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[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
NEW ENGLAND MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
MAY 1, 1997
AS REVISED SEPTEMBER 15, 1997
This Statement of Additional Information (the "Statement") contains
information which may be useful to investors but which is not included in the
Prospectus of the New England Funds listed above (the "Funds" and each a
"Fund"). This Statement is not a prospectus and is only authorized for
distribution when accompanied or preceded by the Prospectus of the Funds dated
May 1, 1997 for Class A, Class B or Class C shares, or the Prospectus of the
Funds dated September 1, 1997 for Class Y shares (the "Prospectus" or
"Prospectuses"). 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, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds.
New England Government Securities Fund, New England Strategic Income
Fund, New England Bond Income Fund and New England Municipal Income Fund are
series of New England Funds Trust I, a registered management investment company
that offers a total of twelve series, and New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government Fund and New
England High Income Fund are series of New England Funds Trust II, a registered
management investment company that offers a total of seven series. New England
Funds Trust I, New England Funds Trust II and New England Funds Trust III are
collectively referred to in this Statement as the "Trusts," and are each
referred to as a "Trust."
T A B L E O F C O N T E N T S
PART I Page
Investment Restrictions ii
Fund Charges and Expenses x
Ownership of Fund Shares xvi
Investment Performance of the Funds xviii
PART II
Miscellaneous Investment Practices 2
Management of the Trusts 14
Portfolio Transactions and Brokerage 24
Description of the Trusts and Ownership of Shares 31
How to Buy Shares 34
Net Asset Value and Public Offering Price 35
Reduced Sales Charges 36
Shareholder Services 38
Redemptions 42
Standard Performance Measures 44
Income Dividends, Capital Gain Distributions and Tax Status 48
Financial Statements 50
Appendix A - Description of Bond Ratings 51
Appendix B - Publications That May Contain Fund Information 53
Appendix C - Advertising and Promotional Literature 55
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and and California Funds 59
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INVESTMENT RESTRICTIONS
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The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of those restrictions marked with
a dagger (+) below, the percentages set forth below and the percentage
limitations set forth in the Prospectus will apply at the time of the purchase
of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security.
GOVERNMENT SECURITIES FUND
New England Government Securities Fund (the "Government Securities Fund") will
not:
*(1) Invest in any securities other than U.S. Government securities, put and
call options thereon, futures contracts, options on futures contracts
and repurchase agreements;
*(2) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related
options;
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(4) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the present
intention of management to make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes;
such sales would not be made with respect to securities subject to
outstanding options.);
*(5) Make loans to other persons (except as provided in restriction (6)
below); provided that for purposes of this restriction the investment in
repurchase agreements shall not be deemed to be the making of a loan;
*(6) Lend its portfolio securities in excess of 15% of its total assets,
taken at market value;
*(7) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate futures contracts, options on interest
rate futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures or related
options are deemed to be the issuance of a senior security.);
*(8) Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities;
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to U.S. Government Securities and with respect to
interest rate futures contracts; or
*(10) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.
+(11) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
Although the Government Securities Fund may from time to time loan its
portfolio securities and issue senior securities, borrow money or pledge its
assets to the extent permitted by investment restrictions (5), (7) and (8)
above, the Fund has no current intention of engaging in such investment
techniques.
LIMITED TERM U.S. GOVERNMENT FUND
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government
Fund") will not:
*(1) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or options transactions is not considered the purchase
of a security on margin.);
*(2) Make short sales of securities unless at all times when a short position
is open it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount
to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at current value) is held as collateral for
such sales at any one time;
*(3) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the current value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, futures contracts and options on futures contracts,
and collateral arrangements with respect to initial and variation
margin, are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or options are deemed
to be the issuance of a senior security.);
*(4) Invest more than 25% of its total assets (taken at current value) in
securities of businesses in the same industry (for this purpose,
telephone, electric, water and gas utilities are considered separate
industries);
*(5) Make loans, except by the purchase of bonds, debentures, commercial
paper, corporate notes and similar evidences of indebtedness that are a
part of an issue to the public or to financial institutions, or by
lending portfolio securities to the extent set forth in Part II of this
Statement of Additional Information under "Miscellaneous Investment
Practices -- Loans of Portfolio Securities" provided that for purposes
of this restriction, investment in repurchase agreements shall not be
deemed to be the making of a loan;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts. (This restriction does not prevent the Fund from purchasing
securities of companies investing or dealing in the foregoing.);
*(7) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(8) Make investments for the purpose of exercising control or management; or
*(9) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to financial instruments or indices thereof and
currencies and with respect to futures contracts on financial
instruments or indices thereof.
+(10) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
Although the Fund may from time to time make short sales, issue senior
securities, borrow money or pledge its assets to the extent permitted by the
above investment restrictions, the Fund has no current intention of engaging in
such investment techniques.
ADJUSTABLE RATE FUND
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities. (For this purpose, the deposit or
payment by the Fund of initial or variation margin in connection with
interest rate futures contracts or related options transactions is not
considered the purchase of a security on margin.);
*(3) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at market value) is held
as collateral for such sales at any one time. (It is the current
intention of the Fund, which may change without shareholder approval, to
make such sales only for the purpose of deferring realization of gain or
loss for federal income tax purposes; such sales would not be made with
respect to securities covering outstanding options.);
*(4) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(5) Issue senior securities, borrow money or pledge its assets; provided,
however, that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions, in amounts
not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings; and, provided, further,
that the Fund will not purchase any additional portfolio securities at
any time that its borrowings exceed 5% of its total net assets. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate future contracts, and options on
interest rate futures contracts, collateral arrangements with respect to
interest rate caps, floors or swap arrangements, and collateral
arrangements with respect to initial and variation margin are not deemed
to be a pledge of assets and neither (i) such arrangements, (ii) the
purchase or sale of futures or related options, (iii) interest rate caps
and floors nor (iv) interest rate swap agreements, where assets are
segregated to cover the Fund's obligations thereunder, are deemed to be
the issuance of a senior security.);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
the Trust or officers and directors of the investment adviser of the
Fund who individually own more than 1/2 of 1% of the shares or
securities of that issuer, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, that are a part
of an issue to the public or to financial institutions, or by lending
portfolio securities to the extent set forth under "Miscellaneous
Investment Practices - Loans of Portfolio Securities" in Part II of this
Statement. (This restriction 8 does not limit the Fund's ability to
engage in repurchase agreement transactions.);
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may purchase and sell financial futures contracts,
currency futures contracts and options related to such futures
contracts, and may purchase interest rate caps and floors and enter into
interest rate swap agreements. (This restriction does not prevent the
Fund from purchasing securities of companies investing or dealing in the
foregoing.);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may write, purchase and sell puts, calls or combinations
thereof with respect to fixed income securities and currencies and with
respect to futures contracts on fixed income securities or currencies;
*(14) Purchase any illiquid security, including securities that are not
readily marketable, if, as a result, more than 10% of the Fund's total
net assets (based on current value) would then be invested in such
securities. (The staff of the Securities and Exchange Commission (the
"SEC") is presently of the view that repurchase agreements maturing in
more than seven days are subject to this restriction. Until that
position is revised, modified or rescinded, the Fund will conduct its
operations in a manner consistent with this view); or
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets (taken at current value) in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets (taken at current value), or (c) own more
than 3% of the outstanding voting stock of any one investment company.
Although the Fund may loan its portfolio securities and issue senior
securities, borrow money, pledge its assets, and invest in the securities of
other investment companies to the extent permitted by investment restrictions
(5), (8) and (14) above, the Fund has no current intention of engaging in such
investment activities.
In addition, as a matter of current operating policy that may be
changed without shareholder approval, the Fund intends to limit certain of its
investments in accordance with the provisions of the Federal Credit Union Act
and Regulation 703 thereunder.
STRATEGIC INCOME FUND
New England Strategic Income Fund (the "Strategic Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if , as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government (together
with subdivisions thereof) will be considered to be a separate
industry);
(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(3) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or acquire more than 10% of the outstanding voting securities of
an issuer;
*(4) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(6) 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;
*(7) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts, except
that the Fund may buy and sell futures contracts and related options.
(This restriction does not prevent the Fund from purchasing securities
of companies investing in the foregoing);
*(8) 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;
(9) Except to the extent permitted by rule or order of the SEC, participate
on a joint or joint and several basis in any trading account in
securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with any investment adviser or subadviser of the
Fund or accounts under any such investment adviser's or subadviser's
management to reduce brokerage commissions, to average prices among them
or to facilitate such transactions is not considered a trading account
in securities for purposes of this restriction.);
(10) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities
indexes, currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(11) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities deemed to be liquid
under guidelines established by the Trust's trustees and certain Section
4(2) commercial paper);
*(12) Issue senior securities. (For the purpose of this restriction none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restrictions (2) or (5) above; any
borrowing permitted by restriction (4) above; any collateral
arrangements with respect to forward contracts, options, futures
contracts, swap contracts or other similar contracts and options on
futures contracts, swap contracts or other similar contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts or other
similar contracts or options on futures contracts, swap contracts or
other similar contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New England
Funds Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.)
BOND INCOME FUND
New England Bond Income Fund (the "Bond Income Fund") will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any
one industry (in the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities); or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 10% of its total
assets (taken at cost) or 5% of its total assets (taken at current
value), whichever is lower;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any company if officers and trustees of
New England Funds Trust I or of any investment adviser or subadviser of
the Bond Income Fund who individually own more than 1/2 of 1% of the
shares or securities of that company, together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are part of
an issue to the public, or by lending portfolio securities to the extent
set forth under "Miscellaneous Investment Practices -- Loans of
Portfolio Securities" in Part II of this Statement;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or commodity contracts or real estate (except
that the Bond Income Fund may buy and sell marketable securities of
companies, including real estate investment trusts, which may represent
indirect interests in real estate; may buy and sell futures contracts on
securities or on securities indexes and may write, purchase or sell put
or call options on such futures contracts or indexes; and may enter into
currency forward contracts);
*(10) Act as underwriter;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with Back Bay Advisors, L.P. ["Back Bay Advisors"]
or accounts under its management to reduce brokerage commissions, to
average prices among them, or to facilitate such transactions is not
considered participating in a trading account in securities.);
*(13) Write, purchase or sell options or warrants, except that the Fund may
(a) acquire warrants or rights to subscribe to securities of companies
issuing such warrants or rights or of parents or subsidiaries of such
companies, provided that such warrants or other rights to subscribe are
attached to, or part of a unit offering involving, other securities, and
(b) write, purchase or sell put or call options on securities,
securities indexes or futures contracts; or
*(14) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions, or in connection with a merger, consolidation or similar
transaction. (Under the 1940 Act, the Fund may not (a) invest more than
10% of its total assets [taken at current value] in such securities, (b)
own securities of any one investment company having a value in excess of
5% of the Fund's total assets [taken at current value], or (c) own more
than 3% of the outstanding voting stock of any one investment company.)
*(15) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (4) above; any pledge or other encumbrance of assets
permitted by restriction (5) above; any collateral arrangements with
respect to options, forward contracts, futures contracts, swap contracts
and other similar contracts and options on futures contracts and with
respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts, swap contracts and other
similar contracts or options on futures contracts; and the issuance of
shares of beneficial interest permitted from time to time by the
provisions of New England Funds Trust I's Agreement and Declaration of
Trust and by the 1940 Act, the rules thereunder, or any exemption
therefrom.
+(16) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
HIGH INCOME FUND
New England High Income Fund (the "High Income Fund") will not:
*(1) Buy more than 10% of the voting securities or more than 10% of all of
the securities of any issuer, or invest to control or manage any
company;
*(2) Purchase securities on "margin," except for short-term credits as needed
to clear securities purchases;
*(3) Invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization,
or by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer commission or profit, other
than a customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of the value of its total
assets would be invested in such securities;
*(4) Purchase securities, other than shares of the Fund, from or sell
portfolio securities to its directors or officers, or firms they are
affiliated with as principals, except as permitted by the regulations of
the SEC;
*(5) Purchase or sell commodities or commodity contracts, or write, purchase
or sell options, except that the Fund may (a) buy or sell futures
contracts on securities or on securities indexes and (b) write, purchase
or sell put or call options on securities, on securities indexes or on
futures contracts of the type referred to in clause (a) of this
restriction;
*(6) Make loans, except loans of portfolio securities and except to the
extent that the purchase of notes, repurchase agreements, bonds, or
other evidences of indebtedness or deposits with banks or other
financial institutions may be considered loans;
*(7) Make short sales of securities or maintain a short position;
*(8) Purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or in securities
issued by companies which invest in real estate or interests therein;
*(9) Purchase or sell interests in oil and gas or other mineral exploration
or development programs, provided that the Fund may invest in securities
issued by companies which do invest in or sponsor such programs;
*(10) Underwrite the securities of other issuers; or
*(11) Invest more than 10% of the value of its total assets, in the aggregate,
in repurchase agreements maturing in more than seven days and restricted
securities.
*(12) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water, and telephone companies will be considered as
being in separate industries);
*(13) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, up to an amount not in excess of 33 1/3% of its
total assets; or
*(14) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (13) above; any collateral arrangements with respect to
options, forward contracts, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts, futures contracts, swap contracts or similar contracts or
options on futures contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New England
Funds Trust II's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom.
+(15) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
MUNICIPAL INCOME FUND
New England Municipal Income Fund (the "Municipal Income Fund") will not:
*(1) Purchase any security if, as a result, more than 5% of the Fund's total
assets (taken at current value) would then be invested in securities of
a single issuer. This limitation does not apply to U.S. Government
securities. (The Fund will treat each state and each separate political
subdivision, agency, authority or instrumentality of such state, each
multistate agency or authority, and each guarantor, if any, as a
separate issuer);
(2) Invest more than 25% of its total assets (taken at current value) in
industrial development revenue bonds that are based, directly or
indirectly, on the credit of private entities in any one industry or in
securities of private issuers in any one industry. (For the purpose of
this restriction, "private activity bonds" under the Internal Revenue
Code of 1986, as amended [the "Code"], will be treated as industrial
revenue bonds.) (In the utilities category, gas, electric, water and
telephone companies will be considered as being in separate industries);
*(3) Purchase any security on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities, or make short sales. For this purpose, the
deposit or payment by the Fund of initial or variation margin in
connection with interest rate futures contracts or tax exempt bond index
futures contracts is not considered the purchase of a security on
margin;
*(4) Purchase more than 10% of the total value of the outstanding securities
of an issuer;
*(5) Borrow money, except as a temporary measure for extraordinary or
emergency purposes (but not for the purpose of investment) up to an
amount not in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower;
*(6) Pledge, mortgage or hypothecate more than 15% of its total assets (taken
at cost). In order to comply with certain state requirements, as a
matter of operating policy subject to change without shareholder
approval, the Fund will not pledge, mortgage or hypothecate more than 5%
of such assets;
*(7) Invest more than 5% of its total assets (taken at current value) in
securities of businesses less than three years old and industrial
development revenue bonds where the private entity on whose credit the
security is based, directly or indirectly, is less than three years old
(including predecessor businesses and entities);
*(8) Purchase or retain securities of any issuer if, to the knowledge of the
Fund, officers and trustees of New England Funds Trust I or of any
investment adviser or subadviser of the Fund who individually own
beneficially more than 1/2 of 1% of the securities of that issuer,
together own beneficially more than 5% of such securities;
*(9) Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies. This limitation does not
apply to repurchase agreements;
*(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, commodities or real estate (except that the Fund may buy tax
exempt bonds or other permitted investment secured by real estate or an
interest therein);
*(11) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(12) Purchase voting securities or make investments for the purpose of
exercising control or management;
*(13) Participate on a joint or joint and several basis in any trading account
in securities;
*(14) Write, purchase, or sell puts, calls or combinations thereof, except
that the Fund may write, purchase and sell puts, calls or combinations
thereof with regard to futures contracts;
*(15) Invest in the securities of other investment companies, except in
connection with a merger, consolidation or similar transaction. (Under
the 1940 Act, the Fund may not (a) invest more than 10% of its total
assets (taken at current value) in such securities, (b) own securities
of any one investment company having a value in excess of 5% of the
Fund's total assets (taken at current value), or (c) own more than 3% of
the outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security: any borrowing permitted
by restriction (5) above; any collateral arrangements with respect to
forward contracts, options, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts or options on futures contracts; and the issuance of shares of
beneficial interest permitted from time to time by the provisions of New
England Funds Trust I's Agreement and Declaration of Trust and by the
1940 Act, the rules thereunder, or any exemption therefrom.
+(17) Invest more than 15% of the Fund's total net assets in illiquid
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
The Fund may invest more than 25% of its assets in industrial
development revenue bonds, subject to limitation (2) above.
- -------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to separate advisory agreements, each dated August 30, 1996,
New England Funds Management, L.P. ("NEFM") has agreed, subject to the
supervision of the Board of Trustees of the relevant Trust, to manage the
investment and reinvestment of the assets of each Fund and to provide a range of
administrative services to each Fund. For the services described in the advisory
agreements, each Fund pays NEFM a management fee at the annual rate set forth in
the following table:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ------------------------------ ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Fund 0.550% of the first $200 million
0.510% of the next $300 million
0.470% of amounts in excess of $500 million
Bond Income Fund and 0.500% of the first $100 million
Municipal Income Fund 0.375% of amounts in excess of $100 million
Government Securities Fund and 0.650% of the first $200 million
Limited Term U.S. Government Fund 0.625% of the next $300 million
0.600% of amounts in excess of $500 million
High Income Fund 0.700% of the first $200 million
0.650% of amounts in excess of $200 million
Strategic Income Fund 0.650% of the first $200 million
0.600% of amounts in excess of $200 million
</TABLE>
Each advisory agreement provides that NEFM may delegate its
responsibilities thereunder to another party. Pursuant to separate subadvisory
agreements, each dated August 30, 1996, NEFM has delegated responsibility for
managing the investment and reinvestment of the Strategic Income Fund's and the
High Income Fund's assets to Loomis Sayles & Company, L.P. ("Loomis Sayles"), as
subadviser. Pursuant to separate subadvisory agreements, each dated August 30,
1996, NEFM has delegated responsibility for managing the investment and
reinvestment of the other Funds' assets to Back Bay Advisors, as subadviser. The
Funds pay no direct fees to Loomis Sayles or Back Bay Advisors. For providing
such subadvisory services to the Funds, NEFM pays each subadviser a subadvisory
fee at the annual rate set forth in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- -------------------------------------------- ------------------ ---------------------------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund Back Bay Advisors 0.2750% of the first $200 million
0.2550% of the next $300 million
0.2350% of amounts in excess of $500 million
Bond Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
Government Securities Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
High Income Fund Loomis Sayles 0.3500% of the first $200 million
0.3000% of amounts in excess of $200 million
Limited Term U.S. Government Fund Back Bay Advisors 0.3250% of the first $200 million
0.3125% of the next $300 million
0.3000% of amounts in excess of $500 million
Strategic Income Fund Loomis Sayles 0.3500% of the first $200 million
0.3000% of amounts in excess of $200 million
Municipal Income Fund Back Bay Advisors 0.2500% of the first $100 million
0.1875% of amounts in excess of $100 million
</TABLE>
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Back Bay Advisors served as subadviser to the Adjustable Rate, Bond Income,
Government Securities, Limited Term U.S. Government and Municipal Income Funds
under separate advisory agreements and separate subadvisory agreements providing
for management and subadvisory fees at the same rates as are currently in effect
for these Funds.
From July 1, 1996 to August 30, 1996, NEFM served as adviser and Loomis
Sayles served as subadviser to the High Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund. From January 2, 1996 to June 30,
1996, NEFM served as adviser to the High Income Fund pursuant to an advisory
agreement which provided for a management fee payable by the Fund to NEFM at the
annual rate of 0.75% of the Fund's average daily net assets, and Back Bay
Advisors served as subadviser to the High Income Fund pursuant to a subadvisory
agreement which provided for a subadvisory fee payable by NEFM to Back Bay
Advisors at the annual rate of 0.375% of the Fund's average daily net assets.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the High Income
Fund pursuant to an advisory agreement providing for an advisory fee payable by
the Fund to Back Bay Advisors at the annual rate of 0.75% of the Fund's average
daily net assets. Back Bay Advisors' compensation under its advisory agreement
with the High Income Fund was subject to reduction to the extent that, for any
calendar month, the Fund's expenses, including the management fee, but exclusive
of brokerage, taxes, interest, distribution fees and extraordinary items, exceed
an annual rate of 1.50% of the Fund's average daily net assets.
Prior to August 30, 1996, NEFM served as adviser and Loomis Sayles
served as subadviser to the Strategic Income Fund pursuant to advisory and
subadvisory agreements providing for management and subadvisory fees at the same
rates as are currently in effect for the Fund.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the
Government Securities, Limited Term U.S. Government, Bond Income and Municipal
Income Funds, pursuant to separate advisory agreements each of which provided
for an advisory fee payable by such Fund to Back Bay Advisors at the same rate
as the management fee currently payable by such Fund to NEFM.
Prior to January 2, 1996, Back Bay Advisors served as adviser to the
Adjustable Rate Fund, pursuant to an advisory agreement which provided for an
advisory fee payable by the Fund to Back Bay Advisors at an annual rate of 0.40%
of the first $200 million of the Fund's average daily net assets, 0.375% of the
next $300 million of such assets and 0.35% of such assets in excess of $500
million.
Back Bay Advisors was paid $1,056,207 and $911,184, respectively, for
investment management services it rendered to the Adjustable Rate Fund during
the fiscal years ended December 31, 1994 and 1995 and NEFM was paid $866,836 for
the fiscal year ended December 31, 1996, after reduction pursuant to the expense
limitation arrangements described below. For the fiscal year ended December 31,
1996, NEFM paid Back Bay Advisors $433,418 for subadvisory services it rendered
to the Adjustable Rate Fund. Had the voluntary expense limitation not been in
effect, Back Bay Advisors would have been paid $2,351,792 and $1,619,477,
respectively, for investment management services it rendered to the Adjustable
Rate Fund during the fiscal years ended December 31, 1994 and 1995, and NEFM
would have been paid $1,572,103 for services rendered during the fiscal year
ended December 31, 1996.
Prior to January 2, 1996, New England Funds, L.P. (the "Distributor"),
an affiliate of Back Bay Advisors, provided the Adjustable Rate Fund with office
space, facilities and equipment, services of executive and other personnel and
certain administrative services, pursuant to an administrative services
agreement. Under this agreement, the Adjustable Rate Fund paid the Distributor a
fee at the annual rate of 0.15% of the first $200 million of the Fund's average
daily net assets, 0.135% of the next $300 million of such assets and 0.12% of
such assets in excess of $500 million. The Adjustable Rate Fund's current
management fee rate represents the sum of the fee rates under the prior advisory
and administrative services agreements.
Until further notice to the Adjustable Rate Fund, NEFM and Back Bay
Advisors have voluntarily agreed to reduce their fees and, if necessary, to bear
certain expenses related to operating the Fund in order to limit the Fund's
expenses to an annual rate of 0.70%, 1.45% and 0.45% of the average daily net
assets of the Fund's Class A, Class B and Class Y shares, respectively. Such fee
waiver and/or expense reimbursement, if any, will be borne equally by NEFM and
Back Bay Advisors. Prior to January 2, 1996, similar voluntary limitations were
in effect with respect to Back Bay Advisors, the Distributor and the Fund.
For the fiscal years ended December 31, 1994 and 1995, the Government
Securities Fund paid advisory fees to Back Bay Advisors of $1,102,880 and
$1,008,846, respectively. For the fiscal year ended December 31, 1996, the
Government Securities Fund paid management fees to NEFM of $933,063. For the
fiscal year ended December 31, 1996, NEFM paid subadvisory fees of $466,531 to
Back Bay Advisors for the Fund.
The Limited Term U.S. Government Fund paid Back Bay Advisors $3,163,619
and $2,560,201 in advisory fees for the fiscal years ended December 31, 1994 and
1995, respectively. For the fiscal year ended December 31, 1996, the Limited
Term U.S. Government Fund paid NEFM $2,230,443 in advisory fees. For the fiscal
year ended December 31, 1996, NEFM paid subadvisory fees of $1,115,221 to Back
Bay Advisors for the Fund.
For the fiscal years ended December 31, 1994 and 1995, the Bond Income
Fund paid advisory fees to Back Bay Advisors of $774,457 and $872,560,
respectively; and the Municipal Income Fund paid advisory fees to Back Bay
Advisors of $925,947 and $890,150, respectively. For the fiscal year ended
December 31, 1996, the Bond Income Fund paid management fees to NEFM of
$962,307, and the Municipal Income Fund paid management fees to NEFM of
$862,741. For the fiscal year ended December 31, 1996, NEFM paid subadvisory
fees of $481,153 and $431,370 to Back Bay Advisors for the Bond Income and
Municipal Income Funds, respectively.
Prior to July 1, 1995, the advisory agreement for the Municipal Income
Fund included a provision under which Loomis Sayles served as a subadviser and
furnished regularly to Back Bay Advisors, without additional cost to the Fund,
statistical and research information and advice relating to the Fund's
investments. For its services, Loomis Sayles received a fee, paid by Back Bay
Advisors not less often than quarterly, equal to 40% of the compensation paid by
the Fund to Back Bay Advisors on the first $10 million of the Fund's average
daily net assets, 30% of the compensation paid on the next $10 million of such
assets and 20% of the compensation paid on such assets in excess of $20 million.
For the fiscal years ended December 31, 1994, and the period from January 1 to
June 30, 1995, the compensation from Back Bay Advisors to Loomis Sayles under
this agreement was $200,190 and $94,978, respectively.
Until further notice to the Fund, NEFM has voluntarily agreed to reduce
its management fee and, if necessary, to bear certain expenses related to
operating the High Income Fund in order to limit the Fund's expenses to an
annual rate of 1.40% of the average daily net assets attributable to its Class A
shares and 2.15% of such assets attributable to its Class B shares. Prior to
July 1, 1996, these expense limits were 1.60% for the Fund's Class A shares and
2.25% for the Fund's Class B shares. Prior to January 2, 1996, similar voluntary
limitations were in effect with respect to Back Bay Advisors and the Fund. In
addition, Loomis Sayles agreed to waive 50% of the subadvisory fee payable by
NEFM to Loomis Sayles for the High Income Fund for the period from July 1, 1996
to June 30, 1997.
Back Bay Advisors was paid $190,955 and $288,711 in advisory fees by
the High Income Fund for the fiscal years ended December 31, 1994 and 1995,
respectively, and NEFM was paid $301,178 in management fees by the High Income
Fund for the fiscal year ended December 31, 1996, after reduction pursuant to
the foregoing voluntary expense limitations. Had the voluntary expense
limitations not been in effect, Back Bay Advisors would have been paid $273,994
and $342,554, respectively, in advisory fees by the High Income Fund for the
fiscal years ended December 31, 1994 and 1995, and NEFM would have been paid
$383,464 in management fees by the High Income Fund for the fiscal year ended
December 31, 1996. For the period from January 2, 1996 to June 30, 1996, NEFM
paid subadvisory fees of $75,941 to Back Bay Advisors for the Fund. For the
period from July 1, 1996 to December 31, 1996, NEFM paid subadvisory fees of
$48,636 to Loomis Sayles for the High Income Fund, after reduction pursuant to
the voluntary fee waiver by Loomis Sayles described above. Had this waiver not
been in effect, NEFM would have paid subadvisory fees of $97,272 to Loomis
Sayles for the Fund for this period.
Loomis Sayles voluntarily agreed, until December 31, 1996, to waive its
entire subadvisory fee for the Strategic Income Fund (which is paid by NEFM),
and NEFM has agreed to reduce its management fee (which is paid by the Fund) by
an equal amount. In addition, under an expense deferral arrangement, which NEFM
terminated as of December 31, 1996, NEFM agreed to defer its management fee (to
the extent not waived as provided in the preceding sentences) for the Strategic
Income Fund, to the extent necessary to limit the Fund's expenses to the annual
rate of 1.40% for Class A shares, 2.15% for Class B shares and 2.15% for Class C
shares, subject to the obligation of the Fund to pay NEFM such deferred fees in
later periods to the extent that the Fund's expenses fall below the annual rate
of 1.40% for Class A shares, 2.15% for Class B shares and 2.15% for Class C
shares; provided, however, that, the Fund is not obligated to pay any such
deferred fees more than two years after the end of the fiscal year in which such
fee was deferred.
For the period May 1, 1995 (commencement of operations) to December 31,
1995, the Strategic Income Fund paid no management fees to NEFM, and NEFM paid
no subadvisory fees to Loomis Sayles for the Fund. Had the voluntary waiver and
expense deferral arrangements described above not been in effect, the Fund would
have paid NEFM $241,019 in management fees for the period ended December 31,
1995, and NEFM would have paid $472,789 in subadvisory fees to Loomis Sayles for
the fiscal year ended December 31, 1996. In 1996, NEFM received $30,735 in
management fees deferred from 1995 and $399,473 in 1996 management fees.
BROKERAGE COMMISSIONS
In 1994, 1995 and 1996, the Funds paid no commissions on brokerage
transactions.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and, in
the case of the Limited Term U.S. Government, Bond Income and Strategic Income
Funds, Class C shares of each Fund pay a fee pursuant to a plan adopted pursuant
to Rule 12b-1 under the 1940 Act. The following table shows the amounts of Rule
12b-1 fees paid by the Class A, Class B and Class C shares of each Fund during
the fiscal year ended Decembers 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
FUND 1994 1995 1996
- ---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Gvernment Securities Fund $409,909 $366,630 $327,097 (Class A)
$23,270 $37,075 $53,314 (Class B)
Limited Term U.S. Government Fund $1,705,012 $1,332,412 $1,105,672 (Class A)
$98,717 $147,768 $182,790 (Class B)
--- $15,410 $93,928 (Class C)*
Adjustable Rate Fund $1,551,366 $1,040,897 $724,984 (Class A)
$14,092 $21,684 $25,756 (Class B)
Bond Income Fund $416,918 $453,844 $480,362 (Class A)
$30,717 $158,962 $273,249 (Class B)
--- $2,428 $16,367 (Class C)*
High Income Fund $117,107 $130,876 $118,046 (Class A)
$30,717 $82,798 $134,657 (Class B)
Municipal Income Fund $512,288 $483,317 $460,994 (Class A)
$66,711 $107,048 $123,404 (Class B)
Strategic Income Fund** --- $39,090 $143,965 (Class A)
--- $155,887 $598,801 (Class B)
--- $58,847 $184,185 (Class C)
* Class C shares were first offered on January 3, 1995.
** The Strategic Income Fund commenced operations on May 1, 1995.
</TABLE>
During the fiscal year ended December 31, 1996, the Distributor's
expenses relating to each Fund's 12b-1 plans were as follows:
GOVERNMENT SECURITIES FUND
(Class A shares)
Compensation to Investment Dealers $ 326,632
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 139,363
TOTAL $ 465,995
(Class B shares)
Compensation to Investment Dealers $ 72,431
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 139,465
TOTAL $ 211,896
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Compensation to Investment Dealers $ 788,494
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 125,946
Other Distribution Costs $ 160,082
TOTAL $1,074,522
(Class B shares)
Compensation to Investment Dealers $ 180,549
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 94,242
TOTAL $ 274,791
(Class C shares)
Compensation to Investment Dealers $ 93,928
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 174,894
TOTAL $ 268,822
ADJUSTABLE RATE FUND
(Class A shares)
Compensation to Investment Dealers $ 722,936
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 137,630
TOTAL $ 860,566
(Class B shares)
Compensation to Investment Dealers $ 26,586
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 132,695
TOTAL $ 159,281
STRATEGIC INCOME FUND
(Class A shares)
Compensation to Investment Dealers $ 144,143
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 147,902
TOTAL $ 292,045
(Class B shares)
Compensation to Investment Dealers $2,074,927
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 201,889
TOTAL $2,276,816
(Class C shares)
Compensation to Investment Dealers $ 184,187
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 176,885
TOTAL $ 361,072
BOND INCOME FUND
(Class A shares)
Compensation to Investment Dealers $ 480,275
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 99,362
TOTAL $ 579,637
(Class B shares)
Compensation to Investment Dealers $ 462,977
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 99,486
TOTAL $ 562,463
(Class C shares)
Compensation to Investment Dealers $ 16,367
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 97,795
TOTAL $ 114,162
HIGH INCOME FUND
(Class A shares)
Compensation to Investment Dealers $ 98,496
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 140,487
TOTAL $ 238,983
(Class B shares)
Compensation to Investment Dealers $ 313,434
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 150,885
TOTAL $ 464,319
MUNICIPAL INCOME FUND
(Class A shares)
Compensation to Investment Dealers $ 460,750
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 142,250
TOTAL $ 603,000
(Class B shares)
Compensation to Investment Dealers $ 136,884
Compensation to Distributor's Sales Personnel and
Other Related Costs $ 135,817
TOTAL $ 272,701
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor: $277,228 relating to the Class A shares and $45,689 relating to the
Class B shares of the Government Securities Fund; $176,564 relating to the Class
A shares and $23,735 relating to the Class B shares of the Adjustable Rate Fund;
$373,905 relating to the Class A shares and $355,116 relating to the Class B
shares and $8,545 relating to the Class C shares of the Bond Income Fund;
$57,463 relating to the Class A shares and $121,326 relating to the Class B
shares of the High Income Fund; $372,904 relating to the Class A shares and
$73,850 relating to the Class B shares of the Municipal Income Fund; $528,238
relating to the Class A shares, $126,396 relating to Class B shares and $11,289
relating to the Class C shares of the Limited Term U.S. Government Fund; and
$80,318 to the Class A shares, $866,396 relating to the Class B shares and
$16,800 relating to the Class C shares of the Strategic Income Fund. New England
Securities paid substantially all of the fees it received from the Distributor
(a) in commissions to its sales personnel and (b) to defray sales-related
overhead costs.
- -------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- -------------------------------------------------------------------------------
As of June 1, 1997, to the Trust's knowledge, the following persons
owned of record or beneficially 5% or more of the indicated classes of the
following Funds:
GOVERNMENT SECURITIES FUND
Class B shares State Street Bank & Trust Co. 5.35%
Cust for the IRA Rollover of
Edith H. Crowson
22410 Provincial
Katy, TX 77450-1624
Class Y shares New England Mutual Life Ins Co 100%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street
Boston, MA 02116-3706
LIMITED TERM U.S. GOVERNMENT FUND
Class Y shares New England Mutual Life Ins Co 42.42%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street
Boston, MA 02116-3706
NEIC Master Retirement Trust 57.58%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
ADJUSTABLE RATE U.S. GOVERNMENT FUND
Class A shares San Bernadino County 34.00%
Treasurer
172 W. 3rd Street, 1st Fl.
San Bernadino, CA 92415-1001
National Auto Dealers Association 5.16%
8400 Westpark Drive
McLean, VA 22102-3522
Class B shares Smith Barney Inc. 5.45%
388 Greenwich Street
New York, NY 10013-2375
STRATEGIC INCOME FUND
Class B shares MLPF & S for the Sale Benefit of
its Customers 5.42%
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-64844
Class C shares Southtrust Bank of Georgia NA 8.32%
Attn Trust Dept FAO
Atlanta Regional Commission Retirement Plan
79 W. Paces Ferry Road
Atlanta, GA 30305-1350
BOND INCOME FUND
Class C shares Resources Trust Co Tr 14.07%
FBO Barbara J. Scioscia
PO Box 5900
Denver, CO 80217-5900
California Central Trust Bank Corp 12.18%
TTEE FBO Dimension One Spas Inc
PO Box 5024
Costa Mesa, CA 92628-5024
PaineWebber For the Benefit of 7.74%
James L. Binsacca
440 Fulton Road
San Mateo, CA 94402-1120
Class Y shares NEIC Master Retirement Trust 96.15%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
HIGH INCOME FUND
Class A shares Deferred Comp Plan for General Agents of
The New England 9.61%
The New England Investment Acctg
Attn: Roel Kromhout
501 Boylston Street
Boston, MA 02116-3706
Class B shares MLPF&S for the Sole Benefit of
its Customers 5.05%
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-6484
MUNICIPAL INCOME FUND
Class B shares Smith Barney Inc. 5.19%
388 Greenwich Street
New York, NY 10013-2375
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE
For the Periods Ended 12/31/96*
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -----------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 0.79 33.08 93.91 5.88 6.85
Maximum Offering Price -3.73 27.11 85.12 4.92 6.35
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/23/93** 9/23/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value -0.05 10.45 3.08
Redemption at End of Period -4.05 8.64 2.57
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 1.13 19.16 6.56
LIMITED TERM U.S. GOVERNMENT FUND
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 1/3/89** 5 Years 1/3/89**
- ----------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 2.39 27.14 76.62 4.92 7.38
Maximum Offering Price -0.65 23.31 71.27 4.28 6.97
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/27/93** 9/27/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 1.73 10.45 3.09
Redemption at End of Period -2.09 8.64 2.57
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 9/27/93**
- ----------------------------- ------ ---------- ---------
<S> <C> <C> <C>
Net Asset Value 1.64 13.18 6.35
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 2.75 16.13 5.57
ADJUSTABLE RATE FUND***
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5 Years 10/18/91** 5 Years 10/18/91**
- ----------------------------- ------ ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value 5.83 26.45 27.97 4.80 4.85
Maximum Offering Price 4.83 25.11 26.62 4.58 4.63
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 4.90 13.10 3.80
Redemption at End of Period 0.90 11.14 3.25
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94** 3/31/94**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value n/a n/a n/a
STRATEGIC INCOME FUND*****
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class A shares: As a % of 1 Year 5/1/95** 5/1/95**
- ----------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 14.52 26.28 15.00
Maximum Offering Price 9.38 20.59 11.86
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 5/1/95** 5/1/95**
- ----------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 13.68 24.74 14.15
Redemption at End of Period 9.68 21.74 12.50
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95** 5/1/95**
- ----------------------------- ------ -------- --------
<S> <C> <C> <C>
Net Asset Value 13.59 24.56 14.05
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 5/1/95** 5/1/95**
- ----------------------------- -------- --------
<S> <C> <C>
Net Asset Value n/a n/a
BOND INCOME FUND
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 4.60 45.62 125.23 7.81 8.46
Maximum Offering Price -0.09 39.10 115.15 6.82 7.96
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 3.73 17.25 4.94
Redemption at End of Period -0.27 15.41 4.44
<CAPTION>
Aggregate Annualized
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94** 12/30/94**
- ----------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net Asset Value 3.90 22.61 10.78
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class Y shares: As a % of 1 Year 12/30/94** 12/30/94**
- ----------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net Asset Value 4.59 26.54 12.49
HIGH INCOME FUND
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 14.89 67.50 107.11 10.87 7.55
Maximum Offering Price 9.76 59.92 97.87 9.84 7.06
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/20/93** 9/20/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 14.12 27.09 7.58
Redemption at End of Period 10.12 25.18 7.09
MUNICIPAL INCOME FUND
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- ----------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 4.63 38.38 93.49 6.71 6.82
Maximum Offering Price -0.10 32.23 84.90 5.75 6.34
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ -------------------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93** 9/13/93**
- ----------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 3.85 11.41 3.33
Redemption at End of Period -0.15 9.53 2.80
* Federal regulations require this example to be calculated using a $1,000 investment. The normal minimum initial investment
in shares of the Funds is $2,500, however.
** Commencement of Fund operations or offering of indicated class of shares.
*** Assuming deduction of current maximum sales load, the Adjustable Rate Fund's Class A shares' average one-year and
since-inception aggregate total returns would have been 4.83% and 4.58%, respectively, and their average annual
since-inception total return would have been 4.30% had a voluntary expense limitation not been in effect. Based on
net asset values, the Fund's Class A shares' one-year and since-inception aggregate total returns would have been
5.59% and 25.79%, respectively, and their since-inception average annual total return would have been 4.51%, without
the voluntary limitation. Assuming redemption at the end of the period, the Fund's Class B shares' one-year and
since-inception aggregate total returns would have been 0.66% and 10.12%, respectively, had a voluntary expense
limitation not been in effect, and their average annual total return for the since-inception period would have been
2.97%. Based on net asset values, the Fund's Class B shares' aggregate total returns for the one-year and
since-inception periods would have been 4.66% and 12.06%, respectively, and their average annual total returns for
the since-inception period would have been 3.51%, without the voluntary limitation.
**** Assuming deduction of current maximum sales load, the High Income Fund's Class A shares' one-year, five-year and
ten-year aggregate total returns would have been 9.60%, 57.82% and 90.43%, respectively, had a voluntary expense
limitation for certain periods not been in effect, and their five-year and ten-year average annual total returns
would have been 9.56% and 6.65%, respectively. Based on net asset values, the High Income Fund's Class A shares'
one-year, five-year and ten-year aggregate total returns would have been 14.89%, 67.50% and 107.06%, respectively,
without the voluntary limitation, and their five-year and ten-year average annual total returns would have been
10.59% and 7.16%, respectively. Assuming redemption at the end of the period, the Fund's Class B shares' aggregate
total returns for the one-year and since-inception periods would have been 9.96% and 24.39%, respectively, had a
voluntary expense limitation not been in effect, and their average annual total return for the since-inception period
would have been 6.88%. Based on net asset values, the Fund's Class B shares' aggregate total returns for the
one-year and since-inception periods would have been 14.12% and 27.09%, respectively, without the voluntary
limitation, and their average annual total return for the since-inception period would have been 7.38%.
***** Assuming deduction of the current maximum sales load, the Strategic Income Fund's Class A, Class B and Class C shares'
aggregate total returns for the since-inception period would have been 19.59%, 20.74% and 23.56%, respectively, had a
voluntary expense deferral arrangement not been in effect, and their annualized total returns for the since-inception would
have been 11.32%, 11.96% and 13.52%, respectively.
</TABLE>
YIELD FOR THE 30-DAY PERIOD
ENDED 12/31/96*
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS Y
- ----------------------------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
Government Securities Fund ............................ 5.06 4.55 --- 5.57
Limited Term U.S. Government Fund...................... 5.28 4.79 4.77 5.80
Adjustable Rate U.S. Government Fund................... 5.89 5.19 --- ---
Strategic Income Fund ................................. 7.61 7.20 7.23 ---
Bond Income Fund ...................................... 6.76 6.31 6.25 7.35
High Income Fund ...................................... 9.01 8.67 --- ---
Municipal Income Fund ................................. 5.19 4.68 --- ---
* Yields for the Class A shares of the Funds are based on the public offering price of a Class A share of the Funds and
yields for the Class B, Class C and Class Y shares are based on the net asset value of a share of the Funds.
</TABLE>
Distribution Rate. The Government Securities, Limited Term U.S.
-----------------
Government, Adjustable Rate, Bond Income and High Income Funds may include in
their written sales material distribution rates based on the Funds'
distributions from net investment income and short-term capital gains for a
recent 30 day, three month or one year period.
Distributions of less than one year are annualized by multiplying by
the factor necessary to produce twelve months of distributions. The distribution
rates are determined by dividing the amount of the particular Fund's
distributions per share over the relevant period by either the maximum offering
price or the net asset value of a share of the Fund on the last day of the
period.
DISTRIBUTION RATES
FOR PERIODS ENDING 12/31/96
AS A % OF 30 DAY 3 MONTHS 12 MONTHS
--------------------------------- ------ -------- ---------
GOVERNMENT SECURITIES FUND
(Class A shares)
Net Asset Value ................. 5.69 6.05 6.57
Maximum Offering Price .......... 5.43 5.77 6.27
(Class B shares)
Net Asset Value ................. 4.93 5.30 5.81
(Class Y shares)
Net Asset Value ................. 5.94 6.30 6.82
LIMITED TERM U.S. GOVERNMENT FUND
(Class A shares)
Net Asset Value ................. 6.23 6.58 7.15
Maximum Offering ................ 6.05 6.38 6.94
(Class B shares)
Net Asset Value ................. 5.58 5.93 6.49
(Class C shares)
Net Asset Value ................. 5.58 5.93 6.49
(Class Y shares)
Net Asset Value ................. 6.57 6.92 7.49
ADJUSTABLE RATE FUND
(Class A shares)
Net Asset Value ................. 5.75 5.53 5.73
Maximum Offering Price .......... 5.70 5.48 5.68
(Class B shares)
Net Asset Value ................. 5.01 4.82 4.98
(Class Y shares)
Net Asset Value ................. n/a n/a n/a
STRATEGIC INCOME FUND
(Class A shares)
Net Asset Value ................. 7.54 7.54 7.93
Maximum Offering Price .......... 7.21 7.21 7.57
(Class B shares)
Net Asset Value ................. 6.77 6.79 7.19
(Class C shares)
Net Asset Value ................. 6.78 6.80 9.33
(Class Y shares)
Net Asset Value ................. n/a n/a n/a
BOND INCOME FUND
(Class A shares)
Net Asset Value ................. 6.97 6.97 7.03
Maximum Offering Price .......... 6.66 6.66 6.72
(Class B shares)
Net Asset Value ................. 6.21 6.23 6.28
(Class C shares)
Net Asset Value ................. 6.20 6.50 6.28
(Class Y shares)
Net Asset ....................... 7.21 7.21 7.28
HIGH INCOME FUND
(Class A shares)
Net Asset Value ................. 8.92 8.92 8.94
Maximum Offering Price ......... 8.52 8.52 8.54
(Class B shares)
Net Asset Value ................. 8.18 8.18 8.26
MUNICIPAL INCOME FUND
(Class A shares)
Net Asset Value ................. 5.42 5.42 5.47
Maximum Offering Price .......... 5.17 5.17 5.22
(Class B shares)
Net Asset Value ................. 4.67 4.67 4.71
The foregoing data represent past performance only, and are not a
representation as to the future results of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than the original
cost.