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Rule 497(c)
File No. 2-98326
[LOGO]
NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET (TM)
NEW ENGLAND STAR WORLDWIDE FUND
PROSPECTUS AND APPLICATION
DECEMBER 29, 1995
New England Star Worldwide Fund (the "Fund") is a newly organized, multi-
manager, diversified mutual fund that will allocate its investment capital on an
equal basis among multiple segments of the Fund advised by investment management
organizations that employ different investment styles and strategies. The Fund
is a series of New England Funds Trust I (the "Trust"), a registered open-end
management 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 without
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 determined
after an order is received. Class A share purchases generally involve a sales
charge at the time of purchase. No initial sales charge applies to Class B share
purchases. A contingent deferred sales charge (a "CDSC"), however, is imposed
upon certain redemptions of Class B shares. 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."
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 (the "Statement") about the Fund dated December 29, 1995
has been filed with the Securities and Exchange Commission (the "SEC") and is
available free of charge. Write to New England Funds, L.P. (the "Distributor"),
SAI Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at
1-800-225-5478. 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 ENDORSED
BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-TION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
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TABLE OF CONTENTS
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SCHEDULE OF FEES Sales charges, yearly operating expenses.
INVESTMENT STRATEGY
How the Fund Pursues Its Investment Objective
SUBADVISERS' INVESTMENT STYLES
INVESTMENT RISKS It is important to understand the risks inherent
in the Fund before you invest.
PERFORMANCE INFORMATION
Subadvisers' Past Performance
FUND MANAGEMENT
BUYING FUND SHARES Everything you need to know to open and add
Minimum Investment to a New England Star Worldwide Fund
6 Ways to Buy Fund Shares account.
. Through you investment dealer
. By mail
. By wire transfer
. By Investment Builder
. By electronic purchase through ACH
. By exchange from another New England
Fund
Sales Charges
Reduced Sales Charges (Class A Shares Only)
OWNING FUND SHARES
Exchanging Among New England Funds New England Funds offers three convenient
Fund Dividend Payments ways to exchange Fund shares.
SELLING FUND SHARES
4 Ways to Sell Fund Shares How to withdraw money or close your
. Through your investment dealer account.
. By telephone
. By mail
. By Systematic Withdrawal Plan
Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption
proceeds within 120 days for no sales charge.
FUND DETAILS Additional information you may find
How Fund Share Price Is Determined important.
Income Tax Considerations
The Fund's Expenses
Performance Criteria
Additional Facts About the Fund
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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
investment in each class of shares of the Fund for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
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CLASS A CLASS B CLASS C
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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
Redemption Fee...................................................... None None None
Exchange Fee........................................................ None None None
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(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
portion of certain purchases of Class A shares greater than $1,000,000
redeemed within approximately 1 year after purchase, but not to any other
purchases or redemptions of Class A shares. See "Buying Fund Shares - Sales
Charges."
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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CLASS A CLASS B CLASS C
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Management Fees.................................................... 1.05% 1.05% 1.05%
12b-1 Fees......................................................... 0.25% 1.00%* 1.00%*
Other Expenses**................................................... 0.90% 0.90% 0.90%
Total Expenses..................................................... 2.20% 2.95% 2.95%
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* 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.
** Other Expenses are based on estimated expenses for the Fund's first full
fiscal year.
EXAMPLE
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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 will vary.
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<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C> <C>
(1) (2)
1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79 $70 $30 $30
3 Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122 $121 $91 $91
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(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
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.
Please keep in mind that the Example shown above is hypothetical. The
information above should not be considered a representation of past or future
return or expenses; actual return or expenses may be more or less than those
shown.
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
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."
INVESTMENT STRATEGY
The Fund's investment objective is long-term growth of capital.
HOW THE FUND PURSUES ITS INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital by investing primarily in equity
securities both within the United States and around the world. The Fund is a
global fund, which means it will seek to invest in equity securities traded on
foreign stock markets as well as the stock markets of the United States. Foreign
markets represent two-thirds of the value of all stocks traded in the world, and
offer many opportunities for investment in addition to those found in the United
States. Foreign markets may be located in large, developed countries such as
Great Britain or in smaller, developing markets like Singapore. The Fund may
also invest in other securities, as described below. Under normal market
conditions, however, at least 65% of each segment of the Fund's portfolio, and
at least 65% of the Fund's total assets, will be invested in equity securities.
The Fund may in the discretion of each of its subadvisers (see below) invest
without limit in securities of foreign issuers (including issuers in emerging
markets) as well as in securities of U.S. issuers. Under normal market
conditions, the Fund will invest in securities of issuers in at least three
different countries, one of which will be the United States. As a temporary,
defensive measure, however, the Fund may invest without limit in securities of
U.S. issuers, including corporate and government debt obligations, or in cash or
cash equivalents. For more information about investments in foreign securities,
see "Investment Risks - Foreign Securities."
Capital invested in the Fund will be allocated equally among five different
segments of the portfolio, managed by four different subadvisers. Each
subadviser will manage its segment or segments of the Fund's assets in
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accordance with that subadviser's own investment style and strategy. The
subadvisers' styles and strategies are outlined below. See also "Subadvisers'
Investment Styles" and "Fund Management." New England Funds Management, L.P.
("NEFM") oversees the segments' investment activities as conducted by the
subadvisers.
HARRIS ASSOCIATES L.P. ("HARRIS ASSOCIATES") manages two segments of the
Fund's portfolio, a U.S. segment and an international segment. Harris
Associates' investment philosophy is predicated on the belief that over time
market price and value converge and that investment in securities priced
significantly below long-term value presents the best opportunity to achieve
long term growth of capital. The U.S. segment invests primarily in equity
securities of U.S. issuers, whereas the international segment invests
primarily in markets outside the U.S., which may include both mature and
emerging markets. The segments of the Fund managed by Harris Associates invest
primarily in common stocks and securities convertible into common stock, but
may also invest in other securities that are suited to the Fund's investment
objective, including preferred stocks and fixed-income securities (including
lower quality fixed-income securities).
MONTGOMERY ASSET MANAGEMENT, L.P. ("MONTGOMERY") normally will invest at least
65% of its segment of the Fund's portfolio in equity securities in emerging
market countries. Montgomery selects investments for its segment based on a
combination of quantitative screening techniques, "top-down" industry
selection and "bottom-up" stock selection, using fundamental analysis.
FOUNDERS ASSET MANAGEMENT, INC.'S ("FOUNDERS") segment of the portfolio may
invest in both small and established growth companies, in both emerging and
established markets throughout the world. Founders' approach to investment
management gives greater emphasis to the fundamental financial, marketing and
operating characteristics of individual companies, and is less concerned with
the short-term impact of changes in macroeconomic and market conditions, than
some other investment firms. This segment of the portfolio may invest in
bonds, debentures and other fixed-income securities (including lower quality
fixed-income securities) when Founders believes that these investments offer
opportunity for growth of capital.
JANUS CAPITAL CORPORATION ("JANUS CAPITAL") pursues the Fund's investment
objective by investing its segment of the portfolio in U.S. and foreign
(including emerging) markets, using a "bottom up" approach. Janus Capital
seeks to identify companies with earnings growth potential that may not be
recognized by the market at large. This segment of the portfolio invests
primarily in common stocks, and may also invest, to a lesser degree, in
preferred stocks, warrants, government securities, corporate bonds and
debentures or other fixed-income securities (including lower quality fixed-
income securities).
Under unusual market conditions as determined by any of the four subadvisers,
all or any portion of the segment(s) of the portfolio managed by that subadviser
may be invested, for temporary, defensive purposes, in short-term debt
instruments 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 quality by
the subadviser, and repurchase agreements that are fully collateralized by cash,
U.S. Government securities or high-quality money market instruments.
Although each segment of the Fund's portfolio will normally be invested
primarily in equity securities, each segment may also engage in various other
investment techniques and practices. See "Investment Risks" below.
Daily net capital inflows will be allocated on an equal basis among the five
segments of the Fund. Over time, the amount of assets in each segment may differ
as a result of different investment results achieved by the subadvisers of the
different segments. The Fund does not intend to reallocate its assets among the
segments to reduce these differences.
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SUBADVISERS' INVESTMENT STYLES
NEFM believes that a multi-adviser approach to global equity investing -- one
that combines the varied styles and geographic focuses of a number of
subadvisers in selecting securities for the Fund's portfolio -- offers a
different investment opportunity than global 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 consistently
maintained superior performance rankings relative to their peers over long
periods. NEFM believes that assigning portfolio management responsibility for
the five segments of the Fund's portfolio to four subadvisers, whose varying
styles have resulted in records of success, 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 applied by each of the subadvisers to the
segment(s) of the Fund's portfolio for which that subadviser is
responsible.
HARRIS ASSOCIATES L.P.
Harris Associates manages two of the five segments of the Fund's portfolio, a
U.S. segment and an international segment. Harris Associates' chief
consideration in security selection is the size of the discount of market price
relative to the economic value of the security as determined by Harris
Associates. Harris Associates' investment philosophy is predicated on the belief
that over time market price and value converge and that investment in securities
priced significantly below long-term value presents the best opportunity to
achieve long-term growth of capital.
U.S. Segment. In managing its U.S. segment of the Fund's portfolio, Harris
Associates uses several qualitative and quantitative methods in analyzing
economic value, but considers the primary determinant of value to be the
enterprise's long-run ability to generate cash for its owners. Once Harris
Associates has determined that a security is undervalued, Harris Associates will
consider it for purchase by this segment of the Fund. In making investment
decisions, a key additional factor is the quality of management and, for equity
securities, particular emphasis is placed on significant stock ownership by the
company's management. Harris Associates believes that the risks of equity
investing are often reduced if management's interests are strongly aligned with
the interests of stockholders. At least 65% of the value of this segment of the
portfolio will, under normal market conditions, be invested in equity securities
of U.S. issuers. The segment may invest the balance of its assets in equity or
fixed income securities, including those of non-U.S. issuers.
International Segment. In managing its international segment of the Fund's
portfolio, Harris Associates uses several qualitative and quantitative methods
in analyzing economic value, but considers the primary determinant of value to
be the enterprise's long-run ability to generate cash for its owners. Once
Harris Associates has determined that a security is undervalued, Harris
Associates will consider it for purchase by this segment of the Fund, taking
into account the quality of management, the firm's market position within its
industry and its degree of pricing power. Harris Associates also considers the
relative political and economic stability of the company's home country in
evaluating the potential rewards and risks of an investment opportunity. This
segment of the Fund may invest in securities traded in mature markets (for
example, Japan, Canada and the United Kingdom), in less developed markets
(Mexico and Thailand, for example) and in selected emerging markets (Peru and
India, for example). There are no limits on the Fund's geographic asset
distribution, but, to provide adequate diversification, Harris Associates
ordinarily invests this segment of the Fund in the securities markets of at
least five countries outside the United States. Under normal market conditions,
at least 65% of the segment's total assets will be invested in equity
securities.
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MONTGOMERY ASSET MANAGEMENT, L.P.
Under normal market conditions, Montgomery will invest at least 65% of the
assets of its segment in equity securities of companies in countries having
emerging markets. As used in this prospectus, "emerging markets" means those
countries that are classified by the World Bank or the International Monetary
Fund as "emerging," "developing" or "in transition."
This segment currently limits its investments to the following emerging market
countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay, Venezuela); Asia (China,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka,
Taiwan, Thailand, Vietnam); Southern and Eastern Europe (Czech Republic, Greece,
Hungary, Poland, Portugal, Turkey); Mid-East (Israel, Jordan); and Africa
(Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia,
Zimbabwe). This segment may determine not to invest in one or more of the
emerging market countries listed above, and, in the future, this segment may
invest in other emerging market countries. Under normal conditions, this segment
maintains investments in at least six emerging market countries and invests no
more than 35% of its total assets in any one emerging market country. Montgomery
considers a company to be an emerging market company if its securities are
principally traded in the capital market of an emerging market country; or it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging market countries or from sales made in such emerging market
countries, regardless of where the securities of such company are principally
traded; or it is organized under the laws of, or has a principal office in, an
emerging market country.
Montgomery uses a proprietary, quantitative asset allocation model created by
Montgomery to manage its segment of the Fund. This model employs mean-variance
optimization, a process used in developed markets based on modern portfolio
theory and statistics. Mean-variance optimization helps determine the percent of
assets to invest in each country in an attempt to maximize expected returns for
a given risk level. Montgomery's aims are to invest in those countries that are
expected to have the highest risk/reward trade-off when incorporated into the
context of Montgomery's segment as a whole. This "top-down" country selection is
combined with "top-down" industry selection and "bottom-up" stock selection
using original research, publicly available information and company visits.
FOUNDERS ASSET MANAGEMENT, INC.
Founders is a "growth-style" manager of equity portfolios and gives priority to
the selection of individual securities that have the potential to provide
superior results over time, despite short-term volatility. Under normal
circumstances, Founders' approach to investment management gives greater
emphasis to the fundamental financial, marketing and operating strengths of the
companies whose securities it buys, and is less concerned with the short-term
impact of changes in macroeconomic and market conditions. Founders focuses on
purchasing the stocks of companies with strong management and market positions
whose earnings prospects are significantly above the average for their market
sectors.
Founders' segment of the Fund normally will invest at least 65% of its assets in
equity securities. The segment may invest in a variety of markets throughout the
world. Founders will emphasize common stocks of both small and established
growth companies that generally have proven performance records and strong
market positions. This segment of the Fund's portfolio will usually consist of
investments in companies in various countries (which may include the U.S.), and
under normal market conditions it will invest in at least three countries.
Founders will not invest more than 25% of the assets of its segment of the Fund
in the securities of any one foreign country.
JANUS CAPITAL CORPORATION
Janus Capital manages its segment of the portfolio to seek long-term capital
growth primarily from investing in common stocks of foreign and domestic
companies, of any size. This segment of the Fund normally invests in issuers
from at least five different countries, including the United States, but may at
times invest in fewer than
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five countries or even a single country. Under normal market conditions at least
65% of the total assets of the segment will be invested in equity
securities.
Janus Capital takes a "bottom-up" approach to investing its segment of the
Fund's portfolio. This means that investments are selected based primarily on
the earnings growth potential and other characteristics of the individual
companies in which the segment invests. (This "bottom-up" approach contrasts
with a "top-down" approach, in which a portfolio is selected based primarily on
decisions to invest in certain industries, countries or regions.) In managing
the segment, Janus Capital does, however, consider factors such as expected
levels of inflation, government policies influencing business conditions, the
outlook for currency relationships, and prospects for economic growth in
different countries, regions or geographic areas.
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
preferred stocks and securities exercisable for or convertible into common
or preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock).
While offering greater potential for long-term growth, equity securities
are more volatile and more risky than some other forms of investment.
Therefore, the value of your investment in the Fund may sometimes decrease
instead of increase. The Fund may invest in equity securities of companies
with relatively small market capitalization. Securities of such companies
may be more volatile than the securities of larger, more established
companies and the broad equity market indices. See "Small Companies" below.
The Fund's investments may include securities traded over-the-counter as
well as those traded on a securities exchange. Some over-the-counter
securities may be more difficult to sell under some market conditions.
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 securities increase or decrease. The movements in the
prices of convertible securities, however, may be smaller than the
movements in the value of the underlying equity securities. The value of
convertible securities that pay dividends or interest, like the value of
other fixed-income securities, generally fluctuates inversely with changes
in interest rates. Warrants have no voting rights, pay no dividends and
have no rights with respect to the assets of the corporation issuing them.
They do not represent ownership of the securities for which they are
exercisable, but only the right to buy such securities at a particular
price. The credit risk associated with convertible securities is generally
reflected by their being rated, if at all, below investment grade by
organizations such as Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P"). Less than 35% of the Fund's assets
will be invested in convertible securities rated below investment grade and
unrated convertible securities of comparable quality.
The Fund may invest in equity securities either by purchasing such
securities directly or by purchasing "depository receipts." Depository
receipts are instruments issued by a bank that represent an interest in
equity securities held by arrangement with the bank. Depository receipts
can be either "sponsored" or "unsponsored." Sponsored depository receipts
are issued by banks in cooperation with the issuer of the underlying equity
securities. Unsponsored arrangements do not involve participation by the
issuer of the underlying equity security. Less information about the issuer
of the underlying equity security may be available in the case of
unsponsored depository receipts.
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. 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 securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and securities custody costs are often higher than those in the
United States, and judgments against foreign entities may be more difficult
to obtain and enforce. With respect to certain foreign countries, there is
a possibility of governmental expropriation of assets, confiscatory
taxation, political or financial instability and diplomatic developments
that could affect the value of investments in those countries. The receipt
of interest on foreign government securities may depend on the availability
of tax or other revenues to satisfy the issuer's obligations.
The Fund's investments in foreign securities may include investments in
emerging or developing countries, whose economies or securities markets are
not yet highly developed. Special considerations associated with these
investments (in addition to the considerations regarding foreign
investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular
commodities or on international aid or development assistance, currency
transfer restrictions, highly limited numbers of potential buyers for such
securities and delays and disruptions in securities settlement
procedures.
. FOREIGN CURRENCY
Most foreign securities in the Fund's portfolio will be denominated in
foreign currencies or traded in securities markets in which settlements are
made in foreign currencies. Similarly, any income on such securities is
generally paid to the Fund in foreign currencies. The value of these
foreign currencies relative to the U.S. dollar varies continually, causing
changes in the dollar value of the Fund's portfolio investments (even if
the local market price of the investments is unchanged) and changes in the
dollar value of the Fund's income available for distribution to its
shareholders. The effect of changes in the dollar value of a foreign
currency on the dollar value of the Fund's assets and on the net investment
income available for distribution may be favorable or unfavorable.
The Fund may incur costs in connection with conversions between various
currencies. 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.
. PRIVATIZATIONS
In a number of countries around the world, governments have undertaken to
sell to investors interests in enterprises that the government has
historically owned or controlled. These transactions are known as
"privatizations" and may in some cases represent opportunities for
significant capital appreciation. In some cases, the ability of U.S.
investors, such as the Fund, to participate in privatizations may be
limited by local law, or the terms of participation may be less
advantageous than for local investors. Also, there is no assurance that
privatized enterprises will be successful, or that an investment in such an
enterprise will retain its value or appreciate in value.
. SMALL COMPANIES
The Fund may, in the discretion of its subadvisers, invest without limit in
the securities of companies with smaller capitalization. Investments in
companies with relatively small capitalization may involve
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greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed
those of companies with larger capitalization. Such growth rates may in
turn be reflected in more rapid share price appreciation. However,
companies with smaller capitalization often have limited product lines,
markets or financial resources and 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 values of funds that invest in companies with smaller
capitalization therefore may fluctuate more widely than market
averages.
. FIXED-INCOME SECURITIES
Fixed-income securities include a broad array of short, medium and long
term obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed
by specific assets (such as mortgages or other receivables) that have been
set aside as collateral for the issuer's obligation. Fixed-income
securities generally involve an obligation of the issuer to pay interest or
dividends on either a current basis or at the maturity of the security, as
well as the obligation to repay the principal amount of the security at
maturity.
Fixed-income securities involve both credit risk and market risk. Credit
risk is the risk that the security's issuer will fail to fulfill its
obligation to pay interest, dividends or principal on the security. Market
risk is the risk that the value of the security will fall because of
changes in market rates of interest. (Generally, the value of fixed-income
securities falls when market rates of interest are rising.) Some fixed-
income securities also involve prepayment or call risk. This is the risk
that the issuer will repay 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.
Because interest rates vary, it is impossible to predict the income of a
fund that invests in fixed-income securities for any particular period.
Fluctuations in the value of 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 S&P or Ba or lower by Moody's
(and comparable unrated securities) are of below "investment grade"
quality. Lower quality fixed-income securities generally provide higher
yields, but are subject to greater credit and market risk, than higher
quality fixed-income securities. 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 sub-
adviser's own credit analysis than for a fund investing in higher quality
bonds. The market for lower quality fixed-income securities may be more
severely affected than some other financial markets by economic recession
or substantial interest rate increases, by changing public perceptions of
this market or by legislation that limits the ability of certain categories
of financial institutions to invest in these securities. In addition, the
secondary market may be less liquid for lower rated fixed-income
securities. This lack of liquidity at certain times may affect the
valuation of these securities and may make the valuation and sale of these
securities more difficult. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as "junk
bonds." For more information, including a detailed description of the
ratings assigned by S&P and Moody's, please refer to the Statement's
"Appendix A - Description of Bond Ratings."
. ZERO COUPON BONDS AND "STRIPS"
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<PAGE>
The Fund may invest in zero coupon bonds or "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 maturity. "Strips" are debt securities
that are stripped of their interest after the securities are issued, but
otherwise are comparable to zero coupon bonds. The market values of
"strips" and zero coupon bonds generally fluctuate in response to changes
in interest rates to a greater degree than do interest-paying securities of
comparable term and quality. Under many market conditions, investments in
stripped securities may be illiquid, making it difficult for the Fund to
dispose of them or determine their current value.
. REPURCHASE AGREEMENTS
In repurchase agreements, the Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a later date. Such
transactions afford an opportunity for the Fund to earn a return on
available cash at minimal market risk, although the Fund may be subject to
various delays and risks of loss if the seller is unable to meet its
obligation to repurchase.
. INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. Because of restrictions on direct investment by U.S.
entities in certain countries, investing indirectly in such countries (by
purchasing shares of another fund that is permitted to invest in such
countries) may be the most practical or efficient way for the Fund to
invest in such countries. In other cases, where the subadviser of a segment
desires to make only a relatively small investment in a particular country,
investing through a fund that holds a diversified portfolio in that country
may be more effective than investing directly in issuers in that country.
As an investor in another investment company, the Fund will indirectly bear
its share of the expenses of that investment company. These expenses are in
addition to the Fund's own costs of operations. In some cases, investing in
an investment company may involve the payment of a premium over the value
of the assets held in that investment company's portfolio.
. SHORT-TERM TRADING
Although 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 capital gains. Portfolio turnover considerations will not
limit any subadviser's investment discretion in managing the Fund's assets.
. 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 purpose of enhancing investment return, or to hedge against
changes in the value of other assets that the Fund owns or intends to
acquire. The Fund may also conduct foreign currency exchange transactions
on a spot (i.e. cash) basis at the spot rate prevailing in the foreign
currency exchange market. Options, futures and swap contracts fall into the
broad category of financial instruments known as "derivatives" and involve
special risks. Use of options, futures or swaps for other than hedging
purposes may be considered a speculative activity, involving greater risks
than are involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer" and
the "buyer." A call option gives the buyer the right to buy a
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<PAGE>
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 the 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).
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
anticipates purchasing at a later date. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating rate payments
for fixed rate payments with respect to a notional amount of principal). A
currency swap is an agreement to exchange cash flows on a notional amount
based on changes in the relative values of the specified currencies. An
index swap is an agreement to make or receive payments based on the
different returns that would be achieved if a notional amount were invested
in a specified basket of securities (such as the Standard & Poor's
Composite Index of 500 Stocks [the "S&P 500"]) or in some other investment
(such as U.S. Treasury securities).
The value of options purchased by the Fund, futures contracts held by the
Fund and the Fund's positions in swap contracts may fluctuate up or down
based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of
securities held in the Fund's portfolio. All transactions in options,
futures or swaps involve the possible risk of loss to the Fund of all or a
significant part of the value of its investment. In some cases, the risk of
loss may exceed the amount of the Fund's investment. The Fund will be
required, however, to set aside with its custodian bank certain assets in
amounts sufficient at all times to satisfy its obligations under options,
futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. The Fund's ability to hedge against adverse
changes in the value of securities held in its portfolio through options,
futures and swap transactions also depends on the degree of correlation
between the changes in the value of futures, options or swap positions and
changes in the values of the portfolio securities. The successful use of
futures and exchange traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a
timely basis. There can be no assurance that such a market will exist at
any particular time. 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 certain regulatory requirements may
limit the Fund's ability to engage in futures, options and swap
transactions.
. CURRENCY HEDGING TRANSACTIONS
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<PAGE>
The Fund may, at the discretion of its subadvisers, engage in foreign
currency exchange transactions, in connection with the purchase and sale of
portfolio securities, to protect the value of specific portfolio positions
or in anticipation of changes in relative values of currencies in which
current or future Fund portfolio holdings are denominated or quoted.
Currency hedging transactions may include forward contracts (contracts with
another party to buy or sell a currency at a specified price on a specified
date), futures contracts (which are similar to forward contracts but are
traded on an exchange) and swap contracts. For more information on foreign
currency hedging transactions, see Part II of the Statement.
. STRUCTURED NOTES
The Fund may invest in a broad category of instruments known as "structured
notes." These instruments are debt obligations issued by industrial
corporations, financial institutions or governmental or international
agencies. Traditional debt obligations typically obligate the issuer to
repay the principal plus a specified rate of interest. Structured notes, by
contrast, obligate the issuer to pay amounts of principal or interest that
are determined by reference to changes in some external factor or factors.
For example, the issuer's obligations could be determined by reference to
changes in the value of a commodity (such as gold or oil), a foreign
currency, an index of securities (such as the S&P 500) or an interest rate
(such as the U.S. Treasury bill rate). In some cases, the issuer's
obligations are determined by reference to changes over time in the
difference (or "spread") between two or more external factors (such as the
U.S. prime lending rate and the total return of the stock market in a
particular country, as measured by a stock index). In some cases, the
issuer's obligations may fluctuate inversely with changes in an external
factor or factors (for example, if the U.S. prime lending rate goes up, the
issuer's interest payment obligations are reduced). In some cases, the
issuer's obligations may be determined by some multiple of the change in an
external factor or factors (for example, three times the change in the U.S.
Treasury bill rate). In some cases, the issuer's obligations remain fixed
(as with a traditional debt instrument) so long as an external factor or
factors do not change by more than the specified amount (for example, if
the value of a stock index does not exceed some specified maximum); but if
the external factor or factors change by more than the specified amount,
the issuer's obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of a
mutual fund. For example, they can be used to increase the fund's exposure
to changes in the value of assets that the fund would not ordinarily
purchase directly (such as stocks traded in a market that is not open to
U.S. investors). They can also be used to hedge the risks associated with
other investments the fund holds. For example, if a structured note has an
interest rate that fluctuates inversely with general changes in a country's
stock market index, the value of the structured note would generally move
in the opposite direction to the value of holdings of stocks in that
market, thus moderating the effect of stock market movements on the value
of the fund's portfolio as a whole.
Structured notes involve special risks. As with any debt obligation,
structured notes involve the risk that the issuer will become insolvent or
otherwise default on its payment obligations. This risk is in addition to
the risk that the issuer's obligations (and thus the value of the Fund's
investment) will be reduced because of adverse changes in the external
factor or factors to which the obligations are linked. The value of
structured notes will in many cases be more volatile (that is, will change
more rapidly or severely) than the value of traditional debt instruments.
Volatility will be especially high if the issuer's obligations are
determined by reference to some multiple of the change in the external
factor or factors. Many structured notes have limited or no liquidity, so
that the Fund would be unable to dispose of the investment prior to
maturity. (The Fund is not permitted to invest more than 15% of its net
assets in illiquid investments.) As with all investments, successful use of
structured notes depends in significant part on the accuracy of the
relevant subadviser's analysis of the issuer's creditworthiness and
financial prospects, and of the subadviser's forecast as to changes in
relevant economic and financial market conditions and factors. In instances
where the issuer of a structured note is a foreign entity, the usual risks
associated with investments in foreign securities (described above)
apply.
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<PAGE>
. SECURITIES LENDING
The 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 securities loaned and
will also receive interest through investment of the cash collateral in
short-term liquid investments. No loans will be made if, as a result, the
aggregate amount of such loans outstanding at any time would exceed 33 % of
the Fund's total assets (taken at current value). Any voting rights, or
rights to consent, relating to securities loaned pass to the borrower.
However, if a material event affecting the investment occurs, such loans
will be called so that the securities may be voted by the Fund. The Fund
pays various fees in connection with such loans, including shipping fees
and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but involve
some credit risk to the Fund if the borrower defaults on its obligation and
the Fund is delayed or prevented from recovering the collateral.
. SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a party borrows a security and then
sells the borrowed security to another party. The Fund may engage in short
sales only if the Fund owns (or has the right to acquire without further
consideration) the security it has sold short, a practice known as selling
short "against the box." Short sales against the box may protect the Fund
against the risk of losses in the value of its portfolio securities because
any unrealized losses with respect to such securities should be wholly or
partially offset by a corresponding gain in the short position. However,
any potential gains in such securities should be wholly or partially offset
by a corresponding loss in the short position. Short sales against the box
may be used to lock in a profit on a security when, for tax reasons or
otherwise, a subadviser does not want to sell the security. The Fund does
not currently expect that more than 20% of its total assets would be
involved in short sales against the box. For a more complete explanation,
please refer to Part II of the Statement.
. MISCELLANEOUS
The Fund will not invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable, which may
include securities whose disposition is restricted by federal securities
laws.
The Fund may purchase Rule 144A securities. These are privately offered
securities that can be resold only to certain qualified institutional
buyers. The 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 the subadviser of the
relevant segment 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
basis. This means that the Fund enters into a commitment to buy the
security before the security has been issued, or, in the case of a security
that has already been issued, to accept delivery of the security on a date
beyond the usual settlement period. If the value of a security purchased on
a when-issued or delayed-delivery basis falls or market rates of interest
increase between the time the Fund commits to buy the security and the
delivery date, the Fund may sustain a loss in value of or yield on the
security. For more information on when-issued and delayed-delivery
securities, see Part II of the Statement.
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<PAGE>
Although it is not possible to predict the Fund's portfolio turnover rate
with certainty, the four subadvisers expect their respective segments not
to exceed an annual turnover rate of 125%. A turnover rate in excess of
100% may be considered high.
. SPECIAL CONSIDERATIONS REGARDING THE MULTI-ADVISER APPROACH
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(s) of the portfolio
independently from the other subadvisers (and Harris Associates will manage
its two segments independently of each other), 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 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 perform
differently from the other segments depending upon the investments it holds
and changing market conditions, one segment may be larger or smaller at
various times than other segments. The Fund does not intend to reallocate
its assets among the segments to reduce these differences in size. Net cash
inflows or outflows resulting from sales and redemptions of the Fund's
shares will, however, be allocated on an equal basis among the five
segments of the portfolio.
NEFM may, at its discretion, terminate its agreement with a segment's
subadviser. In such case, NEFM will either enter into an agreement with
another subadviser to manage the segment or will allocate the segment's
assets equally among the other segments of the Fund.
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<PAGE>
PERFORMANCE INFORMATION
SUBADVISERS' PAST PERFORMANCE
The graphs below are based on performance data provided by each subadviser
relating to all of the accounts (the "Accounts") managed by that subadviser that
have investment objectives substantially similar to the Fund and are managed by
that subadviser using investment styles and strategies substantially similar
(although not necessarily identical) to those to be employed by that subadviser
in managing its segment(s) of the Fund's portfolio. THE FOLLOWING INFORMATION
DOES NOT REPRESENT THE FUND'S PERFORMANCE. THE FUND IS NEWLY ORGANIZED AND HAS
NO PERFORMANCE RECORD OF ITS OWN. THE FOLLOWING INFORMATION SHOULD NOT BE
CONSIDERED A PREDICTION OF THE FUTURE PERFORMANCE OF THE FUND. The Fund's
performance may be higher or lower than that shown below.
The following graphs show the total returns for the period from December 31,
1994 through September 30, 1995, and for the one, three and four year periods
ended September 30, 1995, of the Accounts managed by each subadviser. The graphs
also show the total return of the Lipper Global Index for each period and the
combined total returns of the Accounts for the year-to-date and the one and
three year periods ended September 30, 1995, during which all four subadvisers
were managing Accounts. Combined Subadviser Performance was calculated by taking
the average of the subadvisers' total returns shown in the graph, assuming that
each segment had the same dollar value at the beginning of the period. All
performance information shown below is adjusted to give effect to the higher of
the level of the actual expenses of the Accounts during the periods shown, or
the annualized expenses projected for the Fund's Class A shares during its first
full fiscal year. The following information has not been adjusted to reflect
deduction of the sales charge payable on the Fund's Class A shares, nor does it
give effect to the higher expense levels of the Fund's Class B and Class C
shares or any contingent deferred sales charges. Performance would be lower if
it were adjusted for these charges and expenses. The information presented in
the graphs below for "Oakmark" and "Oakmark International" represents the total
return of The Oakmark Fund and The Oakmark International Fund, respectively, two
mutual funds managed by Harris Associates that have investment objectives and
policies substantially similar to the investment objectives and policies of the
U.S. and international segments of the Fund, respectively, for which Harris
Associates serves as subadviser.
During the periods that Janus Capital, Montgomery and Harris Associates were
managing their Accounts, there were no changes in the portfolio management
personnel for the Accounts. Michael W. Gerding joined the team managing the
Founders Account in May 1990, at which time he assumed lead portfolio management
responsibility for that Account.
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<PAGE>
[A bar graph appears here, illustrating the year-to-date total returns for
December 31, 1994 to September 30, 1995 for the Lipper Global Index, Combined
Subadviser Performance and the Accounts of Founders, Janus Capital, Montgomery,
Oakmark and Oakmark International. (1) The data points from the chart are as
follows:
<TABLE>
<S> <C>
Lipper Global Index 13.31%
Combined Subadviser Performance 12.60%
Founders 19.30%
Janus Capital 15.75%
Montgomery -6.74%
Oakmark 24.74%
Oakmark International 9.93%]
</TABLE>
[A bar graph appears here, illustrating the one year total returns for September
30, 1994 to September 30, 1995 for the Lipper Global Index, Combined Subadviser
Performance and the Accounts of Founders, Janus Capital, Montgomery, Oakmark and
Oakmark International. (2) The data points from the chart are as follows:
<TABLE>
<S> <C>
Lipper Global Index 8.42%
Combined Subadviser Performance 7.00%
Founders 14.49%
Janus Capital 14.74%
Montgomery -16.91%
Oakmark 21.97%
Oakmark International 0.71%]
</TABLE>
[A bar graph appears here, illustrating the three year average annual total
returns for September 30, 1992 to September 30, 1995 for the Lipper Global
Index, Combined Subadviser Performance and for the Accounts of Founders, Janus
Capital, Montgomery, Oakmark and Oakmark International. (3) The data points from
the chart are as follows:
<TABLE>
<S> <C>
Lipper Global Index 14.42%
Combined Subadviser Performance 17.56%
Founders 16.79%
</TABLE>
-15-
<PAGE>
<TABLE>
<S> <C>
Janus Capital 18.88%
Montgomery 12.75%
Oakmark 23.91%
Oakmark International 14.84%]
</TABLE>
[A bar graph appears here, illustrating the four year average annual total
returns for September 30, 1991 to September 30, 1995 for the Lipper Global Index
and for the Accounts of Founders, Janus Capital and Oakmark. (4) The data points
from the chart are as follows:
<TABLE>
<S> <C>
Lipper Global Index 11.34%
Founders 13.68%
Janus Capital 15.75%
Oakmark 30.29%]
</TABLE>
(1) Because of its emerging market focus, it is more relevant to compare the
past performance of the Account managed by Montgomery to that of the
International Finance Corporation ("IFC") Global Index than to that of the
Lipper Global Index. Similarly, because of their respective U.S. and non-
U.S. (rather than global) focuses, it is more relevant to compare the past
performance of The Oakmark Fund and The Oakmark International Fund to the
S&P 500 and the Morgan Stanley World Index (which includes the securities
of 21 different countries and excludes U.S. securities), respectively, than
to the Lipper Global Index. The total return for the IFC Global Index for
the period December 31, 1994 through September 30, 1995 was -9.65%. The
total return for the S&P 500 for this period was 29.72%. The total return
for the Morgan Stanley World Index for this period was 7.09%. Total returns
stated for periods of less than one year are not annualized.
(2) The total return for the IFC Global Index for the one year period ended
September 30, 1995 was -19.90%. The total return for the S&P 500 for this
period was 29.69%. The total return for the Morgan Stanley World Index for
this period was 5.81%.
(3) The average annual total return for the IFC Global Index for the three year
period ended September 30, 1995 was 16.61%. The average annual total return
for the S&P 500 for this period was 14.96%. The average annual total return
for the Morgan Stanley World Index for this period was 13.53%. In the case
of Montgomery, the average annual total return for the period March 1, 1992
(inception of the Accounts managed by Montgomery with objectives and
investment approaches substantially the same as the Montgomery segment of
the Fund) through September 30, 1995 was 8.94%. The Oakmark International
Fund commenced operations on September 30, 1992.
(4) The average annual total return for the S&P 500 for the four year period
ended September 30, 1995 was 13.97%. In the case of Founders, the average
annual total return for the five year period ended September 30, 1995 was
16.54%, compared to an average annual total return of 13.22% for the Lipper
Global Index for the same period, and the average annual total return for
the period December 31, 1989 (inception of the Account managed by Founders
with an objective and investment approach substantially the same as the
Founders segment of the Fund) through September 30, 1995 was 14.53%. In the
case of Janus Capital, the average annual total return for the period May
15, 1991 (inception of the first Account managed by Janus Capital with an
objective and investment approach substantially the same as the Janus
Capital segment of the Fund) through September 30, 1995 was 20.75%. In the
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<PAGE>
case of The Oakmark Fund, the average annual total return for the period
August 5, 1991 (inception of The Oakmark Fund) through September 30, 1995
was 32.16%.
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<PAGE>
FUND MANAGEMENT
New England Funds Management, L.P., 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 payable by the Fund is higher than that paid by most other
mutual funds, but it is believed to be appropriate for the services received by
the Fund and to be comparable to fees paid by some other mutual funds investing
in a manner similar to the Fund. This difference in the fee rate is partially
due to the multi-adviser format. NEFM pays each of Harris Associates, Founders
and Janus Capital an advisory fee at the annual rate of 0.65% of the first $50
million of the average daily net assets of each segment of the Fund that that
subadviser manages, 0.60% of the next $50 million of such assets and 0.55% of
such assets in excess of $100 million. NEFM pays Montgomery an advisory fee at
the annual rate of 0.90% of the first $25 million of the average daily net
assets of the segment of the Fund that Montgomery manages, 0.70% of the next $25
million of such assets and 0.55% of such assets in excess of $50 million.
Montgomery has agreed to waive 0.15% of the fee payable to it by NEFM through
June 30, 1996, but this waiver will not reduce the fees payable by the Fund to
NEFM.
The Distributor in its discretion may, but is not obligated to, pay a 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 or
segments of the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for its segment(s) of the
portfolio, places orders to purchase and sell securities for its segment(s) of
the portfolio and employs professional advisers and securities analysts who
provide research services relating to its segment(s) of the portfolio. The Fund
pays no direct fees to any of the subadvisers. Below is a brief description of
the subadvisers.
HARRIS ASSOCIATES, Two North LaSalle Street, Chicago, Illinois 60602, has
advised and managed mutual funds since 1970. Harris Associates also serves as
investment adviser to individuals, trusts, retirement plans, endowments and
foundations, and manages several private partnerships.
Robert J. Sanborn, CFA, is the portfolio manager for the U.S. segment of the
Fund managed by Harris Associates. Mr. Sanborn joined Harris Associates as a
portfolio manager and analyst in 1988.
David G. Herro, CFA, and Michael J. Welsh are the portfolio managers for the
international segment of the Fund managed by Harris Associates. Mr. Herro joined
Harris Associates in 1992 from the State of Wisconsin Investment Board, where he
managed a $700 million international equity fund from 1989 through July 1992.
Mr. Welsh joined Harris Associates as an international analyst in 1992.
Previously, he had been a senior associate, valuation services, with Coopers &
Lybrand.
MONTGOMERY, 600 Montgomery Street, San Francisco, California 94111, was formed
in 1990 and since then has advised private accounts and mutual funds. Its
general partner is Montgomery Asset Management, Inc. and its sole limited
partner is Montgomery Securities, an investment banking firm founded in 1969.
The portfolio managers for the segment of the Fund managed by Montgomery are
Josephine S. Jimenez, CFA, Managing Director and Senior Portfolio Manager, and
Bryan L. Sudweeks, Ph.D., CFA, Managing Director and Senior Portfolio Manager.
From 1988 through 1991, when she joined Montgomery, Ms. Jimenez worked at
Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. as senior analyst and portfolio manager. Before joining
Montgomery in 1991, Dr. Sudweeks was a senior analyst and portfolio manager at
Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991.
-18-
<PAGE>
FOUNDERS, 2930 East Third Avenue, Denver, Colorado 80206, has acted as an
investment 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
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 and advice of the
management team in making purchase and sale determinations. Michael W. Gerding
is lead portfolio manager for the segment of the Fund managed by Founders. Mr.
Gerding is a Vice President of Investments at Founders and has managed
portfolios at Founders since 1990. Mr. Borgen has served as Founders' Chief
Investment Officer since 1969 and owns all of Founders' outstanding shares.
JANUS CAPITAL, 100 Fillmore Street, Suite 300, Denver, Colorado 80206, has
managed mutual funds since 1970 and also advises individual, corporate,
charitable and retirement accounts. Helen Young Hayes has day-to-day management
responsibility for those assets of the Fund allocated to Janus Capital. Ms.
Hayes is a portfolio manager and Vice President of Janus Capital, where she has
been employed since 1987. Kansas City Southern Industries, Inc. ("KCSI"), a
publicly traded holding company, owns approximately 83% of the outstanding
voting stock of Janus Capital. Thomas H. Bailey, President and Chairman of the
Board of Janus Capital, owns approximately 12% of Janus Capital's voting stock
and, by agreement with KCSI, selects a majority of Janus Capital's board of
directors.
The general partners of NEFM, Harris Associates and the Distributor are special
purpose corporations. These corporations are indirect wholly-owned subsidiaries
of New England Investment Companies, L.P. ("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 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.
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 they manage as a factor in the selection of broker-dealers to
effect portfolio transactions for the Fund. Subject to procedures adopted by the
trustees of the Trust, Fund brokerage transactions may be executed by brokers
that are affiliated with NEIC or any subadviser. See "Portfolio Transactions and
Brokerage" in Part II of the Statement.
The Trust's Board of Trustees supervises the affairs of the Trust as conducted
by NEFM and the subadvisers.
-19-
<PAGE>
BUYING FUND SHARES
USING TELE#FACTS 1-800-346-5984
TELE#FACTS IS NEW ENGLAND FUND'S 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 RECENT PERFORMANCE INFORMATION. YOU CAN ALSO PURCHASE,
SELL OR EXCHANGE CLASS A AND B SHARES AND PURCHASE AND SELL CLASS C 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
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
. $25 (for initial and subsequent investments) for payroll deduction
investment programs for 401(k), SARSEP, 403(b) retirement plans and
certain other retirement 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.
. $1,000 (per Fund) for Portfolio 1,2,3 investment programs. Subsequent
investment minimums are $50 per Fund. See Part II of the
Statement.
6 WAYS TO BUY FUND SHARES
You may purchase Class A, Class B and Class C shares of the Fund 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, P.O. Box 8551, Boston, MA 02266-
8551. Proceeds of redemptions of Fund shares purchased by check may not be
available for up to ten days after the purchase date.
FOR SUBSEQUENT INVESTMENTS, please mail your check to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551 along with a letter of instruction or
an additional deposit slip from your statements. To make investing even
easier, you can also order personalized investment slips by calling 1-800-
225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time).
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<PAGE>
Investment checks should be made payable to New England Funds. New England
Funds will accept second-party checks (up to $10,000) for investments into
existing accounts only. (A second-party check is a check made payable to a
Fund shareholder which the shareholder has endorsed to New England Funds
for deposit into an account registered to the shareholder.) New England
Funds will NOT accept third-party checks, except certain third-party checks
issued by other mutual fund companies, broker dealers or banks representing
the transfer of retirement assets. (A third-party check is a check made
payable to a party which is not a Fund shareholder, but which has been
ultimately endorsed to New England Funds for deposit into an account.)
. 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
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 Worldwide 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
authorize 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
automatic 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
Clearing House ("ACH") system as long as your bank or credit union is a
member of the ACH system and you have a completed, approved ACH application
on file with the Fund.
To purchase through ACH, call us at 1-800-225-5478 between 8:00 a.m. and
7:00 p.m. (Eastern time) on a day when the Fund is open for business. You
may 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 "Exhange") closes at 4:00 p.m. (Eastern time). Purchase
orders accepted through ACH or Tele#Facts after 4:00 p.m. (Eastern time),
or after the Exchange closes if it closes earlier than 4:00 p.m., will be
processed at the net asset value determined at the close of regular trading
on the next day that the Exchange is open. 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.
-21-
<PAGE>
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 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 Fund does not anticipate doing so, it reserves the right to suspend or
change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to persons
whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you request
them in writing from New England Funds, L.P. 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 effected by
another person under a power of attorney from you, special rules apply. Please
contact your investment dealer or the Distributor for details.
SALES CHARGES
CLASS A SHARES
Shares are offered at net asset value plus a sales charge which varies depending
on the size of your purchase. They are also subject to a 0.25% annual service
fee. Class A shares are offered subject to the following initial sales
charges:
<TABLE>
<CAPTION>
SALES CHARGES AS A % OF DEALER'S CONCESSION
-----------------------
AS A % OF
VALUE OF TOTAL INVESTMENT PUBLIC OFFERING PRICE AMOUNT INVESTED OFFERING 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 a commission of up to the following
amounts: 1% on the first $2 million invested; .80% on the next $1 million;
.20% on the next $2 million; and .08% on the excess over $5 million. These
commissions are not payable if the purchase represents the reinvestment of a
redemption made during the previous 12 calendar months.
TO MAKE INVESTING EVEN EASIER,
YOU CAN ALSO ORDER PERSONALIZED INVESTMENT SLIPS BY CALLING 1-800-225-5478
BETWEEN 8.00 A.M. AND 7.00 P.M. (EASTERN TIME).
-22-
<PAGE>
CONTINGENT DEFERRED SALES CHARGE (CLASS A SHARES ONLY). For purchases of
$1,000,000 or more of Class A shares of the Fund, 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 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 exchanged back into the Trusts, then
a CDSC applies to the redemption. For purposes of the CDSC, it is assumed that
the shares held the longest are the first to be redeemed. 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 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 on 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
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.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
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 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, unless otherwise
requested, and is paid to the Distributor. The CDSC may be eliminated for
certain persons and organizations. See "Sales Charges - General" below. At the
time of sale, the Distributor pays investment dealers a commission of 3.75% and
advances the first year's service fee (up to 0.25%) on purchases of Class B
shares.
-23-
<PAGE>
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
distribution fee; and do not convert into another class.
CLASS Y SHARES
The Fund may also in the future offer a fourth class of shares, which is not
currently available for purchase. See "Additional Facts About the Fund"
below.
A, B OR C SHARES - WHICH SHOULD YOU CHOOSE?
YOUR CHOICE OF SHARE CLASS DEPENDS ON THE SIZE OF YOUR INVESTMENT AND
HOW LONG YOU INTEND TO HOLD YOUR SHARES. IN GENERAL, THERE ARE ONLY MINOR
DIFFERENCES IN PERFORMANCE RESULTS FOR THE DIFFERENT CLASSES IF HELD
FOR THE LONG TERM. CONSULT YOUR FINANCIAL REPRESENTATIVE FOR HELP IN
DECIDING WHICH CLASS IS APPROPRIATE FOR YOU.
DECIDING WHICH CLASS TO PURCHASE
The decision as to whether Class A, Class B or Class C shares are more
appropriate for an investor depends on the amount and intended length of the
investment. Investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because Class A shares have lower
12b-1 fees and pay correspondingly higher dividends per share. For these
reasons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the
relevant section of your application that you have been informed of the relative
advantages and disadvantages of Class A and 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
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)
distributions from an IRA due to death, disability or a tax-free return of an
excess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability (as
defined in Section 72(m)(7) of the Internal Revenue 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 received
on sales of each class of shares. The sales charge is allocated between the
investment dealer and the Distributor. The Distributor receives the CDSC. For
purposes of the CDSC, an exchange from one series of one of the Trusts to
another series of one of the Trusts is not considered a redemption or a
purchase. For federal tax purposes, however, such an
-24-
<PAGE>
exchange is considered a redemption and a purchase and, therefore, would be
considered a taxable event on which you may recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares to investment dealers from time to time. The staff
of the SEC is of the view that dealers receiving all or substantially all of the
sales charge may be deemed underwriters of a 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
governmental 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 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 Fund. 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
campaigns 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
institution 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 reduced 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
investments by any state, county or city or any instrumentality,
department, authority or agency thereof that has determined that the Fund
is a legally permissible investment and that is prohibited by applicable
investment laws from paying a sales charge or commission in connection with
the purchase of shares of any registered investment company.
. CLIENTS OF AN ADVISER OR SUBADVISER - no sales charge or CDSC applies to
investments of $25,000 or more in the 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
parents, spouses and children of the foregoing; (2) any individual who is a
participant in a Keogh or IRA Plan under a prototype Plan document of an
adviser or subadviser to any series of the Trusts if at least one
participant in the plan qualifies under category (1) above; and (3) an
individual who invests through an IRA and is a participant in an
-25-
<PAGE>
employee benefit plan that is a client of an adviser or subadviser to any
series of the Trusts. Any investor eligible for these arrangements should
so indicate in writing at the time of the purchase.
. Shares of the 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 Section 401(a), 403(b) or 457 of the
Internal Revenue Code and rabbi trusts. Investors may be charged a fee if
they effect transactions through a broker or agent.
. There is no sales charge, CDSC or initial investment minimum related to
investments by certain current and retired employees of the Trusts'
investment advisers or subadvisers, the Distributor or any other company
affiliated with The New England; current and former directors and trustees
of the Trusts 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 the Distributor; 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.
. Shareholders of Reich & Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of any series of the Trusts at net
asset value and without the imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of sales expenses associated
with such sales.
-26-
<PAGE>
OWNING FUND SHARES
EXCHANGING AMONG NEW ENGLAND FUNDS
CLASS A SHARES
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any of the series of the Trusts) for the Class A
shares of any other series of the Trusts (except New England 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 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 New
England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund") for
shares of another fund that has a higher sales charge, you will pay the
difference between any sales charge you have already paid on your Adjustable
Rate Fund shares and the higher sales charge of the 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.
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 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.
CLASS B SHARES
You may exchange Class B shares of the Fund or any 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 (except New England Growth Fund, which does
not offer 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 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), call Tele#Facts at 1-800-346-5984 twenty-four hours a day or
write to New England Funds. Exchange requests accepted after 4:00 p.m. (Eastern
time), or after the Exchange closes if it closes earlier than 4:00 p.m., will be
processed at the net asset value determined at the close of regular trading on
the next day that the Exchange is open. The exchange must be for a minimum of
$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
-27-
<PAGE>
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 series into which you are exchanging. The exchange
privilege may be exercised only in those states where shares of such other
series may be legally sold.
You have the automatic privilege to exchange your Fund shares by telephone. New
England Funds, L.P. will employ reasonable procedures to confirm that your
telephone instructions are genuine, and, if it does not, it may be liable for
any losses due to unauthorized or fraudulent instructions. New England Funds,
L.P. will require a form of personal identification prior to acting upon your
telephone instructions, will provide you with written confirmations of such
transactions and will record your instructions.
Except as otherwise permitted by SEC rule, shareholders will receive at least 60
days' advance notice of any material change to the exchange privilege.
FUND DIVIDEND PAYMENTS
The Fund pays dividends annually. The Fund pays as dividends substantially all
net investment income (other than long-term capital gains) each year and
distributes annually all net realized long-term capital gains (after applying
any available capital loss carryovers). The trustees of the Trust may adopt a
different schedule as long as payments are made at least annually. If you intend
to purchase shares of the Fund shortly before it declares a 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
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in
writing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned undeliverable to the Fund
or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested.
----------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program that allows
you to have all dividends and any other distributions automatically
invested in shares of the same class of another New England Fund,
subject to the investor eligibility requirements of that other fund and
to state securities law requirements. Shares will be purchased at the
selected fund's net asset value (without a sales charge or CDSC) on the
dividend record date. A dividend diversification account must be in the
same registration (shareholder name) as the distributing fund account
and, if a new account in the purchased fund is being established, the
purchased fund's minimum investment requirements must be met. Before
establishing a dividend diversification program into any other New
England Fund, you must obtain a copy of that fund's prospectus.
----------------------------------------------------------------------------
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<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 redemption privilege on your account, shares may be redeemed
by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) 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 deducted
from the proceeds.
Your bank must be a member of the Federal Reserve System or have a
correspondent bank that is a member. If your account is with a savings
bank, it must have only one correspondent bank that is a member of the
System.
. Mailed to Your Address of Record - Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) 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. (Eastern 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 availability will depend on
your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that
the Exchange is open.
. BY MAIL:
You may redeem your shares at their net asset value (LESS ANY APPLICABLE
CDSC) next determined after receipt of your request in good order by
sending a written request (including any necessary special documentation)
to New England Funds, P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, 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
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<PAGE>
confirmation statement) and indicate any special 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 signature guaranteed by an eligible guarantor institution in
accordance with procedures 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
benefit plans and IRAs. Contact the Distributor or your investment dealer
for details.
If you hold certificates for your Class A shares, you must enclose them
with your redemption request or your request will not be honored. The Fund
recommends 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 basis, 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 Distributor or your investment dealer. Since withdrawal
payments may have tax consequences, you should consult your tax adviser
before establishing such a plan.
GENERAL. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time on the same day will
receive that day's net asset value). Redemption proceeds (LESS ANY APPLICABLE
CDSC) will normally be mailed to you within seven days after State Street Bank
or the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10 days
after such purchase or transfer, the Fund may withhold redemption proceeds until
the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply with respect to redemptions under powers of attorney. Please
call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Fund may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Fund to
dispose of its securities or to determine fairly the value of its net assets, or
during any other period permitted by the SEC for the protection of
investors.
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<PAGE>
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 redemption
and notify New England Funds or your investment dealer at the time of
reinvestment that you are taking advantage of this privilege. You may reinvest
the proceeds either by returning the redemption check or by sending your check
for some or all of the redemption amount. Please note: For federal income tax
purposes, a redemption is a sale that involves tax consequences (even if the
proceeds are later reinvested). Please consult your tax adviser.
FUND DETAILS
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of the Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on the Exchange each day it is
open. 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 securities is generally
taken from the closing price on the exchange where the security is primarily
traded. Securities traded primarily on an exchange outside the United States
which closes before the close of the Exchange generally will be valued for
purposes of calculating the Fund's net asset value at the last sale or bid price
on that non-U.S. exchange, except that when an occurrence after the closing of
that exchange is likely to have materially changed such a security's value, such
security will be valued at fair value as 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.
An option that is purchased by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, at the last bid 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 experience significant price fluctuations after the
determination of the settlement price. When a settlement price is not used,
futures contracts will be valued at their fair value as determined by or under
the direction of 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 pricing 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 expressed in terms of a foreign
currency will be translated into U.S. dollars at the prevailing market rate on
the date of 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
calculations 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
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
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<PAGE>
shares through your investment dealer, the dealer must receive your order by the
close of regular trading on the Exchange and transmit it to the Distributor by
5:00 p.m. (Eastern time) to receive that day's public offering price.
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
income tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your
distributions derived from 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
distributions"), 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 during
that calendar year. 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.
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 taxpayer
identification number, if the Fund is notified that you have under reported
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
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The 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 Internal Revenue Code which would
allow Fund shareholders who are U.S. citizens or U.S. corporations to claim a
foreign tax credit or deduction (but not both) on their U.S. income tax return.
If the Fund makes the election, the amount of each shareholder's distribution
reported on the information returns filed by the Fund with the Internal Revenue
Service must be increased by the amount of the shareholder's portion of the
Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax consequences of an
investment 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
investment in the Fund on their particular federal, state and local tax
situations and about consequences of their investment under foreign laws.
THE FUND'S EXPENSES
In addition to the management fee paid to NEFM, the Fund pays all expenses not
borne by the NEFM, the subadvisers or the Distributor, including, but not
limited to, the charges and expenses of the Fund's custodian and transfer agent,
independent auditors and legal counsel for the Fund and the Trust's independent
trustees, 12b-1
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<PAGE>
fees, all brokerage commissions and transfer taxes in connection with portfolio
transactions, all taxes and filing fees, the fees and expenses for registration
or qualification of its shares under federal or state securities laws, all
expenses of shareholders' and trustees' meetings, preparing, printing and
mailing prospectuses and reports to shareholders and the compensation of
trustees of the Trust who are not directors, officers or employees of The New
England or its affiliates, other than affiliated registered investment
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, if any, 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 Distribution
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 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
distribution 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
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
The Fund may include total return information for each class of shares in
advertisements 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
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.
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.
All performance information is based on past results and is not an indication of
likely future performance.
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<PAGE>
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 is a newly organized series of the
Trust.
. When you invest in the Fund, you acquire freely transferable shares of
beneficial 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 the Statement, the investment policies of the Fund may be
changed without shareholder approval or, in most cases, prior notice. 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
position and needs.
. If they become available, Class Y shares of the Fund will be eligible for
purchase by endowments and foundations. The minimum initial investment is
$1 million for these entities and the minimum for each subsequent
investment is $100,000. Class Y shares may also be purchased by plan
sponsors of 401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that
have total investment assets in these plans of at least $10 million. Plan
sponsors' investment assets in multiple Retirement Plans can be aggregated
for purposes of meeting this minimum. Class Y shares will also be eligible
for purchase by any separate account of The New England or of any other
insurance company affiliated with The New England ("Separate Accounts").
There is no minimum initial or subsequent investment amount for Retirement
Plans or Separate Accounts. Investments in Class Y shares will also be able
to be made by certain individual retirement accounts if the amounts
invested represent rollover distributions from investments by any of the
foregoing Retirement Plans of amounts invested in Class Y shares.
. If Class Y shares become available, they will be identical to Class A,
Class B and Class C shares, except that Class Y shares will have no sales
charge or CDSC and will bear no Rule 12b-1 fees. Class Y will bear its own
transfer agency and prospectus printing costs and will 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
trustees 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
subcontracted 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
accounts, 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 notified of the Fund's intention to close the account and will have 60
days immediately following the notice to bring the account up to the
minimum. The minimum does not apply to Keogh, pension and profit sharing
plans, automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in the Fund's net asset value per
share.
. The Fund's annual report contains additional performance information and
will be made available upon request and without charge.
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<PAGE>
. The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
. Summit Cash Reserve Fund (the "Cash Fund"), a series of Financial
Institutions Series Trust, is related to the Fund for purposes of
investment and investor 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 CDSC,
the holding period for purposes of determining the expiration of the CDSC
will stop and resume only when an exchange is made back into shares of the
Fund. 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 any 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.
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<PAGE>
Rule 497(c)
File No. 2-98326
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND STAR WORLDWIDE FUND
Supplement dated December 29, 1995 to New England Star Worldwide Fund Prospectus
dated December 29, 1995
Beginning December 29, 1995 through March 15, 1996, or until the assets of New
England Star Worldwide Fund (the "Fund") reach $50 million, the Distributor will
reallow 100% of the sales charge on commissionable sales of Class A shares and
will award an additional 0.50% of the amount of such sales to participating
investment dealers. During the same period, the Distributor will award
participating investment dealers 0.50% on commissionable sales of Class B shares
in addition to the commissions on sales of Class B shares described in the
prospectus under the section captioned "Sales Charges," and will also award
participating investment dealers 0.50% on sales of Class C shares.
<PAGE>
Rule 497(c)
File No. 2-98326
NEW ENGLAND FUNDS
NEW ENGLAND STAR WORLDWIDE FUND
STATEMENT OF ADDITIONAL INFORMATION
December 29, 1995
This Statement of Additional Information (the "Statement") contains
information which may be useful to investors but which is not included in the
prospectus of New England Star Worldwide Fund (the "Fund"). This Statement is
not a prospectus and is only authorized for distribution when accompanied or
preceded by the prospectus of the Fund dated December 29, 1995 for Class A, B, C
or Y shares (the "prospectus"). The Statement should be read together with the
prospectus. Investors may obtain a free copy of the prospectus from New England
Funds, L.P., Prospectus Fulfillment Desk, 399 Boylston Street, Boston, MA
02116.
This Statement contains information about the Class A, B, C and Y shares of
the Fund. The Fund is a series of New England Funds Trust I (the "Trust"), a
registered investment company that offers a total of eleven series.
<TABLE>
<CAPTION>
T a b l e o f C o n t e n t s
Page
PART I
<S> <C>
Investment Restrictions
Fund Charges and Expenses
PART II
Miscellaneous Investment Practices
Management of the Trust
Portfolio Transactions and Brokerage
Description of the Trust and Ownership of Shares
How to Buy Shares
Net Asset Value and Public Offering Price
Reduced Sales Charges
Shareholder Services
Redemptions
Standard Performance Measures
Income Dividends, Capital Gain Distributions and Tax Status
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Contain Fund Information
Appendix C - Advertising and Promotional Literature
</TABLE>
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<PAGE>
PART I
_____________________________________________________________________________
INVESTMENT RESTRICTIONS
_____________________________________________________________________________
The following is a description of restrictions on the investments to be
made by the Fund, some of which restrictions (those restrictions marked with an
asterisk) may not be changed without the approval of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act of 1940 [the "1940 Act"]). Except in the case of restriction (15) below, the
percentages set forth below and the percentage limitations set forth in the
prospectus will apply at the time of the purchase of a security and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security.
The Fund may not:
(1) With respect to 75% of its total assets, invest in the securities of any
one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such
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
all 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 it owns or, 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. (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 33 1/3 % of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(6) Pledge more than 33 1/3 % of its total assets (taken at cost). (For the
purpose of this restriction, reverse repurchase agreements, collateral
arrangements with respect to options, futures contracts, options on futures
contracts, forward contracts, swap contracts and other similar instruments
and with respect to initial and variation margin are not deemed to be a
pledge of assets);
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<PAGE>
(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
the Trust 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%;
*(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,
swap contracts, currency forward contracts, structured notes and other
similar instruments. (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 a
subadviser or accounts under its management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(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, (c) enter into currency forward
contracts and (d) invest in structured notes;
(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;
*(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
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<PAGE>
by restriction (6) above; any borrowing permitted by restriction (5) above;
any collateral arrangements with respect to options or futures contracts,
and with respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts or other
similar instruments; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of the Trust's Declaration of
Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom. (The Fund is required, under regulatory provisions applicable to
it as interpreted by the staff of the SEC, to set aside in a segregated
account with its custodian bank liquid, high grade assets in amounts
sufficient at all times to satisfy its obligations under options, futures
contracts, forward contracts, swap contracts and other similar
instruments); or
(18) Lend its portfolio securities if, as a result, the aggregate amount of such
loans outstanding at any one time would exceed 33 1/3 % of the Fund's total
assets (taken at current value).
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.
As a matter of operating policy, subject to change without shareholder
approval, the Fund will not (i) invest more than 5% of the value of its net
assets in warrants (included within that amount but not to exceed 2% of the
value of its net assets may be warrants which are not listed on either the New
York Stock Exchange or the American Stock Exchange) (for purposes of this
restriction, warrants acquired in units or attached to other securities may be
deemed to be without value); (ii) purchase or sell real property including real-
estate limited partnerships but excluding readily marketable investments in real
estate investment trusts or readily marketable securities of companies which
invest in real estate; or (iii) purchase puts, calls, straddles, spreads and 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.
_____________________________________________________________________________
FUND CHARGES AND EXPENSES
_____________________________________________________________________________
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Pursuant to an Advisory Agreement dated December 29, 1995 New England Funds
Management, L.P. ("NEFM") has agreed, subject to the supervision of the board of
trustees of the Trust, to manage the investment and reinvestment of the assets
of the Fund and to provide a range of administrative services to the Fund. For
the services described in the Advisory Agreement, the Fund pays NEFM a fee at
the annual rate of 1.05% of the Fund's average daily net assets.
The Advisory Agreement provides that NEFM may delegate its responsibilities
thereunder to other parties. As explained in the prospectus, the Fund's
portfolio is divided into five segments. NEFM has delegated responsibility for
the investment and reinvestment of the assets of each segment of the portfolio
to four different investment advisers (the "subadvisers"). The subadvisers are
Harris Associates L.P. ("Harris"), which manages two of the five segments, and
Founders Asset Management Inc. ("Founders"), Janus Capital Corporation ("Janus
Capital") and Montgomery Asset Management, L.P. ("Montgomery"),
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<PAGE>
each of which manage one of the five segments. NEFM pays each subadviser a fee
for managing its segment or segments of the portfolio, at the annual rate of
0.65% of the average daily net assets of each such segment up to $50 million,
0.60% of the next $50 million of such assets and 0.55% of such assets in excess
of $100 million; except that Montgomery's fee is at the annual rate of 0.90% of
the average daily net assets of its segment of the portfolio up to $25 million,
0.70% of the next $25 million of such assets and 0.55% of such assets in excess
of $50 million. Montgomery has agreed to waive 0.15% of its fee through June 30,
1996.
For more information about the Fund's investment advisory and subadvisory
agreements, see "Management of the Trust" in Part II of this Statement.
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<PAGE>
PART II
_____________________________________________________________________________
MISCELLANEOUS INVESTMENT PRACTICES
_____________________________________________________________________________
The following information relates to certain investment practices in which
the Fund may engage.
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 at the present time has no intention to engage in the lending of
portfolio securities.) 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. 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 board of trustees of the Trust or persons acting pursuant to the direction
of the board.
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
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<PAGE>
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.
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<PAGE>
Such transactions afford the Fund the opportunity to earn a return on
temporarily available cash at minimal 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.
Short Sales Against the Box. The Fund may make short sales of securities only if
at all times when a short position is open the Fund owns at least an equal
amount of such securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue as,
and equal in amount to, the securities sold short. These transactions are known
as short sales "against the box."
In a short sale against the box, the Fund does not deliver from its
portfolio the securities sold and does not receive immediately the proceeds from
the short sale. Instead, the Fund borrows the securities sold short from a
broker-dealer through which
-3-
<PAGE>
the short sale is executed, and the broker-dealer delivers such securities, on
behalf of the Fund, to the purchaser of such securities. The broker-dealer is
entitled to retain the proceeds from the short sale until the Fund delivers to
the broker-dealer the securities sold short. In addition, the Fund is required
to pay to the broker-dealer the amount of any dividends paid on shares sold
short. To secure its obligation to deliver to such broker-dealer the securities
sold short, the Fund must deposit and continuously maintain in a separate
account with the Fund's custodian an equivalent amount of the securities sold
short or securities convertible into or exchangeable for such securities without
the payment of additional consideration. The Fund is said to have a short
position in the securities sold until it delivers to the broker-dealer the
securities sold, at which time the Fund receives the proceeds of the sale. The
Fund may close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities sold short,
rather than delivering portfolio securities.
Short sales may protect the Fund against the risk of losses in the value of
its portfolio securities, because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in the portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities that are convertible into any equity security that is sold short,
changes in the relative value of the convertible security and the related equity
security.
Short sale transactions involve certain risks. If the price of the security
sold short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss. If the price
declines during this period, the Fund will realize a short-term capital gain.
Any realized short-term capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium, dividend or
interest which the Fund may have to pay in connection with such short sale. The
Fund will also incur transaction costs in connection with short sales. Certain
provisions of the Code may limit the degree to which the Fund is able to enter
into short sales. There is no limitation on the amount of the Fund's assets
that, in the aggregate, may be deposited as collateral for the obligation to
replace securities borrowed to effect short sales and allocated to segregated
accounts in connection with short sales. The Fund currently expects that no more
than 20% of its total assets would be involved in short sales against the box.
Options and Futures
- -------------------
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, 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
-4-
<PAGE>
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 illiquid 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
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<PAGE>
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.
-6-
<PAGE>
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 any time when,
in the case of a call warrant, the exercise price is greater 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
portfolio securities, the Fund may buy put options on the foreign currency. If
the value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in
part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Fund could sustain losses on transactions in foreign
currency options that would require the Fund to forego a portion or all of the
benefits of advantageous changes in those rates.
-7-
<PAGE>
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.
RISKS. The use of futures contracts and options 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. If the price of the futures contract moves more than the price of the
hedged security, the 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.
-8-
<PAGE>
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
-9-
<PAGE>
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 Fund purchases foreign stock index futures.
The successful use of transactions in futures and options depends in part
on the ability of the Fund's subadvisers 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.
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
-10-
<PAGE>
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.
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 TRUST
______________________________________________________________________________
Trustees
- --------
Trustees of the Trust and their ages (in parentheses), addresses and principal
occupations during the past five years are as follows:
GRAHAM T. ALLISON, JR. -- Trustee (55); 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
-11-
<PAGE>
United States Secretary of Defense; formerly, Assistant Secretary of
Defense; formerly, Dean, John F. Kennedy School of Government.
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.
SANDRA O. MOOSE -- Trustee (53); 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,
NEFM; Director, Back Bay Advisors, Inc.; formerly, Director, New England
Securities Corporation ("New England Securities").
JAMES H. SCOTT -- Trustee (53); 2001 Bryan Street, Suite 1850, Dallas, Texas
75201; Vice President, TU Services (electric utility); formerly, Treasurer, The
Trustees of Amherst College.
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 medical 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.; Chairman of the Board and Director,
NEF Corporation; Chairman of the Board and Director, Back Bay Advisors,
Inc.; Director, New England Mutual Life Insurance Company ("The New
England"); formerly, Executive Vice President, Bank of America; formerly,
Group Head of International Banking, Trading and Securities, Security
Pacific National Bank, and Chief Executive Officer of the Security Pacific
Investment Group.
_______________________
* Trustee deemed an "interested person" of the Trust, as defined in the
Investment Company Act of 1940 (the "1940 Act").
-12-
<PAGE>
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 Trust and their ages (in parentheses) and principal occupations
during the past five years are as follows:
J. STEVEN NEAMTZ -- Vice President (37); Executive Vice President, NEF
--------------
Corporation; Executive Vice President, New England Funds, L.P.
BRUCE R. SPECA -- Vice President (39); 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.
ROBERT P. CONNOLLY -- Secretary and Clerk (41); 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.
CHARLES T. WALLIS -- Senior Vice President (54); President and Chief Executive
---------------------
Officer, Back Bay Advisors, L.P. ("Back Bay Advisors"); President, Chief
Executive Officer and Director, Back Bay Advisors, Inc.; Director, New
England Securities; formerly, Vice President, The New England.
HAROLD B. BJORNSON -- Vice President (38); Vice President, Back Bay Advisors;
--------------
formerly Assistant Vice President, New England Securities.
KIMBERLY J. FORSYTH -- Vice President (32); Senior Vice President, Back Bay
--------------
Advisors; formerly, Senior Vice President and Director of Tax-Exempt Credit
Research Department, Legg Mason, Incorporated (investment advisory firm);
formerly, Vice President and Senior Credit Analyst, Putnam Investment
Management, Incorporated; formerly, Director of Municipal Research, Alex.
Brown & Sons Incorporated (brokerage/advisory firm).
CHARLES G. GLUECK -- Vice President (55); Senior Vice President, Back Bay
--------------
Advisors; formerly, Senior Investment Officer, The New England.
ERIC N. GUTTERSON -- Vice President (44); Vice President, Back Bay Advisors.
--------------
-13-
<PAGE>
SCOTT A. MILLIMET -- Vice President (38); Vice President, Back Bay Advisors;
--------------
formerly, Senior Vice President and Manager of Carroll, McEntee & McGinley,
Chicago Board of Trade.
J. SCOTT NICHOLSON -- Vice President (45); Senior Vice President, Back Bay
Advisors.
EDGAR M. REED -- Vice President (48); Executive Vice President and Chief
--------------
Investment Officer, Back Bay Advisors; formerly, Head of the Fixed Income
Management Group, Aetna Capital Management.
G. KENNETH HEEBNER -- Senior Vice President (55); Associate, Capital Growth
---------------------
Management Limited Partnership ("CGM").
ROBERT L. KEMP -- Senior Vice President (63); Associate, CGM.
---------------------
ROBERT J. BLANDING -- Senior Vice President (48); Chief Executive Officer,
---------------------
Loomis Sayles.
MERIANNE BECK -- Vice President (49); Vice President, Senior Partner and Fixed-
--------------
Income Portfolio Manager, Loomis Sayles; formerly, Senior Portfolio
Manager and Investment Strategist, TSA Capital Management.
CATHERINE L. BUNTING -- Vice President (37); Senior Vice President, Back Bay
--------------
Advisors; formerly, trader, Harvard Management Company.
CHRISTINE A. CREELMAN -- Vice President (48); Vice President, Back Bay Advisors.
--------------
CHARLES J. FINLAYSON -- Vice President (56); Vice President, General Counsel,
--------------
Secretary and Clerk, Loomis Sayles; Vice President, Director and
General Counsel, Loomis, Sayles & Company, Incorporated.
DANIEL FUSS -- Vice President (62); Managing Partner and Executive Vice
--------------
President, Loomis Sayles; Executive Vice President and Director, Loomis,
Sayles & Company, Incorporated.
RICHARD W. HURCKES -- Vice President (62); Vice President, Loomis Sayles.
--------------
CAROL C. McMURTRIE -- Vice President (51); Managing Partner and Vice President,
--------------
Loomis Sayles; Vice President and Director, Loomis, Sayles & Company,
Incorporated; formerly, Vice President, Addison Capital Management.
TRICIA H. MILLS -- Vice President (46); Vice President, Loomis Sayles.
--------------
SCOTT S. PAPE -- Vice President (39); Vice President, Loomis Sayles; formerly,
--------------
Equity Portfolio Manager, Illinois State Board of Investment.
JEFFREY C. PETHERICK -- Vice President (32); Vice President, Loomis Sayles.
--------------
-14-
<PAGE>
DOUGLAS D. RAMOS -- Vice President (39); Vice President and Senior Partner,
--------------
Loomis Sayles.
Previous positions during the past five years with The New England, Back
Bay Advisors, Loomis Sayles or New England Funds, L.P. are omitted, if not
materially different from a trustee's or officer's current position with such
entity. Each of the Trust's 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.
The address of each trustee and officer of the Trust affiliated with New
England Funds, L.P. or Back Bay Advisors is 399 Boylston Street, Boston,
Massachusetts. The address of each officer associated with Loomis Sayles is One
Financial Place, Boston, Massachusetts, except for Mr. Blanding, Mr. Davis and
Ms. Beck, whose address is 155 Lake Avenue, Suite 1030, Pasadena, California;
Messrs. Hurckes and Pape, whose address is Three First National Plaza, Chicago,
Illinois; and Mr. Petherick, whose address is 1533 North Woodward Street, #300,
Detroit, Michigan. The address of each officer affiliated with CGM is One
International Place, Boston, Massachusetts 02110.
Trustees Fees
- -------------
The Trust pays no compensation to its officers or to its trustees who are
interested persons thereof.
Each trustee who is not an interested person of the Trust receives, in the
aggregate for serving on the boards of the Trust and New England Funds Trust II,
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 21 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 was a member. Each committee chairman receives an
additional retainer fee at the annual rate of $2,500. These fees are allocated
among the Fund and the 20 other mutual fund portfolios based on a formula that
takes into account, among other factors, the net assets of each fund.
During the fiscal year ended December 31, 1994 the persons who were then
trustees of the Trust received the amounts set forth in the following table for
serving as a trustee of the Trust 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 December 29, 1995
a total of 37 mutual fund portfolios (not all of which were in existence during
1994).
-15-
<PAGE>
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Benefits Accrued as Estimated Annual from the New England
Aggregate Compensation Part of Fund Expenses Benefits Upon Funds Trusts, Zenith
Name of Trustee from the Trust in 1994 in 1994 Retirement and NEVA in 1994
<S> <C> <C> <C> <C>
Graham T. Allison, Jr. (a) $ 0 $0 $0 $ 0
Kenneth J. Cowan $18,244 $0 $0 $59,375
Joseph M. Hinchey (b) $17,507 $0 $0 $56,875
Richard S. Humphrey, Jr. (b) $17,507 $0 $0 $56,875
Robert B. Kittredge (b) $17.951 $0 $0 $89,279 (c)
Laurens MacLure (b) $18,688 $0 $0 $91,779 (c)
Sandra O. Moose $16,326 $0 $0 $52,875
James H. Scott $17,507 $0 $0 $56,875
John A. Shane $17,211 $0 $0 $55,875
Joseph F. Turley (b) $17,951 $0 $0 $58,375
Pendleton P. White $17,951 $0 $0 $58,375
</TABLE>
________
(a) Became a Trustee of the Trust effective April 1, 1995.
(b) Resigned as a trustee of the Trust effective May 1, 1995.
(c) Also includes compensation paid by the 5 CGM Funds, a group of mutual funds
for which Capital Growth Management Limited Partnership, the investment adviser
of the Trust's New England Growth Fund, Zenith's Capital Growth Series and NEVA,
serves as investment adviser.
The Trust provides no pension or retirement benefits to trustees, but has
adopted a deferred payment arrangement under which each trustee may elect not to
receive fees from the Trust 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 of the funds in the Trust on the normal payment date for such
fees. As a result of this method of calculating the deferred payments, the 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.
As of December 29, 1995, the officers and trustees of the Trust as a group
owned less than 1% of the outstanding shares of the Trust.
Advisory and Subadvisory Agreements
- -----------------------------------
The Fund's advisory agreement provides that NEFM will furnish or pay the
expenses of the Fund for office space, facilities and equipment, services of
executive and other personnel of the Trust and certain administrative services.
The Fund pays all expenses not borne by its adviser or subadvisers
including, but not limited to, the charges and expenses of the Fund's custodian
and transfer agent, independent auditors and legal counsel, all brokerage
commissions and transfer taxes in connection with portfolio transactions, all
taxes and filing fees, the fees and expenses for registration or qualification
of its shares under the federal or state securities laws, all expenses of
shareholders' and trustees' meetings and of preparing, printing and mailing
reports to shareholders and the compensation of trustees who are not directors,
officers or employees of
-16-
<PAGE>
the Fund's adviser, subadviser or their affiliates, other than affiliated
registered investment companies. The Fund also pays NEFM for certain legal and
accounting services provided to the Fund by NEFM.
Under the Fund's advisory agreement, if the total ordinary business
expenses of the Fund or the 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, NEFM 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
$30,000,000, 2% of the next $70,000,000 and 1 1/2% of such assets in excess of
$100,000,000. NEFM 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 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 the Fund's
Distribution Agreement and the Distribution Plans would be excluded from
"expenses."
The advisory agreement and each sub-advisory agreement between NEFM and the
subadviser that manages a segment or segments of the Fund's portfolio provides
that it will continue in effect for two years from its date of execution and
thereafter from year to year if its continuance is approved at least annually
(i) by the board of trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund and (ii) by vote of a majority of the
trustees who are not "interested persons" of the 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 the advisory agreement or the subadvisory
agreement must be approved by vote of a majority of the outstanding voting
securities of the Fund and by vote of a majority of the trustees of the Trust
who are not such interested persons, cast in person at a meeting called for the
purpose of voting on such approval. Each agreement may be terminated without
penalty by vote of the Trust's board of trustees or by vote of a majority of the
outstanding voting securities of the Fund, upon 60 days' written notice, or by
NEFM upon 90 days' written notice, and each terminates automatically in the
event of its assignment. The subadvisory agreement also may be terminated by the
subadviser upon 90 days' notice and is automatically terminated upon termination
of the advisory agreement. In addition, the 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 Trust or the Fund, unless the continuance of
the agreement after such change of name is approved by a majority of the
outstanding voting securities of the Fund and by a majority of the Trustees who
are not interested persons of the Trust or NEFM.
The advisory agreement and each sub-advisory agreement each provide that
the adviser and 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, organized in 1995, is an independently operated subsidiary of NEIC,
and serves as the investment adviser to New England Growth Opportunities Fund,
New England Strategic Income Fund, New England Equity Income Fund and Growth
Fund of Israel, as well as the Fund, and will serve, beginning January 2, 1996,
as the investment adviser to
-17-
<PAGE>
each of the remaining 19 funds in the New England Funds Trusts except New
England Growth Fund.
Harris was organized in 1995 to succeed to the business of a predecessor
limited partnership also named Harris Associates L.P., which together with its
predecessor had advised and managed mutual funds since 1970. Harris is a wholly-
owned subsidiary of NEIC, having been acquired by NEIC in 1995. Harris also
serves as investment adviser to individuals, trusts, retirement plans,
endowments and foundations, and manages numerous private partnerships.
Janus Capital serves as investment adviser to the Janus mutual funds and to
other mutual funds, individual, charitable, corporate and retirement accounts.
Kansas City Southern Industries, Inc., a publicly-traded company, owns 83% of
the outstanding voting stock of Janus Capital. Thomas H. Bailey, Chairman and
President of Janus Capital, owns approximately 12% of such voting stock.
Certain officers and employees of Harris have responsibility for portfolio
management of other advisory accounts and clients (including other registered
investment companies and accounts of affiliates of Harris) that may invest in
securities in which the Fund may invest. Where Harris determines that an
investment purchase or sale opportunity is appropriate and desirable for more
than one advisory account, purchase and sale orders may be executed separately
or may be combined and, to the extent practicable, allocated by Harris to the
participating accounts. Where advisory accounts have competing interests in a
limited investment opportunity, Harris will allocate investment opportunities
based on numerous considerations, including the time the competing accounts have
had funds available for investment, the amounts of available funds, an account's
cash requirements and the time the competing accounts have had investments
available for sale. It is Harris's policy to allocate, to the extent
practicable, investment opportunities to each client over a period of time on a
fair and equitable basis relative to its other clients. It is believed that the
ability of the Fund to participate in larger volume transactions in this manner
will in some cases produce better executions for the Fund. However, in some
cases, this procedure could have a detrimental effect on the price and amount of
a security available to the Fund or the price at which a security may be sold.
The trustees are of the view that the benefits of retaining Harris as investment
manager outweigh the disadvantages, if any, that might result from participating
in such transactions.
In addition to advising a segment of the Fund's portfolio, Montgomery
serves as investment adviser to other mutual funds, pension and profit-sharing
plans, and other institutional and private investors. At times, Montgomery may
effect purchases and sales of the same investment securities for the Fund, and
for one or more other investment accounts. In such cases, it will be the
practice of Montgomery to allocate the purchase and sale transactions among the
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
Montgomery responsible for selecting investments for the Fund and the accounts.
It is the opinion of the trustees that the desirability of retaining Montgomery
as an investment adviser to the Fund outweighs the disadvantages, if any, which
might result from these procedures.
-18-
<PAGE>
The segment of the Fund advised 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
an adviser 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 an
adviser to the Fund outweighs the disadvantages, if any, which might result from
these procedures.
Distribution Agreement and Rule 12b-1 Plans. Under an agreement with the
-------------------------------------------
Fund (the "Distribution Agreement"), New England Funds, L.P. serves as the
general distributor of each class of shares of the Fund. Under this agreement,
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 Fund
available through advertising and other means and the cost of printing and
mailing prospectuses to persons other than shareholders. The 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 the Distribution 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 Fund the service
and distribution fees described in the prospectus.
As described in the prospectuses, the 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 the Fund, and (together with
the Distribution Agreement) by the board of trustees, including a
-19-
<PAGE>
majority of the trustees who are not interested persons of the 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 Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
relevant class of shares of the Fund. Each Plan may be amended by vote of the
trustees, including a majority of the 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 Fund
requires approval of the holders of such shares. The Trust's trustees review
quarterly written reports 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 Trust shall be committed
to the discretion of such disinterested persons.
The Distributor has entered into selling agreements with investment
dealers, including New England Securities, an affiliate of the Distributor, for
the sale of the Fund's shares. New England Securities is registered as a broker-
dealer under the Securities Exchange Act of 1934. The Distributor may at its
expense pay an amount not to exceed 0.50% of the amount invested to dealers who
have selling agreements with the Distributor. If they become available, Class Y
shares of the Fund 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 NEFM with respect to sales of Class Y shares.
The Distribution Agreement 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 Fund or by vote
of a majority of the Independent Trustees.
The Distribution Agreement 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 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 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 Trust nor any trustee of the Trust had any direct or
indirect financial interest in the operation of the Plans or any related
agreement.
Benefits to the Fund and its 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 name of the
Trust and the Fund and if it should cease to be the distributor, the Trust or
the 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, New England Tax
-20-
<PAGE>
Exempt Money Market Trust, New England Funds Trust II, New England Funds Trust
III and the other series of the Trust besides the Fund.
During the years ended December 31, 1992 and 1993, New England Funds, L.P.
received commissions on the sale of the Class A shares of the Trust aggregating
$19,853,746 and $12,478,105 and respectively, of which $1,985,975 and $1,428,524
was retained by New England Funds, L.P. During the year ended December 31, 1994,
New England Funds, L.P. received commissions on the sale of shares of the Trust
aggregating $9,569,312, of which $8,290,120 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 the Trust's investment advisers or the Funds directly for providing certain
administrative services relating to the Trust.
Custodial Arrangements. State Street Bank and Trust Company ("State Street
----------------------
Bank"), 225 Franklin Street, Boston, Massachusetts 02110, is the Trust's
custodian. As such, State Street Bank holds in safekeeping certificated
securities and cash belonging to the Fund and, in such capacity, is the
registered owner of securities in book-entry form belonging to the Fund. Upon
instruction, State Street Bank receives and delivers cash and securities of the
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 Trust and calculates the
total net asset value, total net income and net asset value per share of the
Fund on a daily basis.
Independent Accountants. The Fund's independent accountants are Price
-----------------------
Waterhouse L.L.P., 160 Federal Street, Boston, MA 02109. The independent
accountants of the 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 Trust as to matters of accounting and federal and state
income taxation.
Other Arrangements
- ------------------
Pursuant to a contract between the Fund and New England Funds, L.P., New
England Funds, L.P. acts as shareholder servicing and transfer agent for the
Fund 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 Fund's shares. The Fund
pays per account fees to New England Funds, L.P. for these services in the
amount of $17.25. 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 $9.40.
________________________________________________________________________________
PORTFOLIO TRANSACTIONS AND BROKERAGE
________________________________________________________________________________
Segments of the Fund Advised by Harris. In placing orders for the
--------------------------------------
purchase and sale of portfolio securities for the segments of the Fund advised
by Harris, Harris always seeks best execution, subject to the considerations set
forth below. Transactions in unlisted securities are carried out through broker-
dealers who make the market for such securities unless, in the judgment
-21-
<PAGE>
of Harris, a more favorable execution can be obtained by carrying out such
transactions through other brokers or dealers.
Harris selects only brokers or dealers which it believes are financially
responsible, will provide efficient and effective services in executing,
clearing and settling an order and will charge commission rates which, when
combined with the quality of the foregoing services, will produce best execution
for the transaction. This does not necessarily mean that the lowest available
brokerage commission will be paid. However, the commissions are believed to be
competitive with generally prevailing rates. Harris will use its best efforts to
obtain information as to the general level of commission rates being charged by
the brokerage community from time to time and will evaluate the overall
reasonableness of brokerage commissions paid on transactions by reference to
such data. In making such evaluation, all factors affecting liquidity and
execution of the order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account.
Receipt of brokerage or research services from brokers may sometimes be a
factor in selecting a broker which Harris believes will provide best execution
for a transaction. These services include not only a wide variety of reports on
such matters as economic and political developments, industries, companies,
securities, portfolio strategy, account performance, daily prices of securities,
stock and bond market conditions and projections, asset allocation and portfolio
structure, but also meetings with management representatives of issuers and with
other analysts and specialists. Although it is not possible to assign an exact
dollar value to these services, they may, to the extent used, tend to reduce
Harris's expenses. Such services may be used by Harris in servicing other client
accounts and in some cases may not be used with respect to these segments of the
Fund. Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best execution, Harris may,
however, consider purchases of shares of the Fund by customers of broker-dealers
as a factor in the selection of broker-dealers to execute these segments'
securities transactions.
Harris may cause these segments of the Fund to pay a broker-dealer that
provides brokerage and research services to Harris an amount of commission for
effecting a securities transaction for these segments in excess of the amount
another broker-dealer would have charged for effecting that transaction. Harris
must determine in good faith that such greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of that particular transaction or
Harris's overall responsibilities to these segments of the Fund and its other
clients. Harris's authority to cause the Fund to pay such greater commissions is
also subject to such policies as the trustees of the Trust may adopt from time
to time.
Segment of the Fund Advised by Montgomery. In all purchases and sales of
-----------------------------------------
securities for its segment of the Fund, Montgomery's primary consideration is to
obtain the most favorable execution available. Pursuant to the sub-advisory
agreement between NEFM and Montgomery, Montgomery determines which securities
are to be purchased and sold by its segment and which broker-dealers are
eligible to execute its segment's portfolio transactions, subject to the
instructions of, and review by, NEFM and the trustees. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the
-22-
<PAGE>
opinion of Montgomery, a better price and execution can otherwise be obtained by
using a broker for the transaction.
Montgomery contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the over-
the-counter markets. In purchasing ADRs and EDRs (and other similar
instruments), Montgomery's segment of the Fund may purchase those listed on
stock exchanges, or traded in the over-the-counter markets in the U.S. or
Europe, as the case may be. ADRs, like other securities traded in the U.S., will
be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which this segment may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for this segment also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which this segment will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, Montgomery will use its best efforts to
choose a broker-dealer capable of providing the services necessary generally to
obtain the most favorable execution available. The full range and quality of
services available will be considered in making these determinations, such as
the firm's ability to execute trades in a specific market required by this
segment of the Fund, such as in an emerging market, the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors.
Montgomery may also consider the sale of the Fund's shares as a factor in
the selection of broker-dealers to execute portfolio transactions for its
segment. The placement of portfolio transactions with broker-dealers who sell
shares of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc.
While Montgomery's general policy is to seek first to obtain the most
favorable execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to Montgomery, even if the
specific services were not imputed just to the Fund and may be lawfully and
appropriately used by Montgomery in advising other clients. Montgomery considers
such information, which is in addition to, and not in lieu of, the services
required to be performed by it under its sub-advisory agreement with NEFM, to be
useful in varying degrees, but of indeterminable value. In negotiating any
commissions with a broker or evaluating the spread to be paid to a dealer, this
segment of the Fund may therefore pay a higher commission or spread than would
be the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by Montgomery to be reasonable in relation to the value
of the brokerage and/or research services provided by such broker-dealer, which
services either produce a direct benefit to this segment of the Fund or assist
Montgomery in carrying out its responsibilities to this
-23-
<PAGE>
segment of the Fund. The standard of reasonableness is to be measured in light
of Montgomery's overall responsibilities to its segment. The trustees review all
brokerage allocations where services other than best execution capabilities are
a factor to ensure that the other services provided meet the criteria outlined
above and produce a benefit to the Fund.
On occasion, situations may arise in which legal and regulatory
considerations will preclude trading for this segment's account by reason of
activities of Montgomery Securities, a broker-dealer affiliated with Montgomery,
or its affiliates. It is the judgment of the trustees that the Fund will not be
materially disadvantaged by any such trading preclusion and that the
desirability of continuing its sub-advisory arrangements with Montgomery and
Montgomery's affiliation with Montgomery Securities and other affiliates of
Montgomery Securities outweigh any disadvantages that may result from the
foregoing.
Montgomery's sell discipline for this segment's investment in issuers is
based on the premise of a long-term investment horizon; however, sudden changes
in valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by Montgomery in determining the appropriate investment horizon.
Sell decisions at the country level are dependent on the results of
Montgomery's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen Montgomery's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of factors
including current stock valuation relative to the estimated fair value range, or
a high P/E relative to expected growth. Negative changes in the relevant
industry sector, or a reduction in international competitiveness and declining
financial flexibility may also signal a sell.
Segment of the Fund Advised by Founders. It is the policy of Founders, in
---------------------------------------
effecting transactions in portfolio securities, to seek the best execution of
orders. The determination of what may constitute best execution in a securities
transaction involves a number of judgmental considerations, including, without
limitation, the overall direct net economic result to this segment of the Fund
(involving both price paid or received and any commissions and other costs), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, the availability of the
broker to stand ready to execute possibly difficult transactions for this
segment in the future, and the financial strength and stability of the broker.
Subject to the policy of seeking best execution of orders at the most
favorable prices, Founders may execute transactions with brokerage firms which
provide research services and products to Founders. The phrase "research
services and products" includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, the availability
of securities or purchasers or sellers of securities, the furnishing of analyses
and reports concerning issuers, industries, securities, economic factors and
-24-
<PAGE>
trends, portfolio strategy and the performance of accounts, and the obtainment
of products such as third-party publications, computer and electronic access
equipment, software programs, and other information and accessories that may
assist Founders in furtherance of its investment advisory responsibilities to
its advisory clients. Such services and products permit Founders to supplement
its own research and analysis activities, and provide it with information from
individuals and research staffs of many securities firms. Generally, it is not
possible to place a dollar value on the benefits derived from specific research
services and products. Founders may receive a benefit from these research
services and products which is not passed on, in the form of a direct monetary
benefit, to this segment of the Fund. If Founders determines that any research
product or service has a mixed use, such that it also serves functions that do
not assist in the investment decision-making process, Founders may allocate the
cost of such service or product accordingly. The portion of the product or
service that Founders determines will assist it in the investment decision-
making process may be paid for in brokerage commission dollars. Any such
allocation may create a conflict of interest for Founders. Subject to the
standards outlined in this and the preceding paragraph, Founders may arrange to
execute a specified dollar amount of transactions through a broker that has
provided research products or services. Such arrangements do not constitute
commitments by Founders to allocate portfolio brokerage upon any prescribed
basis, other than upon the basis of seeking best execution of orders.
Research services and products may be useful to Founders in providing
investment advice to any of the funds or clients it advises. Likewise,
information made available to Founders from brokers effecting securities
transactions for such other funds and clients may be utilized on behalf of
another fund. Thus, there may be no correlation between the amount of brokerage
commissions generated by a particular fund or client and the indirect benefits
received by that fund or client.
A significant proportion of the total commissions paid by Founders'
advisory clients for portfolio transactions during the year ended December 31,
1994 was paid to brokers that provided research services to Founders. It is
expected that a majority of the brokerage business of the segment of the Fund
advised by Founders will be placed with firms that provide such services.
Subject to the policy of seeking the best execution of orders, sales of
shares of the Fund may also be considered as a factor in the selection of
brokerage firms to execute portfolio transactions for this segment of the Fund.
Because selection of executing brokers is not based solely on net
commissions, the segment of the Fund advised by Founders may pay an executing
broker a commission higher than that which might have been charged by another
broker for that transaction. Founders will not knowingly pay higher mark-ups on
principal transactions to brokerage firms as consideration for receipt of
research services or products. While it is not practicable for Founders to
solicit competitive bids for commissions on each portfolio transaction,
consideration is regularly given to available information concerning the level
of commissions charged in comparable transactions by various brokers.
Transactions in over-the-counter securities are normally placed with principal
market makers, except in circumstances where, in the opinion of Founders, better
prices and execution are available elsewhere.
-25-
<PAGE>
Segment of the Fund Advised by Janus Capital. Decisions as to the
---------------------------------------------
assignment of portfolio business for the segment of the 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 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 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
-26-
<PAGE>
portfolio transactions for the 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 Fund anticipates that its portfolio turnover rate 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 Trust, the
Fund's brokerage transactions may be executed by brokers that are affiliated
with the Distributor, NEFM or the subadvisers. Any such transactions will comply
with Rule 17e-1 under the Investment Company Act of 1940.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund 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 Trust, such as New England Securities, may not serve as the Fund's 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 TRUST 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 (the
"Declaration of Trust") dated June 7, 1985 and is a "series" company as
described in Rule 18f-1 under the 1940 Act. The Fund is a newly organized series
of the Trust. The Trust has eleven separate portfolios (the "Funds"). The other
series of the Trust are New England Growth Fund, which currently offers one
class of shares, New England Tax Exempt Income Fund, which currently offers two
classes of shares, New England Capital Growth Fund, New England Strategic Income
Fund and New England Government Securities Fund, each of which currently offers
three classes of shares, and New England Balanced Fund, New England Value Fund,
New England International Equity Fund, New England Star Advisers Fund and New
England Bond Income Fund, each of which currently offers four classes of shares.
The initial portfolio of the Trust (the Fund now called New England Government
Securities Fund) commenced operations on September 16, 1985. New England
International Equity Fund commenced operations on May 22, 1992. New England
Capital Growth Fund was organized in 1992 and commenced operations on August 3,
1992. New England Star Advisers Fund was organized in 1994 and commenced
operations on July 7, 1994. New England Strategic Income Fund was organized in
1995 and commenced operations on May 1, 1995. The remaining funds in the Trust
are successors to the following corporations which commenced operations in the
years indicated:
-27-
<PAGE>
<TABLE>
<CAPTION>
Corporation Date of Commencement
----------- --------------------
<S> <C>
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, Inc.* 1969
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc. 1973
NEL Tax Exempt Bond Fund, Inc. 1976
</TABLE>
*Predecessor of New England Value Fund
**Predecessor of New England Balanced Fund
The Declaration of Trust currently permits the Trust's trustees to issue an
unlimited number of full and fractional shares of each series. The Fund is
represented by a series of shares of the Trust. The Declaration of Trust further
permits the 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 Fund do
not have any preemptive rights. Upon termination of the 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 Declaration
of Trust also permits the trustees to charge shareholders directly for
custodial, transfer agency and servicing expenses.
The shares of the Fund are divided into four classes, Class A, Class B,
Class C and Class Y. The Fund offers such classes of shares as set forth in the
prospectus. The 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 the 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 the Fund for the issue or sale of its
shares and all income, earnings, profits, losses and proceeds therefrom, subject
only to the rights of creditors, are allocated to, and constitute the underlying
assets of, that class. The underlying assets of each class of the Fund are
segregated and are charged with the expenses with respect to that class and with
a share of the general expenses of the Trust. Any general expenses of the Trust
that are not readily identifiable as belonging to a particular class of a fund
in the Trust 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
the Trust are allocated to the separate books of account of each fund in the
Trust, certain expenses may be legally chargeable against the assets of all
classes of the funds in the Trust.
The Declaration of Trust also permits 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.
-28-
<PAGE>
The Declaration of Trust provides for the perpetual existence of the Trust.
The Trust or any fund of the Trust, 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 the Declaration of Trust
further provides that the board of trustees may also terminate the 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 prospectus, 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 Declaration of Trust provides that on any matter submitted to a vote of
all shareholders of the 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 agreements 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) the 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 the 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 Trust has undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders).
-29-
<PAGE>
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 the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the 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 the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
trustees. The Declaration of Trust provides for indemnification out of the
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 the 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 the Fund itself would be unable to
meet its obligations.
The Declaration of Trust further provides that the board of trustees will
not be liable for errors of judgment or mistakes of fact or law. However,
nothing in the Declaration 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 the Trust provide for
indemnification by the Trust of trustees and officers of the 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 Fund 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.
-30-
<PAGE>
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 prospectus through firms that
are members of the National Association of Securities Dealers, Inc. and that
have selling agreements with the Distributor.
The Distributor may at its discretion accept a telephone order for the
purchase of $5,000 or more of the Fund's Class A, B or C shares. Payment must be
received by the Distributor within five business days following the transaction
date or the order will be subject to cancellation. Telephone orders must be
placed through the Distributor or your investment dealer.
________________________________________________________________________________
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 the Fund (the excess
of the assets of the 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 equity securities in markets outside the United
States, as well as trading in foreign government securities and other fixed-
income securities, 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 Fund computes the net asset value of its 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. If events materially affecting the value of the Fund's securities
occur during such
-31-
<PAGE>
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 trustees.
Trading in many of the portfolio securities of the Fund takes place in
various markets outside the United States on days and at times other than when
the New York Stock Exchange is open for trading. Therefore, the calculation of
the Fund's 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 the 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 the
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 the 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 New England Funds Trust II and the Trust (the "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 in the Trusts with a
value at the current public offering price of $30,000 makes an additional
purchase of $20,000 of Class A shares of the 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
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<PAGE>
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"] if 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 the 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
-33-
<PAGE>
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
Fund by (1) clients of an adviser or subadviser to the Trusts; any director,
officer or partner of a client of an adviser or subadviser to the Trusts; 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 Trusts if at least one
participant in the plan qualifies under category (1) above; and (3) an
individual who invests through an IRA and is a participant in an employee
benefit plan that is a client of an adviser or subadviser to the Trusts. 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 the Fund by any of the Trusts' investment advisers or
subadvisers, New England Funds, L.P. or any other company affiliated with The
New England; current and former directors and trustees of the Trusts; 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 and any trust, pension, profit sharing
or other benefit plans for any of the foregoing persons and any separate account
of The New England or any other 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 the Fund by
any state, county or city or any instrumentality, department, authority or
agency thereof that has determined that the 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 the Fund may be purchased at net
----------------------------
asset value by investment advisers, financial planners or other intermediaries
who place trades for their own accounts or the accounts of their clients and who
charge a management, consulting or other fee for their services; 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 Section 401(a), 403(b) or 457 of the Code and rabbi trusts. Investors
may be charged a fee if they effect transactions through a broker or agent.
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 Fund 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.
-34-
<PAGE>
________________________________________________________________________________
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 Fund and no
direct charges are made to shareholders. Although the Fund has no present
intention of making such direct charges to shareholders, it reserves 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 the Fund's investor eligibility requirements, investors may
automatically invest in additional shares of the 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 (800) 225-5478 or your investment dealer.
This program is voluntary and may be terminated 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)
- ----------------------------------------------------------------
-35-
<PAGE>
The federal tax laws provide for a variety of retirement plans offering tax
benefits. These plans may be funded with shares of the Fund or with certain
other investments. The plans include H.R. 10 (Keogh) plans for self-employed
individuals and partnerships, individual retirement accounts (IRAs), corporate
pension trust and profit sharing plans, including 401(k) plans, and retirement
plans for public school systems and certain tax exempt organizations, i.e.,
403(b) plans.
The reduced minimum initial investment available to retirement plans offering
tax benefits is referred to in the prospectus. For these plans, initial
investments in the 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 the 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.
Systematic Withdrawal Plans (Class A, B and C Shares)
- -----------------------------------------------------
An investor owning Fund 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. 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.
-36-
<PAGE>
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 Fund
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 Fund 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 Trusts (in the
case of Class A shares of New England Adjustable Rate U.S. Government Fund, New
England Intermediate Term Tax Free Fund of California and New England
Intermediate Term Tax Free Fund of New York, 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. If you own Class A or Class C
shares, you may also elect to exchange your shares of the Fund for Class A
shares of the Money Market Funds. On all exchanges of Class A shares subject to
a CDSC, the exchange stops the aging period relating to the CDSC. The aging
resumes only when an exchange is made back into shares of one of the Trusts. If
you own Class Y shares of the Fund, you may exchange those shares for Class Y
shares of other funds in the Trusts or for the 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 (800) 223-7124 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 other funds (besides the Fund) 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.
-37-
<PAGE>
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.
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 TAX EXEMPT INCOME FUND seeks as high a level of current income
exempt from federal income taxes as is consistent with reasonable risk and
protection of shareholder's' capital. The Tax Exempt Income Fund invests
primarily in debt securities, the interest of which is, in the opinion of the
debt issuer's counsel, exempt from federal income tax ("tax exempt bonds"), 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 investment adviser, believes is
consistent with preservation of capital.
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<PAGE>
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 December 15, 1995, 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 the
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 contingent deferred sales charge
(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 the 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
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<PAGE>
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 of $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 the Fund may be redeemed by calling toll free
(800) 225-5478. A wire fee, currently $5.00, will be deducted from the proceeds.
Telephone redemption requests must be received by the close of regular trading
on the 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
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<PAGE>
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 withdrawls pursuant to a systematic
withdrawal plan, not to exceed 10% annually of the value of the account, and
redemptions made from the account to pay custodial fees.
The CDSC may be waived on redemptions made from 403(b)(7) custodial
accounts due to attainment of age 59 1/2 for shareholders who established
custodial accounts prior to January 3, 1995.
The CDSC may also be waived on redemptions necessary to pay plan
participants or beneficiaries from qualified retirement plans under Section 401
of the Code, including profit sharing plans, money purchase plans, 401(k) and
custodial accounts under Section 403(b)(7) of the Code. Distributions necessary
to pay plan participants and beneficiaries include payments 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 Fund will normally redeem shares for cash; however, the Fund reserves
the right to pay the redemption price wholly or partly in kind if the Trust's
board of trustees determines it to be advisable and in the interest of the
remaining shareholders of the 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 Fund has elected to
be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Fund is
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
Trust at the beginning of such period. The Fund does not currently intend to
impose any redemption charge (other than the CDSC imposed by the Distributor),
although it reserves the right to charge a fee not exceeding 1% of the
redemption price. A redemption constitutes a sale of shares for federal income
tax purposes on which the investor may realize a long- or short-term capital
gain or loss. See also "Income Dividends, Capital Gain Distributions and Tax
Status," below.
Reinstatement Privilege (Class A shares only)
- ---------------------------------------------
-41-
<PAGE>
The prospectus describes redeeming shareholders' reinstatement privileges
for Class A shares. Written notice and the investment check from persons wishing
to exercise this reinstatement privilege must be received by your investment
dealer within 120 days after the date of the redemption. The reinstatement or
exchange will be made at net asset value next determined after receipt of the
notice and the investment check and will be limited to the amount of the
redemption proceeds or to the nearest full share if fractional shares are not
purchased.
Even though an account is reinstated, the redemption will constitute a sale
for federal income tax purposes. Investors who reinstate their accounts by
purchasing shares of the Fund 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
________________________________________________________________________________
Calculation of Total Return. Total return is a measure of the change in
---------------------------
value of an investment in the Fund over the period covered, which assumes that
any dividends or capital gains distributions are automatically reinvested in
shares of the same class of the Fund rather than paid to the investor in cash.
The formula for total return used by the Fund is prescribed by the Securities
and Exchange Commission 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 the Fund.
Performance Comparisons
- -----------------------
Total Return. Total returns will generally be higher for Class A shares
------------
than for Class B and C shares of the Fund, because of the higher levels of
expenses borne by the Class B and C shares. Because of its lower operating
expenses, Class Y shares of the Fund can be expected to achieve a higher total
return than the Fund's Class A, B and C shares. The Fund may from time to time
include 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.
-42-
<PAGE>
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 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
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<PAGE>
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 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.
Articles and releases, developed by the Fund and other parties, about the
Fund regarding performance, rankings, statistics and analyses of the Fund's 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 Fund. 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 Fund's advertising and promotional literature, see Appendix C.
The Fund 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 Fund. 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 Fund 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
<TABLE>
<CAPTION>
5 yrs. 10 15 20 25 30
<S> <C> <C> <C> <C> <C> <C>
$ 50 3,698 9,208 17,417 29,647 47,868 75,015
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
<CAPTION>
INVESTMENTS AT 10% RATE OF RETURN
5 YRS. 10 15 20 25 30
<S> <C> <C> <C> <C> <C> <C>
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
</TABLE>
The Fund's 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. For example, 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. The Fund's advertising and
sales literature may also include historical and current performance and total
returns of investment alternatives to 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
Trusts, with respect to investing in shares of the Trusts 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.
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 .
In addition, sales literature may be published concerning topics of general
investor interest for the benefit of registered representatives and the Fund's
prospective shareholders. These materials may include, but are not limited to,
discussions of college planning,
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<PAGE>
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 Fund's prospectus, it is the policy of the 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 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.
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Code. In order to qualify, the 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, the 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
the 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. The Fund intends to make
distributions sufficient to avoid imposition of the excise tax. Distributions
declared by the 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
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<PAGE>
federal tax purposes as paid by the Fund and received by shareholders on
December 31 of the year in which declared.
Shareholders of the Fund will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions by the 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 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 Israel and other 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 by the Fund 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.
The 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 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 may elect
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 order to avoid any Fund-level tax.
Redemptions and exchanges of the 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
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<PAGE>
sale of Fund shares to the extent the shareholder acquired other shares of the
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).
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<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION
- -----------------------------
AAA
This is the highest rating assigned by Standard & Poor's to a debt obligation
and indicates an extremely strong capacity to pay interest and repay principal.
AA
Bonds rated AA also qualify as high quality debt obligations. Capacity to pay
interest and repay principal is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to repay principal and pay interest for bonds in this
category than for bonds in higher rated categories.
BB, B, CCC, CC, C
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CI
The rating CI is reserved for income bonds on which no interest is being paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-); The ratings from "AA' to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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<PAGE>
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.
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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.
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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
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.
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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
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
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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
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WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
Worth Magazine
WRKO
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<PAGE>
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to New England Investment Companies ("NEIC") and its
affiliates that perform advisory functions for New England Funds including, but
not limited to: Back Bay Advisors, L.P., Harris Associates L.P., Loomis, Sayles
and Company, L.P., Westpeak Investment Advisors, L.P., Capital Growth Management
Limited Partnership and Draycott Partners, Ltd.
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, Montgomery
Asset Management, L.P., Berger Associates, Inc., Janus Capital Corporation and
Founders Asset Management, Inc.
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:
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- 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, New England
Star Advisers Fund (the "Star Advisers Fund") portfolio manager Rodney L.
Linafelter of Berger Associates, Inc. and Berger Funds, who also serves as
portfolio manager of the Berger 100 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 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; 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 Fund portfolio manager Michael W.
Gerding of Founders Asset Management, Inc. 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 & Company, L.P. and Loomis Sayles Funds, who
also serves 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 New England
Strategic Income Fund and the Loomis Sayles Bond Fund; and Fund portfolio
managers Robert J. Sanborn and 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 the
other funds of the managers differ as to performance, objectives, investment
restrictions and limitations, portfolio composition, asset size and other
characteristics, including fees and expenses. References may also be made to
industry rankings and ratings of the Fund and other funds managed by the Fund's
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 $78 billion in assets under
management. Clients
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serviced by NEIC and its affiliates, besides New England Funds, are wealthy
individuals, major corporations and large institutions.
Back Bay Advisors, L.P. 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 Partners, Ltd. 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.
Capital Growth Management, L.P. 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 Standard & Poor's Index of 500 Common Stocks,
prompt responses to changes in the market or economy and aggressive, highly
concentrated portfolios.
Loomis, Sayles & Company, L.P. 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 Investment Advisors, L.P. ("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
priced 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
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<PAGE>
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, IRS 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
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-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.
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<PAGE>
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 references 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.
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