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NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
MAY 1, 1996 AS REVISED JUNE 28, 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 Shares 26
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 and Tax Status 43
Financial Statements 45
Appendix A - Description of Bond Ratings 46
Appendix B - Publications That May Contain Fund Information 48
Appendix C - Advertising and Promotional Literature 50
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds 54
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INVESTMENT RESTRICTIONS
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The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the 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
(excluding Rule 144A securities); +(2) invest more than 15% of the Fund's total
net assets in illiquid investments (excluding Rule 144A securities deemed to be
liquid under guidelines established by the Trust's trustees and certain Section
4(2) commercial paper); (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
(excluding Rule 144A securities) or +(2) invest more than 15% of the Fund's
total net assets in illiquid securities (excluding Rule 144A securities deemed
to be liquid under guidelines established by the Trust's trustees and certain
Section 4(2) commercial paper).
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 (excluding Rule 144A 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
(excluding Rule 144A securities deemed to be liquid under guidelines
established by the Trust's trustees and certain Section 4(2) commercial
paper);
(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 (excluding Rule 144A securities ); (2) invest more than 15% of the
Fund's total net assets in illiquid investments (excluding Rule 144A securities
deemed to be liquid under guidelines established by the Trust's trustees and
certain Section 4(2) commercial paper); 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
(excluding Rule 144A securities); or (2) invest more than 15% of the Fund's
total net assets in illiquid investments (excluding Rule 144A securities deemed
to be liquid under guidelines established by the Trust's trustees and certain
Section 4(2) commercial paper).
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 (excluding Rule 144A securities) or (2) invest more than 15% of
the Fund's total net assets in illiquid investments (excluding Rule 144A
securities deemed to be liquid under guidelines established by the Trust's
trustees and certain Section 4(2) commercial paper).+
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ---------------------------------------------------- -----------------------------------------------------------
<S> <C> <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>
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:
<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> <C>
Adjustable Rate Fund Back Bay Advisors 0.275% of the first $200 million
0.255% of the next $300 million
0.235% of amounts in excess of $500 million
Bond Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund Back Bay Advisors 0.375% of all assets
Limited Term U.S. Government Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.35% of the first $200 million
0.30% of amounts in excess of $200 million
Municipal Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
</TABLE>
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:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- ------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Government Securities Fund $465,401 $409,909 $366,630 (Class A)
$1,582 $23,270 $37,075 (Class B)**
Limited Term U.S. Government Fund $1,873,424 $1,705,012 $1,332,412 (Class A)
$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 Fund**** $39,090 (Class A)
$155,887 (Class B)
$58,847 (Class C)
<FN>
* 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.
</TABLE>
During the fiscal year ended December 31, 1995, the Distributor's
expenses relating to each Fund's 12b-1 plans were as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
(Class A shares)
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Adjustable Rate U.S. Government Fund
<S> <C> <C>
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 Construction Corp. 5.55%
Defined Benefit Pension Plan and Trust
529 East 169th Street
South Holland, IL 60478-2925
Class Y shares NEIC Master Retirement Trust 54.95%
c/o Defined Contribution Services
P.O. Box 755
Boston, MA 02117-0755
New England Mutual Life Insurance Company, 45.05%
Separate Investment Accounting
501 Boylston Street, 6th Floor
Boston, MA 02116-2706
Bond Income Fund
Class Y shares NEIC Master Retirement Trust 99.99%
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 Company 5.23%
Custodian for the IRA Rollover of
Edith H. Crowson
22410 Provincial
Katy, TX 77450-1624
Class Y shares New England Mutual Life Insurance Company, 100.00%
Separate Investment Accounting
501 Boylston Street, 6th Floor
Boston, MA 02116-3706
Strategic Income Fund
Class A shares Merrill Lynch Pierce Fenner & Smith Inc. 5.03%
Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
<PAGE>
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- --------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/95*
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------------------- ------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 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
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/23/93** 9/23/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 19.24 10.50 4.49
Redemption at End of Period 15.24 7.63 3.29
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 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 % of 1 Year 5 Years 1/3/89** 5 Years 1/3/89**
- ---------------------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
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
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/27/93** 9/27/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 12.30 8.32 3.60
Redemption at End of Period 8.30 5.73 2.48
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1/3/95** 1/3/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value 11.35 11.35
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 13.33 13.02 7.25
ADJUSTABLE RATE FUND***
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 10/19/91** 3 Years 10/19/91**
- ---------------------------------------------- ------ ---------- ------- ----------
<S> <C> <C> <C> <C>
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
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 7.81 7.82 3.32
Redemption at End of Period 3.81 4.88 2.09
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value n/a n/a n/a
STRATEGIC INCOME FUND*****
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 5/1/95** 5/1/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value 10.27 15.71
Maximum Offering Price 5.30 8.01
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 5/1/95** 5/1/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value 9.73 14.87
Redemption at End of Period 5.73 8.68
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 5/1/95** 5/1/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value 9.65 14.75
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 5/1/95** 5/1/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
Net Asset Value n/a n/a
BOND INCOME FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 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
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 19.89 13.04 5.48
Redemption at End of Period 15.89 10.20 4.31
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1/3/95** 1/3/95**
- ---------------------------------------------- -------- --------
<S> <C> <C>
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**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 20.99 20.99 20.99
HIGH INCOME FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 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**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 11.19 11.37 4.83
Redemption at End of Period 7.19 8.64 3.70
MUNICIPAL INCOME FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ---------------------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 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**
- ---------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 16.31 7.28 3.10
Redemption at End of Period 12.31 4.44 1.91
<FN>
* 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YIELD FOR THE 30-DAY PERIOD
ENDED 12/31/95
FUND CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------ ------- ------ ------- -------
<S> <C> <C> <C> <C>
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.
</TABLE>
Distribution Rate. The Government Securities, Limited Term U.S.
Government, Adjustable Rate, Bond Income and High Income Funds may include in
their written sales material distribution rates based on the Funds'
distributions from net investment income and short-term capital gains for a
recent 30 day, three month or one year period.
Distributions of less than one year are annualized by multiplying by
the factor necessary to produce twelve months of distributions. The distribution
rates are determined by dividing the amount of the particular Fund's
distributions per share over the relevant period by either the maximum offering
price or the net asset value of a share of the Fund on the last day of the
period.
<TABLE>
<CAPTION>
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/95
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
GOVERNMENT SECURITIES FUND ------ -------- ---------
<S> <C> <C> <C>
(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
(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
</TABLE>
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.
