscellaneous" below) and may purchase put
and call options on stock indices and futures contracts and options thereon for
the purpose of hedging.
FOUNDERS ASSET MANAGEMENT, INC.'S ("FOUNDERS") segment of the portfolio will
invest primarily in common stocks of well-established, high-quality growth com-
panies with mid or high market capitalization. These companies tend to have
strong performance records, with solid continuous operating records of three
years or more. Founders' approach to investment management gives greater empha-
sis to the fundamental financial, marketing and operating characteristics of
individual companies, and is less concerned with the short-term impact of
changes in macroeconomics and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds, debentures and other
corporate obligations when Founders believes that these investments offer op-
portunity for growth of capital. This segment of the portfolio may also invest
in Rule 144A securities and may enter into futures contracts or options thereon
for hedging purposes.
JANUS CAPITAL CORPORATION ("JANUS CAPITAL") pursues the Fund's investment ob-
jective by investing substantially all of its segment of the Fund's portfolio
in common stocks when its portfolio manager believes that the relevant market
environment favors profitable investing in such securities. Janus Capital em-
phasizes companies with earnings growth potential. This segment of the portfo-
lio may also invest in preferred stocks, warrants, government securities, cor-
porate bonds and debentures or other debt securities or repurchase agreements
when its portfolio manager perceives an opportunity for capital growth from
such securities or to receive a return on idle cash. Janus Capital's segment
may also invest in Rule 144A securities and may enter into options, futures and
forward contracts.
LOOMIS, SAYLES & COMPANY, L.P. ("LOOMIS SAYLES") manages its segment of the
portfolio by investing primarily in stocks of small cap companies with good
earnings growth potential, that Loomis Sayles believes are undervalued by the
market. Typically, such companies range in size from $100 million to $500 mil-
lion in market capitalization, have better than average growth rates at below
average price/earnings ratios and have strong balance sheets and cash flow.
Loomis
3
<PAGE>
Sayles seeks to build a core small cap portfolio of solid growth company
stocks, with a smaller emphasis on special situations and turnarounds (compa-
nies that have experienced significant business problems but which Loomis
Sayles believes have favorable prospects for recovery), as well as unrecognized
stocks.
Under unusual market conditions as determined by any of the four subadvisers,
all or any portion of the segment of the portfolio managed by that subadviser
may be invested, for temporary, defensive purposes, in short-term debt instru-
ments or in cash. In addition, under normal conditions, a portion of each seg-
ment's assets may be invested in short-term assets for liquidity purposes or
pending investment in other securities. Short-term investments may include U.S.
Government securities, certificates of deposit, commercial paper and other ob-
ligations of corporate issuers rated in the top two rating categories by a ma-
jor rating agency or, if unrated, determined to be of comparable quality by the
subadviser, and repurchase agreements that are fully collateralized by cash,
U.S. Government securities or high-quality money market instruments.
4
<PAGE>
Investment Risks
It is important to understand the following risks inherent in the Fund before
you invest.
.EQUITY SECURITIES
Equity securities are securities that represent an ownership interest (or the
right to acquire such an interest) in a company, and include common and pre-
ferred stocks and securities exercisable for or convertible into common or
preferred stocks (such as warrants, convertible debt securities and convert-
ible 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 the Fund may sometimes decrease instead of
increase. The Fund may invest in equity securities of companies with rela-
tively 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. The Fund's invest-
ments may include securities traded over-the-counter as well as those traded
on a securities exchange. Some over-the-counter securities may be more diffi-
cult to sell under some market conditions.
The Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or other
equity securities. Convertible securities also include other securities, such
as warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally increase or decrease as the values of the underlying equity se-
curities increase or decrease. The movements in the prices of convertible se-
curities, however, may be smaller than the movements in the value of the un-
derlying equity securities. The value of convertible securities that pay div-
idends or interest, like the value of other fixed-income securities, gener-
ally fluctuates inversely with changes in interest rates. Warrants have no
voting rights, pay no dividends and have no rights with respect to the assets
of the corporation issuing them. They do not represent ownership of the secu-
rities for which they are exercisable, but only the right to buy such securi-
ties at a particular price.
Less than 35% of the Fund's net assets will be invested in convertible secu-
rities rated below investment grade and unrated convertible securities of
comparable quality.
.SMALL COMPANIES
The Fund, in the discretion of each subadviser, may invest without limit in
the securities of companies with smaller capitalization. Investments in com-
panies 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 capitaliza-
tion often have limited product lines, markets or financial resources and
they may be dependent upon a relatively small management group. The securi-
ties may have limited marketability and may be subject to more abrupt or er-
ratic movements in price than securities of companies with larger capitaliza-
tion or the market averages in general. The net asset value of funds that in-
vest in companies with smaller capitalization therefore may fluctuate more
widely than market averages.
.FOREIGN SECURITIES
Investments in foreign securities present risks not typically associated with
investments in comparable securities of U.S. issuers.
There may be less information publicly available about a foreign corporate or
governmental issuer than about a U.S. issuer, and foreign corporate issuers
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The securi-
ties of some foreign issuers are less liquid and at times more volatile than
securities of comparable U.S. issuers. Foreign brokerage commissions and se-
curities custody costs are often higher than those in the United States, and
judgments against foreign entities may be more difficult to obtain and en-
force. With respect to certain foreign countries, there is a possibility of
governmental expropriation of assets, confiscatory taxation, political or fi-
nancial instability and diplomatic develop
5
<PAGE>
ments that could affect the value of investments in those countries. The re-
ceipt of interest on foreign government securities may depend on the avail-
ability of tax or other revenues to satisfy the issuer's obligations.
The Fund's investments in foreign securities may include investments in coun-
tries 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 assis-
tance, currency transfer restrictions, highly limited numbers of potential
buyers for such securities and delays and disruptions in securities settle-
ment procedures.
The Fund may invest in foreign equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository re-
ceipts are instruments issued by a bank that represent an interest in equity
securities held by arrangement with the bank. Depository receipts can be ei-
ther "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 is-
suer 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.
.FOREIGN CURRENCY
Most foreign securities in the Fund's portfolio will be denominated in for-
eign 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 fa-
vorable or unfavorable.
The Fund may incur costs in connection with conversions between various cur-
rencies. In addition, the 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.
.FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short, medium and long term
obligations issued by the U.S. or foreign governments, government or interna-
tional 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 as-
sets (such as mortgages or other receivables) that have been set aside as
collateral for the issuer's obligation. Fixed-income securities generally in-
volve an obligation of the issuer to pay interest or dividends on either a
current basis or at the maturity of the security, as well as the obligation
to repay the principal amount of the security at maturity.
Fixed-income securities involve both credit risk and market risk. Credit risk
is the risk that the security's issuer will fail to fulfill its obligation to
pay interest, dividends or principal on the security. Market risk is the risk
that the value of the security will fall because of changes in market rates
of interest. (Generally, the value of fixed-income securities falls when mar-
ket rates of interest are rising.) Some fixed-income securities also involve
prepayment or call risk. This is the risk that the issuer will repay the Fund
the principal on the security before it is due, thus depriving the Fund of a
favorable stream of future interest or dividend payments.
6
<PAGE>
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period. Fluctua-
tions in the value of the 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
("S&P") or Ba or lower by Moody's Investors 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 sub-
ject to greater credit and market risk, than higher quality fixed-income se-
curities. 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 in-
vesting 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 cer-
tain categories of financial institutions to invest in these securities. In
addition, the secondary market may be less liquid for lower rated fixed-in-
come securities. This lack of liquidity at certain times may affect the valu-
ation of these securities and may make the valuation and sale of these secu-
rities more difficult. During the fiscal year ended December 31, 1995, the
Fund did not have any of its assets invested in fixed-income securities rated
below investment grade. Securities of below investment grade are considered
high-yield, high-risk securities and are commonly known as "junk bonds." For
more information, including a detailed description of the ratings assigned by
S&P and Moody's, please refer to the Statement's "Appendix A -- Description
of Bond Ratings."
.ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES AND "STRIPS"
The Fund may invest in zero coupon, pay-in-kind and step coupon securities
and "strips." Zero coupon bonds do not make regular interest payments; rath-
er, they are sold at a discount from face value. Principal and accrued dis-
count (representing interest accrued but not paid) are paid at maturity.
"Strips" are debt securities that are stripped of their interest coupon after
the securities are issued, but otherwise are comparable to zero coupon bonds.
Step coupon bonds trade at a discount from their face value and pay coupon
interest. The coupon rate is low for an initial period and then increases to
a higher coupon rate thereafter. Pay-in-kind bonds normally give the issuer
an option to pay cash at a coupon payment date or give the holder of the se-
curity a similar bond with the same coupon rate and a face value equal to the
amount of the coupon payment that would have been made. The market values of
"strips" and zero coupon, pay-in-kind and step coupon securities generally
fluctuate in response to changes in interest rates to a greater degree than
do conventional interest paying securities of comparable term and quality.
Under many market conditions, investments in such securities may be illiquid,
making it difficult for the Fund to dispose of them or determine their cur-
rent value.
.REPURCHASE AGREEMENTS
Under a repurchase agreement, the Fund buys securities from a seller, usually
a bank or brokerage firm, with the understanding that the seller will repur-
chase the securities at a higher price at a later date. If the seller fails
to repurchase the securities, the Fund has rights to sell the securities to
third parties. Repurchase agreements can be regarded as loans by the Fund to
the seller, collateralized by the securities that are the subject of the
agreement. Repurchase agreements afford an opportunity for the Fund to earn a
return on available cash at relatively low market risk, although the Fund may
be subject to various delays and risks of loss if the seller fails to meet
its obligation to repurchase.
7
<PAGE>
. SHORT-TERM TRADING
Although the Fund seeks long-term growth or return, the Fund may, consistent
with its investment objective, engage in portfolio trading in anticipation
of, or in response to, changing economic or market conditions and trends.
These policies may result in higher turnover rates in the Fund's portfolio,
which may produce higher transaction costs and a higher level of taxable cap-
ital gains. Portfolio turnover considerations will not limit any subadviser's
investment discretion in managing the Fund's assets.
The Fund's recent portfolio turnover rate is set forth above under "Financial
Highlights."
. OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
The Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. The Fund may buy and sell futures contracts
on securities, securities indexes or currencies. The Fund may also enter into
swap contracts. The Fund may engage in these transactions either for the pur-
pose of enhancing investment return, or to hedge against changes in the value
of other assets that the Fund owns or intends to acquire. The Fund may also
conduct foreign currency exchange transactions on a spot (i.e. cash) basis at
the spot rate prevailing in the foreign currency exchange market. Options,
futures and swap contracts fall into the broad category of financial instru-
ments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be considered a specula-
tive activity, involving greater risks than are involved in hedging.
Options can generally be classified as either "call" or "put" options. There
are two parties to a typical options transaction: the "writer" and the "buy-
er." A call option gives the buyer the right to buy a security or other asset
(such as an amount of currency or a futures contract) from, and a put option
the right to sell a security or other asset to, the option writer at a speci-
fied price, on or before a specified date. The buyer of an option pays a pre-
mium when purchasing the option, which reduces the return on the underlying
security or other asset if the option is exercised, and results in a loss if
the option expires unexercised. The writer of an option receives a premium
from writing an option, which may increase its return if the option expires
or is closed out at a profit. If the Fund as the writer of an option is un-
able to close out an unexpired option, it must continue to hold the under-
lying security or other asset until the option expires, to "cover" its obli-
gations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in
the amount specified in the contract. Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are
usually closed out before the settlement date through the purchase (or sale)
of a comparable contract. If the price of the sale of the futures contract by
the Fund exceeds (or is less than) the price of the offsetting purchase, the
Fund will realize a gain (or loss).
The Fund may enter into interest rate, currency and securities index swaps.
The Fund will enter into these transactions primarily to seek to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against an increase in the price of securities the Fund antici-
pates purchasing at a later date. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap is
an agreement to exchange cash flows on a notional amount based on changes in
the relative values of the specified currencies. An index swap is an agree-
ment 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 securi-
ties (such as the Standard & Poor's Composite Index of 500 Stocks [the "S&P
500"]) or in some other investment (such as U.S. Treasury securities).
The value of options purchased by the Fund, futures contracts held by the
Fund and the
8
<PAGE>
Fund's positions in swap contracts may fluctuate up or down based on a vari-
ety of market and economic factors. In some cases, the fluctuations may off-
set (or be offset by) changes in the value of securities held in the Fund's
portfolio. All transactions in options, futures or swaps involve costs and
the possible risk of loss to the Fund of all or a significant part of the
value of its investment. In some cases, the risk of loss may exceed the
amount of the Fund's investment. The Fund will be required, however, to set
aside with its custodian bank certain assets in amounts sufficient at all
times to satisfy its obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. The Fund's ability to hedge against adverse
changes in the value of securities held in its portfolio through options,
futures and swap transactions also depends on the degree of correlation be-
tween the changes in the value of futures, options or swap positions and
changes in the values of the portfolio securities. The successful use of
futures and exchange traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a timely
basis. There can be no assurance that such a market will exist at any partic-
ular time. In the case of swap contracts and of options that are not traded
on an exchange ("over-the-counter" options), the Fund is at risk that the
other party to the transaction will default on its obligations, or will not
permit the Fund to terminate the transaction before its scheduled maturity.
As a result of these characteristics, the Fund will treat most swap contracts
and over-the-counter options (and the assets it segregates to cover its obli-
gations thereunder) as illiquid. Certain provisions of the Internal Revenue
Code (the "Code") and certain regulatory requirements may limit the Fund's
ability to engage in futures, options and swap transactions.
.CURRENCY HEDGING TRANSACTIONS
Each segment of the Fund may, at the discretion of its subadviser, engage in
foreign currency exchange transactions, in connection with the purchase and
sale of portfolio securities, to protect the value of specific portfolio po-
sitions or in anticipation of changes in relative values of currencies in
which current or future Fund portfolio holdings are denominated or quoted.
For more information on foreign currency hedging transactions, see Part II of
the Statement.
.MISCELLANEOUS
The Fund will not invest more than 15% of its assets in "illiquid securi-
ties," that is, securities which are not readily resalable, which may include
securities whose disposition is restricted by federal securities laws.
The Fund may purchase Rule 144A securities. These are privately offered secu-
rities that can be resold only to certain qualified institutional buyers. The
Fund may also purchase commercial paper issued under Section 4(2) of the Se-
curities Act of 1933. Rule 144A securities and Section 4(2) commercial paper
are treated as illiquid, unless the relevant subadviser has determined, under
guidelines established by the Trust's trustees, that the particular issue of
Rule 144A securities or commercial paper is liquid. Investment in restricted
or other illiquid securities involves the risk that the Fund may be unable to
sell such a security at the desired time. Also, the Fund may incur expenses,
losses or delays in the process of registering restricted securities prior to
resale.
The Fund may purchase securities on a "when-issued" or "delayed-delivery" ba-
sis. This means that the Fund enters into a commitment to buy the security
before the security has been issued, or, in the case of a security that has
already been issued, to accept delivery of the security on a date beyond the
usual settlement period. If the value of a security purchased on a "when-is-
sued" or "delayed delivery" basis falls or market rates of interest increase
between the time the Fund commits to buy the security and the delivery date,
the Fund may sustain a loss in value of or yield on the security. For more
information on "when-issued" and "delayed delivery" securities, see Part II
of the Statement.
9
<PAGE>
To the extent the Fund may invest in derivative securities for other than
bona fide hedging purposes, such investments may be speculative in nature and
may involve additional risks.
The Fund is a "non-diversified" fund and as such is not required to meet any
diversification requirements under the Investment Company Act of 1940 (the
"1940 Act"), although the Fund must meet certain diversification standards to
qualify as a "regulated investment company" under the Code. Since the Fund
may invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible than a more wide-
ly-diversified fund to any single economic, political or regulatory occur-
rence.
. SPECIAL CONSIDERATIONS REGARDING THE MULTI-ADVISER APPROACH
New England Funds Management, L.P. ("NEFM") oversees the portfolio management
services provided to the Fund by each of the four subadvisers. NEFM does not,
however, determine what investments will be purchased or sold for any segment
of the portfolio. Because each subadviser will be managing its segment of the
portfolio independently from the other subadvisers, the same security may be
held in two different segments of the portfolio, or may be acquired for one
segment of the portfolio at a time when the subadviser of another segment
deems it appropriate to dispose of the security from that 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 appro-
priate when another subadviser or subadvisers believe continued exposure to
the equity markets is appropriate for their segments of the portfolio. Be-
cause each subadviser directs the trading for its own segment of the portfo-
lio, and does not aggregate its transactions with those of the other
subadvisers, the Fund may incur higher brokerage costs than would be the case
if a single adviser or subadviser were managing the entire portfolio. Also,
because each segment of the portfolio will perform differently from the other
segments depending upon the investments it holds and changing market condi-
tions, the segment of the Fund's assets managed by a subadviser may be larger
or smaller at various times than the segments managed by other subadvisers.
For example, as of December 31, 1995, the percentages of the Fund's net as-
sets held in the segments of the Fund managed by Berger, Founders, Janus Cap-
ital and Loomis Sayles were 24%, 27%, 25% and 24%, respectively. Net cash
inflows or outflows resulting from sales and redemptions of the Fund's shares
will, however, continue to be allocated on an equal basis among the four seg-
ments of the portfolio without regard to the relative size of the segments.
The Fund does not intend to reallocate its assets among the segments to re-
duce these differences in size.
NEFM may, at its discretion, terminate its agreement with a segment's
subadviser. In such cases NEFM will either enter into an agreement with an-
other subadviser or will allocate the segment's assets equally among the
other segments of the Fund.
10
<PAGE>
SubAdvisers' Investment Styles
NEFM believes that a multi-adviser approach to equity investing-one that com-
bines the varied styles of a number of subadvisers in selecting securities
for the Fund's portfolio-offers a different investment opportunity than eq-
uity funds run by a single adviser using a single style.
Any given management style tends to produce better returns than other styles
under certain market and economic conditions, and to perform less well under
other conditions. Therefore, most single-adviser funds have not consistently
maintained superior performance rankings relative to their peers over long
periods. NEFM believes that consistency of results, minimizing under-perfor-
mance even at the cost of out-performance at times, is likely to produce
higher performance over time.
NEFM believes that assigning portfolio management responsibility for the Fund
to four subadvisers, whose varying styles have resulted in records of suc-
cess, may increase the likelihood that the Fund may produce superior long-
term results for its shareholders, with less variability of return and less
risk of persistent under-performance than a single-adviser fund. Of course,
past results should not be considered a prediction of future performance, and
there is no assurance that the Fund will in fact achieve superior results
over any time period. The investment styles described below will be those ap-
plied by each of the subadvisers to the segment of the Fund's portfolio for
which that subadviser is responsible.
BERGER ASSOCIATES, INC.
Berger places primary emphasis on established companies which it believes have
favorable growth prospects, regardless of the company's size. Berger emphasizes
stocks with potential for rapid earnings expansion. Berger seeks companies with
the capability to perform well under varying economic conditions, including the
ability to compete in the global marketplace. Berger also seeks companies with
the ability to market increasing
amounts of products or services, in order to increase shareholder equity at an
above-average rate. Berger also places considerable emphasis on the quality of
the corporate leadership of companies under consideration.
FOUNDERS ASSET MANAGEMENT, INC.
Founders manages its segment of the Fund's portfolio by investing primarily in
established companies with above-average prospects for growth in earnings per
share. This segment will invest primarily in mid-cap and large capitalization
stocks. Founders believes that mid-cap companies (companies with between $1.0
billion and $5.0 billion of market capitalization) can produce returns close to
those of smaller-cap companies, but with less risk because of their stronger
infrastructures and performance records and more solid market positions, and
that large-capitalization stocks add stability to the portfolio.
JANUS CAPITAL CORPORATION
Janus Capital manages its segment of the portfolio to seek long-term capital
growth primarily from investing in common stocks of companies of any size, in-
cluding large, well-established companies and smaller, emerging growth compa-
nies. Janus Capital's analysis and selection process focus on stocks with earn-
ings growth potential that may not be recognized by the market.
LOOMIS, SAYLES & COMPANY, L.P.
Loomis Sayles manages its segment of the portfolio by investing primarily in
stocks of small cap companies with good earnings growth potential, that Loomis
Sayles believes are undervalued by the market. Typically, such companies range
in size from $100 million to $500 million in market capitalization, have better
than average growth rates at below average price/earnings ratios and have
strong balance sheets and cash flow. Loomis Sayles seeks to build a core small
cap portfolio of solid growth company stocks, with a smaller emphasis on spe-
cial situations and turnarounds (companies that have experienced significant
business problems but which Loomis Sayles believes have favorable prospects for
recovery), as well as unrecognized stocks.
11
<PAGE>
Fund Management
NEFM, 399 Boylston Street, Boston, Massachusetts 02116, serves as the Fund's
adviser. NEFM oversees, evaluates and monitors the subadvisers' provision of
subadvisory services to the Fund and provides general business management and
administration to the Fund. The Fund pays NEFM a management fee at the annual
rate of 1.05% of the Fund's average daily net assets. This fee rate is higher
than that paid by most other mutual funds, but is comparable to fee rates paid
by some mutual funds with a similar investment objective and policies to the
Fund. This difference in the fee rate is partially due to the multi-adviser
format. NEFM pays each subadviser a subadvisory fee at the annual rate of 0.55%
of the first $50 million of the average daily net assets of the segment of the
Fund that the subadviser manages and 0.50% of such assets in excess of $50 mil-
lion.
The Distributor in its discretion may, but is not obligated to, award an incen-
tive bonus to the subadviser whose segment of the Fund's portfolio has the
highest relative return for the prior year versus that segment's investment
peer group, as tracked by a major independent mutual fund reporting service.
Subject to the supervision of NEFM, each subadviser manages its segment of the
Fund's portfolio in accordance with the Fund's investment objective and poli-
cies, makes investment decisions for that segment of the portfolio, places or-
ders to purchase and sell securities for that segment of the portfolio, and em-
ploys professional advisers and securities analysts who provide research serv-
ices to that segment of the portfolio. The Fund pays no direct fees to any of
the subadvisers. Below is a brief description of the subadvisers.
BERGER, 210 University Boulevard, Suite 900, Denver, Colorado 80206, serves as
an investment adviser to mutual funds, pension and profit sharing plans and
other institutional and private investors. Rodney L. Linafelter, Vice President
of Berger, has day-to-day responsibility for the management of the segment of
the Fund managed by Berger. Kansas City Southern Industries, Inc. ("KCSI"), a
publicly traded holding company, owns approximately 80% of the outstanding
shares of Berger.
FOUNDERS, 2930 East Third Avenue, Denver, Colorado 80206, has acted as an in-
vestment adviser since 1938. To facilitate day-to-day investment management,
Founders employs a unique team-and-lead-manager system. The management team for
a portfolio or fund is comprised of Founders' Chief Investment Officer Bjorn K.
Borgen, a lead portfolio manager, assistant portfolio managers, portfolio trad-
ers and research analysts. Team members share responsibility for providing
ideas, information, knowledge and expertise in the management of Founders' seg-
ment of the Fund. Each team member has one or more areas of expertise that is
applied to the management of Founders' segment of the Fund. Daily decisions on
portfolio selection rest with the lead portfolio manager, who, through partici-
pation in the team process, utilizes the input of other team members in making
purchase and sale determinations. Edward F. Keely is lead portfolio manager for
the segment of the Fund that is managed by Founders. Mr. Borgen has served as
Founders' Chief Investment Officer since 1969 and owns all of Founders' out-
standing shares.
JANUS CAPITAL, 100 Fillmore Street, Denver, Colorado 80206, has managed mutual
funds since 1970 and also advises individual, corporate, charitable and retire-
ment accounts. Warren B. Lammert has day-to-day management responsibility for
those assets of the Fund allocated to Janus Capital, where he serves as a port-
folio manager and Vice President of Investments. KCSI owns approximately 83% of
the voting stock of Janus Capital. Thomas H. Bailey, President and Chairman of
the Board of Janus Capital, owns approximately 12% of Janus Capital's voting
stock and, by agreement with KCSI, selects a majority of Janus Capital's board
of directors.
LOOMIS SAYLES, One Financial Center, Boston, Massachusetts 02111, is one of the
country's oldest and largest investment counsel firms. Jeffrey C. Petherick and
Mary Champagne, Vice Presidents of Loomis Sayles, have day-to-day management
responsibility for the segment of the Fund allocated to Loomis Sayles. Mr.
Petherick, who joined Loomis Sayles in 1990, has co-managed
12
<PAGE>
the Loomis Sayles segment of the Fund since the Fund's inception. Ms. Cham-
pagne has co-managed the Loomis Sayles segment of the Fund since July 1995.
Prior to joining Loomis Sayles in 1993, Ms. Champagne served as a portfolio
manager at NBD Bank for 10 years.
Prior to January 2, 1996, New England Investment Companies, L.P. ("NEIC")
served as adviser to the Fund.
The general partners of NEFM, Loomis Sayles and the Distributor are special
purpose corporations. These corporations are indirect wholly-owned subsidiar-
ies of NEIC, whose sole general partner, New England Investment Companies,
Inc. ("NEIC Inc."), is a wholly-owned subsidiary of New England Mutual Life
Insurance Company ("The New England"). The New England and Metropolitan Life
Insurance Company ("MetLife") have entered into an agreement to merge, with
MetLife to be the survivor of the merger. The merger is conditioned upon,
among other things, approval by the policyholders of The New England and
MetLife and receipt of certain regulatory approvals. After such merger, NEIC
Inc. will be a wholly-owned subsidiary of MetLife.
Subject to applicable regulatory restrictions and such policies as the Trust's
trustees may adopt, each subadviser may consider sales of shares of the Fund
and other mutual funds it manages as a factor in the selection of broker-deal-
ers to effect portfolio transactions for the Fund. Subject to procedures
adopted by the trustees of the Trust, Fund brokerage transactions may be exe-
cuted by brokers that are affiliated with NEIC, NEFM or any subadviser. See
"Portfolio Transactions and Brokerage" in Part II of the Statement.
NEFM provides executive and other personnel for the management of the Trust.
The Trust's Board of Trustees supervises the affairs of the Fund as conducted
by NEFM and the subadvisers.
13
<PAGE>
Buying Fund Shares
USING TELE#FACTS 1-800-346-5984
TELE#FACTS IS NEW ENGLAND FUNDS' AUTOMATED SERVICE SYSTEM THAT GIVES YOU 24-
HOUR ACCESS TO YOUR ACCOUNT. THROUGH YOUR TOUCH-TONE TELEPHONE, YOU CAN RECEIVE
YOUR CURRENT ACCOUNT BALANCE, YOUR LAST FIVE TRANSACTIONS, FUND PRICES AND RE-
CENT PERFORMANCE INFORMATION. YOU CAN ALSO PURCHASE, SELL OR EXCHANGE CLASS A
SHARES OF ANY NEW ENGLAND FUND. FOR A FREE BROCHURE ABOUT TELE#FACTS INCLUDING
A CONVENIENT WALLET CARD, CALL US AT 1-800-225-5478.
MINIMUM INVESTMENT
$2,500 is the minimum for an initial investment in the Fund and $50 is the min-
imum for each subsequent investment. There are special initial investment mini-
mums for the following plans:
n $25 (for initial and subsequent investments) for payroll deduction investment
programs for 401(k), SARSEP, 403(b) retirement plans and certain other retire-
ment plans.
n $50 for automatic investing through the Investment Builder program.
n $250 for retirement plans with tax benefits such as corporate pension and
profit sharing plans, IRAs and Keogh plans.
n $1,000 for accounts registered under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and Class C shares of the Fund in the follow-
ing ways:
THROUGH YOUR INVESTMENT DEALER:
Many investment dealers have a sales agreement with the Distributor and would
be pleased to accept your order.
BY MAIL:
FOR AN INITIAL INVESTMENT, simply complete an application and return it, with a
check payable to New England Funds, P.O. Box 8551, Boston, MA 02266-8551.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an addi-
tional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or trust-
ee. Third party checks will not be accepted. When purchases are made by check
or periodic account investment, redemptions will not be allowed until the in-
vestment being redeemed has been in the account for 10 calendar days.
BY WIRE TRANSFER OF FEDERAL FUNDS:
FOR AN INITIAL INVESTMENT, call us at 1-800- 225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time) on a day when the Fund is open for business to obtain
an account number and wire transfer instructions.
FOR SUBSEQUENT INVESTMENTS, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit New England Star
Advisers Fund, Class of shares, Shareholder Name, Shareholder Account Number.
Funds may be transferred between 9:00 a.m. and 4:00 p.m. (Eastern time). Your
bank may charge a fee for this service.
BY INVESTMENT BUILDER:
Investment Builder is New England Funds' automatic investment plan. You may au-
thorize automatic monthly transfers of $50 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
FOR AN INITIAL INVESTMENT, please indicate that you would like to begin an au-
tomatic investment plan through Investment Builder on the enclosed application.
Indicate the amount of the monthly investment and enclose a check marked "Void"
or a deposit slip from your bank account.
TO ADD INVESTMENT BUILDER TO AN EXISTING ACCOUNT, please call us at 1-800-225-
5478 for a Service Options Form.
BY ELECTRONIC PURCHASE THROUGH ACH:
You may purchase additional shares electronically through the Automated Clear-
ing House ("ACH") system as long as your bank or credit union is a member of
the ACH system and you have a completed, approved ACH application on file with
the Fund.
14
<PAGE>
TO MAKE INVESTING EVEN EASIER, YOU CAN ALSO ORDER PERSONALIZED INVESTMENT SLIPS
BY CALLING 1-800-225-5478.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Fund is open for business. You may purchase
shares through ACH by calling Tele#Facts at 1-800-346-5984 twenty-four hours a
day. Under normal circumstances, the New York Stock Exchange (the "Exchange")
closes at 4:00 p.m. (Eastern time). Purchase orders through ACH or Tele#Facts
will be complete only upon receipt by New England Funds of funds from your bank
and, on the day that funds are received, will be processed at the net asset
value next determined at the close of regular trading on the Exchange on days
that the Exchange is open. Proceeds of redemptions of Fund shares purchased
through ACH may not be available for up to ten days after the purchase date.
BY EXCHANGE FROM ANOTHER NEW ENGLAND FUND:
You may also purchase shares of the Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares --Exchanging Among New England
Funds" for complete details.
GENERAL
All purchase orders are subject to acceptance by the Fund and will be effected
at the net asset value next determined after the order is received in proper
form by State Street Bank and Trust Company ("State Street Bank") (except or-
ders received by your investment dealer before the close of trading on the Ex-
change and transmitted to the Distributor by 5:00 p.m. [Eastern time] on the
same day, which will be effected at the net asset value determined on that
day). Although the Fund does not anticipate doing so, it reserves the right to
suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to persons
whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you re-
quest them in writing from the Distributor. The Fund's "open account" system
for recording your investment eliminates the problems and expense of handling
and safekeeping certificates. Certificates will not be issued for Class B
shares or Class C shares. If you wish transactions in your account to be ef-
fected by another person under a power of attorney from you, special rules ap-
ply. Please contact your investment dealer or the Distributor for details.
SALES CHARGES
CLASS A SHARES
Shares are offered at net asset value plus a sales charge which varies depend-
ing on the size of your purchase. They are also subject to a 0.25% annual serv-
ice fee. Class A shares are offered subject to the following initial sales
charges:
<TABLE>
<CAPTION>
SALES CHARGE AS A % DEALER'S
OF CONCESSION
------------------- AS % OF
VALUE OF OFFERING NET AMOUNT OFFERING
TOTAL INVESTMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$50,000 5.75% 6.10% 5.00%
$50,000 -
$99,999 4.50% 4.71% 4.00%
$100,000 -
$249,999 3.50% 3.63% 3.00%
$250,000 -
$499,999 2.50% 2.56% 2.15%
$500,000 -
$999,999 2.00% 2.04% 1.70%
$1,000,000 or
more None None *
</TABLE>
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases (except investments by plans under
Sections 401(a) or 401(k) of the Code whose total investments amount to $1
million or more or that have 100 or more eligible employees ["Retirement
Plans"]) a commission of up to the following amounts: 1% on the first $3 mil-
lion invested; 0.50% on the next $2 million; and 0.25% on the excess over $5
million. For investments by Retirement Plans, the Distributor may, at its
discretion, pay investment dealers who initiate and are responsible for such
purchases a commission of up to the following amounts: 1% on the first $3
million invested; and 0.50% on amounts over $3 million and up to $10 million.
These commissions are not payable if the purchase represents the reinvestment
of a redemption made during the previous 12 calendar months. Section 401(a),
401(k), 457 and 403(b) plans that have total investment assets of at least
$10 million are eligible to purchase Class Y shares of the Fund, which are
described in a separate prospectus.
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of
$1,000,000 or more of
15
<PAGE>
A, B OR C SHARES -- WHICH SHOULD YOU CHOOSE?
YOUR CHOICE OF SHARE CLASS DEPENDS ON THE SIZE OF YOUR INVESTMENT AND HOW LONG
YOU INTEND TO HOLD YOUR SHARES. IN GENERAL, THERE ARE ONLY MINOR DIFFERENCES IN
PERFORMANCE RESULTS FOR THE DIFFERENT CLASSES IF HELD FOR THE LONG TERM. CON-
SULT YOUR FINANCIAL REPRESENTATIVE FOR HELP IN DECIDING WHICH CLASS IS APPRO-
PRIATE FOR YOU.
Class A shares of the Fund or purchases by Retirement Plans as defined above, a
CDSC, at the rate of 1% of the lesser of the purchase price or the net asset
value at the time of redemption, applies to redemptions of shares within one
year after purchase. If an exchange is made to Class A shares of any of New En-
gland Cash Management Trust Money Market Series or U.S. Government Series or
New England Tax Exempt Money Market Trust (the "Money Market Funds"), then the
one-year holding period for purposes of determining the expiration of the CDSC
will stop and will resume only when an exchange is made back into Class A
shares of a series of New England Funds Trust I or New England Funds Trust II
(the "Trusts"). If the Money Market Fund shares are redeemed rather than ex-
changed back into a series of the Trusts, then a CDSC applies to the redemp-
tion. For purposes of the CDSC, it is assumed that the shares held the longest
are the first to be redeemed. No CDSC applies to a redemption of shares fol-
lowed by a reinvestment effected within 30 days after the date of the redemp-
tion.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales charge,
subject to a 0.25% annual service fee, a 0.75% annual distribution fee for 8
years (at which time they automatically convert to Class A shares) and to a
CDSC if they are redeemed within 5 years of purchase. The holding period for
purposes of timing the conversion to Class A shares and determining the CDSC
will continue to run after an exchange to Class B shares of any series of the
Trusts. If the exchange is made to Class B shares of a Money Market Fund, then
the holding period stops and will resume only when an exchange is made back
into Class B shares of a series of the Trusts. If the Money Market Fund shares
are redeemed rather than exchanged back into the Trusts, then a CDSC applies to
the redemption, at the same rate as if the Class B shares of the Fund had been
redeemed at the time they were exchanged for Money Market Fund shares. For pur-
poses of the CDSC, it is assumed that the shares held the longest are the first
to be redeemed.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption. Ac-
cordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
Fund purchased with reinvested dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of re-
demption of such shares. The CDSC equals the following percentages of the dol-
lar amounts subject to the charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ------------------- ------------------------
<S> <C>
1st............. 4%
2nd............. 3%
3rd............. 3%
4th............. 2%
5th............. 1%
thereafter...... 0%
</TABLE>
Year one ends one year after the day on which the purchase was accepted, and so
on.
The CDSC is deducted from the proceeds of the redemption, not the amount re-
maining in the account, unless otherwise requested, and is paid to the Distrib-
utor. The CDSC may be eliminated for certain persons and organizations. See
"Sales Charges -- General" below. At the time of sale, the Distributor pays in-
vestment dealers a commission of 3.75% and advances the first year's service
fee (up to 0.25%) on purchases of Class B shares.
CLASS C SHARES
Class C shares are offered at net asset value, without an initial sales charge
or CDSC; are subject to a 0.25% annual service fee and a 0.75% annual distribu-
tion fee; and do not convert into another class.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or Class C shares are more appro-
priate for an investor depends on the amount and intended length of the invest-
ment. Investors making large investments, qualifying for a reduced initial
sales
16
<PAGE>
charge, might consider Class A shares because Class A shares have lower 12b-1
fees and pay correspondingly higher dividends per share. For these reasons, the
Distributor will treat any order of $1 million or more for Class B shares as a
Class A order. Any order of $1 million or more for Class C shares will be
treated as an order for Class A shares, unless you indicate on the relevant
section of your application that you have been informed of the relative advan-
tages and disadvantages of Class A and Class C shares. Investors making smaller
investments might consider Class B or Class C shares because 100% of the pur-
chase is invested immediately. Investors making smaller investments who antici-
pate redeeming their shares within five years may find Class C shares more fa-
vorable than Class B shares, because Class B shares are subject to a CDSC on
redemptions made within five years after purchase. Class B shares are more fa-
vorable than Class C shares for investors who anticipate holding their invest-
ment for more than eight years, since Class B shares convert to Class A shares
(and thus bear lower ongoing fees) after eight years. Consult your investment
dealer for advice applicable to your particular circumstances.
GENERAL
NO CDSC ON ANY CLASS OF SHARES APPLIES in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2) dis-
tributions from an IRA due to death, disability or a tax-free return of an ex-
cess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability
(as defined in Section 72(m)(7) of the Code) of a shareholder if the redemption
is made within one year after the shareholder's death or disability. Also,
there is no CDSC on certain withdrawals pursuant to a Systematic Withdrawal
Plan. See "Selling Fund Shares -- 4 Ways to Sell Fund Shares -- By Systematic
Withdrawal Plan" below.
The Fund receives the net asset value next determined after an order is re-
ceived on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a pur-
chase and, therefore, would be considered a taxable event on which you may rec-
ognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares to investment dealers from time to time. The
staff of the SEC is of the view that dealers receiving all or substantially all
of the sales charge may be deemed underwriters of the Fund's shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Fund at net asset value to an eligible govern-
mental authority .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 se-
ries of the Trusts or if the account is registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Fund. In some instances these in-
centives are provided to certain dealers who achieve sales goals or who have
sold or may sell significant amounts of shares. The Distributor from time to
time may provide financial assistance programs to dealers in connection with
conferences, sales or training programs, seminars, advertising and sales cam-
paigns and/or shareholder services arrangements. Certain dealers who have sold
or may sell significant amounts of shares also may receive compensation in the
form of payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives to locations, within or
outside of
17
<PAGE>
the U.S., for educational seminars or meetings of a business nature.
The Distributor may provide non-cash incentives for achievement of specified
sales levels by representatives of participating broker-dealers and financial
institutions. Such incentives include, but are not limited to, merchandise from
gift catalogues or other sources. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or financial in-
stitution with which the representative is associated.
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
. LETTER OF INTENT -- if aggregate purchases of all series and classes of the
Trusts over a 13-month period will reach a breakpoint (a dollar amount at which
a lower sales charge applies), smaller individual amounts can be invested at
the sales charge applicable to that breakpoint.
. COMBINING ACCOUNTS -- purchases by all qualifying accounts of all series and
classes of the Trusts (which do not include the Money Market Funds unless the
shares were purchased through an exchange from a series of the Trusts) may be
combined with purchases of qualifying accounts of a spouse, parents, children,
siblings, grandparents or grandchildren, individual fiduciary accounts, sole
proprietorships and/or single trust estates. The values of all accounts are
combined to determine the sales charge.
. UNIT HOLDERS OF UNIT INVESTMENT TRUSTS -- unit investment trust distributions
of less than $1 million may be invested in Class A shares of the Fund at a re-
duced sales charge of 1.50% of the public offering price (or 1.52% of the net
amount invested).
. ELIGIBLE GOVERNMENTAL AUTHORITIES -- no sales charge or CDSC applies to in-
vestments by any state, county or city or any instrumentality, department, au-
thority or agency thereof that has determined that the Fund is a legally per-
missible investment and that is prohibited by applicable investment laws from
paying a sales charge or commission in connection with the purchase of shares
of any registered investment company.
. CLIENTS OF AN ADVISER OR SUBADVISER -- no sales charge or CDSC applies to in-
vestments of $25,000 or more in the Fund 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 par-
ents, spouses and children of the foregoing; (2) any individual who is a par-
ticipant in a Keogh or IRA Plan under a prototype Plan document of an adviser
or subadviser to any series of the Trusts if at least one participant in the
plan qualifies under category (1) above; and (3) an individual who invests
through an IRA and is a participant in an employee benefit plan that is a cli-
ent of an adviser or subadviser to any series of the Trusts. Any investor eli-
gible for these arrangements should so indicate in writing at the time of the
purchase.
. Shares of the Fund may be purchased at net asset value by investment advis-
ers, financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management, consult-
ing or other fee for their services; clients of such investment advisers, fi-
nancial planners or other intermediaries who place trades for their own ac-
counts if the accounts are linked to the master account of such investment ad-
viser, financial planner or other intermediary on the books and records of the
broker or agent; and retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in Sections
401(a), 403(b), 401(k) and 457 of the Code and "rabbi trusts." Investors may be
charged a fee if they effect transactions through a broker or agent.
. Shares of the Fund are available at net asset value for investments in par-
ticipant-directed 401(a) and 401(k) plans that have 100 or more eligible em-
ployees.
. Shares of the Fund are available at net asset value for investments by non-
discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part
of an
18
<PAGE>
organization not principally engaged in banking or trust activities.
. Shares of the Fund also may be purchased at net asset value through certain
broker-dealers and/or financial services organizations without any transaction
fee. Such organizations may receive compensation, in an amount up to 0.35% an-
nually of the average value of the Fund shares held by their customers. This
compensation may be paid by NEFM and/or one or more of the Fund's subadvisers
out of their own assets, or may be paid indirectly by the Fund in the form of
servicing, distribution or transfer agent fees.
. There is no sales charge, CDSC or initial investment minimum related to in-
vestments by certain current and retired employees of the Trusts' investment
advisers or subadvisers, the Distributor, The New England or any other company
affiliated with The New England; current and former directors and trustees of
the Trusts, The New England or their predecessor companies; agents and general
agents of The New England and its insurance company subsidiaries; current and
retired employees of such agents and general agents; registered representatives
of broker-dealers who have selling arrangements with the Distributor; the
spouse, parents, children, siblings, grandparents or grandchildren of the per-
sons listed above; any trust, pension, profit sharing or other benefit plan for
any of the foregoing persons; and any separate account of The New England or of
any insurance company affiliated with The New England.
. Shareholders of Reich & Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Fund at net asset value and with-
out the imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales de-
scribed above reflects the absence or reduction of sales expenses associated
with such sales.
19
<PAGE>
Owning Fund Shares
AUTOMATIC EXCHANGE PLAN
THE FUND HAS AN AUTOMATIC EXCHANGE PLAN UNDER WHICH SHARES OF A CLASS OF THE
FUND ARE AUTOMATICALLY EXCHANGED EACH MONTH FOR SHARES OF THE SAME CLASS OF
OTHER SERIES OF THE TRUSTS (OTHER THAN NEW ENGLAND GROWTH FUND, WHICH IS AVAIL-
ABLE ONLY TO CERTAIN ELIGIBLE INVESTORS). THE MINIMUM MONTHLY EXCHANGE AMOUNT
UNDER THE PLAN IS $50. THERE IS NO FEE FOR EXCHANGES MADE PURSUANT TO THIS PRO-
GRAM, BUT THERE MAY BE A SALES CHARGE AS DESCRIBED ON THIS PAGE. SHARES OF THE
ADJUSTABLE RATE FUND THAT ARE SUBJECT TO A DIFFERENTIAL SALES CHARGE AS DE-
SCRIBED ON THIS PAGE MAY NOT PARTICIPATE IN THIS PROGRAM.
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds ac-
quired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts (except New England Growth Fund, which is sub-
ject to special eligibility restrictions) without paying a sales charge; such
exchange will be made at the next-determined net asset value of the shares.
Class A shares of New England Intermediate Term Tax Free Fund of California and
New England Intermediate Term Tax Free Fund of New York (and shares of the
Money Market Funds acquired through exchanges of such shares) may be exchanged
for Class A shares of the other series of the Trusts at net asset value only if
you have held them for at least six months; otherwise, sales charges apply to
the exchange. If you exchange your Class A shares of New England Adjustable
Rate U.S. Government Fund (the "Adjustable Rate Fund") for shares of another
series of the Trusts that has a higher sales charge, you will pay the differ-
ence between any sales charge you have already paid on your Adjustable Rate
Fund shares and the higher sales charge of the series into which you are ex-
changing. In addition, you may redeem Class A shares of any Money Market Fund
that were not acquired through exchanges from any series of the Trusts and have
the proceeds directly applied to the purchase of shares of a series of the
Trust at the applicable sales charge.
CLASS B SHARES
You may exchange Class B shares of the Fund or any other series of the Trusts
(and Class B shares of the Money Market Funds or Class A shares of the Money
Market Funds which have not been subject to a previous sales charge) for Class
B shares of any other series of the Trusts that offers Class B shares. Such ex-
changes will be made at the next-determined net asset value of the shares.
Class B shares will automatically convert on a tax-free basis to Class A shares
eight years after they are purchased (excluding the time the shares are held in
a Money Market Fund). See "Sales Charges -- Class B Shares" above.
CLASS C SHARES
You may exchange Class C shares of the Fund or any other series of the Trusts
for Class C shares of any other series of the Trusts which offers Class C
shares or for Class A shares of the Money Market Funds.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Fund is open for business, call Tele#Facts at
1-800-346-5984 twenty-four hours a day or write to New England Funds. Exchange
requests after 4:00 p.m. (Eastern time), or after the Exchange closes if it
closes earlier than 4:00 p.m., will be processed at the net asset value deter-
mined at the close of regular trading on the next day that the Exchange is
open. The exchange must be for a minimum of $500 (or the total net asset value
of your account, whichever is less), except that under the Automatic Exchange
Plan the minimum is $50. All exchanges are subject to the minimum investment
and eligibility requirements of the series into which you are exchanging. In
connection with any exchange, you must receive a current prospectus of the se-
ries into which you are exchanging. The exchange privilege may be exercised
only in those states where shares of such other series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. New
England Funds, L.P. will employ reasonable procedures to confirm that your tel-
ephone instructions are genuine, and, if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions. New England Funds, L.P.
will require a form of personal identification prior to acting upon your tele-
phone instructions, will provide you with written confirmations of such trans-
actions and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive at least
60 days' advance notice of any material change to the exchange privilege.
20
<PAGE>
FUND DIVIDEND PAYMENTS
The Fund pays dividends annually. The Fund pays as dividends substantially all
net investment income (other than long-term capital gains) each year and dis-
tributes annually all net realized long-term capital gains (after applying any
available capital loss carryovers). The trustees of the Trust may adopt a dif-
ferent schedule as long as payments are made at least annually. If you intend
to purchase shares of the 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.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from dividends and interest in cash while re-
investing distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in writ-
ing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned undeliverable to the Fund
or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested.
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a
dividend diversification
program that allows you to
have all dividends and any
other distributions automat-
ically invested in shares of
the same class of another
New England Fund, subject to
the investor eligibility re-
quirements of that other
fund and to state securities
law requirements. Shares
will be purchased at the se-
lected fund's net asset
value (without a sales
charge or CDSC) on the divi-
dend 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 es-
tablished, the purchased
fund's minimum investment
requirements must be met.
Before establishing a divi-
dend diversification program
into any other New England
Fund, you must obtain a copy
of that fund's prospectus.
21
<PAGE>
Selling Fund Shares
4 WAYS TO SELL FUND SHARES
You may sell Class A, Class B and Class C shares of the Fund in the following
ways:
THROUGH YOUR INVESTMENT DEALER:
Call your authorized investment dealer for information.
BY TELEPHONE:
You or your investment dealer may redeem (sell) shares by telephone using any
of the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone re-
demption privilege on your account, shares may be redeemed by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the Fund
is open for business or by calling Tele#Facts at 1-800-346-5984 twenty-four
hours a day. The proceeds (LESS ANY APPLICABLE CDSC) generally will be wired on
the next business day to the bank account previously chosen by you on your ap-
plication. A wire fee (currently $5.00) will be deducted from the proceeds.
Your bank must be a member of the Federal Reserve System or have a correspon-
dent bank that is a member. If your account is with a savings bank, it must
have only one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) and requesting that a
check for the proceeds (LESS ANY APPLICABLE CDSC) be mailed to the address on
your account, provided that the address has not changed over the previous month
and that the proceeds are for $100,000 or less. Generally, the check will be
mailed to you on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (East-
ern time) on a day when the Fund is open for business or call Tele#Facts at
1-800-346-5984 twenty-four hours a day. The proceeds (LESS ANY APPLICABLE CDSC)
generally will arrive at your bank within three business days; their availabil-
ity will depend on your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the Ex-
change closes if it closes before 4:00 p.m., will be processed at the net asset
value determined at the close of regular trading on the next day that the Ex-
change is open.
BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE CDSC)
next determined after receipt of your request in good order by sending a writ-
ten request (including any necessary special documentation) to New England
Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any spe-
cial capacity in which you are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your signa-
ture guaranteed by an eligible guarantor institution in accordance with proce-
dures established by New England Funds, L.P. Signature guarantees by notaries
public are not acceptable.
Additional written information may be required for redemptions by certain bene-
fit plans and IRAs. Contact the Distributor or your investment dealer for de-
tails.
22
<PAGE>
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Fund recom-
mends that certificates be sent by registered mail.
BY SYSTEMATIC WITHDRAWAL PLAN:
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized ba-
sis, 10% of the value of your Fund account. Redemption of shares pursuant to
the Plan will not be subject to a CDSC. For information, contact the Distribu-
tor or your investment dealer. Since withdrawal payments may have tax conse-
quences, you should consult your tax adviser before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next de-
termined after your redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your in-
vestment dealer before the close of regular trading on the Exchange and trans-
mitted to the Distributor by 5:00 p.m. Eastern time on the same day will re-
ceive that day's net asset value). Redemption proceeds (LESS ANY APPLICABLE
CDSC) will normally be mailed to you within seven days after State Street Bank
or the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10
days after such purchase or transfer, the Fund may withhold redemption proceeds
until the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in per-
son to the Distributor or by mail as described above. Requests are processed at
the net asset value next determined after the request is received.
Special rules apply with respect to redemptions under powers of attorney.
Please call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your re-
quest before a redemption request can be honored. See the instructions for re-
demption by mail above.
The Fund may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holi-
days, or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Fund to
dispose of its securities or to determine fairly the value of its net assets,
or during any other period permitted by the SEC for the protection of invest-
ors.
REPURCHASE OPTION (CLASS A SHARES ONLY)
You may apply your Class A share redemption proceeds (without a sales charge)
to the repurchase of Class A shares of any series of the Trusts. To qualify,
you must reinvest some or all of the proceeds within 120 days after your re-
demption and notify New England Funds or your investment dealer at the time of
reinvestment that you are taking advantage of this privilege. You may reinvest
the proceeds either by returning the redemption check or by sending your check
for some or all of the redemption amount. Please note: For federal income tax
purposes, a redemption is a sale that involves tax consequences (even if the
proceeds are later reinvested). Please consult your tax adviser.
23
<PAGE>
Fund Details
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of the Fund's shares is determined as of the close of regu-
lar trading (normally 4:00 p.m. Eastern time) on the Exchange on each day that
the Exchange is open for trading. The Fund's holdings of equity securities are
valued at the most recent sales prices on an applicable exchange or NASDAQ, or,
in the case of unlisted securities (or listed securities which were not traded
during the day), at the last quoted bid prices. Price information on listed se-
curities is generally taken from the closing price on the exchange where the
security is primarily traded. Securities traded primarily on an exchange out-
side the United States which closes before the close of the Exchange generally
will be valued for purposes of calculating the Fund's net asset value at the
last sale or bid price on that non-U.S. exchange, except that when an occur-
rence after the closing of that exchange is likely to have materially changed
such a security's value, such security will be valued at fair value as of the
close of regular trading on the Exchange. An option that is written by the Fund
generally will be valued at the last sale price or, in the absence of the last
sale price, the last offer price. The value of a futures contract will be equal
to the unrealized gain or loss on the contract that is determined by marking
the contract to the current settlement price. A settlement price may not be
used if the market makes a limit move with respect to a particular futures con-
tract or if the securities underlying the futures contract experience signifi-
cant price fluctuations after the determination of the settlement price. When a
settlement price is not used, futures contracts will be valued at their fair
value as determined by or under the direction of the Trust's Board of Trustees.
Short-term notes are valued at cost, or, where applicable, amortized cost,
which method is intended to approximate market value. All other securities and
assets of each segment of the Fund's portfolio are valued at their fair market
value as determined in good faith by the subadviser of that segment (or a pric-
ing service selected by the subadviser) under the supervision of the Trust's
Board of Trustees. The value of any assets for which the market price is ex-
pressed in terms of a foreign currency will be translated into U.S. dollars at
the prevailing market rate on the date of the net asset value computation, or,
if no such rate is quoted at such time, at such other appropriate rate as may
be determined by or under the direction of the Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (determined as explained above) plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number of shares of
such class outstanding. The public offering price of the Fund's Class A shares
is determined by adding the applicable sales charge to the net asset value. See
"Buying Fund Shares --Sales Charges" above. The public offering price of Class
B and Class C shares is the net asset value per share.
The price you pay for a share will be determined using the next set of calcula-
tions made after your order is accepted by the Distributor. In other words, if,
on a Tuesday morning, your properly completed application is received, your
wire is received or your dealer places your trade for you, the price you pay
will be determined by the calculations made as of the close of regular trading
on the Exchange on Tuesday. If you buy shares through your investment dealer,
the dealer must receive your order by the close of regular trading on the Ex-
change and transmit it to the Distributor by 5:00 p.m. (Eastern time) to re-
ceive that day's public offering price.
CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets - Liabilities
--------------------------------------------------- = Net Asset Value(NAV)
Total Number of Outstanding Shares in a Class
THE PUBLIC OFFERING PRICE FOR CLASS A SHARES IS THE NAV PLUS
THE APPLICABLE SALES CHARGE. THE PUBLIC OFFERING PRICE FOR
CLASS B AND CLASS C SHARES IS THE NAV.
24
<PAGE>
AVERAGE COST
STATEMENT
IF YOU HAVE EXCHANGED OR REDEEMED SHARES DURING THE YEAR, YOU WILL RECEIVE A
STATEMENT THAT SHOWS THE COST BASIS OF THOSE SHARES WHICH SHOULD HELP YOU DE-
TERMINE YOUR GAIN OR LOSS FOR TAX PURPOSES.
INCOME TAX CONSIDERATIONS
The Fund intends to meet all requirements of the Code necessary to qualify as a
"regulated investment company" and thus does not expect to pay any federal in-
come tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your distri-
butions derived from the Fund's short-term capital gains and ordinary income
are taxable to you as ordinary income. (A portion of these distributions may
qualify for the dividends-received deduction for corporations.) Distributions
derived from the Fund's long-term capital gains ("capital gains distribu-
tions"), if designated as such by the Fund, are taxable to you as long-term
capital gains, regardless of how long you have owned shares in the Fund. Both
income distribution and capital gains distributions are taxable whether you
elected to receive them in cash or additional shares.
To avoid an excise tax, the Fund intends to distribute prior to calendar year
end virtually all the Fund's ordinary income and net capital gains earned dur-
ing that calendar year. If declared in December to shareholders of record in
that month, and paid the following January, these distributions will be consid-
ered for federal income tax purposes to have been received by shareholders on
December 31.
The 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 tax-
payer identification number, if the Fund is notified that you have
underreported income in the past, or if you fail to certify to the Fund that
you are not subject to such withholding. In addition, the Fund will be required
to withhold 31% of the gross proceeds of Fund shares you redeem if you have not
provided a correct, certified taxpayer identification number. If you are a tax-
exempt shareholder, however, these back-up withholding rules will not apply so
long as you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from the Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's dis-
tributions on your federal income tax return. You should consult your tax ad-
viser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The foregoing is a summary of certain federal income tax consequences of an in-
vestment in the Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an in-
vestment in the Fund on their particular federal, state and local tax situa-
tions.
THE FUND'S EXPENSES
In addition to the management fee paid to NEFM, the Fund pays all expenses not
borne by NEFM, the subadvisers or the Distributor, including, but not limited
to, the charges and expenses of the Fund's custodian and transfer agent, inde-
pendent auditors and legal counsel for the Fund and the Trust's independent
trustees, 12b-1 fees, all brokerage commissions and transfer taxes in connec-
tion with portfolio transactions, all taxes and filing fees, the fees and ex-
penses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings, prepar-
ing, printing and mailing prospectuses and reports to shareholders and the com-
pensation of trustees of the Trust who are not directors, officers or employees
of The New England or its affiliates, other than affiliated registered invest-
ment companies. Certain expenses are allocated differently between the Fund's
Class A, Class B and Class C shares, on the one hand, and its Class Y shares,
on the other hand. (See "Additional Facts about the Fund" below.)
Under a Service Plan in the case of Class A shares, and Service and Distribu-
tion Plans in the case of Class B and Class C shares, adopted pursuant to Rule
12b-1 under the 1940 Act, the Fund pays the Distributor a monthly service fee
at an annual rate not to exceed 0.25% of the Fund's average daily net assets
attributable to the Class A, Class B and Class C shares. The Distributor may
pay up to the entire amount of this fee to securities dealers who are dealers
of record
25
<PAGE>
with respect to the Fund's shares, for providing personal services to investors
in shares of the Fund and/or the maintenance of shareholder accounts. In the
case of the Class B shares, the Distributor pays investment dealers at the time
of sale the first year's service fee, in the amount of up to 0.25% of the
amount invested. The Class A service fee is payable only to reimburse the
Distributor for amounts it pays or expends in connection with the provision of
personal services to investors and/or the maintenance of shareholder accounts.
To the extent that the Distributor's reimbursable expenses in any year exceed
the maximum amount payable under the relevant Service Plan for that year, such
expenses may be carried forward for reimbursement in future years in which the
Plan remains in effect. The Class B and C service fees are payable regardless
of the amount of the Distributor's related expenses.
The Fund's Class B and Class C shares also pay the Distributor a monthly dis-
tribution fee at an annual rate not to exceed 0.75% of the average net assets
of the Fund's Class B and Class C shares. The Distributor may pay up to the en-
tire amount of this fee to securities dealers who are dealers of record with
respect to the Fund's shares, as distribution fees in connection with the sale
of the Fund's shares. The Distributor retains the balance of the fee as compen-
sation for its services as distributor of the Class B and Class C shares.
PERFORMANCE CRITERIA
The Fund may include total return information for each class of shares in ad-
vertisements or other written sales material. The Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter. Total return is measured by comparing the value of a hypothetical
$1,000 investment in a class at the beginning of the relevant period to the
value of the investment at the end of the period (assuming deduction of the
current maximum sales charge on Class A shares, automatic reinvestment of all
dividends and capital gains distributions and, in the case of Class B shares,
imposition of the CDSC relevant to the period quoted). Total return may be
quoted with or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The class may also
show total return over other periods, on an aggregate basis for the period pre-
sented, or without deduction of a sales charge. If a sales charge is not de-
ducted in calculating total return, the class's total return will be higher.
Total return will generally be higher for Class A shares than for Class B and
Class C shares, because of the higher levels of expenses borne by the Class B
and Class C shares. An investor should balance this expected lower total return
against the benefit gained by 100% immediate investment of the purchase price
of Class B or Class C shares. As a result of lower operating expenses, Class Y
shares can be expected to achieve a higher investment return than the Fund's
Class A, Class B or Class C shares.
All performance information is based on past results and is not an indication
of likely future performance.
ADDITIONAL FACTS ABOUT THE FUND
.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 Fund was organized as a series of the Trust in
1994.
.When you invest in the Fund, you acquire freely transferable shares of bene-
ficial interest that entitle you to receive dividends as determined by the
Trust's trustees and to cast a vote for each share you own at shareholder
meetings. Shares of the Fund vote separately from shares of other series of
the Trust, except as otherwise required by law. Shares of all classes of the
Fund vote together, except as to matters relating to a class's Rule 12b-1
plan, on which only shares of that class are entitled to vote.
.Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I
26
<PAGE>
of the Statement, the investment policies of the Fund may be changed by the
Trust's trustees without shareholder approval or, in most cases, prior no-
tice. The investment objective of the Fund is not fundamental. If there is a
change in the Fund's objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their current financial posi-
tion and needs.
.The Fund also offers Class Y shares to certain qualified investors. Class Y
shares are identical to Class A, Class B and Class C shares, except that
Class Y shares have no sales charge or CDSC, bear no Rule 12b-1 fees and have
separate voting rights in certain circumstances. Class Y bears its own trans-
fer agency and prospectus printing costs and does not bear any portion of
those costs relating to other classes of shares.
.The Trust does not generally hold regular shareholder meetings and will do
so only when required by law. Shareholders of the Trust may remove the trust-
ees of the Trust from office by votes cast at a shareholder meeting or by
written consent.
.The transfer and dividend paying agent for the Fund is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has sub-
contracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
.If the balance in your account with the Fund is less than a minimum amount
set by the trustees of the Trust from time to time (currently $500 for all
accounts, except for those indicated below and for individual retirement ac-
counts, which have a $25 minimum), the Fund may close your account and send
the proceeds to you. Shareholders who are affected by this policy will be no-
tified of the Fund's intention to close the account and will have 60 days im-
mediately following the notice to bring the account up to the minimum. The
minimum does not apply to Keogh, pension and profit sharing plans, automatic
investment plans or accounts that have fallen below the minimum solely be-
cause of fluctuations in the Fund's net asset value per share.
.The Fund's annual report contains additional performance information and is
available upon request and without charge. The Fund will send a single copy
of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to
be delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
.The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
.Summit Cash Reserves Fund (the "Cash Fund"), a series of Financial Institu-
tions Series Trust, is related to the Fund for purposes of investment and in-
vestor services. Shares of all classes of the Fund may be exchanged for
shares of the Cash Fund at net asset value. If shares of the Fund that are
exchanged for shares of the Cash Fund are subject to a CDSC, the holding pe-
riod for purposes of determining the expiration of the CDSC will stop and re-
sume only when an exchange is made back into shares of a series of the
Trusts. If Fund shares subject to a CDSC are exchanged for Cash Fund shares
and the Cash Fund shares are later redeemed rather than being exchanged back
into shares of a series of the Trusts, then a CDSC will apply at the same
rate as if the Fund shares were redeemed at the time of the exchange.
27
<PAGE>
GLOSSARY OF TERMS
CAPITAL GAIN DISTRIBUTIONS -- Payments to shareholders of profits earned from
selling securities in the fund's portfolio. Capital gain distributions are usu-
ally paid once a year.
CONTINGENT DEFERRED SALES CHARGE (CDSC) -- A fee that may be charged when a
shareholder sells fund shares.
DISTRIBUTION FEE -- An annual asset-based sales charge that is used to pay for
sales-related expenses.
INCOME DISTRIBUTIONS -- Payments to shareholders resulting from interest or
dividend income earned by a fund's portfolio.
MUTUAL FUND -- The pooled assets of a group of investors, professionally man-
aged in pursuit of a specific objective.
NET ASSET VALUE (NAV) -- The market value of one share of a mutual fund on any
given day without sales charge or CDSC. Determined by dividing the fund's total
net assets by the number of fund shares outstanding.
NEW ENGLAND FUNDS, L.P. -- The distributor and transfer agent of the New En-
gland Funds.
NEW ENGLAND FUNDS MANAGEMENT, L.P. -- The investment adviser to most of the New
England Funds.
OPEN END MANAGEMENT INVESTMENT COMPANY -- A mutual fund that allows investors
to redeem fund shares directly from the fund company on any business day.
PUBLIC OFFERING PRICE -- The price of one share of a mutual fund, including its
initial sales charge, if there is one.
RECORD DATE -- The date on which mutual fund investors must own a fund's shares
to be eligible to receive specific income or capital gain distributions.
SERVICE FEE -- Payments by a fund to the fund's distributor or a financial rep-
resentative for personal services to investors and/or for maintenance of share-
holder accounts.
TOTAL RETURN -- The change in value of an investment in a fund investment over
a specific time period, assuming all earnings are reinvested in additional
shares of the fund. Expressed as a percentage.
12B-1 FEES -- Fees paid by a mutual fund under a plan adopted under 1940 Act
Rule 12b-1. Can include both distribution fees and service fees.
28
<PAGE>
[PRINTED ON RECYCLED PAPER LOGO APPEARS HERE]
[NEF Logo]
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
Statement of Additional Information -- PART I
May 1, 1996
This Statement of Additional Information (the "Statement") contains
information which may be useful to investors but which is not included
in the Prospectus of the New England Funds listed above (the "Funds" and
each a "Fund"). This Statement is not a prospectus and is only
authorized for distribution when accompanied or preceded by the
Prospectus of the Funds dated May 1, 1996 for Class A, Class B or Class
C shares, or the Prospectus of the Funds dated May 1, 1996 for Class Y
shares (the "Prospectus" or "Prospectuses"). The Statement should be
read together with the Prospectus. Investors may obtain a free copy of
any of the Prospectuses from New England Funds, L.P., Prospectus
Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the
Funds. Part II includes information about the Funds and other New
England Funds.
New England Government Securities Fund, New England Strategic
Income Fund, New England Bond Income Fund and New England Municipal
Income Fund (formerly named New England Tax Exempt Income Fund) are
series of New England Funds Trust I, a registered management investment
company that offers a total of eleven series, and New England Limited
Term U.S. Government Fund, New England Adjustable Rate U.S. Government
Fund and New England High Income Fund are series of New England Funds
Trust II, a registered management investment company that offers a total
of eight series. New England Funds Trust I and New England Funds Trust
II are collectively referred to in this Statement as the "Trusts," and
are each referred to as a "Trust."
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions ii
Fund Charges and Expenses xi
Investment Performance of the Funds xviii
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of 26
Shares
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions 43
and Tax Status
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain 48
Fund Information
Appendix C - Advertising and Promotional 50
Literature
Appendix D - Portfolio Composition of the Municipal 54
Income, Bond Income and California Funds
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the investments
to be made by the Funds, some of which restrictions (which are marked
with an asterisk) may not be changed without the approval of a majority
of the outstanding voting securities of the relevant Fund (as defined in
the Investment Company Act of 1940 [the "1940 Act"]). Except in the
case of those restrictions marked with a dagger (+) below, the
percentages set forth below and the percentage limitations set forth in
the prospectus will apply at the time of the purchase of a security and
shall not be considered violated unless an excess or deficiency occurs
or exists immediately after and as a result of a purchase of such
security.
Government Securities Fund
New England Government Securities Fund (the "Government Securities
Fund") will not:
*(1) Invest in any securities other than U.S. Government securities,
put and call options thereon, futures contracts, options on futures
contracts and repurchase agreements;
*(2) Purchase or sell commodities or commodity contracts, except
that the Fund may purchase and sell interest rate futures contracts
and related options;
*(3) Purchase any security on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of portfolio securities. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with interest rate futures contracts or related options
transactions is not considered the purchase of a security on
margin.);
*(4) Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal
amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short, and unless not more than 10% of the Fund's
net assets (taken at market value) is held as collateral for such
sales at any one time. (It is the present intention of management
to make such sales only for the purpose of deferring realization of
gain or loss for federal income tax purposes; such sales would not
be made with respect to securities subject to outstanding options.);
*(5) Make loans to other persons (except as provided in restriction
(6) below); provided that for purposes of this restriction the
investment in repurchase agreements shall not be deemed to be the
making of a loan;
*(6) Lend its portfolio securities in excess of 15% of its total
assets, taken at market value;
*(7) Issue senior securities, borrow money or pledge its assets;
provided, however, that the Fund may borrow from a bank as a
temporary measure for extraordinary or emergency purposes or to meet
redemptions, in amounts not exceeding 10% (taken at the market
value) of its total assets and pledge its assets to secure such
borrowings; and, provided, further, that the Fund will not purchase
any additional portfolio securities at any time that its borrowings
exceed 5% of its total net assets. (For the purpose of this
restriction, collateral arrangements with respect to the writing of
options, interest rate futures contracts, options on interest rate
futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets
and neither such arrangements nor the purchase or sale of futures or
related options are deemed to be the issuance of a senior
security.);
*(8) Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933
in selling portfolio securities;
*(9) Write, purchase or sell puts, calls or combinations thereof,
except that the Fund may write, purchase and sell puts, calls or
combinations thereof with respect to U.S. Government Securities and
with respect to interest rate futures contracts; or
*(10) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or
similar transaction. Under the 1940 Act, the Fund may not (a)
invest more than 10% of its total assets (taken at current value) in
such securities, (b) own securities of any one investment company
having a value in excess of 5% of the Fund's total assets [taken at
current value], or (c) own more than 3% of the outstanding voting
stock of any one investment company.
Although the Government Securities Fund may from time to time loan
its portfolio securities and issue senior securities, borrow money or
pledge its assets to the extent permitted by investment restrictions
(5), (6) and (7) above, the Fund has no current intention of engaging in
such investment techniques.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as a
result of such purchase more than 10% of the Fund's total net assets
would be invested in such securities; +(2) invest more than 15% of the
Fund's total net assets in illiquid investments; (3) invest in any oil,
gas and other mineral leases; (4) purchase or sell real property
including limited partnership interests but excluding readily marketable
interests in real estate investment trusts or readily marketable
securities of companies which invest in real estate, or (5) invest more
than 5% of its net assets in warrants, no more than 2% of which will be
invested in warrants that are not listed on the New York Stock Exchange
or American Stock Exchange, provided however, that for purposes of this
limitation, warrants acquired by the Fund in units or attached to other
securities may be deemed to be without value.
Limited Term U.S. Government Fund
New England Limited Term U.S. Government Fund (the "Limited Term U.S.
Government Fund") will not:
*(1) Purchase any security on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of portfolio securities. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or options transactions is not
considered the purchase of a security on margin.);
*(2) Make short sales of securities unless at all times when a short
position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short, and unless not more
than 10% of the Fund's net assets (taken at current value) is held
as collateral for such sales at any one time;
*(3) Issue senior securities, borrow money or pledge its assets;
provided, however, that the Fund may borrow from a bank as a
temporary measure for extraordinary or emergency purposes or to meet
redemptions, in amounts not exceeding 10% (taken at the current
value) of its total assets and pledge its assets to secure such
borrowings; and, provided, further, that the Fund will not purchase
any additional portfolio securities at any time that its borrowings
exceed 5% of its total net assets. (For the purpose of this
restriction, collateral arrangements with respect to the writing of
options, futures contracts and options on futures contracts, and
collateral arrangements with respect to initial and variation
margin, are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or options are
deemed to be the issuance of a senior security.);
*(4) Invest more than 25% of its total assets (taken at current
value) in securities of businesses in the same industry (for this
purpose, telephone, electric, water and gas utilities are considered
separate industries);
*(5) Make loans, except by the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness that are a part of an issue to the public or to
financial institutions, or by lending portfolio securities to the
extent set forth in Part II of this Statement of Additional
Information under "Miscellaneous Investment Practices -- Loans of
Portfolio Securities" provided that for purposes of this
restriction, investment in repurchase agreements shall not be deemed
to be the making of a loan;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts. (This restriction does not prevent the Fund from
purchasing securities of companies investing or dealing in the
foregoing.);
*(7) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
*(8) Make investments for the purpose of exercising control or
management; or
*(9) Write, purchase or sell puts, calls or combinations thereof,
except that the Fund may write, purchase and sell puts, calls or
combinations thereof with respect to financial instruments or
indices thereof and currencies and with respect to futures contracts
on financial instruments or indices thereof.
Although the Fund may from time to time make short sales, issue
senior securities, borrow money or pledge its assets to the extent
permitted by the above investment restrictions, the Fund has no current
intention of engaging in such investment techniques.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as a
result of such purchase more than 10% of the Fund's total net assets
would be invested in such securities or +(2) invest more than 15% of the
Fund's total net assets in illiquid securities.
The Fund may invest in the securities of other investment companies
to the extent permitted by the 1940 Act. The Fund has given
undertakings to certain state regulatory authorities that the Fund will
not (i) invest in real estate limited partnership interests or (ii)
invest more than 5% of its net assets in warrants, no more than 2% of
which will be invested in warrants that are not listed on the New York
Stock Exchange or American Stock Exchange; provided, however, that for
purposes of this limitation, warrants acquired by the Fund in units or
attached to other securities may be deemed to be without value. Such
undertakings can be changed without shareholder approval, but the
Statement will be revised to reflect any such changes.
Adjustable Rate Fund
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate
Fund") will not:
*(1) Purchase any security (other than U.S. Government securities)
if, as a result, more than 5% of the Fund's total assets (taken at
current value) would then be invested in securities of a single
issuer or 25% of the Fund's total assets (taken at current value)
would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as
being in separate industries);
*(2) Purchase any security on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of portfolio securities. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with interest rate futures contracts or related options
transactions is not considered the purchase of a security on
margin.);
*(3) Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal
amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short, and unless not more than 10% of the Fund's
net assets (taken at market value) is held as collateral for such
sales at any one time. (It is the current intention of the Fund,
which may change without shareholder approval, to make such sales
only for the purpose of deferring realization of gain or loss for
federal income tax purposes; such sales would not be made with
respect to securities covering outstanding options.);
*(4) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class
and all debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(5) Issue senior securities, borrow money or pledge its assets;
provided, however, that the Fund may borrow from a bank as a
temporary measure for extraordinary or emergency purposes or to meet
redemptions, in amounts not exceeding 10% (taken at the market
value) of its total assets and pledge its assets to secure such
borrowings; and, provided, further, that the Fund will not purchase
any additional portfolio securities at any time that its borrowings
exceed 5% of its total net assets. (For the purpose of this
restriction, collateral arrangements with respect to the writing of
options, interest rate future contracts, and options on interest
rate futures contracts, collateral arrangements with respect to
interest rate caps, floors or swap arrangements, and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither (i) such arrangements,
(ii) the purchase or sale of futures or related options, (iii)
interest rate caps and floors nor (iv) interest rate swap
agreements, where assets are segregated to cover the Fund's
obligations thereunder, are deemed to be the issuance of a senior
security.);
*(6) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors) less
than three years old;
*(7) Purchase or retain securities of any issuer if officers and
trustees of the Trust or officers and directors of the investment
adviser of the Fund who individually own more than 1/2 of 1% of the
shares or securities of that issuer, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness, that
are a part of an issue to the public or to financial institutions,
or by lending portfolio securities to the extent set forth under
"Miscellaneous Investment Practices - Loans of Portfolio Securities"
in Part II of this Statement. (This restriction 8 does not limit
the Fund's ability to engage in repurchase agreement transactions.);
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts, and may purchase interest rate caps and floors and enter
into interest rate swap agreements. (This restriction does not
prevent the Fund from purchasing securities of companies investing
or dealing in the foregoing.);
*(10)Act as underwriter, except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11)Make investments for the purpose of exercising control or
management;
*(12)Participate on a joint or joint and several basis in any trading
account in securities;
*(13)Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may write, purchase and sell puts, calls or
combinations thereof with respect to fixed income securities and
currencies and with respect to futures contracts on fixed income
securities or currencies;
*(14)Purchase any illiquid security, including securities that are not
readily marketable, if, as a result, more than 10% of the Fund's
total net assets (based on current value) would then be invested in
such securities. (The staff of the Securities and Exchange
Commission (the "SEC") is presently of the view that repurchase
agreements maturing in more than seven days are subject to this
restriction. Until that position is revised, modified or rescinded,
the Fund will conduct its operations in a manner consistent with
this view); or
*(15)Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or
similar transaction. Under the 1940 Act, the Fund may not (a) invest
more than 10% of its total assets (taken at current value) in such
securities, (b) own securities of any one investment company having
a value in excess of 5% of the Fund's total assets (taken at current
value), or (c) own more than 3% of the outstanding voting stock of
any one investment company.
Although the Fund may loan its portfolio securities and issue
senior securities, borrow money, pledge its assets, and invest in the
securities of other investment companies to the extent permitted by
investment restrictions (5), (8) and (14) above, the Fund has no current
intention of engaging in such investment activities. Also, the Fund
will not invest in any stripped securities or other derivative
investments.
In addition, as a matter of current operating policy that may be
changed without shareholder approval, the Fund (1) intends to limit
certain of its investments in accordance with the provisions of the
Federal Credit Union Act and Regulation 703 thereunder, (2) will not
purchase or sell real property, including limited partnership interests
but excluding readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest in
real estate, and (3) will not purchase any security restricted as to
disposition under federal securities laws if as a result of such
purchase more than 10% of the Fund's total net assets would be invested
in such securities.
Strategic Income Fund
New England Strategic Income Fund (the "Strategic Income Fund") will
not:
*(1) Purchase any security (other than U.S. Government securities)
if , as a result, more than 25% of the Fund's total assets (taken at
current value) would be invested in any one industry (in the
utilities category, gas, electric, water and telephone companies
will be considered as being in separate industries, and each foreign
country's government (together with subdivisions thereof) will be
considered to be a separate industry);
(2) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities), or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales. (For this purpose, the deposit or payment by the
Fund of initial or variation margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin);
(3) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock
issues of an issuer as a single class and all debt issues of an
issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 25% of its total assets, and then
only as a temporary measure for extraordinary or emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a
pledge of assets);
(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three
years old;
(7) Purchase or retain securities of any issuer if officers and trustees
of New England Funds Trust I or of any investment adviser of the
Fund who individually own more than 1/2 of 1% of the shares or
securities of that issuer, together own more than 5%;
*(8) Make loans, except by entering into repurchase agreements or by
purchase of bonds, debentures, commercial paper, corporate notes and
similar evidences of indebtedness, which are a part of an issue to
the public or to financial institutions, or through the lending of
the Fund's portfolio securities;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related
options. (This restriction does not prevent the Fund from
purchasing securities of companies investing in the foregoing);
*(10) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
(11) Make investments for the purpose of exercising control or
management;
(12) Except to the extent permitted by rule or order of the SEC,
participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase
or sale of portfolio securities with any investment adviser or
subadviser of the Fund or accounts under any such investment
adviser's or subadviser's management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(13) Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, (b) write, purchase and sell put and
call options on securities, securities indexes, currencies, futures
contracts, swap contracts and other similar instruments and (c)
enter into currency forward contracts;
+(14)Purchase any illiquid security if, as a result, more than 15% of
its net assets (taken at current value) would be invested in such
securities;
(15) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions or no commissions. Under the 1940 Act, the Fund may not
(a) invest more than 10% of its total assets (taken at current
value) in such securities, (b) own securities of any one investment
company having a value in excess of 5% of the total assets of the
Fund (taken at current value), or (c) own more than 3% of the
outstanding voting stock of any one investment company; or
*(16)Issue senior securities. (For the purpose of this restriction none
of the following is deemed to be a senior security: any pledge or
other encumbrance of assets permitted by restrictions (2) or (5)
above; any borrowing permitted by restriction (4) above; any
collateral arrangements with respect to forward contracts, options,
futures contracts, swap contracts or other similar contracts and
options on futures contracts, swap contracts or other similar
contracts and with respect to initial and variation margin; the
purchase or sale of options, forward contracts, futures contracts,
swap contracts or other similar contracts or options on futures
contracts, swap contracts or other similar contracts; and the
issuance of shares of beneficial interest permitted from time to
time by the provisions of New England Funds Trust I's Agreement and
Declaration of Trust and by the 1940 Act, the rules thereunder, or
any exemption therefrom.)
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) at the time of purchase,
invest more than 5% of its assets the securities of any issuer,
excluding government securities; and (2) purchase puts, calls,
straddles, spreads and any combination thereof if by reason thereof the
value of its aggregate investments in such will exceed 5% of its total
assets.
Bond Income Fund
New England Bond Income Fund (the "Bond Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities)
if, as a result, more than 5% of the Fund's total assets (taken at
current value) would then be invested in securities of a single
issuer or 25% of the Fund's total assets (taken at current value)
would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as
being in separate industries);
*(2) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of purchases and
sales of securities); or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class
and debt issues of an issuer as a single class) or acquire more than
10% of the outstanding voting securities of an issuer;
*(4) Borrow money, except as a temporary measure for extraordinary
or emergency purposes, up to an amount not in excess of 10% of its
total assets (taken at cost) or 5% of its total assets (taken at
current value), whichever is lower;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors) less
than three years old;
*(7) Purchase or retain securities of any company if officers and
trustees of New England Funds Trust I or of any investment adviser
or subadviser of the Bond Income Fund who individually own more than
1/2 of 1% of the shares or securities of that company, together own
more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness, which
are part of an issue to the public, or by lending portfolio
securities to the extent set forth under "Miscellaneous Investment
Practices -- Loans of Portfolio Securities" in Part II of this
Statement;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or commodity contracts or real estate (except
that the Bond Income Fund may buy and sell marketable securities of
companies, including real estate investment trusts, which may
represent indirect interests in real estate; may buy and sell
futures contracts on securities or on securities indexes and may
write, purchase or sell put or call options on such futures
contracts or indexes; and may enter into currency forward
contracts);
*(10)Act as underwriter;
*(11)Make investments for the purpose of exercising control or
management;
*(12)Participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase
or sale of portfolio securities with Back Bay Advisors, L.P. ["Back
Bay Advisors"] or accounts under its management to reduce brokerage
commissions, to average prices among them, or to facilitate such
transactions is not considered participating in a trading account in
securities.);
*(13)Write, purchase or sell options or warrants, except that the Fund
may (a) acquire warrants or rights to subscribe to securities of
companies issuing such warrants or rights or of parents or
subsidiaries of such companies, provided that such warrants or other
rights to subscribe are attached to, or part of a unit offering
involving, other securities, and (b) write, purchase or sell put or
call options on securities, securities indexes or futures contracts;
or
*(14)Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or
similar transaction. (Under the 1940 Act, the Fund may not (a)
invest more than 10% of its total assets [taken at current value] in
such securities, (b) own securities of any one investment company
having a value in excess of 5% of the Fund's total assets [taken at
current value], or (c) own more than 3% of the outstanding voting
stock of any one investment company.)
*(15)Issue senior securities. For the purpose of this restriction, none
of the following is deemed to be a senior security: any borrowing
permitted by restriction (4) above; any pledge or other encumbrance
of assets permitted by restriction (5) above; any collateral
arrangements with respect to options, forward contracts, futures
contracts, swap contracts and other similar contracts and options on
futures contracts and with respect to initial and variation margin;
the purchase or sale of options, forward contracts, futures
contracts, swap contracts and other similar contracts or options on
futures contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds
Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
In order to comply with certain state requirements applicable to
restriction (5) above, as a matter of operating policy, subject to
change without shareholder approval, the Bond Income Fund will not
pledge more than 2% of its assets. As a matter of operating policy
subject to change without shareholder approval, the Fund will not (1)
purchase any security restricted as to disposition under federal
securities laws if as a result of such purchase more than 10% of the
Fund's total net assets would be invested in such securities; (2) invest
more than 15% of the Fund's total net assets in illiquid investments; or
(3) purchase or sell real property, including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest in real estate.
High Income Fund
New England High Income Fund (the "High Income Fund") will not:
*(1) Buy more than 10% of the voting securities or more than 10% of
all of the securities of any issuer, or invest to control or manage
any company;
*(2) Purchase securities on "margin," except for short-term credits
as needed to clear securities purchases;
*(3) Invest in securities issued by other investment companies,
except in connection with a merger, consolidation, acquisition, or
reorganization, or by purchase in the open market of securities of
closed-end investment companies where no underwriter or dealer
commission or profit, other than a customary brokerage commission,
is involved and only if immediately thereafter not more than 10% of
the value of its total assets would be invested in such securities;
*(4) Purchase securities, other than shares of the Fund, from or
sell portfolio securities to its directors or officers, or firms
they are affiliated with as principals, except as permitted by the
regulations of the SEC;
*(5) Purchase or sell commodities or commodity contracts, or write,
purchase or sell options, except that the Fund may (a) buy or sell
futures contracts on securities or on securities indexes and (b)
write, purchase or sell put or call options on securities, on
securities indexes or on futures contracts of the type referred to
in clause (a) of this restriction;
*(6) Make loans, except loans of portfolio securities and except to
the extent that the purchase of notes, repurchase agreements, bonds,
or other evidences of indebtedness or deposits with banks or other
financial institutions may be considered loans;
*(7) Make short sales of securities or maintain a short position;
*(8) Purchase or sell real estate, provided that the Fund may invest
in securities secured by real estate or interests therein or in
securities issued by companies which invest in real estate or
interests therein;
*(9) Purchase or sell interests in oil and gas or other mineral
exploration or development programs, provided that the Fund may
invest in securities issued by companies which do invest in or
sponsor such programs;
*(10)Underwrite the securities of other issuers; or
*(11)Invest more than 10% of the value of its total assets, in the
aggregate, in repurchase agreements maturing in more than seven days
and restricted securities.
*(12)Purchase any security (other than U.S. Government securities) if,
as a result, more than 25% of the Fund's total assets (taken at
current value) would be invested in any one industry (in the
utilities category, gas, electric, water, and telephone companies
will be considered as being in separate industries);
*(13)Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 33 1/3% of its
total assets; or
*(14)Issue senior securities. For the purpose of this restriction, none
of the following is deemed to be a senior security: any borrowing
permitted by restriction (13) above; any collateral arrangements
with respect to options, forward contracts, futures contracts, swap
contracts and other similar contracts and options on futures
contracts and with respect to initial and variation margin; the
purchase or sale of options, forward contracts, futures contracts,
swap contracts or similar contracts or options on futures contracts;
and the issuance of shares of beneficial interest permitted from
time to time by the provisions of New England Funds Trust II's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not borrow money in amounts in
excess of 10% of it total assets (taken at cost) or 5% of its total
assets (taken at current value), whichever is lower.
As a matter of operating policy, subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as a
result of such purchase more than 10% of the Fund's total net assets
would be invested in such securities or (2) invest more than 15% of the
Fund's total net assets in illiquid investments.
The Fund has given undertakings to certain state regulatory
authorities that the Fund will not (1) invest more than 5% of its net
assets in warrants, no more than 2% of which will be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange; provided, however, that for purposes of this
limitation, warrants acquired by the Fund in units or attached to other
securities may be deemed to be without value, (2) invest in mineral
leases or (3) invest in real estate limited partnership interests. Such
undertakings can be changed without shareholder approval, but the
Statement will be revised to reflect any such changes.
Municipal Income Fund
New England Municipal Income Fund (the "Municipal Income Fund") will
not:
*(1) Purchase any security if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested
in securities of a single issuer. This limitation does not apply to
U.S. Government securities. (The Fund will treat each state and
each separate political subdivision, agency, authority or
instrumentality of such state, each multistate agency or authority,
and each guarantor, if any, as a separate issuer);
(2) Invest more than 25% of its total assets (taken at current value) in
industrial development revenue bonds that are based, directly or
indirectly, on the credit of private entities in any one industry or
in securities of private issuers in any one industry. (For the
purpose of this restriction, "private activity bonds" under the
Internal Revenue Code of 1986, as amended [the "Code"], will be
treated as industrial revenue bonds.) (In the utilities category,
gas, electric, water and telephone companies will be considered as
being in separate industries);
*(3) Purchase any security on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities; or make short sales. For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with interest rate futures contracts or tax
exempt bond index futures contracts is not considered the purchase
of a security on margin;
*(4) Purchase more than 10% of the total value of the outstanding
securities of an issuer;
*(5) Borrow money, except as a temporary measure for extraordinary
or emergency purposes (but not for the purpose of investment) up to
an amount not in excess of 10% of its total assets (taken at cost)
or 5% of its total assets (taken at current value), whichever is
lower;
*(6) Pledge, mortgage or hypothecate more than 15% of its total
assets (taken at cost). In order to comply with certain state
requirements, as a matter of operating policy subject to change
without shareholder approval, the Fund will not pledge, mortgage or
hypothecate more than 5% of such assets;
*(7) Invest more than 5% of its total assets (taken at current
value) in securities of businesses less than three years old and
industrial development revenue bonds where the private entity on
whose credit the security is based, directly or indirectly, is less
than three years old (including predecessor businesses and
entities);
*(8) Purchase or retain securities of any issuer if, to the
knowledge of the Fund, officers and trustees of New England Funds
Trust I or of any investment adviser or subadviser of the Fund who
individually own beneficially more than 1/2 of 1% of the securities of
that issuer, together own beneficially more than 5% of such
securities;
*(9) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies. This
limitation does not apply to repurchase agreements;
*(10)Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or real estate (except that the Fund may buy
tax exempt bonds or other permitted investment secured by real
estate or an interest therein);
*(11)Act as underwriter, except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(12)Purchase voting securities or make investments for the purpose of
exercising control or management;
*(13)Participate on a joint or joint and several basis in any trading
account in securities;
*(14)Write, purchase, or sell puts, calls or combinations thereof,
except that the Fund may write, purchase and sell puts, calls or
combinations thereof with regard to futures contracts;
*(15)Invest in the securities of other investment companies, except in
connection with a merger, consolidation or similar transaction.
(Under the 1940 Act, the Fund may not (a) invest more than 10% of
its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in
excess of 5% of the Fund's total assets (taken at current value), or
(c) own more than 3% of the outstanding voting stock of any one
investment company);
*(16)Issue senior securities. For the purpose of this restriction, none
of the following is deemed to be a senior security: any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to forward contracts, options, futures contracts, swap
contracts and other similar contracts and options on futures
contracts and with respect to initial and variation margin; the
purchase or sale of options, forward contracts or options on futures
contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds
Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
The Fund may invest more than 25% of its assets in industrial
development revenue bonds, subject to limitation (2) above. In
addition, as a matter of such operating policy subject to change without
shareholder approval, the Fund will not invest more than 25% of its
assets in securities of issuers located in the same state, and the Fund
will not (1) purchase any security restricted as to disposition under
federal securities laws if as a result of such purchase more than 10% of
the Fund's total net assets would be invested in such securities or (2)
invest more than 15% of the Fund's total net assets in illiquid
investments.+
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Pursuant to separate advisory agreements, each dated January 2,
1996 (May 1, 1995, in the case of the Strategic Income Fund), New
England Funds Management, L.P. ("NEFM") has agreed, subject to the
supervision of the Board of Trustees of the relevant Trust, to manage
the investment and reinvestment of the assets of each Fund and to
provide a range of administrative services to each Fund. For the
services described in the advisory agreements, each Fund pays NEFM a
management fee at the annual rate set forth in the following table:
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily
net assets of the Fund)
Adjustable Rate Fund 0.55% of the first $200 million
0.51% of the next $300 million
0.47% of amounts in excess of
$500 million
Bond Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of
$100 million
Government Securities Fund 0.650% of the first $200 million
0.625% of the next $300 million
0.600% of amounts in excess of
$500 million
High Income Fund 0.75% of all assets
Limited Term U.S. Government 0.650% of the first $200 million
Fund 0.625% of the next $300 million
0.600% of amounts in excess of
$500 million
Strategic Income Fund 0.65% of the first $200 million
0.60% of amounts in excess of
$200 million
Municipal Income Fund 0.500% of the first $100 million
0.375% of amounts in excess of
$100 million
Each advisory agreement provides that NEFM may delegate its
responsibilities thereunder to another party. Pursuant to a subadvisory
agreement dated May 1, 1995, NEFM has delegated responsibility for
managing the investment and reinvestment of the Strategic Income Fund's
assets to Loomis Sayles & Company, L.P. ("Loomis Sayles"), as
subadviser. Pursuant to separate subadvisory agreements, each dated
January 2, 1996, NEFM has delegated responsibility for managing the
investment and reinvestment of the other Funds' assets to Back Bay
Advisors, as subadviser. The Funds pay no direct fees to Loomis Sayles
or Back Bay Advisors. For providing such subadvisory services to the
Funds, NEFM pays each subadviser a subadvisory fee at the annual rate
set forth in the following table:
Subadvisory fee payable by NEFM
Fund Subadviser to subadviser
(as a percentage of average
daily net assets of the Fund)
Adjustable Rate Fund Back Bay 0.275% of the first $200
Advisors 0.255% million
0.235% of the next $300 million
of amounts in excess of
$500 million
Bond Income Fund Back Bay 0.2500 of the first $100
Advisors % million
0.1875 of amounts in excess of
% $100 million
Government Securities Back Bay 0.3250 of the first $200
Fund Advisors % million
0.3125 of the next $300 million
% of amounts in excess of
0.3000 $500 million
%
High Income Fund Back Bay 0.375% of all assets
Advisors
Limited Term U.S. Back Bay 0.3250 of the first $200
Government Fund Advisors % million
0.3125 of the next $300 million
% of amounts in excess of
0.3000 $500 million
%
Strategic Income Fund Loomis 0.35% of the first $200
Sayles 0.30% million
of amounts in excess of
$200 million
Municipal Income Fund Back Bay 0.2500 of the first $100
Advisors % million
0.1875 of amounts in excess of
% $100 million
Prior to January 2, 1996, Back Bay Advisors served as adviser to
the Government Securities, Limited Term U.S. Government, Bond Income,
High Income and Municipal Income Funds, pursuant to separate advisory
agreements each of which provided for an advisory fee payable by such
Fund to Back Bay Advisors at the same rate as the management fee
currently payable by such Fund to NEFM.
Prior to January 2, 1996, Back Bay Advisors served as adviser to
the Adjustable Rate Fund, pursuant to an advisory agreement which
provided for an advisory fee payable by the Fund to Back Bay Advisors at
the annual rate of 0.40% of the first $200 million of the Fund's average
daily net assets, 0.375% of the next $300 million of such assets and
0.35% of such assets in excess of $500 million.
Back Bay Advisors was paid $955,078, $1,056,207 and $911,184,
respectively, for investment management services it rendered to the
Adjustable Rate Fund during the fiscal years ended December 31, 1993,
1994 and 1995, after reduction pursuant to the expense limitation
arrangement described below. Had the voluntary expense limitation not
been in effect Back Bay Advisors would have been paid $2,011,626,
$2,351,792 and $1,619,477, respectively, for investment management
services it rendered to the Adjustable Rate Fund during the fiscal years
ended December 31, 1993, 1994 and 1995.
Prior to January 2, 1996, New England Funds, L.P. (the
"Distributor"), an affiliate of Back Bay Advisors, provided the
Adjustable Rate Fund with office space, facilities and equipment,
services of executive and other personnel and certain administrative
services, pursuant to an administrative services agreement. Under this
agreement, the Adjustable Rate Fund paid the Distributor a fee at the
annual rate of 0.15% of the first $200 million of the Fund's average
daily net assets, 0.135% of the next $300 million of such assets and
0.12% of such assets in excess of $500 million. The Adjustable Rate
Fund's current management fee rate represents the sum of the fee rates
under the prior advisory and administrative services agreements.
Until further notice to the Adjustable Rate Fund, NEFM and the
Distributor have voluntarily agreed to reduce their fees and, if
necessary, to bear certain expenses related to operating the Fund in
order to limit the Fund's expenses to an annual rate of 0.70%, 1.45% and
0.45% of the average daily net assets of the Fund's Class A, Class B and
Class Y shares, respectively. Prior to January 2, 1996, similar
voluntary limitations were in effect with respect to Back Bay Advisors,
the Distributor and the Fund.
For the fiscal years ended December 31, 1993, 1994 and 1995, the
Government Securities Fund paid advisory fees to Back Bay Advisors of
$1,211,057, $1,102,880 and $1,008,846, respectively.
The Limited Term U.S. Government Fund paid Back Bay Advisors
$3,390,740, $3,163,619 and $2,560,201 in advisory fees for the fiscal
years ended December 31, 1993, 1994 and 1995, respectively, after
reduction pursuant to the voluntary expense limitations then in effect.
For the fiscal years ended December 31, 1993, 1994 and 1995, the
Bond Income Fund paid advisory fees to Back Bay Advisors of $751,948,
$774,457 and $872,560, respectively; and the Municipal Income Fund paid
advisory fees to Back Bay Advisors of $911,990, $925,947 and $890,150,
respectively.
Prior to July 1, 1995, the advisory agreement for the Municipal
Income Fund included a provision under which Loomis Sayles served as a
subadviser and furnished regularly to Back Bay Advisors, without
additional cost to the Fund, statistical and research information and
advice relating to the Fund's investments. For its services, Loomis
Sayles received a fee, paid by Back Bay Advisors not less often than
quarterly, equal to 40% of the compensation paid by the Fund to Back Bay
Advisors on the first $10 million of the Fund's average daily net
assets, 30% of the compensation paid on the next $10 million of such
assets and 20% of the compensation paid on such assets in excess of $20
million. For the fiscal years ended December 31, 1993 and 1994, and the
period from January 1 to June 30, 1995, the compensation from Back Bay
Advisors to Loomis Sayles under this agreement was $197,398, $200,190
and $94,978, respectively.
In addition to the expense limitations discussed in Part II of this
Statement under "Management of the Trusts," Back Bay Advisors'
compensation under its advisory agreement with the High Income Fund was
subject to reduction to the extent that, for any calendar month, the
Fund's expenses, including the management fee, but exclusive of
brokerage, taxes, interest, distribution fees and extraordinary items,
exceed an annual rate of 1.50% of the Fund's average daily net assets.
Until further notice to the Fund, NEFM has voluntarily agreed to
reduce its management fee and, if necessary, to bear certain expenses
related to operating the High Income Fund to an annual rate of 1.50% of
the Fund's average daily net assets. Prior to January 2, 1996, similar
voluntary limitations were in effect with respect to Back Bay Advisors
and the Fund.
Back Bay Advisors was paid $131,833, $190,955 and $288,711 in
advisory fees by the High Income Fund during the fiscal years ended
December 31, 1993, 1994 and 1995, respectively, after reduction pursuant
to the foregoing voluntary expense limitations. Had the voluntary
expense limitation not been in effect, Back Bay Advisors would have been
paid $207,486, $273,994 and $342,554, respectively, in advisory fees by
the High Income Fund during the fiscal years ended December 31, 1993,
1994 and 1995.
Loomis Sayles has voluntarily agreed, until further notice to the
Strategic Income Fund, to waive its entire subadvisory fee (which is
paid by NEFM), and NEFM has agreed to reduce its management fee (which
is paid by the Fund) by an equal amount. These agreements may be
terminated by Loomis Sayles or NEFM at any time. In addition, under an
expense deferral arrangement, which NEFM may terminate at any time, NEFM
has agreed to defer its management fee (to the extent not waived as
provided in the preceding sentences) for the Strategic Income Fund until
further notice, to the extent necessary to limit the Fund's expenses to
the annual rate of 1.40% for Class A shares, 2.15% for Class B shares
and 2.15% for Class C shares, subject to the obligation of the Fund to
pay NEFM such deferred fees in later periods to the extent that the
Fund's expenses fall below the annual rate of 1.40% for Class A shares,
2.15% for Class B shares and 2.15% for Class C shares; provided,
however, that, the Fund is not obligated to pay any such deferred fees
more than two years after the end of the fiscal year in which such fee
was deferred.
For the period May 1, 1995 (commencement of operations) to December
31, 1995, the Strategic Income Fund paid no management fees to NEFM.
Had the voluntary expense deferral arrangements described above not been
in effect, the Fund would have paid NEFM $241,019 in management fees for
this period. Under the terms of the expense deferral arrangement, the
Fund may be obligated to pay up to $111,240 of such fees to NEFM in
future periods.
BROKERAGE COMMISSIONS
In 1993, 1994 and 1995, the Funds paid no commissions on brokerage
transactions.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B
and, in the case of the Limited Term U.S. Government, Bond Income and
Strategic Income Funds, Class C shares of each Fund pay a fee pursuant
to a plan adopted pursuant to Rule 12b-1 under the 1940 Act. The
following table shows the amounts of Rule 12b-1 fees paid by the Class
A, Class B and Class C shares of each Fund during the fiscal year ended
Decembers 31, 1993, 1994 and 1995:
Fund 1993 1994 1995
Government Securities $465,401 $409,909 $366,630 (Class A)
Fund $1,582 $23,270 $37,075 (Class B)**
Limited Term U.S. $1,873,424 $1,705,012 $1,332,412 (Class A)
Government Fund $7,721 $98,717 $147,768 (Class B)**
$15,410 (Class C)***
Adjustable Rate Fund $1,322,743 $1,551,366 $1,040,897 (Class A)
$1,444 $14,092 $21,684 (Class B)*
Bond Income Fund $416,977 $416,918 $453,844 (Class A)
$3,957 $30,717 $158,962 (Class B)*
$2,428 (Class C)***
High Income Fund $96,279 $117,107 $130,876 (Class A)
$1,574 $30,717 $82,798 (Class B)**
$0 (Class C)***
Municipal Income Fund $523,343 $512,288 $483,317 (Class A)
$5,363 $66,711 $107,048 (Class B)*
Strategic Income $39,090 (Class A)
Fund**** $155,887 (Class B)
$58,847 (Class C)
* Class B shares were first offered on September 13, 1993.
**Government Securities Fund Class B shares were first offered September
23, 1993; Limited Term U.S. Government Fund Class B shares were first
offered September 27, 1993; High Income Fund Class B shares were first
offered September 20, 1993.
*** Class C shares were first offered on January 3, 1995.
**** The Strategic Income Fund commenced operations on May 1, 1995.
During the fiscal year ended December 31, 1995, the Distributor's
expenses relating to each Fund's 12b-1 plans were as follows:
Government Securities Fund
(Class A shares)
Compensation to Investment Dealers $366,286
Compensation to Distributor's Sales Personnel $345
TOTAL $366,631
(Class B shares)
Compensation to Investment Dealers $65,747
TOTAL $65,747
Limited Term U.S. Government Fund
(Class A shares)
Compensation to Investment Dealers $950,359
Compensation to Distributor's Sales Personnel $382,055
TOTAL $1,332,414
(Class B shares)
Compensation to Investment Dealers $207,134
TOTAL $207,134
(Class C shares)
Compensation to Investment Dealers $15,410
Compensation to Distributor's Sales Personnel $0
TOTAL $15,410
Adjustable Rate Fund
(Class A shares)
Compensation to Investment Dealers $1,038,424
Compensation to Distributor's Sales Personnel $2,475
TOTAL $1,040,899
(Class B shares)
Compensation to Investment Dealers $23,182
TOTAL $23,182
Strategic Income Fund
(Class A shares)
Compensation to Investment Dealers $0
Compensation to Distributor's Sales Personnel $39,091
TOTAL $39,091
(Class B shares)
Compensation to Investment Dealers $1,440,926
TOTAL $1,440,926
(Class C shares)
Compensation to Investment Dealers $58,548
Compensation to Distributor's Sales Personnel $0
TOTAL $58,548
Bond Income Fund
(Class A shares)
Compensation to Investment Dealers $454,410
Compensation to Distributor's Sales Personnel $0
TOTAL $454,410
(Class B shares)
Compensation to Investment Dealers $424,667
TOTAL $424,667
(Class C shares)
Compensation to Investment Dealers $2,428
Compensation to Distributor's Sales Personnel $0
TOTAL $2,428
High Income Fund
(Class A shares)
Compensation to Investment Dealers $93,316
Compensation to Distributor's Sales Personnel $37,563
TOTAL $130,879
(Class B shares)
Compensation to Investment Dealers $227,854
TOTAL $227,854
Municipal Income Fund
(Class A shares)
Compensation to Investment Dealers $483,199
Compensation to Distributor's Sales Personnel $118
TOTAL $483,317
(Class B shares)
Compensation to Investment Dealers $167,871
TOTAL $167,871
Of the amounts listed above as compensation to investment dealers,
the following amounts were paid by the Distributor to New England
Securities Corporation ("New England Securities"), a broker-dealer
affiliate of the Distributor: $314,477 relating to the Class A shares
and $24,892 relating to the Class B shares of the Government Securities
Fund; $218,479 relating to the Class A shares and $17,849 relating to
the Class B shares of the Adjustable Rate Fund; $379,050 relating to the
Class A shares and $337,627 relating to the Class B shares and $2,025
relating to the Class C shares of the Bond Income Fund; $54,412 relating
to the Class A shares and $74,624 relating to the Class B shares of the
High Income Fund; $402,169 relating to the Class A shares and $113,310
relating to the Class B shares of the Municipal Income Fund; $653,488
relating to the Class A shares, $156,687 relating to Class B shares and
$2,609 relating to the Class C shares of the Limited Term U.S.
Government Fund; and $-0- to the Class A shares, $605,340 relating to
the Class B shares and $4,133 relating to the Class C shares of the
Strategic Income Fund. New England Securities paid substantially all of
the fees it received from the Distributor (a) in commissions to its
sales personnel and (b) to defray sales-related overhead costs.
At April 1, 1996, to the Trust's knowledge, the following persons
owned of record or beneficially 5% or more of the indicated Fund:
Adjustable Rate U.S. Government Fund
Class A shares San Bernardino County 25.28%
Treasurer
172 W. 3rd Street, 1st Floor
San Bernardino, CA 92415-1001
Molten Metal Technology, Inc. 7.13%
51 Sawyer Road
Waltham, MA 02154-3448
Class B shares Smith Barney, Inc. 6.31%
388 Greenwich Street
New York, NY 10013-2375
Lynn C. Knarr 6.23%
14 Canal Road
Westport, CT 06880-6904
High Income Fund
Class A shares Deferred Compensation Plan 7.10%
for General Agents of
The New England
501 Boylston Street, 6th Floor
Boston, MA 02116
Limited Term U.S. Government Fund
Class C shares Samuel Oschin 15.35%
Michael H. Oschin
P.O. Box 48289
Los Angeles, CA 90048-0289
Hook's Concrete 5.55%
Construction Corp.
Defined Benefit Pension
Plan and Trust
529 East 169th Street
South Holland, IL 60478-
2925
Class Y shares NEIC Master Retirement 54.95%
Trust
c/o Defined Contribution
Services
P.O. Box 755
Boston, MA 02117-0755
New England Mutual Life 45.05%
Insurance Company, Separate
Investment Accounting
501 Boylston Street, 6th
Floor
Boston, MA 02116-2706
Bond Income Fund
Class Y shares NEIC Master Retirement 99.99%
Trust
c/o Defined Contribution
Services
P.O. Box 755
Boston, MA 02117-0755
Municipal Income
Fund
Class B shares Smith Barney 5.32%
388 Greenwich Street
New York, NY 10013-2375
Government Securities Fund
Class B shares State Street Bank & Trust 5.23%
Company
Custodian for the IRA
Rollover of
Edith H. Crowson
22410 Provincial
Katy, TX 77450-1624
Class Y shares New England Mutual Life 100.00%
Insurance Company, Separate
Investment Accounting
501 Boylston Street, 6th
Floor
Boston, MA 02116-3706
Strategic Income
Fund
Class A shares Merrill Lynch Pierce Fenner 5.03%
& Smith Inc.
Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
INVESTMENT PERFORMANCE OF THE FUNDS
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
Government Securities Fund
Aggregate Average Annual
Total Return Total Return
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
Net Asset Value 20.03 51.67 116.06 8.69 8.01
Maximum Offering Price 14.65 44.80 106.38 7.68 7.51
Aggregate Average Annual
Total Return Total Return
Class B shares: As a % 1 Since Since
of Year 9/23/93** 9/23/93**
Net Asset Value 19.24 10.50 4.49
Redemption at End of 15.24 7.63 3.29
Period
Aggregate Average Annual
Total Return Total Return
Class Y shares: As a % Since Since
of 1 Year 3/31/94** 3/31/94**
Net Asset Value 20.31 17.83 9.80
Limited Term U.S. Government Fund
Aggregate Average Annual
Total Return Total Return
Since Since
Class A shares: As a % 1 5 1/3/89 5 1/3/89
of Year Years ** Years **
Net Asset Value 13.01 41.32 72.49 7.16 8.11
Maximum Offering Price 9.57 37.13 67.47 6.52 7.64
Aggregate Average Annual
Total Return Total Return
Class B shares: As a % Since Since
of 1 Year 9/27/93** 9/27/93**
Net Asset Value 12.30 8.32 3.60
Redemption at End of 8.30 5.73 2.48
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 1/3/95** 1/3/95**
Net Asset Value 11.35 11.35
Aggregate Average Annual
Total Return Total Return
Class Y shares: As a % 1 Since Since
of Year 3/31/94** 3/31/94**
Net Asset Value 13.33 13.02 7.25
Adjustable Rate Fund***
Aggregate Average Annual
Total Return Total Return
Since Since
Class A shares: As a % 1 10/19/91 3 10/19/91
of Year ** Years **
Net Asset Value 8.62 20.92 4.42 4.63
Maximum Offering Price 7.57 19.64 4.05 4.36
Aggregate Average Annual
Total Return Total Return
Class B shares: As a % 1 Since Since
of Year 9/13/93** 9/13/93**
Net Asset Value 7.81 7.82 3.32
Redemption at End of 3.81 4.88 2.09
Period
Aggregate Average Annual
Total Return Total Return
Class Y shares: As a % 1 Since Since
of Year 3/31/94** 3/31/94**
Net Asset Value n/a n/a n/a
Strategic Income Fund*****
Aggregate Annualized
Total Return Total Return
Class A shares: As a % Since Since
of 5/1/95** 5/1/95**
Net Asset Value 10.27 15.71
Maximum Offering Price 5.30 8.01
Aggregate Annualized
Total Return Total Return
Class B shares: As a % Since Since
of 5/1/95** 5/1/95**
Net Asset Value 9.73 14.87
Redemption at End of 5.73 8.68
Period
Aggregate Annualized
Total Return Total Return
Class C shares: As a % Since Since
of 5/1/95** 5/1/95**
Net Asset Value 9.65 14.75
Aggregate Annualized
Total Return Total Return
Class Y shares: As a % Since Since
of 5/1/95** 5/1/95**
Net Asset Value n/a n/a
Bond Income Fund
Aggregate Average Annual
Total Return Total Return
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
Net Asset Value 20.77 64.46 148.94 10.47 9.55
Maximum Offering Price 15.29 57.12 137.72 9.46 9.05
Aggregate Average Annual
Total Return Total Return
1 Since Since
Class B shares: As a % of Year 9/13/93** 9/13/93**
Net Asset Value 19.89 13.04 5.48
Redemption at End of 15.89 10.20 4.31
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class C shares: As a % of 1/3/95** 1/3/95**
Net Asset Value 18.11 18.11
Aggregate Average Annual
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
Net Asset Value 20.99 20.99 20.99
High Income Fund
Aggregate Average Annual
Total Return Total Return
1 5 10 5 10
Class A shares: As a % of Year Years Years Years Years
Net Asset Value 11.78 98.94 100.02 14.75 7.18
Maximum Offering Price 6.73 89.91 90.98 13.69 6.68
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/20/93** 9/20/93**
Net Asset Value 11.19 11.37 4.83
Redemption at End of 7.19 8.64 3.70
Period
Municipal Income Fund
Aggregate Average Annual
Total Return Total Return
1 5 10 5 10
Class A shares: As a % of Year Years Years Years Years
Net Asset Value 17.23 47.57 124.16 8.09 8.41
Maximum Offering Price 12.00 40.93 114.21 7.10 7.92
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 16.31 7.28 3.10
Redemption at End of 12.31 4.44 1.91
Period
* Federal regulations require this example to be calculated using a
$1,000 investment. The normal minimum initial investment in shares
of the Funds is $2,500, however.
** Commencement of Fund operations or offering of indicated class of
shares.
*** Assuming deduction of current maximum sales load, the Adjustable
Rate Fund's Class A shares' average one-year and since-inception
aggregate total returns would have been 7.34% and 17.72%,
respectively, and their average annual since-inception total return
would have been 2.44% had a voluntary expense limitation not been
in effect. Based on net asset values, the Fund's Class A shares'
one-year and since-inception aggregate total returns would have
been 8.39% and 19.00%, respectively, and their since-inception
average annual total return would have been 2.71%, without the
voluntary limitation. Assuming redemption at the end of the
period, the Fund's Class B shares' one-year and since-inception
aggregate total returns would have been 3.57% and 4.10%,
respectively, had a voluntary expense limitation not been in
effect, and their average annual total return for the since-
inception period would have been 1.31%. Based on net asset values,
the Fund's Class B shares' aggregate total returns for the one-year
and since-inception periods would have been 7.57% and 7.58%,
respectively, and their average annual total returns for the since-
inception period would have been 2.54%, without the voluntary
limitation. The Fund's Class Y shares' one-year and since-
inception aggregate total returns would have been n/a% and n/a%,
respectively, and their since-inception average annual total return
would have been n/a%, without the voluntary limitation.
**** Assuming deduction of current maximum sales load, the High Income
Fund's Class A shares' one-year, five-year and ten-year aggregate
total returns would have been 6.61%, 86.45% and 83.70%,
respectively, had a voluntary expense limitation for certain
periods not been in effect, and their five-year and ten-year
average annual total returns would have been 10.25% and -0.60%,
respectively. Based on net asset values, the High Income Fund's
Class A shares' one-year, five-year and ten-year aggregate total
returns would have been 11.66%, 95.48% and 92.74%, respectively,
without the voluntary limitation, and their five-year and ten-year
average annual total returns would have been 11.29% and
-0.10%, respectively. Assuming redemption at the end of the
period, the Fund's Class B shares' aggregate total returns for the
one-year and since-inception periods would have been 7.07% and
8.01%, respectively, had a voluntary expense limitation not been in
effect, and their average annual total return for the since-
inception period would have been 3.07%. Based on net asset values,
the Fund's Class B shares' aggregate total returns for the one-year
and since-inception periods would have been 11.07% and 10.74%,
respectively, without the voluntary limitation, and their average
annual total return for the since-inception period would have been
4.20%.
***** Assuming deduction of the current maximum sales load, the
Strategic Income Fund's Class A, Class B, Class C and Class Y
shares' aggregate total returns for the since-inception period
would have been 4.65%, 5.08%, 9.00% and n/a%, respectively, had a
voluntary expense deferral arrangement not been in effect, and
their annualized total returns for the since-inception would have
been 7.36%, 8.03%, 14.10% and n/a%, respectively.
YIELD FOR THE 30-DAY PERIOD
Ended 12/31/95
Fund Class A Class B Class C Class Y
Government Securities Fund 4.41 3.83 n/a 4.90
Limited Term U.S. Government
Fund 4.90 4.42 4.46 5.40
Adjustable Rate U.S. Government
Fund 5.79 5.10 n/a n/a
Strategic Income Fund 8.36 7.99 8.05 n/a
Bond Income Fund 6.09 5.63 5.63 6.61
High Income Fund 9.48 9.27 n/a n/a
Municipal Income Fund 5.11 4.60 n/a n/a
* Yields for the Class A shares of the Funds are based on the
public offering price of a Class A share of the Funds and yields
for the Class B, Class C and Class Y shares are based on the net
asset value of a share of the Funds.
Distribution Rate. The Government Securities, Limited Term U.S.
Government, Adjustable Rate, Bond Income and High Income Funds may
include in their written sales material distribution rates based on the
Funds' distributions from net investment income and short-term capital
gains for a recent 30 day, three month or one year period.
Distributions of less than one year are annualized by multiplying
by the factor necessary to produce twelve months of distributions. The
distribution rates are determined by dividing the amount of the
particular Fund's distributions per share over the relevant period by
either the maximum offering price or the net asset value of a share of
the Fund on the last day of the period.
DISTRIBUTION RATES
For Periods Ending 12/31/95
As a % of 30 day 3 months 12 months
Government Securities Fund
(Class A shares)
Net Asset Value 6.39 6.39 6.20
Maximum Offering Price 6.11 6.11 5.92
(Class B shares)
Net Asset Value 5.67 5.67 5.48
(Class Y shares)
Net Asset Value 8.30 7.62 6.70
Limited Term U.S. Government Fund
(Class A shares)
Net Asset Value 7.69 7.45 6.94
Maximum Offering Price 7.46 7.23 6.73
(Class B shares)
Net Asset Value 7.05 6.83 6.32
(Class C shares)
Net Asset Value 7.04 6.83 n/a
(Class Y shares)
Net Asset Value 7.22 7.39 7.16
Adjustable Rate Fund
(Class A shares)
Net Asset Value 5.62 5.53 5.91
Maximum Offering Price 5.57 5.47 5.85
As a % of 30 day 3 months 12 months
(Class B shares)
Net Asset Value 4.87 4.81 5.17
(Class Y shares)
Net Asset Value n/a n/a n/a
Strategic Income Fund
(Class A shares)
Net Asset Value 8.58 8.14 n/a
Maximum Offering Price 8.20 7.77 n/a
(Class B shares)
Net Asset Value 7.85 7.61 n/a
(Class C shares)
Net Asset Value 7.57 7.44 n/a
(Class Y shares)
Net Asset Value n/a n/a n/a
Bond Income Fund
(Class A shares)
Net Asset Value 6.80 6.80 6.47
Maximum Offering Price 6.49 6.49 6.18
(Class B shares)
Net Asset Value 6.02 6.05 5.77
(Class C shares)
Net Asset Value 6.02 6.18 n/a
(Class Y shares)
Net Asset Value 6.24 6.48 n/a
High Income Fund
(Class A shares)
Net Asset Value 9.69 10.04 10.27
Maximum Offering Price 9.25 9.59 9.81
(Class B shares)
Net Asset Value 9.03 9.39 9.62
Municipal Income Fund
(Class A shares)
Net Asset Value 5.37 5.37 5.36
Maximum Offering Price 5.13 5.13 5.12
(Class B shares)
Net Asset Value 4.58 4.58 4.59
The foregoing data represent past performance only, and are not a
representation as to the future results of any Fund. The investment
return and principal value of an investment in any Fund will fluctuate
so that the investor's shares, when redeemed, may be worth more or less
than the original cost.
[NEF Logo]
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND VALUE FUND
Statement of Additional Information -- PART I
May 1, 1996
This Statement of Additional Information (the "Statement") contains
information which may be useful to investors but which is not included
in the Prospectus of the New England Funds listed above (the "Funds" and
each a "Fund"). This Statement is not a prospectus and is only
authorized for distribution when accompanied or preceded by the
Prospectus of the Funds dated May 1, 1996 for Class A, Class B and Class
C shares or the Prospectus of the Funds dated May 1, 1996 for Class Y
shares (the "Prospectus" or "Prospectuses"). The Statement should be
read together with the Prospectus. Investors may obtain a free copy of
any of the Prospectuses from New England Funds, L.P., Prospectus
Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the
Funds. Part II includes information about the Funds and other New
England Funds. New England Growth Fund, New England Capital Growth
Fund, New England Value Fund, New England Balanced Fund, New England
International Equity Fund and New England Star Advisers Fund are series
of New England Funds Trust I, a registered management investment company
that offers a total of eleven series, and New England Growth
Opportunities Fund is a series of New England Funds Trust II, a
registered management investment company that offers a total of eight
series.
T a b l e o f C o n t e n t s
Page
Part I
Investment Restrictions ii
Fund Charges and Expenses ix
Investment Performance of the Funds xix
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 23
Description of the Trusts and Ownership of 26
Shares
How to Buy Shares 29
Net Asset Value and Public Offering Price 29
Reduced Sales Charges 30
Shareholder Services 32
Redemptions 36
Standard Performance Measures 38
Income Dividends, Capital Gain Distributions 43
and Tax Status
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain 48
Fund Information
Appendix C - Advertising and Promotional 50
Literature
Appendix D - Portfolio Composition of the Municipal 54
Income, Bond Income and California Funds
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the investments
to be made by the Funds, some of which restrictions (which are marked
with an asterisk) may not be changed without the approval of a majority
of the outstanding voting securities of the relevant Fund (as defined in
the Investment Company Act of 1940 [the "1940 Act"]). Except in the
case of restrictions marked with a dagger (+) below, the percentages set
forth below and the percentage limitations set forth in the Prospectus
will apply at the time of the purchase of a security and shall not be
considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of a purchase of such security.
New England Growth Fund, New England Value Fund and New England Balanced
Fund
New England Growth Fund (the "Growth Fund"), New England Value Fund (the
"Value Fund") and New England Balanced Fund (the "Balanced Fund") each
will not:
*(1) Purchase any security (other than U.S. Government securities)
if, as a result, more than 5% of the Fund's total assets (taken at
current value) would then be invested in securities of a single
issuer or 25% of the Fund's total assets (taken at current value)
would be invested in any one industry;
*(2) Purchase securities on margin (but it may obtain such short-
term credits as may be necessary for the clearance of purchases and
sales of securities), or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class
and all debt issues of an issuer as a single class) or acquire more
than 10% of the outstanding voting securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken at
cost) or 5% of its total assets (taken at current value), whichever
is lower, and then only as a temporary measure for extraordinary or
emergency purposes;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current
value) in securities of businesses (including predecessors) less
than three years old;
*(7) Purchase or retain securities of any issuer if officers and
trustees of New England Funds Trust I or of the investment adviser
of the Fund who individually own more than 1/2 of 1% of the shares or
securities of that issuer, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness, which
are a part of an issue to the public or to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts. Also,
the Value Fund will not buy or sell real estate or interests in real
estate which are not readily marketable. (This restriction does not
prevent such Funds from purchasing securities of companies investing
in the foregoing);
*(10) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or
management;
*(12) Participate on a joint or joint and several basis in any
trading account in securities;
*(13) Purchase options or warrants if, as a result, more than 1% of
its total assets (taken at current value) would be invested in such
securities;
*(14) Write options or warrants; or
*(15) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions. (Under the 1940 Act, the Growth Fund, the Value Fund
and the Balanced Fund each may not (a) invest more than 10% of its
total assets [taken at current value] in such securities, (b) own
securities of any one investment company having a value in excess of
5% of the total assets of such Fund [taken at current value], or (c)
own more than 3% of the outstanding voting stock of any one
investment company.)
*(16) Issue senior securities. For the purpose of this retriction,
none of the following is deemed to be a senior security: any
borrowing permitted by restriction (4) above; any pledge or other
encumbrance of assets permitted by restricution (5) above; any
collateral arrangements with respect to options, forward contracts,
futures contracts, swap contracts and other similar contracts and
options on futures contracts and with respect to initial and
variation margin; the purchase or sale of options, forward
contracts, futures contracts, swap contracts and other similar
contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration
of Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom.
In order to comply with certain state requirements applicable to
restriction (5) above, as a matter of operating policy, subject to
change without shareholder approval, the Growth Fund, the Value Fund and
the Balanced Fund will not pledge more than 2% of their assets. In
addition, as a matter of operating policy, subject to change without
shareholder approval, the Funds do not intend to make short sales of the
type permitted by restriction (2).
As a matter of operating policy, subject to change without
shareholder approval, the Growth Fund, the Value Fund and the Balanced
Fund will not (1) purchase any security restricted as to disposition
under federal securities laws if as a result of such purchase more than
10% of the Fund's total net assets would be invested in such securities;
+(2) invest more than 15% of the Fund's total net assets in illiquid
securities, or (3) purchase or sell real property, including limited
partnership interests.
New England Capital Growth Fund
New England Capital Growth Fund (the "Capital Growth Fund") may not:
(1) Purchase any security (other than U.S. Government securities) if, as
a result, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities)
if, as a result, more than 25% of the Fund's total assets (taken at
current value) would be invested in any one industry (in the
utilities category, gas, electric, water and telephone companies
will be considered as being in separate industries, and each foreign
country's government [together with subdivisions thereof] will be
considered to be a separate industry);
(3) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities), or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales. (For this purpose, the deposit or payment by the
Fund of initial or variation margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock
issues of an issuer as a single class and all debt issues of an
issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at
cost) or 5% of its total assets (taken at current value), whichever
is lower, and then only as a temporary measure for extraordinary or
emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a
pledge of assets);
(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three
years old;
(8) Purchase or retain securities of any issuer if officers and trustees
of New England Funds Trust I or of the investment adviser or
subadviser of the Fund who individually own more than l/2 of 1% of
the shares or securities of that issuer, together own more than 5%;
*(9) Make loans, except by entering into repurchase agreements or by
purchase of bonds, debentures, commercial paper, corporate notes and
similar evidences of indebtedness, which are a part of an issue to
the public or to financial institutions, or through the lending of
the Fund's portfolio securities;
*(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related
options. (This restriction does not prevent the Fund from
purchasing securities of companies investing in the foregoing);
*(11) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
(12) Make investments for the purpose of exercising control or
management;
(13) Except to the extent permitted by rule or order of the
Securities and Exchange Commission (the "SEC"), participate on a
joint or joint and several basis in any trading account in
securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with Loomis, Sayles & Company, L.P. ["Loomis
Sayles"] or accounts under its management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(14) Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, (b) write, purchase and sell put and
call options on securities or securities indexes and (c) enter into
currency forward contracts;
+(15) Purchase any illiquid security if, as a result, more than 15%
of its net assets (taken at current value) would be invested in such
securities;
(16) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions or no commissions. Under the 1940 Act, the Fund may not
(a) invest more than 10% of its total assets (taken at current
value) in such securities, (b) own securities of any one investment
company having a value in excess of 5% of the total assets of the
Fund (taken at current value), or (c) own more than 3% of the
outstanding voting stock of any one investment company; or
*(17) Issue senior securities. (For the purpose of this restriction,
none of the following is deemed to be a senior security: any pledge
or other encumbrance of assets permitted by restriction (6) above;
any borrowing permitted by restriction (5) above; any collateral
arrangements with respect to options, futures contracts and options
on futures contracts and with respect to initial and variation
margin; the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration
of Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom.)
The Capital Growth Fund has undertaken that its investments in
warrants (other than warrants acquired in units or attached to other
securities) will not exceed 5% of the value of its net assets and that,
within that 5%, not more than 2% of its net assets will be invested in
warrants not listed on the New York or American Stock Exchanges; it will
not invest in commodity futures contracts or real estate limited
partnerships; it will not invest more than 5% of its net assets in
restricted securities; it will not invest in puts, calls, straddles,
spreads or any combination thereof; it will not invest in futures
contracts and it will not make loans of portfolio securities. The
undertakings set forth in this paragraph can be changed without
shareholder approval, but the Statement will be revised to reflect any
such changes.
New England Star Advisers Fund
New England Star Advisers Fund (the "Star Advisers Fund") may not:
*(1) Purchase any security (other than U.S. Government securities)
if , as a result, more than 25% of the Fund's total assets (taken at
current value) would be invested in any one industry (in the
utilities category, gas, electric, water and telephone companies
will be considered as being in separate industries, and each foreign
country's government (together with subdivisions thereof) will be
considered to be a separate industry);
(2) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities), or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales. (For this purpose, the deposit or payment by the
Fund of initial or variation margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin);
(3) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock
issues of an issuer as a single class and all debt issues of an
issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 25% of its total assets, and then
only as a temporary measure for extraordinary or emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a
pledge of assets);
(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three
years old;
(7) Purchase or retain securities of any issuer if officers and trustees
of New England Funds Trust I or of any investment adviser or
subadviser of the Fund who individually own more than 1/2 of 1% of the
shares or securities of that issuer, together own more than 5%;
*(8) Make loans, except by entering into repurchase agreements or by
purchase of bonds, debentures, commercial paper, corporate notes and
similar evidences of indebtedness, which are a part of an issue to
the public or to financial institutions, or through the lending of
the Fund's portfolio securities;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related
options. (This restriction does not prevent the Fund from
purchasing securities of companies investing in the foregoing);
*(10) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
(11) Make investments for the purpose of exercising control or
management;
(12) Except to the extent permitted by rule or order of the SEC,
participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase
or sale of portfolio securities with any investment adviser or
subadviser of the Fund or accounts under any such investment
adviser's or subadviser's management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(13) Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, (b) write, purchase and sell put and
call options on securities, securities indexes, currencies, futures
contracts, swap contracts and other similar instruments and (c)
enter into currency forward contracts;
+(14) Purchase any illiquid security if, as a result, more than 15%
of its net assets (taken at current value) would be invested in such
securities;
(15) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions or no commissions. Under the 1940 Act, the Fund may not
(a) invest more than 10% of its total assets (taken at current
value) in such securities, (b) own securities of any one investment
company having value in excess of 5% of the total assets of the Fund
(taken at current value), or (c) own more than 3% of the outstanding
voting stock of any one investment company; or
*(16) Issue senior securities. (For the purpose of this restriction
none of the following is deemed to be a senior security: any pledge
or other encumbrance of assets permitted by restrictions (2) or (5)
above; any borrowing permitted by restriction (4) above; any
collateral arrangements with respect to forward contracts, options,
futures contracts and options on futures contracts and with respect
to initial and variation margin; the purchase or sale of options,
forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds
Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.)
As a matter of operating policy subject to change without
shareholder approval, the Star Advisers Fund intends not to purchase
securities when its outstanding borrowings exceeds 5% of its total
assets and the Fund will not (1) invest more 15% of its total assets in
securities of issuers which together with any predecessors have a record
of less than three years continuous operation or securities of issuers
which are restricted as to disposition; (2) invest in any oil, gas and
other mineral leases; (3) purchase or sell real property including
limited partnership interests but excluding readily marketable interests
in real estate investment trusts or readily marketable securities of
companies which invest in real estate; (4) invest more than 5% of its
net assets in warrants, no more than 2% of which will be invested in
warrants that are not listed on the New York Stock Exchange or American
Stock Exchange, provided however, that for purposes of this limitation,
warrants acquired by the Fund in units or attached to other securities
may be deemed to be without value; (5) invest in any uncovered puts,
calls, straddles, spreads or any combination thereof, if immediately
thereafter the aggregate premiums paid on such outstanding options would
exceed 5% of the market value of the total assets of the Fund; or (6)
invest in commodities or commodity futures contracts, except that the
Fund may buy and sell stock index futures contracts and related options,
stock index options, currency options, currency futures contracts and
related options and interest rate futures contracts and related options.
New England International Equity Fund
New England International Equity Fund (the "International Equity Fund")
may not:
(1) Purchase any security (other than U.S. Government securities) if, as
a result, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities)
if, as a result, more than 25% of the Fund's total assets (taken at
current value) would be invested in any one industry (in the
utilities category, gas, electric, water and telephone companies
will be considered as being in separate industries, and each foreign
country's government [together with subdivisions thereof] will be
considered to be a separate industry);
(3) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities), or make short sales except where, by virtue of
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold, and the Fund will not deposit or pledge more
than 10% of its total assets (taken at current value) as collateral
for such sales. (For this purpose, the deposit or payment by the
Fund of initial or variation margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock
issues of an issuer as a single class and all debt issues of an
issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at
cost) or 5% of its total assets (taken at current value), whichever
is lower, and then only as a temporary measure for extraordinary or
emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a
pledge of assets);
(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three
years old;
(8) Purchase or retain securities of any issuer if officers and trustees
of New England Funds Trust I or of the investment adviser or
subadviser of the Fund who individually own more than 1/2 of 1% of the
shares or securities of that issuer, together own more than 5%;
*(9) Make loans, except by entering into repurchase agreements or by
purchase of bonds, debentures, commercial paper, corporate notes and
similar evidences of indebtedness, which are a part of an issue to
the public or to financial institutions, or through the lending of
the Fund's portfolio securities;
*(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related
options. (This restriction does not prevent the Fund from
purchasing securities of companies investing in the foregoing);
*(11) Act as underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws;
(12) Make investments for the purpose of exercising control or
management;
(13) Except to the extent permitted by rule or order of the SEC,
participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase
or sale of portfolio securities with Draycott Partners, Ltd.
["Draycott"] or accounts under its management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(14) Write, purchase or sell options or warrants, except that the
Fund may (a) acquire warrants or rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, (b) write, purchase and sell put and
call options on securities, securities indexes, currencies, futures
contracts, swap contracts and other similar instruments and (c)
enter into currency forward contracts;
+(15) Purchase any illiquid security if, as a result, more than 15%
of its total assets (taken at current value) would be invested in
such securities;
(16) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary brokers'
commissions or no commissions. Under the 1940 Act, the Fund may not
(a) invest more than 10% of its total assets (taken at current
value) in such securities, (b) own securities of any one investment
company having a value in excess of 5% of the total assets of the
Fund (taken at current value), or (c) own more than 3% of the
outstanding voting stock of any one investment company; or
*(17) Issue senior securities. For the purpose of this restriction
none of the following is deemed to be a senior security: any pledge
or other encumbrance of assets permitted by restriction (6) above;
any borrowing permitted by restriction (5) above; any collateral
arrangements with respect to options, futures contracts and options
on futures contracts and with respect to initial and variation
margin; the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration
of Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom.
The Fund has given undertakings to certain state regulatory
authorities in connection with the qualification of Fund shares for sale
in such states that its investments in warrants (other than warrants
acquired in units or attached to other securities) will not exceed 5% of
the value of its net assets and that, within that 5%, not more than 2%
of its net assets will be invested in warrants not listed on the New
York or American Stock Exchanges; that it will not invest in commodity
futures contracts or real estate limited partnerships; that it will not
invest more than 5% of its net assets in restricted securities; and that
it will not invest in puts, calls, straddles, spreads or any combination
thereof if by reason thereof the value of its aggregate investment in
such classes of securities will exceed 5% of its total assets. Such
undertakings can be changed without shareholder approval, but the
Statement will be revised to reflect any such changes.
The staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are subject to restriction
(15) above.
New England Growth Opportunities Fund
New England Growth Opportunities Fund (the "Growth Opportunities Fund")
will not:
*(1) Purchase securities of an issuer if such purchase would cause
more than 5% of the market value of the total Fund assets to be
invested in the securities of such issuer (exclusive of United
States or Canadian government obligations), or if such purchase
would cause more than 10% of the securities of such issuer to be
held by the Fund;
*(2) Purchase or retain the securities of any issuer if the officers
and trustees of New England Funds Trust II owning beneficially 1/2 of
1% of the securities of such issuer together own beneficially more
than 5% of the securities of such issuer;
*(3) Purchase the securities issued by any other investment company,
except that a purchase involving no commission or profit to a
sponsor or dealer (other than a customary broker's commission) is
permitted and except that a purchase that is part of a plan of
merger or consolidation is permitted;
*(4) Purchase securities issued by companies with a record
(including that of their predecessors) of less than three years'
continuous operation;
*(5) Purchase securities for the portfolio on margin, make short
sales or make loans to persons affiliated with New England Funds
Trust II;
*(6)Act as underwriter of securities of other issuers, or invest
directly in real estate or in commodities or commodity contracts; or
*(7) Make loans to other persons, provided, however, that this
restriction shall not prohibit the Fund from entering into
repurchase agreements with respect to not more than 25% of the
Fund's total assets taken at current value. The purchase of a
portion of an issue of bonds, notes or debentures publicly
distributed or of a type customarily purchased by institutional
investors does not constitute the making of loans within the meaning
of this restriction.
*(8) The Growth Opportunities Fund may make secured or unsecured
bank borrowings, provided that an asset coverage of at least 300%
for all such borrowings (including the amount then being borrowed)
is maintained as required by the 1940 Act.
*(9) Issue senior securities. For the purpose of this restriction,
none of the following is deemed to be a senior security; any
borrowing permitted by restriction (8) above; any collateral
arrangements with respect to options, futures contracts, swap
contracts and other similar contracts and options on futures
contracts and with respect to initial and variation margin; the
purchase or sale of options, forward contracts, futures contracts,
swap contracts and other similar contracts or options on futures
contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds
Trust II's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
It is a fundamental policy of the Growth Opportunities Fund that it
will not concentrate its assets in the securities of issuers in the same
industry. The Fund intends to abide by the views of the SEC staff on
what constitutes industry concentration. Accordingly, the Fund will not
make an investment if, immediately thereafter, the Fund would hold more
than 25% of its total assets in securities of issuers in any one
industry. This limitation does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
It is contrary to the Growth Opportunities Fund's present policy,
which may be changed without shareholder approval, to:
(a) Purchase interests in oil, gas or other mineral exploration or
development programs, mineral leases;
(b) Write put or call options;
(c) Invest in real estate investments, or
(d) Invest in warrants.
As a matter of operating policy subject to change without
shareholder approval, the Fund will not (1) purchase any security
restricted as to disposition under federal securities laws if as a
result of such purchase more than 10% of the Fund's total net assets
would be invested in such securities; +(2) invest more than 15% of the
Fund's total net assets in illiquid securities; or (3) purchase or sell
real property, including limited partnership interests.
The Growth Opportunities Fund has no present intention of borrowing
money except on a temporary basis, as may be needed; to cover
redemptions of shares. Should this intention change, the Prospectus
will be amended.
FUND CHARGES AND EXPENSES
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Pursuant to an advisory agreement dated September 1, 1993, Capital
Growth Management Limited Partnership ("CGM") has agreed to manage the
investment and reinvestment of the assets of the Growth Fund, subject to
the supervision of the Board of Trustees of New England Funds Trust I.
Under the advisory agreement, the Fund pays CGM an advisory fee at the
annual rate of 0.75% of the first $200 million of the Fund's average
daily net assets, 0.70% of the next $300 million of such assets and
0.65% of such assets in excess of $500 million.
Pursuant to separate advisory agreements, each dated January 2,
1996 (December 29, 1995, in the case of the International Equity Fund),
New England Funds Management, L.P. ("NEFM") has agreed, subject to the
supervision of the Board of Trustees of the relevant Trust, to manage
the investment and reinvestment of the assets of the Capital Growth,
Value, Balanced, International Equity, Star Advisers and Growth
Opportunities Funds and to provide a range of administrative services to
such Funds. For the services described in the advisory agreements, each
such Fund has agreed to pay NEFM a management fee at the annual rate set
forth in the following table:
Management fee payable by Fund to NEFM
Fund (as a percentage of average daily net
assets of the Fund)
Balanced Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
Capital Growth Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
Growth Opportunities 0.70% of the first $200 million
Fund 0.65% of the next $300 million
0.60% of amounts in excess of $500
million
International Equity 0.90% of the first $200 million
Fund 0.85% of the next $300 million
0.80% of amounts in excess of $500
million
Star Advisers Fund 1.05% of all assets
Value Fund 0.75% of the first $200 million
0.70% of the next $300 million
0.65% of amounts in excess of $500
million
The advisory agreements for the Capital Growth, Value, Balanced,
International Equity, Star Advisers and Growth Opportunities Funds each
provide that NEFM may delegate its responsibilities thereunder to other
parties. Pursuant to separate subadvisory agreements, each dated
January 2, 1996 (February 29, 1996, in the case of the International
Equity Fund), NEFM has delegated responsibility for managing the
investment and reinvestment of each of these Funds' assets to a
subadviser. The subadviser is Loomis Sayles, in the case of the
Balanced, Value and Capital Growth Funds; Westpeak Investment Advisors,
L.P. ("Westpeak"), in the case of the Growth Opportunities Fund; and
Draycott, in the case of the International Equity Fund. The Funds pay no
direct fees to the subadvisers. For providing such subadvisory services
to the Funds, NEFM pays each subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable by NEFM
Fund Subadviser to subadviser
(as a percentage of average
daily net assets of the Fund)
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Fund Loomis 0.60% of the first $25 million
Sayles 0.55% of the next $75 million
0.50% of the next $100 million
0.35% of the next $300 million
0.30% of amounts in excess of
$500 million
Growth Westpeak 0.50% of the first $25 million
Opportunities Fund 0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of
$200 million
International Draycott 0.54% of the first $200 million
Equity Fund 0.49% of the next $300 million
0.44% of amounts in excess of
$500 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
As explained in the Prospectus, the Star Advisers Fund's portfolio
is divided into four segments. Pursuant to separate subadvisory
agreements, each dated January 2, 1996, NEFM has delegated
responsibility for managing the investment and reinvestment of the
assets of each segment of the portfolio to a different subadviser. The
four subadvisers are Berger Associates, Inc. ("Berger"), Founders Asset
Management, Inc. ("Founders"), Janus Capital Corporation ("Janus
Capital") and Loomis Sayles. For providing such subadvisory services to
the Fund, NEFM pays each subadviser a subadvisory fee at the annual rate
of 0.55% of the first $50 million of the average daily net assets of the
segment of the Fund managed by that subadviser and 0.50% of such assets
in excess of $50 million.
Prior to January 2, 1996, Loomis Sayles served as adviser to the
Capital Growth, Balanced and Value Funds pursuant to separate advisory
agreements, each of which provided for an advisory fee payable by such
Fund to Loomis Sayles at the same rate as the management fee currently
payable by such Fund to NEFM.
From May 1, 1995 until January 2, 1996, NEFM served as adviser and
Westpeak served as subadviser to the Growth Opportunities Fund pursuant
to advisory and subadvisory agreements providing for the same advisory
and subadvisory fee rates as are currently in effect for the Fund.
Prior to May 1, 1995, Back Bay Advisors, L.P. ("Back Bay Advisors")
served as adviser to the Growth Opportunities Fund pursuant to an
advisory agreement providing for an advisory fee payable by the Fund to
Back Bay Advisors at the annual rate of 0.50% of the Fund's average
daily net assets.
Prior to January 2, 1996, New England Investment Companies, L.P.
("NEIC") served as adviser to the Star Advisers Fund pursuant to an
advisory agreement providing for a management fee payable by the Fund to
NEIC at the same rate as the management fee currently payable by such
Fund to NEFM.
Prior to December 29, 1995, Draycott served as adviser to the
International Equity Fund pursuant to an advisory agreement providing
for an advisory fee payable by the Fund to Draycott at the annual rate
of 0.80% of the first $200 million of the Fund's average daily net
assets, 0.75% of the next $300 million of such assets and 0.70% of such
assets in excess of $500 million.
Prior to December 29, 1995, short-term cash management services
were provided to the International Equity Fund by Back Bay Advisors, a
subadviser to Draycott. For these services, Draycott had agreed to
compensate Back Bay Advisors at the annual rate of 0.08% of average
daily net assets of the Fund. Back Bay Advisors voluntarily agreed to
waive this fee in its entirety.
Prior to December 29, 1995, New England Funds, L.P. (the
"Distributor"), of which Draycott was then an affiliate, furnished or
paid the expenses of the International Equity Fund for office space,
facilities and equipment, services of executive and other personnel of
New England Funds Trust I and certain administrative services, pursuant
to an administrative services agreement. Under this agreement, the Fund
paid the Distributor a fee at the annual rate of 0.10% of the average
daily net assets attributable to the Fund's Class A, Class B and Class C
shares and 0.05% of the average daily net assets attributable to the
Fund's Class Y shares. The International Equity Fund's current
management fee rate represents, with respect to the Fund's Class A,
Class B and Class C shares, the sum of the fee rates under the prior
advisory and administrative services agreements.
Until further notice to the International Equity Fund, NEFM and the
Distributor have voluntarily agreed to reduce their fees and, if
necessary, to bear certain expenses related to operating the Fund in
order to limit the Fund's expenses to an annual rate of 1.75% of the
average daily net assets of the Fund's Class A shares, 2.50% of the
average daily net assets of the Fund's Class B shares, 2.50% of the
average daily net assets of the Fund's Class C shares and 1.00% of the
average daily net assets of the Fund's Class Y shares. NEFM and the
Distributor may terminate these voluntary limitations at any time.
Prior to December 29, 1995, similar voluntary limitations were in effect
with respect to Draycott, the Distributor and the Fund.
For the last three fiscal years, the advisory fees for the Funds (before
any voluntary fee reductions) were:
Fund 1993 1994 1995
Growth Fund $8,074,472 $7,572,051 $7,631,203
Capital Growth Fund $ 558,088 $ 834,943 $ 989,864
Value Fund $1,287,064 $1,543,333 $1,811,567
Balanced Fund $ 954,586 $1,498,050 $1,906,665
International Equity $ 387,348 $1,541,223 $2,025,005
Fund*
Growth Opportunities $ 511,327 $ 555,258 $ 856,469
Star Advisers Fund** $ 569,280 $3,599,730
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $171,250, $1,449,606 and $1,756,405,
respectively, in advisory fees for the fiscal years ended December
31, 1993, 1994 and 1995.
**The Star Advisers Fund commenced operations on July 7, 1994. As a
result of the voluntary expense limitation in effect, the Star
Advisers Fund paid $543,254 and $3,599,730, respectively, in advisory
fees for the period July 7, 1994 through December 31, 1994 and for
the fiscal year ended December 31, 1995.
For the period from the commencement of the Star Advisers Fund's
operations in July 1994 until December 31, 1994, NEIC and the
subadvisers of the Star Advisers Fund voluntarily agreed to reduce their
compensation. As a result of this voluntary agreement, the compensation
paid by the Fund to NEIC for this period was at the annual rate of 1.00%
of the Fund's average daily net assets, and the compensation paid by
NEIC to each subadviser was at the annual rate of 0.50% of the average
daily net assets of the segment of the Fund's portfolio managed by that
subadviser. Without the voluntary limitations, estimated compensation
paid to NEIC would have been at the annual rate of 1.05% of the Fund's
average daily net assets and the compensation paid by NEIC to each
subadviser would be been at the annual rate of 0.55% of the average
daily net assets of the segment of the Fund's portfolio managed by that
subadviser.
For more information about the Funds' advisory and subadvisory
agreements, see "Management of the Trusts" in Part II of this Statement.
BROKERAGE COMMISSIONS
In 1993, 1994 and 1995, brokerage transactions for the Growth Fund
aggregating $3,159,418,968, $3,048,679,127 and $4,526,450,414,
respectively, were allotted to brokers providing research services, and
$4,896,039, $4,187,824 and $5,685,876, respectively, in commissions were
paid on these transactions in such years. During 1993, 1994 and 1995
the Fund paid total brokerage commissions of $5,204,339, $4,305,999 and
$5,784,166, respectively.
In 1993, 1994 and 1995, brokerage transactions for the Value Fund
aggregating $10,177,146, $9,382,814 and $14,560,184, respectively, were
allotted to brokers providing research services, and $14,608, $14,664
and $28,143, respectively, in commissions were paid on these
transactions in such years. During 1993, 1994 and 1995, the Fund paid
total brokerage commissions of $290,786, $342,576.50 and $658,975,
respectively.
In 1993, 1994 and 1995, brokerage transactions for the Balanced
Fund aggregating $12,509,788, $14,761,967 and $12,187,184, respectively,
were allotted to brokers providing research services, and $18,540,
$28,267 and $30,368, respectively, in commissions were paid on these
transactions in such years. During 1993, 1994 and 1995, the Fund paid
total brokerage commissions of $188,608, $159,243 and $415,773,
respectively.
In 1993, 1994 and 1995, the Growth Opportunities Fund paid
aggregate brokerage commissions of $27,372, $9,427 and $138,878,
respectively.
For the fiscal year ended December 31, 1993, brokerage transactions
for the International Equity Fund and the Capital Growth Fund
aggregating $141,224,000 and $84,641,249, respectively, were allocated
to brokers providing research services, and $376,365 and $108,879,
respectively, in commissions were paid on these transactions. During
1993, the International Equity Fund and the Capital Growth Fund paid
total brokerage commissions of $376,365 and $156,966, respectively. For
the fiscal year ended December 31, 1994, brokerage transactions for the
International Equity Fund and the Capital Growth Fund aggregating
$482,619,468 and $135,445,676, respectively, were allocated to brokers
providing research services, and $1,173,745 and $10,615, respectively,
in commissions were paid on these transactions. During 1994, the
International Equity Fund and the Capital Growth Fund paid total
brokerage commissions of $1,173,745 and $191,861, respectively. For the
fiscal year ended December 31, 1995, brokerage transactions for the
International Equity Fund and the Capital Growth Fund aggregating
$593,996,591 and $130,894,587, respectively, were allocated to brokers
providing research services and $1,446,337 and $157,512, respectively,
in commissions were paid on these transactions. During 1995, the
International Equity Fund and the Capital Growth Fund paid total
brokerage commissions of approximately $1,446,337 and $157,512,
respectively.
For the period July 7, 1994 (commencement of operations) to
December 31, 1994 and the fiscal year ended December 31, 1995, brokerage
transactions for the Star Advisers Fund aggregating $44,236,466 and
$191,214,413, respectively, were allocated to brokers providing research
services, and $172,408 and $614,183, respectively, in commissions were
paid these transactions. For the period July 7, 1994 to December 31,
1994 and the fiscal year ended December 31, 1995, the Fund paid total
brokerage commissions of $172,408 and $614,183, respectively.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and
Class C shares of each Fund pay fees under plans adopted pursuant to
Rule 12b-1 under the 1940 Act. The following table shows the amounts of
Rule 12b-1 fees paid by each Fund during the fiscal years ended December
31, 1993, 1994 and 1995:
Fund 1993 1994 1995
Growth Fund $2,970,951 $2,777,712 $2,800,465 (Class A)
Value Fund $429,022 $489,686 $545,439 (Class A)
$2,966 $81,490 $206,005 (Class B)*
$3,915 (Class C)**
Balanced Fund $318,195 $401,403 $445,951 (Class A)
$6,196 $141,331 $301,592 (Class B)*
$3,017 (Class C)**
Growth $357,066 $376,217 $340,216 (Class A)
Opportunities $2,469 $35,609 $107,138 (Class B)*
Fund $3,589 (Class C)***
Star Advisers $68,910 $404,530 (Class A)
Fund**** $204,766 $1,458,476 (Class B)
$62,604 $327,977 (Class C)
International $112,228 $341,787 $346,710 (Class A)
Equity Fund $13,893 $262,144 $476,345 (Class B)*
$5,831 (Class C)**
Capital Growth $183,521 $247,956 $277,682 (Class A)
Fund $10,030 $121,432 $207,706 (Class B)*
$1,362 (Class C)**
* Class B shares were first offered on September 13, 1993.
** Class C shares were first offered on January 3, 1995.
*** Growth Opportunities Fund Class C shares were first
offered on May 1, 1995.
*** The Star Advisers Fund commenced operations on July 7,
* 1994.
During the fiscal year ended December 31, 1995, expenses relating
to each Fund's 12b-1 plans were as follows:
Growth Fund
Compensation to Investment Dealers $2,800,486
Compensation to Distributor's Sales Personnel $0
TOTAL $2,800,486
Value Fund
(Class A shares)
Compensation to Investment Dealers $545,760
Compensation to Distributor's Sales Personnel $0
TOTAL $545,760
(Class B shares)
Compensation to Investment Dealers $390,701
TOTAL $390,701
(Class C shares)
Compensation to Investment Dealers $3,915
Compensation to Distributor's Sales Personnel $0
TOTAL $3,915
Balanced Fund
(Class A shares)
Compensation to Investment Dealers $446,230
Compensation to Distributor's Sales Personnel $0
TOTAL $446,230
(Class B shares)
Compensation to Investment Dealers $626,248
TOTAL $626,248
(Class C shares)
Compensation to Investment Dealers $3,017
Compensation to Distributor's Sales Personnel $0
TOTAL $3,017
Growth Opportunities Fund
(Class A shares)
Compensation to Investment Dealers $304,910
Compensation to Distributor's Sales Personnel $35,306
TOTAL $340,217
(Class B shares)
Compensation to Investment Dealers $779,939
TOTAL $779,939
(Class C shares)
Compensation to Investment Dealers $5,588
Compensation to Distributor's Sales Personnel $0
TOTAL $5,588
Star Advisers Fund
(Class A shares)
Compensation to Investment Dealers $406,208
Compensation to Distributor's Sales Personnel $0
TOTAL $406,208
(Class B shares)
Compensation to Investment Dealers $4,567,857
TOTAL $4,567,857
(Class C shares)
Compensation to Investment Dealers $327,977
TOTAL $327,977
International Equity Fund
(Class A shares)
Compensation to Investment Dealers $346,104
Compensation to Distributor's Sales Personnel $605
TOTAL $346,710
(Class B shares)
Compensation to Investment Dealers $655,446
TOTAL $655,446
(Class C shares)
Compensation to Investment Dealers $5,831
Compensation to Distributor's Sales Personnel $0
TOTAL $5,831
Capital Growth Fund
(Class A shares)
Compensation to Investment Dealers $277,675
Compensation to Distributor's Sales Personnel $7
TOTAL $277,682
(Class B shares)
Compensation to Investment Dealers $308,412
TOTAL $308,412
(Class C shares)
Compensation to Investment Dealers $1,362
Compensation to Distributor's Sales Personnel $0
TOTAL $1,362
Of the amounts listed above as compensation to investment dealers,
the following amounts were paid by the Distributor to New England
Securities Corporation ("New England Securities"), a broker-dealer
affiliate of the Distributor: $2,223,363 relating to the Growth Fund;
$482,105 relating to the Class A shares, $345,495 relating to the Class
B shares and $1,278 relating to the Class C shares of the Value Fund;
$387,181 relating to the Class A shares, $503,830 relating to the Class
B shares and $1,606 relating to the Class C shares of the Balanced Fund;
$106,272 relating to the Class A shares, $297,832 relating to the Class
B shares and $0 relating to the Class C shares of the Growth
Opportunities Fund; $266,394 relating to the Class A shares, $2,052,764
relating to the Class B shares and $59,625 relating to the Class C
shares of the Star Advisers Fund; $247,105 relating to the Class A
shares, $439,856 relating to the Class B shares and $1,262 relating to
the Class C shares of the International Equity Fund; and $217,870
relating to the Class A shares, $269,249 relating to the Class B shares
and $0 relating to the Class C shares of the Capital Growth Fund. New
England Securities paid substantially all of the fees it received from
the Distributor (a) in commissions to its sales personnel and (b) to
defray sales-related overhead costs.
OWNERSHIP OF FUND SHARES
At April 1, 1996, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding Class A
shares and Class B shares of the indicated Funds:
Balanced Fund
Class C shares State Street Bank and Trust 12.85%
Company
Custodian for the IRA Rollover of
Paula S. Holmberg
13490 Braun Road
Golden, CO 80401-1647
Great Lakes Elevator, Inc. 7.05%
Employees 401(k) Plan
401 Hall Street, SW, Box 9
Grand Rapids, MI 49503-5098
Bond Income Fund
Class C shares Resources Trust Company Trust IRA 30.55%
FBO Barbara J. Scioscia
P.O. Box 5900
Denver, CO 80217-5900
State Street Bank and Trust 6.42%
Company
Custodian for the IRA of
William J. Walker
11 Saddle Club Road
Lexington, MA 02173-2102
Capital Growth
Fund
Class C shares State Street Bank and Trust 8.68%
Company for the IRA
Rollover of
Brain C. Thayer
4 Joel Avenue
Manchester, ME 04351-9543
State Street Bank and Trust 7.64%
Company
Custodian for the IRA
Rollover of
William J. Walker
11 Saddle Club Road
Lexington, MA 02173-2102
Larry A. Minnick 7.23%
8105 Bromlay Place
Indianapolis, IN 46219-2851
Donaldson Lufkin Jenrette 6.41%
Securities Corporation,
Inc.
P.O. Box 2052
Jersey City, NJ 07303-2851
Raymond James & Associates, 6.28%
Inc.
Norman P. Swafford IRA
Rollover
2236 E. Rock Creek Road
Arnold, MO 63010-3605
Smith Barney, Inc. 6.03%
388 Greenwich Street
New York, NY 10013-2375
State Street Bank and Trust 5.56%
Company
Custodian for the IRA
Rollover of
Rita D. Kiehle
1716 8th Street, NW
Grand Rapids, MI 49504-3905
Wanda N. Burkett 5.08%
Kenneth D. Burkett
40 Twining Road
Taos Ski Valley, NM 87525
Growth Opportunities Fund
Class C shares State Street Bank and Trust 9.00%
Company
Custodian for the IRA of
Michael R. Handzo
1605 Belvue Drive
Forest Hill, MD 21050-2508
Smith Barney 6.15%
388 Greenwich Street
New York, NY 10013-2375
Lorayne Carberry 5.95%
1672 Canton Avenue
Milton, MA 02186-2316
International
Equity Fund
Class C shares PaineWebber for the Benefit 8.24%
of
Polly P. White
240 S. High Haro Avenue
Friday Harbor, WA 98250-
9442
PaineWebber for the Benefit 5.54%
of
Karen J. Foley
12 Walden Oaks
St. Joseph, MO 64505-9400
PaineWebber for the Benefit 5.37%
of
First Minnetonka City Bank
14550 Excelsior Boulevard
Minnetonka, MN 55345-5822
Class Y shares New England Mutual Life 51.08%
Insurance Company, Separate
Investment Accounting
501 Boylston Street, 6th
Floor
Boston, MA 02116-3706
First Bank North as agent 11.50%
holding shares for
BHS Custody Agency UAD
P.O. Box 64010
St. Paul, MN 55164-0010
Walker Art Center 8.14%
Vineland Place
Minneapolis, MN 55403
The New England 6.12%
Progress Sharing Plan
501 Boylston Street
Boston, MA 02116-3706
Star Advisers
Fund
Class Y shares New England Mutual Life 100.00%
Insurance Company, Separate
Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
Value Fund
Class Y shares New England Mutual Life 100.00%
Insurance Company, Separate
Investment Accounting
501 Boylston Street
Boston, MA 02116-3706
INVESTMENT PERFORMANCE OF THE FUNDS
Performance Results - Percent Change*
For The Periods Ended 12/31/95
Growth Fund
Aggregate Average Annual
Total Return Total Return
As a % of 1 5 10 5 10
Year Years Years Years Years
Net Asset Value 38.06 108.9 282.79 15.88 14.37
8
Maximum Offering Price 29.04 95.30 258.03 14.32 13.60
Value Fund
Aggregate Average Annual
Total Return Total Return
Class A shares: As a % 1 5 10 5 10
of Year Years Years Years Years
Net Asset Value 32.32 126.2 224.79 17.74 12.50
8
Maximum Offering Price 24.76 113.3 206.05 16.36 11.84
4
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 37.31 36.81 14.60
Redemption at End of 27.31 33.81 13.50
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class C shares: As a % of 12/30/94** 12/30/94**
Net Asset Value 31.31 31.31
Aggregate Annualized
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
Net Asset Value 32.75 35.91 19.16
Balanced Fund
Aggregate Average Annual
Total Return Total Return
Class A shares: As a % of 1 5 10 5 10
Year Years Years Years Years
Net Asset Value 26.32 106.65 176.0 15.62 10.69
2
Maximum Offering Price 19.03 94.87 160.1 14.27 10.03
4
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 25.32 25.09 10.22
Redemption at End of 21.32 22.08 9.06
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class C shares: As a % of 12/30/94** 12/30/94**
Net Asset Value 25.19 25.19
Aggregate Average Annual
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/8/94** 3/08/94**
Net Asset Value 26.84 23.28 12.25
Growth Opportunities Fund***
Aggregate Average
Total Return Annual
Total Return
Class A shares: As a % of 1 5 10 5 10
Year Years Years Years Years
Net Asset Value 35.12 110.25 217.19 16.02 12.24
Maximum Offering Price 27.29 98.15 199.04 14.66 11.58
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 34.34 35.90 14.26
Redemption at End of 30.34 32.89 13.16
Period
Aggregate Average Annual
Total Return Total Return
Since Since
Class C shares: As a % of 5/1/95** 5/1/95**
Net Asset Value 20.15 20.15
Aggregate Annualized
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
Net Asset Value n/a n/a n/a
Star Advisers Fund
Aggregate Average Annual
Total Return Total Return
Since Since
Class A shares: As a % of 1 Year 7/7/94** 7/7/94**
Net Asset Value 34.36 42.93 27.29
Maximum Offering Price 26.62 34.74 22.32
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 7/7/94** 7/7/94**
Net Asset Value 33.41 41.41 26.38
Redemption at End of 29.41 38.41 24.56
Period
Aggregate Average Annual
Total Return Total Return
Since Since
Class C shares: As a % of 1 Year 7/7/94** 7/7/94**
Net Asset Value 33.39 n/a 26.40
Redemption at End of n/a n/a n/a
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class Y shares: As a % of 1 3/31/94 3/31/94
Year ** **
Net Asset Value 34.77 31.94 27.73
International Equity Fund****
Aggregate Average Annual
Total Return Total Return
Since Since
Class A shares: As a % of 1 Year 5/21/92** 5/21/92**
Net Asset Value 5.78 40.54 9.88
Maximum Offering Price -0.33 32.48 8.10
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 5.02 13.07 5.49
Redemption at End of 1.02 10.07 4.26
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class C shares: As a % of 12/30/94** 12/30/94**
Net Asset Value 5.22 5.26
Aggregate Average Annual
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 9/9/93** 9/13/93**
Net Asset Value 6.56 16.92 7.00
Capital Growth Fund*****
Aggregate Average Annual
Total Return Total Return
Since Since
Class A shares: As a % of 1 Year 8/3/92** 8/3/92**
Net Asset Value 30.68 59.37 14.64
Maximum Offering Price 23.14 50.31 12.68
Aggregate Average Annual
Total Return Total Return
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
Net Asset Value 29.73 31.32 12.58
Redemption at End of 25.73 28.32 11.45
Period
Aggregate Annualized
Total Return Total Return
Since Since
Class C shares: As a % of 12/30/94** 12/30/94**
Net Asset Value 29.66 29.66
Aggregate Average Annual
Total Return Total Return
Since Since
Class Y shares: As a % of 1 Year 3/31/94 3/31/94
** **
Net Asset Value n/a n/a n/a
* Federal regulations require this example to be calculated using a
$1,000 investment. The normal minimum initial investment in shares of
the Funds is $2,500, however.
**Commencement of Fund operations or offering of specified class of
shares.
*** Assuming deduction of the current maximum sales load, the Growth
Opportunities Fund's Class A shares' ten-year average annual total
return would have been 11.52%, had a voluntary expense limitation by
the Fund's former investment adviser not been in effect, and their ten-
year aggregate total return would have been 198.98%. Based on net
asset values, the Fund's Class A shares' ten-year average annual total
return would have been 12.18%, had this limitation not been in effect,
and their ten-year aggregate total return would have been 217.13%.
**** Assuming deduction of the current maximum sales load, the
International Equity Fund's Class A shares' since-inception average
annual total return would have been 6.03%, and their aggregate one-
year and since-inception total returns would have been 0.41% and
30.41%, respectively, had a voluntary expense limitation not been in
effect. Based on net asset values, the Fund's Class A shares' since-
inception average annual total return would have been 38.47%, and
their one-year and since-inception aggregate total returns would have
been 5.07% and 40.56%, respectively, without the voluntary limitation.
Assuming redemption at the end of the period, the Fund's Class B
shares' since-inception average annual total return would have been
3.37%, had a voluntary expense limitation not been in effect, and
their aggregate total returns for the one-year and since-inception
periods would have been 0.94% and 9.09%, respectively. Based on net
asset values, the Fund's Class B shares' average annual total return
for the since-inception period would have been 4.51%, and their
aggregate total returns for the one-year and since-inception periods
would have been 4.94% and 12.09%, respectively, without the voluntary
limitation. The Fund's Class C and Class Y shares' annualized total
returns for the since-inception period would have been 5.18% and
6.40%, respectively, and their since-inception aggregate total returns
would have been 5.14% and 16.32%, respectively, without the voluntary
limitation.
*****Assuming deduction of the current maximum sales load, the Capital
Growth Fund's Class A shares' since-inception average annual total
return would have been 11.13%, and their aggregate one-year and since-
inception total returns would have been 23.14% and 48.76%,
respectively, had a voluntary expense limitation not been in effect.
Based on net asset values, their since-inception average annual total
return would have been 13.09%, and their one-year and since inception
aggregate total returns would have been 30.69% and 57.90%,
respectively, without the voluntary limitation. Assuming redemption
at the end of the period, the Fund's Class B shares' since-inception
average annual return would have been 11.45%, and their one-year and
since-inception aggregate total returns would have been 25.73% and
28.32%, respectively, without the voluntary limitation. Based on net
asset values, the Fund's Class B shares' since-inception average
annual total return would have been 12.58%, and their one-year and
since-inception aggregate total returns would have been 29.73% and
31.32%, respectively, without the voluntary limitation. The Fund's
Class C shares' average annual total return for the since-inception
period would have been 29.66%, and their aggregate one-year and since-
inception total returns would have been 29.66% and 29.66%,
respectively, without the voluntary limitation. The Fund's Class Y
shares' since-inception average annual total return would have been
n/a%, and their one-year and since-inception aggregate total returns
would have been n/a% and n/a%, respectively, without the voluntary
limitation.
The foregoing data represent past performance only and are not a
prediction as to the future returns of any Fund. The investment return
and principal value of an investment in any Fund will fluctuate so that
the investor's shares, when redeemed, may be worth more or less than
this original cost.
[NEF Logo]
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
Statement of Additional Information -- PART II
May 1, 1996
The following information applies generally to the funds listed
below (the "Funds" and each a "Fund"). The Funds constitute all of the
series of New England Funds Trust I and New England Funds Trust II (the
"Trusts" and each a "Trust"), except for New England Star Worldwide
Fund, a series of New England Funds Trust I, and Growth Fund of Israel,
a series of New England Funds Trust II, each of which are described in
separate Statements of Additional Information. In certain cases, the
discussion applies to some but not all of the Funds. Certain data
applicable to particular Funds is found in Part I of this Statement of
Additional Information (the "Statement") as well as in the Prospectuses
of the Funds dated May 1, 1996 (the "Prospectuses"). The following
Funds are described in this Statement:
Series of New England Funds Trust I
New England Capital Growth Fund (the "Capital Growth Fund")
New England Balanced Fund (the "Balanced Fund")
New England Growth Fund (the "Growth Fund")
New England International Equity Fund (the "International Equity
Fund")
New England Star Advisers Fund (the "Star Advisers Fund")
New England Value Fund (the "Value Fund")
New England Government Securities Fund (the "Government Securities
Fund")
New England Strategic Income Fund (the "Strategic Income
Fund")
New England Bond Income Fund (the "Bond Income Fund")
New England Municipal Income Fund (the "Municipal Income
(formerly named New England Tax Fund")
Exempt Income Fund)
Series of New England Fund Trust II
New England Growth Opportunities Fund (the "Growth Opportunities
Fund")
New England Limited Term U.S. (the "Limited Term U.S.
Government Fund Government Fund")
New England Adjustable Rate U.S. (the "Adjustable Rate Fund")
Government Fund
New England High Income Fund (the "High Income Fund")
New England Massachusetts Tax Free (the "Massachusetts Fund")
Income Fund
New England Intermediate Term Tax Free (the "California Fund')
Fund of California
New England Intermediate Term Tax Free (the "New York Fund")
Fund of New York
MISCELLANEOUS INVESTMENT PRACTICES
The following information relates to certain investment practices
in which certain Funds may engage. The table below indicates which
Funds may engage in each of these practices.
Practices Funds
Loans of Portfolio Securities Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
High Income Fund
Adjustable Rate Fund
International Equity Fund
Star Advisers Fund
Strategic Income Fund
U.S. Government Securities All Funds
When-Issued Securities Star Advisers Fund
Government Securities Fund
Bond Income Fund
Municipal Income Fund
High Income Fund
Limited Term U.S. Government Fund
California Fund
Massachusetts Fund
New York Fund
Adjustable Rate Fund
Strategic Income Fund
Repurchase Agreements All Funds
Zero Coupon Securities All Funds
Convertible Securities Value Fund
Balanced Fund
Growth Opportunities Fund
High Income Fund
International Equity Fund
Capital Growth Fund
Star Advisers Fund
Strategic Income Fund
Bond Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Futures, Options and Swap Government Securities Fund
Contracts Municipal Income Fund
Limited Term U.S. Government Fund
International Equity Fund
Star Advisers Fund
California Fund
New York Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Massachusetts Fund
Growth Opportunities Fund
Foreign Currency Transactions International Equity Fund
Balanced Fund
Capital Growth Fund
Value Fund
Star Advisers Fund
Strategic Income Fund
Bond Income Fund
Loans of Portfolio Securities. The Fund may lend its portfolio
securities to broker-dealers under contracts calling for cash
collateral equal to at least the market value of the securities loaned,
marked to the market on a daily basis. The Fund will continue to
benefit from interest or dividends on the securities loaned and will
also receive interest through investment of the cash collateral in
short-term liquid investments, which may include shares of money market
funds subject to any investment restriction listed in Part I of this
Statement. Any voting rights, or rights to consent, relating to
securities loaned pass to the borrower. However, if a material event
affecting the investment occurs, such loans will be called so that the
securities may be voted by the Fund. The Fund pays various fees in
connection with such loans, including shipping fees and reasonable
custodian and placement fees approved by the boards of trustees of the
Trusts or persons acting pursuant to the direction of the boards.
These transactions must by fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default
on its obligation and the Fund is delayed in or prevented from
recovering the collateral.
U.S. Government Securities. The Fund may invest in some or all of the
following U.S. Government securities:
" U.S. Treasury Bills - Direct obligations of the United States
Treasury which are issued in maturities of one year or less. No
interest is paid on Treasury bills; instead, they are issued at a
discount and repaid at full face value when they mature. They are
backed by the full faith and credit of the United States Government.
" U.S. Treasury Notes and Bonds - Direct obligations of the United
States Treasury issued in maturities that vary between one and 40 years,
with interest normally payable every six months. These obligations are
backed by the full faith and credit of the United States Government.
" "Ginnie Maes" - Debt securities issued by a mortgage banker or
other mortgagee which represent an interest in a pool of mortgages
insured by the Federal Housing Administration or the Farmer's Home
Administration or guaranteed by the Veterans Administration. The
Government National Mortgage Association ("GNMA") guarantees the timely
payment of principal and interest when such payments are due, whether or
not these amounts are collected by the issuer of these certificates on
the underlying mortgages. An assistant attorney general of the United
States has rendered an opinion that the guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family or multi-family residential mortgage
pools backing an issue of Ginnie Maes have a maximum maturity of up to
30 years. Scheduled payments of principal and interest are made to the
registered holders of Ginnie Maes (such as the Fund) each month.
Unscheduled prepayments may be made by homeowners, or as a result of a
default. Prepayments are passed through to the registered holder (such
as the Fund, which reinvests any prepayments) of Ginnie Maes along with
regular monthly payments of principal and interest.
" "Fannie Maes" - The Federal National Mortgage Association ("FNMA")
is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of
approved seller/servicers. Fannie Maes are pass-through securities
issued by FNMA that are guaranteed as to timely payment of principal and
interest by FNMA but are not backed by the full faith and credit of the
United States Government.
" "Freddie Macs" - The Federal Home Loan Mortgage Corporation
("FHLMC") is a corporate instrumentality of the United States
Government. Freddie Macs are participation certificates issued by FHLMC
that represent an interest in residential mortgages from FHLMC's
National Portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but Freddie Macs are not backed by the
full faith and credit of the United States Government.
U.S. Government securities generally do not involve the credit
risks associated with investments in other types of fixed-income
securities, although, as a result, the yields available from U.S.
Government securities are generally lower than the yields available
from corporate fixed-income securities. Like other fixed-income
securities, however, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of portfolio
securities will not affect interest income on existing portfolio
securities but will be reflected in the Fund's net asset value. Since
the magnitude of these fluctuations will generally be greater at times
when the Fund's average maturity is longer, under certain market
conditions the Fund may, for temporary defensive purposes, accept lower
current income from short-term investments rather than investing in
higher yielding long-term securities.
When-Issued Securities. The Fund may enter into agreements with banks
or broker-dealers for the purchase or sale of securities at an agreed-
upon price on a specified future date. Such agreements might be
entered into, for example, when the Fund anticipates a decline in
interest rates and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later. When
the Fund purchases securities in this manner (i.e., on a when-issued or
delayed-delivery basis), it is required to create a segregated account
with the Trust's custodian and to maintain in that account cash or U.S.
Government securities in an amount equal to or greater than, on a daily
basis, the amount of the Fund's when-issued or delayed-delivery
commitments. The Fund will make commitments to purchase on a when-
issued or delayed-delivery basis only securities meeting the Fund's
investment criteria. The Fund may take delivery of these securities
or, if it is deemed advisable as a matter of investment strategy, the
Fund may sell these securities before the settlement date. When the
time comes to pay for when-issued or delayed-delivery securities, the
Fund will meet its obligations from the then available cash flow or the
sale of securities, or from the sale of the when-issued or delayed-
delivery securities themselves (which may have a value greater or less
than the Fund's payment obligation).
Repurchase Agreements. The Fund may enter into repurchase agreements,
by which the Fund purchases a security and obtains a simultaneous
commitment from the seller to repurchase the security at an agreed-upon
price and date. The resale price is in excess of the purchase price
and reflects an agreed-upon market rate unrelated to the coupon rate on
the purchased security. Such transactions afford the Fund the
opportunity to earn a return on temporarily available cash at
relatively low market risk. While the underlying security may be a
bill, certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the United States Government, the
obligation of the seller is not guaranteed by the United States
Government and there is a risk that the seller may fail to repurchase
the underlying security. In such event, the Fund would attempt to
exercise rights with respect to the underlying security, including
possible disposition in the market. However, the Fund may be subject
to various delays and risks of loss, including (a) possible declines in
the value of the underlying security during the period while the Fund
seeks to enforce its rights thereto, (b) possible reduced levels of
income and lack of access to income during this period and (c)
inability to enforce rights and the expenses involved in the attempted
enforcement.
Zero Coupon Securities. Zero coupon securities are debt obligations
that do not entitle the holder to any periodic payments of interest
either for the entire life of the obligation or for an initial period
after the issuance of the obligations. Such securities are issued and
traded at a discount from their face amounts. The amount of the
discount varies depending on such factors as the time remaining until
maturity of the securities, prevailing interest rates, the liquidity of
the security and the perceived credit quality of the issuer. The
market prices of zero coupon securities generally are more volatile
than the market prices of securities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree
than do non-zero coupon securities having similar maturities and credit
quality. In order to satisfy a requirement for qualification as a
"regulated investment company" under the Internal Revenue Code of 1986,
as amended (the "Code"), the Fund must distribute each year at least
90% of its net investment income, including the original issue discount
accrued on zero coupon securities. Because the Fund will not on a
current basis receive cash payments from the issuer of a zero coupon
security in respect of accrued original issue discount, in some years
the Fund may have to distribute cash obtained from other sources in
order to satisfy the 90% distribution requirement under the Code. Such
cash might be obtained from selling other portfolio holdings of the
Fund. In some circumstances, such sales might be necessary in order to
satisfy cash distribution requirements even though investment
considerations might otherwise make it undesirable for the Fund to sell
such securities at such time.
Convertible Securities. The Fund may invest in convertible securities,
including corporate bonds, notes or preferred stocks of U.S. or foreign
issuers that can be converted into (that is, exchanged for) common
stocks or other equity securities. Convertible securities also include
other securities, such as warrants, that provide an opportunity for
equity participation. Because convertible securities can be converted
into equity securities, their values will normally vary in some
proportion with those of the underlying equity securities. Convertible
securities usually provide a higher yield than the underlying equity,
however, so that the price decline of a convertible security may
sometimes be less substantial than that of the underlying equity
security.
Tax Exempt Bonds. The Fund may invest in tax exempt bonds. Tax exempt
bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as bridges, highways, hospitals, housing, mass
transportation, schools, streets, and water and sewer works. Other
public purposes for which tax exempt bonds may be issued include the
refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to lend to other public
institutions and facilities. In addition, prior to the Tax Reform Act
of 1986, certain debt obligations known as industrial development bonds
could be issued by or on behalf of public authorities to obtain funds
to provide privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity, or sewage
or solid waste disposal. Such obligations are included within the term
"tax exempt bonds" if the interest paid thereon is, in the opinion of
bond counsel, exempt from federal income tax. Interest on certain
industrial development bonds used to fund the construction, equipment,
repair or improvement of privately operated industrial or commercial
facilities may also be exempt from federal income tax. The Tax Reform
Act of 1986 eliminated some types of tax exempt industrial revenues
bonds but retains others under the general category of "private
activity bonds." The interest on so-called "private activity bonds" is
exempt from ordinary federal income taxation but is treated as a tax
preference item in computing a shareholder's alternative minimum tax
liability, as noted in the Prospectus.
The Fund may not be a desirable investment for "substantial users"
of facilities financed by industrial development bonds or for "related
persons" of substantial users.
The two principal classifications of tax exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General
obligation bonds are obligations involving the credit of an issuer
possessing taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or source. The
characteristics and method of enforcement of general obligation bonds
vary according to the law applicable to the particular issuer, and
payment may be dependent upon an appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities, or
in some cases from the proceeds of a special excise or other specific
revenue source such as the user of the facility. Tax exempt industrial
development bonds and private activity bonds are in most cases revenue
bonds and generally are not payable from the unrestricted revenues of
the issuer. The credit and quality of such bonds is usually directly
related to the credit standing of the corporate user of the facilities.
Principal and interest on such bonds is the responsibility of the
corporate user (and any guarantor).
Prices and yields on tax exempt bonds are dependent on a variety
of factors, including general money market conditions, the financial
condition of the issuer, general conditions of the tax exempt bond
market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. A number of these factors,
including the ratings of particular issues, are subject to change from
time to time. Information about the financial condition of an issuer
of tax exempt bonds may not be as extensive as that made available by
corporations whose securities are publicly traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Ratings Group ("Standard & Poor's" or "S&P")
represent their opinions and are not absolute standards of quality.
Tax exempt bonds with the same maturity, interest rate and rating may
have different yields while tax exempt bonds of the same maturity and
interest rate with different ratings may have the same yield.
Obligations of issuers of tax exempt bonds are subject to the
provisions of bankruptcy, insolvency and other laws, such as the
Bankruptcy Reform Act of 1978, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time
for payment of principal or interest, or both, or to impose other
constraints upon enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the
power or ability of issuers to meet their obligations for the payment
of interest and principal on their tax exempt bonds may be materially
affected, or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time
have the effect of introducing uncertainties in the market for tax
exempt bonds or certain segments thereof, or materially affecting the
credit risk with respect to particular bonds. Adverse economic,
business, legal or political developments might affect all or a
substantial portion of the Fund's tax exempt bonds in the same manner.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income tax
exemption for interest on debt obligations issued by states and their
political subdivisions and similar proposals may well be introduced in
the future. If such a proposal were enacted, the availability of tax
exempt securities for investment by the Fund and the value of the
Fund's portfolio could be materially affected, in which event the Fund
would reevaluate its investment objective and policies and consider
changes in the structure of the Fund or dissolution.
All debt securities, including tax exempt bonds, are subject to
credit and market risk. Generally, for any given change in the level
of interest rates, prices for longer maturity issues tend to fluctuate
more than prices for shorter maturity issues. The ability of the Fund
to invest in securities other than tax exempt bonds is limited by a
requirement of the Code that at least 50% of the Fund's total assets be
invested in tax exempt bonds at the end of each calendar quarter.
State Tax Exempt Securities. The Fund may invest in "State Tax Exempt
Securities" which term refers to debt securities the interest from
which is, in the opinion of bond counsel, exempt from federal income
tax and State personal income taxes (other than the possible incidence
of any alternative minimum taxes). State Tax Exempt Securities consist
primarily of bonds of the Fund's named state, their political
subdivisions (for example, counties, cities, towns, villages and school
districts) and authorities issued to obtain funds for various public
purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals,
mass transportation, schools, streets and water and sewer works. Other
public purposes for which certain State Tax Exempt Securities may be
issued include the refunding of outstanding obligations, obtaining
funds for general operating expenses, or obtaining funds to lend to
public or private institutions for the construction of facilities such
as educational, hospital and housing facilities. In addition, certain
types of industrial development bonds and private activity bonds have
been or may be issued by public authorities or on behalf of state or
local governmental units to finance privately operated housing
facilities, sports facilities, convention or trade facilities, air or
water pollution control facilities and certain local facilities for
water supply, gas, electricity or sewage or solid waste disposal.
Other types of industrial development and private activity bonds are
used to finance the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities. Industrial
development bonds and private activity bonds are included within the
term "State Tax Exempt Securities" if the interest paid thereon is, in
the opinion of bond counsel, exempt from federal income tax and State
personal income taxes (other than the possible incidence of any
alternative minimum taxes). The Fund may invest more than 25% of the
value of its total assets in such bonds, but not more than 25% in bonds
backed by non-governmental users in any one industry (see "Investment
Restrictions" in Part I of this Statement). However, as described in
the Fund's Prospectus, the income from certain private activity bonds
is an item of tax preference for purposes of the federal alternative
minimum tax, and it is a fundamental policy of the Fund that
distributions from interest income on such private activity bonds,
together with distributions of interest income on investments other
than State Tax Exempt Securities, will normally not exceed 10% of the
total amount of the Fund's income distributions.
In addition, the term "State Tax Exempt Securities" includes debt
obligations issued by other governmental entities (for example, U. S.
territories) if such debt obligations generate interest income which is
exempt from federal income tax and State personal income taxes (other
than any alternative minimum taxes).
There are, of course, variations in the quality of State Tax
Exempt Securities, both within a particular classification and between
classifications, depending on numerous factors (see Appendix A).
The yields on State Tax Exempt Securities are dependent on a
variety of factors, including general money market conditions, the
financial condition of the issuer, general conditions of the State Tax
Exempt Securities market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of
Moody's and Standard and Poor's represent their opinions as to the
quality of the State Tax Exempt Securities which they undertake to
rate. It should be emphasized, however, that ratings are general and
are not absolute standards of quality. Consequently, State Tax Exempt
Securities with the same maturity, interest rate and rating may have
different yields while State Tax Exempt Securities of the same maturity
and interest rates with different ratings may have the same yield.
Subsequent to its purchase by the Fund, an issue of State Tax Exempt
Securities or other investments may cease to be rated or the rating may
be reduced below the minimum rating required for purchase by the Fund.
Neither event will require the elimination of an investment from the
Fund's portfolio, but the Fund's subadviser will consider such an event
as part of its normal, ongoing review of all the Fund's portfolio
securities.
The Fund does not currently intend to invest in so-called "moral
obligation" bonds, where repayment is backed by a moral commitment of
an entity other than the issuer, unless the credit of the issuer
itself, without regard to the "moral obligation," meets the investment
criteria established for investments by the Fund.
Securities in which the Fund may invest, including State Tax
Exempt Securities, are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Code, and laws, if any, which
may be enacted by Congress or the State legislature extending the time
for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations. There is also the
possibility that as a result of litigation or other conditions the
power or ability of issuers to meet their obligations for the payment
of interest and principal on their State Tax Exempt Securities may be
materially affected or that their obligations may be found to be
invalid and unenforceable.
The Fund's named state and certain of its cities and towns and
public bodies have from time to time encountered financial difficulties
which have adversely affected their respective credit standings and
borrowing abilities. Such difficulties could, of course, affect
outstanding obligations of such entities, including obligations held by
the Fund.
Futures, Options and Swap Contracts
Futures Contracts. A futures contract is an agreement between two
parties to buy and sell a particular commodity (e.g., an interest-
bearing security) for a specified price on a specified future date. In
the case of futures on an index, the seller and buyer agree to settle
in cash, at a future date, based on the difference in value of the
contract between the date it is opened and the settlement date. The
value of each contract is equal to the value of the index from time to
time multiplied by a specified dollar amount. For example, long-term
municipal bond index futures trade in contracts equal to $1000
multiplied by the Bond Buyer Municipal Bond Index, and Standard &
Poor's 500 Index futures trade in contracts equal to $500 multiplied by
the Standard & Poor's 500 Index.
When a trader, such as the Fund, enters into a futures contract,
it is required to deposit with (or for the benefit of) its broker as
"initial margin" an amount of cash or short-term high-quality
securities (such as U.S. Treasury Bills or high-quality tax exempt
bonds acceptable to the broker) equal to approximately 2% to 5% of the
delivery or settlement price of the contract (depending on applicable
exchange rules). Initial margin is held to secure the performance of
the holder of the futures contract. As the value of the contract
changes, the value of futures contract positions increases or declines.
At the end of each trading day, the amount of such increase and decline
is received and paid respectively by and to the holders of these
positions. The amount received or paid is known as "variation margin."
If the Fund has a long position in a futures contract it will establish
a segregated account with the Fund's custodian containing cash or
certain liquid assets 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 high grade liquid debt assets that, when added to the amounts
deposited as margin, equal the market value of the instruments or
currency underlying the futures contracts.
Although futures contracts by their terms require actual delivery
and acceptance of securities (or cash in the case of index futures), in
most cases the contracts are closed out before settlement. A futures
sale is closed by purchasing a futures contract for the same aggregate
amount of the specific type of financial instrument or commodity and
with the same delivery date. Similarly, the closing out of a futures
purchase is closed by the purchaser selling an offsetting futures
contract.
Gain or loss on a futures position is equal to the net variation
margin received or paid over the time the position is held, plus or
minus the amount received or paid when the position is closed, minus
brokerage commissions.
Options. An option on a futures contract obligates the writer, in
return for the premium received, to assume a position in a futures
contract (a short position if the option is a call and a long position
if the option is a put), at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the
holder of the option generally will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option. The premium
paid by the purchaser of an option will reflect, among other things,
the relationship of the exercise price to the market price and
volatility of the underlying contract, the remaining term of the
option, supply and demand and interest rates. Options on futures
contracts traded in the United States may only be traded on a United
States board of trade licensed by the Commodity Futures Trading
Commission (the "CFTC").
An option on a security entitles the holder to receive (in the
case of a call option) or to sell (in the case of a put option) a
particular security at a specified exercise price. An "American style"
option allows exercise of the option at any time during the term of the
option. A "European style" option allows an option to be exercised
only at the end of its term. Options on securities may be traded on or
off a national securities exchange.
A call option on a futures contract written by the Fund is
considered by the Fund to be covered if the Fund owns the security
subject to the underlying futures contract or other securities whose
values are expected to move in tandem with the values of the securities
subject to such futures contract, based on historical price movement
volatility relationships. A call option on a security written by the
Fund is considered to be covered if the Fund owns a security
deliverable under the option. A written call option is also covered if
the Fund holds a call on the same futures contract or security as the
call written where the exercise price of the call held (a) is equal to
or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other high grade
liquid obligations in a segregated account with its custodian.
A put option on a futures contract written by the Fund, or a put
option on a security written by the Fund, is covered if the Fund
maintains cash, U.S. Treasury bills or other high-grade liquid debt
obligations 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 cash, U.S.
Treasury bills or other high-grade liquid obligations used to secure
the closed put option. Also, effecting a closing transaction will
permit the cash or proceeds from the concurrent sale of any futures
contract or securities subject to the option to be used for other Fund
investments. If the Fund desires to sell particular securities
covering a written call option position, it will close out its position
or will designate from its portfolio comparable securities to cover the
option prior to or concurrent with the sale of the covering securities.
The Fund will realize a profit from closing out an option if the
price of the offsetting position is less than the premium received from
writing the option or is more than the premium paid to purchase the
option; the Fund will realize a loss from closing out an option
transaction if the price of the offsetting option position is more than
the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market
price of a call option will generally reflect increases in the market
price of the covering securities, any loss resulting from the closing
of a written call option position is expected to be offset in whole or
in part by appreciation of such covering securities.
Since premiums on options having an exercise price close to the
value of the underlying securities or futures contracts usually have a
time value component (i.e., a value that diminishes as the time within
which the option can be exercised grows shorter) an option writer may
profit from the lapse of time even though the value of the futures
contract (or security in some cases) underlying the option (and of the
security deliverable under the futures contract) has not changed.
Consequently, profit from option writing may or may not be offset by a
decline in the value of securities covering the option. If the profit
is not entirely offset, the Fund will have a net gain from the options
transaction, and the Fund's total return will be enhanced. Likewise,
the profit or loss from writing put options may or may not be offset in
whole or in part by changes in the market value of securities acquired
by the Fund when the put options are closed.
As an alternative to purchasing call and put options on index
futures, the Fund may purchase or sell call or put options on the
underlying indices themselves. Such options would be used in a manner
identical to the use of options on index futures.
The Fund may purchase put warrants and call warrants whose values
vary depending on the change in the value of one or more specified
securities indices ("index warrants"). Index warrants are generally
issued by banks or other financial institutions and give the holder the
right, at any time during the term of the warrant, to receive upon
exercise of the warrant a cash payment from the issuer based on the
value of the underlying index at the time of exercise. In general, if
the value of the underlying index rises above the exercise price of the
index warrant, the holder of a call warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference
between the value of the index and the exercise price of the warrant;
if the value of the underlying index falls, the holder of a put warrant
will be entitled to receive a cash payment from the issuer upon
exercise based on the difference between the exercise price of the
warrant and the value of the index. The holder of a warrant would not
be entitled to any payments from the issuer at a time when, in the case
of a call warrant, the exercise price is less than the value of the
underlying index, or in the case of a put warrant, the exercise price
is less than the value of the underlying index. If the Fund were not
to exercise an index warrant prior to its expiration, then the Fund
would lose the amount of the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to
its use of options on securities indices. The risks of the Fund's use
of index warrants are generally similar to those relating to its use of
index options. Unlike most index options, however, index warrants are
issued in limited amounts and are not obligations of a regulated
clearing agency, but are backed only by the credit of the bank or other
institution which issues the warrant. Also, index warrants generally
have longer terms than index options. Although the Fund will normally
invest only in exchange-listed warrants, index warrants are not likely
to be as liquid as certain index options backed by a recognized
clearing agency. In addition, the terms of index warrants may limit
the Fund's ability to exercise the warrants at such time, or in such
quantities, as the Fund would otherwise wish to do.
The Fund may buy and write options on foreign currencies in a
manner similar to that in which futures or forward contracts on foreign
currencies will be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even
if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of the portfolio
securities, the Fund may buy put options on the foreign currency. If
the value of the currency declines, the Fund will have the right to
sell such currency for a fixed amount in U.S. dollars, thereby
offsetting, in whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in
which securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Fund may buy call options
on the foreign currency. The purchase of such options could offset, at
least partially, the effects of the adverse movements in exchange
rates. As in the case of other types of options, however, the benefit
to the Fund from purchases of foreign currency options will be reduced
by the amount of the premium and related transactions costs. In
addition, if currency exchange rates do not move in the direction or to
the extent desired, the Fund could sustain losses on transactions in
foreign currency options that would require the Fund to forego a
portion or all of the benefits of advantageous changes in those rates.
The Fund may also write options on foreign currencies. For
example, to hedge against a potential decline in the U.S. dollar value
of foreign currency denominated securities due to adverse fluctuations
in exchange rates, the Fund could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised and the diminution
in value of portfolio securities be offset at least in part by the
amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be
acquired, the Fund could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge the increased cost up to the amount of the
premium. If exchange rates do not move in the expected direction, the
option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss, which may not be fully offset by the
amount of the premium. Through the writing of options on foreign
currencies, the Fund also may lose all or a portion of the benefits
which might otherwise have been obtained from favorable movements in
exchange rates.
All call options written by the Fund on foreign currencies will be
"covered." A call option written on a foreign currency by the Fund is
"covered" if the Fund owns the foreign currency underlying the call or
has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currencies held in its
portfolio. A call option is also covered if the Fund has a call on the
same foreign currency in the same principal amount as the call written
if the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise
price of the call written, if the difference is maintained by the Fund
in cash or high-grade liquid assets 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 high-grade
obligations in an amount that at all times at least equals the excess
of (x) the amount of the Fund's obligation under the call option over
(y) the value of such securities.
Swap Contracts. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency
swap is an agreement to exchange cash flows on a notional amount based
on changes in the relative values of the specified currencies. An index
swap is an agreement to make or receive payments based on the different
returns that would be achieved if a notional amount were invested in a
specified basket of securities (such as the Standard & Poor's Composite
Index of 500 Stocks [the "S&P 500"]) or in some other investment (such
as U.S. Treasury securities). The Fund will maintain at all times in a
segregated account with its custodian cash, U.S. Treasury bills or other
high grade liquid obligations in amounts sufficient to satisfy its
obligations under swap contracts.
Risks. The use of futures contracts, options and swap contracts
involves risks. One risk arises because of the imperfect correlation
between movements in the price of futures contracts and movements in
the price of the securities that are the subject of the hedge. The
Fund's hedging strategies will not be fully effective unless the Fund
can compensate for such imperfect correlation. There is no assurance
that the Fund will be able to effect such compensation.
The correlation between the price movement of the futures contract
and the hedged security may be distorted due to differences in the
nature of the markets. For example, to the extent that the Municipal
Income Fund enters into futures contracts on securities other than tax
exempt bonds, the value of such futures may not vary in direct
proportion to the value of tax exempt bonds that the Fund owns or
intends to acquire, because of an imperfect correlation between the
movement of taxable securities and tax exempt bonds. If the price of
the futures contract moves more than the price of the hedged security,
the relevant Fund would experience either a loss or a gain on the
future that is not completely offset by movements in the price of the
hedged securities. In an attempt to compensate for imperfect price
movement correlations, the Fund may purchase or sell futures contracts
in a greater dollar amount than the hedged securities if the price
movement volatility of the hedged securities is historically greater
than the volatility of the futures contract. Conversely, the Fund may
purchase or sell fewer contracts if the volatility of the price of
hedged securities is historically less than that of the futures
contracts.
The price of index futures may not correlate perfectly with
movement in the relevant index due to certain market distortions.
First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts
through offsetting transactions, which could distort the normal
relationship between the index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures
market may attract more speculators than does the securities market.
In addition, trading hours for foreign stock index futures may not
correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock index future relates. This may result
in a disparity between the price of index futures and the value of the
relevant index due to the lack of continuous arbitrage between the
index futures price and the value of the underlying index. Finally,
hedging transactions using stock indices involve the risk that
movements in the price of the index may not correlate with price
movements of the particular portfolio securities being hedged.
Price movement correlation also may be distorted by the
illiquidity of the futures and options markets and the participation of
speculators in such markets. If an insufficient number of contracts
are traded, commercial users may not deal in futures contracts or
options because they do not want to assume the risk that they may not
be able to close out their positions within a reasonable amount of
time. In such instances, futures and options market prices may be
driven by different forces than those driving the market in the
underlying securities, and price spreads between these markets may
widen. The participation of speculators in the market enhances its
liquidity. Nonetheless, speculators trading spreads between futures
markets may create temporary price distortions unrelated to the market
in the underlying securities.
Positions in futures contracts and options on futures contracts
may be established or closed out only on an exchange or board of trade.
There is no assurance that a liquid market on an exchange or board of
trade will exist for any particular contract or at any particular time.
The liquidity of markets in futures contracts and options on futures
contracts may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of
fluctuation in a futures or options price during a single trading day.
Once the daily limit has been reached in a contract, no trades may be
entered into at a price beyond the limit, which may prevent the
liquidation of open futures or options positions. Prices have in the
past exceeded the daily limit on a number of consecutive trading days.
If there is not a liquid market at a particular time, it may not be
possible to close a futures or options position at such time, and, in
the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. However, if
futures or options are used to hedge portfolio securities, an increase
in the price of the securities, if any, may partially or completely
offset losses on the futures contract.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid
secondary market for an option of the same series. If a liquid
secondary market for an exchange-traded option does not exist, it might
not be possible to effect a closing transaction with respect to a
particular option with the result that the Fund would have to exercise
the option in order to realize any profit. If the Fund is unable to
effect a closing purchase transaction in a secondary market, it will be
not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on
an exchange; (v) the facilities of an exchange or the Options Clearing
Corporation or other clearing organization may not at all times be
adequate to handle current trading volume or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their
terms.
Because the specific procedures for trading foreign stock index
futures on futures exchanges are still under development, additional or
different margin requirements as well as settlement procedures may be
applicable to foreign stock index futures at the time the International
Equity Fund purchases foreign stock index futures.
The successful use of transactions in futures and options depends
in part on the ability of a Fund's adviser or subadviser(s) to forecast
correctly the direction and extent of interest rate movements within a
given time frame. To the extent interest rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the
hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. In addition, whether or
not interest rates move during the period that the Fund holds futures
or options positions, the Fund will pay the cost of taking those
positions (i.e., brokerage costs). As a result of these factors, the
Fund's total return for such period may be less than if it had not
engaged in the hedging transaction.
Options trading involves price movement correlation risks similar
to those inherent in futures trading. Additionally, price movements in
options on futures may not correlate with price movements in the
futures underlying the options. Like futures, options positions may
become less liquid because of adverse economic circumstances. The
securities covering written option positions are expected to offset
adverse price movements if those options positions cannot be closed out
in a timely manner, but there is no assurance that such offset will
occur. Also, an option writer may not effect a closing purchase
transaction after it has been notified of the exercise of an option.
Over-the-Counter Options. An over-the-counter option (an option not
traded on a national securities exchange) may be closed out only with
the other party to the original option transaction. While the Fund
will seek to enter into over-the-counter options only with dealers who
agree to or are expected to be capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund
will be able to liquidate an over-the-counter option at a favorable
price at any time prior to its expiration. Accordingly, the Fund might
have to exercise an over-the-counter option it holds in order to
realize any profit thereon and thereby would incur transactions costs
on the purchase or sale of the underlying assets. If the Fund cannot
close out a covered call option written by it, it will not be able to
sell the underlying security until the option expires or is exercised.
Furthermore, over-the-counter options are not subject to the
protections afforded purchasers of listed options by the Options
Clearing Corporation or other clearing organizations.
The staff of the Securities and Exchange Commission (the "SEC")
has taken the position that over-the-counter options on U.S. Government
securities and the assets used as cover for written over-the-counter
options on U.S. Government securities should generally be treated as
illiquid securities for purposes of the investment restrictions
prohibiting the Government Securities Fund from investing more than 15%
of its net assets in illiquid securities. However, if a dealer
recognized by the Federal Reserve Bank of New York as a "primary
dealer" in U.S. Government securities is the other party to an option
contract written by the Fund, and the Fund has the absolute right to
repurchase the option from the dealer at a formula price established in
a contract with the dealer, the SEC staff has agreed that the Fund only
needs to treat as illiquid that amount of the "cover" assets equal to
the amount at which (i) the formula price exceeds (ii) any amount by
which the market value of the securities subject to the options exceeds
the exercise price of the option (the amount by which the option is "in-
the-money"). Although Back Bay Advisors, L.P. ("Back Bay Advisors"),
the Government Securities Fund's subadviser, does not believe that over-
the-counter options on U.S. Government securities are generally
illiquid, the Fund has agreed that pending resolution of this issue it
will conducts its operations in conformity with the views of the SEC
staff on such matters.
Back Bay Advisors has established standards for the
creditworthiness of the primary dealers with which the Government
Securities Fund may enter into over-the-counter option contracts having
the formula-price feature referred to above. Those standards, as
modified from time to time, are implemented and monitored by Back Bay
Advisors. Such contracts will provide that the Fund has the absolute
right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary
between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by the Fund
for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for
the difference between the price of the securities and the exercise
price of the option if the option is written out-of-the-money.
Although each agreement will provide that the Fund's repurchase price
shall be determined in good faith (and that it shall not exceed the
maximum determined pursuant to the formula), the formula price will not
necessarily reflect the market value of the option written, and
therefore the Fund might pay more to repurchase the option contract
than the Fund would pay to close out a similar exchange-traded option.
Economic Effects and Limitations. Income earned by the Fund from its
hedging activities will be treated as capital gain and, if not offset
by net recognized capital losses incurred by the Fund, will be
distributed to shareholders in taxable distributions. Although gain
from futures and options transactions may hedge against a decline in
the value of the Fund's portfolio securities, that gain, to the extent
not offset by losses, will be distributed in light of certain tax
considerations and will constitute a distribution of that portion of
the value preserved against decline. If the Municipal Income Fund is
required to use taxable fixed-income securities as margin, the portion
of the Fund's dividends that is taxable to shareholders will be larger
than if that Fund is permitted to use tax exempt bonds for that
purpose.
The Fund intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator"
adopted by the CFTC and the National Futures Association, which
regulate trading in the futures markets. The Fund will use futures
contracts and related options primarily for bona fide hedging purposes
within the meaning of CFTC regulations. To the extent that the Fund
holds positions in futures contracts and related options that do not
fall within the definition of bona fide hedging transactions, the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the Fund's net
assets, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into.
Future Developments. The above discussion relates to the Fund's
proposed use of futures contracts, options and options on futures
contracts currently available. The relevant markets and related
regulations are still in the developing stage. In the event of future
regulatory or market developments, the Fund may also use additional
types of futures contracts or options and other investment techniques
for the purposes set forth above.
Foreign Currency Hedging Transactions. To protect against a change in
the foreign currency exchange rate between the date on which the Fund
contracts to purchase or sell a security and the settlement date for
the purchase or sale, or to "lock in" the equivalent of a dividend or
interest payment in another currency, the Fund might purchase or sell a
foreign currency on a spot (or cash) basis at the prevailing spot rate.
If conditions warrant, the Fund may also enter into contracts with
banks or broker-dealers to purchase or sell foreign currencies at a
future date ("forward contracts"). The Fund will maintain cash or high-
quality debt obligations in a segregated account with the custodian in
an amount at least equal to (i) the difference between the current
value of the Fund's liquid holdings that settle in the relevant
currency and the Fund's outstanding obligations under currency forward
contracts, or (ii) the current amount, if any, that would be required
to be paid to enter into an offsetting forward currency contract which
would have the effect of closing out the original forward contract.
The Fund's use of currency hedging transactions may be limited by tax
considerations. The Fund may also purchase or sell foreign currency
futures contracts traded on futures exchanges. Foreign currency
futures contract transactions involve risks similar to those of other
futures transactions. See "Options and Futures" above.
MANAGEMENT OF THE TRUSTS
Trustees
Trustees of the Trusts and their ages (in parentheses), addresses
and principal occupations during the past five years are as follows:
GRAHAM T. ALLISON, JR.--Trustee (56); 79 John F. Kennedy Street,
Cambridge, MA 02138; Douglas Dillon Professor and Director for the
Center of Science and International Affairs, John F. Kennedy School
of Government; Special Advisor to the United States Secretary of
Defense; formerly, Assistant Secretary of Defense; formerly, Dean,
John F. Kennedy School of Government.
DANIEL M. CAIN - Trustee (51); 452 Fifth Avenue, New York, NY 10018;
President and CEO, Cain Brothers & Company, Incorporated
(investment banking); Trustee, Universal Health Realty Income Trust
(REIT); Chairman, Inter Fish, Inc. (an aqua culture venture in
Barbados).
KENNETH J. COWAN -- Trustee (63); One Beach Drive, S.E. #2103, St.
Petersburg, Florida 33701; Retired; 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 (52); 1001 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004; Partner and Managing Director, The Carlyle
Group (investments); Trustee, Council for Excellence in Government
(not-for-profit); Director, Frontier Ventures (personal
investment); Director, Highway Master Communications (mobile
communications); Managing Partner, Little Falls Partners (family
investment); Director, Sequana Therapeutics
(biotechnology/genomics); Director, Telcom Ventures
(telecommunications); formerly, Director of the U.S. Office of
Management and Budget and a member of President Bush's Cabinet.
SANDRA O. MOOSE -- Trustee (54); 135 E. 57th Street, New York, NY 10022;
Senior Vice President and Director, The Boston Consulting Group,
Inc. (management consulting); Director, GTE Corporation and Rohm
and Haas Company (specialty chemicals).
HENRY L.P. SCHMELZER -- Trustee and President (52); President, Chief
Executive Officer and Director, NEF Corporation; President and
Chief Executive Officer, New England Funds, L.P.; President and
Chief Executive Officer, New England Funds Management, L.P.
("NEFM"); Director, Back Bay Advisors, Inc. ("BBAI"); formerly,
Director, New England Securities Corporation ("New England
Securities").
JOHN A. SHANE -- Trustee (62); 300 Unicorn Park Drive, Woburn,
Massachusetts 01801; President, Palmer Service Corporation
(venture capital organization); General Partner, The Palmer
Organization and Palmer Partners L.P.; Director, Arch
Communications Group, Inc. (paging service); Director, Dowden
Publishing Company, Inc. (publishers of medial magazines);
Director, Eastern Bank Corporation; Director, Gensym Corporation
(expert system software); Director, Overland Data, Inc.
(manufacturer of computer tape drives); Director, Summa Four, Inc.
(manufacturer of telephone switching equipment); Director, United
Asset Management Corporation (holding company for institutional
money management); formerly, Director, Abt Associates, Inc.
(consulting firm); formerly, Director, Aviv Corporation
(manufacturer of controllers); formerly, Director, Banyan Systems,
Inc. (manufacturer of network software); formerly, Director, Cerjac
Inc. (manufacturer of telephone testing equipment).
PETER S. VOSS -- Chairman of the Board, Chief Executive Officer and
Trustee (49); President and Chief Executive Officer, New England
Investment Companies, L.P. ("NEIC"); Director, President and Chief
Executive Officer, New England Investment Companies, Inc. ("NEIC
Inc."); Chairman of the Board and Director, NEF Corporation;
Chairman of the Board and Director, BBAI; Director, New England
Mutual Life Insurance Company ("The New England"); formerly, Group
Executive Vice President, Bank of America (Los Angeles); formerly,
Group Head of International Banking, Trading and Securities,
Security Pacific National Bank and Chief Executive Officer,
Security Pacific Investment Group.
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
PENDLETON P. WHITE -- Trustee (64); 6 Breckenridge Lane, Savannah, Georgia
31411; Retired; formerly, President and Chairman of the Executive
Committee, Studwell Associates (executive search consultants);
formerly, Trustee, The Faulkner Corporation (community hospital
corporation).
Officers
Officers of the Trusts, in addition to Messrs. Schmelzer and Voss, and
their ages (in parentheses) and principal occupations during the past five
years are as follows:
BRUCE R. SPECA -- Vice President (40); Executive Vice President, NEF
Corporation; Executive Vice President, New England Funds, L.P.;
Executive Vice President, NEFM.
FRANK NESVET -- Treasurer (52); Senior Vice President and Chief
Financial Officer, NEF Corporation ; Senior Vice President and
Chief Financial Officer, New England Funds, L.P.; Senior Vice
President and Chief Financial Officer, NEFM; formerly, Executive
Vice President, SuperShare Services Corporation (mutual fund and
unit investment trust sponsor).
ROBERT P. CONNOLLY -- Secretary and Clerk (42); Senior Vice President
and General Counsel, NEF Corporation; Senior Vice President and
General Counsel, New England Funds, L.P.; Senior Vice President and
General Counsel, NEFM; formerly, Managing Director and General
Counsel, Kroll Associates, Inc. (business consulting company);
formerly, Managing Director and General Counsel, Equitable Capital
Management Corporation.
Each person listed above holds the same position(s) with both
Trusts. Previous positions during the past five years with The New
England, New England Funds, L.P. or NEFM are omitted, if not materially
different from a trustee's or officer's current position with such
entity. Each of the Trusts' trustees is also a director or trustee of
certain other investment companies for which New England Funds, L.P.
acts as principal underwriter and Back Bay Advisors acts as investment
adviser. Except as indicated above, the address of each trustee and
officer of the Trusts is 399 Boylston Street, Boston, Massachusetts
02116.
Trustee Fees
The Trusts pay no compensation to their officers or to their trustees
who are interested persons thereof.
Each Trustee who is not an interested person of the Trusts
receives, in the aggregate for serving on the boards of the Trusts and
New England Cash Management Trust and New England Tax Exempt Money
Market Trust (all four trusts collectively, the "New England Funds
Trusts"), comprising a total of 22 mutual fund portfolios, a retainer
fee at the annual rate of $40,000 and meeting attendance fees of $2,500
for each meeting of the boards he or she attends and $1,500 for each
meeting he or she attends of a committee of the board of which he or she
is a member. Each committee chairman receives an additional retainer
fee at the annual rate of $2,500. These fees are allocated among the
Funds and the five other mutual fund portfolios in the New England Funds
Trusts based on a formula that takes into account, among other factors,
the net assets of each fund.
During the fiscal year ended December 31, 1995, the persons who
were then trustees of the Trusts received the amounts set forth in the
following table for serving as a trustee of the Trusts and for also
serving on the governing boards of the other New England Funds Trusts,
New England Zenith Fund ("Zenith") and New England Variable Annuity Fund
I ("NEVA"), comprising as of April 15, 1996 a total of 37 mutual fund
portfolios (not all of which were in existence during all of 1995).
Total
Compen-
Aggregate sation
Compen- Pension or from the
Aggregate sation Retirement New
Compen- from Benefits England
sation New Accrued as Estimated Funds
from England Part of Annual Trusts,
New England Funds Fund Benefits Zenith and
Funds Trust Trust II Expenses Upon NEVA
Name of Trustee I in 1995 in 1995 in 1995 Retirement in 1995
- ---------------- --------- --------- ------- ------- --------
Graham T. $26,800 $16,000 $0 $0 $50,000
Allison, Jr. (a)
Daniel M. Cain $ 0 $ 0 $0 $0 $ 0
(b)
Kenneth J. Cowan $32,991 $19,784 $0 $0 $69,291
Richard Darman $ 0 $ 0 $0 $0 $ 0
(b)
Joseph M. $ 7,051 $ 4,079 $0 $0 $50,125
Hinchey (c)
Richard S. $ 7,051 $ 4,079 $0 $0 $48,167
Humphrey, Jr.
(c)
Robert B. $ 6,634 $ 3,787 $0 $0 $78,667(e)
Kittredge (c)
Laurens MacLure $ 6,692 $ 3,828 $0 $0 $81,500(e)
(c)
Sandra O. Moose $26,943 $15,550 $0 $0 $56,250
James H. Scott $27,984 $16,279 $0 $0 $59,000
(d)
John A. Shane $30,318 $17,912 $0 $0 $63,000
Joseph F. Turley $7,051 $4,079 $0 $0 $48,167
(c)
Pendleton P. $30,318 $17,912 $0 $0 $63,000
White
(a) Became a trustee of the Trusts effective April 1, 1995.
(b) Became a trustee of the Trusts effective February 23, 1996.
(c) Resigned as a trustee of the Trusts effective May 1, 1995.
(d) Resigned as a trustee of the Trusts effective March 5, 1996.
(e) Also includes compensation paid by the 5 CGM Funds, a group of mutual
funds for which Capital Growth Management Limited Partnership ("CGM"),
the investment adviser of the Growth Fund, Zenith's Capital Growth
Series and NEVA, serves as investment adviser.
The Funds provide no pension or retirement benefits to trustees,
but have adopted a deferred payment arrangement under which each trustee
may elect not to receive fees from the Funds on a current basis but to
receive in a subsequent period an amount equal to the value that such
fees would have if they had been invested in each Fund on the normal
payment date for such fees. As a result of this method of calculating
the deferred payments, each Fund, upon making the deferred payments,
will be in the same financial position as if the fees had been paid on
the normal payment dates.
At April 15, 1996, the officers and trustees of each Trust as a
group owned less than 1% of the outstanding shares of each Fund.
Advisory and Subadvisory Agreements
Each Fund's advisory agreement between the Fund and NEFM (between
the Fund and CGM, in the case of the Growth Fund) provides that the
adviser (NEFM or CGM) will furnish or pay the expenses of the
applicable Fund for office space, facilities and equipment, services of
executive and other personnel of the Trust and certain administrative
services.
Each Fund pays all expenses not borne by its adviser or
subadviser(s) including, but not limited to, the charges and expenses
of the Fund's custodian and transfer agent, independent auditors and
legal counsel for the Fund and the Trusts' independent trustees, all
brokerage commissions and transfer taxes in connection with portfolio
transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings
and of preparing, printing and mailing reports to shareholders and the
compensation of trustees who are not directors, officers or employees
of the Fund's adviser, subadviser(s) or their affiliates, other than
affiliated registered investment companies. Each Fund (except the
Growth Fund) also pays NEFM for certain legal and accounting services
provided to the Fund by NEFM.
Under each Fund's advisory agreement, if the total ordinary
business expenses of the Fund or the applicable Trust as a whole for
any fiscal year exceed the lowest applicable limitation (based on
percentage of average net assets or income) prescribed by any state in
which the shares of the Fund or Trust are qualified for sale, the
Fund's adviser shall pay such excess. At present, the most restrictive
state annual expense limitation is 2 1/2% of the average annual net
assets up to $30 million, 2% of the next $70 million and 1 1/2% of such
assets in excess of $100 million. The adviser will not be required to
reduce its fee or pay such expenses to an extent or under circumstances
which might result in the Fund's inability to qualify as a regulated
investment company under the Code. The term "expenses" is defined in
the relevant advisory agreement and excludes brokerage commissions,
taxes, interest, distribution-related expenses and extraordinary
expenses. This means that the distribution fees payable to New England
Funds, L.P. under each Fund's Distribution Agreement and the
Distribution Plans would be excluded from "expenses."
Each Fund's advisory agreement and (except in the case of the
Growth Fund) each Fund's subadvisory agreement between NEFM and the
subadviser that manages the Fund (or, in the case of the Star Advisers
Fund, each subadvisory agreement between NEFM and the subadviser that
manages a segment 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 by vote of
a majority of the outstanding voting securities of the relevant Fund
and (ii) by vote of a majority of the trustees who are not "interested
persons" of the relevant Trust, as that term is defined in the 1940
Act, cast in person at a meeting called for the purpose of voting on
such approval. Any amendment to an advisory or subadvisory agreement
must be approved by vote of a majority of the outstanding voting
securities of the relevant Fund and by vote of a majority of the
trustees of the relevant Trust who are not such interested persons,
cast in person at a meeting called for the purpose of voting on such
approval. Each advisory and subadvisory agreement may be terminated
without penalty by vote of the relevant Trust's board of trustees 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 terminated upon
termination of the related advisory agreement. In addition, each
advisory agreement will automatically terminate if the Trust or the
Fund shall at any time be required by the Distributor to eliminate all
reference to the words "New England" or the letters "TNE" in the name
of the relevant Trust or the relevant Fund, unless the continuance of
the agreement after such change of name is approved by a majority of
the outstanding voting securities of the relevant Fund and by a
majority of the trustees who are not interested persons of the relevant
Trust or the Fund's adviser or subadviser.
Each advisory and subadvisory agreement provides that the adviser
or subadviser shall not be subject to any liability in connection with
the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
NEFM, formed in 1995, is a limited partnership whose sole general
partner, NEF Corporation, is a wholly-owned subsidiary of NEIC
Holdings, Inc. ("NEIC Holdings"), which is a wholly-owned subsidiary of
NEIC. NEF Corporation is also the sole general partner of New England
Funds, L.P., the distributor of the Funds. NEIC owns the entire
limited partnership interest in each of NEFM and New England Funds,
L.P.
NEIC's sole general partner, NEIC Inc., is a wholly-owned
subsidiary of The New England, which owns a majority limited
partnership interest in NEIC. NEIC and its eight subsidiary or
affiliated asset management firms, collectively, have more than $81
billion of assets under management or administration.
Back Bay Advisors, formed in 1986, is a limited partnership whose
sole general partner, BBAI, is a wholly-owned subsidiary of NEIC
Holdings. NEIC owns the entire limited partnership interest in Back
Bay Advisors. Back Bay Advisors provides investment management
services to institutional clients, including other registered
investment companies and accounts of The New England and its
affiliates. Back Bay Advisors specializes in fixed-income management
and currently manages over $6 billion in total assets.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") was organized in
1926 and is one of the oldest and largest investment counsel firms in
the country. An important feature of the Loomis Sayles investment
approach is its emphasis on investment research. Recommendations and
reports of the Loomis Sayles research department are circulated
throughout the Loomis Sayles organization and are available to the
individuals in the Loomis Sayles organization who have been assigned
the responsibility for making investment decisions for the Funds'
portfolios. Loomis Sayles provides investment advice to numerous other
institutional and individual clients. These clients include some
accounts of The New England and its affiliates ("New England
Accounts"). Loomis Sayles is a limited partnership whose sole general
partner, Loomis, Sayles & Company, Incorporated, is a wholly-owned
subsidiary of NEIC Holdings. NEIC owns the entire limited partnership
interest in Loomis Sayles.
CGM is a limited partnership whose sole general partner, Kenbob,
Inc., is a corporation owned in equal shares by Robert L. Kemp and G.
Kenneth Heebner. NEIC owns a majority limited partnership interest in
CGM. Prior to March 1, 1990, the Growth Fund was managed by Loomis
Sayles' Capital Growth Management Division. On March 1, 1990, Loomis
Sayles reorganized its Capital Growth Management Division into CGM. In
addition to advising the Growth Fund, CGM acts as investment adviser of
CGM Capital Development Fund, CGM Trust, NEVA and Zenith's Capital
Growth Series. CGM also provides investment advice to other
institutional and individual clients.
Westpeak Investment Advisors, L.P. ("Westpeak"), organized in
1991, provides investment management services to institutional clients,
including accounts of The New England and its affiliates. Westpeak is
a limited partnership whose sole general partner, Westpeak Investment
Advisors, Inc., is a wholly-owned subsidiary of NEIC Holdings. NEIC
owns the entire limited partnership interest in Westpeak.
Draycott Partners, Ltd. ("Draycott"), formed in 1991, provides
investment management services to institutional clients, including
separate accounts of The New England. Draycott was a wholly-owned
subsidiary of NEIC until December 29, 1995, when NEIC sold Draycott to
Cursitor Holdings Limited ("Cursitor"), an international investment
management firm. Effective February 29, 1996, Cursitor Alliance LLC, a
newly formed Delaware limited liability company, acquired the stock of
Cursitor. Cursitor Alliance LLC is owned (directly and indirectly) 93%
by Alliance Capital Management L.P. and 7% by an entity owned by the
principals of Cursitor. At February 29, 1996, Cursitor Alliance LLC
had approximately $17 billion in assets under management. Alliance
Capital Management Corporation ("ACMC") is the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance
Capital. ACMC is an indirect, wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States ("The Equitable"), which is
a wholly-owned subsidiary of The Equitable Companies Incorporated, a
holding company controlled by AXA, a French insurance holding company.
As of February 29, 1996, The Equitable owned, directly and indirectly,
approximately 59% of the outstanding limited partnership interest in
Alliance Capital.
The New England and Metropolitan Life Insurance Company
("MetLife") have entered into an agreement to merge, with MetLife to be
the survivor of the merger. The merger is conditioned upon, among
other things, approval by the policy holders of The New England and
MetLife and receipt of certain regulatory approvals. After such
merger, NEIC Inc. will be a wholly-owned subsidiary of MetLife, and
MetLife will own, directly or indirectly, a majority limited
partnership in NEIC.
Berger Associates, Inc. ("Berger") serves as investment adviser to
the mutual funds in the Berger Funds' group and to pension and profit-
sharing plans and other institutional and private investors. Kansas
City Southern Industries, Inc. ("KCSI") a publicly-traded holding
company, owns approximately 80% of the stock of Berger.
Founders Asset Management, Inc. ("Founders") was organized in
1938. It serves as investment adviser to the Founders mutual funds as
well as to private accounts. Bjorn K. Borgen, Chief Executive Officer
of Founders, owns all of the stock of Founders.
Janus Capital Corporation ("Janus Capital") serves as investment
adviser to the Janus mutual funds and to other mutual funds,
individual, charitable, corporate and retirement accounts. KCSI owns
approximately 83% of the outstanding voting stock of Janus Capital.
Thomas H. Bailey, President and Chairman of the Board of Janus Capital,
owns approximately 12% of Janus Capital's voting stock and, by
agreement with KCSI, selects a majority of Janus Capital's board.
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
trustees are of the view that the benefits of retaining Back Bay
Advisors as investment manager outweigh the disadvantages, if any, that
might result from participating in such transactions.
Certain officers of Loomis Sayles have responsibility for the
management of other client portfolios. The Pasadena office of Loomis
Sayles buys and sells portfolio securities for the Value and Balanced
Funds, the Chicago office buys and sells portfolio securities for the
Capital Growth Fund, the Detroit office buys and sells portfolio
securities for the segment of the Star Advisers Fund's portfolio that
is advised by Loomis Sayles and the Boston office buys and sells
portfolio securities for the Strategic Income Fund. These offices buy
and sell securities independently of one another. The other investment
companies and clients served by Loomis Sayles sometimes invest in
securities in which the Capital Growth, Value, Balanced and Star
Advisers 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 trustees that the desirability
of retaining Loomis Sayles as subadviser for the Strategic Income,
Capital Growth, Value, Balanced and Star Advisers Funds outweighs the
disadvantages, if any, which might result from these practices.
Certain officers and employees of Draycott have responsibility for
portfolio management for other clients (including affiliates of
Draycott), some of which may invest in securities in which the
International Equity Fund also may invest. When the Fund and other
clients desire to purchase or sell the same security at or about the
same time, 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 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. It is the opinion of the
trustees that the desirability of retaining Draycott as subadviser to
the Fund outweighs the disadvantages, if any, which might result from
such procedure.
In addition to managing a segment of the Star Advisers Fund's
portfolio, Berger serves as investment adviser or subadviser to other
mutual funds, pension and profit-sharing plans, and other institutional
and private investors. At times, Berger may effect purchases and sales
of the same investment securities for the Fund, and for one or more
other investment accounts. In such cases, it will be the practice of
Berger to allocate the purchase and sale transactions among the Fund
and the accounts in such manner as it deems equitable. In making such
allocation, the main factors to be considered are the respective
investment objectives of the Fund and the accounts, the relative size
of portfolio holdings of the same or comparable securities, the current
availability of cash for investment by the Fund and each account, the
size of investment commitments generally held by the Fund and each
account, and the opinions of the persons at Berger responsible for
selecting investments for the Fund and the accounts. It is the opinion
of the trustees that the desirability of retaining Berger as a
subadviser to the Fund outweighs the disadvantages, if any, which might
result from these procedures.
The segment of the Star Advisers Fund managed by Founders and one
or more of the other mutual funds or clients to which Founders serves
as investment adviser may own the same securities from time to time.
If purchases or sales of securities for the segment of the Fund advised
by Founders and other funds or clients advised by Founders arise for
consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the Fund and other
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on the price and
amount of the security being purchased or sold for the Fund. However,
the ability of the Fund to participate in volume transactions may
possibly produce better executions for the Fund in some cases. It is
the opinion of the trustees that the desirability of retaining Founders
as a subadviser to the Fund outweighs the disadvantages, if any, which
might result from these procedures.
Janus Capital performs investment advisory services for other
mutual funds, individual, charitable, corporate and retirement accounts
(the "private accounts"), as well as for a segment of the portfolio of
the Fund. Although the overall investment objective of the Fund may
differ from the objectives of the private accounts and other funds
served by Janus Capital, there may be securities that are suitable for
the portfolio of the Fund as well as for one or more of the other funds
or the private accounts. Therefore, purchases and sales of the same
investment securities may be recommended for the Fund and for one or
more of the other funds or private accounts. To the extent that the
Fund and one or more of the other funds or private accounts seek to
acquire or sell the same security at the same time, either the price
obtained by the Fund or the amount of securities that may be purchased
or sold by the Fund at one time may be adversely affected. In such
cases, the purchase and sale transactions are allocated among the Fund,
the other funds and the private accounts in a manner believed by the
management of Janus Capital to be equitable to each. It is the opinion
of the trustees that the desirability of retaining Janus Capital as a
subadviser to the 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 the Growth Opportunities Fund
also may invest. When the Fund and other clients desire to purchase or
sell the same security at or about the same time, the purchase and sale
orders are ordinarily placed and confirmed separately but may be
combined to the extent practicable and allocated as nearly as
practicable on a pro rata basis in proportion to the amounts desired to
be purchased or sold for each. It is believed that the ability of those
clients to participate in larger volume transactions will in some cases
produce better executions for the 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. It is the opinion of the trustees of the Fund that the
desirability of retaining Westpeak as subadviser for the Fund outweighs
the disadvantages, if any, which might result from these practices.
Distribution Agreements and Rule 12b-1 Plans. Under a separate
agreement with each Fund, New England Funds, L.P. serves as the general
distributor of each class of shares of the Funds. Under these
agreements, New England Funds, L.P. is not obligated to sell a specific
number of shares. New England Funds, L.P. bears the cost of making
information about the Funds available through advertising and other
means and the cost of printing and mailing Prospectuses to persons
other than shareholders. Each Fund pays the cost of registering and
qualifying its shares under state and federal securities laws and the
distribution of Prospectuses to existing shareholders.
New England Funds, L.P. is compensated under each agreement
through receipt of the sales charges on Class A shares described below
under "Net Asset Value and Public Offering Price" and is paid by the
Funds the service and distribution fees described in the Prospectus.
As described in the Prospectuses, each Fund has adopted Rule 12b-1
plans (the "Plans") for its Class A, Class B and Class C shares which,
among other things, permit it to pay the Fund's distributor (currently
New England Funds, L.P.) monthly fees out of its net assets. Pursuant
to Rule 12b-1 under the 1940 Act, each Plan was approved by the
shareholders of each Fund, and (together with the related Distribution
Agreement) by the board of trustees, including a majority of the
trustees who are not interested persons of the relevant Trust (as
defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or the Distribution Agreement
(the "Independent Trustees").
Each Plan may be terminated by vote of a majority of the relevant
Independent Trustees, or by vote of a majority of the outstanding
voting securities of the relevant class of shares of the relevant Fund.
Each Plan may be amended by vote of the relevant trustees, including a
majority of the relevant Independent Trustees, cast in person at a
meeting called for that purpose. Any change in any Plan that would
materially increase the fees payable thereunder by the relevant class
of shares of the relevant Fund requires approval by vote of the holders
of a majority of such shares outstanding. The Trusts' trustees review
quarterly a written report of such costs and the purposes for which
such costs have been incurred. For so long as a Plan is in effect,
selection and nomination of those trustees who are not interested
persons of the relevant Trust shall be committed to the discretion of
such disinterested persons.
New England Funds, L.P. has entered into selling agreements with
investment dealers, including New England Securities, an affiliate of
New England Funds, L.P., for the sale of the Funds' shares. New
England Securities is registered as a broker-dealer under the
Securities Exchange Act of 1934. New England Funds, L.P. may at its
expense pay an amount not to exceed 0.50% of the amount invested to
dealers who have selling agreements with the Distributor. Class Y
shares of the Funds may be offered by registered representatives of New
England Securities who are also employees of New England Investment
Associates, Inc. ("NEIA"), an indirect, wholly-owned subsidiary of
NEIC. NEIA may receive compensation from each Fund's adviser or
subadviser with respect to sales of Class Y shares.
The Distribution Agreement for any Fund may be terminated at any
time on 60 days' written notice without payment of any penalty by New
England Funds, L.P. or by vote of a majority of the outstanding voting
securities of the relevant Fund or by vote of a majority of the
relevant Independent Trustees.
The Distribution Agreements and the Plans will continue in effect
for successive one-year periods, provided that each such continuance is
specifically approved (i) by the vote of a majority of the relevant
Independent Trustees and (ii) by the vote of a majority of the entire
board of trustees cast in person at a meeting called for that purpose
or by a vote of a majority of the outstanding securities of a Fund (or
the relevant class, in the case of the Plans).
With the exception of New England Funds, L.P., New England
Securities and their direct and indirect corporate parents (NEIC and
The New England), no interested person of the Trusts nor any trustee of
the Trusts had any direct or indirect financial interest in the
operation of the Plans or any related agreement.
Benefits to the Funds and their shareholders resulting from the
Plans are believed to include (1) enhanced shareholder service, (2)
asset retention, (3) enhanced bargaining position with third party
service providers and economies of scale arising from having higher
asset levels and (4) portfolio management opportunities arising from
having an enhanced positive cash flow.
New England Funds, L.P. controls the words "New England" in the
names of the Trusts and the Funds and if it should cease to be the
distributor, New England Funds Trust I, New England Funds Trust II or
the affected Fund may be required to change their names and delete
these words or letters. New England Funds, L.P. also acts as general
distributor for New England Cash Management Trust and New England Tax
Exempt Money Market Trust.
During the year ended December 31, 1993, New England Funds, L.P.
received commissions on the sale of the Class A shares of New England
Funds Trust I aggregating $12,478,105, of which $1,428,524 was retained
by New England Funds, L.P. During the years ended December 31, 1994
and 1995, New England Funds, L.P. received commissions on the sale of
shares of New England Funds Trust I aggregating $9,569,312 and
$8,779,918, respectively, of which $8,290,120 and $7,706,937,
respectively, was allowed to other securities dealers and the balanced
retained by New England Funds, L.P. See "Other Arrangements" for
information about amounts received by New England Funds, L.P. from New
England Funds Trust I's investment advisers and subadvisers or the
Funds directly for providing certain administrative services relating
to New England Funds Trust I.
During the years ended December 31, 1993, 1994 and 1995, New
England Funds, L.P. received commissions on the sale of the Class A
shares of New England Funds Trust II aggregating $5,970,295, $2,071,744
and $1,913,291, respectively, of which $573,825, $1,780,651 and
$1,752,050, respectively, were reallowed to other securities dealers
and the balance retained by New England Funds, L.P. See "Other
Arrangements" for information about amounts received by New England
Funds, L.P. from Back Bay Advisors or the Funds directly for providing
certain administrative services relating to New England Funds Trust II.
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. New England Funds Trust I's and the
Growth Fund of Israel series of New England Funds Trust II's
independent accountants are Price Waterhouse LLP, 160 Federal Street,
Boston, Massachusetts 02110. New England Funds Trust II's (except the
Growth Fund of Israel series, which is described in a separate
Statement of Additional Information) independent accountants are
Coopers & Lybrand LLP, One Post Office Square, Boston, Massachusetts
02109. The independent accountants of each Trust conduct an annual
audit of that Trust's financial statements, assist in the preparation
of federal and state income tax returns and consult with the Trusts as
to matters of accounting and federal and state income taxation. The
information concerning financial highlights in the Prospectuses, and
financial statements contained in the Funds' annual reports for the
year ended December 31, 1995 and incorporated by reference into this
statement, have been so included in reliance on the reports of each
Trusts' independent accountants, given on the authority of such firms
as experts in auditing and accounting.
Other Arrangements
Prior to January 2, 1996, office space, facilities, equipment and
certain other administrative services for the Funds in New England
Funds Trust I (except the International Equity, Capital Growth and Star
Advisers Funds) were furnished by New England Securities, an affiliate
of New England Funds, L.P., under service agreements with CGM, Loomis
Sayles or Back Bay Advisors. In the case of the Growth Fund, New
England Securities continues to provide such services under its service
agreement with CGM. For the years ended December 31, 1994 and 1995,
New England Securities received $2,261,375 and $3,357,556,
respectively, from the Fund's advisers under these agreements. In the
case of the Capital Growth Fund, New England Funds, L.P. provided
similar services under a service agreement with Loomis Sayles. For the
years ended December 31, 1994 and 1995, New England Funds, L.P.
received $278,333 and $323,029, respectively, from Loomis Sayles under
this agreement. In the case of the Star Advisers Fund, New England
Funds, L.P. provided similar services under a service agreement with
NEIC. For the years ended December 31, 1994 and 1995, New England
Funds, L.P. received $269,302 and $1,715,899, respectively, from NEIC
under this agreement. In the case of the International Equity Fund,
New England Funds, L.P. provided similar services prior to December 29,
1995 under an administrative services agreement with the Fund under
which the International Equity Fund paid a fee at the annual rate of
0.10% of the average daily net assets attributable to the Fund's Class
A, Class B and Class C shares and 0.05% of such assets attributable to
the Fund's Class Y shares. For the fiscal years ended December 31,
1994 and 1995, New England Funds, L.P. received $167,715 and $192,366,
respectively, from the International Equity Fund for these services.
Class C shares did not commence operations until January 3, 1995.
Prior to January 2, 1996, New England Funds, L.P. provided similar
services for the Growth Opportunities, Limited Term U.S. Government,
Massachusetts and High Income Funds under an agreement with Back Bay
Advisors. For the years ended December 31, 1994 and 1995, New England
Funds, L.P. received $676,787 and $1,511,359, respectively, from Back
Bay Advisors under this agreement. In the case of the Adjustable Rate
Fund, New England Funds, L.P. provided similar services under an
Administrative Services Agreement with the Fund, under which the Fund
paid a fee at the annual rate of 0.15% of the first $200 million of the
Fund's average daily net assets, 0.135% of the next $300 million of
such assets and 0.12% of such assets in excess of $500 million. For
the years ended December 31, 1994 and 1995, New England Funds, L.P.
received $382,335 and $334,777, respectively, from the Adjustable Rate
Fund for these services. In the case of the California and New York
Funds, New England Funds, L.P. provided similar services under
Administrative Services Agreements with the Funds under which the Funds
paid a fee at the rate of 0.125% of each Fund's average daily net
assets. For the year ended December 31, 1994, New England Funds, L.P.
waived its fees of $49,097 and $25,557 for these services for the
California and New York Funds, respectively, and for the year ended
December 31, 1995, New England Funds, L.P. waived its fees of $46,879
and $22,124 for these services from the California and New York Funds,
respectively.
Pursuant to a contract between the Funds and New England Funds,
L.P., New England Funds, L.P. acts as shareholder servicing and
transfer agent for the Funds and is responsible for services in
connection with the establishment, maintenance and recording of
shareholder accounts, including all related tax and other reporting
requirements and the implementation of investment and redemption
arrangements offered in connection with the sale of the Funds' shares.
The Funds pay per-account fees to New England Funds, L.P. for these
services in the amount of $17.25 for the Balanced Fund, Growth Fund,
Capital Growth Fund, Value Fund, International Equity Fund, Star
Advisers Fund, Growth Opportunities Fund and Strategic Income Fund; and
$15.45 for the High Income Fund, Massachusetts Tax Free Income Fund,
Limited Term U.S. Government Fund, Adjustable Rate Fund, Intermediate
Term Tax Free Fund of California, Intermediate Term Tax Free Fund of
New York, Bond Income Fund, Municipal Income Fund and Government
Securities Fund. New England Funds, L.P. has subcontracted with State
Street Bank for it to provide, through its subsidiary, Boston Financial
Data Services, Inc. ("BFDS") transaction processing, mail and other
services. For these services, New England Funds, L.P. pays BFDS a per
account fee of $0.95 for the Intermediate Term Tax Free Fund of
California, Intermediate Term Tax Free Fund of New York, Bond Income
Fund, Municipal Income Fund, Adjustable Rate Fund, Government
Securities Fund and Strategic Income Fund; $0.87 for Massachusetts Tax
Free Income Fund, High Income Fund and Limited Term U.S. Government
Fund; $0.78 for International Equity Fund, Capital Growth Fund,
Balanced Fund, Value Fund, Growth Fund and Star Advisers Fund; and
$0.70 for the Growth Opportunities Fund.
In addition, during the fiscal year ended 1995, New England Funds,
L.P. received legal and accounting services fees paid by the Growth
Fund, Balanced Fund, Value Fund, Bond Income Fund, Municipal Income
Fund, Government Securities Fund, International Equity Fund, Capital
Growth Fund and Star Advisers Funds in the amounts of $50,428, $48,931,
$48,646, $54,147, $49,949, $51,179, $49,556, $48,113 and $51,811,
respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
All Funds (except segments of the Star Advisers Fund advised by
Berger and Janus Capital). In placing orders for the purchase and sale
of portfolio securities for each Fund, Back Bay Advisors, CGM,
Draycott, Founders, Westpeak and Loomis Sayles always seek the best
price and execution. Some of each Fund's portfolio transactions are
placed with brokers and dealers who provide Back Bay Advisors, CGM,
Draycott, Founders, Westpeak or Loomis Sayles with supplementary
investment and statistical information or furnish market quotations to
that Fund, the other Funds or other investment companies advised by
Back Bay Advisors, CGM, Draycott, Founders, Westpeak or Loomis Sayles.
The business would not be so placed if the Funds would not thereby
obtain the best price and execution. Although it is not possible to
assign an exact dollar value to these services, they may, to the extent
used, tend to reduce the expenses of Back Bay Advisors, CGM, Draycott,
Founders, Westpeak or Loomis Sayles. The services may also be used by
Back Bay Advisors, CGM, Draycott, Founders, Westpeak or Loomis Sayles
in connection with their other advisory accounts and in some cases may
not be used with respect to the Funds.
In placing orders for the purchase and sale of equity securities,
each Fund's adviser or subadviser selects only brokers which it
believes are financially responsible, will provide efficient and
effective services in executing, clearing and settling an order and
will charge commission rates that, when combined with the quality of
the foregoing services, will produce best price and execution for the
transaction. This does not necessarily mean that the lowest available
brokerage commission will be paid. However, the commissions are
believed to be competitive with generally prevailing rates. Each
Fund's adviser or subadviser will use its best efforts to obtain
information as to the general level of commission rates being charged
by the brokerage community from time to time and will evaluate the
overall reasonableness of brokerage commissions paid on transactions by
reference to such data. In making such evaluation, all factors
affecting liquidity and execution of the order, as well as the amount
of the capital commitment by the broker in connection with the order,
are taken into account. No Fund will pay a broker a commission at a
higher rate than otherwise available for the same transaction in
recognition of the value of research services provided by the broker or
in recognition of the value of any other services provided by the
broker which do not contribute to the best price and execution of the
transaction.
Star Advisers Fund (segment advised by Berger). Berger places
portfolio transactions for its segment of the Star Advisers Fund only
with brokers and dealers who render satisfactory service in the
execution of orders at the most favorable prices and at reasonable
commission rates. However, Berger may place such transactions with a
broker with whom it has negotiated a commission that is in excess of
the commission then being charged by another broker where such
commission is the result of Berger having reasonably taken into account
the quality and reliability of the brokerage services, including,
without limitation, the availability and value of research services or
execution services. Berger places portfolio brokerage business of its
segment of the Star Advisers Fund with brokers who provide useful
research services to Berger. Such research services typically consist
of studies made by investment analysts or economists relating either to
the past record of and future outlook for companies and the industries
in which they operate, or to national and worldwide economic
conditions, monetary conditions and trends in investors' sentiment, and
the relationship of these factors to the securities market. In
addition, such analysts may be available for regular consultation so
that Berger may be apprised of current developments in the above-
mentioned factors. The research services received from brokers are
often helpful to Berger in performing its investment advisory
responsibilities to its segment of the Star Advisers Fund, but they are
not essential, and the availability of such services from brokers does
not reduce the responsibility of Berger advisory personnel to analyze
and evaluate the securities in which its segment of the Star Advisers
Fund invests. The research services obtained as a result of the Fund's
brokerage business also will be useful to Berger in making investment
decisions for its other advisory accounts, and, conversely, information
obtained by reason of placement of brokerage business of such other
accounts may be used by Berger in rendering investment advice to its
segment of the Star Advisers Fund. Although such research services may
be deemed to be of value to Berger, they are not expected to decrease
the expenses that Berger would otherwise incur in performing investment
advisory services for its segment of the Star Advisers Fund nor will
the subadvisory fees that are received by Berger from NEFM for
providing services to the Fund be reduced as result of the availability
of such research services from brokers.
Star Advisers Fund (segment advised by Janus Capital). Decisions
as to the assignment of portfolio business for the segment of the Star
Advisers Fund's portfolio 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 segment of the Star Advisers Fund's
portfolio, Janus Capital may agree to pay brokerage commissions for
effecting a securities transaction, in an amount higher than another
broker or dealer would have charged for effecting that transaction as
authorized, under certain circumstances, by the Securities Exchange Act
of 1934.
In selecting brokers and dealers and in negotiating commissions,
Janus Capital considers a number of factors, including but not limited
to: Janus Capital's knowledge of currently available negotiated
commission rates or prices of securities currently available and other
current transaction costs; the nature of the securities being traded;
the size and type of the transaction; the nature and character of the
markets for the security to be purchased or sold; the desired timing of
the trade; the activity existing and expected in the market for the
particular security; confidentiality; the quality of the execution,
clearance and settlement services; financial stability of the broker or
dealer; the existence of actual or apparent operational problems of any
broker or dealer; and research products or services provided. In
recognition of the value of the foregoing factors, Janus Capital may
place portfolio transactions with a broker or dealer with whom it has
negotiated a commission that is in excess of the commission another
broker or dealer would have charged for effecting that transaction if
Janus Capital determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research
provided by such broker or dealer viewed in terms of either that
particular transaction or of the overall responsibilities of Janus
Capital. Research may include furnishing advice, either directly or
through publications or writing, as to the value of securities, the
advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities;
furnishing seminars, information, analyses and reports concerning
issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and
government officials; comparative performance evaluation and technical
measurement services and quotation services, and products and other
services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and
accessories that deliver, process or otherwise utilize information,
including the research described above) that assist Janus Capital in
carrying out its responsibilities. Research received from brokers or
dealers is supplemental to Janus Capital's own research efforts.
Janus Capital may use research products and services in servicing
other accounts in addition to the Star Advisers Fund. If Janus Capital
determines that any research product or service has a mixed use, such
that it also serves functions that do not assist in the investment
decision-making process, Janus Capital may allocate the costs of such
service or product accordingly. Only that portion of the product or
service that Janus Capital determines will assist it in the investment
decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for Janus
Capital.
Janus Capital may also consider sales of shares of mutual funds
advised by Janus Capital by a broker-dealer or the recommendation of a
broker-dealer to its customers that they purchase shares of such funds
as a factor in the selection of broker-dealers to execute portfolio
transactions for the Star Advisers Fund. In placing portfolio business
with such broker-dealers, Janus Capital will seek the best execution of
each transaction.
General
Portfolio turnover is not a limiting factor with respect to
investment decisions. The Funds anticipate that their portfolio
turnover rates will vary significantly from time to time depending on
the volatility of economic and market conditions.
Subject to procedures adopted by the Board of Trustees of the
Trusts, the Funds' brokerage transactions may be executed by brokers
that are affiliated with NEIC or the Funds' advisers or subadvisers.
Any such transactions will comply with Rule 17e-1 under the 1940 Act.
The Bond Income, Government Securities and Municipal Income Funds
and all the Funds of New England Funds Trust II may pay, but during
their three most recent fiscal years have not paid, brokerage
commissions to New England Securities for acting as the respective
Fund's agent on purchases and sales of securities. SEC rules require
that the commissions paid to New England Securities by a Fund for
portfolio transactions not exceed "usual and customary" brokerage
commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange
during a comparable period of time." The trustees of each Trust,
including those who are not "interested persons" of the Trust, 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 Trusts' dealer in
connection with such transactions.
It is expected that the portfolio transactions in fixed-income
securities will generally be with issuers or dealers on a net basis
without a stated commission. Securities firms may receive brokerage
commissions on transactions involving options, futures and options on
futures and the purchase and sale of underlying securities upon
exercise of options. The brokerage commissions associated with buying
and selling options may be proportionately higher than those associated
with general securities transactions.
DESCRIPTION OF THE TRUSTS AND OWNERSHIP OF SHARES
New England Funds Trust I is organized as a Massachusetts business
trust under the laws of Massachusetts by an Agreement and Declaration
of Trust (a "Declaration of Trust") dated June 7, 1985, as amended, and
is a "series" company as described in Section 18(f)(2) of the 1940 Act.
The Trust has eleven separate portfolios. The Growth Fund currently
offers one class of shares, the Municipal Income Fund currently offers
two classes of shares, the Capital Growth, Strategic Income and
Government Securities Funds and New England Star Worldwide Fund each
currently offers three classes of shares and the Balanced, Value,
International Equity, Star Advisers, Strategic Income and Bond Income
Funds each currently offers four classes of shares. Until September
1986, the name of the Trust was "New England Life Government Securities
Trust"; from September 1986 to April 1994, its name was "The New
England Funds." Prior to January 5, 1996, the name of the Municipal
Income Fund was "New England Tax Exempt Income Fund." The initial
portfolio of the Trust (the Fund now called New England Government
Securities Fund) commenced operations on September 16, 1985. The
International Equity Fund commenced operations on May 22, 1992. The
Capital Growth Fund was organized in 1992 and commenced operations on
August 3, 1992. The Star Advisers Fund was organized in 1994 and
commenced operations on July 7, 1994. The Strategic Income Fund was
organized in 1995 and commenced operations on May 1, 1995. New England
Star Worldwide Fund was organized in 1995 and commenced operations on
December 29, 1995. 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, 1969
Inc.*
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, 1976
Inc.****
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income Fund
**** Predecessor of the Municipal Income Fund
New England Funds Trust II is organized as a Massachusetts
business trust pursuant to a Declaration of Trust dated May 6, 1931, as
amended, and consisted of a single investment portfolio (now the Growth
Opportunities Fund) until January 1989, when the Trust was reorganized
as a "series" company as described in Section 18(f)(2) of the 1940 Act.
The Trust has eight separate portfolios. The High Income,
Massachusetts, California and New York Funds each currently offers two
classes of shares, the Adjustable Rate U.S. Government Fund and Growth
Fund of Israel each currently offers three classes of shares and the
Growth Opportunities and Limited Term U.S. Government Funds each
currently offers four classes of shares. Until December 1988, the name
of the Trust was "Investment Trust of Boston"; from December 1988 until
April 1992, its name was "Investment Trust of Boston Funds"; from April
1992 until April 1994, its name was "TNE Funds Trust." The High Income
Fund and the Massachusetts Fund are successors to separate investment
companies that were organized in 1983 and 1984, respectively, and
reorganized as series of the Trust in January 1989. The Limited Term
U.S. Government Fund was organized in 1988 and commenced operations in
January 1989. The Adjustable Rate Fund was organized in 1991 and
commenced operations on October 18 of that year. The California and
New York Funds were organized in 1993 and commenced operations on April
23 of that year. Growth Fund of Israel was organized in 1995 and
commenced operations on March 15, 1996.
The Declarations of Trust of New England Funds Trust I and New
England Funds Trust II currently permit each Trust's trustees to issue
an unlimited number of full and fractional shares of each series. Each
Fund is represented by a particular series of shares. The Declarations
of Trust further permit each Trust's trustees to divide the shares of
each series into any number of separate classes, each having such
rights and preferences relative to other classes of the same series as
the trustees may determine. The shares of each Fund do not have any
preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of each class of
the Fund are entitled to share pro rata in the net assets attributable
to that class of shares of the Fund available for distribution to
shareholders. The Declarations of Trust also permit the trustees to
charge shareholders directly for custodial, transfer agency and
servicing expenses.
The shares of all the Funds (except as noted in the first two
paragraphs of this section) are divided into four classes, Class A,
Class B, Class C and Class Y. Each Fund offers such classes of shares
as set forth in such Fund's Prospectus. Class Y shares are available
for purchase only by certain eligible institutional investors and have
higher minimum purchase requirements than Classes A, B and C. All
expenses of each Fund [excluding transfer agency fees and expenses of
printing and mailing Prospectuses to shareholders ("Other Expenses")]
are borne by its Class A, B, C and Y shares on a pro rata basis, except
for 12b-1 fees, which are borne only by Classes A, B and C and may be
charged at a separate rate to each such class. Other Expenses of
Classes A, B and C are borne by such classes on a pro rata basis, but
Other Expenses relating to the Class Y shares may be allocated
separately to the Class Y shares.
The assets received by each class of a Fund for the issue or sale
of its shares and all income, earnings, profits, losses and proceeds
therefrom, subject only to the rights of the creditors, are allocated
to, and constitute the underlying assets of, that class of a Fund. The
underlying assets of each class of a Fund are segregated and are
charged with the expenses with respect to that class of a Fund and with
a share of the general expenses of the relevant trust. Any general
expenses of the Trust that are not readily identifiable as belonging to
a particular class of a Fund are allocated by or under the direction of
the trustees in such manner as the trustees determine to be fair and
equitable. While the expenses of each Trust are allocated to the
separate books of account of each Fund, certain expenses may be legally
chargeable against the assets of all of the Funds in a Trust.
The Declarations of Trust also permit each Trust's trustees,
without shareholder approval, to subdivide any series or class of
shares or fund into various sub-series or sub-classes with such
dividend preferences and other rights as the trustees may designate.
While the trustees have no current intention to exercise this power, it
is intended to allow them to provide for an equitable allocation of the
impact of any future regulatory requirements which might affect various
classes of shareholders differently. The trustees may also, without
shareholder approval, establish one or more additional series or
classes or merge two or more existing series or classes.
The Declarations of Trust provide for the perpetual existence of
the Trusts. Either Trust or any Fund, however, may be terminated at
any time by vote of at least two-thirds of the outstanding shares of
each Fund affected. Similarly, any class within a Fund may be
terminated by vote of at least two-thirds of the outstanding shares of
such class. While each Declaration of Trust further provides that the
board of trustees may also terminate the relevant Trust upon written
notice to its shareholders, the 1940 Act requires that the Trust
receive the authorization of a majority of its outstanding shares in
order to change the nature of its business so as to cease to be an
investment company.
Voting Rights
As summarized in the Prospectuses, shareholders are entitled to
one vote for each full share held (with fractional votes for each
fractional share held) and may vote (to the extent provided therein) in
the election of trustees and the termination of the Trust and on other
matters submitted to the vote of shareholders.
The Declarations of Trust provide that on any matter submitted to
a vote of all shareholders of a Trust, all Trust shares entitled to
vote shall be voted together irrespective of series or class unless the
rights of a particular series or class would be adversely affected by
the vote, in which case a separate vote of that series or class shall
also be required to decide the question. Also, a separate vote shall be
held whenever required by the 1940 Act or any rule thereunder. Rule
18f-2 under 1940 Act provides in effect that a series or class shall be
deemed to be affected by a matter unless it is clear that the interests
of each series or class in the matter are substantially identical or
that the matter does not affect any interest of such series or class.
On matters affecting an individual series or class, only shareholders
of that series or class are entitled to vote. Consistent with the
current position of the SEC, shareholders of all series and classes
vote together, irrespective of series or class, on the election of
trustees and the selection of the Trust's independent accountants, but
shareholders of each series vote separately on other matters requiring
shareholder approval, such as certain changes in investment policies of
that series or the approval of the investment advisory and subadvisory
agreement relating to that series, and shareholders of each class
within a series vote separately as to the Rule 12b-1 plan (if any)
relating to that class.
There will normally be no meetings of shareholders for the purpose
of electing trustees except that, in accordance with the 1940 Act, (i)
a Trust will hold a shareholders' meeting for the election of trustees
at such time as less than a majority of the trustees holding office
have been elected by shareholders, and (ii) if, as a result of a
vacancy on the board of trustees, less than two-thirds of the trustees
holding office have been elected by the shareholders, that vacancy may
be filled only by a vote of the shareholders. In addition, trustees
may be removed from office by a written consent signed by the holders
of two-thirds of the outstanding shares and filed with a Trust's
custodian or by a vote of the holders of two-thirds of the outstanding
shares at a meeting duly called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of
the outstanding shares.
Upon written request by the holders of shares having a net asset
value of at least $25,000 or at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a trustee, the Trusts have
undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders).
Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. Shareholder voting rights
are not cumulative.
No amendment may be made to a Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the
relevant Trust except (i) to change the Trust's or a Fund's name or to
cure technical problems in the Declaration of Trust, (ii) to establish
and designate new series or classes of Trust shares and (iii) to
establish, designate or modify new and existing series or classes of
Trust shares or other provisions relating to Trust shares in response
to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a
Trust. However, the Declarations of Trust disclaim shareholder
liability for acts or obligations of a Trust and require that notice of
such disclaimer be given in each agreement, obligation or instrument
entered into or executed by a Trust or the trustees. The Declarations
of Trust provide for indemnification out of each Fund's property for
all loss and expense of any shareholder held personally liable for the
obligations of the Fund by reason of owning shares of such Fund. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to
circumstances in which the disclaimer is inoperative and a Fund itself
would be unable to meet its obligations.
The Declarations of Trust further provide that the relevant board
of trustees will not be liable for errors of judgment or mistakes of
fact or law. However, nothing in the Declarations of Trust protects a
trustee against any liability to which the trustee would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or
her office. The By-Laws of each Trust provide for indemnification by
the Trust of trustees and officers of the relevant Trust, except with
respect to any matter as to which any such person did not act in good
faith in the reasonable belief that his or her action was in or not
opposed to the best interests of the Trust.
Such persons may not be indemnified against any liability to the
Trust or the Trust's shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or
her office.
HOW TO BUY SHARES
The procedures for purchasing shares of the Funds are summarized
in the Prospectus. Banks may charge a fee for transmitting funds by
wire. With respect to shares purchased by federal funds, shareholders
should bear in mind that wire transfers may take two or more hours to
complete.
For purchase of Fund shares by mail, the settlement date is the
first business day after receipt of the check by the transfer agent so
long as it is received by the close of regular trading of the New York
Stock Exchange on a day when the Exchange is open; otherwise the
settlement date is the following business day. For telephone orders,
the settlement date is the fifth business day after the order is made.
Shares may also be purchased either in writing, by phone or, in
the case of Class A, B and C shares, by electronic funds transfer using
Automated Clearing House ("ACH"), or by exchange as described in the
Prospectuses through firms that are members of the National Association
of Securities Dealers, Inc. and that have selling agreements with New
England Funds, L.P.
New England Funds, L.P. may at its discretion accept a telephone
order for the purchase of $5,000 or more of a Fund's Class A, B and C
shares. Payment must be received by New England Funds, L.P. within
five business days following the transaction date or the order will be
subject to cancellation. Telephone orders must be placed through New
England Funds, L.P. or your investment dealer.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset
value per share is summarized in the Prospectus.
The total net asset value of each class of shares of a Fund (the
excess of the assets of such Fund attributable to such class over the
liabilities attributable to such class) is determined as of the close
of regular trading (normally 4:00 p.m. Eastern time) on each day that
the New York Stock Exchange is open for trading. The weekdays that the
New York Stock Exchange is expected to be closed are New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Securities listed on a
national securities exchange or on the NASDAQ National Market System
are valued at their last sale price, or, if there is no reported sale
during the day, the last reported bid price estimated by a broker.
Unlisted securities traded in the over-the-counter market are valued at
the last reported bid price in the over-the-counter market or on the
basis of yield equivalents as obtained from one or more dealers that
make a market in the securities. U.S. Government securities are traded
in the over-the-counter market. Options, interest rate futures and
options thereon that are traded on exchanges are valued at their last
sale price as of the close of such exchanges. Securities for which
current market quotations are not readily available and all other
assets are taken at fair value as determined in good faith by the board
of trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the board.
Generally, trading in foreign government securities and other
fixed-income securities, as well as trading in equity securities in
markets outside the United States, is substantially completed each day
at various times prior to the close of the New York Stock Exchange.
Securities traded on a non-U.S. exchange will be valued at their last
sale price (or the last reported bid price, if there is no reported
sale during the day), on the exchange on which they principally trade,
as of the close of regular trading on such exchange. The value of
other securities principally traded outside the United States will be
computed as of the completion of substantial trading for the day on the
markets on which such securities principally trade. Securities
principally traded outside the United States will generally be valued
several hours before the close of regular trading on the New York Stock
Exchange, generally 4:00 p.m. Eastern time, when the Funds compute the
net asset value of their shares. Occasionally, events affecting the
value of securities principally traded outside the United States may
occur between the completion of substantial trading of such securities
for the day and the close of the New York Stock Exchange, which events
will not be reflected in the computation of a Fund's net asset value.
If events materially affecting the value of a Fund's securities occur
during such period, then these securities will be valued at their fair
value as determined in good faith by or in accordance with procedures
approved by the Trusts' trustees.
Trading in some of the portfolio securities of some of the Funds
takes place in various markets outside the Untied States on days and at
times other than when the New York Stock Exchange is open for trading.
Therefore, the calculation of these Funds' net asset value does not
take place at the same time as the prices of many of its portfolio
securities are determined, and the value of the Fund's portfolio may
change on days when the Fund is not open for business and its shares
may not be purchased or redeemed.
The per share net asset value of a class of a Fund's shares is
computed by dividing the number of shares outstanding into the total
net asset value attributable to such class. The public offering price
of a Class A share of a Fund is the net asset value per share next-
determined after a properly completed purchase order is accepted by New
England Funds, L.P. or State Street Bank, plus a sales charge as set
forth in the Fund's Prospectus. The public offering price of a Class
B, C or Y share of a Fund is the next-determined net asset value.
REDUCED SALES CHARGES
Class A Shares Only
Special purchase plans are enumerated in the text of the
Prospectus.
Cumulative Purchase Discount. A Fund shareholder making an
additional purchase of Class A shares may be entitled to a discount on
the sales charge payable on that purchase. This discount will be
available if the shareholder's "total investment" in the Fund reaches
the breakpoint for a reduced sales charge in the table under "Buying
Fund Shares -- Sales Charges" in the Prospectus. The total investment
is determined by adding the amount of the additional purchase,
including sales charge, to the current public offering price of all
series and classes of shares of both Trusts held by the shareholder in
one or more accounts. If the total investment exceeds the breakpoint,
the lower sales charge applies to the entire additional investment even
though some portion of that additional investment is below the
breakpoint to which a reduced sales charge applies. For example, if a
shareholder who already owns shares of one or more Funds with a value
at the current public offering price of $30,000 makes an additional
purchase of $20,000 of Class A shares of another Fund (other than the
Growth Fund), the reduced sales charge of 4.5% of the public offering
price will apply to the entire amount of the additional investment.
Letter of Intent. A Letter of Intent (a "Letter"), which can be
effected at any time, is a privilege available to investors which
reduces the sales charge on investments in Class A shares. Ordinarily,
reduced sales charges are available for single purchases of Class A
shares only when they reach certain breakpoints (e.g., $50,000,
$100,000, etc.). By signing a Letter, a shareholder indicates an
intention to invest enough money in Class A shares within 13 months to
reach a breakpoint. If the shareholder's intended aggregate purchases
of all series and classes of the Trusts over a defined 13-month period
will be large enough to qualify for a reduced sales charge, the
shareholder may invest the smaller individual amounts at the public
offering price calculated using the sales load applicable to the 13-
month aggregate investment.
A Letter is a non-binding commitment, the amount of which may be
increased, decreased or canceled at any time. The effective date of a
Letter is the date it is received in good order at New England Funds,
L.P., or, if communicated by a telephone exchange or order, at the date
of telephoning provided a signed Letter, in good order, reaches New
England Funds, L.P. within five business days.
A reduced sales charge is available for aggregate purchases of all
series and classes of shares of the Trusts pursuant to a written Letter
effected within 90 days after any purchase. In the event the account
was established prior to 90 days before the Letter effective date, the
account will be credited with Rights of Accumulation ("ROA") towards
the breakpoint level that will be reached upon the completion of the 13
months' purchases. The ROA credit is the value of all shares held as
of the effective date of the Letter based on the "public offering price
computed on such date."
The cumulative purchase discount, described above, permits the
aggregate value at the current public offering price of Class A shares
of any accounts with the Trusts held by a shareholder to be added to
the dollar amount of the intended investment under a Letter, provided
the shareholder lists them on the account application.
State Street Bank will hold in escrow shares with a value at the
current public offering price of 5% of the aggregate amount of the
intended investment. The amount in escrow will be released when the
Letter is completed. If the shareholder does not purchase shares in
the amount indicated in the Letter, the shareholder agrees to remit to
State Street Bank the difference between the sales charge actually paid
and that which would have been paid had the Letter not been in effect,
and authorizes State Street Bank to redeem escrowed shares in the
amount necessary to make up the difference in sales charges.
Reinvested dividends and distributions are not included in determining
whether the Letter has been completed.
Combining Purchases. Purchases of all series and classes of the
Trusts by or for an investor, the investor's spouse, parents, children,
siblings, grandparents or grandchildren and any other account of the
investor, including sole proprietorships, in either Trust may be
treated as purchases by a single individual for purposes of determining
the availability of a reduced sales charge. Purchases for a single
trust estate or a single fiduciary account may also be treated as
purchases by a single individual for this purpose, as may purchases on
behalf of a participant in a tax-qualified retirement plan and other
employee benefit plans, provided that the investor is the sole
participant in the plan.
Combining with Other Series and Classes of the Trusts. A
shareholder's total investment for purposes of the cumulative purchase
discount and purchases under a Letter of Intent includes the value at
the current public offering price of any shares of series and classes
of the Trusts that the shareholder owns (which includes shares of New
England Cash Management Trust and New England Tax Exempt Money Market
Trust [the "Money Market Funds"] unless such shares were purchased by
exchanging shares of either of the Trusts). Shares owned by persons
described in the preceding paragraph may also be included.
Unit Holders of Unit Investment Trusts. Unit investment trust
distributions may be invested in Class A shares of any Fund at a
reduced sales charge of 1.50% of the public offering price (or 1.52% of
the net amount invested); for large purchases on which a sales charge
of less than 1.50% would ordinarily apply, such lower charge also
applies to investments of unit investment trust distributions.
Clients of Advisers or Subadvisers. No sales charge or contingent
deferred sales charge applies to investments of $100,000 or more in
Class A shares of the Funds by (1) clients of an adviser or subadviser
to the Funds; any director, officer or partner of a client of an
adviser or subadviser to the Funds; and the spouse, parents, children,
siblings, grandparents or grandchildren of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a
prototype of an adviser or subadviser to the Funds if at least one
participant in the plan qualifies under category (1) above; and (3) an
individual who invests through an IRA and is a participant in an
employee benefit plan that is a client of an adviser or subadviser to
the Funds. Any investor eligible for this arrangement should so
indicate in writing at the time of the purchase.
Offering to Employees of The New England and Associated Entities.
There is no sales charge, CDSC or initial investment minimum related to
investments in Class A shares of any Fund by certain current and
retired employees of the Trusts' investment advisers or subadvisers,
New England Funds, L.P., The New England or any other company
affiliated with The New England; current and former directors and
trustees of the Trusts, The New England or their predecessor companies;
agents and general agents of The New England and its insurance company
subsidiaries; current and retired employees of such agents and general
agents; registered representatives of broker-dealers that have selling
arrangements with New England Funds, L.P.; the spouse, parents,
children, siblings, grandparents or grandchildren of the persons listed
above; any trust, pension, profit sharing or other benefit plan for any
of the foregoing persons; and any separate account of The New England
or of any insurance company affiliated with The New England.
Eligible Governmental Authorities. There is no sales charge or
contingent deferred sales charge related to investments in Class A
shares of any Fund by any state, county or city or any instrumentality,
department, authority or agency thereof that has determined that a Fund
is a legally permissible investment and that is prohibited by
applicable investment laws from paying a sales charge or commission in
connection with the purchase of shares of any registered investment
company.
Investment Advisory Accounts. Shares of any Fund may be purchased
at net asset value by investment advisers, financial planners or other
intermediaries who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee
for their services; clients of such investment advisers, financial
planners or other intermediaries who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser, financial planner or other intermediary on the
books and records of the broker or agent; and retirement and deferred
compensation plans and trusts used to fund those plans, including, but
not limited to, those defined in Sections 401(a), 403(b), 401(k) and
457 of the Code and "rabbi trusts." Investors may be charged a fee if
they effect transactions through a broker or agent.
Certain Broker-Dealers and Financial Services Organizations.
Shares of any Fund also may be purchased at net asset value through
certain broker-dealers and/or financial services organizations without
any transaction fee. Such organizations may receive compensation, in
an amount of up to 0.35% annually of the average value of the Fund
shares held by their customers. This compensation may be paid by NEFM
and/or a Fund's subadviser out of their own assets, or may be paid
indirectly by the Fund in the form of servicing, distribution or
transfer agent fees.
Shareholders of Reich and Tang Government Securities Trust.
Shareholders of Reich and Tang Government Securities Trust may exchange
their shares of that fund for Class A shares of the Funds at net asset
value and without imposition of a sales charge.
The reduction or elimination of the sales charge in connection with
sales described above reflects the absence or reduction of sales
expenses associated with such sales.
SHAREHOLDER SERVICES
Open Accounts
A shareholder's investment is automatically credited to an open
account maintained for the shareholder by State Street Bank. Following
each transaction in the account, a shareholder will receive a
confirmation statement disclosing the current balance of shares owned
and the details of recent transactions in the account. After the close
of each calendar year, State Street Bank will send each shareholder a
statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This statement
should be retained as a permanent record. New England Funds, L.P. may
charge a fee for providing duplicate information.
The open account system provides for full and fractional shares
expressed to three decimal places and, by making the issuance and
delivery of stock certificates unnecessary, eliminates problems of
handling and safekeeping, and the cost and inconvenience of replacing
lost, stolen, mutilated or destroyed certificates.
The costs of maintaining the open account system are paid by the
Funds and no direct charges are made to shareholders. Although the
Funds have no present intention of making such direct charges to
shareholders, they each reserve the right to do so. Shareholders will
receive prior notice before any such charges are made.
Automatic Investment Plans (Class A, B and C Shares)
Subject to each Fund's investor eligibility requirements,
investors may automatically invest in additional shares of a Fund on a
monthly basis by authorizing New England Funds, L.P. to draw checks on
an investor's bank account. The checks are drawn under the Investment
Builder Program, a program designed to facilitate such periodic
payments, and are forwarded to New England Funds, L.P. for investment
in the Fund. A plan may be opened with an initial investment of $50 or
more and thereafter regular monthly checks of $50 or more will be drawn
on the investor's account. The reduced minimum initial investment
pursuant to an automatic investment plan is referred to in the
Prospectus. An Investment Builder application must be completed to
open an automatic investment plan. An application may be found in the
Prospectus or may be obtained by calling New England Funds, L.P. at 1-
800-225-5478 or your investment dealer.
This program is voluntary and may be terminated at any time by New
England Funds, L.P. upon notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any
time by the investor by written notice to New England Funds, L.P.,
which must be received at least five business days prior to any payment
date. The plan may be discontinued by State Street Bank at any time
without prior notice if any check is not paid upon presentation; or by
written notice to you at least thirty days prior to any payment date.
State Street Bank is under no obligation to notify shareholders as to
the nonpayment of any check.
Retirement Plans Offering Tax Benefits (Class A, B and C Shares)
The federal tax laws provide for a variety of retirement plans
offering tax benefits. These plans may be funded with shares of the
Funds or with certain other investments. The plans include H.R. 10
(Keogh) plans for self-employed individuals and partnerships,
individual retirement accounts (IRAs), corporate pension trust and
profit sharing plans, including 401(k) plans, and retirement plans for
public school systems and certain tax exempt organizations, i.e.,
403(b) plans.
The reduced minimum initial investment available to retirement
plans offering tax benefits is referred to in the Prospectus. For
these plans, initial and subsequent investments in a Fund must be at
least $250 for each participant in corporate pension and profit sharing
plans, IRAs and Keogh plans and $50 for subsequent investments. There
is a special initial and subsequent investment minimum of $25 for
payroll deduction investment programs for 401(k), SARSEP, 403(b) and
certain other retirement plans. Income dividends and capital gain
distributions must be reinvested (unless the investor is over age 59 1/2
or disabled). Plan documents and further information can be obtained
from New England Funds, L.P.
An investor should consult a competent tax or other adviser as to
the suitability of a Fund's shares as a vehicle for funding a plan, in
whole or in part, under the Employee Retirement Income Security Act of
1974 and as to the eligibility requirements for a specific plan and its
state as well as federal tax aspects.
Certain retirement plans may also be eligible to purchase Class Y
shares. See the Prospectus relating to Class Y shares.
Systematic Withdrawal Plans (Class A, B and C Shares)
An investor owning a Fund's shares having a value of $5,000 or
more at the current public offering price may establish a Systematic
Withdrawal Plan providing for periodic payments of a fixed or variable
amount. An investor may terminate the plan at any time. A form for
use in establishing such a plan is available from the servicing agent
or your investment dealer. Withdrawals may be paid to a person other
than the shareholder if a signature guarantee is provided. Please
consult your investment dealer or New England Funds, L.P.
A shareholder under a Systematic Withdrawal Plan may elect to
receive payments monthly, quarterly, semiannually or annually for a
fixed amount of not less than $50 or a variable amount based on (1) the
market value of a stated number of shares, (2) a specified percentage
of the account's market value or (3) a specified number of years for
liquidating the account (e.g., a 20-year program of 240 monthly
payments would be liquidated at a monthly rate of 1/240, 1/239, 1/238,
etc.). The initial payment under a variable payment option may be $50
or more.
In the case of shares subject to a CDSC, the amount or percentage
you specify may not, on an annualized basis, exceed 10% of the value,
as of the time you make the election, of your account with the Fund
with respect to which you are electing the Plan. Withdrawals of Class
B shares of a Fund under the Plan will be treated as redemptions of
shares purchased through the reinvestment of Fund distributions, or, to
the extent such shares in your account are insufficient to cover Plan
payments, as redemptions from the earliest purchased shares of such
Fund in your account. No CDSC applies to a redemption pursuant to the
Plan.
All shares under the Plan must be held in an open (uncertificated)
account. Income dividends and capital gain distributions will be
reinvested (without a sales charge in the case of Class A shares) at
net asset value determined on the record date.
Since withdrawal payments represent proceeds from the liquidation
of shares, withdrawals may reduce and possibly exhaust the value of the
account, particularly in the event of a decline in net asset value.
Accordingly, the shareholder should consider whether a Systematic
Withdrawal Plan and the specified amounts to be withdrawn are
appropriate in the circumstances. The Funds and New England Funds,
L.P. make no recommendations or representations in this regard. It may
be appropriate for the shareholder to consult a tax adviser before
establishing such a plan.
It may be disadvantageous for a shareholder to purchase on a
regular basis additional Fund shares with a sales charge while
redeeming shares under a Systematic Withdrawal Plan. Accordingly, the
Funds and New England Funds, L.P. do not recommend additional
investments in Class A shares by a shareholder who has a withdrawal
plan in effect and who would be subject to a sales load on such
additional investments.
Because of statutory restrictions this plan is not available to
pension or profit-sharing plans, IRAs or 403(b) plans that have State
Street Bank as trustee.
Exchange Privilege
A shareholder may exchange the shares of any Fund (in the case of
Class A shares of the Adjustable Rate and California and New York
Funds, only if such shares have been held for at least six months) for
shares of the same class of any other fund of the Trusts (subject to
the investor eligibility requirements of the fund into which the
exchange is being made) on the basis of relative net asset values at
the time of the exchange without any sales charge. When an exchange is
made from the Class B shares of one Fund to the Class B shares of
another Fund, the shares received in exchange will have the same age
characteristics as the shares exchanged. The age of the shares
determines the expiration of the CDSC and the conversion date. If you
own Class A and Class B shares, you may also elect to exchange your
shares of any fund of the Trusts for shares of the same class of the
Money Market Funds. Class C shares may also be exchanged for Class A
shares of the Money Market Funds. On all exchanges of Class A shares
subject to a CDSC and Class B shares into the Money Market Funds, the
exchange stops the aging period relating to the CDSC and, for Class B
shares only, conversion to Class A shares. The aging resumes only when
an exchange is made back into Class B shares of a fund of the Trusts.
If you own Class Y shares, you may exchange those shares for Class Y
shares of other Funds or for Class A shares of the Money Market Funds.
These options are summarized in the Prospectus. An exchange may be
effected, provided that neither the registered name nor address of the
accounts are different and provided that a certificate representing the
shares being exchanged has not been issued to the shareholder, by (1) a
telephone request to New England Funds, L.P. at 1-800-225-5478 or (2) a
written exchange request to New England Funds, P.O. Box 8551, Boston,
MA 02266-8551. You must acknowledge receipt of a current Prospectus
for a Fund before an exchange for that Fund can be effected.
The investment objectives of the funds in the Trusts and the Money
Market Funds are as follows:
Stock Funds:
New England Growth Fund seeks long-term growth of capital through
investments in equity securities of companies whose earnings are
expected to grow at a faster rate than the United States economy.
New England Capital Growth Fund seeks long-term growth of capital.
New England Value Fund seeks a reasonable long-term investment
return from a combination of market appreciation and dividend income
from equity securities.
New England Balanced Fund seeks a reasonable long-term investment
return from a combination of long-tern capital appreciation and
moderate current income.
New England Growth Opportunities Fund seeks opportunities for long-
term growth of capital and income.
New England International Equity Fund seeks total return from long-
term growth of capital and dividend income primarily through investment
in a diversified portfolio of marketable international equity
securities.
New England Star Advisers Fund seeks long-term growth of capital.
New England Star Worldwide Fund seeks long-term growth of capital.
Growth Fund of Israel seeks long-term growth of capital.
Bond Funds:
New England Government Securities Fund seeks a high level of
current income consistent with safety of principal by investing in U.S.
Government securities and engaging in transactions involving related
options, futures and options on futures.
New England Limited Term U.S. Government Fund seeks a high current
return consistent with preservation of capital.
New England Adjustable Rate U.S. Government Fund seeks a high
level of current income consistent with low volatility of principal.
New England Strategic Income Fund seeks high current income with a
secondary objective of capital growth.
New England Bond Income Fund seeks a high level of current income
consistent with what the Fund considers reasonable risk. The Bond
Income Fund invests primarily in corporate and U.S. Government bonds.
New England High Income Fund seeks high current income plus the
opportunity for capital appreciation to produce a high total return.
New England Municipal Income Fund seeks as high a level of current
income exempt from federal income taxes as is consistent with
reasonable risk and protection of shareholders' capital. The Municipal
Income Fund invests primarily in debt securities of municipal issuers,
the interest of which is exempt from federal income tax but may be
subject to the federal alternative minimum tax, and may engage in
transactions in financial futures contracts and options on futures.
New England Massachusetts Tax Free Income Fund seeks as high a
level of current income exempt from federal income tax and
Massachusetts personal income taxes as Back Bay Advisors, the Fund's
subadviser, believes is consistent with preservation of capital.
New England Intermediate Term Tax Free Fund of California seeks as
high a level of current income exempt from federal income tax and its
state personal income tax as is consistent with preservation of
capital.
New England Intermediate Term Tax Free Fund of New York seeks as
high a level of current income exempt from federal income tax and its
state personal income tax and New York City personal income tax as is
consistent with preservation of capital.
Money Market Funds:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum current income consistent with
preservation of capital and liquidity.
U.S. Government Series -- highest current income consistent with
preservation of capital and liquidity.
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST -- current income exempt from
federal income taxes consistent with preservation of capital and
liquidity.
As of April 15, 1996, the net assets of the funds in the Trusts
and the Money Market Funds totaled over $5 billion.
An exchange constitutes a sale of shares for federal income tax
purposes in which the investor may realize a long- or short-term
capital gain or loss.
Automatic Exchange Plan (Class A, B and C Shares)
As described in the Prospectus following the caption "Owning Fund
Shares," a shareholder may establish an Automatic Exchange Plan under
which shares of a Fund are automatically exchanged each month for
shares of the same class of one or more of the other funds in the
Trusts. Registration on all accounts must be identical. The exchanges
are made on the 15th of each month or the first business day thereafter
if the 15th is not a business day until the account is exhausted or
until New England Funds, L.P. is notified in writing to terminate the
plan. Exchanges may be made in amounts of $500 or over ($1000 for
spousal IRAs). The Service Options Form is available from New England
Funds, L.P. or your financial representative to establish an Automatic
Exchange Plan.
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 shares and on purchases of
Class B shares. For purposes of the CDSC, an exchange of shares from
one Fund to another series of the Trusts is not considered a redemption
or a purchase. For federal tax purposes, however, such an exchange is
considered a sale and a purchase and, therefore, would be considered a
taxable event on which you may recognize a gain or loss. In
determining whether a CDSC is applicable to a redemption of Class B
shares, the calculation will be determined in the manner that results
in the lowest rate being charged. Therefore, it will be assumed that
the redemption is first of any Class A shares in the shareholder's Fund
account, second of shares held for over five years, third of shares
issued in connection with dividend reinvestment and fourth of shares
held longest during the five-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset
value of shares since the time of purchase or reinvested distributions
associated with such shares. Unless you request otherwise at the time
of redemption, the CDSC is deducted from the redemption, not the amount
remaining in the account.
To illustrate, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor
has acquired 10 additional shares under dividend reinvestment. If at
such time the investor makes his or her first redemption of 50 shares
(proceeds of $600), 10 shares will not be subject to the CDSC because
of dividend reinvestment. With respect to the remaining 40 shares, the
CDSC is applied only to the original cost of $10 per share and not to
the increase in the net asset value of $2 per share. Therefore, $400
of the $600 redemption proceeds will be charged at a rate of 3% (the
applicable rate in the second year after purchase).
Signatures on redemption requests must be guaranteed by an
"Eligible Guarantor Institution," as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. However, a signature guarantee will
not be required if the proceeds of the redemption do not exceed
$100,000 and the proceeds check is made payable to the registered
owner(s) and mailed to the record address.
If you select the telephone redemption service in the manner
described in the next paragraph, shares of a Fund may be redeemed by
calling toll free 1-800-225-5478. A wire fee, currently $5.00, will be
deducted from the proceeds. Telephone redemption requests must be
received by the close of regular trading on the New York Stock
Exchange. Requests made after that time or on a day when the New York
Stock Exchange is not open for business cannot be accepted and a new
request on a later day will be necessary. The proceeds of a telephone
withdrawal will normally be sent on the first business day following
receipt of a proper redemption request.
In order to redeem shares by telephone, a shareholder must either
select this service when completing the Fund application or must do so
subsequently on the Service Options Form, available from your
investment dealer. When selecting the service, a shareholder must
designate a bank account to which the redemption proceeds should be
sent. Any change in the bank account so designated may be made by
furnishing to your investment dealer a completed Service Options Form
with a signature guarantee. Whenever the Service Options Form is used,
the shareholder's signature must be guaranteed as described above.
Telephone redemptions may only be made if the designated bank is a
member of the Federal Reserve System or has a correspondent bank that
is a member of the System. If the account is with a savings bank, it
must have only one correspondent bank that is a member of the System.
The redemption price will be the net asset value per share (less
any applicable CDSC) next determined after the redemption request and
any necessary special documentation are received by State Street Bank
or your investment dealer in proper form. Payment normally will be
made by State Street Bank on behalf of the Fund within seven days
thereafter. However, in the event of a request to redeem shares for
which the Fund has not yet received good payment, the Fund reserves the
right to withhold payments of redemption proceeds if the purchase of
shares was made by a check which was deposited less than fifteen days
prior to the redemption request (unless the Fund is aware that the
check has cleared).
The CDSC may be waived on redemptions made from IRA accounts due
to attainment of age 59 1/2 for IRA shareholders who established accounts
prior to January 3, 1995. The CDSC may also be waived on redemptions
made from IRA accounts due to death, disability, return of excess
contribution, required minimum distributions at age 70 1/2 (waivers apply
only to amounts necessary to meet the required minimum amount), certain
withdrawals pursuant to a systematic withdrawal plan, not be exceed 10%
annually of the value of the account, and redemptions made from the
account to pay custodial fees.
The CDSC may be waived on redemptions made from 403(b)(7)
custodial accounts due to attainment of age 59 1/2 for shareholders who
established custodial accounts prior to January 3, 1995.
The CDSC may also by waived on redemptions necessary to pay plan
participants or beneficiaries from qualified retirement plans under
Section 401 of the Code, including profit sharing plans, money purchase
plans, 401(k) and custodial accounts under Section 403(b)(7) of the
Code. Distributions necessary to pay plan participants and
beneficiaries include payment made due to death, disability, separation
from service, normal or early retirement as defined in the plan
document, loans from the plan and hardship withdrawals, return of
excess contributions, required minimum distributions at age 70 1/2
(waivers only apply to amounts necessary to meet the required minimum
amount), certain withdrawals pursuant to a systematic withdrawal plan,
not to exceed 10% annually of the value of your account, and
redemptions made from qualified retirement accounts or Section
403(b)(7) custodial accounts necessary to pay custodial fees.
A CDSC will apply in the event of plan level transfers, including
transfers due to changes in investment where assets are transferred
outside of New England Funds, including IRA and 403(b)(7) participant-
directed transfers of assets to other custodians (except for the
reasons given above) or qualified transfers of assets due to trustee-
directed movement of plan assets due to merger, acquisition or addition
of additional funds to the plan.
The Funds will normally redeem shares for cash; however, the Funds
reserve the right to pay the redemption price wholly or partly in kind
if the relevant Trust's board of trustees determines it to be advisable
and in the interest of the remaining shareholders of a Fund. If
portfolio securities are distributed in lieu of cash, the shareholder
will normally incur brokerage commissions upon subsequent disposition
of any such securities. However, the Funds have elected to be governed
by Rule 18f-1 under the 1940 Act, pursuant to which the Funds are
obligated to redeem shares solely in cash for any shareholder during
any 90-day period up to the lesser of $250,000 or 1% of the total net
asset value of the relevant Trust at the beginning of such period. The
Funds do not currently intend to impose any redemption charge (other
than the CDSC imposed by the Funds' distributor), although they reserve
the right to charge a fee not exceeding 1% of the redemption price. A
redemption constitutes a sale of shares for federal income tax purposes
on which the investor may realize a long- or short-term capital gain or
loss. See also "Income Dividends, Capital Gain Distributions and Tax
Status," below.
Reinstatement Privilege (Class A shares only)
The Prospectuses describe redeeming shareholders' reinstatement
privileges for Class A shares. Written notice and the investment check
from persons wishing to exercise this reinstatement privilege must be
received by your investment dealer within 120 days after the date of
the redemption. The reinstatement or exchange will be made at net
asset value next determined after receipt of the notice and the
investment check and will be limited to the amount of the redemption
proceeds or to the nearest full share if fractional shares are not
purchased.
Even though an account is reinstated, the redemption will
constitute a sale for federal income tax purposes. Investors who
reinstate their accounts by purchasing shares of the Funds should
consult with their tax advisers with respect to the effect of the "wash
sale" rule if a loss is realized at the time of the redemption.
STANDARD PERFORMANCE MEASURES
Calculations of Yield
Each Fund (except the Growth, Value, Growth Opportunities, Star
Advisers, International Equity and Capital Growth Funds) may advertise
the yield of its Class A, Class B, Class C and Class Y shares. Yield
for each class will be computed by annualizing net investment income
per share for a recent 30-day period and dividing that amount by the
maximum offering price per share of the relevant class (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on
the last trading day of that period. Net investment income will
reflect amortization of any market value premium or discount of fixed-
income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. Each Fund's
yield will vary from time to time depending upon market conditions, the
composition of its portfolio and operating expenses of the Trust
allocated to each Fund. These factors, possible differences in the
methods used in calculating yield and the tax exempt status of
distributions should be considered when comparing a Fund's yield to
yields published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the
value of the Fund's shares and to the relative risks associated with
the investment objectives and policies of the Fund. Yields do not take
into account any applicable sales charges or CDSC. Yield may be stated
with or without giving effect to any expense limitations in effect for
a Fund.
The Municipal Income Fund, the Massachusetts Fund and the
California and New York Funds each may also advertise a taxable
equivalent yield, calculated as described above except that, for any
given tax bracket, net investment income will be calculated using as
gross investment income an amount equal to the sum of (i) any taxable
income of the Fund plus (ii) the tax exempt income of the Fund divided
by the difference between 1 and the effective federal (or combined
federal and state) income tax rate for taxpayers in that tax bracket.
At any time in the future, yields and total return may be higher
or lower than past yields and there can be no assurance that any
historical results will continue.
Investors in the Funds are specifically advised that share prices,
expressed as the net asset values per share, will vary just as yield
will vary. An investor's focus on the yield of a Fund to the exclusion
of the consideration of the share price of that Fund may result in the
investor's misunderstanding the total return he or she may derive from
the Fund.
Calculation of Total Return. Total return is a measure of the
change in value of an investment in a Fund over the period covered,
which assumes that any dividends or capital gains distributions are
automatically reinvested in shares of the same class of that Fund
rather than paid to the investor in cash. The formula for total return
used by the Funds is prescribed by the SEC and includes three steps:
(1) adding to the total number of shares of the particular class that
would be purchased by a hypothetical $1,000 investment in the Fund
(with or without giving effect to the deduction of sales charge or
CDSC, if applicable) all additional shares that would have been
purchased if all dividends and distributions paid or distributed during
the period had been automatically reinvested; (2) calculating the value
of the hypothetical initial investment as of the end of the period by
multiplying the total of shares owned at the end of the period by the
net asset value per share of the relevant class on the last trading day
of the period; (3) dividing this account value for the hypothetical
investor by the amount of the initial investment, and annualizing the
result for periods of less than one year. Total return may be stated
with or without giving effect to any expense limitations in effect for
a Fund.
Performance Comparisons
Yield and Total Return. Yields and total returns will generally
be higher for Class A shares than for Class B and Class C shares of the
same Fund, because of the higher levels of expenses borne by the Class
B and Class C shares. Because of its lower operating expenses, Class Y
shares of each Fund can be expected to achieve a higher yield and total
return than the same Fund's Class A, Class B and Class C shares. The
Funds may from time to time include their yield and total return in
advertisements or in information furnished to present or prospective
shareholders. The Funds may from time to time include in
advertisements its total return and the ranking of those performance
figures relative to such figures for groups of mutual funds categorized
by Lipper Analytical Services as having similar investment objectives.
Total return may also be used to compare the performance of the
Fund against certain widely acknowledged standards or indices for stock
and bond market performance or against the U.S. Bureau of Labor
Statistics' Consumer Price Index.
The Standard & Poor's Composite Index of 500 Stocks (the "S&P
500") is a market value-weighted and unmanaged index showing the
changes in the aggregate market value of 500 stocks relative to the
base period 1941-43. The S&P 500 is composed almost entirely of common
stocks of companies listed on the New York Stock Exchange, although the
common stocks of a few companies listed on the American Stock Exchange
or traded over-the-counter are included. The 500 companies represented
include 400 industrial, 60 transportation and 40 financial services
concerns. The S&P 500 represents about 80% of the market value of all
issues traded on the New York Stock Exchange.
The Salomon Brothers World Government Bond Index includes a broad
range of institutionally-traded fixed-rate government securities issued
by the national governments of the nine countries whose securities are
most actively traded. The index generally excludes floating- or
variable-rate bonds, securities aimed principally at non-institutional
investors (such as U.S. Savings Bonds) and private-placement type
securities.
The Shearson Lehman Government Bond Index (the "SL Government
Index") is a measure of the market value of all public obligations of
the U.S. Treasury; all publicly issued debt of all agencies of the U.S.
Government and all quasi-federal corporations; and all corporate debt
guaranteed by the U.S. Government. Mortgage backed securities, flower
bonds and foreign targeted issues are not included in the SL Government
Index.
The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of
approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the SL Government/Corporate Index, an
issue must have amounts outstanding in excess of $1 million, have at
least one year to maturity and be rated "Baa" or higher ("investment
grade") by a nationally recognized rated agency.
The Lehman Brothers Municipal Bond Index is a composite measure of
the total return performance of the municipal bond market. This index
is computed from prices on approximate 1800 bonds.
The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York
Stock Exchange.
The Merrill Lynch High Yield Index includes over 750 issues and
represents public debt greater than $10 million (original issuance
rated BBB/BB and below), and the First Boston High Yield Index includes
over 350 issues and represents all public debt greater than $100
million (original issuance and rated BBB/BB and below).
The Salomon Brothers Broad Investment Grade Bond Index is a price
composite of a broad range of institutionally based U.S. Government
mortgage-backed and corporate debt securities of investment outstanding
of at least $1 million and with a remaining period to maturity of at
least one year.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the
prices of goods and services in major expenditure groups.
Lipper Analytical Services, Inc. is an independent service that
monitors the performance of over 1,300 mutual funds, and calculates
total return for the funds grouped by investment objective.
The Morgan Stanley Capital International Europe, Australia and Far
East (Gross Domestic Product) Index (the "EAFE Index") is a market-
value weighted and unmanaged index of common stocks traded outside the
U.S. The stocks in the index are selected with reference to national
and industry representation and weighted in the EAFE Index according to
their relative market value (market price per share times the number of
shares outstanding).
The Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE [GDP] Index") is a market-value weighted and
unmanaged index of common stocks traded outside the U.S. The stocks in
the index are selected with reference to national and industry
representation and weighted in the EAFE (GDP) Index according to their
relative market values. The relative market value of each country is
further weighted with reference to the country's relative gross
domestic product.
The International Equity Fund may compare its performance to the
Salomon-Russell Broad Market Index Global X-US and to universes of
similarly managed investment pools compiled by Frank Russell Company
and Intersec Research Corporation.
From time to time, the Adjustable Rate Fund advertisements and
other materials and communications may cite statistics to reflect the
Fund's performance over time, utilizing comparisons to indexes
including those based on U.S. Treasury securities and those derived
from a calculated measure such as a cost of funds index or a moving
average of mortgage rates. Commonly used indexes include the one-,
three-, five-, ten- and 30-year constant maturity Treasury rates, the
three-month and 180-day Treasury bill rate, rates on longer-term
Treasury certificates, the 11th District Federal Home Loan Bank Cost of
Funds, the National Median Cost of Funds, the one-month, three-month,
six-month or one-year London Interbank Offered Rate (LIBOR), the prime
lending rate of one or several banks, or commercial paper rates. Some
indexes, such as the one-year constant maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the
11th District Federal Home Loan Bank Cost of Funds Index, tend to lag
behind changes in market rate levels and tend to be somewhat less
volatile.
The current interest rate on many FNMA ARMs is set by reference to
the 11th District Cost of Funds Index published monthly by the Federal
Reserve. Since June 1987, the current interest rate on these ARMs,
measured on a monthly basis, has been higher than the average yield of
taxable money market funds represented by Donoghue's Taxable Money Fund
Average and current rates on newly issued one year bank certificates of
deposit. The interest rates on other ARMs and the yield on the
Adjustable Rate Fund's portfolio may be higher or lower than the
interest rates on FNMA ARMs and there is also no assurance that
historical yield relationships among different types of investments
will continue.
Advertising and promotional materials may refer to the maturity
and duration of the Bond Funds. Maturity refers to the period of time
before a bond or other debt instrument becomes due. Duration is a
commonly used measure of the price responsiveness of a fixed-income
security to an interest rate change (i.e., the change in price one can
expect from a given change in yield).
Articles and releases, developed by the Funds and other parties,
about the Funds regarding performance, rankings, statistics and
analyses of the individual Funds' and the fund group's asset levels and
sales volumes, numbers of shareholders by Fund or in the aggregate for
New England Funds, statistics and analyses of industry sales volumes
and asset levels, and other characteristics may appear in advertising,
promotional literature, publications, including, but not limited to,
those publications listed in Appendix B to this Statement, and on
various computer networks, for example, the Internet. In particular,
some or all of these publications may publish their own rankings or
performance reviews of mutual funds, including the Funds. References
to or reprints of such articles may be used in the Funds' advertising
and promotional literature. Such advertising and promotional material
may refer to NEIC, its structure, goals and objectives and the advisory
subsidiaries of NEIC, including their portfolio management
responsibilities, portfolio managers and their categories and
background; their tenure, styles and strategies and their shared
commitment to fundamental investment principles and may identify
specific clients, as well as discuss the types of institutional
investors who have selected the advisers to manage their investment
portfolios and the reasons for that selection. The references may
discuss the independent, entrepreneurial nature of each advisory
organization and allude to or include excerpts from articles appearing
in the media regarding NEIC, its advisory subsidiaries and their
personnel. For additional information about the Funds' advertising and
promotional literature, see Appendix C.
The Funds may enter into arrangements with banks exempted from
registration under the Securities Exchange Act of 1934. Advertising
and sales literature developed to publicize such arrangements will
explain the relationship of the bank to New England Funds and New
England Funds, L.P. as well as the services provided by the bank
relative to the Funds. The material may identify the bank by name and
discuss the history of the bank including, but not limited to, the type
of bank, its asset size, the nature of its business and services and
its status and standing in the industry.
The Funds may use the accumulation charts below in their
advertisements to demonstrate the benefits of monthly savings at an 8%
and 10% rate of return, respectively.
Investments At 8% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- -------
$ 50 3,698 9,208 17,417 29,647 47,868 75,015
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
Investments At 10% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- ---------
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
The Funds' advertising and sales literature may refer to
historical, current and prospective political, social, economic and
financial trends and developments that affect domestic and
international investment as it relates to any of the New England Funds.
The Funds' advertising and sales literature may include historical and
current performance and total returns of investment alternatives to the
New England Funds. For example, the Adjustable Rate Fund's advertising
and sales literature may include the historical and current performance
and total returns of bank certificates of deposits, bank and mutual
fund money market accounts and other income investments; and the
advertising and sales literature of any of the New England Funds, but
particularly that of Growth Fund of Israel, New England Star Worldwide
Fund and New England International Equity Fund, may discuss all of the
above international developments, including but not limited to,
international developments involving Europe, North and South America,
Asia, the Middle East and Africa, as well as events and issues
affecting specific countries that directly or indirectly may have had
consequences for the New England Funds or may have influenced past
performance or may influence current or prospective performance of the
New England Funds. Articles, releases, advertising and literature may
discuss the range of services offered by the Trusts and New England
Funds, L.P., as distributor and transfer agent of the Funds, with
respect to investing in shares of the Funds and customer service. Such
materials may discuss the multiple classes of shares available through
the Trusts and their features and benefits, including the details of
the pricing structure.
New England Funds, L.P. will make reference in its advertising and
sales literature to awards, citations and honors bestowed on it by
industry organizations and other observers and raters including, but
not limited to Dalbar's Quality Tested Service Seal and Key Honors
Award. Such reference may explain the criteria for the award, indicate
the nature and significance of the honor and provide statistical and
other information about the award and New England Funds, L.P.'s
selection including, but not limited to, the scores and categories in
which New England Funds, L.P. excelled, the names of funds and fund
companies that have previously won the award and comparative
information and data about those against whom New England Funds, L.P.
competed for the award, honor or citation.
New England Funds, L.P. may publish, allude to or incorporate in
its advertising and sales literature testimonials from shareholders,
clients, brokers who sell or own shares, broker-dealers, industry
organizations and officials and other members of the public, including,
but not limited to, fund performance, features and attributes, or
service and assistance provided by departments within the organization,
employees or associates of New England Funds, L.P.
Advertising and sales literature may also refer to the beta
coefficient of the New England Funds. A beta coefficient is a measure
of systematic or undiversifiable risk of a stock. A beta coefficient
of more than 1 means that the company's stock has shown more volatility
than the market index (e.g., the S&P 500) to which it is being related.
If the beta is less than 1, it is less volatile than the market average
to which it is being compared. If it equals 1, its risk is the same as
the market index. High variability in stock price may indicate greater
business risk, instability in operations and low quality of earnings.
The beta coefficients of the New England Funds may be compared to the
beta coefficients of other funds.
The Funds may enter into arrangements with banks exempted from
registration under the Securities Exchange Act of 1934. Advertising
and sales literature developed to publicize such arrangements will
explain the relationship of the bank to New England Funds and New
England Funds, L.P. as well as the services provided by the bank
relative to the Funds. The material may identify the bank by name and
discuss the history of the bank including, but not limited to, the type
of bank, its asset size, the nature of its business and services and
its status and standing in the industry.
In addition, sales literature may be published concerning topics
of general investor interest for the benefit of registered
representatives and the Funds' prospective shareholders. These
materials may include, but are not limited to, discussions of college
planning, retirement planning, reasons for investing and historical
examples of the investment performance of various classes of
securities, securities markets and indices.
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
As described in the Funds' Prospectuses, it is the policy of each
Fund to pay its shareholders, as dividends, substantially all net
investment income and to distribute annually all net realized long-term
capital gains, if any, after offsetting any capital loss carryovers.
Income dividends and capital gain distributions are payable in
full and fractional shares of the relevant class of the particular Fund
based upon the net asset value determined as of the close of the New
York Stock Exchange on the record date for each dividend or
distribution. Shareholders, however, may elect to receive their income
dividends or capital gain distributions, or both, in cash. The
election may be made at any time by submitting a written request
directly to New England Funds. In order for a change to be in effect
for any dividend or distribution, it must be received by New England
Funds on or before the record date for such dividend or distribution.
As required by federal law, detailed federal tax information will
be furnished to each shareholder for each calendar year on or before
January 31 of the succeeding year.
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code. In order to qualify, each Fund
must, among other things (i) derive at least 90% of its gross income
from dividends, interest, payments with respect to certain securities
loans, gains from sale of securities or foreign currencies, or other
income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in
such stock, securities or currencies; (ii) derive less than 30% of its
gross income from gains from the sale or other disposition of
securities held for less than three months; (iii) distribute at least
90% of its dividend, interest and certain other taxable income each
year; and (iv) at the end of each fiscal quarter maintain at least 50%
of the value of its total assets in cash, government securities,
securities of other regulated investment companies, other securities of
issuers which represent, with respect to each issuer, no more than 5%
of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and with no more than 25% of its
assets 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 and businesses. So long as it
qualifies for treatment as a regulated investment company, a Fund will
not be subject to federal income tax on income paid to its shareholders
in the form of dividends or capital gains distributions.
An excise tax at the rate of 4% will be imposed on the excess, if
any, of each Fund's "required distribution" over its actual
distributions in any calendar year. Generally, the "required
distribution" is 98% of the Fund's ordinary income for the calendar
year plus 98% of its capital gain net income recognized during the one-
year period ending on October 31 (or December 31, if the Fund so
elects) plus undistributed amounts from prior years. Each Fund intends
to make distributions sufficient to avoid imposition of the excise tax.
Distributions declared by a Fund during October, November or December
to shareholders of record on a date in any such month and paid by the
Fund during the following January will be treated for federal tax
purposes as paid by the Fund and received by shareholders on December
31 of the year in which declared.
Shareholders of each Fund will be subject to federal income taxes
on distributions made by the Fund (other than "exempt-interest
dividends" paid by the Municipal Income, Massachusetts, New York and
California Funds, as described in the relevant Prospectuses) whether
received in cash or additional shares of the Fund. Distributions by
each Fund of net income and short-term capital gains, if any, will be
taxable to shareholders as ordinary income. Distributions of long-term
capital gains, if any, will be taxable to shareholders as long-term
capital gains, without regard to how long a shareholder has held shares
of the Fund. A loss on the sale of shares held for 6 months or less
will be treated as a long-term capital loss to the extent of any long-
term capital gain dividend paid to the shareholder with respect to such
shares.
Dividends and distributions on Fund shares received shortly after
their purchase, although in effect a return of capital, are subject to
federal income taxes.
The International Equity Fund may be eligible to make and, if
eligible, may make an election under Section 853 of the Code so that
its shareholders will be able to claim a credit or deduction on their
income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes
paid by the Fund to foreign countries. The ability of shareholders of
the Fund to claim a foreign tax credit is subject to certain
limitations imposed by Section 904 of the Code, which in general limit
the amount of foreign tax that may be used to reduce a shareholder's
U.S. tax liability to that amount of U.S. tax which would be imposed on
the amount and type of income in respect of which the foreign tax was
paid. A shareholder who for U.S. income tax purposes claims a foreign
tax credit in respect of Fund distributions may not claim a deduction
for foreign taxes paid by the Fund, regardless of whether the
shareholder itemizes deductions. Also, under Section 63 of the Code,
no deduction in respect of income taxes paid to foreign countries may
be claimed by shareholders who do not itemize deductions on their
federal income tax returns. The Fund will notify shareholders each
year of the amount for dividends and distributions and the
shareholder's pro rata share of qualified taxes paid by the Fund to
foreign countries.
Each Fund's transactions, if any, in foreign currencies are likely
to result in a difference between the Fund's book income and taxable
income. This difference may cause a portion of the Fund's income
distributions to constitute a return of capital for tax purposes or
require the Fund to make distributions exceeding book income to avoid
excise tax liability and to qualify as a regulated investment company.
The International Fund 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, the Fund has
elected to "mark to market" annually its investments in such entities
and to distribute any resulting net gain to shareholders. As a result,
the Fund may be required to sell securities it would have otherwise
continued to hold in order to make distributions to shareholders in or
order to avoid any Fund-level tax.
Redemptions and exchanges of each Fund's shares are taxable events
and, accordingly, shareholders may realize gains and losses on these
transactions. If shares have been held for more than one year, gain or
loss realized will be long-term capital gain or loss, provided the
shareholder holds the shares as a capital asset. Furthermore, no loss
will be allowed on the sale of Fund shares to the extent the
shareholder acquired other shares of the same Fund within 30 days prior
to the sale of the loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and related regulations currently in
effect. For the complete provisions, reference should be made to the
pertinent Code sections and regulations. The Code and regulations are
subject to change by legislative or administrative actions.
Dividends and distributions also may be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state or local taxes.
The foregoing discussion relates solely to U.S. federal income tax
law. Non-U.S. investors should consult their tax advisers concerning
the tax consequences of ownership of shares of the Fund, including the
possibility that distributions may be subject to a 30% United States
withholding tax (or a reduced rate of withholding provided by treaty).
FINANCIAL STATEMENTS
The financial statements of New England Funds Trust I and New
England Funds Trust II and the related reports of independent
accountants included in their annual reports for the year ended
December 31, 1995 are incorporated herein by reference.
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION
AAA -- This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
AA -- Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay interest and repay principal is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay
principal and pay interest for bonds in this category than for bonds in
higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-); The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large, or by an exceptionally stable, margin, and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the long-
term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, if fact, have
speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default of there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the
following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is
not longer available reasonable up-to-date data to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated
by the symbols Aa1, A1, Baa1, and B1.
APPENDIX B
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
B'nai B'rith Jewish Monthly
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorfman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(the) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Reuters
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall St. Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to NEIC and its affiliates that perform advisory
and subadvisory functions for New England Funds including, but not
limited to: Back Bay Advisors, Harris Associates L.P., Loomis Sayles,
CGM and Westpeak.
References may be included in New England Funds' advertising and
promotional literature to NEIC affiliates that do not perform advisory
or subadvisory functions for the Funds including, but not limited to,
New England Investment Associates, L. P., Copley Real Estate Advisors,
L.P., Marlborough Capital Advisors, L.P., Reich & Tang Capital
Management and Reich and Tang Mutual Funds Group.
References to subadvisers unaffiliated with NEIC that perform
subadvisory functions on behalf of New England Funds may be contained in
New England Funds' advertising and promotional literature including, but
not limited to, Berger, Draycott, Janus Capital, Founders and Montgomery
Asset Management, L.P.
New England Funds' advertising and promotional material will
include, but is not limited to, discussions of the following information
about the above entities:
Specific and general investment emphasis, specialties, competencies,
operations and functions
Specific and general investment philosophies, strategies, processes
and techniques
Specific and general sources of information, economic models,
forecasts and data services utilized, consulted or considered in the
course of providing advisory or other services
The corporate histories, founding dates and names of founders of the
entities
Awards, honors and recognition given to the firms
The names of those with ownership interest and the percentage of
ownership
Current capitalization, levels of profitability and other financial
information
Identification of portfolio managers, researchers, economists,
principals and other staff members and employees
The specific credentials of the above individuals, including but not
limited to, previous employment, current and past positions, titles
and duties performed, industry experience, educational background and
degrees, awards and honors
Specific identification of, and general reference to, current
individual, corporate and institutional clients, including pension and
profit sharing plans
Current and historical statistics about:
-total dollar amount of assets managed
-New England Funds' assets managed in total and by Fund
-the growth of assets
-asset types managed
-numbers of principal parties and employees, and the length of their
tenure, including officers, portfolio managers, researchers,
economists, technicians and support staff
-the above individuals' total and average number of years of industry
experience and the total and average length of their service to the
adviser or the subadviser
Specific and general references to portfolio managers and funds that
they serve as portfolio manager of, other than New England Funds, and
those families of funds, other than New England Funds, including, but
not limited to, Star Advisers Fund portfolio manager Rodney L.
Linafelter of Berger and Berger Funds who also serves as portfolio
manager of the Berger 100 Fund and Berger Growth and Income Fund; Star
Advisers Fund portfolio manager Warren B. Lammert of Janus Capital and
Janus Funds, who also serves as portfolio manager of Janus Mercury
Fund, and New England Star Worldwide Fund (the "Star Worldwide Fund")
portfolio manager Helen Young Hayes, also of Janus Capital and Janus
Funds, who serves as portfolio manager of the Janus Worldwide Fund,
IDEX II Series Fund - IDEX II Global Portfolio and Janus Aspen Series
- Worldwide Growth Portfolio; Star Worldwide Fund portfolio managers
Josephine S. Jimenez and Bryan L. Sudweeks of Montgomery Asset
Management, L.P., who also serve as portfolio managers of Montgomery
Emerging Markets Fund; Star Advisers Fund portfolio manager Edward F.
Keely and Star Worldwide Fund portfolio manager Michael W. Gerding of
Founders and Founders Funds, who also serve as portfolio manager of
Founders Growth Fund and Founders Worldwide Growth Fund, respectively;
and Star Advisers Fund portfolio managers Jeffrey C. Petherick and
Mary Champagne of Loomis Sayles and Loomis Sayles Funds, who also
serve as portfolio managers of the Loomis Sayles Small Cap Fund.
Specific and general references may be made to the Loomis Sayles
Funds, the Loomis Sayles Bond Fund and Daniel Fuss, who serves as
portfolio manager of the Strategic Income Fund and the Loomis Sayles
Bond Fund; and Star Worldwide Fund portfolio manager Robert J. Sanborn
and Star Worldwide Fund and Growth Fund of Israel portfolio manager
David G. Herro of Harris Associates L.P. and Oakmark Funds, who also
serve as portfolio managers of The Oakmark Fund and The Oakmark
International Fund, respectively. Any such references will indicate
that New England Funds and 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 managers by the Funds'
advisers and subadvisers, including, but not limited to those provided
by Morningstar, Lipper Analytical Services, Forbes and Worth.
In addition, communications and materials developed by New England
Funds will make reference to the following information about NEIC and
its affiliates:
NEIC is the fifth largest publicly traded manager in the U.S.
listed on the New York Stock Exchange. NEIC maintains over $81 billion
in assets under management. Clients serviced by NEIC and its
affiliates, besides New England Funds, are wealthy individuals, major
corporations and large institutions.
Back Bay Advisors employs a conservative style of management
emphasizing short and intermediate term securities to reduce volatility,
adds value through careful continuous credit analysis and has expertise
in government, corporate and tax-free municipal bonds and equity
securities. Among its clients are Boston City Retirement System, Public
Service Electric and Gas of New Jersey, Petrolite Corp. and General
Mills.
Draycott specializes in international stocks and tracks key world
markets and economic trends from offices in London and Boston. Its
investment approach is based on concentration on "blue chip" companies
in stable, growing economies and is guided by independent, non-consensus
thinking. It monitors country weightings with strict attention to risk
control to promote long-term returns.
CGM seeks to deliver exceptional growth for its clients through the
selection of stocks with the potential to outperform the market and grow
at a faster rate than the U.S. economy. Among its approaches are
pursuit of growth 50% above the S&P 500, prompt responses to changes in
the market or economy and aggressive, highly concentrated portfolios.
Loomis Sayles is one of the oldest and largest investment firms in
the U.S. and has provided investment counseling to individuals and
institutions since 1926. Characteristic of Loomis Sayles is that it has
one of the largest staffs of research analysts in the industry,
practices strict buy and sell disciplines and focuses on sound value in
stock and bond selection. Among its clients are large corporations such
as Chrysler, Mobil Oil and Revlon.
Westpeak employs proprietary research and a disciplined stock
selection process that seeks rigorously to control unnecessary risk.
Its investment process is designed to evaluate when value and growth
styles - two primary approaches to stock investing - hold potential for
reward. Over seventy fundamental attributes are continuously analyzed
by Westpeak's experienced analysts and sophisticated computer systems.
The results are assessed against Wall Street's consensus thinking, in
pursuit of returns in excess of appropriate benchmarks. The
value/growth strategy is a unique blend of investment styles, seeking
opportunities for increased return with reduced risk. Among the keys to
Westpeak's investment process are continuous review of timely, accurate
data on over 3600 companies, analysis of dozens of factors for excess
return potential and identification of overvalued and undervalued
stocks.
Harris Associates L.P. is a Chicago-based investment management
company with more than $7.6 billion in assets under management,
comprised of the $4 billion Oakmark Fund Group and $3.6 billion in
individual and institutional assets. Harris Associates L.P.'s
investment philosophy is predicated on the belief that over time market
price and value converge and that investment in securities prices
significantly below long-term value presents the best opportunity to
achieve long-term growth of capital.
On June 30, 1995, NEIC purchased the assets of Graystone Partners,
L.P. ("Graystone"), a Chicago-based consulting firm focusing exclusively
on working with the wealthiest families in the country. Founded in
1993, Graystone specializes in assisting high net worth families in
developing asset allocation strategies, identifying appropriate
portfolio managers and the monitoring of investment performance.
References may be included in New England Funds' advertising and
promotional literature about its 401(k) and retirement plans. The
information may include, but is not limited to:
Specific and general references to industry statistics regarding
401(k) and retirement plans including historical information and
industry trends and forecasts regarding the growth of assets, numbers
of plans, funding vehicles, participants, sponsors and other
demographic data relating to plans, participants and sponsors, third
party and other administrators, benefits consultants and firms
including, but not limited to, DC Xchange, William Mercer and other
organizations involved in 401(k) and retirement programs with whom New
England Funds may or may not have a relationship.
Specific and general reference to comparative ratings, rankings and
other forms of evaluation as well as statistics regarding the New
England Funds as a 401(k) or retirement plan funding vehicle produced
by, including, but not limited to, Access Research, Dalbar, Investment
Company Institute and other industry authorities, research
organizations and publications.
Specific and general discussion of economic, legislative, and other
environmental factors affecting 401(k) and retirement plans, including
but not limited to, statistics, detailed explanations or broad
summaries of:
-past, present and prospective tax regulation, Internal Revenue
Service requirements and rules, including, but not limited to
reporting standards, minimum distribution notices, Form 5500, Form
1099R and other relevant forms and documents, Department of Labor
rules and standards and other regulation. This includes past,
current and future initiatives, interpretive releases and positions
of regulatory authorities about the past, current or future
eligibility, availability, operations, administration, structure,
features, provisions or benefits of 401(k) and retirement plans
-information about the history, status and future trends of Social
Security and similar government benefit programs including, but not
limited to, eligibility and participation, availability, operations
and administration, structure and design, features, provisions,
benefits and costs
-current and prospective ERISA regulation and requirements.
Specific and general discussion of the benefits of 401(k) investment
and retirement plans, and, in particular, the New England Funds 401(k)
and retirement plans, to the participant and plan sponsor, including
explanations, statistics and other data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but not
limited to, videos, slides, presentation materials, brochures, an
investment calculator, payroll stuffers, quarterly publications,
releases and information on a periodic basis and the availability of
wholesalers and other personnel.
Specific and general reference to the benefits of investing in mutual
funds for 401(k) and retirement plans, and, in particular, New England
Funds and investing in its 401(k) and retirement plans, including but
not limited to:
-the significant economies of scale experienced by mutual fund
companies in the 401(k) and retirement benefits arena
-broad choice of investment options and competitive fees
-plan sponsor and participant statements and notices
-the plan prototype, summary descriptions and board resolutions
-plan design and customized proposals
-trusteeship, record keeping and administration
-the services of State Street Bank, including but not limited to,
trustee services and tax reporting
-the services of DST and BFDS, including but not limited to, mutual
fund processing support, participant 800 numbers and participant
401(k) statements
-the services of Trust Consultants Inc. (TCI), including but not
limited to, sales support, plan record keeping, document service
support, plan sponsor support, compliance testing and Form 5500
preparation.
Specific and general reference to the role of the investment dealer
and the benefits and features of working with a financial professional
including:
-access to expertise on investments
-assistance in interpreting past, present and future market trends
and economic events
-providing information to clients including participants during
enrollment and on an ongoing basis after participation
-promoting and understanding the benefits of investing, including
mutual fund diversification and professional management.
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Percentage
of Net
Security Assets
Preferred Stock ................................ 0%
Short-term Obligations and Other Assets ....... 0%
Debt _ Unrated ............................... 0%
Debt _ Standard and Poor's Rating
AAA ....................................... 16.0%
AA ........................................ 9.8%
A ......................................... 9.9%
BBB........................................ 50.6%
BB......................................... 13.7%
B.......................................... 0%
CCC........................................ 0%
C/D........................................ 0%
The chart above indicates the composition of the Municipal Income Fund
for the fiscal year ended December 31, 1995, with the debt securities
rated by S&P separated into the indicated categories. The percentages
were calculated on a dollar-weighted average basis by determining
monthly the percentage of the Municipal Income Fund's net assets
invested in each category as of the end of each month during the year.
Back Bay Advisors does not rely primarily on ratings designed by any
rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will
be in subsequent fiscal years.
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
BOND INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Percentage
of Net
Security Assets
Preferred Stock ................................ 0%
Short-term Obligations and Other Assets ........ 0%
Debt _ Unrated ............................... 0%
Debt _ Standard and Poor's Rating
AAA ....................................... 35%
AA ........................................ 15%
A ......................................... 15%
BBB........................................ 17%
BB......................................... 18%
B.......................................... 0%
CCC........................................ 0%
C/D........................................ 0%
The chart above indicates the composition of the Bond Income Fund for
the fiscal year ended December 31, 1995, with the debt securities rated
by S&P separated into the indicated categories. The percentages were
calculated on a dollar-weighted average basis by determining monthly the
percentage of the Bond Income Fund's net assets invested in each
category as of the end of each month during the year. Back Bay Advisors
does not rely primarily on ratings designed by any rating agency in
making investment decisions. The chart does not necessarily indicate
what the composition of the Fund's portfolio will be in subsequent
fiscal years.
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
CALIFORNIA FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Percentage
of Net
Security Assets
Preferred Stock .............................. 0%
Short-term Obligations and Other Assets ........ 0%
Debt _ Unrated ............................. 0%
Debt _ Standard and Poor's Rating
AAA ....................................... 32.3%
AA ........................................ 10.7%
A ......................................... 22.7%
BBB........................................ 29.0%
BB......................................... 5.3%
B.......................................... 0%
CCC........................................ 0%
C/D........................................ 0%
The chart above indicates the composition of the California Fund for the
fiscal year ended December 31, 1995, with the debt securities rated by
S&P separated into the indicated categories. The percentages were
calculated on a dollar-weighted average basis by determining monthly the
percentage of the California Fund's net assets invested in each category
as of the end of each month during the year. Back Bay Advisors does not
rely primarily on ratings designed by any rating agency in making
investment decisions. The chart does not necessarily indicate what the
composition of the Fund's portfolio will be in subsequent fiscal years.
