<PAGE>
Registration Nos. 2-98326
811-4323
- - - - - - - - - - - - - - -
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- - - - - - - - - - - - - - -
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 36 [X]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
Amendment No. 37 [ X ]
(Check appropriate box or boxes)
- - - - - - - - - - - - - - -
NEW ENGLAND FUNDS TRUST I
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices, including Zip Code)
(617) 578-1388
(Registrant's Telephone Number, including Area Code)
- - - - - - - - - - - - - - -
Robert P. Connolly, Esq.
New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Copy to:
Edward A. Benjamin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
- - - - - - - - - - - - - - -
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[X] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Registrant has registered an indefinite number of securities under the
Securities Act of 1933 in accordance with Rule 24f-2 under the Investment
Company Act of 1940, as amended. Registrant filed on February 28, 1997 the Rule
24f-2 Notice for the Registrant's fiscal year ended December 31, 1996.
<PAGE>
NEW ENGLAND FUNDS TRUST I
(Prospectus and Statement of Additional Information)
CROSS-REFERENCE SHEET
Items required by Form N-1A
Item No. of Form
N-1A Caption in Prospectus
- ----------------- ---------------------
1 . . . . . . . . . Cover page
2 . . . . . . . . . Schedule of Fees
3 . . . . . . . . . Financial Highlights
4 . . . . . . . . . Cover page; Additional Facts About the
Funds; Investment Objectives; How the
Funds Pursue Their Objectives; Fund
Investments; Investment Risks
5 . . . . . . . . . Fund Management; Additional Facts About
the Funds
5A . . . . . . . . . None
6 . . . . . . . . . Cover page; Additional Facts About the
Funds; Buying Fund Shares; Owning
Fund Shares; Income Tax
Considerations
7 . . . . . . . . . Cover page; Schedule of Fees; Buying
Fund Shares; Owning Fund Shares;
Selling Fund Shares; How Fund Share
Price is Determined; Fund Management
8 . . . . . . . . . Selling Fund Shares; Exchanging Among
New England Funds
9 . . . . . . . . . None
<PAGE>
Item No. of Form Caption in Statement of
N-1A Additional Information
- ----------------- -----------------------
10 . . . . . . . . . Cover page
11 . . . . . . . . . Table of Contents
12 . . . . . . . . . Description of the Trusts and Ownership
of Shares
13 . . . . . . . . . Miscellaneous Investment Practices;
Investment Restrictions
14 . . . . . . . . . Management of the Trusts
15 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
16 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
17 . . . . . . . . . Fund Charges and Expenses; Portfolio
Transactions and Brokerage
18 . . . . . . . . . Description of the Trusts and Ownership
of Shares
19 . . . . . . . . . How to Buy Shares; Net Asset Value and
Public Offering Price; Reduced Sales
Charges; Shareholder Services;
Redemptions
20 . . . . . . . . . Income Dividends, Capital Gain
Distributions and Tax Status
21 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
22 . . . . . . . . . Performance Criteria (in Prospectus);
Investment Performance of the Funds;
Standard Performance Measures
23 . . . . . . . . . Financial Statements
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
SUPPLEMENT DATED JUNE 30, 1997 TO NEW ENGLAND STAR SMALL CAP FUND PROSPECTUS
DATED DECEMBER 31, 1996 (AS SUPPLEMENTED MAY 1, 1997) AND TO NEW ENGLAND
STAR FUNDS PROSPECTUS DATED MAY 1, 1997
In the Schedule of Fees section, the tables appearing under the captions "Annual
Fund Operating Expenses" and "Example" are replaced with the following:
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees . . . . . . . . . 1.05% 1.05% 1.05%
12b-1 Fees . . . . . . . . . . . . 0.25% 1.00%* 1.00%*
Other Expenses** . . . . . . . . . 1.21% 1.21% 1.21%
Total Fund Operating Expenses . . 2.51% 3.26% 3.26%
*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
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 be more or less
than those shown.
CLASS A CLASS B CLASS C
------- ------- -------
(1) (2)
1 year ............... $ 81 $ 83 $ 33 $ 33
3 years .............. $131 $130 $100 $100
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
<PAGE>
FINANCIAL HIGHLIGHTS (unaudited)
The Financial Highlights presented below are for Class A, B and C shares of New
England Star Small Cap Fund (the "Fund") outstanding throughout the indicated
period. The Financial Highlights should be read in conjunction with the
financial statements and the notes thereto included in Part II of the Fund's
Statement of Additional Information dated May 1, 1997, as revised June 30, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------ ----------------- ----------------
DECEMBER 31, 1996(a) DECEMBER 31, 1996(a) DECEMBER 31, 1996(a)
THROUGH MAY 31, 1997 THROUGH MAY 31, 1997 THROUGH MAY 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.50 $12.50 $12.50
---------------- ---------------- ----------------
Income from investment operations
Net investment loss (b) (0.06) (0.10) (0.10)
Net realized and unrealized gain on investments 0.61 0.62 0.62
---------------- ---------------- ----------------
Total income from investment operations 0.55 0.52 0.52
---------------- ---------------- ----------------
Net asset value, end of period $13.05 $13.02 $13.02
================ ================ ================
Total return (%)(c) 4.4 4.2 4.2
Ratios/Supplemental data
Net assets, end of period (000) $28,153 $26,085 $7,962
Ratio of operating expenses to average net assets (%) 2.51 (d) 3.26 (d) 3.26 (d)
Ratio of net investment income (loss) to average
net assets (%) (1.25)(d) (2.00)(d) (2.00)(d)
Portfolio turnover rate (%) 117 (d) 117 (d) 117 (d)
Average commission rate paid (e) $0.0541 $0.0541 $0.0541
(a) Commencement of operations.
(b) Per share Net Investment Loss has been calculated using the average shares outstanding during the year.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of Class B shares are
not reflected in total return calculations. Not annualized.
(d) Computed on an annualized basis.
(e) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share
for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs, or spreads on shares
traded on a principal basis.
</TABLE>
<PAGE>
In the section in the May 1, 1997 New England Star Funds prospectus entitled
"Past Performance of Star Small Cap Fund's Subadvisers" on pages 19-20 and in
the section in the December 31, 1996 New England Star Small Cap Fund prospectus
entitled "Performance Information" on pages 13-14, the text and tables beginning
with the sixth paragraph (which begins, "Montgomery Asset Management, L.P.")
through the end of the section are revised to read as follows:
HARRIS ASSOCIATES L.P. The data presented below under "Oakmark Small Cap Fund"
represent the average annual total return of Oakmark Small Cap Fund, as
adjusted, a mutual fund managed by Harris Associates.
<TABLE>
<CAPTION>
OAKMARK SMALL CAP LIPPER SMALL COMPANY RUSSELL
FUND GROWTH FUND INDEX 2000 INDEX
----------------- -------------------- ----------
<S> <C> <C> <C>
April 1, 1996 to March 31, 1997 32.14% (1.94%) 5.11%
November 1, 1995 (inception date)
to March 31, 1997 33.86% 5.84% 12.49%
</TABLE>
The performance information shown above for the Accounts and the Small Cap
Accounts is adjusted to give effect to the greater of the level of (a) the
actual expenses of the Accounts or Small Caps Accounts during the periods shown,
or (b) the annualized expenses projected for the Fund's Class A shares during
the first full fiscal year. The performance information for the Accounts and the
Small Cap Accounts 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. Performance
would be lower if it were adjusted for these charges and expenses.
LOOMIS, SAYLES & COMPANY, L.P. The data presented below under "Small Cap
Accounts" represent the composite average annual total returns of two accounts
managed by the Loomis Sayles Managers. During the periods shown, the Loomis
Sayles Managers were associated with another advisory firm and not with Loomis
Sayles. See "Fund Management." In addition, footnote (1) shows the total returns
for the Keystone Institutional Small Capitalization Growth Fund and the Keystone
Small Company Growth Fund II, which were managed by the Loomis Sayles Managers
during the periods for which performance is shown.
<TABLE>
<CAPTION>
SMALL CAP LIPPER SMALL COMPANY RUSSELL
ACCOUNTS (2) GROWTH FUND INDEX 2000 INDEX
------------ ----------------- ----------
<S> <C> <C> <C>
January 1, 1996 to June 30, 1996 (not annualized) 12.00% 14.08% 10.40%
July 1, 1995 to June 30, 1996 48.48% 30.12% 23.94%
July 1, 1994 (inception date) to June 30, 1996 46.25% 28.04% 21.99%
</TABLE>
(1) For the period from December 28, 1995 (inception date) to June 30, 1996,
the total return for the Keystone Institutional Small Capitalization Growth
Fund was 16.50% and for the period February 21, 1996 (inception date) to
June 30, 1996, the total return for the Keystone Small Company Growth Fund
II was 7.10%. The total returns for the Keystone Institutional Small
Capitalization Growth Fund and the Keystone Small Company Growth Fund II
were not included in the calculation of the total returns for the Small Cap
Accounts shown in the table. The performance information presented for the
Keystone Institutional Small Capitalization Growth Fund and the Keystone
Small Company Growth Fund II have not been adjusted to reflect that the
Fund's expense ratio is expected to be higher than the expense ratios of
the two Keystone funds. If adjustments were made to reflect the Fund's
higher expense level, the total returns presented would be lower.
(2) The composite average annual and total return data presented above under
"Small Cap Accounts" represent all of the accounts which (1) were managed
by the Loomis Sayles Managers during the periods shown, (2) have
transferred their portfolio assets to Loomis Sayles and (3) are currently
being managed by the Loomis Sayles Managers. The composite average annual
and total return data do not include accounts which were managed by the
Loomis Sayles Managers during the periods shown, but were not transferred
to Loomis Sayles.
The Loomis Sayles Managers also serve, and have served, in those capacities for
certain other separate accounts that have investment objectives and investment
policies substantially similar to those of the Star Small Cap Fund (the "Small
Cap Growth Accounts"). The Loomis Sayles Managers began managing Small Cap
Growth Accounts at Loomis Sayles on September 16, 1996. For the period September
16, 1996 through March 31, 1997, the total return of the Small Cap Growth
Accounts was (9.76%). For the period October 1, 1996 (the first month beginning
after the Loomis Sayles Managers began managing Small Cap Growth Accounts at
Loomis Sayles) through March 31, 1997, the total return of the Small Cap Growth
Accounts was (11.95%), the total return of the Lipper Small Company Growth Fund
Index was (10.28%) and the total return of the Russell 2000 Index was (0.24%).
MONTGOMERY ASSET MANAGEMENT, L.P. The average annual total return data presented
below for Montgomery under "Accounts" represents a composite of the performance
of all of the Accounts, including two mutual funds (Montgomery Small Cap
Opportunities Fund and Montgomery Small Cap Fund), which were managed by
Montgomery.
<TABLE>
<CAPTION>
LIPPER SMALL COMPANY RUSSELL
ACCOUNTS GROWTH FUND INDEX 2000 INDEX
----------- ------------------- -------------
<S> <C> <C> <C>
April 1, 1996 to March 31, 1997 (4.86%) (1.94%) 5.11%
April 1, 1994 to March 31, 1997 10.36% 12.08% 12.70%
April 1, 1992 to March 31, 1997 11.74% 11.78% 12.78%
July 1, 1990 (inception date) to March 31, 1997 16.87% 12.24% 12.93%
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- ------------------------------------------------------------------------------
CLASS Y SHARES OF:
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND STAR WORLDWIDE FUND
NEW ENGLAND STAR SMALL CAP FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND EQUITY INCOME FUND
PROSPECTUS AND APPLICATION
SEPTEMBER 15, 1997
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund, New England Star Advisers Fund, New
England Star Worldwide Fund, New England Star Small Cap Fund and New England
Value Fund, each a series of New England Funds Trust I, New England Growth
Opportunities Fund, a series of New England Funds Trust II, and New England
Equity Income Fund, a series of New England Funds Trust III, are separate mutual
funds (the "Funds" and each a "Fund"). New England Funds Trust I, New England
Funds Trust II and New England Funds Trust III are referred to in this
prospectus as the "Trusts."
Each Fund except New England Growth Fund offers four classes of shares: Class Y
(for qualified institutional investors) and Classes A, B and C (for other
investors). New England Growth Fund currently offers three classes of shares:
Class Y (for qualified institutional investors) and Classes A and B (for other
investors). This prospectus sets forth information investors should know before
investing in Class Y shares. Please read it carefully and keep it for future
reference. A Statement of Additional Information in two parts (the "Statement")
about the Funds dated May 1, 1997 as revised September 15, 1997 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, Massachusetts 02116 or call toll free at
1-800-225-5478. The Statement contains more detailed information about the Funds
and is incorporated into this prospectus by reference. Class A, Class B and
Class C shares of the Funds are described in a separate prospectus. To obtain
more information about Class A, Class B and Class C shares, please call the
Distributor toll-free at 1-800-225-5478.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
3 FUND EXPENSES AND FINANCIAL INFORMATION
3 Schedule of Fees
5 Financial Highlights
- -------------------------------------------------------------------------------
14 INVESTMENT STRATEGY
14 Investment Objectives
14 How the Funds Pursue Their Objectives
14 Fund Investments
- -------------------------------------------------------------------------------
18 INVESTMENT RISKS
- -------------------------------------------------------------------------------
25 FUND MANAGEMENT
- -------------------------------------------------------------------------------
28 BUYING FUND SHARES
28 Minimum Investment
28 Ways to Buy Fund Shares
28 [] By wire transfer
29 [] By mail
- -------------------------------------------------------------------------------
30 OWNING FUND SHARES
30 Exchanging Among New England Funds
30 Fund Dividend Payments
- -------------------------------------------------------------------------------
32 SELLING FUND SHARES
32 Ways to Sell Fund Shares
32 [] By telephone
32 [] By mail
- -------------------------------------------------------------------------------
34 FUND DETAILS
34 How Fund Share Price Is Determined
34 Income Tax Considerations
35 Performance Criteria
36 Additional Facts About the Funds
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class Y shares of the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y shares of the Funds
for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
ALL FUNDS
---------
Class Y
---------
Maximum Initial Sales Charge Imposed on a Purchase None
Maximum Contingent Deferred Sales Charge None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
NEW ENGLAND NEW ENGLAND
INTERNATIONAL EQUITY INCOME
EQUITY FUND FUND
------------- -------------
Class Y Class Y
------------- -------------
Management Fees (after voluntary fee
waiver and expense reduction) 0.85%* 0.00%**
12b-1 Fees None None
Other Expenses 0.30% 1.25%**
Total Fund Operating Expenses (after
voluntary fee waiver and expense reduction) 1.15%* 1.25%**
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH BALANCED VALUE GROWTH
FUND FUND FUND FUND
-------------- ----------- ----------- -----------
Class Y Class Y Class Y Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees 0.75% 0.73% 0.73% 0.68%
12b-1 Fees None None None None
Other Expenses 0.50% 0.19%*** 0.33% 0.25%
Total Fund Operating Expenses 1.25% 0.92% 1.06% 0.93%
<CAPTION>
NEW ENGLAND NEW ENGLAND
NEW ENGLAND GROWTH STAR NEW ENGLAND
STAR ADVISERS OPPORTUNITIES WORLDWIDE STAR SMALL
FUND FUND FUND CAP FUND
-------------- ----------- ----------- -----------
Class Y Class Y Class Y Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees 1.05% 0.70% 1.05% 1.05%
12b-1 Fees None None None None
Other Expenses 0.38% 0.35% 1.28% 0.75%
Total Fund Operating Expenses 1.43% 1.05% 2.33% 1.80%
* Without the voluntary fee waiver and expense reduction by the Fund's adviser, Management Fees
would be 0.89% and Total Fund Operating Expenses would be 1.19%. These voluntary limitations
can be terminated by the Fund's adviser at any time. See "Fund Management."
** Without the voluntary fee waiver and expense reduction by the Fund's adviser, Management Fees,
Other Expenses and Total Fund Operating Expenses would be 0.70%, 2.72% and 3.42%,
respectively. These voluntary limitations can be terminated by the Fund's adviser at any time.
See "Fund Management."
*** Pursuant to an administration and accounting service agreement among New England Funds
Management, L.P., Loomis, Sayles & Company, L.P., TNE Advisers, Inc. and New England Balanced
Fund, TNE Advisers, Inc. will be paid up to 0.25% of the value of the Class Y shares of New
England Balanced Fund held by TNE Advisers' clients. A maximum fee of 0.05% of the value of
the Class Y shares will be paid by New England Balanced Fund and the remaining fee payable to
TNE Advisers, Inc. under this arrangement will be shared equally between New England Funds
Management, L.P. and Loomis, Sayles & Company, L.P.
</TABLE>
EXAMPLE
A $1,000 investment in Class Y shares of the Funds would incur the following
dollar amount of transaction costs and operating expenses, assuming a 5% annual
return and redemption at period end. The 5% return and expenses in the Example
should not be considered indicative of actual or expected Fund performance or
expenses, both of which may be more or less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
CAPITAL GROWTH FUND BALANCED FUND GROWTH FUND
---------------------------- ----------------------- ---------------------
Class Y Class Y Class Y
<C> <C> <C> <C>
1 year $ 13 $ 9 $ 9
3 years $ 40 $ 29 $ 30
5 years $ 69 $ 51 $ 51
10 years $ 151 $ 113 $ 114
NEW ENGLAND
<CAPTION>
NEW ENGLAND NEW ENGLAND STAR WORLDWIDE NEW ENGLAND STAR
INTERNATIONAL EQUITY FUND STAR ADVISERS FUND FUND SMALL CAP FUND
---------------------------- ------------------------ -------------------- --------------------
Class Y Class Y Class Y Class Y
<C> <C> <C> <C> <C>
1 year $ 12 $ 15 $ 24 $ 18
3 years $ 37 $ 45 $ 73 $ 57
5 years $ 63 $ 78 $ 125 $ 97
10 years $ 140 $ 171 $ 267 $ 212
<CAPTION>
NEW ENGLAND
NEW ENGLAND GROWTH OPPORTUNITIES NEW ENGLAND EQUITY
VALUE FUND FUND INCOME FUND
---------------------------- ------------------------- --------------------
Class Y Class Y Class Y
<C> <C> <C> <C>
1 year $ 11 $ 11 $ 13
3 years $ 34 $ 33 $ 40
5 years $ 58 $ 58 $ 69
10 years $ 129 $ 128 $ 151
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of New England Value Fund, New England Balanced Fund, New
England International Equity Fund and New England Star Advisers Fund outstanding
throughout the indicated periods. In the case of New England Capital Growth Fund
and New England Growth Opportunities Fund, which had no Class Y shares
outstanding prior to 1997, and New England Star Worldwide Fund, which did not
offer Class Y shares prior to 1997, financial highlights are presented for a
Class A, Class B and Class C share of each Fund outstanding throughout the
indicated periods. In the case of New England Growth Fund and New England Equity
Income Fund, which did not offer Class B, Class C or Class Y shares prior to
1997, financial highlights are presented for a Class A share of each Fund
outstanding throughout the indicated periods. In the case of New England Star
Small Cap Fund, which commenced operations on December 31, 1996, financial
highlights are presented for Class A, Class B and Class C shares of the Fund
outstanding throughout the five month period ended May 31, 1997.)
The Financial Highlights presented on pages 6 through 17 have been included in
financial statements for the Funds. The financial statements for New England
Value Fund, New England Balanced Fund, New England International Equity Fund,
New England Capital Growth Fund, New England Growth Fund, New England Star
Advisers Fund, New England Star Worldwide Fund and New England Equity Income
Fund have been examined by Price Waterhouse LLP, independent accountants. The
financial statements for New England Growth Opportunities Fund have been
examined by Coopers & Lybrand LLP, independent accountants. The reports of Price
Waterhouse LLP and Coopers & Lybrand LLP are incorporated by reference in Part
II of the Statement and may be obtained by shareholders. The Financial
Highlights should be read in conjunction with the financial statements and the
notes thereto incorporated by reference in Part II of the Statement. With the
exception of New England Star Small Cap Fund, each Fund's annual report contains
additional performance information and is available upon request and without
charge.
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- ------------------------------------------
AUG. 3(a) SEPT. 13(a)
THROUGH YEAR ENDED DEC. 31, THROUGH YEAR ENDED DEC. 31,
DEC. 31, ---------------------------------------- DEC. 31, ------------------------------
1992 1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.50 $14.23 $15.27 $15.02 $18.41 $14.79 $15.24 $14.89 $18.09
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income (loss) 0.02 0.00 (0.08) (0.11)(e) (0.14)(f) 0.00 (0.08) (0.16)(e) (0.28)(f)
Net gain (loss) on
investments (both realized
and unrealized) 1.84 1.12 (0.17) 4.74 3.22 0.53 (0.27) 4.60 3.15
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations 1.86 1.12 (0.25) 4.63 3.08 0.53 (0.35) 4.44 2.87
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net
investment income) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.11) (0.08) 0.00 (1.24) (2.22) (0.08) 0.00 (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.13) (0.08) 0.00 (1.24) (2.22) (0.08) 0.00 (1.24) (2.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $14.23 $15.27 $15.02 $18.41 $19.27 $15.24 $14.89 $18.09 $18.74
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (%)(c) 14.9 7.9 (1.6) 30.7 17.1 3.6 (2.3) 29.7 16.2
Ratios/Supplemental data
Net assets, end of
period (000) $34,772 $98,735 $95,803 $123,504 $141,326 $6,748 $15,390 $26,234 $37,439
Ratio of operating expenses
to average net assets (%)(d) 1.00(b) 1.23 1.63 1.61 1.50 2.29(b) 2.38 2.36 2.25
Ratio of net investment
income (loss) to average
net assets (%) 0.74(b) (0.03) (0.45) (0.67) (0.71) (1.15)(b) (1.20) (1.42) (1.46)
Portfolio turnover rate (%) 15 77 82 69 74 77 82 69 74
Average commission rate paid(g) --- --- --- --- $0.0509 --- --- --- $0.0509
</TABLE>
<PAGE>
NEW ENGLAND CAPITAL GROWTH FUND (CONTINUED)
CLASS C
-----------------------------
YEAR ENDED
DECEMBER 31,
---------------------------
1995(a) 1996
------- ------
Net asset value, beginning of period $14.89 $18.08
Income from investment operations
Net investment income (loss) (0.09)(e) (0.28)(f)
Net gain (loss) on investments
(both realized and unrealized) 4.52 3.16
------ ------
Total income (loss) from investment
operations 4.43 2.88
------ ------
Less distributions
Distributions (from net investment income) 0.00 0.00
Distributions (from net realized
capital gains) (1.24) (2.22)
------ ------
Total distributions (1.24) (2.22)
------ ------
Net asset value, end of period $18.08 $18.74
====== ======
Total return (%)(c) 29.7 16.2
Ratios/Supplemental data
Net assets, end of period (000) $ 354 $ 504
Ratio of operating expenses to average
net assets (%)(d) 2.36 2.25
Ratio of net investment income (loss)
to average net assets (%) (1.42) (1.46)
Portfolio turnover rate (%) 69 74
Average commission rate paid(g) --- $0.0509
(a) The Fund commenced operations on August 3, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on January
3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B shares are not reflected in total return calculations. Periods
of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the voluntary expense limitations in effect from August 3, 1992 through
September 30, 1993 would have been: (%)
Class A Class B
----------------------------- --------------------
8/3/92 - Year Ended 9/13/93 -
12/31/92 12/31/93 12/31/93
2.20(b) 1.58 2.97(b)
(e) Per share net investment income (loss) does not reflect current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
(f) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
<PAGE>
NEW ENGLAND VALUE FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------
MARCH 31(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------------- ------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $7.57 $7.24 $ 8.75
----- ----- ------
Income from investment operations
Net investment income 0.10 0.12 0.08
Net gain (loss) on investments (both realized and unrealized) 0.08 2.21 2.10
----- ----- ------
Total income from investment operations 0.18 2.33 2.18
----- ----- ------
Less distributions
Distributions (from net investment income) (0.10) (0.11) (0.08)
Distributions (from capital gains) (0.41) (0.71) (1.30)
----- ----- ------
Total distributions (0.51) (0.82) (1.38)
----- ----- ------
Net asset value, end of period $7.24 $8.75 $ 9.55
===== ===== ======
Total return (%) 2.4 (c) 32.8 26.4
Ratios/Supplemental data
Net assets, end of period (000) $4,001 $6,738 $12,716
Ratio of operating expenses to average net assets (%) 1.54 (b) 1.12 1.06
Ratio of net investment income to average net assets (%) 1.05 (b) 1.47 1.03
Portfolio turnover rate (%) 29 52 64
Average commission rate paid(d) --- --- $0.0574
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose
its average commission rate paid per share for trades on which commissions are charged. This
rate generally does not reflect mark-ups, mark-downs or spreads on shares traded on a
principal basis.
</TABLE>
<PAGE>
NEW ENGLAND BALANCED FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------
MAR. 8(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------------- ------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $12.20 $11.27 $13.15
------ ------ ------
Income from investment operations
Net investment income 0.38 0.46 0.44
Net gain (loss) on investments (both realized and unrealized) (0.72) 2.51 1.76
------ ------ ------
Total income (loss) from investment operations (0.34) 2.97 2.20
------ ------ ------
Less distributions
Distributions (from net investment income) (0.38) (0.45) (0.45)
Distributions (from net realized capital gains) (0.21) (0.64) (0.95)
------ ------ ------
Total distributions (0.59) (1.09) (1.40)
------ ------ ------
Net asset value, end of period $11.27 $13.15 $13.95
====== ====== ======
Total return (%) (2.8)(c) 26.8 17.6
Ratios/Supplemental data
Net assets, end of period (000) $39,183 $59,411 $77,665
Ratio of operating expenses to average net assets (%) 0.99 (b) 1.11 0.88
Ratio of net investment income to average net assets (%) 3.69 (b) 3.62 3.24
Portfolio turnover rate (%) 36 54 70
Average commission rate paid(d) --- --- $0.0577
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs
or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.88 $7.59 $7.46 $8.49 $8.85 $11.19 $10.08 $10.44 $8.87 $10.55
----- ----- ----- ----- ----- ------ ------ ------ ----- ------
Income from investment operations
Net investment
income (loss) (0.01)(a) 0.28 0.09 0.07 0.10 0.09 0.02 0.11 0.05 0.04
Net gains or losses
on investments
(both realized and
unrealized) 1.62 (0.17) 1.56 0.38 4.92 (0.83) 1.12 (0.84) 3.30 2.07
----- ----- ----- ----- ----- ------ ------ ------ ----- ------
Total income (loss) from
investment operations 1.61 0.11 1.65 0.45 5.02 (0.74) 1.14 (0.73) 3.35 2.11
----- ----- ----- ----- ----- ------ ------ ------ ----- ------
Less distributions
Distributions (from
net investment
income) (0.05) (0.24) (0.11) (0.09) (0.10) (0.09) (0.01) (0.11) (0.05) (0.04)
Distributions (from
net realized capital
gains) (2.85) 0.00 (0.46) 0.00 (2.57) (0.28) (0.77) (0.73) (1.62) (0.99)
Distributions (from
paid-in capital) 0.00 0.00 (0.05) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ------ ------ ------ ----- ------
Total distributions (2.90) (0.24) (0.62) (0.09) (2.68) (0.37) (0.78) (0.84) (1.67) (1.03)
----- ----- ----- ----- ----- ------ ------ ------ ----- ------
Net asset value, end
of period $7.59 $7.46 $8.49 $8.85 $11.19 $10.08 $10.44 $8.87 $ 10.55 $11.63
===== ===== ===== ===== ====== ====== ====== ===== ======== ======
Total return (%)(b) 18.5 1.5 22.3 5.1 56.7 (6.6) 11.3 (7.1) 38.1 20.9
Ratios/Supplemental data
Net assets, end of
period (000) $440,851 $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515 $988,430 $ 1,201,110 $ 1,296,542
Ratio of operating
expenses to average
net assets (%) 1.29 1.26 1.22 1.23 1.14 1.15 1.18 1.19 1.20 1.18
Ratio of net investment
income to average
net assets (%) (0.06) 3.64 1.19 0.77 0.89 0.89 0.16 1.05 0.42 0.33
Portfolio turnover
rate (%) 154 283 203 185 186 218 145 141 235 199
Average commission
rate paid(c) --- --- --- --- --- --- --- --- --- $ 0.0668
(a) Net investment income per share has been calculated based upon the averages of monthly shares outstanding.
(b) A sales charge was not reflected in total return calculations.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades on which commissions are charged. This rate generally does not reflect mark-ups, mark-downs or spreads on
shares traded on a principal basis.
</TABLE>
<PAGE>
NEW ENGLAND INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS Y
----------------------------------------------------------------------
SEPT. 9(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------------ ------------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $15.19 $14.86 $15.64 $16.25
------ ------ ------ ------
Income from investment operations
Net investment income 0.13 0.00 0.42 0.11(e)
Net gain (loss) on investments (both realized and
unrealized) (0.01) 1.32 0.60 0.54
------ ------ ------ ------
Total income from investment operations 0.12 1.32 1.02 0.65
------ ------ ------ ------
Less distributions
Distributions (from net investment income) (0.13) 0.00 (0.41) (0.09)
Distributions (from net realized capital gains) (0.32) (0.53) 0.00 (0.33)
Distributions (from paid in capital) 0.00 (0.01) 0.00 0.00
------ ------ ------ ------
Total distributions (0.45) (0.54) (0.41) (0.42)
------ ------ ------ ------
Net asset value, end of period $14.86 $15.64 $16.25 $16.48
====== ====== ====== ======
Total return (%) 0.7 (c) 8.9 6.6 4.0
Ratios/Supplemental data
Net assets, end of period (000) $7,006 $56,561 $83,119 $52,161
Ratio of operating expenses to average net assets 1.00 (b) 1.00 1.00 1.00
(%) (d)
Ratio of net investment income to average net 0.33 (b) 0.76 1.99 0.89
assets (%)
Portfolio turnover rate (%) 101 123 119 59
Average commission rate paid(f) --- --- --- $0.0180
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary
expense limitations would have been 1.35%(b), 1.04%, 1.21% and 1.19%, respectively.
(e) Per share net investment loss has been calculated using the average shares outstanding during
the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose
its average commission rate per share for trades on which commissions are charged. This rate
generally does not reflect mark-ups, mark-downs or spreads on shares traded on a principal
basis.
</TABLE>
The Fund's current subadviser assumed that function on February 14, 1997. These
financial highlights reflect results achieved by the previous subadviser under
different investment policies.
<PAGE>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------------------
SEVEN
YEAR ENDED MONTHS
MAY 31, ENDED YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------------------------------------------
1987 1988(b) 12/31/88(b) 1989 1990 1991 1992 1993(a) 1994 1995 1996
---- ------- ----------- ---- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.70 $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Income from investment operations
Net investment
income 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21 0.22 0.18 0.13
Net gain (loss)
on investments
(both realized
and unrealized) 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75 (0.10) 4.01 2.07
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Total income
(loss) from
investment
operations 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96 0.12 4.19 2.20
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Less distributions
Distributions
(from net
investment
income) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21) (0.21) (0.18) (0.13)
Distributions (in
excess of net
investment
income) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) 0.00 0.00 0.00
Distributions
(from net
realized capital
gains) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27) (0.17) (2.03) (2.59)
Distributions
(from paid-in
capital) 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Total
distributions (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49) (0.38) (2.21) (2.72)
------ ------ ------ ----- ------ ----- ------ ------ ------ ------ ------
Net asset value,
end of period $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67 $12.41 $14.39 $13.87
====== ====== ===== ====== ===== ====== ====== ====== ====== ====== ======
Total return(%)(f) 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0 1.00 35.1 17.2
Ratios/Supplemental data
Net assets, end
of period (000) $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168 $104,081 $150,693 $166,963
Ratio of
operating
expenses to
average net
assets(%) 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21 1.28 1.38 1.30
Ratio of net
investment
income to
average net
assets(%) 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70 1.75 1.31 0.92
Portfolio
turnover rate(%) 25 8 83 17 6 12 10 4 6 69 127
Average
commission rate
paid(g) --- --- --- --- --- --- --- --- --- --- $0.0348
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW ENGLAND GROWTH OPPORTUNITIES FUND (CONTINUED)
CLASS B CLASS C
---------------------------------------------------- ---------------------------
SEPT. 13(c) MAY 1(c) YEAR
THROUGH YEAR ENDED DEC. 31, THROUGH ENDED
DEC. 31, ------------------------------------- DEC. 31, DEC. 31,
1993(a) 1994 1995 1996 1995 1996
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.95 $12.66 $12.42 $14.40 $13.84 $14.39
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income 0.06 0.16 0.10 0.03 0.06 0.04
Net gain (loss) on investments (both
realized and unrealized) 0.01 (0.09) 4.01 2.07 2.58 2.05
------ ------ ------ ------ ------ ------
Total income from investment operations 0.07 0.07 4.11 2.10 2.64 2.09
------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net investment income) (0.03) (0.14) (0.10) (0.04) (0.06) (0.04)
Distributions (in excess of net investment (0.06) 0.00 0.00 0.00 0.00 0.00
income)
Distributions (from net realized capital (0.27) (0.17) (2.03) (2.59) (2.03) (2.59)
gains)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.36) (0.31) (2.13) (2.63) (2.09) (2.63)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.66 $12.42 $14.40 $13.87 $14.39 $13.85
====== ====== ====== ====== ====== ======
Total return (%)(f) 0.60 0.60 34.3 16.3 20.2 16.3
Ratios/Supplemental data
Net assets, end of period (000) $1,498 $5,185 $29,026 $46,856 $4,707 $3,912
Ratio of operating expenses to average net
assets (%) 2.08(e) 1.93 2.11 2.05 2.11(e) 2.05
Ratio of net investment income to average
net assets (%) 0.71(e) 1.10 0.56 0.17 0.56(e) 0.17
Portfolio turnover rate (%) 4 6 69 127 69 127
Average commission rate paid(g) --- --- --- $0.0348 --- $0.0348
(a) As of January 1, 1993, the Fund discontinued the use of equalization accounting.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's former adviser, Back
Bay Advisors, L.P., assumed that function on July 27, 1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P., voluntarily agreed to
limit total Fund expenses to 1.25% of the Fund's average annual net assets. Without such
limitation, the ratio of operating expenses to average net assets for the year ended May 31,
1988 would have been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC in the case of the Class B shares
are not reflected in total return calculations. Unless otherwise indicated, periods of less
than one year are not annualized.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is required to disclose
its average commission rate per share for trades on which commissions are charged. This rate
generally does not reflect mark-ups, mark-downs or spreads on shares traded on a principal
basis.
</TABLE>
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
<PAGE>
NEW ENGLAND STAR ADVISERS FUND
<TABLE>
<CAPTION>
CLASS Y
--------------------------------------------------------
NOV. 15(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
-------------------- --------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $13.59 $13.24 $16.83
------ ------ ------
Income from investment operations
Net investment income (loss) 0.06 0.00 (0.02)(e)
Net gain (loss) on investments (both realized and unrealized) (0.35) 4.58 3.23
------ ------ ------
Total income from investment operations (0.29) 4.58 3.21
------ ------ ------
Less distributions
Distributions (from net investment income) (0.06) 0.00 0.00
Distributions (from realized capital gains) 0.00 (0.99) (1.71)
------ ------ ------
Total distributions (0.06) (0.99) (1.71)
------ ------ ------
Net asset value, end of period $13.24 $16.83 $18.33
------ ------ ------
Total return (%) (2.1) (c) 34.8 19.6
Ratios/Supplemental data
Net assets, end of period (000) $196 $5,569 $18,649
Ratio of operating expenses to average net assets (%) (d) 1.79 (b) 1.57 1.43
Ratio of net investment income to average net assets (%) 2.26 (b) (0.08) (0.11)
Portfolio turnover rate (%) 100 142 127
Average Commission Rate(f) --- --- $0.0595
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets (computed on an annualized basis)
without giving effect to the voluntary expense limitations in effect from November 15, 1994
through December 31, 1994 would have been 1.90% for the period ended December 31, 1994.
(e) Per share net investment loss has been calculated using the average shares outstanding during
the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which commissions are charged.
This rate generally does not reflect mark-ups, mark-downs or spreads on shares traded on a
principal basis.
</TABLE>
<PAGE>
NEW ENGLAND STAR WORLDWIDE FUND
CLASS A CLASS B CLASS C
-------- -------- --------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------- -------- --------
1996 1996 1996
---- ---- ----
Net asset value, beginning of
period $12.50 $12.50 $12.50
------ ------ ------
Income from investment operations
Net investment income (loss) (0.03)(b) (0.12)(b) (0.12)(b)
Net gains or losses on
investments (both realized and 2.11 2.10 2.11
unrealized)
------ ------ ------
Total income from investment
operations 2.08 1.98 1.99
------ ------ ------
Less distributions
Distributions (from net
investment income) 0.00 0.00 0.00
Distributions (from net realized
capital gains) (0.18) (0.18) (0.18)
------ ------ ------
Total distributions (0.18) (0.18) (0.18)
------ ------ ------
Net asset value, end of period $14.40 $14.30 $14.31
====== ====== ======
Total return (%)(a) 16.7 15.9 15.9
Ratios/Supplemental data
Net assets, end of period (000) $68,509 $65,367 $17,980
Ratio of operating expenses to
average net assets (%) 2.58 3.33 3.33
Ratio of net investment income
(loss) to average net assets (0.21) (0.96) (0.96)
(%)
Portfolio turnover rate (%) 57 57 57
Average commission rate paid(c) $0.0004 $0.0004 $0.0004
(a) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B shares are not reflected in total return calculations. Periods
of less than one year are not annualized.
(b) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
<PAGE>
NEW ENGLAND EQUITY INCOME FUND
CLASS A SHARES
----------------------------
NOV. 15 (a) YEAR
THROUGH ENDED
DEC. 31, DEC. 31
1995 1996
------ ------
Net asset value, beginning of period $12.50 $12.86
------ ------
Income from investment operations
Net investment income 0.04 0.31
Net gains or losses on securities
(both realized and unrealized) 0.36 3.11
------ ------
Total from investment operations 0.40 3.42
------ ------
Less distributions
Dividends (from net investment income) (0.04) (0.30)
Distributions (from net capital gains) 0.00 (0.83)
------ ------
Total distributions (0.04) (1.13)
------ ------
Net asset value, end of period $12.86 $15.15
====== ======
Total return(%) 3.2(c) 26.6
Ratios/Supplemental data
Net assets, end of period (000) $2,064 $2,613
Ratio of expenses to average net assets(%)(d) 1.50 (b) 1.50
Ratio of net income to average net assets(%) 3.58(b) 2.06
Portfolio turnover rate(%) 0 45
Average commission rate (e) --- $0.0608
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods of
less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving effect
to the expense limitations in effect would have been 5.97% (annualized) and
3.67% for the periods ended December 31, 1995 and December 31, 1996,
respectively.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs, or spreads on shares traded on a principal basis.
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------- ----------------- ----------------
JANUARY 1, 1997 JANUARY 1, 1997 JANUARY 1, 1997
THROUGH THROUGH THROUGH
MAY 31, 1997 MAY 31, 1997 MAY 31, 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.50 $12.50 $12.50
------ ------ ------
Income from investment operations
Net investment loss(a) (0.06) (0.10) (0.10)
Net realized and unrealized gain on investments 0.61 0.62 0.62
------ ------ ------
Total income from investment operations 0.55 0.52 0.52
------ ------ ------
Net asset value, end of period $13.05 $13.02 $13.02
====== ====== ======
Total return (%)(b) 4.4 4.2 4.2
Ratios/Supplemental data
Net assets, end of period (000) $28,153 $26,085 $7,962
Ratio of operating expenses to average net assets (%) 2.51(c) 3.26(c) 3.26(c)
Ratio of net investment income (loss) to average
net assets (%) (1.25)(c) (2.00)(c) (2.00)(c)
Portfolio turnover rate (%) 117(c) 117(c) 117(c)
Average commission rate(d) $0.0541 $0.0541 $0.0541
(a) Per share Net Investment Loss has been calculated using the average shares outstanding during the year.
(b) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of Class B
shares are not reflected in total return calculations. Not annualized.
(c) Computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades on which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs, or spreads on shares traded on a financial basis.
</TABLE>
<PAGE>
INVESTMENT STRATEGY
INVESTMENT OBJECTIVES
NEW ENGLAND CAPITAL GROWTH FUND (the "Capital Growth Fund")
The Fund seeks long-term growth of capital.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles"), Chicago, IL
NEW ENGLAND BALANCED FUND
(the "Balanced Fund")
The Fund seeks a reasonable long-term investment return from a combination of
long-term capital appreciation and moderate current income.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND GROWTH FUND
(the "Growth Fund")
The Fund seeks long-term growth of capital through investment in equity
securities of companies whose earnings are expected to grow at a faster rate
than the United States economy.
Adviser: Capital Growth Management Limited Partnership ("CGM")
NEW ENGLAND INTERNATIONAL EQUITY FUND
(the "International Equity Fund")
The Fund seeks total return from long-term growth of capital and dividend
income, primarily through investment in international equity securities.
Subadviser: Loomis Sayles, Boston, MA
NEW ENGLAND STAR ADVISERS FUND
(the "Star Advisers Fund")
The Fund seeks long-term growth of capital.
Subadvisers: Berger Associates, Inc. ("Berger"), Founders Asset Management,
Inc. ("Founders"), Janus Capital Corporation ("Janus Capital")
and Loomis Sayles, Detroit, MI
NEW ENGLAND STAR WORLDWIDE FUND
(the "Star Worldwide Fund")
The Fund seeks long-term growth of capital.
Subadvisers: Harris Associates L.P. ("Harris Associates"), Montgomery Asset
Management, L.P. ("Montgomery"), Founders and Janus Capital
NEW ENGLAND STAR SMALL CAP FUND
(the "Star Small Cap Fund")
The Fund seeks capital appreciation.
Subadvisers: Robertson, Stephens & Company Investment Management, L.P.
("Robertson Stephens"), Montgomery, Loomis Sayles, Boston, MA and
Harris Associates
NEW ENGLAND VALUE FUND
(the "Value Fund")
The Fund seeks a reasonable long-term investment return from a combination of
market appreciation and dividend income from equity securities.
Subadviser: Loomis Sayles, Pasadena, CA
NEW ENGLAND GROWTH OPPORTUNITIES FUND
(the "Growth Opportunities Fund")
The Fund seeks opportunities for long-term growth of capital and income.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
NEW ENGLAND EQUITY INCOME FUND
(the "Equity Income Fund")
The Fund seeks current income and capital growth.
Subadviser: Loomis Sayles, New York, NY
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund,
except for the Star Advisers Fund.
FUND INVESTMENTS
[] CAPITAL GROWTH FUND
The Capital Growth Fund seeks to attain its objective by investing substantially
all of its assets in equity securities. Investments are selected based on their
growth potential; current income is not a consideration. The Fund normally will
invest primarily in equity securities of companies with medium or large market
capitalization (capitalization of $1 billion to $5 billion and over $5 billion,
respectively), but will also invest a portion of its assets in equity securities
of companies with relatively small market capitalization (under $1 billion).
The Fund's subadviser selects investments based upon fundamental research and
analysis of individual companies and industries. The subadviser selects
investments for the Fund based on qualitative and quantitative criteria
including, among others, industry dominance and competitive position, consistent
earnings growth, a history of high profitability, the subadviser's expectation
of continued high profitability and overall financial strength, although not
every investment will have all of these characteristics. The Fund may invest in
foreign securities.
[] GROWTH FUND
Most of the Growth Fund's investments are normally in common stocks, although
the Fund may invest in any type of equity securities. The Fund does not consider
current income as a factor in selecting its investments. The Fund may invest in
foreign securities.
[] VALUE FUND
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is ordinarily
placed on undervalued securities. Although long-term market appreciation is
ordinarily the basis for security selection, current income may be a significant
consideration when yields appear to be favorable compared to overall
opportunities for capital appreciation. The Fund may invest in foreign
securities.
[] BALANCED FUND
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its equity investments are normally in
dividend-paying common stocks of recognized investment quality that are expected
to achieve growth in earnings and dividends over the long term. In selecting
equity investments for the Fund, an emphasis is ordinarily placed on undervalued
securities. Fixed-income securities include notes, bonds, non-convertible
preferred stock and money market instruments. The Fund invests at least 25% of
its assets in fixed-income securities and, under normal market conditions, more
than 50% of its assets in equity securities. The Fund may invest in foreign
securities.
[] INTERNATIONAL EQUITY FUND
The International Equity Fund seeks to achieve its objective by investing
primarily in common stocks, although the Fund may invest in any type of equity
securities. Normally the Fund will invest at least 65% of its total assets in
equity securities of issuers headquartered outside the United States or that
derive a substantial part of their revenues or profits from countries outside
the United States. Under normal conditions the Fund's portfolio will contain
equity securities of issuers from at least three countries outside the United
States. The Fund may also invest in closed-end investment companies domiciled in
the United States that invest primarily in securities issued by foreign
companies. In addition, the Fund may invest up to 20% of its assets in bonds
issued or guaranteed by foreign governments (including their political
subdivisions, agencies, authorities and/or instrumentalities), supranational
agencies or foreign companies, including but not limited to convertible debt and
below investment grade or unrated debt. The Fund may also engage in certain
options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of the Fund by
selecting a group of attractively valued countries and then selecting securities
within such countries that are expected to offer the best value based on its
valuation and earnings growth expectations.
[] GROWTH OPPORTUNITIES FUND
It is normally the policy of the Growth Opportunities Fund to invest in a
diversified portfolio of common stocks considered by the Fund's subadviser to
have possibilities for long-term appreciation of capital and income. Emphasis
will be given to both undervalued securities ("value" style) and securities of
companies with growth potential ("growth" style). The Fund will ordinarily
invest substantially all of its assets in equity securities. The Fund may invest
in foreign securities that are traded in U.S. markets.
[] EQUITY INCOME FUND
Under normal market circumstances, the Equity Income Fund will invest at least
80% of its assets in dividend-paying common or preferred stocks. The Fund's
portfolio will be selected to seek a current dividend yield which is comparable
to the published composite yield of the Standard & Poor's Composite Index of 500
Common Stocks (the "S&P 500") and long-term capital appreciation. The Fund may
also invest in non dividend-paying stocks, other equity securities, fixed-income
securities, Rule 144A securities, zero coupon bonds and strips, foreign
securities and repurchase agreements.
MULTI-ADVISER FUNDS (STAR ADVISERS FUND, STAR WORLDWIDE AND STAR SMALL CAP FUND)
Capital invested in each of the Star Advisers, Star Worldwide and Star Small Cap
Funds (the "Star Funds") will be allocated equally among the different segments
of the Fund's portfolio, managed by different subadvisers. For each Star Fund,
each subadviser will manage its segment or segments of the Fund's assets in
accordance with the Fund's objective and the subadviser's own investment style
and strategy.
New England Funds Management, L.P. ("NEFM"), the manager of the Star Funds,
believes that a multi-adviser approach to equity investing - one that combines
the varied styles of a number of subadvisers in selecting securities for the
Star Funds' portfolios - offers a different investment opportunity than funds
run by a single adviser using a single style.
Any given management style tends to produce better returns than other styles
under certain market and economic conditions, and to perform less well under
other conditions. Therefore, most single-adviser funds have not consistently
maintained superior performance rankings relative to their peers over long
periods. NEFM believes that consistency of results, minimizing under-performance
even at the cost of out-performance at times, is likely to produce higher
performance over time.
NEFM believes that assigning portfolio management responsibility for the Star
Funds to several subadvisers, whose varying styles have resulted in records of
success, may increase the likelihood that the Fund may produce superior 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 a Star Fund will in fact achieve superior results over any time
period.
[] STAR ADVISERS FUND
The Star Advisers Fund seeks to attain its objective by investing primarily in
equity securities. The Fund may also invest in other securities, as described
below. Under normal market conditions, however, at least 65% of the Fund's
assets will be invested in equity securities. Capital invested in the Fund will
be allocated on an equal basis among four different subadvisers. Each subadviser
will manage its segment of the Fund's assets in accordance with that
subadviser's own investment style and strategy. The Fund, in the discretion of
each subadviser, may invest without limit in securities of companies with
smaller capitalization. The Fund may in the discretion of each of its
subadvisers invest without limit in securities of foreign issuers (including
issuers in emerging markets) as well as in securities of U.S. issuers.
The investment styles described below will be those applied by each of the
subadvisers to the segment of the Fund's portfolio for which that subadviser is
responsible.
BERGER places primary emphasis on established companies which it believes have
favorable growth prospects, regardless of the company's size. Berger emphasizes
stocks with potential for rapid earnings expansion. Berger seeks companies with
the capability to perform well under varying economic conditions, including the
ability to compete in the global marketplace. Berger also seeks companies with
the ability to market increasing amounts of products or services in order to
increase shareholder equity at an above-average rate. Berger also places
considerable emphasis on the quality of the corporate leadership of companies
under consideration. Common stocks will generally constitute all or most of the
segment of the Fund managed by Berger, but this segment of the portfolio may
from time to time take substantial positions in securities convertible into
common stocks, and may also purchase preferred stocks, government securities,
zero-coupon securities and other senior securities when Berger believes it is
appropriate to do so. This segment of the portfolio may also invest in Rule 144A
securities (see "Investment Risks -- Miscellaneous" below) and may purchase put
and call options on stock indices and futures contracts and options thereon for
the purpose of hedging.
FOUNDERS' segment of the portfolio will invest primarily in common stocks of
well-established, high-quality growth companies. Founders manages its segment of
the Fund's portfolio by investing primarily in established companies with
above-average prospects for growth in earnings per share. This segment will
invest primarily in mid-cap and large capitalization stocks. Founders believes
that mid-cap companies (companies with between $1.0 billion and $5.0 billion of
market capitalization) may produce returns comparable to those of smaller-cap
companies, but with less risk because of their generally stronger
infrastructures and performance records and more solid market positions, and
that large-capitalization stocks add stability to the portfolio. These companies
tend to have strong performance records, with continuous operating records of
three years or more. Founders' approach to investment management gives greater
emphasis to the fundamental financial, marketing and operating characteristics
of individual companies, and is less concerned with the short-term impact of
changes in macroeconomic and market conditions, than some other investment
firms. This segment of the portfolio may invest in bonds, debentures and other
corporate obligations when Founders believes that these investments offer
opportunity for growth of capital. This segment of the portfolio may also invest
in Rule 144A securities and may enter into futures contracts or options thereon
for hedging purposes.
JANUS CAPITAL pursues the Fund's investment objective by investing substantially
all of Janus Capital's segment of the portfolio in common stocks when its
portfolio manager believes that the relevant market environment favors
profitable investing in such securities. Janus Capital manages its segment of
the portfolio to seek long-term capital growth primarily from investing in
common stocks of companies of any size, including large, well-established
companies and smaller, emerging growth companies. Janus Capital's analysis and
selection process focus on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also invest in
preferred stocks, warrants, government securities, corporate bonds and
debentures or other debt securities or repurchase agreements when its portfolio
manager perceives an opportunity for capital growth from such securities or to
receive a return on idle cash. Janus Capital's segment may also invest in Rule
144A securities and may enter into options, futures and forward contracts.
LOOMIS SAYLES manages its segment of the portfolio by investing primarily in
stocks of small cap companies with good earnings growth potential that Loomis
Sayles believes are undervalued by the market. Such companies typically have
market capitalization (shares outstanding times market price per share) of less
than $1 billion, have better than average growth rates at below average
price/earnings ratios and have strong balance sheets and cash flow. Loomis
Sayles seeks to build a core small cap portfolio of solid growth company stocks,
with a smaller emphasis on special situations and turnarounds (companies that
have experienced significant business problems but which Loomis Sayles believes
have favorable prospects for recovery), as well as unrecognized stocks.
[] STAR WORLDWIDE FUND
The Star Worldwide 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
accordance with that subadviser's own investment style and strategy. The
subadvisers' styles and strategies are outlined below.
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 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' 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 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).
[] STAR SMALL CAP FUND
The Star Small Cap Fund seeks to attain its objective of capital appreciation by
investing primarily in equity securities of small capitalization companies,
which the Fund currently considers to be companies having total market
capitalization (shares outstanding times market price per share), at the time of
purchase, of under $1 billion ("Small Cap Companies"). Under normal market
conditions, at least 65% of the Fund's net assets will be invested in Small Cap
Companies. The Fund may also invest its assets in companies having larger market
capitalization and in other securities, including foreign and fixed-income
securities. Foreign securities, including equity securities that are traded
over-the-counter or on foreign exchanges, may constitute up to 25% of the Fund's
net assets. There are no geographic limits on the Fund's foreign investments.
For more information about investment in foreign and fixed income securities see
"Investment Risks -- Foreign Securities" and "Investment Risks -- Fixed Income
Securities."
The investment styles below will be those applied by each of the subadvisers to
the segment of the Fund's portfolio for which that subadviser manages.
ROBERTSON STEPHENS pursues the Fund's investment objective by selecting
securities for its segment based on a flexible, research-driven, bottom up
approach to value recognition and trend analysis. Stock selection focuses on a
growth catalyst that is expected to drive earnings and valuations higher over a
1 to 3 year time horizon. The catalyst may be a new product launch, a new
management team, expansion into new markets, realization of undervalued assets,
or some other change expected to result in growth. Once identified, that
catalyst becomes the primary reason for owning the stock.
MONTGOMERY seeks to identify companies at an early stage or a transitional point
of the companies' development, such as the introduction of new products,
favorable management changes, new marketing opportunities or increased market
share for existing product lines. Using fundamental research, Montgomery targets
businesses having positive internal dynamics that can outweigh unpredictable
macro-economic factors, such as interest rates, commodity prices, foreign
currency rates and overall stock market volatility. Montgomery searches for
companies with potential to gain market share within their respective
industries, achieve and maintain high and consistent profitability, produce
increased quarterly earnings and provide solutions to current and pending
problems in their respective industries or society at large.
LOOMIS SAYLES intends to manage its segment of the Fund by investing in
companies that offer distinctive products, services or technologies. These
companies are expected to exhibit the potential for dynamic earnings growth as a
result of rising sales and improving profitability. Most of these companies will
have market capitalizations between $100 million and $1 billion at the time of
initial purchase. Loomis Sayles also places a significant amount of importance
on the quality of management of these smaller companies because it is Loomis
Sayles' belief that ultimately it is the skill of the management team that will
enable these small companies to mature into large, successful companies. Loomis
Sayles employs a fundamental research approach to identify and invest in these
companies. Some of the factors evaluated include historical results, competitive
position, including market share gains and losses, the impact of technology,
secular trends in the economy and management history. Projections are made for
both current and the following year's results and for longer term (3-5 years)
growth rates. Typically, only companies with a projected long term earnings
growth rate in excess of 20% per year are purchased for the portfolio. Positions
are typically eliminated from the portfolio when the company begins to evidence
slowing growth trends usually associated with larger companies.
HARRIS ASSOCIATES' approach in selecting investments for its segment of the Fund
is oriented to individual stock selection and is driven by the size of the
discount of the security's 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 capital appreciation.
In managing its segment, Harris Associates uses several qualitative and
quantitative methods in analyzing economic value, but considers the primary
determinant of value to be the company's long-term ability to generate cash for
its owners. Once Harris Associates has determined that a security is
undervalued, it will be considered for purchase, taking into account the quality
and motivation of the management, the firm's market position within its industry
and its degree of purchasing power. Harris Associates believes that the risks of
equity investment are often reduced if management's interests are strongly
aligned with the interests of stockholders.
[] ADDITIONAL INFORMATION
The Funds other than the Balanced Fund seek to attain their objectives by
normally investing in equity securities. When the particular Fund's subadviser
deems it appropriate, however, the Star Advisers, Star Worldwide, Star Small
Cap, Equity Income, International Equity, Capital Growth, Growth Opportunities
and Value Funds may, for temporary defensive purposes, hold a substantial
portion of their assets in cash or fixed-income investments, including U.S.
Government obligations, investment grade (and comparable unrated) corporate
bonds or notes, money market instruments and repurchase agreements. Corporate
obligations in the lowest investment grade category (rated BBB by Standard &
Poor's Ratings Group ["S&P"] or Baa by Moody's Investors Service, Inc.
["Moody's"]) have some speculative characteristics and may be more adversely
affected by changing economic conditions than are higher grade obligations. No
estimate can be made as to when or for how long a Fund will employ defensive
strategies. Under some market conditions, the Balanced Fund may, for temporary
purposes, invest less than 50% of its assets in equity securities and the
balance in cash and fixed-income investments.
<PAGE>
INVESTMENT RISKS
It is important to understand the following risks inherent in a 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 a Fund may sometimes decrease instead of
increase. Each 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. Each 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.
Each Fund may invest in convertible securities, including corporate bonds, notes
or preferred stocks that can be converted into common stocks or other equity
securities. Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally increase or decrease as the values of the underlying equity
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. Less than 35% of each Fund's respective net assets will be
invested in convertible securities rated below investment grade and unrated
convertible securities of comparable quality.
[] SMALL COMPANIES
The Star Advisers, Star Worldwide and Equity Income Funds, in the discretion of
each of their subadvisers, may invest without limit in the securities of
companies with smaller capitalization. The Star Small Cap Fund invests primarily
in securities of companies with market capitalization of under $1 billion.
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies. These
companies often have sales and earnings growth rates which exceed those of
companies with larger capitalization. Such growth rates may in turn be reflected
in more rapid share price appreciation. However, companies with smaller
capitalization often have limited product lines, markets or financial resources
and 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
market averages in general. The net asset value of funds that invest in
companies with smaller capitalization therefore may fluctuate more widely than
market averages.
[] WARRANTS (STAR FUNDS)
The Star Funds may invest in warrants. A warrant is an instrument that gives the
holder a right to purchase a given number of shares of a particular security at
a specified price until a stated expiration date. Buying a warrant generally can
provide a greater potential for profit or loss than an investment of equivalent
amounts in the underlying common stock. The market value of a warrant does not
necessarily move with the value of the underlying securities. If a holder does
not sell the warrant, it risks the loss of its entire investment if the market
price of the underlying security does not, before the expiration date, exceed
the exercise price of the warrant plus the cost thereof. Investment in warrants
is a speculative activity. Warrants pay no dividends and confer no rights (other
than the right to purchase the underlying securities) with respect to the assets
of the issuer.
[] FOREIGN SECURITIES
Investments in foreign securities present risks not typically associated with
investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations. Because the Funds may purchase securities denominated in foreign
currencies, a change in the value of any such currency against the U.S. dollar
will result in a change in the U.S. dollar value of the Fund's assets and the
Fund's income available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the value of a currency relative to the U.S. dollar
declines after a Fund's income has been earned in that currency, translated into
U.S. dollars and declared as a dividend, but before payment of such dividend,
the Fund could be required to liquidate portfolio securities to pay such
dividend. Similarly, if the value of a currency relative to the U.S. dollar
declines between the time a Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount in such currency of such expenses at the time they
were incurred.
There may be less information publicly available about a foreign corporate or
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 International Equity, Equity Income and Star Funds' 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.
The Funds may invest in foreign 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
depository receipts are arranged without involvement by the issuer of the
underlying equity securities. Less information about the issuer of the
underlying equity securities may be available in the case of unsponsored
depository receipts.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities, and
include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal and
Steel Community and the Inter-American Development Bank.
In determining whether to invest in securities of foreign issuers, the adviser
or subadviser of each Fund will consider the likely effects of foreign taxes on
the net yield available to the Fund and its shareholders. Compliance with
foreign tax law may reduce the Fund's net income available for distribution to
shareholders.
[] FOREIGN CURRENCY
Most foreign securities in the Funds' portfolios will be denominated in foreign
currencies or traded in securities markets in which settlements are made in
foreign currencies. Similarly, any income on such securities is generally paid
to the Fund in foreign currencies. The value of these foreign currencies
relative to the U.S. dollar varies continually, causing changes in the dollar
value of the Fund's portfolio investments (even if the local market price of the
investments is unchanged) and changes in the dollar value of the Fund's income
available for distribution to its shareholders. The effect of changes in the
dollar value of a foreign currency on the dollar value of the Fund's assets and
on the net investment income available for distribution may be favorable or
unfavorable.
The Funds may incur costs in connection with conversions between various
currencies. In addition, those Funds may be required to liquidate portfolio
assets, or may incur increased currency conversion costs, to compensate for a
decline in the dollar value of a foreign currency occurring between the time
when the Fund declares and pays a dividend, or between the time when the Fund
accrues and pays an operating expense in U.S. dollars.
[] PRIVATIZATIONS (STAR FUNDS)
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 Funds, 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.
[] 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 a Fund the
principal on the security before it is due, thus depriving the Fund of a
favorable stream of future interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a fund
that invests in fixed-income securities for any particular period. Fluctuations
in the value of a Fund's investments in fixed-income securities will cause a
Fund's net asset value to increase or decrease.
All non-convertible fixed-income securities purchased by the Funds other than
the International Equity and Balanced Funds will, at the time of purchase,
either be rated investment grade by at least one major rating agency or be
unrated but determined to be of investment grade quality by the Fund's
subadviser.
[] LOWER QUALITY FIXED-INCOME SECURITIES (INTERNATIONAL EQUITY, BALANCED,
EQUITY INCOME AND STAR FUNDS)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's (and
comparable unrated securities) are 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
subadviser's own credit analysis than for a fund investing in higher quality
bonds. The market for lower quality fixed-income securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the market may be less
liquid for lower rated fixed-income securities. This lack of liquidity at
certain times may affect the valuation of these securities and may make the
valuation and sale of these securities more difficult. During the fiscal year
ended December 31, 1996, the International Equity, Balanced, Star Advisers, Star
Worldwide and Equity Income Funds had on average 0%, 2.3%, 0%, 0% and 0% of
their assets, respectively, invested in fixed-income securities rated below
investment grade. Securities of below investment grade quality are considered
high yield, high risk securities and are commonly known as "junk bonds." For
more information, including a detailed description of the ratings assigned by
S&P and Moody's, please refer to the Statement's "Appendix A - Description of
Bond Ratings."
[] ASSET-BACKED SECURITIES (STAR SMALL CAP FUND)
The Star Small Cap Fund may invest up to 25% of its total assets in asset-backed
securities, which represent a direct or indirect participation, or are secured
by and payable from, pools of assets, such as motor vehicle installment sales
contracts, installment loan contracts, leases on various types of real and
personal property and receivables from revolving credit (e.g., credit card)
agreements. Payments or distributions of principal and interest on asset-backed
securities may be supported by credit enhancements, such as various forms of
cash collateral accounts or letters of credit.
[] ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES AND "STRIPS"
(EQUITY INCOME, STAR ADVISERS AND STAR WORLDWIDE FUNDS)
The Equity Income, Star Advisers and Star Worldwide Funds may invest in zero
coupon securities and in "strips." Zero coupon bonds do not make regular
interest payments; rather, they are sold at a discount from face value.
Principal and accrued discount (representing interest accrued but not paid) are
paid at maturity. "Strips" are debt securities that are stripped of their
interest coupon after the securities are issued, but otherwise are comparable to
zero coupon bonds. The Star Advisers Fund may also invest in pay-in-kind and
step coupon securities. Step coupon bonds trade at a discount from their face
value and pay coupon interest. The coupon rate is low for an initial period and
then increases to a higher coupon rate thereafter. Pay-in-kind bonds normally
give the issuer an option to pay cash at a coupon payment date or give the
holder of the security a similar bond with the same coupon rate and a face value
equal to the amount of the coupon payment that would have been made. The market
values of "strips" and zero coupon, pay-in-kind and step coupon securities
generally fluctuate in response to changes in interest rates to a greater degree
than do conventional interest-paying securities of comparable term and quality.
Under many market conditions, investments in such securities may be illiquid,
making it difficult for the Fund to dispose of them or determine their current
value.
[] REPURCHASE AGREEMENTS
Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will repurchase
the securities at a higher price at a later date. If the seller fails to
repurchase the securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the Fund to the
seller, collateralized by the securities that are the subject of the agreement.
Repurchase agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund may be subject
to various delays and risks of loss if the seller fails to meet its obligation
to repurchase. The staff of the SEC is currently of the view that repurchase
agreements maturing in more than 7 days are illiquid securities.
[] INVESTMENTS IN OTHER INVESTMENT COMPANIES (INTERNATIONAL EQUITY, STAR
WORLDWIDE AND STAR SMALL CAP FUNDS)
The International Equity, Star Worldwide and Star Small Cap Funds may each
invest up to 10% of their 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 Fund's subadviser desires to make only a relatively small
investment in a particular country, investing through another fund that holds a
diversified portfolio in that country may be more effective than investing
directly in issuers in that country. As an investor in another investment
company, the Fund will indirectly bear its share of the expenses of that
investment company. These expenses are in 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 each Fund seeks long-term growth or return, or in the case of the
Equity Income Fund, current income and capital growth, each 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 adviser's or subadviser's
investment discretion in managing a Fund's assets.
Recent portfolio turnover rates of each Fund other than the Star Small Cap Fund
are set forth above under "Financial Highlights."
Although is not possible to predict the Star Small Cap Fund's portfolio turnover
rate with certainty, the Fund's four subadvisers expect their respective
segments not to exceed an annual turnover rate of 200%.
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS
(INTERNATIONAL EQUITY, GROWTH OPPORTUNITIES AND STAR FUNDS)
The International Equity and Star Funds may buy, sell or write options on
securities, securities indexes, currencies or futures contracts. These Funds may
buy and sell futures contracts on securities, securities indexes or currencies.
These Funds may also enter into swap contracts. These Funds may engage in these
transactions either for the purpose of enhancing investment return, or to hedge
against changes in the value of other assets that the Fund owns or intends to
acquire. These Funds may also conduct foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market. These Funds may enter into interest rate, currency and
securities index swaps. These Funds will enter into these transactions primarily
to seek to preserve a return or spread on a particular investment or portion of
its portfolio, to protect against currency fluctuations, as a duration
management technique or to protect against an increase in the price of
securities the Fund anticipates purchasing at a later date.
The Growth Opportunities Fund may buy and sell futures contracts on a variety of
stock indexes. The Fund would buy such a futures contract only when the Fund is
experiencing significant cash inflows, and then only for the purpose of
maintaining the Fund's exposure to the equity markets during the time before the
Fund has fully invested incoming cash in equity securities directly. Similarly,
the Fund would sell stock index futures only during periods of cash outflows
from the Fund, for the purpose of reducing equity market exposure before
holdings of stock are liquidated. The Fund will not use futures contracts for
speculative purposes or to hedge against changes in the value of the Fund's
securities portfolios.
Options, futures and swap contracts fall into the broad category of financial
instruments known as "derivatives" and involve special risks. Use of options,
futures or swaps for other than hedging purposes may be 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 security or other asset (such as
an amount of currency or a futures contract) from, and a put option the right to
sell a security or other asset to, the option writer at a specified price, on or
before a specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or other asset
if the option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from writing an option,
which may increase its return if the option expires or is closed out at a
profit. If a Fund as the writer of an option is unable to close out an unexpired
option, it must continue to hold the underlying security or other asset until
the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or receipt) 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 a Fund exceeds (or is less
than) the price of the offsetting purchase, the Fund will realize a gain (or
loss). A Fund may not purchase or sell futures contracts or purchase related
options if immediately thereafter the sum of the amount of deposits for initial
margin or premiums on the existing futures and related options positions would
exceed 5% of the market value of the Fund's net assets. Transactions in futures
and related options involve the risks of (1) imperfect correlation between the
price movement of the contracts and the underlying securities, (2) significant
price movement in one but not the other market because of different hours, (3)
the possible absence of a liquid secondary market at any point in time, and the
risk that if the subadviser's prediction on interest rates or other economic
factors is inaccurate, the Fund may be worse off than if it had not hedged.
Futures transactions involve potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index swaps. The
Funds will enter into these transactions primarily to seek to preserve a return
or spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations or to protect against an increase in the price of
securities a Fund anticipates purchasing at a later date. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the relative values of the specified currencies. An
index swap is an agreement to make or receive payments based on the different
returns that would be achieved if a notional amount were invested in a specified
basket of securities (such as the Standard & Poor's Composite Index of 500
Stocks [the "S&P 500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held by a Fund and a
Fund's positions in swap contracts may fluctuate up or down based on a variety
of market and economic factors. In some cases, the fluctuations may offset (or
be offset by) changes in the value of securities held in the Fund's portfolio.
All transactions in options, futures or swaps involve costs and the possible
risk of loss to the Fund of all or a significant part of the value of its
investment. In some cases, the risk of loss may exceed the amount of the Fund's
investment. The Fund will be required, however, to set aside with its custodian
bank certain assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on the
subadvisers' ability to forecast stock market, currency or other financial
market movements correctly. A Fund's ability to hedge against adverse changes in
the value of securities held in its portfolio through options, futures and swap
transactions also depends on the degree of correlation between the changes in
the value of futures, options or swap positions and changes in the values of the
portfolio securities. The successful use of futures and 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 of 1986, as amended, (the "Code"), and certain regulatory
requirements may limit a Fund's ability to engage in futures, options and swap
transactions.
The options and futures markets of foreign countries are small compared to those
of the United States and consequently are characterized in most cases by less
liquidity than are the U.S. markets. In addition, foreign markets may be subject
to less detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Funds in options and futures in foreign
markets are subject to many of the same risks as are the Fund's other foreign
investments. See "Foreign Securities" above. For further information, see
"Miscellaneous Investment Practices -- Futures, Options and Swap Contracts" in
Part II of the Statement.
[] CURRENCY HEDGING TRANSACTIONS (INTERNATIONAL EQUITY AND STAR FUNDS)
The International Equity and Star Funds may, at the discretion of their
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.
[] SECURITIES LENDING (STAR FUNDS)
The Star Funds may lend their 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 1/3% 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.
[] STRUCTURED NOTES (STAR WORLDWIDE AND STAR SMALL CAP FUNDS)
The Star Worldwide and Star Small Cap Funds 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 Funds are not permitted to invest more than 15% of their 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.
[] SHORT SALES (STAR SMALL CAP FUND)
The Star Small Cap Fund may engage in short sales. A short sale is a transaction
in which the Fund sells securities it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the Fund
makes a short sale, the proceeds it receives from the sale will be held by the
broker on behalf of the Fund until the Fund replaces the borrowed securities. To
deliver the securities to the buyer, the Fund will need to arrange through the
broker to borrow the securities and, in doing so, the Fund will be obligated to
replace the securities borrowed at their market value at the time of
replacement, whatever that price may be. The Fund may have to pay a premium to
borrow the securities and must pay any dividends or interest payable until the
securities are replaced. For further information, see "Miscellaneous Investment
Practices -- Short Sales" in Part II of the Statement.
All short sales must be fully collaterized, and no segment of the Star Small Cap
Fund will sell securities short if, immediately after and as a result of the
sale, the value of all securities sold short by that segment would exceed 25% of
that segment's total assets. Each segment of the Fund limits short sales of any
one issuer's securities to 2% of that segment's total assets and to 2% of any
one class of the issuer's securities.
[] SHORT SALES AGAINST THE BOX (STAR FUNDS)
A short sale is a transaction in which a party borrows a security and then sells
the borrowed security to another party. The Star Worldwide 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 would 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 Star Worldwide 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.
[] WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS (INTERNATIONAL EQUITY,
EQUITY INCOME AND STAR FUNDS)
The International Equity, Equity Income and Star Funds may purchase securities
on a "when-issued" basis and "delayed delivery" basis. Additionally, the Star
Small Cap Fund may purchase and sell securities on a "forward commitment" or
"delayed delivery" basis. In these transactions, the price is fixed at the time
the commitment is made, but delivery and payment for the securities
("settlement") takes place at a later date. When-issued securities and forward
commitments may be sold prior to settlement date, but the Funds normally will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. No income
accrues on securities that have been purchased pursuant to a forward commitment
or on a when-issued basis prior to delivery to the Fund. There is a risk that
the securities may not be delivered and the Fund may incur a loss. If the Fund
disposes of the right to acquire a when-issued security prior to acquisition or
disposes of its right to deliver or receive against a forward commitment, the
Fund may incur a gain or loss.
In connection with transactions on a when-issued or forward commitment basis,
the Fund will set aside with its custodian certain assets to provide for
satisfaction of its obligations under when-issued or forward commitments
transactions.
[] MISCELLANEOUS
No Fund will invest more than 15% of its net assets in "illiquid securities,"
that is, securities which are not readily resalable, which may include
securities whose disposition is restricted by federal securities laws.
The Balanced, International Equity, Equity Income and Star Funds may purchase
Rule 144A securities. These are privately offered securities that can be resold
only to certain qualified institutional buyers. The Star Funds may also purchase
commercial paper issued under Section 4(2) of the Securities Act of 1933. Rule
144A securities and Section 4(2) commercial paper are treated as illiquid,
unless a subadviser has determined, under guidelines established by the Trusts'
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 a Fund may be unable to sell such a security at the desired time.
Also, a Fund may incur expenses, losses or delays in the process of registering
restricted securities prior to resale.
To the extent that the Star Funds may invest in derivative securities for other
than bona fide hedging purposes, such investments may be speculative in nature
and may involve additional risks.
The Star Advisers Fund is a "non-diversified" fund and as such is not required
to meet any diversification requirements under the Investment Company Act of
1940 (the "1940 Act"), although the Fund must meet certain diversification
standards to qualify as a "regulated investment company" under the Code. Since
the Fund may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers, the Fund may be more susceptible
than a more widely-diversified fund to any single economic, political or
regulatory occurrence.
[] SPECIAL CONSIDERATIONS REGARDING THE MULTI-ADVISER APPROACH (STAR FUNDS)
NEFM, the manager of the Star Funds, oversees the portfolio management services
provided to each Fund by each of its four subadvisers. Subject to the review of
New England Funds Trust I's trustees, NEFM monitors each subadviser to assure
that the subadviser is managing its segment of the Fund consistently with the
Fund's investment objective and restrictions and applicable laws and guidelines,
including, but not limited to, compliance with the diversification requirements
set forth in the 1940 Act and Subchapter M of the Code. In addition, NEFM also
provides each Fund with administrative services which include, among other
things, day-to-day administration of matters related to the Fund's existence,
maintenance of its records, preparation of reports and assistance in the
preparation of the Fund's registration statement under federal and state laws.
NEFM does not, however, determine what investments will be purchased or sold for
any segment of the Fund. Because each subadviser will be managing its segment of
a Fund independently from the other subadvisers, the same security may be held
in two different segments of a Fund, or may be acquired for one segment of a
Fund 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 Fund. Because each subadviser directs the
trading for its own segment of the Fund, 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 Fund. On a daily basis, capital activity will be allocated equally by
NEFM among the segments of the Funds. However, NEFM may, subject to review of
New England Funds Trust I's Board of Trustees, allocate new investment capital
differently among any of the subadvisers. This action may be necessary, if, for
example, a subadviser determines that it desires no additional investment
capital. 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. For example, as of December 31, 1996, the percentages of the
Fund's net assets held in the segments of the Fund managed by Berger, Founders,
Janus Capital and Loomis Sayles were 24%, 26%, 24% and 26%, respectively. As of
December 31, 1996, the percentages of the Star Worldwide Fund's net assets held
in the segments of the Fund managed by Harris Associates (international
segment), Harris Associates (domestic segment), Montgomery, Founders and Janus
Capital were 20%, 20%, 19%, 20% and 21%, respectively. Although it reserves the
right to do so, subject to the review of the New England Funds Trust I's
trustees, NEFM does not intend to reallocate assets of any Fund among the
segments to reduce these differences in size.
NEFM may terminate its agreement with a segment's subadviser without shareholder
approval. In such case, NEFM may 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.
<PAGE>
FUND MANAGEMENT
NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves as the adviser
to each Fund except the Growth Fund (for which CGM serves as adviser). NEFM
oversees, evaluates and monitors the subadvisory services provided to each Fund
except the Growth Fund and furnishes general business management and
administration to each Fund. NEFM does not determine what investments will be
purchased by the Funds.
ALL FUNDS (EXCEPT THE STAR FUNDS)
The subadviser of the International Equity Fund, the Capital Growth Fund, the
Balanced Fund, the Equity Income Fund and the Value Fund is Loomis Sayles.
Founded in 1926, Loomis Sayles, One Financial Center, Boston, Massachusetts
02111, is one of the country's oldest and largest investment counsel firms. Paul
Drexler, Vice President of Loomis Sayles, has served as the portfolio manager of
the International Equity Fund since February 14, 1997. Scott S. Pape, Vice
President of Loomis Sayles, has served as co-portfolio manager of the Capital
Growth Fund since its inception in 1992. Since June 30, 1996, Bruce A. Ebel,
Vice President of Loomis Sayles, has also served as co-portfolio manager of the
Capital Growth Fund. Carol C. McMurtrie, Vice President and Managing Partner of
Loomis Sayles, and Tricia H. Mills and Douglas D. Ramos, Vice Presidents of
Loomis Sayles, have served as portfolio managers of the Value Fund since March
1993. Douglas D. Ramos and Meri Anne Beck have served as portfolio managers of
the Balanced Fund since 1990; Ms. Beck is also a Vice President of Loomis
Sayles. Mauricio F. Cevallos, Vice President and Manager of Loomis Sayles, Peter
Ramsden, Vice President of Loomis Sayles, and Thomas Kolefas, Vice President of
Loomis Sayles, act as portfolio managers of the Equity Income Fund. Mr. Cevallos
and Mr. Ramsden have served as portfolio managers of the Fund since its
inception in November 1995 and Mr. Kolefas has been co-portfolio manager of the
Fund since May 1996. All of the foregoing persons have been employed by Loomis
Sayles for at least five years, except Mr. Drexler, Mr. Ebel and Mr. Kolefas
who, prior to the time they joined Loomis Sayles, were Deputy Manager of Brown
Brothers Harriman & Co., Senior Vice President of Kemper Asset Management and
Portfolio Manager at Mackay Shields Financial Corporation, respectively.
The adviser of the Growth Fund is CGM, One International Place, Boston,
Massachusetts 02110. CGM, organized in 1989, serves as investment adviser to
seven mutual funds and to other institutional investors. The general partner of
CGM is a corporation controlled equally by Robert L. Kemp and G. Kenneth
Heebner. Mr. Heebner, Senior Portfolio Manager of CGM, has served as portfolio
manager of the Growth Fund since 1976. NEIC owns a majority limited partnership
interest in CGM. In 1996, the Growth Fund paid 0.68% of its average net assets
in advisory fees to CGM. The Distributor has agreed to provide certain
administrative services to the Growth Fund at CGM's expense.
The subadviser of the Growth Opportunities Fund is Westpeak, 1011 Walnut Street,
Boulder, Colorado 80302. The portfolio manager of the Growth Opportunities Fund
is Gerald H. Scriver, President and Chief Executive Officer of Westpeak. Mr.
Scriver has been with Westpeak since its inception in 1991 and has been
portfolio manager of the Growth Opportunities Fund since May 1995.
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table:
MANAGEMENT FEE PAID BY FUND TO NEFM
FUND (AS A PERCENTAGE OF AVERAGE DAILY NET)
ASSETS OF THE FUND)
- ------------------------------ ----------------------------------------------
Balanced Fund 0.75% of the first $200 million
Value Fund 0.70% of the next $300 million
Capital Growth Fund 0.65% of amounts in excess of $500 million
Growth Opportunities Fund 0.70% of the first $200 million
Equity Income Fund 0.65% of the next $300 million
0.60% of amount in excess of $500 million
International Equity Fund 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of $500 million
The management fee rates payable by the Balanced, Capital Growth, International
Equity and Value Funds are higher than those paid by most other mutual funds but
are comparable to fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds.
Subject to the supervision of NEFM, each subadviser manages the portfolio(s) of
each Fund to which it serves as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund, and employs
professional advisers and securities analysts who provide research services to
the Fund. The Funds pays no direct fees to their subadvisers.
NEFM pays the subadvisers of the following Funds 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>
Balanced Fund Loomis Sayles 0.535% of the first $200 million
Value Fund 0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Loomis Sayles 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Growth Opportunities Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200 million
Equity Income Fund Loomis Sayles 0.400% of the first $200 million
0.325% of the next $300 million
0.275% of amounts in excess of $500 million
</TABLE>
Prior to January 2, 1996, the current subadvisers to the Balanced, Capital
Growth and Value Funds served as those Funds' respective advisers. From December
29, 1995 to February 14, 1997, Draycott Partners, Ltd. ("Draycott") served as
subadviser to the International Equity Fund. Prior to December 29, 1995,
Draycott served as the International Equity Fund's adviser.
Loomis Sayles, as subadviser to the International Equity Fund, has voluntarily
agreed to waive the entire subadvisory fee payable to Loomis Sayles by NEFM for
this Fund through February 14, 1998. This waiver by Loomis Sayles will not
reduce the management fee payable by the Fund to NEFM. In addition, NEFM and the
Distributor have voluntarily agreed to reduce their fees and to bear certain
operating expenses charged to the International Equity Fund to the extent that
the total of such fees and expenses would exceed 1.15% annually of the average
daily net assets of the Fund's Class Y shares. NEFM and the Distributor may
terminate these voluntary limitations at any time. In such event, the Fund would
supplement its prospectus.
Loomis Sayles has voluntarily agreed, until further notice to the Equity Income
Fund, to waive its entire subadvisory fee payable to Loomis Sayles by NEFM for
this Fund. This waiver by Loomis Sayles does not reduce the Fund's expenses. In
addition, under an expense deferral arrangement, which NEFM may terminate at any
time, NEFM has agreed to defer its management fee for the Equity Income Fund and
to bear certain expenses associated with operating the Fund to the extent
necessary to limit the Fund's expenses to the annual rate of 1.25% of average
daily net assets for Class Y 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 1.25% of average daily net assets for
Class Y 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
the fee was deferred.
STAR FUNDS
Below is a brief description of the subadvisers of the Star Funds.
BERGER, 210 University Boulevard, Suite 900, Denver, Colorado 80206, serves as
an investment adviser to mutual funds, pension and profit sharing plans and
other institutional and private investors. Patrick S. Adams, Senior Vice
President of Berger, has had day-to-day responsibility for the management of the
segment of the Star Advisers Fund managed by Berger since February 3, 1997. Mr.
Adams previously served as Senior Vice President with Zurich Kemper Investments,
Inc. from June 1996 to January 1997, where he was Portfolio Manager of the
Kemper Growth Fund. Mr. Adams served as Portfolio Manager with Founders from
March 1993 to May 1996. For three years prior to that, Mr. Adams served First of
America Investment Corp. in various positions, including that of Senior
Portfolio Manager/Senior Analyst, and manager of the Parkstone Equity Fund.
Kansas City Southern Industries, Inc. ("KCSI"), a publicly traded holding
company, owns approximately 87% of the outstanding shares of Berger.
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, portfolio traders and research analysts. Team
members share responsibility for providing ideas, information, knowledge and
expertise in the management of Founders' segments of the Star Advisers and Star
Worldwide Funds. Daily decisions on portfolio selection rest with the lead
portfolio manager, who, through participation in the team process, utilizes the
input, research and advice of other team members in making purchase and sale
determinations. Edward F. Keely has been lead portfolio manager for the segment
of the Star Advisers Fund that is managed by Founders since the Fund's inception
in 1994. Mr. Keely is a Vice President of Investments at Founders, where he has
been employed since 1989. Michael W. Gerding has been lead portfolio manager for
the segment of the Star Worldwide 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, Denver, Colorado 80206 has managed mutual
funds since 1970 and also advises individual, corporate, charitable and
retirement accounts. Warren B. Lammert has, since the Star Advisers Fund's
inception in 1994, had day-to-day management responsibility for those assets of
the Star Advisers Fund allocated to Janus Capital, where he serves as a
portfolio manager and Vice President of Investments. Helen Young Hayes has had
day-to-day management responsibility for those assets of the Star Worldwide Fund
allocated to Janus Capital since the Fund's inception. Ms. Hayes is a portfolio
manager and Vice President of Janus Capital, where she has been employed since
1987, and has managed the Janus Capital segment of the Star Worldwide Fund since
the Fund's inception. Mr. Chang is an assistant portfolio manager of Janus
Capital, where he has been employed since 1993 and became co-portfolio manager
of the Star Worldwide Fund in May 1997. KCSI owns approximately 83% of the
outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately 12% of Janus
Capital's voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's board of directors.
LOOMIS SAYLES, Jeffrey C. Petherick and Mary Champagne, Vice Presidents of
Loomis Sayles, have day-to-day management responsibility for the segment of the
Star Advisers Fund that is allocated to Loomis Sayles. Mr. Petherick, who joined
Loomis Sayles in 1990, has co-managed the Loomis Sayles segment of the Fund
since the Fund's inception. Ms. Champagne has co-managed the Loomis Sayles
segment of the Star Advisers Fund since July 1995. Prior to joining Loomis
Sayles in 1993, Ms. Champagne served as a portfolio manager at NBD Bank for 10
years. Messrs. Christopher Ely, Phil Fine and David Smith have had day-to-day
management responsibilities for the segment of the Star Small Cap Fund managed
by Loomis Sayles since the Fund's inception, with Mr. Ely as the lead manager.
Messrs. Ely, Fine and Smith joined Loomis Sayles in July 1996. Mr. Ely is a Vice
President of Loomis Sayles. Prior to July 1996, he was Senior Vice President and
Portfolio Manager with Keystone Investment Management Co., Inc. Messrs. Smith
and Fine are Vice Presidents of Loomis Sayles. Prior to July 1996, Mr. Smith and
Mr. Fine were each a Vice President and Portfolio Manager at Keystone Investment
Management Co., Inc.
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 Star Worldwide 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 Star Worldwide 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. Steven Reid, is the
portfolio manager for the segment of the Star Small Cap Fund managed by Harris
Associates. Mr. Reid joined Harris Associates as an accountant in 1980 and has
been a Partner of Harris Associates since 1992. He is also Portfolio Manager of
the Oakmark Small Cap Fund. Messrs. Sanborn, Herro, Welsh and Reid have been
managing their respective segments since the Funds' respective inceptions.
MONTGOMERY, 101 California 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 Group Holdings, LLC.] The portfolio managers for the
segment of the Star Worldwide 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. Ms.
Jimenez and Mr. Sudweeks joined Montgomery in 1991, and have been the portfolio
managers for this segment since the Fund's inception. The portfolio manager for
the segment of the Star Small Cap Fund managed by Montgomery is Andrew Pratt.
Mr. Pratt joined Montgomery in 1993. He is currently a member of Montgomery's
growth equity team that manages the Montgomery Growth Fund, the Montgomery Micro
Cap Fund and the Montgomery Small Cap Opportunities Fund. From 1988 until he
joined Montgomery, he was an equity analyst at Hewlett-Packard Company, where he
managed a portfolio of small capitalization technology companies, and researched
private placement and venture capital investments.
ROBERTSON STEPHENS, 555 California Street, San Francisco, California 94111, was
formed in 1993 and provides advisory services to both private and public
investment funds. The sole general partner of Robertson Stephens is Robertson
Stephens & Company, Inc. The portfolio manager for the segment of the Star Small
Cap Fund managed by Robertson Stephens is John Wallace, Managing Director and
Portfolio Manager of Robertson Stephens, who has managed such segment since the
Fund's inception. Mr. Wallace joined Robertson Stephens in 1995 and has been
responsible for managing Robertson Stephens' Growth & Income Fund since its
inception in July 1995 and The Robertson Stephens' Diversified Growth Fund since
its inception in August 1996. Prior to joining Robertson Stephens, he was Vice
President of Oppenheimer Funds, Inc. where he was portfolio manager of the
Oppenheimer Main Street Income and Growth Fund.
Each Star Fund pays NEFM a management fee at the annual rate of 1.05% of the
average daily net assets of the Fund.
The management fee rates payable by the Star Funds are higher than those paid by
most other mutual funds but are comparable to fee rates paid by some mutual
funds with similar investment objectives and policies to these Funds. This
difference in the fee rate is partially due to the multi-adviser format.
Subject to the supervision of NEFM, each subadviser manages its segment(s) of
the portfolio(s) of each Star Fund to which it serves as subadviser in
accordance with the Fund's investment objective and policies, makes investment
decisions for the segment(s), places orders to purchase and sell securities for
the segment(s), and employs professional advisers and securities analysts who
provide research services to the segment(s). The Star Funds pay no direct fees
to their subadvisers.
NEFM pays each subadviser of the Star Advisers Fund a subadvisory fee at the
annual rate of 0.55% of the first $50 million of the average daily net assets of
the segment of the Fund that the subadviser manages and 0.50% of such assets in
excess of $50 million. For the Star Worldwide Fund, NEFM pays each of Harris
Associates, Founders and Janus Capital a subadvisory 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, and NEFM pays
Montgomery a subadvisory 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. For the Star Small Cap Fund, NEFM pays
Robertson Stephens and Loomis Sayles a subadvisory fee at an annual rate of
0.55% of the first $50 million of the average daily assets of the segment of the
Fund that each such subadviser manages, and 0.50% of such assets in excess of
$50 million. NEFM pays Montgomery a subadvisory fee at an annual rate of 0.65%
of the first $50 million of the average daily net assets of the segment that
Montgomery manages and 0.50% of such assets in excess of $50 million, and NEFM
pays Harris Associates a subadvisory fee at the annual rate of 0.70% of the
average daily net assets of the segment that Harris Associates manages. The
Distributor in its discretion may, but is not obligated to, pay an incentive
bonus to the subadviser of the Star Advisers and Star Worldwide Funds whose
segment of the Fund's portfolio has the highest relative total return for the
prior year versus that segment's investment peer group as tracked by a major
independent mutual fund reporting service.
Prior to January 2, 1996, New England Investment Companies, L.P. ("NEIC") served
as adviser to the Star Advisers Fund.
GENERAL
The general partners of each of NEFM, the Distributor, Loomis Sayles, Harris and
Westpeak are special purpose corporations. These corporations are indirect
wholly-owned subsidiaries of NEIC, whose sole general partner, New England
Investment Companies, Inc., is an indirect, wholly-owned subsidiary of
Metropolitan Life Insurance Company ("MetLife").
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers and subadvisers may consider sales of
shares of the Funds and other mutual funds they manage as a factor in the
selection of broker-dealers to effect portfolio transactions for the Funds.
Subject to procedures adopted by the trustees of the Trusts, Fund brokerage
transactions may be executed by brokers that are affiliated with NEIC, NEFM, CGM
or any subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM and, in the case of the Growth Fund, CGM provide executive and other
personnel for the management of the Trusts. Each Trust's Board of Trustees
supervises the affairs of that Trust as conducted by the Funds' advisers and
subadvisers.
In addition to the management fee paid to its adviser, each Fund pays all
expenses not borne by its adviser, subadviser(s) or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees and
expenses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and the
compensation of trustees who are not directors, officers or employees of New
England Life Insurance Company ("NELICO") or MetLife or their affiliates, other
than affiliated registered investment companies. Certain expenses may be
allocated differently between each Fund's Class A, Class B and Class C shares,
on the one hand, and its Class Y shares, on the other hand. (See "Additional
Facts about the Funds" below.)
The Funds (excepting the Growth Fund) have applied for an exemptive order from
the SEC to permit NEFM, subject to certain conditions, to enter into subadvisory
agreements with subadvisers other than the existing subadvisers of the Funds
when approved by the relevant Trust's Board of Trustees, without obtaining
shareholder approval. The exemptive request also seeks to permit, without
shareholder approval, the terms of an existing subadvisory agreement to be
changed or the employment of an existing subadviser to be continued after events
that would otherwise cause an automatic termination of a subadvisory agreement,
when such changes or continuation are approved by the relevant Trust's Board of
Trustees. Shareholders would be notified of any subadviser changes.
<PAGE>
BUYING FUND SHARES
MINIMUM INVESTMENT
Class Y shares of the Funds may be purchased by other mutual funds, endowments,
foundations, bank trust departments or trust companies. The minimum initial
investment is $1 million for these entities, and $10,000 is the minimum for each
subsequent investment. Class Y shares may also be purchased by plan sponsors of
401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that have total
investment assets of at least $10 million, and by NELICO or MetLife and any
other insurance company affiliated with NELICO or MetLife or any of their
successor entities ("Insurance Company Accounts"). Plan sponsors' investment
assets in multiple Retirement Plans can be aggregated for purposes of meeting
this minimum. Class Y shares may also be purchased by any separate account of
NELICO or MetLife, any other insurance company affiliated with NELICO or MetLife
("Separate Accounts") and, in the case of the International Equity Fund, by bank
common trusts, bank collective trust funds and dedicated corporate or trusted
funds, such as nuclear decommissioning trusts and hospital depreciation funds
("Special Accounts"). Class Y shares may also be purchased by wrap fee programs
of certain broker-dealers as to which no service or marketing fees are paid to
broker-dealers by the Fund, NEFM or the Distributor ("Wrap Fee Programs"). There
is no minimum initial or subsequent investment amount for Retirement Plans,
Separate Accounts, Special Accounts, Insurance Company Accounts or Wrap Fee
Programs. Investments in the Funds may also be made by certain individual
retirement accounts if the amounts invested represent rollover distributions
from investments by any of the Retirement Plans of amounts invested in the
Funds. The Distributor serves as the principal underwriter of the Fund's shares.
Shares may be purchased on any day when the New York Stock Exchange (the
"Exchange") is open for business (a "business day"). Investors should contact
New England Funds before attempting to place an order for Fund shares. The Funds
and the Distributor reserve the right at any time to reject a purchase order.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through wrap fee programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the same Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from that
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Special Accounts,
Insurance Company Accounts, Wrap Fee Programs or Service Accounts.
WAYS TO BUY FUND SHARES
A shareholder may purchase Class Y shares for cash on any business day by the
two methods described below:
[] BY WIRE TRANSFER:
Prior to an initial investment, obtain an account number and wire transfer
instructions by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028, DDA
#99011538, Credit [Fund Name] Class Y shares, Shareholder Name, and Shareholder
Account Number.
[] BY MAIL:
For an initial investment, simply complete the attached application and return
it with a check payable to New England Funds and mailed to New England Funds, P
O. Box 8551, Boston, MA 02266-8551. All purchases made by check should be in
U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not be accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
Class Y shares of each Fund other than the Star Funds may also be purchased by
exchanging securities on deposit with a custodian acceptable to the subadviser
of the Fund, or by a combination of such securities and cash. Purchase of shares
of a Fund in exchange for securities is subject in each case to the
determination by the Fund's subadviser that the securities to be exchanged are
acceptable for purchase by the Fund. Securities accepted by the Fund's
subadviser in exchange for Fund shares will be valued in the same manner as the
Fund's assets (generally the last quoted sales price), as described below under
"Fund Details -- How Fund Share Price Is Determined," as of the time of the
Fund's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Fund and must be delivered to the Fund upon receipt by the investor from the
issuer. A gain or loss for federal income tax purposes would be realized upon
the exchange by an investor that is subject to federal income taxation,
depending upon the investor's basis in the securities tendered. A shareholder
who wishes to purchase shares by exchanging securities should obtain
instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in exchange
for shares of a Fund it manages unless (1) the subadviser, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933, as amended, or otherwise; (3) the securities are
eligible to be acquired under the Fund's investment policies and restrictions;
and (4) the securities have a value which is readily ascertainable (not
established by evaluation procedures alone) as evidenced by a listing on the New
York Stock Exchange, the American Stock Exchange, NASDAQ or the principal
securities exchange of countries in which the Fund may invest. No investor
owning 5% or more of the Fund's shares may purchase additional Fund shares by
exchange of securities (other than shares of other New England Funds).
GENERAL
The purchase price of shares of each Fund is the net asset value next determined
after a purchase order is received in good order by New England Funds. For
purposes of calculating the purchase price of Fund shares, a purchase order is
considered received by the Fund on the day that it is "in good order" unless it
is rejected by the Fund. For a purchase order to be in "good order" on a
particular day, in the case of a purchase of Fund shares in exchange for
securities, the investor's securities must be placed on deposit at a depository
acceptable to the Fund's subadviser by 4:00 p.m. (Eastern time) and, in the case
of a cash investment, Federal funds must be wired to the Fund between 9:00 a.m.
and 4:00 p.m. (Eastern time) or a check for the purchase price of the shares,
accompanied by a completed application, must have been received by New England
Funds before 4:00 p.m. (Eastern time) on that day. Orders received after 4:00
p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to three
decimal places. The shareholder will receive a statement of Fund shares owned
following each transaction. Investors will not receive certificates representing
Class Y shares. The Funds and the Distributor reserve the right at any time to
reject a purchase order.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<PAGE>
OWNING FUND SHARES
EXCHANGING AMONG NEW ENGLAND FUNDS
You may exchange Class Y shares of the Funds or any other series of the Trusts
for Class Y shares of any other series of the Trusts which offers Class Y shares
or for Class A shares 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"). Agents, general agents, directors and senior officers of
NELICO and its insurance company subsidiaries may, at the discretion of NELICO,
elect to exchange Class Y shares of any series of the Trusts in a NELICO
Deferred Compensation Plan Account for Class A shares of any other series of the
Trusts which do not offer Class Y shares. Class A shares of any series of the
Trusts in a NELICO Deferred Compensation Plan Account may also be exchanged for
Class Y shares of any series of the Trusts. To obtain a prospectus and more
information about Class A shares, please call the Distributor toll free at
1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business or write to New
England Funds. Exchange requests after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be processed at the
net asset value determined at the close of regular trading on the next day that
the Exchange is open. All exchanges are subject to the eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read 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 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 telephone
instructions, will provide shareholders with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or loss.
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 Capital Growth Fund, the Growth Fund, the International Equity Fund, the
Value Fund, the Star Advisers Fund, the Star Worldwide Fund and the Star Small
Cap Fund pay dividends annually, the Growth Opportunities Fund pays dividends
semi-annually and the Balanced Fund and the Equity Income Fund pay dividends
quarterly. Each Fund pays as dividends substantially all net investment income
(other than long-term capital gains) each year and distributes annually all net
realized long- and short-term capital gains (after applying any available
capital loss carryovers). The trustees of the Trusts may adopt a different
schedule as long as payments are made at least annually. If you intend to
purchase shares of a Fund shortly before it declares a dividend or capital gain
distribution, you should be aware that a portion of the purchase price may be
returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional Class Y shares
of the Fund or in Class Y shares of other series of the Trusts, to receive
distributions from dividends and interest in cash while reinvesting
distributions from capital gains in additional Class Y shares of the Fund or of
other series of the Trusts, or to receive all distributions in cash. Income
distributions and capital gains distributions will be reinvested in Class Y
shares of the respective Fund at net asset value 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.
<PAGE>
DIVIDEND DIVERSIFICATION PROGRAM
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in Class Y
shares 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 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 and carefully read a copy of
that fund's prospectus.
<PAGE>
SELLING FUND SHARES
WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[] BY TELEPHONE:
You may redeem (sell) shares by telephone for cash by the two 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) on a day when the
Funds are open for business. The proceeds 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) on a day when the
Funds are open for business and requesting that a check for the proceeds 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 your address of record on the business
day after your redemption request is received.
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 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 or wired to your bank account. All owners of the shares must sign the
request in the exact names in which the shares are registered (this appears on
your confirmation statement) and indicate any special capacity in which they are
signing (such as trustee, custodian or under power of attorney or on behalf of a
partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
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.
GENERAL. Redemption requests will be effected at the net asset value next
determined after the redemption request is received in proper form by State
Street Bank and Trust Company ("State Street Bank"). Redemption proceeds 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 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 has 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 the Distributor for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven 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 Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If a Fund's adviser or subadviser determines, in its or their sole discretion,
that it would be detrimental to the best interests of the remaining shareholders
of the Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of readily
marketable securities held by the Fund in lieu of cash. Securities used to
redeem Fund shares in kind will be valued in accordance with the Funds'
procedures for valuation described under "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by
NEFM and the Fund's subadviser(s) in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions. The Funds' right to pay
redemptions in kind is limited by an election made by the Funds under Rule 18f-1
under the 1940 Act. See "Redemptions" in Part II of the Statement.
<PAGE>
FUND DETAILS
HOW FUND SHARE PRICE IS DETERMINED
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. [Eastern time]) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity 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 except equity securities traded on the London
Stock Exchange ("British Equities"), 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 determined by or under the direction of each Trust's Board of Trustees
as of the close of regular trading on the Exchange. British Equities will be
valued at the mean between the last bid and last asked prices on the London
Stock Exchange. An option that is written by a Fund generally will be valued at
the last sale price or, in the absence of the last sale price, the last offer
price. A futures contract will be valued at 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 each 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 Fund's
portfolio (or, in the case of the Star Funds, each segment of the Fund's
portfolio) are valued at their fair market value as determined in good faith by
the adviser or subadviser of that Fund (or a pricing service selected by the
adviser or subadviser) under the supervision of each 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 the net asset value computation, or, if no such rate is
quoted at such time, at such other appropriate rate as may be determined by or
under the direction of each Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (determined as explained above) plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number of shares of
such class outstanding. The public offering price of each Fund's Class Y 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 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
Each Fund intends to meet all requirements of the Code necessary to qualify as a
regulated investment company and thus does not expect to pay any federal income
tax on investment income and capital gains distributed to shareholders in cash
or in additional shares. Unless you are a tax-exempt entity, your distributions
derived from a Fund's short-term capital gains and ordinary income are taxable
to you as ordinary income. (A portion of these distributions may qualify for the
dividends-received deduction for corporations.) Distributions derived from a
Fund's long-term capital gains ("capital gains distributions"), if designated as
such by a Fund, are taxable to you as long-term capital gains, regardless of how
long you have owned shares in the Fund. Both income distribution and capital
gains distributions are taxable whether you elected to receive them in cash or
additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar year
end virtually all the Fund's ordinary income earned during that calendar year,
and virtually all of the capital gain net income the Fund realized during the
twelve months ending October 31 but has not previously distributed. If declared
in December to shareholders of record in that month, and paid the following
January, these distributions will be considered for federal income tax purposes
to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if a Fund is notified that you have underreported income
in the past or if you fail to certify to a Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold 31% of the
gross proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number. If you are a tax-exempt shareholder,
however, these backup withholding rules will not apply so long as you furnish
the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
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 International Equity, Star Worldwide and Star Small Cap Funds may be liable
to foreign governments for taxes relating primarily to investment income or
capital gains on foreign securities in the Fund's portfolio. The Fund may in
some circumstances be eligible to, and in its discretion may, make an election
under the Code which would allow Fund shareholders who are U.S. citizens or U.S.
corporations to claim a foreign tax credit or deduction (but not both) on their
U.S. income tax return. If the Fund makes the election, the amount of each
shareholder's distribution reported on the information returns filed by the Fund
with the Internal Revenue Service must be increased by the amount of the
shareholder's portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an
investment in a Fund on their particular federal, state and local tax
situations. Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under foreign laws.
In addition, the Distributor performs certain accounting and administrative
services for the Balanced Fund, Growth Fund, Value Fund, International Equity
Fund, Star Advisers Fund, Star Worldwide Fund and Star Small Cap Fund. For those
services, each Fund reimburses the Distributor for all or part of its expenses
of providing these services to the Fund, which includes the following: (i)
expenses for personnel performing bookkeeping, accounting, internal auditing,
financial reporting and clerical functions relating to the Funds, (ii) expenses
for services required in connection with the preparation of registration
statements and prospectuses, shareholder reports and notices, proxy solicitation
materials furnished to shareholders of the Funds or regulatory authorities and
reports and questionnaires for SEC compliance, and (iii) registration, filing
and other fees in connection with requirements of regulatory authorities.
PERFORMANCE CRITERIA
Each Fund may include total return information for each class of shares in
advertisements or other written sales material. Each Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter, or, in the case of the Growth Opportunities Fund's Class A shares, from
July 27, 1988, when there was a change in that Fund's investment adviser, to the
end of the most recent calendar quarter. Total return is measured by comparing
the value of a hypothetical $1,000 investment in a class at the 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.
The Balanced Fund may also include the yield of each class of its shares,
accompanied by the total return, in advertising and other written material.
Yield will be computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a share of the relevant class
(reduced by any earned income expected to be declared shortly as a dividend) on
the last day of the period. Yield calculations will reflect any voluntary
expense limitations in effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates for each class
in its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital gain
over a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value, rather than the maximum offering price, is used to
calculate the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of each Fund can be
expected to achieve a higher investment return than the Fund's Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to issue
an unlimited number of full and fractional shares in multiple series. The
Growth, Value and Balanced Funds were organized prior to 1985 and conducted
investment operations as separate corporations until their reorganization as
series of New England Funds Trust I in January 1987. The International Equity
Fund and the Capital Growth Fund were organized in 1992, the Star Advisers Fund
was organized in 1994, the Star Worldwide Fund was organized in 1995 and the
Star Small Cap Fund was organized in 1996.
[] New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to issue
an unlimited number of full and fractional shares in multiple series. The Growth
Opportunities Fund is the original series of shares of the Trust and has been in
operation since 1931.
[] New England Funds Trust III, an open-end management investment company, was
organized in 1995 as a Massachusetts business trust and is authorized to issue
an unlimited number of full and fractional shares in multiple series.
[] When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive annual or quarterly dividends as
determined by the respective Trust's trustees and to cast a vote for each share
you own at shareholder meetings. Shares of each Fund vote separately from shares
of other series of the same Trust, except as otherwise required by law. Shares
of all classes of a Fund vote together, except as to matters relating to a
class's Rule 12b-1 plan, on which only shares of that class are entitled to
vote. No Rule 12b-1 plan applies to the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y shares, except
that Class A and Class B shares are subject to a sales load or contingent
deferred sales charge, Class A, Class B and Class C shares bear a service fee at
the annual rate of 0.25% of average net assets (and in the case of Class B and
Class C shares a 0.75% distribution fee) and have separate voting rights in
certain circumstances. Class Y may bear its own transfer agency and prospectus
printing costs. The minimum initial investment in Class A, Class B and Class C
shares is generally $2,500 (but lower minimums apply to purchases under certain
special programs).
[] Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each Fund may
be changed by the relevant Trust's trustees without shareholder approval or, in
most cases, prior notice. The investment objectives of the Growth, Value and
Balanced Funds are fundamental. The investment objectives of the Capital Growth,
International Equity, Equity Income, Star Advisers, Star Worldwide and Star
Small Cap Funds are not fundamental. The investment objective of the Growth
Opportunities Fund is not fundamental but, as a matter of policy, the trustees
would not change the objective without shareholder approval. If there is a
change in the objectives of the Capital Growth, International Equity, Star
Advisers or Growth Opportunities Funds, shareholders should consider whether
these Funds remain appropriate investments in light of their current financial
position and needs.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
[] The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has
subcontracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is possible
that a Trust might become liable for any misstatements in this prospectus that
relate to the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined prospectus for Funds of
both Trusts.
[] Each Fund's annual report contains additional performance information and is
available upon request and without charge. Each Fund will send a single copy of
its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to be
delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] The Distributor has entered into a selling agreement with investment dealers,
including a broker-dealer that is an affiliate of the Distributor, for the sale
of the Funds' Class Y Shares. The Distributor may at its expense pay an amount
not to exceed 0.50% of the amount invested to dealers who have selling
agreements with the Distributor. Registered representatives of the affiliated
broker-dealer are also employees of New England Investment Associates, Inc.
("NEIA"), an indirect, wholly owned subsidiary of NEIC. NEIA may receive
compensation with respect to certain sales of each Fund's Class Y shares from
the Fund's subadviser.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of the Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] Class Y Shares of the Funds may be purchased through certain broker-dealers
and/or financial services organizations, including a broker-dealer affiliate of
the Distributor. Such organizations may receive compensation, in an amount of up
to 0.25% annually of the value of the Fund shares held by their clients. The
compensation may be paid by NEFM and/or a Fund's subadviser out of their own
assets, or may be paid by the Fund in the form of accounting, servicing,
distribution or transfer agent fees.
<PAGE>
[GRAPHIC OMITTED]
NEW ENGLAND FUNDS(R)
WHERE THE BEST MINDS MEET(R)
- -------------------------------------------------------------------------------
CLASS Y SHARES OF:
NEW ENGLAND GOVERNMENT SECURITIES FUND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
NEW ENGLAND STRATEGIC INCOME FUND
NEW ENGLAND BOND INCOME FUND
NEW ENGLAND HIGH INCOME FUND
PROSPECTUS AND APPLICATION
SEPTEMBER 15, 1997
New England Government Securities Fund, New England Strategic Income Fund and
New England Bond Income Fund, each a series of New England Funds Trust I, and
New England Limited Term U.S. Government Fund, New England Adjustable Rate U.S.
Government Fund and New England High Income Fund, each a series of New England
Funds Trust II, are separate mutual funds (the "Funds" and each a "Fund"). New
England Funds Trust I, New England Funds Trust II and New England Funds Trust
III are referred to in this prospectus as the "Trusts."
Each Fund offers Class Y shares to qualified investors. New England Limited Term
U.S. Government Fund, New England Strategic Income Fund and New England Bond
Income Fund offer Class A, Class B and Class C shares (for other investors). New
England Government Securities Fund, New England Adjustable Rate U.S. Government
Fund and New England High Income Fund offer Class A and Class B shares (for
other investors). This prospectus sets forth information investors should know
before investing in Class Y shares. Please read it carefully and keep it for
future reference. A Statement of Additional Information in two parts (the
"Statement") about the Funds dated May 1, 1997 as revised September 15, 1997 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, Massachusetts 02116 or call
toll-free at 1-800-225-5478. The Statement contains more detailed information
about the Funds and is incorporated into this prospectus by reference. Class A,
Class B and Class C shares are described in a separate prospectus. To obtain
more information about Class A, Class B and Class C shares, please call the
Distributor toll-free at 1-800-225-5478.
NEW ENGLAND HIGH INCOME FUND INVESTS PRIMARILY IN, AND NEW ENGLAND STRATEGIC
INCOME FUND MAY INVEST UP TO ALL OF ITS ASSETS IN, LOWER RATED BONDS COMMONLY
KNOWN AS "JUNK BONDS." THIS TYPE OF INVESTMENT IS SUBJECT TO GREATER RISK THAN
HIGHER RATED BONDS WITH RESPECT TO PRINCIPAL AND INTEREST PAYMENTS, INCLUDING
THE RISK OF DEFAULT. INVESTORS SHOULD ASSESS CAREFULLY THE RISKS ASSOCIATED WITH
INVESTMENT IN THESE FUNDS. SEE "INVESTMENT RISKS--LOWER RATED FIXED-INCOME
SECURITIES."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
3 FUND EXPENSES AND FINANCIAL INFORMATION
3 Schedule of Fees
5 Financial Highlights
- -------------------------------------------------------------------------------
12 INVESTMENT STRATEGY
12 Investment Objectives
12 How the Funds Pursue Their Objectives
12 Fund Investments
- -------------------------------------------------------------------------------
17 INVESTMENT RISKS
- -------------------------------------------------------------------------------
23 FUND MANAGEMENT
- -------------------------------------------------------------------------------
25 BUYING FUND SHARES
25 Minimum Investment
25 Ways to Buy Fund Shares
25 [] By wire transfer
26 [] By mail
- -------------------------------------------------------------------------------
27 OWNING FUND SHARES
27 Exchanging Among New England Funds
27 Fund Dividend Payments
- -------------------------------------------------------------------------------
29 SELLING FUND SHARES
29 Ways to Sell Fund Shares
29 [] By telephone
29 [] By mail
- -------------------------------------------------------------------------------
31 FUND DETAILS
31 How Fund Share Price Is Determined
31 Income Tax Considerations
32 Performance Criteria
33 Additional Facts About the Funds
35 Appendix A
36 Appendix B
<PAGE>
FUND EXPENSES AND FINANCIAL INFORMATION
SCHEDULE OF FEES
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class Y shares of the Funds and estimated annual expenses for the Funds' Class Y
shares. The Example on the following page shows the cumulative expenses
attributable to a hypothetical $1,000 investment in Class Y shares of the Funds
for the periods specified.
SHAREHOLDER TRANSACTION EXPENSES
ALL FUNDS
---------
Class Y
-------
Maximum Initial Sales Charge Imposed on a Purchase None
Maximum Contingent Deferred Sales Charge None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. BOND INCOME
SECURITIES FUND GOVERNMENT FUND FUND
------------- ------------- -------------
Class Y Class Y Class Y
------------- ------------- -------------
Management Fees 0.65% 0.64% 0.43%
12b-1 Fees None None None
Other Expenses 0.42% 0.26% 0.37%
Total Fund Operating Expenses 1.07% 0.90% 0.80%
NEW ENGLAND
ADJUSTABLE RATE U.S.
GOVERNMENT FUND
Class Y
Management Fees (after voluntary fee
waiver and expense reduction) 0.30%*
12b-1 Fees None
Other Expenses 0.15%
Total Fund Operating Expenses
(after voluntary fee waiver and
expense reduction) 0.45%*
NEW ENGLAND NEW ENGLAND
STRATEGIC INCOME FUND HIGH INCOME FUND
--------------------- ----------------
Class Y Class Y
------------- -------------
Management Fees 0.65% 0.45%**
12b-1 Fees None None
Other Expenses 0.38% 0.70%
Total Fund Operating Expenses 1.03% 1.15%**
* Without the voluntary fee waiver and expense reduction by the Fund's adviser,
Management Fees would be 0.54% and Total Fund Operating Expenses would be
0.69%. These voluntary limitations can be terminated by the Fund's adviser at
any time. See "Fund Management."
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.74% and Total Fund Operating Expenses
would be 1.44%. These voluntary limitations can be terminated by the
Fund's adviser at any time. See "Fund Management."
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at period end. The 5% return and expenses in
the Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which may be more or less than those shown.
<TABLE>
<CAPTION>
NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT LIMITED TERM U.S. ADJUSTABLE RATE
SECURITIES FUND GOVERNMENT FUND U.S. GOVERNMENT FUND
------------------- ----------------- ----------------------
Class Y Class Y Class Y
<S> <C> <C> <C>
1 year $ 11 $ 9 $ 5
3 years $ 34 $ 29 $14
5 years $ 59 $ 50 $25
10 years $131 $111 $57
NEW ENGLAND STRATEGIC NEW ENGLAND NEW ENGLAND
INCOME FUND BOND INCOME FUND HIGH INCOME FUND
--------------------- ---------------- ----------------
Class Y Class Y Class Y
1 year $ 11 $ 8 $ 12
3 years $ 33 $26 $ 37
5 years $ 57 $44 $ 63
10 years $126 $99 $140
</TABLE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management" and "Additional Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Class Y share of New England Limited Term U.S. Government Fund, New
England Government Securities Fund and New England Bond Income Fund outstanding
throughout the indicated periods. In the case of New England Adjustable Rate
U.S. Government Fund, New England Strategic Income Fund and New England High
Income Fund, which had no Class Y shares outstanding prior to 1997, financial
highlights are presented for a Class A and Class B (and Class C for New England
Strategic Income Fund) share of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 6 through 15 have been included in
financial statements for the Funds. The financial statements for New England
Government Securities Fund, New England Bond Income Fund and New England
Strategic Income Fund have been examined by Price Waterhouse LLP, independent
accountants, and the financial statements for New England Limited Term U.S.
Government Fund, New England Adjustable Rate U.S. Government Fund and New
England High Income Fund have been examined by Coopers & Lybrand LLP,
independent accountants. The reports of Price Waterhouse LLP and Coopers &
Lybrand LLP are incorporated by reference in Part II of the Statement and may be
obtained by shareholders. The Financial Highlights should be read in conjunction
with the financial statements and the notes thereto incorporated by reference in
the Statement. Each Fund's annual report contains additional performance
information and is made available upon request and without charge.
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS Y
---------------------------------------------------------------
MAR. 31(a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
------------ ----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $11.20 $10.44 $11.71
----------------------------------------------------------
Income from investment operations
Net investment income 0.54 0.80 0.74
Net gains (losses) on investments (both realized
and unrealized) (0.77) 1.26 (0.63)
----------------------------------------------------------
Total income (loss) from investment operations (0.23) 2.06 0.11
----------------------------------------------------------
Less distributions
Distributions (from net investment income) (0.53) (0.79) (0.75)
Total distributions (0.53) (0.79) (0.75)
----------------------------------------------------------
Net asset value, end of period $10.44 $11.71 $11.07
==========================================================
Total return (%) (2.0)(c) 20.3 1.1
Ratios/Supplemental data
Net assets, end of period (000) $4,104 $7,364 $6,384
Ratio of operating expenses to average net assets (%) 0.93(b) 1.10 1.07
Ratio of net investment income to average net assets (%) 7.25(b) 6.94 6.70
Portfolio turnover rate (%) 809 559 462
</TABLE>
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
<PAGE>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------------------
MAR. 31 (a)
THROUGH
DEC. 31, YEAR ENDED DEC. 31,
--------------------- ------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $12.11 $11.51 $12.13
--------------------- ---------------------- -------------------
Income from investment operations
Net investment income 0.71 0.86 0.85
Net gains (losses) on investments
(both realized and unrealized) (0.74) 0.63 (0.54)
--------------------- ---------------------- -------------------
Total income (loss) from investment operations (0.03) 1.49 0.31
--------------------- ---------------------- -------------------
Less distributions
Distributions (from net investment income) (0.57) (0.87) (0.86)
--------------------- ---------------------- -------------------
Total distributions (0.57) (0.87) (0.86)
--------------------- ---------------------- -------------------
Net asset value, end of period $11.51 $12.13 $11.58
===================== ====================== ===================
Total return (%) (c) (0.80) 13.3 2.8
Ratios/Supplemental data
Net assets, end of period (000) $1,822 $5,723 $5,313
Ratio of operating expenses to average net assets (%) 0.83 (b) 0.87 0.90
Ratio of net investment income to average net assets (%) 7.15 (b) 7.53 7.48
Portfolio turnover rate (%) 244 247 327
</TABLE>
(a) Commencement of offering of Class Y shares.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
<PAGE>
NEW ENGLAND BOND INCOME FUND
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------
YEAR ENDED
DEC. 31,
-------------------------------------------
1995 1996
---- ----
<S> <C> <C>
Net asset value, beginning of period $10.95 $12.40
--------------------- ---------------------
Income from investment operations
Net investment income 0.80 0.87
Net gains or losses on investments (both realized and unrealized) 1.44 (0.34)
--------------------- ---------------------
Total income from investment operations 2.24 0.53
--------------------- ---------------------
Less distributions
Distributions (from net investment income) (0.79) (0.87)
--------------------- ---------------------
Total distributions (0.79) (0.87)
--------------------- ---------------------
Net asset value, end of period $12.40 $12.06
===================== =====================
Total return (%) 21.0 4.6
Ratios/Supplemental data
Net assets, end of period (000) $2,241 $1,844
Ratio of operating expenses to average net assets (%) 0.89 0.80
Ratio of net investment income to average net assets (%) 7.06 7.25
Portfolio turnover rate (%) 81 104
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
OCT, 18(a)
THROUGH, YEAR ENDED DEC. 31,
DEC. 31, ----------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.50 $7.50 $7.46 $7.45 $7.20 $7.37
--------------- --------------- -------------- -------------- --------------- --------------
Income from investment operations
Net investment income 0.09 0.42 0.33 0.37 0.47 0.43
Net gains or losses on
investments (both
realized and unrealized)
0.00 (0.06) (0.03) (0.31) 0.14 (0.01)
--------------- --------------- -------------- -------------- --------------- --------------
Total income from
investment operations
0.09 0.36 0.30 0.06 0.61 0.42
--------------- --------------- -------------- -------------- --------------- --------------
Less distributions
Distributions (from net
investment income) (0.09) (0.40) (0.31) (0.31) (0.44) (0.42)
--------------- --------------- -------------- -------------- --------------- --------------
Total distributions (0.09) (0.40) (0.31) (0.31) (0.44) (0.42)
--------------- --------------- -------------- -------------- --------------- --------------
Net asset value, end of
period $7.50 $7.46 $7.45 $7.20 $7.37 $7.37
=============== =============== ============== ============== =============== ==============
Total return (%)(d) 1.2 4.9 4.0 0.8 8.6 5.8
Ratios/Supplemental data
Net assets, end of period
(000) $60,684 $294,687 $734,251 $489,637 $331,112 $222,809
Ratio of operating
expenses to average net
assets (%)(b) 0.50(c) 0.57 0.60 0.60 0.66 0.70
Ratio of net investment
income to average net
assets (%) 6.43(c) 5.39 4.39 4.85 6.29 6.39
Portfolio turnover rate (%)
52 49 54 17 73 54
</TABLE>
<PAGE>
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
SEPT. 13(a)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, ------------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.52 $7.45 $7.20 $7.37
---------------- --------------- ---------------- ---------------
Income from investment operations
Net investment income 0.08 0.29 0.41 0.37
Net gains (losses) on investments (both realized and
unrealized) (0.08) (0.29) 0.14 (0.02)
---------------- --------------- ---------------- ---------------
Total income from investment operations 0.00 0.00 0.55 0.35
---------------- --------------- ---------------- ---------------
Less distributions
Distributions (from net investment income) (0.07) (0.25) (0.38) (0.36)
---------------- --------------- ---------------- ---------------
Total distributions (0.07) (0.25) (0.38) (0.36)
---------------- --------------- ---------------- ---------------
Net asset value, end of period $7.45 $7.20 $7.37 $7.36
================ =============== ================ ===============
Total return (%)(d) 0.0 0.1 7.8 4.9
Ratios/Supplemental data
Net assets, end of period (000) $855 $2,056 $2,368 $2,821
Ratio of operating expenses to average net assets (%)(b)
1.35(c) 1.35 1.41 1.45
Ratio of net investment income to average net assets (%)
3.50(c) 4.10 5.54 5.64
Portfolio turnover rate (%) 54 17 73 54
</TABLE>
(a) The Fund commenced operations on October 18, 1991. Class B shares were
first offered on September 13, 1993.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of
Class A average net assets. From May 1, 1995 through June 1, 1995 expenses
were voluntarily limited to 0.65% of Class A average net assets. The ratio
of operating expenses to average net assets without giving effect to this
expense limitation would have been 0.89% for the year ended December 31,
1995 and 0.94% for the year ended December 31, 1996. From April 1, 1992
through May 1, 1995 expenses were voluntarily limited to 0.60% of Class A
average net assets. The ratio of operating expenses to average net assets
for Class A shares without giving effect to this expense limitation would
have been 0.96%, 0.86% and 0.88% for the years ended December 31, 1992,
1993 and 1994, respectively. From October 19, 1991 through March 31, 1992,
expenses were voluntarily limited to 0.50% of average net assets. The
ratio of operating expenses to average net assets without giving effect to
this expense limitation would have been 1.26% for the period ended
December 31, 1991.
Commencing June 1, 1995 expenses were voluntarily limited to 1.45% of
Class B average net assets. From May 1, 1995 through June 1, 1995 expenses
were voluntarily limited to 1.40% of Class B average net assets. The ratio
of operating expenses to average net assets without giving effect to this
expense limitation would have been 1.65% for the year ended December 31,
1995 and 1.69% for the year ended December 31, 1996. From September 13,
1993 through May 1, 1995 expenses were voluntarily limited to 1.35% of
Class B average net assets. The ratio of operating expenses to average net
assets for Class B shares without giving effect to this expense limitation
would have been 1.61% for the period ended December 31, 1993 and 1.63% for
the year ended December 31, 1994.
(c) Computed on an annualized basis.
(d) A sales charge in the case of Class A shares and a CDSC in the case of
Class B shares are not reflected in total return calculations. Periods of
less than one year are not annualized.
<PAGE>
NEW ENGLAND STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------ -------------------------------- ---------------------------
MAY 1 (a) YEAR MAY 1 (a) YEAR MAY 1 (a) YEAR
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1995 1996 1995 1996 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.50 $12.99 $12.50 $12.99 $12.50 $12.99
--------------- -------------- ---------------- --------------- --------------- -----------
Income from investment operations
Net investment income 0.74 1.05 0.68 0.95 0.67 0.95
Net gains or losses on
investments (both realized
and unrealized) 0.49 0.73 0.49 0.73 0.49 0.72
--------------- -------------- ---------------- --------------- --------------- -----------
Total income from investment
operations 1.23 1.78 1.17 1.68 1.16 1.67
--------------- -------------- ---------------- --------------- --------------- -----------
Less distributions
Distributions (from net
investment income) (0.73) (1.05) (0.67) (0.95) (0.66) (0.95)
Distributions (from net
realized capital gains) 0.00 (0.36) 0.00 (0.36) 0.00 (0.36)
Distributions (in excess of net
investment income) (0.01) 0.00 (0.01) 0.00 (0.01) 0.00
--------------- -------------- ---------------- --------------- --------------- -----------
Total distributions (0.74) (1.41) (0.68) (1.31) (0.67) (1.31)
--------------- -------------- ---------------- --------------- --------------- -----------
Net asset value, end of period
$12.99 $13.36 $12.99 $13.36 $12.99 $13.35
=============== ============== ================ =============== =============== ===========
Total return (%)(c) 10.3 14.5 9.7 13.7 9.7 13.6
Ratios/Supplemental data
Net assets, end of period (000)
$36,939 $90,729 $38,767 $93,408 $12,252 $31,746
Ratio of operating expenses to
average net assets (%) 0.93(b) 0.96 1.68(b) 1.71 1.68(b) 1.71
Ratio of net investment income
to average net assets (%) 8.75(b) 8.23 8.00(b) 7.48 8.00(b) 7.48
Portfolio turnover rate (%) 22 52 22 52 22 52
<CAPTION>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are not reflected in total
return calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving
effect to the voluntary expense limitations would have been (%):
<S> <C> <C> <C> <C> <C> <C>
1.58(b) 1.31 2.33(b) 2.06 2.33(b) 2.06
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED AUGUST 31, ENDED
-------------------- DEC. 31, YEAR ENDED DEC. 31,
1987 1988 1988(d) 1989 1990
------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $14.52 $13.77 $11.69 $11.08 $10.07
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 1.50 1.53 0.43 1.31 1.30
Net gains or losses on
investments (both
realized and unrealized) (0.26) (1.92) (0.56) (0.93) (2.49)
-------- -------- -------- -------- --------
Total income (loss) from
investment operations (1.24) (0.39) (0.13) (0.38) (1.19)
-------- -------- -------- -------- --------
Less distributions
Distributions (from net
investment income)(e) (1.56) (1.53) (0.43) (1.31) (1.30)
Distributions (in excess
of net investment income) 0.00 0.00 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.43) (0.13) 0.00 0.00 0.00
Distributions (from
paid-in capital) 0.00 (0.03) (0.05) (0.08) (0.02)
-------- -------- -------- -------- --------
Total distributions (1.99) (1.69) (0.48) (1.39) (1.32)
-------- -------- -------- -------- --------
Net asset value, end of
period $13.77 $11.69 $11.08 $10.07 $7.56
======== ======== ======== ======== ========
Total return (%)(g) 9.0 (2.6) (1.2) 3.3 (13.1)
Ratios/Supplemental data
Net assets, end of period
(000) $20,439 $14,517 $11,870 $9,070 $6,814
Ratio of operating
expenses to average net
assets (%)(b) 1.50(f) 1.57 1.50(c) 1.50 1.50
Ratio of net investment
income to average net
assets (%) 10.60 12.45 11.58(c) 12.28 14.00
Portfolio turnover rate (%) 39 29 1 30 7
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.56 $9.07 $9.46 $10.06 $8.89 $8.98
-------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income 1.02 0.94 0.90 0.88 0.88 0.84
Net gains or losses on
investments (both
realized and unrealized) 1.58 0.44 0.61 (1.19) 0.13 0.44
-------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations 2.60 1.38 1.51 (0.31) 1.01 1.28
-------- -------- -------- -------- -------- --------
Less distributions
Distributions (from net
investment income)(e) (1.02) (0.94) (0.90) (0.86) (0.88) (0.83)
Distributions (in excess
of net investment income) 0.00 0.00 (0.01) 0.00 (0.04) (0.01)
Distributions (from net
realized capital gains) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from
paid-in capital) (0.07) (0.05) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions (1.09) (0.99) (0.91) (0.86) (0.92) (0.84)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $9.07 $9.46 $10.06 $8.89 $8.98 $9.42
======== ======== ======== ======== ======== ========
Total return (%)(g) 36.3 15.8 16.5 (3.3) 11.8 14.9
Ratios/Supplemental data
Net assets, end of period
(000) $12,280 $20,992 $31,176 $33,673 $39,148 $42,992
Ratio of operating
expenses to average net
assets (%)(b) 1.50 1.50 1.54 1.60 1.60 1.53
Ratio of net investment
income to average net
assets (%) 11.56 9.74 9.17 9.18 9.71 9.32
Portfolio turnover rate (%) 30 19 43 33 30 134
</TABLE>
<PAGE>
NEW ENGLAND HIGH INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
SEPT. 20 (a)
THROUGH YEAR ENDED DEC. 31,
DEC. 31, --------------------------
1993 1994 1995 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.87 $10.06 $8.88 $8.98
-------- -------- -------- --------
Income from investment operations
Net investment income 0.23 0.79 0.83 0.79
Net gains or losses on investments (both realized and
unrealized) 0.20 (1.18) 0.13 0.42
-------- -------- -------- --------
Total income (loss) from investment operations 0.43 (0.39) 0.96 1.21
-------- -------- -------- --------
Less distributions
Distributions (from net investment income)(e) (0.23) (0.78) (0.81) (0.76)
Distributions (in excess of net investment income) (0.01) (0.01) (0.05) (0.01)
Distributions (from net realized capital gains) 0.00 0.00 0.00 0.00
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (0.24) (0.79) (0.86) (0.77)
-------- -------- -------- --------
Net asset value, end of period $10.06 $8.88 $8.98 $9.42
======== ======== ======== ========
Total return (%)(g) 4.4 (4.0) 11.2 14.1
Ratios/Supplemental data
Net assets, end of period (000) $1,232 $5,233 $10,625 $17,767
Ratio of operating expenses to average net assets (%)(b)
2.25(c) 2.25 2.25 2.19
Ratio of net investment income to average net assets (%)
7.66(c) 8.53 8.96 8.33
Portfolio turnover rate (%) 43 33 30 134
</TABLE>
(a) Commencement of offering of Class B shares.
(b) Commencing June 28, 1996 expenses were voluntarily limited to the annual
rate of 1.40% of Class A average net assets and 2.15% of Class B average
net assets. From October 1, 1993 through June 27, 1996 expenses were
voluntarily limited to the annual rate of 1.60% of Class A average net
assets and 2.25% of Class B average net assets. From May 18, 1989 through
September 30, 1993, expenses (including non-recurring items) were
voluntarily limited to 1.50% annually of average daily net assets of Class
A shares. From July 27, 1988 through May 17, 1989, and during all periods
prior to May 18, 1988, expenses (excluding certain non-recurring items)
were limited to 1.50% annually of average net assets of Class A shares.
Non-recurring expenses excluded for purposes of calculating this expense
limitation were $3,267 for the year ended August 31, 1988, $51,751 for the
four months ended December 31, 1988 and $42,482 for the period from
January 1 through May 17, 1989. The ratios of expenses to average net
assets for Class A shares, including all non-recurring expenses and
assuming the foregoing expense limitations had not been in effect, would
have been 2.34% and 2.34%, respectively, for the years ended August 31,
1987 and 1988, 2.63% (on an annualized basis) for the four months ended
December 31, 1988, 3.08%, 3.02%, 2.63%, 2.00%, 1.82%, 1.83%, 1.72% and
1.69%, respectively, for the years ended December 31, 1989, 1990, 1991,
1992, 1993, 1994, 1995 and 1996. Excluding all non-recurring expenses,
these ratios would have been 2.07%, 2.32%, 2.23% (on an annualized basis),
2.68%, 2.97%, 2.63%, 2.00%, 1.82%, 1.83%, 1.72% and 1.69% for Class A
shares for the years ended August 31, 1987 and 1988, the four months ended
December 31, 1988 and the years ended December 31, 1989, 1990, 1991, 1992,
1993, 1994, 1995 and 1996, respectively. The ratio of expenses to average
net assets for Class B shares, assuming the foregoing expense limitation
had not been in effect, would have been 2.53% (on an annualized basis),
2.48%, 2.37% and 2.35%, respectively, for the period September 20, 1993
through December 31, 1993 and the years ended December 31, 1994, 1995 and
1996.
(c) Computed on an annualized basis.
(d) Fiscal year end changed in 1988 from August 31 to December 31. Back Bay
Advisors, L.P., the Fund's subadviser until June 30, 1996, became the
Fund's adviser on July 27, 1988. Loomis, Sayles & Company, L.P., the
Fund's current subadviser, assumed that function on July 1, 1996.
(e) Amounts distributed include tax basis distributions from paid in capital
of approximately $0.06 and $0.02 per share for the year ended August 31,
1988 and the four months ended December 31, 1988, respectively.
(f) One-time litigation settlement costs of $56,920 (0.27% of average net
assets) were incurred in fiscal 1987. The ratio of operating expenses to
average net assets, if calculated including these non-recurring costs,
would have been 1.77%, after giving effect to the expense limitation in
effect during such period and described above.
(g) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B shares are not reflected in total return calculations. Periods
of less than one year are not annualized.
<PAGE>
I N V E S T M E N T S T R A T E G Y
INVESTMENT OBJECTIVES
NEW ENGLAND GOVERNMENT SECURITIES FUND
(the "Government Securities Fund")
The Fund seeks a high level of current income consistent with safety of
principal by investing in U.S. Government securities.
Subadviser: Back Bay Advisors, L.P.(R) ("Back Bay Advisors")
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
(the "Limited Term U.S. Government Fund")
The Fund seeks a high current return consistent with preservation of capital.
Subadviser: Back Bay Advisors
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
(the "Adjustable Rate Fund")
The Fund seeks a high level of current income consistent with low volatility of
principal. The Fund intends to pursue its objective by investing only in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Subadviser: Back Bay Advisors
NEW ENGLAND STRATEGIC INCOME FUND
(the "Strategic Income Fund")
The Fund seeks high current income with a secondary objective of capital growth.
Subadviser: Loomis, Sayles & Company, L.P. ("Loomis Sayles")
NEW ENGLAND BOND INCOME FUND
(the "Bond Income Fund")
The Fund seeks a high level of current income consistent with what the Fund
considers reasonable risk. The Bond Income Fund invests primarily in corporate
and U.S. Government bonds.
Subadviser: Back Bay Advisors
NEW ENGLAND HIGH INCOME FUND
(the "High Income Fund")
The Fund seeks high current income plus the opportunity for capital appreciation
to produce a high total return.
Subadviser: Loomis Sayles
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
the Fund's investment objective and policies. There can be no assurance that any
Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
FUND INVESTMENTS
[] GOVERNMENT SECURITIES FUND
The Government Securities Fund expects that it will invest primarily in U.S.
Government securities, including U.S. Treasury bills (maturity of one year or
less), U.S. Treasury notes (maturity of one to ten years), and U.S. Treasury
bonds (generally maturities greater than ten years), and mortgage-backed
securities issued or guaranteed by U.S. Government agencies, including but not
limited to the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Under normal market conditions, the Fund intends to
maintain a dollar-weighted average duration of between seven and eight years.
The Fund may hold individual securities with duration longer or shorter than
seven or eight years (e.g., a security with a duration of seven years will
typically have a maturity of approximately 10 years, given the current interest
rate environment) as long as the average duration remains within these limits.
See "Duration" below.
The Fund may invest in securities of any maturity and in zero coupon securities.
In addition to investing directly in U.S. Government securities, the Fund may
purchase "stripped" securities.
For hedging purposes, the Government Securities Fund may also purchase and sell
interest rate futures contracts on U.S. Government securities and may write and
purchase options on such futures and options on U.S. Government securities.
Transactions involving futures and options on futures may help to reduce the
volatility of the Fund's net asset value, but this result cannot be assured.
Options and futures are not backed by the U.S. Government.
It is a fundamental policy of the Fund that under normal market conditions it
will invest at least 65% of its total assets in "U.S. Government Securities,"
which term as used in this prospectus includes all securities issued or
guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities.
[] LIMITED TERM U.S. GOVERNMENT FUND
The Fund seeks to achieve its objective by investing in U.S. Government
Securities. Under normal market conditions, 65% or more of the Fund's total
assets will be invested in U.S. Government Securities (including zero coupon
bonds) and collateralized mortgage obligations ("CMOs"). The Fund limits its
investments in CMOs to those issued by instrumentalities of the U.S. Government.
The Fund may also invest in asset-backed securities rated Aaa by Moody's
Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group
("S&P") or unrated but determined by the Fund's subadviser to be of comparable
quality to securities in those rating categories. For hedging purposes, the Fund
may purchase and sell financial futures contracts and options. The Fund may also
engage in securities lending.
The Fund's subadviser, Back Bay Advisors, provides a continuous investment
program designed to maximize current return while minimizing fluctuations in the
value of the Fund's portfolio, thus stabilizing the net asset value of the
Fund's shares. Because the market value of fixed-income securities fluctuates in
response to changes in interest rates, there is a risk of a decline in the value
of the Fund's portfolio (and a corresponding decrease in the value of the Fund's
shares) if interest rates increase. To reduce this risk, the Fund will
ordinarily seek to maintain an average dollar-weighted maturity of three to
seven years. The Fund may hold individual securities with maturities of more
than seven years as long as its average maturity remains within this limit.
[] ADJUSTABLE RATE FUND
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in adjustable rate mortgage
securities ("ARMs") or other securities collateralized by or representing
interests in mortgages (collectively, "mortgage securities"), which have
interest rates that are reset at periodic intervals and which are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. The Fund
also may invest in CMOs issued by instrumentalities of the U.S. Government, but
will not invest in privately issued CMOs. Other securities purchased by the Fund
will be limited to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities but will not include any stripped securities (such
as interest only or principal only obligations) or zero coupon obligations. When
maintaining a temporary defensive position, the Fund may invest its assets,
without limit, in U.S. Government Securities of any type.
[] STRATEGIC INCOME FUND
The Fund seeks to achieve its investment objectives by investing at least 65% of
its total assets in debt instruments. The Fund may invest in debt instruments
issued by corporations based in the United States or abroad and debt instruments
that are convertible into equity securities. The Fund may also invest in U.S.
Government Securities and in securities issued or guaranteed by foreign
governments (including their political subdivisions, agencies, authorities
and/or instrumentalities) ("Foreign Government Securities") and securities
issued by supranational agencies. The Fund may invest in securities of emerging
markets. The Fund may invest in debt instruments in any rating category,
including debt instruments rated in the lowest rating categories (C by Moody's
and D by S&P) and in instruments that are unrated. For more information about
the risks of investing in low rated, high risk securities and securities of
foreign issuers, see "Investment Risks -- Lower Rated Fixed-Income Securities"
and "-- Foreign Securities."
Under normal market conditions, the Fund will invest in debt instruments of both
domestic and foreign issuers and in corporate as well as government issues. At
any time, however, the Fund may invest up to 100% of its assets in debt
instruments of U.S. issuers, in debt instruments of foreign issuers, in
corporate debt instruments or in government securities. The Fund may invest up
to a total of 35% of its total assets in preferred stocks, dividend-paying
common stocks and shares of closed-end investment companies (which shares will
not exceed 10% of the Fund's total assets).
The proportion of Fund assets invested in corporate bonds, government bonds and
preferred or common stock will vary over time based on changing market
conditions. When Loomis Sayles believes that a particular market presents more
opportunity than other markets, it may increase the proportion of the Fund's
assets invested in that market.
The Fund may invest in Rule 144A securities. For hedging purposes, the Fund may
also purchase and sell options and futures and engage in foreign currency
transactions. The Fund may also invest in mortgage-backed securities, zero
coupon bonds, stripped securities and pay-in-kind securities. For more
information about all these types of investments, see "Investment Risks" below.
[] BOND INCOME FUND
The Bond Income Fund invests primarily in corporate and U.S. Government bonds.
At least 80% of its total assets will be invested in bonds carrying investment
grade ratings from one of the recognized rating services. The Fund may also
purchase non-rated or lower-rated bonds. Bonds rated BBB by S&P or Baa by
Moody's (the lowest ratings that are considered investment grade) have some
speculative characteristics, and unfavorable changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of issuers of
these bonds to make principal and interest payments than is the case with higher
grade bonds. If an investment rated BBB or Baa is downgraded by a major rating
agency, the Fund's subadviser will consider whether the investment remains
appropriate for the Fund. The Fund may invest in debt instruments rated in the
rating categories of B (by Moody's or S&P) or higher and in instruments that are
unrated. The Fund may invest in securities of any maturity and in zero coupon
securities. The Fund may also invest in CMOs. The Fund will normally maintain an
average dollar-weighted portfolio maturity of less than ten years. The Fund may
invest in convertible securities and in Rule 144A securities.
The Fund may invest in foreign securities but will do so only when the Fund's
subadviser believes the associated risks are minimal as compared to similar
securities of domestic issuers.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
[] HIGH INCOME FUND
The High Income Fund invests primarily in long-term corporate fixed-income
securities, the majority of which are rated BBB or lower by S&P or Baa or lower
by Moody's or are unrated. The Fund may invest in debt instruments in any rating
category, including debt instruments rated in the lowest rating categories (C by
Moody's and D by S&P) and instruments that are unrated. See "Investment Risks --
Lower Rated Fixed-Income Securities" below. A diversified portfolio of these
securities normally provides a current yield or yield to maturity that is
significantly higher than yields of higher rated fixed-income securities. In
addition to high current income, the Fund seeks capital appreciation through (1)
market price appreciation in periods of declining interest rates and (2)
improvement in the credit standing of issuers.
The Fund's subadviser, Loomis Sayles, provides the Fund with an investment
program that seeks to reduce risks to the Fund by diversification and analysis
of the underlying creditworthiness of issuers and the underlying value of
securities. Loomis Sayles performs its own credit analyses and does not rely
primarily on the ratings assigned by rating services. Loomis Sayles' analyses,
in ascertaining both creditworthiness and potential for capital appreciation,
focus on technical factors as well as fundamental factors such as the
relationship of current market price to anticipated cash flow and its coverage
of interest or dividend requirements, debt as a percentage of assets, earnings
prospects, the experience and perceived strength of the issuer's management,
price responsiveness of the issuer's securities to changes in interest rates and
business conditions, debt maturity schedules and borrowing requirements and the
issuer's liquidation value.
The Fund will not invest in defaulted issues as a standard practice, but may
from time to time invest in certain defaulted issues that, in the view of Loomis
Sayles, present an attractive opportunity for capital appreciation. Because
defaulted issues are ordinarily not income producing, investment in such issues
would likely reduce the Fund's current yield.
The Fund expects that under normal market conditions at least 80% of the value
of its total assets will be invested in long-term fixed-income securities of
U.S. corporations, including preferred stock and convertible securities. To
achieve its basic investment objective, the Fund from time to time also may
invest up to 20% of the value of its total assets in common stocks and up to 20%
of the value of its total assets in fixed-income securities issued by foreign
governments or by companies organized in foreign countries. However, investments
in both of these types of securities on a combined basis generally will not
exceed 20% of the value of the Fund's assets. See "Investment Risks -- Foreign
Securities" below.
If Loomis Sayles expects a rising trend in interest rates, it may shift the
Fund's portfolio into shorter-term debt securities and domestic money market
instruments whose prices might not be affected as much by an increase in
interest rates. During those periods, or other periods when market conditions
temporarily warrant a more defensive strategy, the Fund may invest an unlimited
portion of its assets in U.S. Government Securities; certificates of deposit,
bankers' acceptances and other obligations of U.S. banks with deposits of at
least $2 billion at the close of the last calendar year; commercial paper that
is rated in the two highest categories by Moody's or S&P; short-term
fixed-income securities that are rated within the three highest categories by
Moody's or S&P; and repurchase agreements with financial institutions deemed
creditworthy by Loomis Sayles. Investment in such instruments may result in a
lower current yield and would tend to limit appreciation possibilities. The Fund
may also invest in Rule 144A securities.
The Fund may lend portfolio securities amounting to not more than 10% of its
assets to securities dealers. These transactions must be fully collateralized at
all times, but involve some credit risk to the Fund if the other party should
default on its obligations and the Fund is delayed in or prevented from
recovering the collateral.
The Fund may engage in a variety of options and futures transactions with
respect to U.S. or Foreign Government Securities and corporate fixed-income
securities. See "Investment Risks -- Options, Futures, Swap Contracts and
Currency Transactions" for information about these kinds of transactions.
[] U.S. AND FOREIGN GOVERNMENT SECURITIES
Different types of U.S. and Foreign Government Securities have different kinds
of government support. U.S. Government Securities include securities backed by
the full faith and credit of the U.S. Government, as well as many other
securities that are not full faith and credit obligations. For example,
obligations of the Federal Home Loan Banks are supported by the right of the
issuer to borrow from the U.S. Treasury, and obligations of the Federal Home
Loan Mortgage Corporation (the "FHLMC") and the Federal National Mortgage
Association (the "FNMA") are supported only by the credit of those corporations.
Similarly, obligations of foreign governmental entities include obligations
issued or guaranteed by governments with taxing power or by their agencies. Some
Foreign Government Securities are supported by the full faith and credit of a
foreign national government or political subdivision (such as a province of
Canada) and some are not. For example, Foreign Government Securities include
securities issued by corporations which have been charged with a public purpose
and a majority of whose outstanding equity securities are owned by a foreign
government or government agency. Such securities may be supported only by the
credit of the issuing corporation and not by that of the government or agency.
In addition to investing directly in U.S. and Foreign Government Securities, the
Government Securities and Strategic Income Funds may purchase "stripped"
securities evidencing undivided ownership interests in interest payments or
principal payments, or both, on U.S. and Foreign Government Securities. These
investments may be more volatile than other types of U.S. or Foreign Government
Securities.
[] FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds that may invest in securities denominated in foreign currencies or
traded in foreign markets may engage in related foreign currency exchange
transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which current or
future portfolio holdings are denominated or quoted.
The Bond Income, High Income and Strategic Income Funds may engage in
transactions in currency forward contracts. A currency forward contract is a
contract that obligates parties to the contract to exchange specified amounts of
different currencies at a specified future date. For example, a party may agree
to deliver a specified number of French francs, in exchange for a specified
number of U.S. dollars on a certain date.
From time to time, a portion of the Bond Income, High Income or Strategic Income
Fund's assets may be invested in securities that are denominated in foreign
currencies or that are traded in markets where purchase or sale transactions
settle in a foreign currency. Currency forward contracts may be used both (1) to
facilitate settlement of a Fund's transactions in these securities and (2) to
hedge against possible adverse changes in the relative values of the currencies
in which the Fund's portfolio holdings (or intended future holdings) are
denominated.
Currency forward contracts involve transaction costs and the risk that the banks
with which a Fund enters into such contracts will fail financially. Each Fund's
subadviser will, however, monitor the creditworthiness of these banks on an
ongoing basis. Successful use of currency forward contracts for hedging purposes
also depends on the accuracy of the subadviser's forecasts as to future changes
in the relative values of currencies. The accuracy of such forecasts cannot be
assured. The Fund will set aside with its custodian certain assets to provide
for satisfaction of its obligations under currency forward contracts.
Although the Bond Income, High Income and Strategic Income Funds are permitted
to use currency forward contracts, they are not obligated to do so. Thus, the
Funds will not necessarily be fully (or even partially) hedged against the risk
of adverse currency price movements at any given time.
Foreign currency transactions involve costs and may result in losses. See Part
II of the Statement for more information.
[] DURATION
"Duration" is a commonly used measure of the price responsiveness of a
fixed-income security or a portfolio of fixed-income securities to an interest
rate change (i.e., the change in price one can expect from a given change in
interest rates). Many investors and investment analysts consider duration to be
a more useful measure of price sensitivity than "maturity." A debt instrument's
duration is derived by discounting principal and interest payments to their
present value using the instrument's current yield to maturity and calculating
the dollar-weighted average time until these payments will be received. The
Government Securities, Limited Term U.S. Government and Bond Income Funds will
seek to maintain an average portfolio duration within specified limits as set
forth in the "Fund Investments" section for each Fund; however, each Fund's
portfolio may include fixed-income securities with durations longer or shorter
than the stated duration limits, so long as the Fund maintains an average
portfolio duration that is consistent with its investment strategy.
The values of securities having shorter durations generally fluctuate less than
securities with longer durations. In general, investments in short and
intermediate term debt securities are less sensitive to interest rate changes
and provide more stability than longer term investments. For example, based on
yields of 6.60% for a five-year U.S. Treasury security and 6.95% for a 30-year
U.S. Treasury security, a 1% increase in interest rates would be expected to
result in approximately a 4.16% reduction in the value of the five-year security
(duration 4.16) as compared to approximately a 12.5% reduction in the value of
the 30-year security (duration 12.5). Conversely, a 1% decrease in interest
rates would be expected to result in similar increases in value. These
expectations represent Back Bay Advisors' estimate of portfolio volatility based
upon historic data collected under a wide variety of market conditions, but
there is no assurance that actual volatility will be consistent with such
expectations.
[] ADDITIONAL INFORMATION
Each Fund may purchase securities for its portfolio on a "when-issued" basis.
This means that the Fund will enter into the commitment to buy the security
before the security has been issued. The Fund's payment obligation and the
interest rate on the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15 to 120 days
later. No interest accrues on the security between the time the Fund enters into
the commitment and the time the security is delivered.
The Funds, consistent with their investment objectives, attempt to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic market
conditions and trends. The Government Securities and Strategic Income Funds also
invest to take advantage of what are believed to be temporary disparities in the
yields of the different segments of the market for U.S. Government Securities.
These policies may result in higher turnover rates in the Funds' portfolios,
which may produce higher transaction costs and a higher level of taxable capital
gains. Portfolio turnover considerations will not limit any Fund's subadviser's
investment discretion in managing the Fund's assets. Recent portfolio turnover
rates for the Funds are set forth above under "Financial Highlights."
Each Fund may enter into repurchase agreements, under which a Fund buys
securities from a seller, usually a bank or brokerage firm, with the
understanding that the seller will repurchase the securities at a higher price
at a later date. If the seller fails to repurchase the securities, the Fund has
rights to sell the securities to third parties. Repurchase agreements can be
regarded as loans by the Fund to the seller, collateralized by the securities
that are the subject of the agreement. Repurchase agreements afford an
opportunity for the Fund to earn a return on available cash at relatively low
credit risk, although the Fund may be subject to various delays and risks of
loss if the seller fails to meet its obligation to repurchase. The staff of the
SEC is currently of the view that repurchase agreements maturing in more than
seven days are illiquid securities.
<PAGE>
I N V E S T M E N T R I S K S
It is important to understand the following risks inherent in a Fund before you
invest.
[] FIXED-INCOME SECURITIES (ALL FUNDS)
The Funds invest principally in fixed-income securities. Because interest rates
vary, it is impossible to predict the income of a Fund for any particular
period. The net asset value of your shares will vary as a result of changes in
the value of the bonds and other securities in a Fund's portfolio.
Fixed-income securities 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 securities, as well as the obligation to repay the
principal amount of the security at maturity.
Fixed-income securities are subject to market and credit risk. Credit risk
relates to the ability of the issuer to make payments of principal and interest.
In the case of municipal bonds, the issuer may make these payments from money
raised through a variety of sources, including (1) the issuer's general taxing
power, (2) a specific type of tax such as a property tax, or (3) a particular
facility or project such as a highway. The ability of an issuer of municipal
bonds to make these payments could be affected by litigation, legislation or
other political events, or the bankruptcy of the issuer. U.S. Government
Securities do not involve the credit risks associated with other types of
fixed-income securities; as a result, the yields available from U.S. Government
Securities are generally lower than the yields available from corporate
fixed-income securities. 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 a Fund the principal on the security before it is
due, thus depriving the Fund of a favorable stream of future interest 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 a Fund's investments in fixed-income securities will cause the
Fund's net asset value to increase or decrease.
[] LOWER RATED FIXED-INCOME SECURITIES (STRATEGIC INCOME FUND, BOND INCOME FUND
AND HIGH INCOME FUND)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's (and
comparable unrated securities) are 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,
including U.S. Government and many Foreign Government 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 subadviser's own
credit analysis than for a fund investing in higher quality bonds. The market
for lower quality fixed-income securities may be more severely affected than
some other financial markets by economic recession or substantial interest rate
increases, by changing public perceptions of this market or by legislation that
limits the ability of certain categories of financial institutions to invest in
these securities. In addition, the 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."
During the fiscal year ended December 31, 1996, 19.5% of the average month-end
net assets of the Bond Income Fund were invested in fixed-income securities
rated in the rating category just below investment grade (BBB/Baa). The
portfolio compositions of the Strategic Income Fund and the High Income Fund
during the fiscal year ended December 31, 1996 are summarized in Appendix B to
this prospectus.
[] FOREIGN SECURITIES (STRATEGIC INCOME FUND, BOND INCOME FUND AND HIGH INCOME
FUND)
Foreign Government Securities and foreign corporate securities present risks not
associated with investments in U.S. Government or corporate securities.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of a Fund may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations. Because the Strategic Income Fund, the Bond Income Fund and the
High Income Fund may purchase securities denominated in foreign currencies, a
change in the value of any such currency against the U.S. dollar will result in
a change in the U.S. dollar value of the Fund's assets and the Fund's income
available for distribution.
In addition, although a Fund's income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the value of a currency relative to the U.S. dollar
declines after a Fund's income has been earned in that currency, translated into
U.S. dollars and declared as a dividend, but before payment of such dividend,
the Fund could be required to liquidate portfolio securities to pay such
dividend. Similarly, if the value of a currency relative to the U.S. dollar
declines between the time a Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount in such currency of such expenses at the time they
were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and other fees in some
circumstances may be higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation of assets,
confiscatory taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those countries. The
receipt of interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's obligations. A
Fund may have limited legal recourse should a foreign government be unwilling or
unable to repay the principal or interest owed.
The Strategic Income Fund will invest all or any portion of its assets in the
securities of emerging markets. Investments in emerging markets include
investments in countries whose economies or securities markets are not yet
highly developed. Special considerations associated with these investments (in
addition to the considerations regarding foreign investments as discussed above)
may include, among others, greater political uncertainties, an economy's
dependence on revenues from particular commodities or on international aid or
development assistance, currency transfer restrictions, highly limited numbers
of potential buyers for such securities and delays and disruptions in securities
settlement procedures.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies' activities, and
include such entities as the International Bank of Reconstruction and
Development (the World Bank), the Asian Development Bank, the European Coal and
Steel Community and the Inter-American Development Bank.
The Funds may invest in foreign 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
depository receipts are arranged without involvement by the issuer of the
underlying equity securities. Less information about the issuer of the
underlying equity securities may be available in the case of unsponsored
depository receipts.
In determining whether to invest in securities of foreign issuers, the
subadviser of each Fund will consider the likely effects of foreign taxes on the
net yield available to the Fund and its shareholders. Compliance with foreign
tax law may reduce the Fund's net income available for distribution to
shareholders.
[] MORTGAGE-RELATED SECURITIES (ALL FUNDS)
Mortgage-related securities, such as GNMA or FNMA certificates, differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans generally may
be prepaid at any time. As a result, if a Fund purchases these assets at a
premium, a faster-than-expected prepayment rate will reduce yield to maturity,
and a slower-than- expected prepayment rate will have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-related securities at
a discount, faster-than-expected prepayments will increase, and
slower-than-expected prepayments will reduce, yield to maturity. Prepayments,
and resulting amounts available for reinvestment by the Fund, are likely to be
greater during a period of declining interest rates and, as a result, are likely
to be reinvested at lower interest rates. Accelerated prepayments on securities
purchased at a premium may result in a loss of principal if the premium has not
been fully amortized at the time of prepayment. Although these securities will
decrease in value as a result of increases in interest rates generally, they are
likely to appreciate less than other fixed-income securities when interest rates
decline because of the risk of prepayments. In addition, an increase in interest
rates would also increase the inherent volatility of the Fund by increasing the
average life of the Fund's portfolio securities.
An ARM, like a traditional mortgage security, is an interest in a pool of
mortgage loans that provides investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. ARMs have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market interest
rate. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag changes in prevailing
market interest rates. Also, some ARMs (or the underlying mortgages) are subject
to caps or floors that limit the maximum change in interest rate during a
specified period or over the life of the security. As a result, changes in the
interest rate on an ARM may not fully reflect changes in prevailing market
interest rates during certain periods. Because of the resetting of interest
rates, ARMs are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
[] ASSET-BACKED SECURITIES (LIMITED TERM U.S. GOVERNMENT FUND)
The securitization techniques used to develop mortgage securities are also being
applied to a broad range of other assets. Through the use of trusts and special
purpose corporations, assets such as automobile and credit card receivables are
being securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to a CMO structure. Generally
the issuers of asset-backed bonds, notes or pass-through certificates are
special purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans. Instruments
backed by pools of receivables are similar to mortgage-backed securities in that
they are subject to unscheduled prepayments of principal prior to maturity. When
the obligations are prepaid, the Fund will ordinarily reinvest the prepaid
amounts in securities the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
that prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss.
[] COLLATERALIZED MORTGAGE OBLIGATIONS (ALL FUNDS)
A CMO is a security backed by a portfolio of mortgages or mortgage securities
held under an indenture. The underlying mortgages or mortgage securities are
issued or guaranteed by the U.S. Government or an agency or instrumentality
thereof. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage securities. CMOs
are issued with a number of classes or series which have different maturities
and which may represent interests in some or all of the interest or principal on
the underlying collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally will be retired
prior to its maturity. Thus, the early retirement of a particular class or
series of CMO held by the Fund would have the same effect as the prepayment of
mortgages underlying a mortgage pass-through security. CMOs may be considered
derivative securities.
[] "STRIPPED" SECURITIES (GOVERNMENT SECURITIES AND STRATEGIC INCOME FUNDS)
Stripped securities are usually structured with two or more classes that receive
different proportions of the interest and principal distribution on a pool of
U.S. or Foreign Government Securities or mortgage assets. In some cases, one
class will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). Stripped securities commonly have greater market volatility than other
types of fixed-income securities. In the case of stripped mortgage securities,
if the underlying mortgage assets experience greater than anticipated payments
of principal, a Fund may fail to recoup fully its investments in IOs. The staff
of the SEC has indicated that it views stripped mortgage securities as illiquid
unless the securities are issued by the U.S. Government or its agencies and are
backed by fixed-rate mortgages. The Funds intend to abide by the staff's
position. Stripped securities may be considered derivative securities.
[] ZERO COUPON SECURITIES (ALL FUNDS EXCEPT ADJUSTABLE RATE FUND)
PAY-IN-KIND SECURITIES (HIGH INCOME AND STRATEGIC INCOME FUNDS)
Zero coupon securities are issued at a significant discount from face value and
pay interest only at maturity, rather than at intervals during the life of the
security. Pay-in-kind securities pay dividends or interest in the form of
additional securities of the issuer, rather than in cash. The prices of
pay-in-kind or zero coupon securities may react more strongly to changes in
interest rates than the prices of many other securities. The Funds are required
to accrue and distribute income from pay-in-kind and zero coupon securities on a
current basis, even though the Funds will not receive the income currently in
cash. Thus a Fund may have to sell other investments to obtain cash needed to
make income distributions.
[] WHEN-ISSUED SECURITIES (ALL FUNDS)
If the value of a "when-issued" security being purchased falls between the time
a Fund commits to buy it and the payment date, the Fund may sustain a loss. The
risk of this loss is in addition to the Fund's risk of loss on the securities
actually in its portfolio at the time. In addition, when a Fund buys a security
on a when-issued basis, it is subject to the risk that market rates of interest
will increase before the time the security is delivered, with the result that
the yield on the security delivered to the Fund may be lower than the yield
available on other, comparable securities at the time of delivery. Each Fund
will set aside with its custodian certain assets to provide for satisfaction of
its obligations under when-issued transactions.
[] OPTIONS, FUTURES, SWAP CONTRACTS AND CURRENCY TRANSACTIONS (ALL FUNDS EXCEPT
ADJUSTABLE RATE FUND)
Except as otherwise noted, the following discussion applies to all Funds except
the Adjustable Rate Fund. The Funds may engage in a variety of transactions
involving the use of options and futures with respect to U.S. or Foreign
Government Securities or corporate fixed-income securities (in the case of the
Strategic Income Fund) for purposes of hedging against changes in interest
rates.
A Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts. A Fund may buy and sell futures contracts on
securities, securities indexes or currencies. A Fund may also enter into swap
contracts. A Fund may engage in these transactions either for the purpose of
enhancing investment return, or to hedge against changes in the value of other
assets that a Fund owns or intends to acquire. A Fund may also conduct foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. Options, futures and swap
contracts fall into the broad category of financial 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 security or other asset (such as
an amount of currency or a futures contract) from, and a put option the right to
sell a security or other asset to, the option writer at a specified price, on or
before a specified date. The buyer of an option pays a premium when purchasing
the option, which reduces the return on the underlying security or other asset
if the option is exercised, and results in a loss if the option expires
unexercised. The writer of an option receives a premium from writing an option,
which may increase its return if the option expires or is closed out at a
profit. If a Fund as the writer of an option is unable to close out an unexpired
option, it must continue to hold the underlying security or other asset until
the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the buyer
to take delivery of the type of instrument or cash at the time and in the amount
specified in the contract. Although many futures contracts call for the delivery
(or acceptance) of the specified instrument, futures are usually closed out
before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Fund will realize a
gain (or loss). A Fund may not purchase or sell futures contracts or purchase
related options if immediately thereafter the sum of the amount of deposits for
initial margin or premiums on the existing futures and related options positions
would exceed 5% of the market value of the Fund's net assets. Transactions in
futures and related options involve the risks of (1) imperfect correlation
between the price movement of the contracts and the underlying securities, (2)
significant price movement in one but not the other market because of different
hours, (3) the possible absence of a liquid secondary market at any point in
time, and the risk that if the subadviser's prediction on interest rates or
other economic factors is inaccurate, the Fund may be worse off than if it had
not hedged. Futures transactions involve potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index swaps. The
Funds will enter into these transactions primarily to 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 a 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 a Fund, futures contracts held by a Fund and a
Fund's positions in swap contracts may fluctuate up or down based on a variety
of market and economic factors. In some cases, the fluctuations may offset (or
be offset by) changes in the value of securities held in the Fund's portfolio.
All transactions in options, futures or swaps involve costs and the possible
risk of loss to the Fund of all or a significant part of the value of its
investment. In some cases, the risk of loss may exceed the amount of the Fund's
investment. The Fund will be required, however, to set aside with its custodian
bank certain assets in amounts sufficient at all times to satisfy its
obligations under options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on a Fund's
subadviser's ability to forecast bond market, currency or other 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. Trading hours for options may differ
from the trading hours for the underlying securities. Thus, significant price
movements may occur in the securities markets that are not reflected in the
options market. This may limit the effectiveness of options as hedging devices.
In the case of swap contracts and of options that are not traded on an exchange
and not protected by the Options Clearing Corporation ("over-the-counter"
options), the Fund is at risk that the other party to the transaction will
default on its obligations, or will not permit the Fund to terminate the
transaction before its scheduled maturity. As a result of these characteristics,
the Funds will treat most swap contracts and over-the-counter options (and the
assets they segregate to cover their obligations thereunder) as illiquid.
Certain provisions of the Internal Revenue Code of 1986, as amended (the "Code")
and certain regulatory requirements may limit the Funds' ability to engage in
futures, options and swap transactions.
The options and futures markets of foreign countries are small compared to those
of the United States and consequently are characterized in most cases by less
liquidity than are the U.S. markets. In addition, foreign markets may be subject
to less detailed reporting requirements and regulatory controls than U.S.
markets. Furthermore, investments by the Bond Income, Strategic Income and High
Income Funds in options and futures in foreign markets are subject to many of
the same risks as are the Fund's other foreign investments. See "Foreign
Securities" above. For further information, see "Miscellaneous Investment
Practices -- Futures, Options and Swap Contracts" in Part II of the Statement.
[] RULE 144A SECURITIES (STRATEGIC INCOME, BOND INCOME AND HIGH INCOME FUNDS)
Rule 144A securities are privately offered securities that can be resold only to
certain qualified institutional buyers. Rule 144A securities are treated as
illiquid, unless the subadviser has determined, under guidelines established by
the trustees of the Trusts, that the particular issue of Rule 144A securities is
liquid. Investment in illiquid securities involves the risk that the Fund may be
unable to sell such securities at the desired time.
[] SECURITIES LENDING (LIMITED TERM U.S. GOVERNMENT FUND)
The Limited Term U.S. Government Fund may lend its portfolio securities to
broker-dealers or other parties under contracts calling for the deposit by the
borrower with the Fund's custodian of cash collateral equal to at least the
market value of the securities loaned, marked to market on a daily basis. The
Fund will continue to benefit from interest or dividends on the 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 25% of the
Fund's total assets (taken at current value). Any voting rights, or rights to
consent, relating to securities loaned pass to the 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.
<PAGE>
F U N D M A N A G E M E N T
New England Funds Management, L.P. ("NEFM"), 399 Boylston Street, Boston,
Massachusetts 02116, serves as the adviser to each of the Funds. NEFM oversees,
evaluates and monitors the subadvisory services provided to each Fund and
furnishes general business management and administration to each Fund. NEFM does
not determine what investments will be purchased by the Funds.
Loomis Sayles is the subadviser of the Strategic Income and High Income Funds.
Founded in 1926, Loomis Sayles, One Financial Center, Boston, Massachusetts
02111, is one of the country's oldest and largest investment counsel firms.
Daniel Fuss, Managing Partner and Executive Vice President of Loomis Sayles, has
served as the Strategic Income Fund's lead portfolio manager since the Fund's
inception in May 1995. Mr. Fuss joined Loomis Sayles in 1976. Kathleen C.
Gaffney, Vice President of Loomis Sayles, has been assisting Mr. Fuss as a
portfolio manager of the Fund since April 1996. Ms. Gaffney joined Loomis Sayles
in 1984. Gary L. Goodenough and Madeline E. Glick, Vice Presidents of Loomis
Sayles, have served as the High Income Fund's portfolio managers since July 1,
1996. Mr. Goodenough served as a Managing Director at Bear Stearns and Salomon
Brothers prior to joining Loomis Sayles in 1993. Ms. Glick is the founder of MEG
Asset Management and served as its President prior to joining Loomis Sayles in
1991.
The subadviser of the other Funds is Back Bay Advisors, 399 Boylston Street,
Boston, Massachusetts 02116. Back Bay Advisors provides discretionary investment
management services to mutual funds and other institutional investors. Formed in
1986, Back Bay Advisors now manages 15 mutual fund portfolios and a total of
over $6 billion of securities. Eric N. Gutterson, Vice President of Back Bay
Advisors, has served as the portfolio manager of the Government Securities Fund
and Limited Term U.S. Government Fund since April 1994. J. Scott Nicholson,
Senior Vice President of Back Bay Advisors, has served as the Adjustable Rate
Fund's portfolio manager since the Fund's inception in October 1991. Catherine
L. Bunting, Senior Vice President of Back Bay Advisors, has served as the Bond
Income Fund's portfolio manager since 1989. Each of the foregoing persons has
been employed by Back Bay Advisors for at least five years.
Subject to the supervision of NEFM, each subadviser manages the portfolio of
each Fund to which it acts as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund and employs
professional advisers and securities analysts who provide research services
relating to the Fund. The Funds pay no direct fees to any of the subadvisers.
Each of the Funds pays NEFM a management fee at the annual rate set forth in the
following table:
<TABLE>
<CAPTION>
Management fee paid by Fund to NEFM
Fund (as a percentage of average daily net assets of the Fund)
- ---------------------------------------------------- -----------------------------------------------------------------
<S> <C> <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 0.500% of the first $100 million
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>
NEFM pays each Fund's subadviser a subadvisory fee at the annual rate set forth
in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- ---------------------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C> <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 and Back Bay Advisors 0.3250% of the first $200 million
Limited Term U.S. Government 0.3125% of the next $300 million
Fund 0.3000% of amounts in excess of $500 million
High Income Fund and Loomis Sayles 0.3500% of the first $200 million
Strategic Income Fund 0.3000% of amounts in excess of $200 million
</TABLE>
Prior to January 2, 1996, Back Bay Advisors served as adviser to each Fund other
than the Strategic Income Fund. From January 2, 1996 to June 30, 1996, Back Bay
Advisors served as subadviser to the High Income Fund.
NEFM has voluntarily agreed, until further notice to the High Income Fund, to
reduce its management fee and, if necessary, to bear certain expenses associated
with operating the Fund in order to limit the Fund's expenses to an annual rate
of 1.15% of the average daily net assets of the Fund's Class Y shares. NEFM may
terminate this voluntary agreement at any time.
NEFM and Back Bay Advisors have voluntarily agreed, until further notice to the
Adjustable Rate Fund, to reduce their fees and, if necessary, to bear certain
expenses associated with operating the Fund in order to limit the Fund's
expenses to the annual rate of 0.45% of the Fund's average daily net assets
attributable to its Class Y shares. NEFM and Back Bay Advisors may terminate
this voluntary agreement at any time.
If any of the voluntary fee reductions described above are terminated, the
prospectus of the affected Fund will be supplemented.
The general partners of Back Bay Advisors, Loomis Sayles, NEFM and the
Distributor are special purpose corporations that are indirect, wholly-owned
subsidiaries of New England Investment Companies, L.P. ("NEIC"). NEIC's sole
general partner, New England Investment Companies, Inc., is a wholly-owned
subsidiary of Metropolitan Life Insurance Company ("MetLife").
In placing portfolio transactions for the Funds, Back Bay Advisors and Loomis
Sayles seek the most favorable price and execution available. Subject to
applicable regulatory restrictions and such policies as each Trust's trustees
may adopt, Back Bay Advisors and Loomis Sayles may consider sales of shares of
the Funds and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Fund. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed by brokers that are affiliated with NEIC, NEFM or any
subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
In addition to overseeing the management of the Funds' portfolios as conducted
by the subadvisers, NEFM provides executive and other personnel for the
management of the Trusts. Each Trust's Board of Trustees supervises the affairs
of that Trust as conducted by NEFM and the Funds' subadvisers.
In addition to the management fee paid to NEFM, each Fund pays all expenses not
borne by its adviser, subadviser or the Distributor, including, but not limited
to, the charges and expenses of the Fund's custodian and transfer agent,
independent auditors and legal counsel for the Fund and the Trusts' independent
trustees, all brokerage commissions and transfer taxes in connection with
portfolio transactions, all taxes and filing fees, the fees and expenses for
registration or qualification of its shares under federal and state securities
laws, all expenses of shareholders' and trustees' meetings, preparing, printing
and mailing prospectuses and reports to shareholders and the compensation of
trustees who are not directors, officers or employees of The New England, NEFM,
Back Bay Advisors, Loomis Sayles or their affiliates, other than affiliated
registered investment companies. Certain expenses may be allocated differently
between each Fund's Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income and Bond Income Funds) Class C shares, on one hand,
and its Class Y shares, on the other hand. (See "Additional Facts About the
Funds" below.)
The Funds have applied for an exemptive order from the SEC to permit NEFM,
subject to certain conditions, to enter into subadvisory agreements with
subadvisers other than the existing subadvisers of the Funds when approved by
the relevant Trust's Board of Trustees, without obtaining shareholder approval.
The exemptive request also seeks to permit, without shareholder approval, the
terms of an existing subadvisory agreement to be changed or the employment of an
existing subadviser to be continued after events that would otherwise cause an
automatic termination of a subadvisory agreement, when such changes or
continuation are approved by the relevant Trust's Board of Trustees.
Shareholders would be notified of any subadviser changes.
<PAGE>
B U Y I N G F U N D S H A R E S
MINIMUM INVESTMENT
Class Y shares of the Funds may be purchased by other mutual funds, endowments,
foundations, bank trust departments or trust companies. The minimum initial
investment is $1 million for these entities and $10,000 is the minimum for each
subsequent investment. Class Y shares may also be purchased by plan sponsors of
401(a), 401(k), 457 or 403(b) plans ("Retirement Plans") that have total
investment assets of at least $10 million, and by New England Life Insurance
Company ("NELICO") or MetLife and any other insurance company affiliated with
NELICO or MetLife or any of their successor entities ("Insurance Company
Accounts"). Plan sponsors' investment assets in multiple Retirement Plans can be
aggregated for purposes of meeting this minimum. Class Y shares may also be
purchased by any separate account of NELICO or MetLife or of any other insurance
company affiliated with NELICO or MetLife ("Separate Accounts"). Class Y shares
may also be purchased by wrap fee programs of certain broker-dealers as to which
no service or marketing fees are paid to such broker-dealers by the Fund, NEFM
or the Distributor ("Wrap Fee Programs"). There is no minimum initial or
subsequent investment amount for Retirement Plans, Separate Accounts, Insurance
Company Accounts or Wrap Fee Programs. Investments in the Funds may also be made
by certain individual retirement accounts if the amounts invested represent
rollover distributions from investments by any of the Retirement Plans of
amounts invested in the Funds. The Distributor serves as the principal
underwriter of the Fund's shares. Shares may be purchased on any day when the
New York Stock Exchange (the "Exchange") is open for business (a "business
day"). Investors should contact New England Funds before attempting to place an
order for Fund shares. The Funds and the Distributor reserve the right at any
time to reject a purchase order.
Class Y shares of a Fund may, at the discretion of NELICO, be purchased on
behalf of agents, general agents, directors and senior officers of NELICO and
its insurance company subsidiaries in connection with deferred compensation
plans offered by NELICO ("NELICO Deferred Compensation Plan Accounts"). There is
no minimum initial or subsequent investment amount for NELICO Deferred
Compensation Plan Accounts.
Class Y shares of a Fund may be purchased through Wrap Fee Programs offered by
certain broker-dealers. Such Wrap Fee Programs may be subject to additional or
different conditions, including a wrap account fee. Each broker-dealer that
offers Class Y shares through a Wrap Fee Program is responsible for transmitting
to its customer a schedule of fees and other information regarding any
conditions and restrictions which may be imposed by the broker-dealer on a
participant in its Wrap Fee Program. Shareholders who are customers of
broker-dealers should contact their broker-dealer for information regarding the
fees associated with the Wrap Fee Program and the conditions and restrictions
which the broker-dealer may impose. In the event that a participant who
purchased Class Y shares of a Fund through a Wrap Fee Program should terminate
the wrap fee arrangement with the broker-dealer, then the Class Y shares will,
at the discretion of the broker-dealer, automatically be converted to a number
of Class A shares of the same Fund having the same net asset value as the shares
converted, and the broker-dealer may thereafter be entitled to receive from that
Fund an annual service fee of 0.25% of the value of the Class A shares owned by
that shareholder.
Class Y shares of a Fund may be purchased through an omnibus account by
investment advisers, financial planners, broker-dealers or other intermediaries
who have entered into a service agreement with the Fund ("Service Accounts").
Shareholders who purchase shares through a Service Account may be charged a fee
if they effect transactions through such parties and should contact such parties
for information regarding such fees. There is no minimum initial or subsequent
investment amount for Retirement Plans, Separate Accounts, Special Accounts,
Insurance Company Accounts, Wrap Fee Programs or Service Accounts.
WAYS TO BUY FUND SHARES
A shareholder may purchase Class Y shares for cash on any business day by the
two methods described below:
[] BY WIRE TRANSFER:
Prior to an initial investment, obtain an account number and wire transfer
instructions by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business. All funds should be
transmitted to State Street Bank and Trust Company, ABA #011000028, DDA
#99011538 Credit [Fund Name] Class Y shares, Shareholder Name, and Shareholder
Account Number.
[] BY MAIL:
For an initial investment, simply complete the attached application and return
it, with a check payable to New England Funds and mailed to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551. All purchases made by check should be in
U.S. dollars and made payable to New England Funds, or, in the case of a
retirement account, the custodian or trustee. Third party checks will generally
not be accepted except under certain circumstances approved by the Distributor.
When purchases are made by check, redemptions may not be allowed until the
investment being redeemed has been in the account for a minimum of ten calendar
days.
Class Y shares of a Fund may also be purchased by exchanging securities on
deposit with a custodian acceptable to the Fund's subadviser or by a combination
of such securities and cash. Purchase of shares of a Fund in exchange for
securities is subject in each case to the determination by the Fund's subadviser
that the securities to be exchanged are acceptable for purchase by the Fund.
Securities accepted by a Fund's subadviser in exchange for Fund shares will be
valued in the same manner as the Fund's assets (generally the last quoted sales
price), as described below under "Fund Details -- How Fund Share Price Is
Determined," as of the time of the Fund's next determination of net asset value
after such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund upon receipt
by the investor from the issuer. A gain or loss for federal income tax purposes
would be realized upon the exchange by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling 1-800-225-5478.
A Fund's subadviser will not approve the acceptance of securities in exchange
for shares of a Fund it advises unless (1) the Fund's subadviser, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933 or otherwise; (3) the securities are eligible to be
acquired under the Fund's investment policies and restrictions; and (4) the
securities have a value which is readily ascertainable (not established by
evaluation procedures alone) as evidenced by a listing on the New York Stock
Exchange, the American Stock Exchange, NASDAQ or the principal securities
exchange of countries in which the Fund may invest. No investor owning 5% or
more of the Fund's shares may purchase additional Fund shares by exchange of
securities (other than shares of other New England Funds).
GENERAL
The purchase price of shares of each Fund is the net asset value next determined
after a purchase order is received in good order by New England Funds. For
purposes of calculating the purchase price of Fund shares, a purchase order is
considered received by the Fund on the day that it is "in good order" unless it
is rejected by the Fund. For a purchase order to be in "good order" on a
particular day, in the case of a purchase of Fund shares in exchange for
securities, the investor's securities must be placed on deposit at a depository
acceptable to a Fund's subadviser by 4:00 p.m. (Eastern time), and, in the case
of a cash investment, Federal funds must be wired to the Fund between 9:00 a.m.
and 4:00 p.m. (Eastern time) or a check for the purchase price of the shares,
accompanied by a completed application, must have been received by New England
Funds before 4:00 p.m. (Eastern time) on that day. Orders received after 4:00
p.m. (Eastern time) will receive the next day's price.
Purchases will be made in full and fractional Class Y shares calculated to three
decimal places. The shareholder will receive a statement of Fund shares owned
following each transaction. Investors will not receive certificates representing
Class Y shares. The Funds and the Distributor reserve the right at any time to
reject a purchase order.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve sales goals or who may sell significant
amounts of shares.
<PAGE>
O W N I N G F U N D S H A R E S
EXCHANGING AMONG NEW ENGLAND FUNDS
You may exchange Class Y shares of the Funds or any other series of the Trusts
for Class Y shares of any other series of the Trusts which offers Class Y shares
or for Class A shares of the 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"). Agents, general agents, directors and senior
officers of NELICO and its insurance company subsidiaries may, at the discretion
of NELICO, elect to exchange Class Y shares of a series of the Trusts in a
NELICO Deferred Compensation Account for Class A shares of any other series of
the Trusts which do not offer Class Y shares. Class A shares of any series of
the Trusts in a NELICO Deferred Compensation Account may also be exchanged for
Class Y shares of any series of the Trusts. To obtain a prospectus and more
information about Class A shares, please call the Distributor toll free at
1-800-225-5478.
TO MAKE AN EXCHANGE, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business or write to New
England Funds. Exchange requests after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes earlier than 4:00 p.m., will be processed at the
net asset value determined at the close of regular trading on the next day that
the Exchange is open. All exchanges are subject to the eligibility requirements
of the series into which you are exchanging. In connection with any exchange,
you must obtain and carefully read 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 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 telephone
instructions, will provide shareholders with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
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
Each Fund declares dividends daily and pays them monthly. Each Fund pays as
dividends substantially all net investment income (tax-exempt and taxable income
other than long- and short-term capital gains) each year and distributes
annually all net realized long- and short-term capital gains (after applying any
available capital loss carryovers). Each Fund pays short-term capital gains
annually. The trustees of the Trusts may adopt a different schedule as long as
payments are made at least annually. If you intend to purchase shares of a Fund
shortly before it declares a capital gain distribution, you should be aware that
a portion of the purchase price may be returned to you as a taxable
distribution.
You have the option to reinvest all distributions in additional Class Y shares
of the Fund or in Class Y shares of other series of the Trusts, to receive
distributions from ordinary income in cash while reinvesting distributions from
capital gains in additional Class Y shares of the Fund or of other series of the
Trusts, or to receive all distributions in cash. Income distributions and
capital gains distributions will be reinvested in Class Y shares of the Fund at
net asset value 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, which allows you to
have all dividends and any other distributions automatically invested in Class Y
shares 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 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 and carefully read a copy of
that fund's prospectus.
<PAGE>
S E L L I N G F U N D S H A R E S
WAYS TO SELL FUND SHARES
You may sell Class Y shares of the Funds in the following ways:
[] BY TELEPHONE:
You may redeem (sell) shares by telephone for cash by the two 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) on a day when the
Funds are open for business. The proceeds 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) on a day when the
Funds are open for business and requesting that a check for the proceeds 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 your address of record on the business
day after your redemption request is received.
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 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, or wired to your bank account. All owners of the shares must sign the
request in the exact names in which the shares are registered (this appears on
your confirmation statement) and indicate any special capacity in which they are
signing (such as trustee, custodian or under power of attorney or on behalf of a
partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
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 for details.
GENERAL
Redemption requests will be effected at the net asset value next determined
after the redemption request is received in proper form by State Street Bank and
Trust Company ("State Street Bank"). Redemption proceeds 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 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 has 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 to redemptions under powers of attorney. Please call the
Distributor or your investment dealer for more information.
Telephone redemptions are not available for tax qualified retirement plans or
for Fund shares in certificate form. If certificates have been issued for your
investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency that makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If Back Bay Advisors, or Loomis Sayles in the case of the Strategic Income and
High Income Funds, determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of readily marketable securities held
by the Fund in lieu of cash. Securities used to redeem Fund shares in kind will
be valued in accordance with the Funds' procedures for valuation described under
"Fund Details - How Fund Share Price Is Determined." Securities distributed by a
Fund in kind will be selected by Back Bay Advisors, or Loomis Sayles in the case
of the Strategic Income and High Income Funds, in light of the Fund's objective
and will not generally represent a pro rata distribution of each security held
in the Fund's portfolio. Investors may incur brokerage charges on the sale of
any such securities so received in payment of redemptions. The Funds' right to
pay redemptions in kind is limited by an election made by the Funds under Rule
18f-1 under the Investment Company Act of 1940, as amended. See "Redemptions" in
Part II of the Statement.
<PAGE>
F U N D D E T A I L S
HOW FUND SHARE PRICE IS DETERMINED
Each Fund's subadviser, under the supervision of each Trust's Board of Trustees,
determines the value of the total net assets of each Fund as of the close of
regular trading (ordinarily 4:00 p.m. Eastern time) each day the Exchange is
open. The Boards of Trustees have authorized Back Bay Advisors or, in the case
of the Strategic Income and High Income Funds, Loomis Sayles, to delegate
certain price determination functions to pricing services or facilities selected
by Back Bay Advisors or Loomis Sayles, as the case may be. Securities for which
market quotations are readily available are generally valued at market value on
the basis of market quotations. Options and futures which are traded on
exchanges are valued at their last sale price as of the close of the Exchange.
All money market instruments with a maturity of more than 60 days are valued at
current market value. The value of debt securities with remaining maturities of
60 days or less shall be their amortized cost value, unless conditions indicate
otherwise. In all other cases, the value of a Fund's assets is determined in
good faith by Back Bay Advisors or, in the case of the Strategic Income and High
Income Funds, Loomis Sayles, or a pricing service selected by Back Bay Advisors
or Loomis Sayles, under the supervision of the Boards of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (the current U.S. dollar value, in the case of
securities principally traded outside the United States) plus any cash and other
assets (including dividends and interest receivable but not collected) less all
liabilities (including accrued expenses), by the number of shares of such class
outstanding. The public offering price of Class Y shares is the net asset value
per share.
The exact price you pay for a share will be determined by 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 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
Each Fund intends to meet all requirements of the Code necessary to ensure that
it qualifies as a regulated investment company and thus does not expect to pay
any federal income tax on investment income and capital gains distributed to
shareholders in cash or additional shares. Unless you are a tax-exempt entity,
your distributions derived from a Fund's short-term capital gains and ordinary
income are taxable to you as ordinary income. Distributions derived from a
Fund's long-term capital gains ("capital gains distributions"), if designated as
such by a Fund, are taxable to you as long-term capital gains, regardless of how
long you have owned shares in the Fund. Both dividends and capital gains
distributions are taxable whether distributed to you in cash or additional
shares.
A Fund's transactions in foreign currency-denominated debt securities and its
hedging activities will likely produce a difference between its book income and
its taxable income. This difference may cause a part or all of a Fund's income
distributions to constitute returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to avoid federal income tax
liability.
DIVIDENDS DERIVED FROM INTEREST ON U.S. GOVERNMENT SECURITIES MAY BE EXEMPT FROM
STATE AND LOCAL TAXES. The Funds intend to advise shareholders of the proportion
of each Fund's dividends that are derived from such interest. Before investing
in any of the Funds, you should check the consequences of your local and state
tax laws, which may be different from the federal tax consequences, and the
consequences for any retirement plan offering tax benefits.
To avoid an excise tax, each Fund intends to distribute prior to calendar year
end virtually all the Fund's ordinary income earned during that calendar year,
and virtually all of the capital gain net income the Fund realized during the
twelve months ending October 31 but has not previously distributed. If declared
in December to shareholders of record in that month, and paid the following
January, these distributions will be considered for federal income tax purposes
to have been received by shareholders on December 31.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if the Fund is notified that you have underreported
income in the past or if you fail to certify to the Fund that you are not
subject to such withholding. In addition, each 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
institution, however, these back-up withholding rules will not apply so long as
you furnish the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
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 foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations. You
should consult a competent tax adviser as to the effect of an investment in a
Fund on your particular federal, state and local tax situations.
[] ADJUSTABLE RATE FUND
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by a Fund from direct obligations of
the U.S. Government, less than 20% of the distributions of the Adjustable Rate
Fund during the current fiscal year are expected to qualify for such tax-free
treatment. Investments in mortgage-backed securities (including GNMA, FNMA and
FHLMC securities) and repurchase agreements collateralized by U.S. Government
securities do not qualify as direct federal obligations in most states.
In addition, the Distributor performs certain accounting and administrative
services for the Bond Income Fund and Government Securities Fund. For those
services, each Fund reimburses the Distributor for all or part of its expenses
of providing these services to the Fund, which includes the following: (i)
expenses for personnel performing bookkeeping, accounting, internal auditing,
financial reporting and clerical functions relating to the Funds, (ii) expenses
for services required in connection with the preparation of registration
statements and prospectuses, shareholder reports and notices, proxy solicitation
materials furnished to shareholders of the Funds or regulatory authorities and
reports and questionnaires for SEC compliance, and (iii) registration, filing
and other fees in connection with requirements of regulatory authorities.
PERFORMANCE CRITERIA
Each Fund may include total return information in advertisements or other
written sales material. Each Fund may show the average annual total return for
each class of shares for the one-, five- and ten-year periods through the end of
the most recent calendar quarter (or, if shorter, the period since the
commencement of the class's operations) or, in the case of the High Income
Fund's Class A shares, for the period since July 27, 1988, when Back Bay
Advisors became the High Income Fund's investment adviser. Total return is
measured by comparing the value of a hypothetical $1,000 investment in a class
at the 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 the Class B shares, imposition of the CDSC for
the period of time 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 classes may also show total return over other
periods, on an aggregate basis for the period presented, or without deduction of
a sales charge. If a sales charge is not deducted in calculating total return,
the class's total return will be higher.
Each Fund may also include the yield, accompanied by the total return, for each
class of shares, in advertising and other written material. Yield will be
computed in accordance with the SEC's standardized formula by dividing the
adjusted net investment income per share earned during a recent 30-day period by
the maximum offering price of a share of the relevant class (reduced by any
earned income expected to be declared shortly as a dividend) on the last day of
the period. Yield calculations will reflect any voluntary expense limitations in
effect for the Fund during the relevant period.
Each Fund may also present one or more distribution rates for each class in its
sales literature. These rates will be determined by annualizing the class's
distributions from net investment income and net short-term capital gains over a
recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value rather than the maximum offering price is used to calculate
the distribution rate, the rate will be higher.
As a result of lower operating expenses, Class Y shares of the Funds can be
expected to achieve a higher investment return than the Funds' Class A, Class B
or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
ADDITIONAL FACTS ABOUT THE FUNDS
[] New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to issue
an unlimited number of full and fractional shares in multiple series. The
Government Securities Fund represents the original series of shares of New
England Funds Trust I. The Bond Income Fund was organized prior to 1985 and
conducted investment operations as a separate corporation until its
reorganization as a series of New England Funds Trust I in January 1987. The
Strategic Income Fund commenced investment operations in 1995.
[] New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to issue
an unlimited number of full and fractional shares in multiple series. The
Limited Term U.S. Government Fund commenced investment operations in 1989. The
High Income Fund was organized in 1984 and conducted investment operations as a
separate corporation until its reorganization as a series of New England Funds
Trust II in 1989. The Adjustable Rate Fund commenced operations in 1991.
[] When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive dividends as determined by the
respective Trust's trustees and to cast a vote for each share you own at
shareholder meetings. Shares of each Fund vote separately from shares of other
series of the same Trust, except as otherwise required by law. Shares of all
classes of a Fund vote together, except as to matters relating to a class's Rule
12b-1 plan, for which only shares of that class are entitled to vote. No Rule
12b-1 plan applies to the Class Y shares of any Fund.
[] Class A, Class B and Class C shares are identical to Class Y shares, except
that Class A and Class B shares are subject to a sales load or contingent
deferred sales charge, Class A, Class B and Class C shares bear a service fee at
the annual rate of 0.25% of average net assets (and in the case of Class B and
Class C shares a 0.75% distribution fee; also, Class A shares of the Limited
Term U.S. Government Fund bear an additional 0.10% distribution fee) and have
separate voting rights in certain circumstances. Class Y may bear its own
transfer agency and prospectus printing costs. The minimum initial investment in
Class A, Class B and Class C shares is generally $2,500 (but lower minimums
apply to purchases under certain special programs).
[] Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each Fund may
be changed by the relevant Trust's trustees without shareholder approval or, in
most cases, prior notice. The investment objectives of the Government Securities
and Bond Income Funds are fundamental. The investment objectives of the
Adjustable Rate Fund and Strategic Income Fund are not fundamental. The
investment objectives of the Limited Term U.S. Government and High Income Funds
are not fundamental but, as a matter of policy, the trustees would not change
that objective without shareholder approval. If there is a change in the
investment objective of the Adjustable Rate or Strategic Income Fund, you should
consider whether the Fund remains an appropriate investment in light of your
then current financial position and needs.
[] The Trusts do not generally hold regular shareholder meetings and will do so
only when required by law. Shareholders of a Trust may remove the trustees of
that Trust from office by votes cast at a shareholder meeting or by written
consent.
[] The transfer and dividend paying agent for the Funds is New England Funds,
L.P., 399 Boylston Street, Boston, MA 02116. New England Funds, L.P. has
subcontracted certain of its obligations as such to State Street Bank, 225
Franklin Street, Boston, MA 02110.
[] The Trusts, together with the Money Market Funds, constitute the New England
Funds. Each Trust offers only its own funds' shares for sale, but it is possible
that a Trust might become liable for any misstatements in this prospectus that
relate to the other Trust. The trustees of each Trust have considered this
possible liability and approved the use of this combined prospectus for Funds of
both Trusts.
[] The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
[] Each Fund's annual report contains additional performance information and is
made available upon request and without charge. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more than one
shareholder of record with the same last name has indicated that mail is to be
delivered. Shareholders may request additional copies of any annual or
semi-annual report in writing or by telephone.
[] The Distributor has entered into a selling agreement with investment dealers,
including a broker-dealer that is an affiliate of the Distributor, for the sale
of the Funds' Class Y Shares. The Distributor may at its expense pay an amount
not to exceed 0.50% of the amount invested to dealers who have selling
agreements with the Distributor. Registered representatives of the affiliated
broker-dealer are also employees of New England Investment Associates, Inc.
("NEIA"), an indirect, wholly-owned subsidiary of NEIC. NEIA may receive
compensation with respect to certain sales of each Fund's Class Y shares from
the Fund's subadviser.
[] The Trusts' trustees have the authority without shareholder approval to issue
other classes of shares of the Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
[] Class Y Shares of the Funds may be purchased through certain broker-dealers
and/or financial organizations, including a broker-dealer that is an
affiliate of the Distributor. Such organizations may receive compensation, in an
amount of up to 0.25% annually of the value of the Fund shares held by their
clients. The compensation may be paid by New England Funds Management, L.P.
and/or a Fund's subadviser out of their own assets, or may be paid by the Fund
in the form of accounting, servicing, distribution or transfer agent fees.
<PAGE>
A P P E N D I X A: R A T I N G S O F S E C U R I T I E S
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa are
rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
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 the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
A P P E N D I X B
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
STRATEGIC INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock.................................... 0%
Short-term Obligations and Other Assets ........... 0%
Common Stock....................................... 0%
Debt-- Unrated..................................... 7%
Debt-- Standard and Poor's Rating
AAA ........................................ 8%
AA.......................................... 8%
A........................................... 11%
BBB......................................... 35%
BB.......................................... 13%
B........................................... 14%
CCC and lower............................... 4%
The chart above indicates the composition of the Strategic Income Fund for the
fiscal year ended December 31, 1996, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
Strategic Income Fund's net assets invested in each category as of the end of
each month during the year. Loomis Sayles does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
HIGH INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Common Stock ....................................... 1%
Preferred Stock .................................... 6%
Short-term Obligations and Other Assets ............ 3%
Debt-- Unrated ..................................... 0%
Debt-- Standard and Poor's Rating
AAA ....................................... 0%
BBB........................................ 0%
BB......................................... 11%
B.......................................... 69%
CCC........................................ 10%
The chart above indicates the composition of the High Income Fund for the fiscal
year ended December 31, 1996, with the debt securities rated by S&P separated
into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the High
Income Fund's net assets invested in each category as of the end of each month
during the year. Loomis Sayles does not rely primarily on ratings designed by
any rating agency in making investment decisions. The chart does not necessarily
indicate what the composition of the Fund's portfolio will be in subsequent
fiscal years.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE 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 and Class C shares or the Prospectus of the
Funds dated September 15, 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 Growth Fund, New England Capital Growth Fund, New England
Balanced Fund, New England International Equity Fund and New England Value Fund
are series of New England Funds Trust I, a registered management investment
company that offers a total of twelve series, and New England Growth
Opportunities Fund is a series of New England Funds Trust II, a registered
management investment company that offers a total of 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 vii
Ownership of Fund Shares xii
Investment Performance of the Funds xv
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 California Funds 59
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the 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 restrictions marked with a
dagger (+) below, the percentages set forth below and the percentage limitations
set forth in the Prospectus will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
NEW ENGLAND GROWTH FUND, NEW ENGLAND VALUE FUND AND NEW ENGLAND BALANCED FUND
New England Growth Fund (the "Growth Fund"), New England Value Fund (the "Value
Fund") and New England Balanced Fund (the "Balanced Fund") each will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any one
industry;
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking
all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
New England Funds Trust I or of the investment adviser of the Fund who
individually own more than 1/2 of 1% of the shares or securities of that
issuer together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are a part
of an issue to the public or to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, real estate or commodities or commodity contracts. Also, the
Value Fund will not buy or sell real estate or interests in real estate
which are not readily marketable. (This restriction does not prevent
such Funds from purchasing securities of companies investing in the
foregoing);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
*(13) Purchase options or warrants if, as a result, more than 1% of its total
assets (taken at current value) would be invested in such securities;
*(14) Write options or warrants;
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions. (Under the 1940 Act, the Growth Fund, the Value Fund and
the Balanced Fund each may not (a) invest more than 10% of its total
assets [taken at current value] in such securities, (b) own securities
of any one investment company having a value in excess of 5% of the
total assets of such Fund [taken at current value], or (c) own more than
3% of the outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this 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; or
+(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.)
NEW ENGLAND CAPITAL GROWTH FUND
New England Capital Growth Fund (the "Capital Growth Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government [together
with subdivisions thereof] will be considered to be a separate
industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(7) 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;
*(8) 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);
*(9) 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;
(10) Except to the extent permitted by rule or order of the Securities and
Exchange Commission (the "SEC"), participate on a joint or joint and
several basis in any trading account in securities. (The "bunching" of
orders for the purchase or sale of portfolio securities with Loomis,
Sayles & Company, L.P. ["Loomis Sayles"] or accounts under its
management to reduce brokerage commissions, to average prices among them
or to facilitate such transactions is not considered a trading account
in securities for purposes of this restriction.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities or securities
indexes and (b) enter into currency forward contracts;
+(12) 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); or
*(13) Issue senior securities. (For the purpose of this restriction, none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.)
NEW ENGLAND INTERNATIONAL EQUITY FUND
New England International Equity Fund (the "International Equity Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other
than U.S. Government securities) if, as a result, more than 5% of the
Fund's total assets (taken at current value) would then be invested in
securities of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities category,
gas, electric, water and telephone companies will be considered as being
in separate industries, and each foreign country's government [together
with subdivisions thereof] will be considered to be a separate
industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold,
and the Fund will not deposit or pledge more than 10% of its total
assets (taken at current value) as collateral for such sales. (For this
purpose, the deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues of
an issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5%
of its total assets (taken at current value), whichever is lower, and
then only as a temporary measure for extraordinary or emergency
purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge of
assets);
*(7) 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;
*(8) 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);
*(9) 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;
(10) 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 Loomis Sayles or accounts under its management
to reduce brokerage commissions, to average prices among them or to
facilitate such transactions is not considered a trading account in
securities for purposes of this restriction.);
(11) 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;
+(12) Purchase any illiquid security if, as a result, more than 15% of its
total assets (taken at current value) would be invested in such
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper); or
*(13) Issue senior securities. For the purpose of this restriction none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts
and with respect to initial and variation margin; the purchase or sale
of options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.
The staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are subject to restriction (12)
above.
NEW ENGLAND GROWTH OPPORTUNITIES FUND
New England Growth Opportunities Fund (the "Growth Opportunities Fund") will
not:
*(1) Purchase securities of an issuer if such purchase would cause more than
5% of the market value of the total Fund assets to be invested in the
securities of such issuer (exclusive of United States or Canadian
government obligations), or if such purchase would cause more than 10%
of the securities of such issuer to be held by the Fund;
*(2) Purchase or retain the securities of any issuer if the officers and
trustees of New England Funds Trust II owning beneficially 1/2 of 1% of
the securities of such issuer together own beneficially more than 5% of
the securities of such issuer;
*(3) Purchase the securities issued by any other investment company, except
that a purchase involving no commission or profit to a sponsor or dealer
(other than a customary broker's commission) is permitted and except
that a purchase that is part of a plan of merger or consolidation is
permitted;
*(4) Purchase securities issued by companies with a record (including that of
their predecessors) of less than three years' continuous operation;
*(5) Purchase securities for the portfolio on margin, make short sales or
make loans to persons affiliated with New England Funds Trust II;
*(6) Act as underwriter of securities of other issuers, or invest directly in
real estate or in commodities or commodity contracts; or
*(7) Make loans to other persons, provided, however, that this restriction
shall not prohibit the Fund from entering into repurchase agreements
with respect to not more than 25% of the Fund's total assets taken at
current value. The purchase of a portion of an issue of bonds, notes or
debentures publicly distributed or of a type customarily purchased by
institutional investors does not constitute the making of loans within
the meaning of this restriction;
*(8) The Growth Opportunities Fund may make secured or unsecured bank
borrowings, provided that an asset coverage of at least 300% for all
such borrowings (including the amount then being borrowed) is maintained
as required by the 1940 Act;
*(9) Issue senior securities. For the purpose of this restriction, none of
the following is deemed to be a senior security; any borrowing permitted
by restriction (8) above; any collateral arrangements with respect to
options, futures contracts, swap contracts and other similar contracts
and options on futures contracts and with respect to initial and
variation margin; the purchase or sale of options, forward contracts,
futures contracts, swap contracts and other similar contracts or options
on futures contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds Trust
II's Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom;
+(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).
It is a fundamental policy of the Growth Opportunities Fund that it will
not concentrate its assets in the securities of issuers in the same industry.
The Fund intends to abide by the views of the SEC staff on what constitutes
industry concentration. Accordingly, the Fund will not make an investment if,
immediately thereafter, the Fund would hold more than 25% of its total assets in
securities of issuers in any one industry. This limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Growth Opportunities Fund has no present intention of borrowing
money except on a temporary basis, as may be needed, to cover redemptions of
shares. Should this intention change, the Prospectus will be amended.
- --------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- --------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 1996, Capital Growth
Management Limited Partnership ("CGM") has agreed to manage the investment and
reinvestment of the assets of the Growth Fund, subject to the supervision of the
Board of Trustees of New England Funds Trust I. Under the advisory agreement,
the Fund pays CGM an advisory fee at the annual rate of 0.75% of the first $200
million of the Fund's average daily net assets, 0.70% of the next $300 million
of such assets and 0.65% of such assets in excess of $500 million.
Pursuant to separate advisory agreements, each dated 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 the Capital Growth, Value,
Balanced, International Equity and Growth Opportunities Funds and to provide a
range of administrative services to such Funds. For the services described in
the advisory agreements, each such Fund has agreed to pay NEFM a management fee
at the annual rate set forth in the following table:
Management fee payable by Fund to NEFM
(as a percentage of average daily
Fund net assets of the Fund)
- ----------------------------- -----------------------------------------------
Balanced Fund, 0.750% of the first $200 million
Capital Growth Fund and 0.700% of the next $300 million
Value Fund 0.650% of amounts in excess of $500 million
Growth Opportunities Fund 0.700% of the first $200 million
0.650% of the next $300 million
0.600% of amounts in excess of $500 million
International Equity Fund 0.900% of the first $200 million
0.850% of the next $300 million
0.800% of amounts in excess of $500 million
The advisory agreements for the Capital Growth, Value, Balanced,
International Equity and Growth Opportunities Funds each provide that NEFM may
delegate its responsibilities thereunder to other parties. Pursuant to separate
subadvisory agreements, each dated August 30, 1996 (February 14, 1997, in the
case of the International Equity Fund), NEFM has delegated responsibility for
managing the investment and reinvestment of each of these Funds' assets to a
subadviser. The subadviser is Loomis Sayles, in the case of the International
Equity, Balanced, Value and Capital Growth Funds; and Westpeak Investment
Advisors, L.P. ("Westpeak"), in the case of the Growth Opportunities Fund. The
Funds pay no direct fees to the subadvisers. For providing such subadvisory
services to the Funds, NEFM pays each subadviser a subadvisory fee at the annual
rate set forth in the following table:
Subadvisory fee payable by NEFM to
subadviser (as a percentage of average
Fund Subadviser daily net assets of the Fund)
- -------------------- --------------- ---------------------------------------
Balanced Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
Capital Growth Fund Loomis Sayles 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of
$500 million
<PAGE>
Subadvisory fee payable by NEFM to
subadviser (as a percentage of average
Fund Subadviser daily net assets of the Fund)
- -------------------- --------------- ---------------------------------------
Growth Opportunities
Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200
million
International Equity
Fund Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200
million
Value Fund Loomis Sayles 0.535% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess of $500
million
Loomis Sayles has voluntarily agreed to waive in its entirety its
subadvisory fee for the International Equity Fund through February 14, 1998.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and
Loomis Sayles served as subadviser to the Capital Growth, Balanced and Value
Funds pursuant to separate advisory and subadvisory agreements providing for the
same management and subadvisory fees as are currently in effect for these Funds.
Prior to August 30, 1996, CGM served as adviser to the Growth Fund pursuant to
an advisory agreement providing for an advisory fee at the same rate as
currently in effect for such Fund. Prior to January 2, 1996, Loomis Sayles
served as adviser to the Capital Growth, Balanced and Value Funds pursuant to
separate advisory agreements, each of which provided for an advisory fee payable
by such Fund to Loomis Sayles at the same rate as the management fee currently
payable by such Fund to NEFM.
From May 1, 1995 until August 30, 1996, NEFM served as adviser and
Westpeak served as subadviser to the Growth Opportunities Fund pursuant to
advisory and subadvisory agreements providing for the same management and
subadvisory fee rates as are currently in effect for the Fund. Prior to May 1,
1995, Back Bay Advisors, L.P. ("Back Bay Advisors") served as adviser to the
Growth Opportunities Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Back Bay Advisors at the annual rate of
0.50% of the Fund's average daily net assets.
From December 29, 1995 until February 14, 1997, Draycott Partners, Ltd.
("Draycott") served as subadviser to the International Equity Fund pursuant to
subadvisory agreements providing for a subadvisory fee payable by NEFM to
Draycott at the annual rate of 0.54% of the first $200 million of the Fund's
average daily net assets, 0.49% of the next $300 million of such assets and
0.44% of such assets in excess of $500 million. From December 29, 1995 to August
30, 1996, NEFM served as adviser to the International Equity Fund pursuant to an
advisory agreement providing for a management fee at the same rate as is
currently in effect for such Fund.
Prior to December 29, 1995, Draycott served as adviser to the
International Equity Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Draycott at the annual rate of 0.80% of the
first $200 million of the Fund's average daily net assets, 0.75% of the next
$300 million of such assets and 0.70% of such assets in excess of $500 million.
Prior to December 29, 1995, short-term cash management services were
provided to the International Equity Fund by Back Bay Advisors, as subadviser to
Draycott. For these services, Draycott had agreed to compensate Back Bay
Advisors at the annual rate of 0.08% of average daily net assets of the Fund.
Back Bay Advisors voluntarily agreed to waive this fee in its entirety.
Prior to December 29, 1995, New England Funds, L.P. (the
"Distributor"), of which Draycott was then an affiliate, furnished or paid the
expenses of the International Equity Fund for office space, facilities and
equipment, services of executive and other personnel of New England Funds Trust
I and certain administrative services, pursuant to an administrative services
agreement. Under this agreement, the Fund paid the Distributor a fee at the
annual rate of 0.10% of the average daily net assets attributable to the Fund's
Class A, Class B and Class C shares and 0.05% of the average daily net assets
attributable to the Fund's Class Y shares. The International Equity Fund's
current management fee rate represents, with respect to the Fund's Class A,
Class B and Class C shares, the sum of the fee rates under the prior advisory
and administrative services agreements.
Until further notice to the International Equity Fund, NEFM and the
Distributor have voluntarily agreed to reduce their fees and, if necessary, to
bear certain expenses related to operating the Fund in order to limit the Fund's
expenses to an annual rate of 1.75% of the average daily net assets of the
Fund's Class A shares, 2.50% of the average daily net assets of the Fund's Class
B shares, 2.50% of the average daily net assets of the Fund's Class C shares and
1.15% of the average daily net assets of the Fund's Class Y shares. NEFM and the
Distributor may terminate this voluntary limitation at any time. Prior to
December 31, 1996, the limit was 1.00% for Class Y shares. From December 29,
1995 to February 14, 1997, the Distributor had also agreed to reduce its fees
and, if necessary, to bear certain expenses related to operating the Fund to
keep the Fund's expenses within these limits. Prior to December 29, 1995,
similar voluntary limitations were in effect with respect to Draycott, the
Distributor and the Fund.
For the last three fiscal years, the advisory or management fees
payable by the Funds (before any voluntary fee reductions) were as follows:
FUND 1994 1995 1996**
- ---------------------------- ---- ---- ----
Growth Fund $7,572,051 $7,631,203 $8,300,884
Capital Growth Fund $ 834,943 $ 989,864 $1,245,009
Value Fund $1,543,333 $1,811,567 $2,241,498
Balanced Fund $1,498,050 $1,906,665 $2,355,084
International Equity Fund* $1,541,223 $2,025,005 $2,439,442
Growth Opportunities Fund $ 555,258 $ 856,469 $1,414,997
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $1,449,606, $1,756,405 and $2,183,655,
respectively, in advisory fees for the fiscal years ended December 31,
1994, 1995 and 1996.
** For the fiscal year ended December 31, 1996, NEFM paid subadvisory fees of
$1,497,544, $882,259 and $1,440,747 to Loomis Sayles for the Balanced,
Capital Growth and Value Funds, respectively. For the fiscal year ended
December 31, 1996, NEFM paid subadvisory fees of $1,296,747 to Draycott
(after the waiver) and $781,353 to Westpeak for the International Equity
and Growth Opportunities Funds, respectively.
For more information about the Funds' advisory and subadvisory
agreements, see "Management of the Trusts" in Part II of this Statement.
BROKERAGE COMMISSIONS
In 1994, 1995 and 1996, brokerage transactions for the Growth Fund
aggregating $262,711,459, $608,932,282 and $729,976,367, respectively, were
allotted to brokers providing research services, and $466,786, $525,823 and
$804,468, respectively, in commissions were paid on these transactions in such
years. During 1994, 1995 and 1996 the Fund paid total brokerage commissions of
$4,305,999, $5,784,166 and $6,700,404, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Value Fund
aggregating $9,382,814, $14,560,184 and $27,447,729, respectively, were allotted
to brokers providing research services, and $14,664, $28,143 and $42,841,
respectively, in commissions were paid on these transactions in such years.
During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$342,577, $658,975 and $563,181, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Balanced Fund
aggregating $14,761,967, $12,187,184 and $17,564,632, respectively, were
allotted to brokers providing research services, and $28,267, $30,368 and
$26,139, respectively, in commissions were paid on these transactions in such
years. During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$159,243, $415,773 and $373,304, respectively.
In 1994, 1995 and 1996, brokerage transactions for the Growth
Opportunities Fund aggregating $-0-, $43,047,123 and $180,664,244, respectively,
were allotted to brokers providing research services and $-0-, $41,640 and
$157,185, respectively, in commissions were paid on these transactions in such
years. During 1994, 1995 and 1996, the Fund paid total brokerage commissions of
$9,427, $138,878 and $352,661, respectively.
For the fiscal year ended December 31, 1994, brokerage transactions for
the International Equity Fund aggregating $482,619,468 were allocated to brokers
providing research services, and $1,203,631 in commissions were paid on these
transactions. During 1994, the International Equity Fund paid total brokerage
commissions of $1,203,631. For the fiscal year ended December 31, 1995,
brokerage transactions for the International Equity Fund aggregating
$593,996,591 were allocated to brokers providing research services and
$1,522,463 in commissions were paid on these transactions. During 1995, the
International Equity Fund paid total brokerage commissions of approximately
$1,522,463. For the fiscal year ended December 31, 1996, brokerage transactions
for the International Equity Fund aggregating $375,687,256 were allocated to
brokers providing research services, and $836,718 in commissions were paid on
these transactions. During 1996, the International Equity Fund paid total
brokerage commissions of $836,718.
For the fiscal year ended December 31, 1994, brokerage transactions for
the Capital Growth Fund aggregating $6,663,568 were allocated to brokers
providing research services, and $10,615 in commissions were paid on these
transactions. During 1994, the Capital Growth Fund paid total brokerage
commissions of $191,861. For the fiscal year ended December 31, 1995, brokerage
transactions for the Capital Growth Fund aggregating $8,522,526 were allocated
to brokers providing research services and $9,427 in commissions were paid on
these transactions. During 1995, the Capital Growth Fund paid total brokerage
commissions of approximately $157,512. For the fiscal year ended December 31,
1996, brokerage transactions for the Capital Growth Fund aggregating $7,402,475
were allocated to brokers providing research services, and $4,500 in commissions
were paid on these transactions. During 1996, the International Equity Fund paid
total brokerage commissions of $174,585.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and
Class C shares of each Fund pay fees under plans adopted pursuant to Rule 12b-1
under the 1940 Act. The following table shows the amounts of Rule 12b-1 fees
paid by each Fund during the fiscal years ended December 31, 1994, 1995 and
1996:
FUND 1994 1995 1996
---- ----
------------------------
Growth Fund*** $2,777,712 $2,800,465 $3,058,031 (Class A)
Value Fund $ 489,686 $ 545,439 $ 646,962 (Class A)
$ 81,490 $ 206,005 $ 359,799 (Class B)
--- $ 3,915 $ 21,301 (Class C)*
Balanced Fund $ 401,403 $ 445,951 $ 510,417 (Class A)
$ 141,331 $ 301,592 $ 486,789 (Class B)
--- $ 3,017 $ 15,702 (Class C)*
Growth Opportunities Fund $ 376,217 $ 340,216 $ 397,330 (Class A)
$ 35,609 $ 107,138 $ 389,526 (Class B)
--- $ 3,589 $ 45,844 (Class C)**
International Equity Fund $ 341,787 $ 346,710 $ 316,834 (Class A)
$ 262,144 $ 476,345 $ 513,700 (Class B)
--- $ 5,831 $ 10,445 (Class C)*
Capital Growth Fund $ 247,956 $ 277,682 $ 333,455 (Class A)
$ 121,432 $ 207,706 $ 321,106 (Class B)
--- $ 1,362 $ 5,079 (Class C)*
* Class C shares were first offered on January 3, 1995.
** Growth Opportunities Fund Class C shares were first offered on
May 1, 1995.
*** The Growth Fund offered only Class A shares during 1994, 1995
and 1996.
During the fiscal year ended December 31, 1996, expenses relating to
each Fund's 12b-1 plans were as follows:
GROWTH FUND
Compensation to Investment Dealers $3,059,063
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 105,193
TOTAL $3,164,256
VALUE FUND
(Class A shares)
Compensation to Investment Dealers $ 648,010
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 97,539
TOTAL $ 745,549
(Class B shares)
Compensation to Investment Dealers $ 607,907
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 99,079
TOTAL $ 706,986
(Class C shares)
Compensation to Investment Dealers $ 21,301
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 96,553
TOTAL $ 117,854
BALANCED FUND
(Class A shares)
Compensation to Investment Dealers $ 510,832
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 97,681
TOTAL $ 608,513
(Class B shares)
Compensation to Investment Dealers $ 672,169
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 100,105
TOTAL $ 772,274
(Class C shares)
Compensation to Investment Dealers $ 15,702
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 96,195
TOTAL $ 111,897
GROWTH OPPORTUNITIES FUND
(Class A shares)
Compensation to Investment Dealers $ 397,435
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 105,193
TOTAL $ 502,628
(Class B shares)
Compensation to Investment Dealers $ 803,140
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 113,672
TOTAL $ 916,812
(Class C shares)
Compensation to Investment Dealers $ 45,845
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 104,535
TOTAL $ 150,380
INTERNATIONAL EQUITY FUND
(Class A shares)
Compensation to Investment Dealers $ 316,099
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 102,532
TOTAL $ 418,631
(Class B shares)
Compensation to Investment Dealers $ 362,592
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 100,047
Other Distribution Costs $ 47,862
TOTAL $ 510,501
(Class C shares)
Compensation to Investment Dealers $ 10,443
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 94,154
TOTAL $ 104,597
CAPITAL GROWTH FUND
(Class A shares)
Compensation to Investment Dealers $ 333,886
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 94,974
TOTAL $ 428,860
(Class B shares)
Compensation to Investment Dealers $ 408,220
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 94,970
TOTAL $ 503,190
(Class C shares)
Compensation to Investment Dealers $ 5,085
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 91,725
TOTAL $ 96,810
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor: $2,361,916 relating to the Growth Fund; $546,493 relating to the
Class A shares, $479,576 relating to the Class B shares and $3,872 relating to
the Class C shares of the Value Fund; $433,083 relating to the Class A shares,
$550,220 relating to the Class B shares and $5,219 relating to the Class C
shares of the Balanced Fund; $150,001 relating to the Class A shares, $568,835
relating to the Class B shares and $4,202 relating to the Class C shares of the
Growth Opportunities Fund; $223,695 relating to the Class A shares, $228,727
relating to the Class B shares and $2,910 relating to the Class C shares of the
International Equity Fund; and $259,577 relating to the Class A shares, $344,989
relating to the Class B shares and $2,893 relating to the Class C shares of the
Capital Growth Fund. New England Securities paid substantially all of the fees
it received from the Distributor (a) in commissions to its sales personnel and
(b) to defray sales-related overhead costs.
- --------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- --------------------------------------------------------------------------------
As of June 1, 1997, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the following Funds:
CAPITAL GROWTH FUND
Class C shares Larry A. Minnick 9.84%
8105 Bromlay Pl.
Indianapolis, IN 46219-2851
State Street Bank and Trust Co 10.42%
Cust of the IRA Rollover of
Fred Glenn McDaniel
4354 Chris Greene Lake Dr.
Charlottesville, VA 22911-5816
BALANCED FUND
Class C shares California Central Trust Bank Corp 13.54%
TTEE FBO Dimension One Spas Inc.
PSP dtd 1/13/87
Post Office Box 5024
Costa Mesa, CA 92628-5024
NFSC FEBO 7.26%
Elizabeth L. Moody
6865 Pacific Drive
Stuart, FL 34997-8604
Class Y shares The New England 7.19%
Progress Profit Sharing Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
New England Mutual Life Ins Co 68.34%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street
Boston, MA 02116-3706
The New England 8.01%
Agent's Retirement Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
The New England 5.58%
Agent's Deferred Compensation Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
Metropolitan Life Insurance Co 7.70%
c/o GADC-Gerald Hart-Agency
Operations NELICO
501 Boylston Street, 10th Fl.
Boston, MA 02116-3706
GROWTH OPPORTUNITIES FUND
Class C shares Raymond James & Assoc Inc 5.12%
For Elite Acct
FAO Appreciated Investment Mgmt Inc.
722 Blake Drive
Ft. Wayne, IN 46804-101
INTERNATIONAL EQUITY FUND
Class C shares NFSC FEBO Rosala Parks 5.10%
608 West Main
Olney, TX 76374-1742
NFSC FEBO 6.75%
Advanced Data Systems Corp
Attn: David Barzillai
255 Spring Valley Ave
Maywood, NJ 07601-1643
Class Y shares The New England 27.80%
Progress Sharing Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02216-37069
The New England 27.50%
Agent's Retirement Plan
c/o Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
The New England 16.89%
Agent's Deferred Comp Plan
c/o/ Benefit Admin Services 501B-8
501 Boylston Street
Boston, MA 02116-3706
NEIC Master Retirement Trust 12.58%
c/o Defined Contribution SVSC
PO Box 755
Boston, MA 02117-0755
Metropolitan Life Ins Co 14.80%
c/o GADC-Gerald Hart-Agency
Operations NELICO
501 Boylston Street, 10th Fl.
Boston, MA 02116-3706
VALUE FUND
Class C shares PaineWebber for the Benefit of 6.25%
Las Vegas Entertainment Network Inc
1801 Century Park East
23rd Floor
Los Angeles, CA 90067-2302
Class Y shares New England Mutual Life Ins Co 73.81%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street, 6th Fl.
Boston, MA 02116-3706
Hawaii Sheet Metal Workers 20.96%
Health & Welfare Fund
1405 North King St. Rm. 403
Honolulu, HI 96817-4227
New England Life Ins Co 5.23%
Debbie Milliner
c/o Financial Admin
501 Boylston Street
Boston, MA 02116-3706
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE*
For The Periods Ended 12/31/96
<TABLE>
<CAPTION>
GROWTH FUND**
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- --------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 20.88 61.18 290.21 10.02 14.58
Maximum Offering Price 13.05 50.68 264.87 8.54 13.82
<CAPTION>
VALUE FUND
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- --------------------------------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value 26.31 124.84 230.34 17.59 12.69
Maximum Offering Price 18.99 111.86 211.44 16.20 12.03
<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 25.35 71.49 17.76
Redemption at End of Period 21.35 69.49 17.34
<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 25.23 64.45 28.08
<CAPTION>
Aggregate Annualized
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 26.43 71.83 21.67
BALANCED 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 17.12 87.31 164.76 13.37 10.23
Maximum Offering Price 10.40 76.52 149.49 12.04 9.57
<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 16.26 45.42 12.02
Redemption at End of Period 12.26 43.42 11.55
<CAPTION>
Aggregate Average Annual
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 16.21 45.48 20.50
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Since Since
Class Y shares: As a % of 1 Year 3/8/94*** 3/08/94***
- --------------------------------- ------ --------- ----------
<S> <C> <C> <C>
Net Asset Value 17.63 45.01 14.08
GROWTH OPPORTUNITIES 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 17.21 88.62 231.00 13.53 12.72
Maximum Offering Price 10.45 77.77 211.99 12.20 12.05
<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 16.34 58.10 14.89
Redemption at End of Period 12.48 56.10 14.45
<CAPTION>
Aggregate Average Annual
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 16.27 39.70 22.19
<CAPTION>
Aggregate Annualized
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
INTERNATIONAL EQUITY FUND*****
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Since Since
Class A shares: As a % of 1 Year 5/21/92*** 5/21/92***
- --------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
Net Asset Value 3.27 45.13 8.40
Maximum Offering Price -2.65 36.82 7.02
<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 2.48 15.88 4.57
Redemption at End of Period -1.52 13.88 4.02
<CAPTION>
Aggregate Average Annual
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 2.48 7.83 3.82
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Since Since
Class Y shares: As a % of 1 Year 9/9/93*** 9/13/93***
- --------------------------------- ------ --------- ----------
<S> <C> <C> <C>
Net Asset Value 3.95 21.54 6.07
CAPITAL GROWTH FUND******
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------
Since Since
Class A shares: As a % of 1 Year 8/3/92*** 8/3/92***
- --------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Net Asset Value 17.05 86.64 15.20
Maximum Offering Price 10.34 75.94 13.67
<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 16.11 52.48 13.64
Redemption at End of Period 12.11 50.48 13.18
<CAPTION>
Aggregate Average Annual
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 16.24 50.73 22.64
<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
</TABLE>
* 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.
** The numbers presented reflect the maximum initial sales charge currently
in effect. Prior to March 3, 1997, a higher maximum initial sales charge
was in effect, so that the total returns achieved by investors may have
been lower than those shown above.
*** Commencement of Fund operations or offering of specified class of
shares.
**** Assuming deduction of the current maximum sales load, the Growth
Opportunities Fund's Class A shares' ten-year average annual total
return would have been 12.05%, had a voluntary expense limitation by the
Fund's former investment adviser not been in effect, and their ten-year
aggregate total return would have been 211.93%. Based on net asset
values, the Fund's Class A shares' ten-year average annual total return
would have been 12.71%, had this limitation not been in effect, and
their ten-year aggregate total return would have been 230.86%.
***** Assuming deduction of the current maximum sales load, the International
Equity Fund's Class A shares' since-inception average annual total
return would have been 6.67%, and their aggregate one-year and
since-inception total returns would have been -2.69% and 34.71%,
respectively, had a voluntary expense limitation not been in effect.
Based on net asset values, the Fund's Class A shares' since-inception
average annual total return would have been 8.07%, and their one-year
and since-inception aggregate total returns would have been 3.23% and
43.03%, respectively, without the voluntary limitation. Assuming
redemption at the end of the period, the Fund's Class B shares'
since-inception average annual total return would have been 2.85%, had a
voluntary expense limitation not been in effect, and their aggregate
total returns for the one-year and since-inception periods would have
been -1.56% and 12.86%, respectively. Based on net asset values, the
Fund's Class B shares' average annual total return for the
since-inception period would have been 4.29%, and their aggregate total
returns for the one-year and since-inception periods would have been
14.86% and 2.44%, respectively, without the voluntary limitation. The
Fund's Class C and Class Y shares' annualized total returns for the
since-inception period would have been 3.78% and 5.88%, respectively,
and their since-inception aggregate total returns would have been 7.70%
and 20.75%, respectively, without the voluntary limitation.
****** Assuming deduction of the current maximum sales load, the Capital Growth
Fund's Class A shares' since-inception average annual total return would
have been 13.44%, and their aggregate one-year and since-inception total
returns would have been 10.34% and 74.39%, respectively, had a voluntary
expense limitation not been in effect. Based on net asset values, their
since-inception average annual total return would have been 14.97%, and
their since inception aggregate total return would have been 85.04%
without the voluntary limitation.
The foregoing data represent past performance only and are not a
prediction as to the future returns of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than this original
cost.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
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 15, 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
(formerly named New England Tax Exempt Income Fund) are series of New England
Funds Trust I, a registered management investment company that offers a total of
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
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the 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) 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) Lend its portfolio securities in excess of 15% of its total assets,
taken at market value;
*(8) 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.);
*(9) 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;
*(10) 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
*(11) 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.
+(12) 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 the
Distributor have voluntarily agreed to reduce their fees and, if necessary, to
bear certain expenses related to operating the Fund in order to limit the Fund's
expenses to an annual rate of 0.70%, 1.45% and 0.45% of the average daily net
assets of the Fund's Class A, Class B and Class Y shares, respectively. Prior to
January 2, 1996, similar voluntary limitations were in effect with respect to
Back Bay Advisors, the Distributor and the Fund.
For the fiscal years ended December 31, 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)
</TABLE>
<TABLE>
<CAPTION>
FUND 1994 1995 1996
- ---------------------------------- ---- ---- ----
<S> <C> <C> <C>
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.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND STAR WORLDWIDE FUND
NEW ENGLAND STAR SMALL CAP 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 and Class C shares or the Prospectus dated
September 15, 1997 for Class Y shares of New England Star Advisers Fund (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. The
Funds are series of New England Funds Trust I (the "Trust"), a registered
management investment company that offers a total of twelve series.
TABLE OF CONTENTS
Page
PART I
Investment Restrictions i
Fund Charges and Expenses v
Ownership of Fund Shares viii
Investment Performance of the Funds ix
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 California Funds 60
Appendix E - Growth Fund of Israel 62
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the 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 restrictions marked with a
dagger (+) below, the percentages set forth below and the percentage limitations
set forth in the Prospectus will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
NEW ENGLAND STAR ADVISERS FUND
New England Star Advisers Fund (the "Star Advisers Fund") may not:
*(1) Purchase any security (other than U.S. Government securities) if , as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities
category, gas, electric, water and telephone companies will be
considered as being in separate industries, and each foreign country's
government (together with subdivisions thereof) will be considered to
be a separate industry);
(2) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership
of other securities, it has the right to obtain, without payment of
further consideration, securities equivalent in kind and amount to
those sold, and the Fund will not deposit or pledge more than 10% of
its total assets (taken at current value) as collateral for such sales.
(For this purpose, the deposit or payment by the Fund of initial or
variation margin in connection with futures contracts or related
options transactions is not considered the purchase of a security on
margin);
(3) Acquire more than 10% of any class of securities of an issuer (other
than U.S. Government securities and taking all preferred stock issues
of an issuer as a single class and all debt issues of an issuer as a
single class) or acquire more than 10% of the outstanding voting
securities of an issuer;
*(4) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(5) Pledge more than 25% of its total assets (taken at cost). (For the
purpose of this restriction, collateral arrangements with respect to
options, futures contracts and options on futures contracts and with
respect to initial and variation margin are not deemed to be a pledge
of assets);
*(6) 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 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 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) Purchase any illiquid security if, as a result, more than 15% of its
net assets (taken at current value) would be invested in such
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's Trustees and certain Section 4(2)
commercial paper).
*(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 and options on futures contracts and with respect to initial
and variation margin; the purchase or sale of options, forward
contracts, futures contracts or options on futures contracts; and the
issuance of shares of beneficial interest permitted from time to time
by the provisions of the Trust's Agreement and Declaration of Trust and
by the 1940 Act, the rules thereunder, or any exemption therefrom.)
NEW ENGLAND STAR WORLDWIDE FUND
New England Star Worldwide Fund (the "Star Worldwide 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 with respect to 75% of its total assets, 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);
*(7) 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;
*(8) 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);
*(9) 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;
(10) 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.);
(11) 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, (b) enter into currency forward contracts and (c)
invest in structured notes;
+(12) Purchase any illiquid security if, as a result, more than 15% of its
net assets (taken at current value) would be invested in such
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's trustees and certain Section 4(2)
commercial paper);
*(13) Issue senior securities. For the purpose of this restriction none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options 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 Agreement
and 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 assets
in amounts sufficient at all times to satisfy its obligations under
options, futures contracts, forward contracts, swap contracts and other
similar instruments); or
The staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are subject to restriction (12)
above.
NEW ENGLAND STAR SMALL CAP FUND
New England Star Small Cap Fund (the "Star Small Cap 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). (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 with respect to 75% of its total assets, 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, short sales and
other similar instruments and with respect to initial and variation
margin are not deemed to be a pledge of assets);
*(7) 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;
*(8) 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);
*(9) 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;
(10) 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.);
(11) Purchase any illiquid security if, as a result, more than 15% of its
net assets (taken at current value) would be invested in such
securities (excluding Rule 144A securities deemed to be liquid under
guidelines established by the Trust's trustees and certain Section 4(2)
commercial paper);
*(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 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 Agreement
and 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 assets
in amounts sufficient at all times to satisfy its obligations under
options, futures contracts, forward contracts, swap contracts and other
similar instruments); or
The staff of the SEC is currently of the view that repurchase
agreements maturing in more than seven days are subject to restriction (11)
above.
- -------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to separate advisory agreements, each dated August 30, 1996
for the Star Advisers and Star Worldwide Funds and dated December 31, 1996 for
the Star Small Cap Fund, 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 Funds and to provide a range of
administrative services to the Funds. For the services described in the advisory
agreements, each Fund has agreed to pay NEFM a management fee at the annual rate
of 1.05% of the Fund's average daily net assets.
As explained in the Prospectus, the Star Advisers and Star Small Cap
Funds' portfolios are each divided into four segments, and the Star Worldwide
Fund's portfolio is divided into five segments.
Pursuant to separate subadvisory agreements, each dated August 30,
1996, NEFM has delegated responsibility for managing the investment and
reinvestment of the assets of each segment of the Star Advisers Fund's portfolio
to a different subadviser. The four subadvisers of the Star Advisers Fund are
Berger Associates, Inc. ("Berger"), Founders Asset Management, Inc.
("Founders"), Janus Capital Corporation ("Janus Capital") and Loomis, Sayles &
Company, L.P. ("Loomis Sayles"). For providing such subadvisory services to the
Star Advisers Fund, NEFM pays each subadviser a subadvisory fee at the annual
rate of 0.55% of the first $50 million of the average daily net assets of the
segment of the Fund managed by that subadviser and 0.50% of such assets in
excess of $50 million.
Pursuant to separate subadvisory agreements, each dated August 30,
1996, NEFM has delegated responsibility for the investment and reinvestment of
the assets of the segments of the Star Worldwide Fund's portfolio to four
different subadvisers. The subadvisers of the Star Worldwide Fund are Harris
Associates L.P. ("Harris"), which manages two of the five segments, and
Founders, Janus Capital and Montgomery Asset Management, L.P. ("Montgomery"),
each of which manage one of the five segments. NEFM pays each subadviser a
subadvisory 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 agreed to waive 0.15% of its
subadvisory fee through June 30, 1996.
Pursuant to separate subadvisory agreements, each dated December 29,
1996, NEFM has delegated responsibility for the investment and reinvestment of
the assets of each segment of the Star Small Cap Fund's portfolio to a different
subadviser. The subadvisers of the Star Small Cap Fund are Montgomery,
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), Loomis Sayles and Harris, each of which manage one of the four
segments. NEFM pays Robertson Stephens and Loomis Sayles a separate sub-advisory
fee at an annual rate of 0.55% of the first $50 million of the average daily
assets of the segment of the Fund that each such subadviser manages, and 0.50%
of such assets in excess of $50 million. NEFM pays Montgomery a subadvisory fee
at an annual rate of 0.65% of the first $50 million of the average daily net
assets of the segment that Montgomery manages, and 0.50% of such assets in
excess of $50 million. NEFM pays Harris Associates a subadvisory fee at the
annual rate of 0.70% of the average daily net assets of the segment of the Fund
that Harris Associates manages.
Management fees for the Star Advisers Fund (before the voluntary fee
reduction described below) for the fiscal years ended December 31, 1994, 1995
and 1996 were $569,280, $3,599,730 and $6,821,099, respectively. The Fund
commenced operations of July 7, 1994. As a result of the voluntary expense
limitation in effect, the Fund paid $543,254 in management fees for the period
July 7, 1994 through December 31, 1994.
Management fees for the Star Worldwide Fund for the fiscal year ended
December 31, 1996 were $780,469. The Fund commenced operations on December 29,
1995.
For the Star Advisers Fund, NEFM paid $796,201, $884,453, $835,227 and
$832,262 in subadvisory fees to Berger, Founders, Janus Capital and Loomis
Sayles, respectively, for the fiscal year ended December 31, 1996.
For the Star Worldwide Fund, NEFM paid $192,641, $95,549, $102,157 and
$122,665 in subadvisory fees to Harris, Founders, Janus Capital and Montgomery,
respectively, for the fiscal year ended December 31, 1996. Without the voluntary
fee waiver described above, NEFM would have paid Montgomery $128,198 in
subadvisory fees.
Prior to August 30, 1996, NEFM served as adviser to the Star Advisers
and Star Worldwide Funds, and the Star Advisers and Star Worldwide Funds'
current subadvisers served as subadvisers to those Funds, pursuant to advisory
and subadvisory agreements providing for the same management and subadvisory
fees as are currently in effect for the Funds. Prior to January 2, 1996, New
England Investment Companies, L.P. ("NEIC") served as adviser to the Star
Advisers Fund, and the Fund's current subadvisers served as subadvisers to the
Fund, in each case pursuant to separate advisory and separate subadvisory
agreements providing for management and subadvisory fees at the same rates as
are currently in effect for the Funds.
For the period from the commencement of the Star Advisers Fund's
operations on July 7, 1994 until December 31, 1994, NEIC and the subadvisers of
the Star Advisers Fund voluntarily agreed to reduce their compensation. As a
result of this voluntary agreement, the compensation paid by the Fund to NEIC
for this period was at the annual rate of 1.00% of the Fund's average daily net
assets, and the compensation paid by NEIC to each subadviser was at the annual
rate of 0.50% of the average daily net assets of the segment of the Fund's
portfolio managed by that subadviser.
For more information about the Funds' advisory and subadvisory
agreements, see "Management of the Trusts" in Part II of this Statement.
BROKERAGE COMMISSIONS
For the period July 7, 1994 (commencement of operations) to December
31, 1994 and the fiscal years ended December 31, 1995 and 1996, brokerage
transactions for the Star Advisers Fund aggregating $44,236,466, $191,214,413
and $136,608,000, respectively, were allocated to brokers providing research
services, and $172,408, $614,183 and $169,415, respectively, in commissions were
paid on these transactions. For the period July 7, 1994 to December 31, 1994 and
the fiscal years ended December 31, 1995 and 1996, the Fund paid total brokerage
commissions of $172,408, $614,183 and $1,428,492, respectively. For the period
December 29, 1995 (commencement of operations) to December 31, 1996, brokerage
transactions for the Star Worldwide Fund aggregating $39,348,000 were allocated
to brokers providing research services and $29,778 in commissions were paid
these transactions. For the period December 29, 1995 to December 31, 1996, the
Fund paid total brokerage commissions of $402,403.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and
Class C shares of each Fund pay fees under plans adopted pursuant to Rule 12b-1
under the 1940 Act. The following table shows the amounts of Rule 12b-1 fees
paid by the Star Advisers and Star Worldwide Funds during the fiscal years ended
December 31, 1994, 1995 and 1996 (The Star Small Cap Fund commenced operations
on December 31, 1996):
FUND 1994 1995 1996
- ------------------------ ---- ---- ----
Star Advisers Fund* $ 68,910 $ 404,530 $ 711,078 (Class A)
$204,766 $1,458,476 $2,916,149 (Class B)
$ 62,604 $ 327,977 $ 627,802 (Class C)
Star Worldwide Fund** -- -- $ 85,683 (Class A)
-- -- $ 305,294 (Class B)
-- -- $ 95,265 (Class C)
* The Star Advisers Fund commenced operations on July 7, 1994.
** The Star Worldwide Fund commenced operations on December 29, 1995.
During the fiscal year ended December 31, 1996, expenses relating to
each Fund's 12b-1 plans were as follows:
STAR ADVISERS FUND
(Class A shares)
Compensation to Investment Dealers $ 713,094
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 184,674
TOTAL $ 897,768
(Class B shares)
Compensation to Investment Dealers $5,422,261
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 317,713
TOTAL $5,739,974
(Class C shares)
Compensation to Investment Dealers $ 627,801
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 209,675
TOTAL $ 837,476
STAR WORLDWIDE FUND
(Class A shares)
Compensation to Investment Dealers $ 86,635
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 150,461
TOTAL $ 237,096
(Class B shares)
Compensation to Investment Dealers $2,086,423
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 201,019
TOTAL $2,287,442
(Class C shares)
Compensation to Investment Dealers $ 95,265
Compensation to Distributor's Sales Personnel and Other
Related Costs $ 152,218
TOTAL $ 247,483
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: $459,124 relating to the Class A shares, $2,580,554 relating to the
Class B shares and $87,168 relating to the Class C shares of the Star Advisers
Fund; and $47,562 relating to the Class A shares, $956,236 relating to the Class
B shares and $5,169 relating to the Class C shares of the Star Worldwide 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 Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the following Funds:
STAR ADVISERS FUND
Class Y shares New England Mutual Life Ins. Co. 73.08%
Separate Investment Accounting
Attn Victor Soohoo
501 Boylston Street - 6th Fl
Boston, MA 02116-3706
Metropolitan Life Ins. Co. 15.63%
c/o GADC-Gerald Hart-Agency
Operations NELICO
501 Boylston Street 10th Fl
Boston, MA 02116-3706
New England Life Insurance Co. 9.66%
Insurance Acctg & Reporting
Attn: Michael Crowley
501 Boylston Street 6th Fl
Boston, MA 02116-3706
STAR SMALL CAP FUND
Class B shares MLPF&S for the Sole Benefit of its Customers 8.78%
4800 Deer Lake Drive East
Jacksonville, Fl 32246-6484
Class C shares US Clearing Corp 6.54%
FBO 166-20126-22
New York 10004-1798
FTC & Co. 6.15%
Attn: Datalynx #231
PO Box 173736
Denver, CO 80217-3736
- -------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- -------------------------------------------------------------------------------
PERFORMANCE RESULTS - PERCENT CHANGE*
FOR THE PERIODS ENDED 12/31/96
STAR ADVISERS FUND
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class A shares: As a % of 1 Year 7/7/94** 7/7/94**
- ---------------------------- ------ -------- --------
Net Asset Value 18.98 70.06 23.77
Maximum Offering Price 12.16 60.31 20.87
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 7/7/94** 7/7/94**
- ---------------------------- ------ -------- --------
Net Asset Value 18.11 67.03 22.88
Redemption at End of Period 14.11 64.03 21.99
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class C shares: As a % of 1 Year 7/7/94** 7/7/94**
- ---------------------------- ------ -------- --------
Net Asset Value 18.03 67.05 22.88
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class Y shares: As a % of 1 Year 11/15/94** 11/15/94**
- ---------------------------- ------ ---------- ----------
Net Asset Value 19.55 57.74 23.86
STAR WORLDWIDE FUND
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class A shares: As a % of 1 Year 12/29/95** 12/29/95**
- ---------------------------- ------ ---------- ----------
Net Asset Value 16.67 16.67 16.67
Maximum Offering Price 9.98 9.98 9.98
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class B shares: As a % of 1 Year 12/29/95** 12/29/95**
- ---------------------------- ------ ---------- ----------
Net Asset Value 15.87 15.87 15.87
Redemption at End of Period 11.87 11.87 11.87
Aggregate Average Annual
Total Return Total Return
----------------------- -------------------
Since Since
Class C shares: As a % of 1 Year 12/29/95** 12/29/95**
- ---------------------------- ------ ---------- ----------
Net Asset Value 15.94 15.94 15.94
* Federal regulations require this example to be calculated using a $1,000
investment. The normal minimum initial investment in shares of the Funds
is $2,500, however.
** Commencement of Fund operations or offering of specified class of shares.
The foregoing data represent past performance only and are not a
prediction as to the future returns of any Fund. The investment return and
principal value of an investment in any Fund will fluctuate so that the
investor's shares, when redeemed, may be worth more or less than this original
cost.
<PAGE>
[GRAPHIC OMITTED]
Where The Best Minds Meet
- -------------------------------------------------------------------------------
NEW ENGLAND EQUITY INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION -- PART I
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 New England Equity Income Fund (the "Fund"), a series of New
England Funds Trust III (the "Trust"). This Statement is not a prospectus and is
only authorized for distribution when accompanied or preceded by the Fund's
prospectus dated September 15, 1997 for Class A, Class B and Class C shares or
the separate prospectus dated September 15, 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 Fund.
Part II includes information about the Fund and other New England Funds.
TABLE OF CONTENTS
Page
PART I
Investment Restrictions ii
Fund Charges and Expenses iii
Investment Performance of the Fund iv
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
Financial Statements
Appendix A - Description of Bond Ratings
Appendix B - Publications That May Be Referred to in Fund Advertisements
and Sales Literature
Appendix C - Advertising and Promotional Literature
Appendix D - Portfolio Composition of the Municipal Income, Bond Income
and California Funds
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Fund. Restrictions marked with an asterisk may not be changed
without the approval of a majority of the outstanding voting securities of the
Fund. Except in the case of restriction (10) 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 the purchase of such security.
The 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) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(4) 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, options on futures contracts and swap
contracts and with respect to initial and variation margin are not
deemed to be a pledge of assets);
*(5) 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;
*(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 buy and sell futures contracts, swap contracts and
related options. (This restriction does not prevent the Fund from
purchasing securities of companies investing 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) 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.);
(9) Write, purchase or sell options except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indexes
or futures contracts and (b) enter into currency forward contracts;
(10) 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;
*(11) 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 and options on futures contracts or swap
contracts and with respect to initial and variation margin; the purchase
or sale of options, forward contracts, futures contracts, swap contracts
or options on futures contracts or swap contracts; 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 Investment
Company Act of 1940 (the "1940 Act"), the rules thereunder, or any
exemption therefrom.)
- -------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 1996, 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, NEFM is paid a
management fee at the annual rate of 0.70% of the first $200 million of the
Fund's average net assets, 0.65% of the next $300 million of such assets and
0.60% of such assets in excess of $500 million.
The advisory agreement provides that NEFM may delegate its
responsibilities thereunder to other parties. As explained in the Prospectus,
NEFM has delegated responsibility for the investment and reinvestment of the
Fund's assets to Loomis, Sayles & Company, L.P. ("Loomis Sayles"), as subadviser
pursuant to a subadvisory agreement dated August 30, 1996. NEFM pays Loomis
Sayles for providing subadvisory services at the annual rate of 0.40% of the
first $200 million of the Fund's average net assets, 0.325% of the next $300
million of such assets and 0.275% of such assets in excess of $500 million.
Since September 15, 1997, Loomis Sayles has voluntarily agreed, until
further notice to the Fund, to waive its entire subadvisory fee payable to
Loomis Sayles by NEFM. This waiver by Loomis Sayles does not reduce the Fund's
expenses. This agreement may be terminated by Loomis Sayles at any time. In
addition, under an expense deferral arrangement, which NEFM may terminate at any
time, NEFM has agreed to defer its management fee for the Fund until further
notice and, if necessary, to bear certain expenses associated with the Fund to
the extent necessary to limit the Fund's expenses to the annual rate of 1.50% of
average daily net assets for Class A shares, 2.25% for Class B shares, 2.25% for
Class C shares and 1.25% for Class Y 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 1.50% of average daily net assets
for Class A shares, 2.25% for Class B shares, 2.25% for Class C shares and 1.25%
for Class Y 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
the fee was deferred.
From November 28, 1995 through September 14, 1997, pursuant to a
voluntary agreement, NEFM and Loomis Sayles bore all expenses (other than any
brokerage costs, interest, taxes or extraordinary expenses) of the Fund in
excess of 1.50% annually of the Fund's average daily net assets.
For the period from November 28, 1995 to December 31, 1995, and the
fiscal year ended December 31, 1996, the management fees payable by the Fund
(before any voluntary fee reductions) were $1,277 and $16,222, respectively. As
a result of the voluntary expense limitations in effect, the Fund paid no
management fees for the period November 28, 1995 to December 31, 1995 or the
fiscal year ended December 31, 1996.
During the period from November 28, 1995 through December 31, 1995 and
for the fiscal year ended December 31, 1996, brokerage transactions for the Fund
aggregating 1,999,812 and 1,981,029 were allotted to brokers providing research
services and $624 and $48 in commissions were paid on those transactions. During
the fiscal years ended December 31, 1995 and 1996 the fund paid brokerage fees
of $3,150 and $3,140, respectively.
As of June 1, 1997, Loomis Sayles Funded Pension Plan and Trust owned
of record beneficially 100% of the Equity Income Fund's outstanding shares.
<PAGE>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND FUNDS TRUST III
STATEMENT OF ADDITIONAL INFORMATION -- PART II
MAY 1, 1997
AS REVISED SEPTEMBER 15, 1997
The following information applies generally to the funds listed below
(the "Funds" and each a "Fund"). The Funds constitute all of the series of New
England Funds Trust I, New England Funds Trust II and New England Funds Trust
III (the "Trusts" and each a "Trust"). In certain cases, the discussion applies
to some but not all of the Funds. Certain data applicable to particular Funds is
found in Part I of this Statement of Additional Information (the "Statement") as
well as in the Prospectuses of the Funds dated May 1, 1997 for Class A, Class B
and Class C shares (except New England Equity Income Fund), September 15, 1997
for Class Y shares and September 15, 1997 for Class A, Class B and Class C
shares of New England Equity Income Fund (the "Prospectus" or "Prospectuses").
The following Funds are described in this Statement:
<TABLE>
<CAPTION>
SERIES OF NEW ENGLAND FUNDS TRUST I
<S> <C>
New England Capital Growth Fund (the "Capital Growth Fund")
New England Balanced Fund (the "Balanced Fund")
New England Growth Fund (the "Growth Fund")
New England International Equity Fund (the "International Equity Fund")
New England Star Advisers Fund (the "Star Advisers Fund")
New England Star Worldwide Fund (the "Star Worldwide Fund")
New England Star Small Cap Fund (the "Star Small Cap Fund")
New England Value Fund (the "Value Fund")
New England Government Securities Fund (the "Government Securities Fund")
New England Strategic Income Fund (the "Strategic Income Fund")
New England Bond Income Fund (the "Bond Income Fund")
New England Municipal Income Fund (the "Municipal Income Fund")
SERIES OF NEW ENGLAND FUNDS TRUST II
New England Growth Opportunities Fund (the "Growth Opportunities Fund")
New England Limited Term U.S. Government Fund (the "Limited Term U.S. Government Fund")
New England Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
New England High Income Fund (the "High Income Fund")
New England Massachusetts Tax Free Income Fund (the "Massachusetts Fund")
New England Intermediate Term Tax Free Fund
of California (the "California Fund')
New England Intermediate Term Tax Free Fund of
New York (the "New York Fund")
SERIES OF NEW ENGLAND FUNDS TRUST III
New England Equity Income Fund (the "Equity Income Fund")
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
The following information relates to certain investment practices in
which certain Funds may engage. The table below indicates which Funds may engage
in each of these practices.
Practices Funds
Loans of Portfolio Securities Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
High Income Fund
Adjustable Rate Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Equity Income Fund
U.S. Government Securities All Funds
When-Issued Securities Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Government Securities Fund
Bond Income Fund
Municipal Income Fund
High Income Fund
Limited Term U.S. Government Fund
California Fund
Massachusetts Fund
New York Fund
Adjustable Rate Fund
Strategic Income Fund
International Equity Fund
Equity Income Fund
Repurchase Agreements All Funds
Zero Coupon Securities All Funds
Convertible Securities Value Fund
Balanced Fund
Growth Opportunities Fund
High Income Fund
International Equity Fund
Capital Growth Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Equity Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
New York Fund
State Tax Exempt Securities California Fund
Massachusetts Fund
New York Fund
Short Sales Star Worldwide Fund
Star Small Cap Fund
Futures, Options and Government Securities Fund
Swap Contracts Municipal Income Fund
Limited Term U.S. Government Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
California Fund
New York Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Massachusetts Fund
Growth Opportunities Fund
Equity Income Fund
Foreign Currency Hedging International Equity Fund
Transactions Balanced Fund
Capital Growth Fund
Value Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Equity Income Fund
Loans of Portfolio Securities. The Fund may lend its portfolio securities to
broker-dealers under contracts calling for cash collateral equal to at least the
market value of the securities loaned, marked to the market on a daily basis.
The Fund will continue to benefit from interest or dividends on the securities
loaned and will also receive interest through investment of the cash collateral
in short-term liquid investments, which may include shares of money market funds
subject to any investment restriction listed in Part I of this Statement. Any
voting rights, or rights to consent, relating to securities loaned pass to the
borrower. However, if a material event affecting the investment occurs, such
loans will be called so that the securities may be voted by the Fund. The Fund
pays various fees in connection with such loans, including shipping fees and
reasonable custodian and placement fees approved by the boards of trustees of
the Trusts or persons acting pursuant to the direction of the boards.
These transactions must be 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:
o 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.
o 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.
o "Ginnie Maes" - Debt securities issued by a mortgage banker or other
mortgagee which represent an interest in a pool of mortgages insured by the
Federal Housing Administration or the Farmer's Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association ("GNMA") guarantees the timely payment of principal and
interest when such payments are due, whether or not these amounts are
collected by the issuer of these certificates on the underlying mortgages.
An assistant attorney general of the United States has rendered an opinion
that the guarantee by GNMA is a general obligation of the United States
backed by its full faith and credit. Mortgages included in single family or
multi-family residential mortgage pools backing an issue of Ginnie Maes
have a maximum maturity of up to 30 years. Scheduled payments of principal
and interest are made to the registered holders of Ginnie Maes (such as the
Fund) each month. Unscheduled prepayments may be made by homeowners, or as
a result of a default. Prepayments are passed through to the registered
holder (such as the Fund, which reinvests any prepayments) of Ginnie Maes
along with regular monthly payments of principal and interest.
o "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.
o "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 set aside with the
Trust's custodian cash or liquid securities eligible for purchase by the Fund in
an amount equal to or greater than, on a daily basis, the amount of the Fund's
when-issued or delayed-delivery commitments. The Fund will make commitments to
purchase on a when-issued or delayed-delivery basis only securities meeting the
Fund's investment criteria. The Fund may take delivery of these securities or,
if it is deemed advisable as a matter of investment strategy, the Fund may sell
these securities before the settlement date. When the time comes to pay for
when-issued or delayed-delivery securities, the Fund will meet its obligations
from the then available cash flow or the sale of securities, or from the sale of
the when-issued or delayed-delivery securities themselves (which may have a
value greater or less than the Fund's payment obligation).
Repurchase Agreements. The Fund may enter into repurchase agreements, by which
the Fund purchases a security and obtains a simultaneous commitment from the
seller to repurchase the security at an agreed-upon price and date. The resale
price is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
relatively low market risk. While the underlying security may be a bill,
certificate of indebtedness, note or bond issued by an agency, authority or
instrumentality of the United States Government, the obligation of the seller is
not guaranteed by the United States Government and there is a risk that the
seller may fail to repurchase the underlying security. In such event, the Fund
would attempt to exercise rights with respect to the underlying security,
including possible disposition in the market. However, the Fund may be subject
to various delays and risks of loss, including (a) possible declines in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (b) possible reduced levels of income and lack of
access to income during this period and (c) inability to enforce rights and the
expenses involved in the attempted enforcement.
Zero Coupon Securities. Zero coupon securities are debt obligations that do not
entitle the holder to any periodic payments of interest either for the entire
life of the obligation or for an initial period after the issuance of the
obligations. Such securities are issued and traded at a discount from their face
amounts. The amount of the discount varies depending on such factors as the time
remaining until maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
securities having similar maturities and credit quality. In order to satisfy a
requirement for qualification as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), the Fund must distribute
each year at least 90% of its net investment income, including the original
issue discount accrued on zero coupon securities. Because the Fund will not on a
current basis receive cash payments from the issuer of a zero coupon security in
respect of accrued original issue discount, in some years the Fund may have to
distribute cash obtained from other sources in order to satisfy the 90%
distribution requirement under the Code. Such cash might be obtained from
selling other portfolio holdings of the Fund. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Fund to sell such securities at such time.
Convertible Securities. The Fund may invest in convertible securities, including
corporate bonds, notes or preferred stocks of U.S. or foreign issuers that can
be converted into (that is, exchanged for) common stocks or other equity
securities. Convertible securities also include other securities, such as
warrants, that provide an opportunity for equity participation. Because
convertible securities can be converted into equity securities, their values
will normally vary in some proportion with those of the underlying equity
securities. Convertible securities usually provide a higher yield than the
underlying equity, however, so that the price decline of a convertible security
may sometimes be less substantial than that of the underlying equity security.
Tax Exempt Bonds. The Fund may invest in tax exempt bonds. Tax exempt bonds
include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as bridges,
highways, hospitals, housing, mass transportation, schools, streets, and water
and sewer works. Other public purposes for which tax exempt bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to lend to other public institutions and
facilities. In addition, prior to the Tax Reform Act of 1986, certain debt
obligations known as industrial development bonds could be issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Such obligations are included
within the term "tax exempt bonds" if the interest paid thereon is, in the
opinion of bond counsel, exempt from federal income tax. Interest on certain
industrial development bonds used to fund the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities may also
be exempt from federal income tax. The Tax Reform Act of 1986 eliminated some
types of tax exempt industrial revenues bonds but retains others under the
general category of "private activity bonds." The interest on so-called "private
activity bonds" is exempt from ordinary federal income taxation but is treated
as a tax preference item in computing a shareholder's alternative minimum tax
liability, as noted in the Prospectus.
The Fund may not be a desirable investment for "substantial users" of
facilities financed by industrial development bonds or for "related persons" of
substantial users.
The two principal classifications of tax exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon an appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities, or in some cases from
the proceeds of a special excise or other specific revenue source such as the
user of the facility. Tax exempt industrial development bonds and private
activity bonds are in most cases revenue bonds and generally are not payable
from the unrestricted revenues of the issuer. The credit and quality of such
bonds is usually directly related to the credit standing of the corporate user
of the facilities. Principal and interest on such bonds is the responsibility of
the corporate user (and any guarantor).
Prices and yields on tax exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the tax exempt bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of tax exempt bonds may not be as extensive as that made available
by corporations whose securities are publicly traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
and Poor's Ratings Group ("Standard & Poor's" or "S&P") represent their opinions
and are not absolute standards of quality. Tax exempt bonds with the same
maturity, interest rate and rating may have different yields while tax exempt
bonds of the same maturity and interest rate with different ratings may have the
same yield.
Obligations of issuers of tax exempt bonds are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Bankruptcy
Reform Act of 1978, affecting the rights and remedies of creditors. Congress or
state legislatures may seek to extend the time for payment of principal or
interest, or both, or to impose other constraints upon enforcement of such
obligations. There is also the possibility that, as a result of litigation or
other conditions, the power or ability of issuers to meet their obligations for
the payment of interest and principal on their tax exempt bonds may be
materially affected, or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for tax exempt bonds or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's tax exempt bonds in the
same manner.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on debt obligations issued by states and their political subdivisions
and similar proposals may well be introduced in the future. If such a proposal
were enacted, the availability of tax exempt securities for investment by the
Fund and the value of the Fund's portfolio could be materially affected, in
which event the Fund would reevaluate its investment objective and policies and
consider changes in the structure of the Fund or dissolution.
All debt securities, including tax exempt bonds, are subject to credit
and market risk. Generally, for any given change in the level of interest rates,
prices for longer maturity issues tend to fluctuate more than prices for shorter
maturity issues. The ability of the Fund to invest in securities other than tax
exempt bonds is limited by a requirement of the Code that at least 50% of the
Fund's total assets be invested in tax exempt bonds at the end of each calendar
quarter.
State Tax Exempt Securities. The Fund may invest in "State Tax Exempt
Securities" which term refers to debt securities the interest from which is, in
the opinion of bond counsel, exempt from federal income tax and State personal
income taxes (other than the possible incidence of any alternative minimum
taxes). State Tax Exempt Securities consist primarily of bonds of the Fund's
named state, their political subdivisions (for example, counties, cities, towns,
villages and school districts) and authorities issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which certain State Tax Exempt Securities may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses, or obtaining funds to lend to public or private institutions for the
construction of facilities such as educational, hospital and housing facilities.
In addition, certain types of industrial development bonds and private activity
bonds have been or may be issued by public authorities or on behalf of state or
local governmental units to finance privately operated housing facilities,
sports facilities, convention or trade facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Other types of industrial
development and private activity bonds are used to finance the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities. Industrial development bonds and private activity bonds are included
within the term "State Tax Exempt Securities" if the interest paid thereon is,
in the opinion of bond counsel, exempt from federal income tax and State
personal income taxes (other than the possible incidence of any alternative
minimum taxes). The Fund may invest more than 25% of the value of its total
assets in such bonds, but not more than 25% in bonds backed by non-governmental
users in any one industry (see "Investment Restrictions" in Part I of this
Statement). However, as described in the Fund's Prospectus, the income from
certain private activity bonds is an item of tax preference for purposes of the
federal alternative minimum tax, and it is a fundamental policy of the Fund that
distributions from interest income on such private activity bonds, together with
distributions of interest income on investments other than State Tax Exempt
Securities, will normally not exceed 10% of the total amount of the Fund's
income distributions.
In addition, the term "State Tax Exempt Securities" includes debt
obligations issued by other governmental entities (for example, U. S.
territories) if such debt obligations generate interest income which is exempt
from federal income tax and State personal income taxes (other than any
alternative minimum taxes).
There are, of course, variations in the quality of State Tax Exempt
Securities, both within a particular classification and between classifications,
depending on numerous factors (see Appendix A).
The yields on State Tax Exempt Securities are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the State Tax Exempt Securities market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The ratings of Moody's and Standard and Poor's represent their
opinions as to the quality of the State Tax Exempt Securities which they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, State Tax Exempt
Securities with the same maturity, interest rate and rating may have different
yields while State Tax Exempt Securities of the same maturity and interest rates
with different ratings may have the same yield. Subsequent to its purchase by
the Fund, an issue of State Tax Exempt Securities or other investments may cease
to be rated or the rating may be reduced below the minimum rating required for
purchase by the Fund. Neither event will require the elimination of an
investment from the Fund's portfolio, but the Fund's subadviser will consider
such an event as part of its normal, ongoing review of all the Fund's portfolio
securities.
The Fund does not currently intend to invest in so-called "moral
obligation" bonds, where repayment is backed by a moral commitment of an entity
other than the issuer, unless the credit of the issuer itself, without regard to
the "moral obligation," meets the investment criteria established for
investments by the Fund.
Securities in which the Fund may invest, including State Tax Exempt
Securities, are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or the State
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations. There is also
the possibility that as a result of litigation or other conditions the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their State Tax Exempt Securities may be materially affected or
that their obligations may be found to be invalid and unenforceable.
The Fund's named state and certain of its cities and towns and public
bodies have from time to time encountered financial difficulties which have
adversely affected their respective credit standings and borrowing abilities.
Such difficulties could, of course, affect outstanding obligations of such
entities, including obligations held by the Fund.
SHORT SALES. The Star Small Cap and Star Worldwide Funds may engage in short
sales of securities; however the Star Worldwide Fund may only engage in short
sales if it owns (or has the right to acquire without further consideration) the
security it has sold, a practice known as selling short "against the box." Each
Fund may engage in short sales of securities in order to profit from an
anticipated decline in the value of a security, or may also engage in
short sales to attempt to limit its exposure to a decline in the value of its
portfolio securities. In a short sale, 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 the short sale is executed, and the broker-dealer
delivers such securities, on behalf of the Fund, to the purchaser of such
securities. The Fund is then obligated to replace the security borrowed by
delivering such security to the broker-dealer. Until the security is replaced,
the Fund is required to pay to the lender any accrued interest or dividends paid
on the security sold short and may also be required to pay a premium to the
broker-dealer. 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. 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 (a) the securities
sold short, (b) securities convertible into or exchangeable for such securities
without the payment of additional consideration or (c) cash or certain liquid
assets. 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, or, if such securities are owned by the
Fund, by delivering from its portfolio an equal amount of the securities sold
short.
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, and there can be no
assurance that the Fund will be able to close out the position at any particular
time or at an acceptable price. 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. The Star Small
Cap and Star Worldwide Funds currently expect that no more than 25% and 20% of
their total assets, respectively, would be involved in short sales.
Futures, Options and Swap Contracts
FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy
and sell a particular commodity (e.g., an interest-bearing security) for a
specified price on a specified future date. In the case of futures on an index,
the seller and buyer agree to settle in cash, at a future date, based on the
difference in value of the contract between the date it is opened and the
settlement date. The value of each contract is equal to the value of the index
from time to time multiplied by a specified dollar amount. For example,
long-term municipal bond index futures trade in contracts equal to $1000
multiplied by the Bond Buyer Municipal Bond Index, and Standard & Poor's 500
Index futures trade in contracts equal to $500 multiplied by the Standard &
Poor's 500 Index.
When a trader, such as the Fund, enters into a futures contract, it is
required to deposit with (or for the benefit of) its broker as "initial margin"
an amount of cash or short-term high-quality securities (such as U.S. Treasury
Bills or high-quality tax exempt bonds acceptable to the broker) equal to
approximately 2% to 5% of the delivery or settlement price of the contract
(depending on applicable exchange rules). Initial margin is held to secure the
performance of the holder of the futures contract. As the value of the contract
changes, the value of futures contract positions increases or declines. At the
end of each trading day, the amount of such increase and decline is received and
paid respectively by and to the holders of these positions. The amount received
or paid is known as "variation margin." If the Fund has a long position in a
futures contract it will establish a segregated account with the Fund's
custodian containing cash or liquid securities eligible for purchase by the Fund
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 liquid securities eligible for purchase
by the Fund that, when added to the amounts deposited as margin, equal the
market value of the instruments or currency underlying the futures contracts.
Although futures contracts by their terms require actual delivery and
acceptance of securities (or cash in the case of index futures), in most cases
the contracts are closed out before settlement. A futures sale is closed by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity and with the same delivery date. Similarly,
the closing out of a futures purchase is closed by the purchaser selling an
offsetting futures contract.
Gain or loss on a futures position is equal to the net variation margin
received or paid over the time the position is held, plus or minus the amount
received or paid when the position is closed, minus brokerage commissions.
OPTIONS. An option on a futures contract obligates the writer, in return for the
premium received, to assume a position in a futures contract (a short position
if the option is a call and a long position if the option is a put), at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option generally will be accompanied by delivery
of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option. The premium paid by the purchaser of an option
will reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying contract, the remaining term of
the option, supply and demand and interest rates. Options on futures contracts
traded in the United States may only be traded on a United States board of trade
licensed by the Commodity Futures Trading Commission (the "CFTC").
An option on a security entitles the holder to receive (in the case of
a call option) or to sell (in the case of a put option) a particular security at
a specified exercise price. An "American style" option allows exercise of the
option at any time during the term of the option. A "European style" option
allows an option to be exercised only at the end of its term. Options on
securities may be traded on or off a national securities exchange.
A call option on a futures contract written by the Fund is considered
by the Fund to be covered if the Fund owns the security subject to the
underlying futures contract or other securities whose values are expected to
move in tandem with the values of the securities subject to such futures
contract, based on historical price movement volatility relationships. A call
option on a security written by the Fund is considered to be covered if the Fund
owns a security deliverable under the option. A written call option is also
covered if the Fund holds a call on the same futures contract or security as the
call written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash or
liquid securities eligible for purchase by the Fund 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 or
liquid securities eligible for purchase by the Fund 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 assets used to secure the closed put option. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any futures contract or securities subject to the option to
be used for other Fund investments. If the Fund desires to sell particular
securities covering a written call option position, it will close out its
position or will designate from its portfolio comparable securities to cover the
option prior to or concurrent with the sale of the covering securities.
The Fund will realize a profit from closing out an option if the price
of the offsetting position is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from closing out an option transaction if the price of the
offsetting option position is more than the premium received from writing the
option or is less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the covering securities, any loss resulting from the
closing of a written call option position is expected to be offset in whole or
in part by appreciation of such covering securities.
Since premiums on options having an exercise price close to the value
of the underlying securities or futures contracts usually have a time value
component (i.e., a value that diminishes as the time within which the option can
be exercised grows shorter) an option writer may profit from the lapse of time
even though the value of the futures contract (or security in some cases)
underlying the option (and of the security deliverable under the futures
contract) has not changed. Consequently, profit from option writing may or may
not be offset by a decline in the value of securities covering the option. If
the profit is not entirely offset, the Fund will have a net gain from the
options transaction, and the Fund's total return will be enhanced. Likewise, the
profit or loss from writing put options may or may not be offset in whole or in
part by changes in the market value of securities acquired by the Fund when the
put options are closed.
As an alternative to purchasing call and put options on index futures,
the Fund may purchase or sell call or put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant; if the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at a time when, in
the case of a call warrant, the exercise price is less than the value of the
underlying index, or in the case of a put warrant, the exercise price is less
than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to its
use of options on securities indices. The risks of the Fund's use of index
warrants are generally similar to those relating to its use of index options.
Unlike most index options, however, index warrants are issued in limited amounts
and are not obligations of a regulated clearing agency, but are backed only by
the credit of the bank or other institution which issues the warrant. Also,
index warrants generally have longer terms than index options. Although the Fund
will normally invest only in exchange-listed warrants, index warrants are not
likely to be as liquid as certain index options backed by a recognized clearing
agency. In addition, the terms of index warrants may limit the Fund's ability to
exercise the warrants at such time, or in such quantities, as the Fund would
otherwise wish to do.
The Fund may buy and write options on foreign currencies in a manner
similar to that in which futures or forward contracts on foreign currencies will
be utilized. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
the portfolio securities, the Fund may buy put options on the foreign currency.
If the value of the currency declines, the Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in
part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund from purchases of foreign currency
options will be reduced by the amount of the premium and related transactions
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Fund could sustain losses on transactions in foreign
currency options that would require the Fund to forego a portion or all of the
benefits of advantageous changes in those rates.
The Fund may also write options on foreign currencies. For example, to
hedge against a potential decline in the U.S. dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates, the Fund
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities be offset at least
in part by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move in
the manner projected, will expire unexercised and allow the Fund to hedge the
increased cost up to the amount of the premium. If exchange rates do not move in
the expected direction, the option may be exercised and the Fund would be
required to buy or sell the underlying currency at a loss, which may not be
fully offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may lose all or a portion of the benefits
which might otherwise have been obtained from favorable movements in exchange
rates.
All call options written by the Fund on foreign currencies will be
"covered." A call option written on a foreign currency by the Fund is "covered"
if the Fund owns the foreign currency underlying the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currencies held
in its portfolio. A call option is also covered if the Fund has a call on the
same foreign currency in the same principal amount as the call written if the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written, if the difference is maintained by the Fund in cash or liquid
securities eligible to be purchased by the Fund 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 securities eligible to be purchased by the Fund in an amount that
at all times at least equals the excess of (x) the amount of the Fund's
obligation under the call option over (y) the value of such securities.
SWAP CONTRACTS. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest (for example,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the relative values of the
specified currencies. An index swap is an agreement to make or receive payments
based on the different returns that would be achieved if a notional amount were
invested in a specified basket of securities (such as the Standard & Poor's
Composite Index of 500 Stocks [the "S&P 500"]) or in some other investment (such
as U.S. Treasury securities). The Fund will maintain at all times in a
segregated account with its custodian cash or liquid securities eligible to be
purchased by the Fund in amounts sufficient to satisfy its obligations under
swap contracts.
RISKS. The use of futures contracts, options and swap contracts involves risks.
One risk arises because of the imperfect correlation between movements in the
price of futures contracts and movements in the price of the securities that are
the subject of the hedge. The Fund's hedging strategies will not be fully
effective unless the Fund can compensate for such imperfect correlation. There
is no assurance that the Fund will be able to effect such compensation.
The correlation between the price movement of the futures contract and
the hedged security may be distorted due to differences in the nature of the
markets. For example, to the extent that the Municipal Income Fund enters into
futures contracts on securities other than tax exempt bonds, the value of such
futures may not vary in direct proportion to the value of tax exempt bonds that
the Fund owns or intends to acquire, because of an imperfect correlation between
the movement of taxable securities and tax exempt bonds. If the price of the
futures contract moves more than the price of the hedged security, the relevant
Fund would experience either a loss or a gain on the future that is not
completely offset by movements in the price of the hedged securities. In an
attempt to compensate for imperfect price movement correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the price movement volatility of the hedged securities is
historically greater than the volatility of the futures contract. Conversely,
the Fund may purchase or sell fewer contracts if the volatility of the price of
hedged securities is historically less than that of the futures contracts.
The price of index futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. In addition, trading hours for
foreign stock index futures may not correspond perfectly to hours of trading on
the foreign exchange to which a particular foreign stock index future relates.
This may result in a disparity between the price of index futures and the value
of the relevant index due to the lack of continuous arbitrage between the index
futures price and the value of the underlying index. Finally, hedging
transactions using stock indices involve the risk that movements in the price of
the index may not correlate with price movements of the particular portfolio
securities being hedged.
Price movement correlation also may be distorted by the illiquidity of
the futures and options markets and the participation of speculators in such
markets. If an insufficient number of contracts are traded, commercial users may
not deal in futures contracts or options because they do not want to assume the
risk that they may not be able to close out their positions within a reasonable
amount of time. In such instances, futures and options market prices may be
driven by different forces than those driving the market in the underlying
securities, and price spreads between these markets may widen. The participation
of speculators in the market enhances its liquidity. Nonetheless, speculators
trading spreads between futures markets may create temporary price distortions
unrelated to the market in the underlying securities.
Positions in futures contracts and options on futures contracts may be
established or closed out only on an exchange or board of trade. There is no
assurance that a liquid market on an exchange or board of trade will exist for
any particular contract or at any particular time. The liquidity of markets in
futures contracts and options on futures contracts may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which limit
the amount of fluctuation in a futures or options price during a single trading
day. Once the daily limit has been reached in a contract, no trades may be
entered into at a price beyond the limit, which may prevent the liquidation of
open futures or options positions. Prices have in the past exceeded the daily
limit on a number of consecutive trading days. If there is not a liquid market
at a particular time, it may not be possible to close a futures or options
position at such time, and, in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin.
However, if futures or options are used to hedge portfolio securities, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract.
An exchange-traded option may be closed out only on a national
securities or commodities exchange which generally provides a liquid secondary
market for an option of the same series. If a liquid secondary market for an
exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund would have to exercise the option in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction in a secondary market,
it will be not be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise. Reasons for the absence of
a liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing Corporation
or other clearing organization may not at all times be adequate to handle
current trading volume or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
Because the specific procedures for trading foreign stock index futures
on futures exchanges are still under development, additional or different margin
requirements as well as settlement procedures may be applicable to foreign stock
index futures at the time the International Equity Fund purchases foreign stock
index futures.
The successful use of transactions in futures and options depends in
part on the ability of a Fund's adviser or subadviser(s) to forecast correctly
the direction and extent of interest rate movements within a given time frame.
To the extent interest rates move in a direction opposite to that anticipated,
the Fund may realize a loss on the hedging transaction that is not fully or
partially offset by an increase in the value of portfolio securities. In
addition, whether or not interest rates move during the period that the Fund
holds futures or options positions, the Fund will pay the cost of taking those
positions (i.e., brokerage costs). As a result of these factors, the Fund's
total return for such period may be less than if it had not engaged in the
hedging transaction.
Options trading involves price movement correlation risks similar to
those inherent in futures trading. Additionally, price movements in options on
futures may not correlate with price movements in the futures underlying the
options. Like futures, options positions may become less liquid because of
adverse economic circumstances. The securities covering written option positions
are expected to offset adverse price movements if those options positions cannot
be closed out in a timely manner, but there is no assurance that such offset
will occur. Also, an option writer may not effect a closing purchase transaction
after it has been notified of the exercise of an option.
OVER-THE-COUNTER OPTIONS. An over-the-counter option (an option not traded on a
national securities exchange) may be closed out only with the other party to the
original option transaction. While the Fund will seek to enter into
over-the-counter options only with dealers who agree to or are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an over-the-counter option at
a favorable price at any time prior to its expiration. Accordingly, the Fund
might have to exercise an over-the-counter option it holds in order to realize
any profit thereon and thereby would incur transactions costs on the purchase or
sale of the underlying assets. If the Fund cannot close out a covered call
option written by it, it will not be able to sell the underlying security until
the option expires or is exercised. Furthermore, over-the-counter options are
not subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation or other clearing organizations.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that over-the-counter options on U.S. Government securities
and the assets used as cover for written over-the-counter options on U.S.
Government securities should generally be treated as illiquid securities for
purposes of the investment restrictions prohibiting the Government Securities
Fund from investing more than 15% of its net assets in illiquid securities.
However, if a dealer recognized by the Federal Reserve Bank of New York as a
"primary dealer" in U.S. Government securities is the other party to an option
contract written by the Fund, and the Fund has the absolute right to repurchase
the option from the dealer at a formula price established in a contract with the
dealer, the SEC staff has agreed that the Fund only needs to treat as illiquid
that amount of the "cover" assets equal to the amount at which (i) the formula
price exceeds (ii) any amount by which the market value of the securities
subject to the options exceeds the exercise price of the option (the amount by
which the option is "in-the-money"). Although Back Bay Advisors, L.P. ("Back Bay
Advisors"), the Government Securities Fund's subadviser, does not believe that
over-the-counter options on U.S. Government securities are generally illiquid,
the Fund has agreed that pending resolution of this issue it will conducts its
operations in conformity with the views of the SEC staff on such matters.
Back Bay Advisors has established standards for the creditworthiness of
the primary dealers with which the Government Securities Fund may enter into
over-the-counter option contracts having the formula-price feature referred to
above. Those standards, as modified from time to time, are implemented and
monitored by Back Bay Advisors. Such contracts will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a repurchase
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, by
which the option is "in-the-money." The formula will also include a factor to
account for the difference between the price of the securities and the exercise
price of the option if the option is written out-of-the-money. Although each
agreement will provide that the Fund's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined pursuant to the
formula), the formula price will not necessarily reflect the market value of the
option written, and therefore the Fund might pay more to repurchase the option
contract than the Fund would pay to close out a similar exchange-traded option.
ECONOMIC EFFECTS AND LIMITATIONS. Income earned by the Fund from its hedging
activities will be treated as capital gain and, if not offset by net recognized
capital losses incurred by the Fund, will be distributed to shareholders in
taxable distributions. Although gain from futures and options transactions may
hedge against a decline in the value of the Fund's portfolio securities, that
gain, to the extent not offset by losses, will be distributed in light of
certain tax considerations and will constitute a distribution of that portion of
the value preserved against decline. If the Municipal Income Fund is required to
use taxable fixed-income securities as margin, the portion of the Fund's
dividends that is taxable to shareholders will be larger than if that Fund is
permitted to use tax exempt bonds for that purpose.
The Fund intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" adopted by the CFTC
and the National Futures Association, which regulate trading in the futures
markets. The Fund will use futures contracts and related options primarily for
bona fide hedging purposes within the meaning of CFTC regulations. To the extent
that the Fund holds positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions, the aggregate
initial margin and premiums required to establish such positions will not exceed
5% of the fair market value of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into.
FUTURE DEVELOPMENTS. The above discussion relates to the Fund's proposed use of
futures contracts, options and options on futures contracts currently available.
The relevant markets and related regulations are still in the developing stage.
In the event of future regulatory or market developments, the Fund may also use
additional types of futures contracts or options and other investment techniques
for the purposes set forth above.
FOREIGN CURRENCY HEDGING TRANSACTIONS. To protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell a security and the settlement date for the purchase or sale, or
to "lock in" the equivalent of a dividend or interest payment in another
currency, the Fund might purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate. If conditions warrant, the Fund may also
enter into contracts with banks or broker-dealers to purchase or sell foreign
currencies at a future date ("forward contracts"). The Fund will maintain cash
or liquid securities eligible for purchase by the Fund 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 "Futures, Options and Swap Contracts" above.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUSTS
- --------------------------------------------------------------------------------
Trustees
Trustees of the Trusts and their ages (in parentheses), addresses and
principal occupations during the past five years are as follows:
GRAHAM T. ALLISON, JR.--Trustee (57); 79 John F. Kennedy Street, Cambridge, MA
02138; Douglas Dillon Professor and Director for the Center of Science
and International Affairs, John F. Kennedy School of Government;
Special Advisor to the United States Secretary of Defense; formerly,
Assistant Secretary of Defense; formerly, Dean, John F. Kennedy School
of Government.
DANIEL M. CAIN - Trustee (52); 452 Fifth Avenue, New York, NY 10018; President
and CEO, Cain Brothers & Company, Incorporated (investment banking);
formerly, Trustee, Universal Health Realty Income Trust; Chairman,
Inter Fish, Inc. (an aqua culture venture in Barbados).
KENNETH J. COWAN -- Trustee (65); One Beach Drive, S.E. #2103, St. Petersburg,
Florida 33701; Retired; Director, A Young Woman's Residence; formerly,
Senior Vice President-Finance and Chief Financial Officer, Blue Cross
of Massachusetts, Inc. and Blue Shield of Massachusetts, Inc.;
Director, Neworld Bank for Savings and Neworld Bancorp.
RICHARD DARMAN - Trustee (53); 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20004; Partner and Managing Director, The Carlyle Group (investments);
Trustee, Council for Excellence in Government (not-for-profit);
Director, Frontier Ventures (personal investment); Director, Highway
Master Communications (mobile communications); Managing Partner, Little
Falls Partners (family investment); Director, Sequana Therapeutics
(biotechnology/genomics); Director, Telcom Ventures
(telecommunications); formerly, Director of the U.S. Office of
Management and Budget and a member of President Bush's Cabinet.
SANDRA O. MOOSE -- Trustee (55); 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 (53); President, Chief
Executive Officer and Director, NEF Corporation; President and Chief
Executive Officer, New England Funds, L.P.; President and Chief
Executive Officer, New England Funds Management, L.P. ("NEFM");
Director, Back Bay Advisors, Inc. ("BBAI"); Director, Maine Bank &
Trust Company; formerly, Director, New England Securities Corporation
("New England Securities").
- -------------------
*Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
JOHN A. SHANE -- Trustee (64); 200 Unicorn Park Drive, Woburn, Massachusetts
01801; President, Palmer Service Corporation (venture capital
organization); General Partner, Palmer Partners L.P.; Director, Abt
Associates, Inc. (consulting firm); Director, Arch Communications
Group, Inc. (paging service); Director, Dowden Publishing Company, Inc.
(publishers of medial magazines); Director, Eastern Bank Corporation;
Director, Gensym Corporation (expert system software); Director,
Overland Data, Inc. (manufacturer of computer tape drives); Director,
Summa Four, Inc. (manufacturer of telephone switching equipment);
Director, United Asset Management Corporation (holding company for
institutional money management).
PETER S. VOSS* -- Chairman of the Board, Chief Executive Officer and Trustee
(50); President and Chief Executive Officer, New England Investment
Companies, L.P. ("NEIC"); Director, President and Chief Executive
Officer, New England Investment Companies, Inc. ("NEIC Inc."); Chairman
of the Board and Director, NEF Corporation; Chairman of the Board and
Director, BBAI; formerly, Director, New England Life Insurance Company
("NELICO"); Group Executive Vice President, Bank of America (Los
Angeles); Group Head of International Banking, Trading and Securities,
Security Pacific National Bank and Chief Executive Officer, Security
Pacific Investment Group.
PENDLETON P. WHITE -- Trustee (66); 6 Breckenridge Lane, Savannah, Georgia
31411; Retired; formerly, President and Chairman of the Executive
Committee, Studwell Associates (executive search consultants);
formerly, Trustee, The Faulkner Corporation (community hospital
corporation).
Officers
Officers of the Trusts, in addition to Messrs. Schmelzer and Voss, and
their ages (in parentheses) and principal occupations during the past five years
are as follows:
BRUCE R. SPECA -- Vice President (41); Executive Vice President, NEF
Corporation; Executive Vice President, New England Funds, L.P.;
Executive Vice President, NEFM.
FRANK NESVET -- Treasurer (53); Senior Vice President and Chief Financial
Officer, NEF Corporation ; Senior Vice President and Chief Financial
Officer, New England Funds, L.P.; Senior Vice President and Chief
Financial Officer, NEFM; formerly, Executive Vice President, SuperShare
Services Corporation (mutual fund and unit investment trust sponsor).
ROBERT P. CONNOLLY -- Secretary and Clerk (43); Senior Vice President and
General Counsel, NEF Corporation; Senior Vice President and General
Counsel, New England Funds, L.P.; Senior Vice President and General
Counsel, NEFM; formerly, Managing Director and General Counsel, Kroll
Associates, Inc. (business consulting company); formerly, Managing
Director and General Counsel, Equitable Capital Management Corporation.
Each person listed above holds the same position(s) with all three
Trusts. Previous positions during the past five years with NELICO or
Metropolitan Life Insurance Company ("MetLife"), New England Funds, L.P. or NEFM
are omitted, if not materially different from a trustee's or officer's current
position with such entity. Each of the Trusts' trustees is also a trustee of
certain other investment companies for which New England Funds, L.P. acts as
principal underwriter. Except as indicated above, the address of each trustee
and officer of the Trusts is 399 Boylston Street, Boston, Massachusetts 02116.
- -------------------
*Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
Trustee Fees
The Trusts pay no compensation to their officers or to their trustees
who are interested persons thereof.
Each Trustee who is not an interested person of the Trusts receives, in
the aggregate for serving on the boards of the Trusts and New England Cash
Management Trust and New England Tax Exempt Money Market Trust (all five trusts
collectively, the "New England Funds Trusts"), comprising as of September 15,
1997 a total of 23 mutual fund portfolios, a retainer fee at the annual rate of
$40,000 and meeting attendance fees of $2,500 for each meeting of the boards he
or she attends and $1,500 for each meeting he or she attends of a committee of
the board of which he or she is a member. Each committee chairman receives an
additional retainer fee at the annual rate of $2,500. These fees are allocated
among the Funds and the three other mutual fund portfolios in the New England
Funds Trusts based on a formula that takes into account, among other factors,
the net assets of each fund.
During the fiscal year ended December 31, 1996, the persons who were
then trustees of the Trusts received the amounts set forth in the following
table for serving as a trustee of the Trusts and for also serving on the
governing boards of the other New England Funds Trusts.
<TABLE>
<CAPTION>
Pension or
Aggregate Aggregate Aggregate Retirement Total
Compensation Compensation Compensation Benefits Estimated Compensation
from from from Accrued as Annual from the
New England New England New England Part of Fund Benefits New England
Funds Trust I Funds Trust II Funds Trust III Expenses Upon Funds Trusts
Name of Trustee in 1996 in 1996 in 1996 in 1996 Retirement in 1996
--------------- ------------- -------------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $30,251 $16,901 $0 $0 $0 $54,500
Daniel M. Cain (a) $28,317 $16,113 $0 $0 $0 $51,250
Kenneth J. Cowan $33,997 $18,946 $0 $0 $0 $61,250
Richard Darman (a) $26,750 $15,242 $0 $0 $0 $48,500
Sandra O. Moose $32,500 $18,537 $0 $0 $0 $59,000
James H. Scott (b) $ 7,907 $ 4,166 $0 $0 $0 $14,000
John A. Shane $32,501 $18,537 $0 $0 $0 $59,000
Pendleton P. White $31,751 $17,992 $0 $0 $0 $57,500
</TABLE>
(a) Became a trustee of the Trusts effective February 23, 1996.
(b) Resigned as a trustee of the Trusts effective March 5, 1996.
The Funds provide no pension or retirement benefits to trustees, but
have adopted a deferred payment arrangement under which each trustee may elect
not to receive fees from the Funds on a current basis but to receive in a
subsequent period an amount equal to the value that such fees would have if they
had been invested in each Fund on the normal payment date for such fees. As a
result of this method of calculating the deferred payments, each Fund, upon
making the deferred payments, will be in the same financial position as if the
fees had been paid on the normal payment dates.
At June 1, 1997, the officers and trustees of each Trust as a group
owned less than 1% of the outstanding shares of each Fund.
Advisory and Subadvisory Agreements
Each Fund's advisory agreement between the Fund and NEFM (between the
Fund and Capital Growth Management Limited Partnership ("CGM"), in the case of
the Growth Fund) provides that the adviser (NEFM or CGM) will furnish or pay the
expenses of the applicable Fund for office space, facilities and equipment,
services of executive and other personnel of the Trust and certain
administrative services.
Each Fund pays all expenses not borne by its adviser or subadviser(s)
including, but not limited to, the charges and expenses of the Fund's custodian
and transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, all brokerage commissions and transfer taxes in
connection with portfolio transactions, all taxes and filing fees, the fees and
expenses for registration or qualification of its shares under federal and state
securities laws, all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders and the compensation of
trustees who are not directors, officers or employees of the Fund's adviser,
subadviser(s) or their affiliates, other than affiliated registered investment
companies. Each Fund (except the Growth Fund) also pays NEFM for certain legal
and accounting services provided to the Fund by NEFM.
Each Fund's advisory agreement and (except in the case of the Growth
Fund) each Fund's subadvisory agreement between NEFM and the subadviser that
manages the Fund (or, in the case of the Star Advisers, Star Worldwide and Star
Small Cap Funds, each subadvisory 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 relevant Trust or by vote of a majority of the outstanding
voting securities of the relevant Fund and (ii) by vote of a majority of the
trustees who are not "interested persons" of the relevant Trust, as that term is
defined in the 1940 Act, cast in person at a meeting called for the purpose of
voting on such approval. Any amendment to an advisory or subadvisory agreement
must be approved by vote of a majority of the outstanding voting securities of
the relevant Fund and by vote of a majority of the trustees of the relevant
Trust who are not such interested persons, cast in person at a meeting called
for the purpose of voting on such approval. Each advisory and subadvisory
agreement may be terminated without penalty by vote of the board of trustees of
the relevant Trust or by vote of a majority of the outstanding voting securities
of the relevant Fund, upon 60 days' written notice, or by the Fund's adviser
upon 90 days' written notice, and each terminates automatically in the event of
its assignment. Each subadvisory agreement also may be terminated by the
subadviser upon 90 days' notice and automatically terminates upon termination of
the related advisory agreement. In addition, each advisory agreement will
automatically terminate if the Trust or the Fund shall at any time be required
by the Distributor to eliminate all reference to the words "New England" or the
letters "TNE" in the name of the relevant Trust or the relevant Fund, unless the
continuance of the agreement after such change of name is approved by a majority
of the outstanding voting securities of the relevant Fund and by a majority of
the trustees who are not interested persons of the relevant Trust or the Fund's
adviser or subadviser.
Each advisory and subadvisory agreement provides that the adviser or
subadviser shall not be subject to any liability in connection with the
performance of its services thereunder in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations and duties.
NEFM, formed in 1995, is a limited partnership whose sole general
partner, NEF Corporation, is a wholly-owned subsidiary of NEIC Holdings, Inc.
("NEIC Holdings"), which is a wholly-owned subsidiary of NEIC. NEF Corporation
is also the sole general partner of New England Funds, L.P., the distributor of
the Funds. NEIC owns the entire limited partnership interest in each of NEFM and
New England Funds, L.P.
NEIC's sole general partner, NEIC, Inc, is a wholly-owned subsidiary of
MetLife New England Holdings, Inc., which in turn is a wholly-owned subsidiary
of MetLife. MetLife owns a majority limited partnership interest in NEIC. NEIC
and its 13 subsidiary or affiliated asset management firms, collectively, have
more than $100 billion of assets under management or administration.
Back Bay Advisors, formed in 1986, is a limited partnership whose sole
general partner, BBAI, is a wholly-owned subsidiary of NEIC Holdings. NEIC owns
the entire limited partnership interest in Back Bay Advisors. Back Bay Advisors
provides investment management services to institutional clients, including
other registered investment companies and accounts of NELICO and its affiliates.
Back Bay Advisors specializes in fixed-income management and currently manages
over $7 billion in total assets.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") was organized in 1926
and is one of the oldest and largest investment counsel firms in the country. An
important feature of the Loomis Sayles investment approach is its emphasis on
investment research. Recommendations and reports of the Loomis Sayles research
department are circulated throughout the Loomis Sayles organization and are
available to the individuals in the Loomis Sayles organization who have been
assigned the responsibility for making investment decisions for the Funds'
portfolios. Loomis Sayles provides investment advice to numerous other
institutional and individual clients. These clients include some accounts of
NELICO and MetLife and their affiliates. Loomis Sayles is a limited partnership
whose sole general partner, Loomis, Sayles & Company, Incorporated, is a
wholly-owned subsidiary of NEIC Holdings. NEIC owns the entire limited
partnership interest in Loomis Sayles.
CGM is a limited partnership whose sole general partner, Kenbob, Inc.,
is a corporation owned in equal shares by Robert L. Kemp and G. Kenneth Heebner.
NEIC owns a majority limited partnership interest in CGM. Prior to March 1,
1990, the Growth Fund was managed by Loomis Sayles' Capital Growth Management
Division. On March 1, 1990, Loomis Sayles reorganized its Capital Growth
Management Division into CGM. In addition to advising the Growth Fund, CGM acts
as investment adviser of CGM Capital Development Fund, CGM Trust, New England
Zenith Fund's Capital Growth Series and New England Variable Annuity Fund I. CGM
also provides investment advice to other mutual funds and other institutional
and individual clients.
Westpeak Investment Advisors, L.P. ("Westpeak"), organized in 1991,
provides investment management services to institutional clients, including
accounts of NELICO and its affiliates. Westpeak is a limited partnership whose
sole general partner, Westpeak Investment Advisors, Inc., is a wholly-owned
subsidiary of NEIC Holdings. NEIC owns the entire limited partnership interest
in Westpeak.
Berger Associates, Inc. ("Berger") serves as investment adviser to the
mutual funds in the Berger Funds' group and to pension and profit-sharing plans
and other institutional and private investors. Kansas City Southern Industries,
Inc. ("KCSI") a publicly-traded holding company, owns approximately 80% of the
stock of Berger.
Founders Asset Management, Inc. ("Founders") was organized in 1938. It
serves as investment adviser to the Founders mutual funds as well as to private
accounts. Bjorn K. Borgen, Chief Executive Officer of Founders, owns all of the
stock of Founders.
Janus Capital Corporation ("Janus Capital") serves as investment
adviser to the Janus mutual funds and to other mutual funds, individual,
charitable, corporate and retirement accounts. KCSI owns approximately 83% of
the outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately 12% of Janus
Capital's voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's board.
Harris Associates, L.P. ("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 limited partnership whose sole general partner is Harris
Associates, Inc., a wholly-owned subsidiary of NEIC. Harris was acquired by NEIC
in 1995. Harris also serves as investment adviser to individuals, trusts,
retirement plans, endowments and foundations, and manages numerous private
partnerships.
Montgomery Asset Management, L.P. ("Montgomery"), a California limited
partnership, was formed in 1990 as an investment adviser and since then has
advised institutional and retail clients. Its general partner is Montgomery
Asset Management, Inc., and its sole limited partner is Montgomery Group
Holdings, LLC. Montgomery Securities is the distributor for The Montgomery
Funds. Under the 1940 Act, both Montgomery Asset Management, Inc. and Montgomery
Securities may be deemed control persons of Montgomery. Although the operations
and management of Montgomery are independent from those of Montgomery
Securities, Montgomery may draw upon the research and administrative resources
of Montgomery Securities in its discretion and consistent with applicable
regulations.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), a California limited partnership, was formed in 1993 and is
registered as an investment adviser with the Securities and Exchange Commission.
The general partner of Robertson Stephens is Robertson, Stephens & Company,
Inc., and the principal limited partner is Robertson, Stephens & Company LLC, a
mutual funds distributor and a major investment banking firm specializing in
emerging growth companies that has developed substantial investment research,
underwriting, and venture capital expertise. Robertson Stephens and its
affiliates have in excess of $4.5 billion under management in public and private
investment funds.
Certain officers and employees of Back Bay Advisors have responsibility
for portfolio management of other advisory accounts and clients (including other
registered investment companies and accounts of affiliates of Back Bay Advisors)
that may invest in securities in which the Funds may invest. Where Back Bay
Advisors determines that an investment purchase or sale opportunity is
appropriate and desirable for more than one advisory account, purchase and sale
orders may be executed separately or may be combined and, to the extent
practicable, allocated by Back Bay Advisors to the participating accounts. Where
advisory accounts have competing interests in a limited investment opportunity,
Back Bay Advisors will allocate an investment purchase opportunity based on the
relative time the competing accounts have had funds available for investment,
and the relative amounts of available funds, and will allocate an investment
sale opportunity based on relative cash requirements and the time the competing
accounts have had investments available for sale. It is Back Bay Advisors'
policy to allocate, to the extent practicable, investment opportunities to each
client over a period of time on a fair and equitable basis relative to its other
clients. It is believed that the ability of the Funds for which Back Bay
Advisors acts as subadviser to participate in larger volume transactions in this
manner will in some cases produce better executions for the Funds. However, in
some cases, this procedure could have a detrimental effect on the price and
amount of a security available to a Fund or the price at which a security may be
sold. The Trusts' trustees are of the view that the benefits of retaining Back
Bay Advisors as investment manager outweigh the disadvantages, if any, that
might result from participating in such transactions.
Certain officers of Loomis Sayles have responsibility for the
management of other client portfolios. The Pasadena office of Loomis Sayles buys
and sells portfolio securities for the Value and Balanced Funds, the Chicago
office buys and sells portfolio securities for the Capital Growth Fund, the
Detroit office buys and sells portfolio securities for the segments of the Star
Advisers and Star Small Cap Funds' portfolios that are managed (or subadvised)
by Loomis Sayles, the Boston office buys and sells portfolio securities for the
Strategic Income Fund and the International Equity Fund and the New York office
buys and sells portfolio securities for the High Income Fund and the Equity
Income Fund. These offices buy and sell securities independently of one another.
The other investment companies and clients served by Loomis Sayles sometimes
invest in securities in which the Capital Growth, Value, Balanced, Star
Advisers, Star Small Cap, High Income, Strategic Income, Equity Income and
International Equity Funds also invest. If one of these Funds and such other
clients advised by the same office of Loomis Sayles desire to buy or sell the
same portfolio securities at about the same time, purchases and sales will be
allocated, to the extent practicable, on a pro rata basis in proportion to the
amounts desired to be purchased or sold for each. It is recognized that in some
cases the practices described in this paragraph could have a detrimental effect
on the price or amount of the securities which each of the Funds purchases or
sells. In other cases, however, it is believed that these practices may benefit
the relevant Fund. It is the opinion of the Trusts' trustees that the
desirability of retaining Loomis Sayles as subadviser for the Strategic Income,
Capital Growth, Value, Balanced, Star Advisers, Star Small Cap, High Income,
Equity Income and International Equity Funds outweighs the disadvantages, if
any, which might result from these practices.
In addition to managing a segment of the Star Advisers Fund's
portfolio, Berger serves as investment adviser or subadviser to other mutual
funds, pension and profit-sharing plans, and other institutional and private
investors. At times, Berger may effect purchases and sales of the same
investment securities for the Fund, and for one or more other investment
accounts. In such cases, it will be the practice of Berger to allocate the
purchase and sale transactions among the Fund and the accounts in such manner as
it deems equitable. In making such allocation, the main factors to be considered
are the respective investment objectives of the Fund and the accounts, the
relative size of portfolio holdings of the same or comparable securities, the
current availability of cash for investment by the Fund and each account, the
size of investment commitments generally held by the Fund and each account, and
the opinions of the persons at Berger responsible for selecting investments for
the Fund and the accounts. It is the opinion of the Trusts' trustees that the
desirability of retaining Berger as a subadviser to the Fund outweighs the
disadvantages, if any, which might result from these procedures.
The segments of the Star Advisers and Star Worldwide Funds managed by
Founders and one or more of the other mutual funds or clients to which Founders
serves as investment adviser may own the same securities from time to time. If
purchases or sales of securities for the segments of the Funds 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 Funds and other clients in a manner deemed equitable to all
by Founders. 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 Funds. However, the
ability of the Funds to participate in volume transactions may possibly produce
better executions for the Funds in some cases. It is the opinion of the trustees
of the Trusts that the desirability of retaining Founders as a subadviser to the
Star Advisers and Star Worldwide Funds 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, as well as for
its segments of the portfolios of the Star Advisers and Star Worldwide Funds.
Although the overall investment objectives of the Funds may differ from the
objectives of the other investment accounts and other funds served by Janus
Capital, there may be securities that are suitable for the portfolio of the
Funds as well as for one or more of the other funds or the other investment
accounts. Therefore, purchases and sales of the same investment securities may
be recommended for the Funds and for one or more of the other funds or other
investment accounts. To the extent that the Funds and one or more of the other
funds or other investment accounts seek to acquire or sell the same security at
the same time, either the price obtained by the Funds or the amount of
securities that may be purchased or sold by the Funds at one time may be
adversely affected. In such cases, the purchase and sale transactions are
allocated among the Funds, the other funds and the other investment accounts in
a manner believed by the management of Janus Capital to be equitable to each. It
is the opinion of the trustees of the Trusts that the desirability of retaining
Janus Capital as a subadviser to the Star Advisers and Star Worldwide Funds
outweighs the disadvantages, if any, which might result from these procedures.
Certain officers of Westpeak have responsibility for portfolio
management for other clients (including affiliates of Westpeak), some of which
may invest in securities in which the Growth Opportunities Fund also may invest.
When the Fund and other clients desire to purchase or sell the same security at
or about the same time, the purchase and sale orders are ordinarily placed and
confirmed separately but may be combined to the extent practicable and allocated
as nearly as practicable on a pro rata basis in proportion to the amounts
desired to be purchased or sold for each. It is believed that the ability of
those clients to participate in larger volume transactions will in some cases
produce better executions for the Trusts. However, in some cases this procedure
could have a detrimental effect on the price and amount of a security available
to the Fund or the price at which a security may be sold. It is the opinion of
the trustees of the Trusts that the desirability of retaining Westpeak as
subadviser for the Fund outweighs the disadvantages, if any, which might result
from these practices.
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 Star Worldwide and/or Star Small Cap Funds 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 Star Worldwide and
Star Small Cap Funds to participate in larger volume transactions in this manner
will in some cases produce better executions for these Funds. However, in some
cases, this procedure could have a detrimental effect on the price and amount of
a security available to these Funds or the price at which a security may be
sold. The trustees of the Trusts are of the view that the benefits of retaining
Harris as a subadviser to the Star Worldwide and Star Small Cap Funds outweigh
the disadvantages, if any, that might result from participating in such
transactions.
In addition to managing segments of the Star Worldwide and Star Small
Cap Funds' portfolios, 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 Star Worldwide and/or Star Small Cap Funds 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 Funds 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 Funds and the accounts, the relative size of portfolio holdings of the same
or comparable securities, the current availability of cash for investment by the
Funds and each account, the size of investment commitments generally held by the
Funds and each account and the opinions of the persons at Montgomery responsible
for selecting investments for the Funds and the accounts. It is the opinion of
the trustees of the Trusts that the desirability of retaining Montgomery as a
subadviser to the Star Worldwide and Star Small Cap Funds outweighs the
disadvantages, if any, which might result from these procedures.
Investment decisions for its segment of the Star Small Cap Fund and for
other investment advisory clients of Robertson Stephens and its affiliates are
made with a view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic suitability for
the particular client involved. Thus, a particular security may be bought or
sold for certain clients even though it could be bought or sold for other
clients at the same time. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling the same security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in Robertson Stephens' opinion is equitable to each and in
accordance with the amount being purchased or sold by each client. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients. Robertson Stephens employs
staffs of portfolio managers who draw upon a variety of resources, including
Robertson Stephens & Company, Inc., for research information. It is the opinion
of the trustees of the Trusts that the desirability of retaining Robertson
Stephens as a subadviser to the Star Small Cap Fund outweighs the disadvantages,
if any, which could result from these procedures.
Distribution Agreements and Rule 12b-1 Plans. Under a separate
agreement with each Fund, New England Funds, L.P. serves as the general
distributor of each class of shares of the Funds. Under these agreements, New
England Funds, L.P. is not obligated to sell a specific number of shares. New
England Funds, L.P. bears the cost of making information about the Funds
available through advertising and other means and the cost of printing and
mailing Prospectuses to persons other than shareholders. Each Fund pays the cost
of registering and qualifying its shares under state and federal securities laws
and the distribution of Prospectuses to existing shareholders.
New England Funds, L.P. is compensated under each agreement through
receipt of the sales charges on Class A shares described below under "Net Asset
Value and Public Offering Price" and is paid by the Funds the service and
distribution fees described in the Prospectus.
As described in the Prospectuses, each Fund has adopted Rule 12b-1
plans (the "Plans") for its Class A, Class B and Class C shares which, among
other things, permit it to pay the Fund's distributor (currently New England
Funds, L.P.) monthly fees out of its net assets. Pursuant to Rule 12b-1 under
the 1940 Act, each Plan was approved by the shareholders of each Fund, and
(together with the related Distribution Agreement) by the board of trustees,
including a majority of the trustees who are not interested persons of the
relevant Trust (as defined in the 1940 Act) and who have no direct or indirect
financial interest in the operation of the Plan or the Distribution Agreement
(the "Independent Trustees").
Each Plan may be terminated by vote of a majority of the relevant
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the relevant class of shares of the relevant Fund. Each Plan may
be amended by vote of the relevant trustees, including a majority of the
relevant Independent Trustees, cast in person at a meeting called for that
purpose. Any change in any Plan that would materially increase the fees payable
thereunder by the relevant class of shares of the relevant Fund requires
approval by vote of the holders of a majority of such shares outstanding. The
Trusts' trustees review quarterly a written report of such costs and the
purposes for which such costs have been incurred. For so long as a Plan is in
effect, selection and nomination of those trustees who are not interested
persons of the relevant Trust shall be committed to the discretion of such
disinterested persons.
New England Funds, L.P. has entered into selling agreements with
investment dealers, including New England Securities, an affiliate of New
England Funds, L.P., for the sale of the Funds' shares. New England Securities
is registered as a broker-dealer under the Securities Exchange Act of 1934. New
England Funds, L.P. may at its expense pay an amount not to exceed 0.50% of the
amount invested to dealers who have selling agreements with the Distributor.
Class Y shares of the Funds may be offered by registered representatives of New
England Securities who are also employees of New England Investment Associates,
Inc. ("NEIA"), an indirect, wholly-owned subsidiary of NEIC. NEIA may receive
compensation from each Fund's adviser or subadviser with respect to sales of
Class Y shares.
The Distribution Agreement for any Fund may be terminated at any time
on 60 days' written notice without payment of any penalty by New England Funds,
L.P. or by vote of a majority of the outstanding voting securities of the
relevant Fund or by vote of a majority of the relevant Independent Trustees.
The Distribution Agreements and the Plans will continue in effect for
successive one-year periods, provided that each such continuance is specifically
approved (i) by the vote of a majority of the relevant Independent Trustees and
(ii) by the vote of a majority of the entire board of trustees cast in person at
a meeting called for that purpose or by a vote of a majority of the outstanding
securities of a Fund (or the relevant class, in the case of the Plans).
With the exception of New England Funds, L.P., New England Securities
and their direct and indirect corporate parents (NEIC and MetLife), no
interested person of the Trusts nor any trustee of the Trusts had any direct or
indirect financial interest in the operation of the Plans or any related
agreement.
Benefits to the Funds and their shareholders resulting from the Plans
are believed to include (1) enhanced shareholder service, (2) asset retention,
(3) enhanced bargaining position with third party service providers and
economies of scale arising from having higher asset levels and (4) portfolio
management opportunities arising from having an enhanced positive cash flow.
New England Funds, L.P. controls the words "New England" in the names
of the Trusts and the Funds and if it should cease to be the distributor, New
England Funds Trust I, New England Funds Trust II, New England Funds Trust III
or the affected Fund may be required to change their names and delete these
words or letters. New England Funds, L.P. also acts as general distributor for
New England Funds Trust III, New England Cash Management Trust and New England
Tax Exempt Money Market Trust.
During the years ended December 31, 1994, 1995 and 1996, New England
Funds, L.P. received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $9,569,312, $8,779,918 and $10,735,444, respectively,
of which $8,290,120, $7,706,937 and $9,418,244, respectively, was allowed to
other securities dealers and the balance retained by New England Funds, L.P.
During the years ended December 31, 1994, 1995 and 1996, New England Funds, L.P.
received CDSCs on the redemption of Class A and Class B shares of New England
Funds Trust I aggregating $228,526, $899,482 and $1,256,009, respectively, of
which $188,000, $879,085 and $1,236,000, respectively, was paid to FEP Capital,
L.P. and the balance retained by New England Funds, L.P. See "Other
Arrangements" for information about amounts received by New England Funds, L.P.
from New England Funds Trust I's investment advisers and subadvisers or the
Funds directly for providing certain administrative services relating to New
England Funds Trust I.
During the years ended December 31, 1994, 1995 and 1996, New England
Funds, L.P. received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $2,071,744, $1,913,291 and $1,674,883,
respectively, of which $1,780,651, $1,752,050 and $1,429,970, respectively, were
reallowed to other securities dealers and the balance retained by New England
Funds, L.P. During the years ended December 31, 1994, 1995 and 1996, New England
Funds, L.P. received CDSCs on the redemption of Class A and Class B shares of
New England Funds Trust II aggregating $256,811, $234,390 and $318,167,
respectively, of which $111,876, $173,421 and $313,465, respectively was paid to
FEP Capital, L.P. and the balance retained by New England Funds, L.P. See "Other
Arrangements" for information about amounts received by New England Funds, L.P.
from Back Bay Advisors or the Funds directly for providing certain
administrative services relating to New England Funds Trust II.
Proceeds from the CDSC on Class A shares are paid to New England Funds,
L.P. and are used by New England Funds, L.P. to defray the expenses for services
New England Funds, L.P. provides the Trust. Proceeds from the CDSC on Class B
shares are paid to New England Funds, L.P. and are remitted to FEP Capital, L.P.
to compensate FEP Capital, L.P. for financing the sale of Class B shares
pursuant to certain Class B financing and servicing agreements between New
England Funds, L.P. and FEP Capital, L.P.
For the period November 15, 1995 through December 31, 1995 and for the
fiscal year end December 31, 1996, New England Funds, L.P. received no
commissions on sales or CDSCs on redemptions of shares of New England Funds
Trust III.
Custodial Arrangements. State Street Bank and Trust Company ("State
Street Bank"), 225 Franklin Street, Boston, Massachusetts 02110, is the Trusts'
custodian. As such, State Street Bank holds in safekeeping certificated
securities and cash belonging to each Fund and, in such capacity, is the
registered owner of securities in book-entry form belonging to each Fund. Upon
instruction, State Street Bank receives and delivers cash and securities of each
Fund in connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of the Trusts and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis.
Independent Accountants. The Trusts' independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Cooper's &
Lybrand LLP, One Post Office Square, Boston, Massachusetts 02109 were the
independent accountants for New England Funds Trust II for the fiscal year ended
December 31, 1996. The independent accountants of each Trust conduct an annual
audit of that Trust's financial statements, assist in the preparation of federal
and state income tax returns and consult with the Trusts as to matters of
accounting and federal and state income taxation. The information concerning
financial highlights in the Prospectuses, and financial statements contained in
the Funds' annual reports for the year ended December 31, 1996 and incorporated
by reference into this Statement, have been so included in reliance on the
reports of each Trusts' independent accountants, given on the authority of such
firms as experts in auditing and accounting.
Other Arrangements
Prior to January 2, 1996, office space, facilities, equipment and
certain other administrative services for the Funds in New England Funds Trust I
(except the International Equity, Capital Growth and Star Advisers Funds) were
furnished by New England Securities, an affiliate of New England Funds, L.P.,
under service agreements with CGM, Loomis Sayles or Back Bay Advisors. In the
case of the Growth Fund, New England Securities continues to provide such
services under its service agreement with CGM. For the years ended December 31,
1994, 1995 and 1996, New England Securities received $1,361,705, $1,369,323 and
$1,473,212, respectively, from the Fund's advisers under these agreements. In
the case of the Capital Growth Fund, New England Funds, L.P. provided similar
services prior to January 2, 1996 under a service agreement with Loomis Sayles.
For the years ended December 31, 1994 and 1995, New England Funds, L.P. received
$278,333 and $323,029, respectively, from Loomis Sayles under this agreement. In
the case of the Star Advisers Fund, New England Funds, L.P. provided similar
services prior to January 2, 1996 under a service agreement with NEIC. For the
years ended December 31, 1994 and 1995, New England Funds, L.P. received
$269,302 and $1,715,899, respectively, from NEIC under this agreement. In the
case of the International Equity Fund, New England Funds, L.P. provided similar
services prior to December 29, 1995 under an administrative services agreement
with the Fund under which the International Equity Fund paid a fee at the annual
rate of 0.10% of the average daily net assets attributable to the Fund's Class
A, Class B and Class C shares and 0.05% of such assets attributable to the
Fund's Class Y shares. For the fiscal years ended December 31, 1994 and 1995,
New England Funds, L.P. received $167,715 and $192,366, respectively, from the
International Equity Fund for these services.
Prior to January 2, 1996, New England Funds, L.P. provided similar
services for the Growth Opportunities, Limited Term U.S. Government,
Massachusetts and High Income Funds under an agreement with Back Bay Advisors.
For the years ended December 31, 1994 and 1995, New England Funds, L.P. received
$676,787 and $1,511,359, respectively, from Back Bay Advisors under this
agreement. In the case of the Adjustable Rate Fund, New England Funds, L.P.
provided similar services under an Administrative Services Agreement with the
Fund, under which the Fund paid a fee at the annual rate of 0.15% of the first
$200 million of the Fund's average daily net assets, 0.135% of the next $300
million of such assets and 0.12% of such assets in excess of $500 million. For
the years ended December 31, 1994 and 1995, New England Funds, L.P. received
$382,335 and $334,777, respectively, from the Adjustable Rate Fund for these
services. In the case of the California and New York Funds, New England Funds,
L.P. provided similar services under Administrative Services Agreements with the
Funds under which the Funds paid a fee at the rate of 0.125% of each Fund's
average daily net assets. For the year ended December 31, 1994, New England
Funds, L.P. waived its fees of $49,097 and $25,557 for these services for the
California and New York Funds, respectively, and for the year ended December 31,
1995, New England Funds, L.P. waived its fees of $46,879 and $22,124 for these
services from the California and New York Funds, respectively.
Pursuant to a contract between the Funds and New England Funds, L.P.,
New England Funds, L.P. acts as shareholder servicing and transfer agent for the
Funds and is responsible for services in connection with the establishment,
maintenance and recording of shareholder accounts, including all related tax and
other reporting requirements and the implementation of investment and redemption
arrangements offered in connection with the sale of the Funds' shares. The Funds
pay an annual per-account fee to New England Funds, L.P. for these services in
the amount of $17.75 for the Balanced Fund, Growth Fund, Capital Growth Fund,
Value Fund, International Equity Fund, Star Advisers Fund, Star Worldwide Fund,
Star Small Cap Fund, Growth Opportunities Fund and Strategic Income Fund, and
$15.95 for the High Income Fund, Massachusetts Fund, Limited Term U.S.
Government Fund, Adjustable Rate Fund, California Fund, New York Fund, Bond
Income Fund, Municipal Income Fund and Government Securities Fund. New England
Funds, L.P. has subcontracted with State Street Bank for it to provide, through
its subsidiary, Boston Financial Data Services, Inc. ("BFDS"), transaction
processing, mail and other services. For these services, New England Funds, L.P.
pays BFDS a monthly per account fee of $0.95 for the California Fund, New York
Fund, Bond Income Fund, Municipal Income Fund, Adjustable Rate Fund, Government
Securities Fund and Strategic Income Fund; $0.87 for the Massachusetts Fund,
High Income Fund and Limited Term U.S. Government Fund; $0.78 for the
International Equity Fund, Capital Growth Fund, Balanced Fund, Value Fund,
Growth Fund, Star Advisers Fund, Star Worldwide Fund and Star Small Cap Fund;
and $0.70 for the Growth Opportunities Fund. The Equity Income Fund pays a $250
monthly fee to New England Funds, L.P. for these services which New England
Funds, L.P. pays in full to State street Bank for it to provide through its
subsidiary, Boston Financial Data Services ("BFDS"), transaction processing and
other services.
In addition, during the fiscal year ended December 31, 1996 New England
Funds, L.P. performed certain accounting and administrative services for the
Growth Fund, Balanced Fund, Value Fund, Bond Income Fund, Municipal Income Fund,
Government Securities Fund, International Equity Fund, Capital Growth Fund, Star
Advisers Fund and Star Worldwide Fund. Each Fund reimbursed New England Funds
for all or part of New England Funds' expenses of providing these services which
include the following: (i) expenses for personnel performing bookkeeping,
accounting, internal auditing and financial reporting functions and clerical
functions relating to the Fund, (ii) expenses for services required in
connection with the preparation of registration statements and prospectuses,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance, and (iii) registration, filing and other fees
in connection with requirements of regulatory authorities.
During the fiscal year ended December 31, 1996, New England Funds, L.P.
received legal and accounting services fees paid by the Growth Fund, Balanced
Fund, Value Fund, Bond Income Fund, Municipal Income Fund, Government Securities
Fund, International Equity Fund, Capital Growth Fund, Equity Income, Star
Advisers Fund and Star Worldwide Fund in the amounts of $173,071, $56,069,
$54,574, $44,322, $40,947, $34,007, $51,077, $36,732, $0, $98,321 and $24,445,
respectively.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
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All Fixed Income Funds. In placing orders for the purchase and sale of
portfolio securities for each Fund, Back Bay Advisors and Loomis Sayles always
seek the best price and execution. Some of each Fund's portfolio transactions
are placed with brokers and dealers who provide Back Bay Advisors or Loomis
Sayles with supplementary investment and statistical information or furnish
market quotations to that Fund, the other Funds or other investment companies
advised by Back Bay Advisors or Loomis Sayles. The business would not be so
placed if the Funds would not thereby obtain the best price and execution.
Although it is not possible to assign an exact dollar value to these services,
they may, to the extent used, tend to reduce the expenses of Back Bay Advisors
or Loomis Sayles. The services may also be used by Back Bay Advisors or Loomis
Sayles in connection with their other advisory accounts and in some cases may
not be used with respect to the Funds.
All Equity Funds. In placing orders for the purchase and sale of equity
securities, each Fund's adviser or subadviser selects only brokers which it
believes are financially responsible, will provide efficient and effective
services in executing, clearing and settling an order and will charge commission
rates that, when combined with the quality of the foregoing services, will
produce best price and execution for the transaction. This does not necessarily
mean that the lowest available brokerage commission will be paid. However, the
commissions are believed to be competitive with generally prevailing rates. Each
Fund's adviser or subadviser will use its best efforts to obtain information as
to the general level of commission rates being charged by the brokerage
community from time to time and will evaluate the overall reasonableness of
brokerage commissions paid on transactions by reference to such data. In making
such evaluation, all factors affecting liquidity and execution of the order, as
well as the amount of the capital commitment by the broker in connection with
the order, are taken into account.
Star Advisers Fund (segment advised by Berger). Berger places portfolio
transactions for its segment of the Star Advisers Fund only with brokers and
dealers who render satisfactory service in the execution of orders at the most
favorable prices and at reasonable commission rates. However, Berger may place
such transactions with a broker with whom it has negotiated a commission that is
in excess of the commission then being charged by another broker where such
commission is the result of Berger having reasonably taken into account the
quality and reliability of the brokerage services, including, without
limitation, the availability and value of research services or execution
services. Berger places some of the portfolio brokerage business of its segment
of the Star Advisers Fund with brokers who provide useful research services to
Berger. Such research services typically consist of studies made by investment
analysts or economists relating either to the past record of and future outlook
for companies and the industries in which they operate, or to national and
worldwide economic conditions, monetary conditions and trends in investors'
sentiment, and the relationship of these factors to the securities market. In
addition, such analysts may be available for regular consultation so that Berger
may be apprised of current developments in the above-mentioned factors. Other
research services provided by brokers include computerized stock quotation and
trading information, fundamental and technical analysis data and software,
computerized stock market and business news services and account performance
data. The research services received from brokers are helpful to Berger in
performing its investment advisory responsibilities to its segment of the Star
Advisers Fund, but they are not essential, and the availability of such services
from brokers does not reduce the responsibility of Berger advisory personnel to
analyze and evaluate the securities in which its segment of the Star Advisers
Fund invests. The research services obtained as a result of the Fund's brokerage
business also will be useful to Berger in making investment decisions for its
other advisory accounts, and, conversely, information obtained by reason of
placement of brokerage business of such other accounts may be used by Berger in
rendering investment advice to its segment of the Star Advisers Fund. Although
such research services may be deemed to be of value to Berger, they are not
expected to decrease the expenses that Berger would otherwise incur in
performing investment advisory services for its segment of the Star Advisers
Fund nor will the subadvisory fees that are received by Berger from NEFM for
providing services to the Fund be reduced as result of the availability of such
research services from brokers.
Star Advisers Fund and Star Worldwide Fund (segments advised by Janus
Capital). Decisions as to the assignment of portfolio business for the segments
of the Star Advisers and Star Worldwide Funds' portfolios 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 segments, Janus Capital may agree to pay
brokerage commissions for effecting a securities transaction, in an amount
higher than another broker or dealer would have charged for effecting that
transaction as authorized, under certain circumstances, by the Securities
Exchange Act of 1934.
In selecting brokers and dealers and in negotiating commissions, Janus
Capital considers a number of factors, including, but not limited to: Janus
Capital's knowledge of currently available negotiated commission rates or prices
of securities currently available and other current transaction costs; the
nature of the securities being traded; the size and type of the transaction; the
nature and character of the markets for the security to be purchased or sold;
the desired timing of the trade; the activity existing and expected in the
market for the particular security; confidentiality; the quality of the
execution, clearance and settlement services; financial stability of the broker
or dealer; the existence of actual or apparent operational problems of any
broker or dealer; and research products or services provided. In recognition of
the value of the foregoing factors, Janus Capital may place portfolio
transactions with a broker or dealer with whom it has negotiated a commission
that is in excess of the commission another broker or dealer would have charged
for effecting that transaction if Janus Capital determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research provided by such broker or dealer viewed in terms of
either that particular transaction or of the overall responsibilities of Janus
Capital. Research may include furnishing advice, either directly or through
publications or writing, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and government
officials; comparative performance evaluation and technical measurement services
and quotation services, and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist Janus Capital in carrying out its responsibilities. Research received
from brokers or dealers is supplemental to Janus Capital's own research efforts.
Janus Capital may use research products and services in servicing other
accounts in addition to the Star Advisers Fund. If Janus Capital determines that
any research product or service has a mixed use, such that it also serves
functions that do not assist in the investment decision-making process, Janus
Capital may allocate the costs of such service or product accordingly. Only that
portion of the product or service that Janus Capital determines will assist it
in the investment decision-making process may be paid for in brokerage
commission dollars. Such allocation may create a conflict of interest for Janus
Capital.
Janus Capital may also consider sales of shares of mutual funds advised
by Janus Capital by a broker-dealer or the recommendation of a broker-dealer to
its customers that they purchase shares of such funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Star
Advisers and Star Worldwide Funds. In placing portfolio business with such
broker-dealers, Janus Capital will seek the best execution of each transaction.
Star Advisers Fund and Star Worldwide Fund (segments 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 the 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 the 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
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 the 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.
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 the 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.
All Equity Funds (advised by Loomis Sayles.) In placing orders for the
purchase and sale of securities for the Capital Income Growth Fund, Balanced
Fund, International Equity Fund, Value Fund, Equity Income Fund and the segments
of the Star Advisers Fund and the Star Small Cap Fund advised by Loomis Sayles,
Loomis Sayles follows the same policies as for the other Funds for which it acts
as subadviser, except that Loomis Sayles may cause these Funds or segments to
pay a broker-dealer that provides brokerage and research services to Loomis
Sayles an amount of commission for effecting a securities transaction for the
Fund in excess of the amount another broker-dealer would have charged for
effecting that transaction. Loomis Sayles 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 Loomis Sayles' overall responsibilities to the
Fund and its other clients. Loomis Sayles' authority to cause these Funds or
segments to pay such greater commissions is also subject to such policies as the
trustees of the Trusts may adopt from time to time.
Growth Opportunities Fund (advised by Westpeak.) In placing orders for
the purchase and sale of securities, Westpeak always seeks best execution.
Westpeak each 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 price and
execution. This does not necessarily mean that the lowest available brokerage
commission will be paid. Westpeak 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. Westpeak may cause
the Fund to pay a broker-dealer that provides brokerage and research services to
Westpeak an amount of commission for effecting a securities transaction for the
Fund in excess of the amount another broker-dealer would have charged effecting
that transaction. Westpeak 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 Westpeak's overall responsibilities to the Fund and
its other clients. Westpeak's authority to cause the Fund it manages to pay such
greater commissions is also subject to such policies as the trustees of the Fund
may adopt from time to time.
Star Worldwide and Star Small Cap Funds (segments advised by Harris.)
In placing orders for the purchase and sale of portfolio securities for the
segments of the Star Worldwide and Star Small Cap Funds 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
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 the Funds. Consistent
with the Rules of the National Association of Securities Dealers, Inc., and
subject to seeking best execution, Harris may, however, consider purchases of
shares of the Star Worldwide and Star Small Cap Funds by customers of
broker-dealers as a factor in the selection of broker-dealers to execute Fund
portfolio transactions.
Harris may cause its segments of the Star Worldwide and Star Small Cap
Funds to pay a broker-dealer that provides brokerage and research services to
Harris an amount of commission for effecting a securities transaction for the
Fund 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 the Funds
and its other clients. Harris's authority to cause the Funds to pay such greater
commissions is also subject to such policies as the trustees of the Trusts may
adopt from time to time.
Star Worldwide and Star Small Cap Funds (segments advised by
Montgomery.) In all purchases and sales of securities for its segments of the
Funds, Montgomery's primary consideration is to obtain the most favorable
execution available. Pursuant to the subadvisory agreements between NEFM and
Montgomery, Montgomery determines which securities are to be purchased and sold
by its segments and which broker-dealers are eligible to execute its segments'
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 opinion of Montgomery, a better price and execution can otherwise
be obtained by using a broker for the transaction.
For the Star Worldwide Fund, 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 American
Depository Receipts ("ADRs") and European Depository Receipts ("EDRs") (and
other similar instruments), Montgomery's segments of the Star Worldwide 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 Montgomery's
segment of the Star Worldwide Fund may invest may be traded in the
over-the-counter markets.
Purchases of portfolio securities for the segments 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 the
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 Star Worldwide and Star
Small Cap Funds' shares as a factor in the selection of broker-dealers to
execute portfolio transactions for its segments. The placement of portfolio
transactions with broker-dealers who sell shares of the Funds 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 subadvisory agreements 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, the
segments of the Funds 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 the segments of the Funds or assist
Montgomery in carrying out its responsibilities to the segments of the Funds.
The standard of reasonableness is to be measured in light of Montgomery's
overall responsibilities to its segments. The trustees of the Trusts 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 the segments' accounts 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 Funds will not be
materially disadvantaged by any such trading preclusion and that the
desirability of continuing their subadvisory 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 the segments' 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.
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.
Star Small Cap Fund (segment advised by Robertson Stephens.) It is the
policy of Robertson Stephens, 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 when 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, Robertson Stephens may execute transactions with brokerage
firms which provide research services and products to Robertson Stephens. 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 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 Robertson Stephens in furtherance of its investment
advisory responsibilities to its advisory clients. Such services and products
permit Robertson Stephens 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. Robertson
Stephens 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 Robertson Stephens 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, Robertson Stephens may allocate the cost of
such service or product accordingly. The portion of the product or service that
Robertson Stephens 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 Robertson Stephens. Subject to the standards
outlined in this and the preceding paragraph, Robertson Stephens 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 Robertson Stephens 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 Robertson Stephens in
providing investment advice to any of the funds or clients it advises. Likewise,
information made available to Robertson Stephens 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.
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 Robertson Stephens may pay an
executing broker a commission higher than that which might have been charged by
another broker for that transaction. Robertson Stephens 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
Robertson Stephens 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
Robertson Stephens, better prices and execution are available elsewhere.
Subject to the overriding objective of obtaining the best possible
execution of orders, each of the subadvisers may allocate brokerage transactions
to affiliated brokers. In order for the affiliated broker to effect portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by the affiliated broker must be reasonable and fair compared to the
commissions, fees and other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period. Furthermore, the
trustees of the Trusts, including a majority of those trustees who are not
"interested persons" of the Trusts as defined in the 1940 Act have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.
General
Portfolio turnover is not a limiting factor with respect to investment
decisions. The Funds anticipate that their portfolio turnover rates will vary
significantly from time to time depending on the volatility of economic and
market conditions.
Subject to procedures adopted by the Board of Trustees of the Trusts,
the Funds' brokerage transactions may be executed by brokers that are affiliated
with NEIC or the Funds' advisers or subadvisers. Any such transactions will
comply with Rule 17e-1 under the 1940 Act.
The Bond Income, Government Securities and Municipal Income Funds and
all the Funds of New England Funds Trust II may pay, but during their three most
recent fiscal years have not paid, brokerage commissions to New England
Securities for acting as the respective Fund's agent on purchases and sales of
securities. SEC rules require that the commissions paid to New England
Securities by a Fund for portfolio transactions not exceed "usual and customary"
brokerage commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time." The trustees
of the Trusts, including those who are not "interested persons" of the Trusts,
have adopted procedures for evaluating the reasonableness of commissions paid to
New England Securities and will review these procedures periodically.
Under the 1940 Act, persons affiliated with each Trust are prohibited
from dealing with each Trust's Funds as a principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts,
affiliated persons of the Trusts, such as New England Securities, may not serve
as the Funds' 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.
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DESCRIPTION OF THE TRUSTS AND OWNERSHIP OF SHARES
- --------------------------------------------------------------------------------
New England Funds Trust I is organized as a Massachusetts business
trust under the laws of Massachusetts by an Agreement and Declaration of Trust
(a "Declaration of Trust") dated June 7, 1985, as amended, and is a "series"
company as described in Section 18(f)(2) of the 1940 Act. The Trust has twelve
separate portfolios. The Municipal Income Fund currently offers two classes of
shares, the Government Securities and Growth Funds, each currently offer three
classes of shares and the Capital Growth, Balanced, Value, International Equity,
Star Advisers, Star Worldwide, Star Small Cap, Strategic Income and Bond Income
Funds each currently offers four classes of shares. Until September 1986, the
name of the Trust was "New England Life Government Securities Trust"; from
September 1986 to April 1994, its name was "The New England Funds." Prior to
January 5, 1996, the name of the Municipal Income Fund was "New England Tax
Exempt Income Fund." The initial portfolio of the Trust (the Fund now called New
England Government Securities Fund) commenced operations on September 16, 1985.
The International Equity Fund commenced operations on May 22, 1992. The Capital
Growth Fund was organized in 1992 and commenced operations on August 3, 1992.
The Star Advisers Fund was organized in 1994 and commenced operations on July 7,
1994. The Strategic Income Fund was organized in 1995 and commenced operations
on May 1, 1995. The Star Worldwide Fund was organized in 1995 and commenced
operations on December 29, 1995. The Star Small Cap Fund was organized in 1996
and commenced operations on December 31, 1996. The remaining Funds in the Trust
are successors to the following corporations which commenced operations in the
years indicated:
Corporation Date of Commencement
----------- --------------------
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, Inc.* 1969
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, Inc.**** 1976
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income Fund
**** Predecessor of the Municipal Income Fund
New England Funds Trust II is organized as a Massachusetts business
trust pursuant to a Declaration of Trust dated May 6, 1931, as amended, and
consisted of a single investment portfolio (now the Growth Opportunities Fund)
until January 1989, when the Trust was reorganized as a "series" company as
described in Section 18(f)(2) of the 1940 Act. The Trust has seven separate
portfolios. The High Income, Massachusetts, California and New York Funds each
currently offers two classes of shares, the Adjustable Rate Fund currently
offers three classes of shares and the Growth Opportunities and Limited Term
U.S. Government Funds each currently offers four classes of shares. Until
December 1988, the name of the Trust was "Investment Trust of Boston"; from
December 1988 until April 1992, its name was "Investment Trust of Boston Funds";
from April 1992 until April 1994, its name was "TNE Funds Trust." The High
Income Fund and the Massachusetts Fund are successors to separate investment
companies that were organized in 1983 and 1984, respectively, and reorganized as
series of the Trust in January 1989. The Limited Term U.S. Government Fund was
organized in 1988 and commenced operations in January 1989. The Adjustable Rate
Fund was organized in 1991 and commenced operations on October 18 of that year.
The California and New York Funds were organized in 1993 and commenced
operations on April 23 of that year.
New England Funds Trust III was organzied as a Massachusetts business
trust pursuant to a Declaration of Trust dated August 22, 1995. The Equity
Income Fund is currently the only series of the Trust and until September 15,
1997 offered only Class A shares. Effective September 15, 1997 the Fund will
offer four classes of shares, Classes A, B, C and Y.
The Declarations of Trust of New England Funds Trust I and New England
Funds Trust II currently permit each Trust's trustees to issue an unlimited
number of full and fractional shares of each series. Each Fund is represented by
a particular series of shares. The Declarations of Trust further permit each
Trust's trustees to divide the shares of each series into any number of separate
classes, each having such rights and preferences relative to other classes of
the same series as the trustees may determine. The shares of each Fund do not
have any preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of each class of the Fund
are entitled to share pro rata in the net assets attributable to that class of
shares of the Fund available for distribution to shareholders. The Declarations
of Trust also permit the trustees to charge shareholders directly for custodial,
transfer agency and servicing expenses.
The shares of all the Funds (except as noted in the preceding
paragraphs of this section) are divided into four classes, Class A, Class B,
Class C and Class Y. Each Fund offers such classes of shares as set forth in
such Fund's Prospectus. Class Y shares are available for purchase only by
certain eligible institutional investors and have higher minimum purchase
requirements than Classes A, B and C. All expenses of each Fund [excluding
transfer agency fees and expenses of printing and mailing Prospectuses to
shareholders ("Other Expenses")] are borne by its Class A, B, C and Y shares on
a pro rata basis, except for 12b-1 fees, which are borne only by Classes A, B
and C and may be charged at a separate rate to each such class. Other Expenses
of Classes A, B and C are borne by such classes on a pro rata basis, but Other
Expenses relating to the Class Y shares may be allocated separately to the Class
Y shares.
The assets received by each class of a Fund for the issue or sale of
its shares and all income, earnings, profits, losses and proceeds therefrom,
subject only to the rights of the creditors, are allocated to, and constitute
the underlying assets of, that class of a Fund. The underlying assets of each
class of a Fund are segregated and are charged with the expenses with respect to
that class of a Fund and with a share of the general expenses of the relevant
trust. Any general expenses of the Trust that are not readily identifiable as
belonging to a particular class of a Fund are allocated by or under the
direction of the trustees in such manner as the trustees determine to be fair
and equitable. While the expenses of each Trust are allocated to the separate
books of account of each Fund, certain expenses may be legally chargeable
against the assets of all of the Funds in a Trust.
The Declarations of Trust also permit each Trust's trustees, without
shareholder approval, to subdivide any series or class of shares or fund into
various sub-series or sub-classes with such dividend preferences and other
rights as the trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The trustees may also,
without shareholder approval, establish one or more additional series or classes
or merge two or more existing series or classes.
The Declarations of Trust provide for the perpetual existence of the
Trusts. Either Trust or any Fund, however, may be terminated at any time by vote
of at least two-thirds of the outstanding shares of each Fund affected.
Similarly, any class within a Fund may be terminated by vote of at least
two-thirds of the outstanding shares of such class. While each Declaration of
Trust further provides that the board of trustees may also terminate the
relevant Trust upon written notice to its shareholders, the 1940 Act requires
that the Trust receive the authorization of a majority of its outstanding shares
in order to change the nature of its business so as to cease to be an investment
company.
Voting Rights
As summarized in the Prospectuses, shareholders are entitled to one
vote for each full share held (with fractional votes for each fractional share
held) and may vote (to the extent provided therein) in the election of trustees
and the termination of the Trust and on other matters submitted to the vote of
shareholders.
The Declarations of Trust provide that on any matter submitted to a
vote of all shareholders of a Trust, all Trust shares entitled to vote shall be
voted together irrespective of series or class unless the rights of a particular
series or class would be adversely affected by the vote, in which case a
separate vote of that series or class shall also be required to decide the
question. Also, a separate vote shall be held whenever required by the 1940 Act
or any rule thereunder. Rule 18f-2 under 1940 Act provides in effect that a
series or class shall be deemed to be affected by a matter unless it is clear
that the interests of each series or class in the matter are substantially
identical or that the matter does not affect any interest of such series or
class. On matters affecting an individual series or class, only shareholders of
that series or class are entitled to vote. Consistent with the current position
of the SEC, shareholders of all series and classes vote together, irrespective
of series or class, on the election of trustees and the selection of the Trust's
independent accountants, but shareholders of each series vote separately on
other matters requiring shareholder approval, such as certain changes in
investment policies of that series or the approval of the investment advisory
and subadvisory agreement relating to that series, and shareholders of each
class within a series vote separately as to the Rule 12b-1 plan (if any)
relating to that class.
There will normally be no meetings of shareholders for the purpose of
electing trustees except that, in accordance with the 1940 Act, (i) a Trust will
hold a shareholders' meeting for the election of trustees at such time as less
than a majority of the trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy on the board of trustees,
less than two-thirds of the trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with a Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of shares having a net asset value
of at least $25,000 or at least 1% of the outstanding shares stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
trustee, the Trusts have undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders).
Except as set forth above, the trustees shall continue to hold office
and may appoint successor trustees. Shareholder voting rights are not
cumulative.
No amendment may be made to a Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the relevant Trust
except (i) to change the Trust's or a Fund's name or to cure technical problems
in the Declaration of Trust, (ii) to establish and designate new series or
classes of Trust shares and (iii) to establish, designate or modify new and
existing series or classes of Trust shares or other provisions relating to Trust
shares in response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Trust.
However, the Declarations of Trust disclaim shareholder liability for acts or
obligations of a Trust and require that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by a Trust or
the trustees. The Declarations of Trust provide for indemnification out of each
Fund's property for all loss and expense of any shareholder held personally
liable for the obligations of the Fund by reason of owning shares of such Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and a Fund itself would be unable to meet
its obligations.
The Declarations of Trust further provide that the relevant board of
trustees will not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declarations of Trust protects a trustee against any
liability to which the trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. The By-Laws of each Trust provide
for indemnification by the Trust of trustees and officers of the relevant Trust,
except with respect to any matter as to which any such person did not act in
good faith in the reasonable belief that his or her action was in or not opposed
to the best interests of the Trust. Such persons may not be indemnified against
any liability to the Trust or the Trust's shareholders to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
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HOW TO BUY SHARES
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The procedures for purchasing shares of the Funds are summarized in the
Prospectus. Banks may charge a fee for transmitting funds by wire. With respect
to shares purchased by federal funds, shareholders should bear in mind that wire
transfers may take two or more hours to complete.
For purchase of Fund shares by mail, the settlement date is the first
business day after receipt of the check by the transfer agent so long as it is
received by the close of regular trading of the New York Stock Exchange on a day
when the Exchange is open; otherwise the settlement date is the following
business day. For telephone orders, the settlement date is the third business
day after the order is made.
Shares may also be purchased either in writing, by phone or, in the
case of Class A, B and C shares, by electronic funds transfer using Automated
Clearing House ("ACH"), or by exchange as described in the Prospectuses through
firms that are members of the National Association of Securities Dealers, Inc.
and that have selling agreements with New England Funds, L.P.
New England Funds, L.P. may at its discretion accept a telephone order
for the purchase of $5,000 or more of a Fund's Class A, B and C shares. Payment
must be received by New England Funds, L.P. within three business days following
the transaction date or the order will be subject to cancellation. Telephone
orders must be placed through New England Funds, L.P. or your investment dealer.
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NET ASSET VALUE AND PUBLIC OFFERING PRICE
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The method for determining the public offering price and net asset
value per share is summarized in the Prospectus.
The total net asset value of each class of shares of a Fund (the excess
of the assets of such Fund attributable to such class over the liabilities
attributable to such class) is determined as of the close of regular trading
(normally 4:00 p.m. Eastern time) on each day that the New York Stock Exchange
is open for trading. The weekdays that the New York Stock Exchange is expected
to be closed are New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Securities listed on a national securities exchange or on the
NASDAQ National Market System are valued at their last sale price, or, if there
is no reported sale during the day, the last reported bid price estimated by a
broker. Unlisted securities traded in the over-the-counter market are valued at
the last reported bid price in the over-the-counter market or on the basis of
yield equivalents as obtained from one or more dealers that make a market in the
securities. U.S. Government securities are traded in the over-the-counter
market. Options, interest rate futures and options thereon that are traded on
exchanges are valued at their last sale price as of the close of such exchanges.
Securities for which current market quotations are not readily available and all
other assets are taken at fair value as determined in good faith by the board of
trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the board.
Generally, trading in foreign government securities and other
fixed-income securities, as well as trading in equity securities in markets
outside the United States, is substantially completed each day at various times
prior to the close of the New York Stock Exchange. Securities traded on a
non-U.S. exchange will be valued at their last sale price (or the last reported
bid price, if there is no reported sale during the day), on the exchange on
which they principally trade, as of the close of regular trading on such
exchange. The value of other securities principally traded outside the United
States will be computed as of the completion of substantial trading for the day
on the markets on which such securities principally trade. Securities
principally traded outside the United States will generally be valued several
hours before the close of regular trading on the New York Stock Exchange,
generally 4:00 p.m. Eastern time, when the Funds compute the net asset value of
their shares. Occasionally, events affecting the value of securities principally
traded outside the United States may occur between the completion of substantial
trading of such securities for the day and the close of the New York Stock
Exchange, which events will not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of a Fund's securities
occur during such period, then these securities will be valued at their fair
value as determined in good faith by or in accordance with procedures approved
by the Trusts' trustees.
Trading in some of the portfolio securities of some of the Funds takes
place in various markets outside the United States on days and at times other
than when the New York Stock Exchange is open for trading. Therefore, the
calculation of these Funds' net asset value does not take place at the same time
as the prices of many of its portfolio securities are determined, and the value
of the Fund's portfolio may change on days when the Fund is not open for
business and its shares may not be purchased or redeemed.
The per share net asset value of a class of a Fund's shares is computed
by dividing the number of shares outstanding into the total net asset value
attributable to such class. The public offering price of a Class A share of a
Fund is the net asset value per share next-determined after a properly completed
purchase order is accepted by New England Funds, L.P. or State Street Bank, plus
a sales charge as set forth in the Fund's Prospectus. The public offering price
of a Class B, C or Y share of a Fund is the next-determined net asset value.
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REDUCED SALES CHARGES
Class A Shares Only
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Special purchase plans are enumerated in the text of the Prospectus.
Cumulative Purchase Discount. A Fund shareholder making an additional
purchase of Class A shares may be entitled to a discount on the sales charge
payable on that purchase. This discount will be available if the shareholder's
"total investment" in the Fund reaches the breakpoint for a reduced sales charge
in the table under "Buying Fund Shares -- Sales Charges" in the Prospectus. The
total investment is determined by adding the amount of the additional purchase,
including sales charge, to the current public offering price of all series and
classes of shares of both Trusts held by the shareholder in one or more
accounts. If the total investment exceeds the breakpoint, the lower sales charge
applies to the entire additional investment even though some portion of that
additional investment is below the breakpoint to which a reduced sales charge
applies. For example, if a shareholder who already owns shares of one or more
Funds with a value at the current public offering price of $30,000 makes an
additional purchase of $20,000 of Class A shares of another Fund, the reduced
sales charge of 4.5% of the public offering price will apply to the entire
amount of the additional investment.
Letter of Intent. A Letter of Intent (a "Letter"), which can be
effected at any time, is a privilege available to investors which reduces the
sales charge on investments in Class A shares. Ordinarily, reduced sales charges
are available for single purchases of Class A shares only when they reach
certain breakpoints (e.g., $50,000, $100,000, etc.). By signing a Letter, a
shareholder indicates an intention to invest enough money in Class A shares
within 13 months to reach a breakpoint. If the shareholder's intended aggregate
purchases of all series and classes of the Trusts over a defined 13-month period
will be large enough to qualify for a reduced sales charge, the shareholder may
invest the smaller individual amounts at the public offering price calculated
using the sales load applicable to the 13-month aggregate investment.
A Letter is a non-binding commitment, the amount of which may be
increased, decreased or canceled at any time. The effective date of a Letter is
the date it is received in good order at New England Funds, L.P., or, if
communicated by a telephone exchange or order, at the date of telephoning
provided a signed Letter, in good order, reaches New England Funds, L.P. within
five business days.
A reduced sales charge is available for aggregate purchases of all
series and classes of shares of the Trusts pursuant to a written Letter effected
within 90 days after any purchase. In the event the account was established
prior to 90 days before the Letter effective date, the account will be credited
with Rights of Accumulation ("ROA") towards the breakpoint level that will be
reached upon the completion of the 13 months' purchases. The ROA credit is the
value of all shares held as of the effective date of the Letter based on the
"public offering price computed on such date."
The cumulative purchase discount, described above, permits the
aggregate value at the current public offering price of Class A shares of any
accounts with the Trusts held by a shareholder to be added to the dollar amount
of the intended investment under a Letter, provided the shareholder lists them
on the account application.
State Street Bank will hold in escrow shares with a value at the
current public offering price of 5% of the aggregate amount of the intended
investment. The amount in escrow will be released when the Letter is completed.
If the shareholder does not purchase shares in the amount indicated in the
Letter, the shareholder agrees to remit to State Street Bank the difference
between the sales charge actually paid and that which would have been paid had
the Letter not been in effect, and authorizes State Street Bank to redeem
escrowed shares in the amount necessary to make up the difference in sales
charges. Reinvested dividends and distributions are not included in determining
whether the Letter has been completed.
Combining Purchases. Purchases of all series and classes of the Trusts
by or for an investor, the investor's spouse, parents, children, siblings,
grandparents or grandchildren and any other account of the investor, including
sole proprietorships, in either Trust may be treated as purchases by a single
individual for purposes of determining the availability of a reduced sales
charge. Purchases for a single trust estate or a single fiduciary account may
also be treated as purchases by a single individual for this purpose, as may
purchases on behalf of a participant in a tax-qualified retirement plan and
other employee benefit plans, provided that the investor is the sole participant
in the plan.
Combining with Other Series and Classes of the Trusts. A shareholder's
total investment for purposes of the cumulative purchase discount and purchases
under a Letter of Intent includes the value at the current public offering price
of any shares of series and classes of the Trusts that the shareholder owns
(which includes shares of New England Cash Management Trust and New England Tax
Exempt Money Market Trust [the "Money Market Funds"] unless such shares were
purchased by exchanging shares of either of the Trusts). Shares owned by persons
described in the preceding paragraph may also be included.
Unit Holders of Unit Investment Trusts. Unit investment trust
distributions may be invested in Class A shares of any Fund at a reduced sales
charge of 1.50% of the public offering price (or 1.52% of the net amount
invested); for large purchases on which a sales charge of less than 1.50% would
ordinarily apply, such lower charge also applies to investments of unit
investment trust distributions.
Clients of Advisers or Subadvisers. No sales charge or contingent
deferred sales charge applies to investments of $100,000 or more in Class A
shares of the Funds by (1) clients of an adviser or subadviser to the Funds; any
director, officer or partner of a client of an adviser or subadviser to the
Funds; and the spouse, parents, children, siblings, grandparents or
grandchildren of the foregoing; (2) any individual who is a participant in a
Keogh or IRA Plan under a prototype of an adviser or subadviser to the Funds if
at least one participant in the plan qualifies under category (1) above; and (3)
an individual who invests through an IRA and is a participant in an employee
benefit plan that is a client of an adviser or subadviser to the Funds. Any
investor eligible for this arrangement should so indicate in writing at the time
of the purchase.
Offering to Employees of MetLife and Associated Entities. There is no
sales charge, CDSC or initial investment minimum related to investments in Class
A shares of the Funds by any of the Trusts' investment advisers or subadvisers,
New England Funds, L.P. or any other company affiliated with NELICO or MetLife;
current and former directors and trustees of the Trusts or their predecessor
companies; agents and general agents of NELICO or MetLife and their 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 NELICO or MetLife or any other company
affiliated with NELICO or MetLife.
Eligible Governmental Authorities. There is no sales charge or
contingent deferred sales charge related to investments in Class A shares of any
Fund by any state, county or city or any instrumentality, department, authority
or agency thereof that has determined that a Fund is a legally permissible
investment and that is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered investment company.
Investment Advisory Accounts. Shares of any Fund may be purchased at
net asset value by investment advisers, financial planners or other
intermediaries who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for their services;
clients of such investment advisers, financial planners or other intermediaries
who place trades for their own accounts if the accounts are linked to the master
account of such investment adviser, financial planner or other intermediary on
the books and records of the broker or agent; and retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in Sections 401(a), 403(b), 401(k) and 457 of the Code
and "rabbi trusts." Investors may be charged a fee if they effect transactions
through a broker or agent.
Certain Broker-Dealers and Financial Services Organizations. Shares of
any Fund also may be purchased at net asset value through certain broker-dealers
and/or financial services organizations without any transaction fee. Such
organizations may receive compensation, in an amount of up to 0.35% annually of
the average value of the Fund shares held by their customers. This compensation
may be paid by NEFM and/or a Fund's subadviser out of their own assets, or may
be paid indirectly by the Fund in the form of servicing, distribution or
transfer agent fees.
Shareholders of Reich and Tang Government Securities Trust.
Shareholders of Reich and Tang Government Securities Trust may exchange their
shares of that fund for Class A shares of the Funds at net asset value and
without imposition of a sales charge.
The reduction or elimination of the sales charge in connection with sales
described above reflects the absence or reduction of sales expenses associated
with such sales.
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SHAREHOLDER SERVICES
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Open Accounts
A shareholder's investment is automatically credited to an open account
maintained for the shareholder by State Street Bank. Following each transaction
in the account, a shareholder will receive a confirmation statement disclosing
the current balance of shares owned and the details of recent transactions in
the account. After the close of each calendar year, State Street Bank will send
each shareholder a statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This statement should be
retained as a permanent record. New England Funds, L.P. may charge a fee for
providing duplicate information.
The open account system provides for full and fractional shares
expressed to three decimal places and, by making the issuance and delivery of
stock certificates unnecessary, eliminates problems of handling and safekeeping,
and the cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.
The costs of maintaining the open account system are paid by the Funds
and no direct charges are made to shareholders. Although the Funds have no
present intention of making such direct charges to shareholders, they each
reserve the right to do so. Shareholders will receive prior notice before any
such charges are made.
Automatic Investment Plans (Class A, B and C Shares)
Subject to each Fund's investor eligibility requirements, investors may
automatically invest in additional shares of a Fund on a monthly basis by
authorizing New England Funds, L.P. to draw checks on an investor's bank
account. The checks are drawn under the Investment Builder Program, a program
designed to facilitate such periodic payments, and are forwarded to New England
Funds, L.P. for investment in the Fund. A plan may be opened with an initial
investment of $100 or more and thereafter regular monthly checks of $100 or more
will be drawn on the investor's account. The reduced minimum initial investment
pursuant to an automatic investment plan is referred to in the Prospectus. An
Investment Builder application must be completed to open an automatic investment
plan. An application may be found in the Prospectus or may be obtained by
calling New England Funds, L.P. at 1-800-225-5478 or your investment dealer.
This program is voluntary and may be terminated at any time by New
England Funds, L.P. upon notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any time by
the investor by written notice to New England Funds, L.P., which must be
received at least five business days prior to any payment date. The plan may be
discontinued by State Street Bank at any time without prior notice if any check
is not paid upon presentation; or by written notice to you at least thirty days
prior to any payment date. State Street Bank is under no obligation to notify
shareholders as to the nonpayment of any check.
Retirement Plans Offering Tax Benefits (Class A, B and C Shares)
The federal tax laws provide for a variety of retirement plans offering
tax benefits. These plans may be funded with shares of the Funds or with certain
other investments. The plans include H.R. 10 (Keogh) plans for self-employed
individuals and partnerships, individual retirement accounts (IRAs), corporate
pension trust and profit sharing plans, including 401(k) plans, and retirement
plans for public school systems and certain tax exempt organizations, i.e.,
403(b) plans.
The reduced minimum initial investment available to retirement plans
offering tax benefits is referred to in the Prospectus. For these plans, initial
investments in a Fund must be at least $250 for each participant in corporate
pension and profit sharing plans and Keogh plans, and $100 for subsequent
investments. There is a special initial and subsequent investment minimum of $25
for payroll deduction investment programs for 401(k), SARSEP, SEP, SIMPLE Plans,
403(b) and certain other retirement plans. Income dividends and capital gain
distributions must be reinvested (unless the investor is over age 59 1/2 or
disabled). Plan documents and further information can be obtained from New
England Funds, L.P.
An investor should consult a competent tax or other adviser as to the
suitability of a Fund's shares as a vehicle for funding a plan, in whole or in
part, under the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and as to the eligibility requirements for a specific plan and its
state as well as federal tax aspects.
Certain retirement plans may also be eligible to purchase Class Y
shares. See the Prospectus relating to Class Y shares.
Systematic Withdrawal Plans (Class A, B and C Shares)
An investor owning a Fund's shares having a value of $5,000 or more at
the current public offering price may establish a Systematic Withdrawal Plan
providing for periodic payments of a fixed or variable amount. An investor may
terminate the plan at any time. A form for use in establishing such a plan is
available from the servicing agent or your investment dealer. Withdrawals may be
paid to a person other than the shareholder if a signature guarantee is
provided. Please consult your investment dealer or New England Funds, L.P.
A shareholder under a Systematic Withdrawal Plan may elect to receive
payments monthly, quarterly, semiannually or annually for a fixed amount of not
less than $50 or a variable amount based on (1) the market value of a stated
number of shares, (2) a specified percentage of the account's market value or
(3) a specified number of years for liquidating the account (e.g., a 20-year
program of 240 monthly payments would be liquidated at a monthly rate of 1/240,
1/239, 1/238, etc.). The initial payment under a variable payment option may be
$50 or more.
In the case of shares subject to a CDSC, the amount or percentage you
specify may not, on an annualized basis, exceed 10% of the value, as of the time
you make the election, of your account with the Fund with respect to which you
are electing the Plan. Withdrawals of Class B shares of a Fund under the Plan
will be treated as redemptions of shares purchased through the reinvestment of
Fund distributions, or, to the extent such shares in your account are
insufficient to cover Plan payments, as redemptions from the earliest purchased
shares of such Fund in your account. No CDSC applies to a redemption pursuant to
the Plan.
All shares under the Plan must be held in an open (uncertificated)
account. Income dividends and capital gain distributions will be reinvested
(without a sales charge in the case of Class A shares) at net asset value
determined on the record date.
Since withdrawal payments represent proceeds from the liquidation of
shares, withdrawals may reduce and possibly exhaust the value of the account,
particularly in the event of a decline in net asset value. Accordingly, a
shareholder should consider whether a Systematic Withdrawal Plan and the
specified amounts to be withdrawn are appropriate in the circumstances. The
Funds and New England Funds, L.P. make no recommendations or representations in
this regard. It may be appropriate for a shareholder to consult a tax adviser
before establishing such a plan.
It may be disadvantageous for a shareholder to purchase on a regular
basis additional Fund shares with a sales charge while redeeming shares under a
Systematic Withdrawal Plan. Accordingly, the Funds and New England Funds, L.P.
do not recommend additional investments in Class A shares by a shareholder who
has a withdrawal plan in effect and who would be subject to a sales load on such
additional investments.
Because of statutory restrictions this plan is not available to pension
or profit-sharing plans, IRAs or 403(b) plans that have State Street Bank as
trustee.
Exchange Privilege
A shareholder may exchange the shares of any Fund (except for shares of
the Adjustable Rate Fund and in the case of Class A shares of the California and
New York Funds, only if such shares have been held for at least six months) for
shares of the same class of any other Fund (subject to the investor eligibility
requirements, if any, 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. In the case of Class A shares of the Adjustable Rate Fund, if exchanged
for shares of any other Fund that has a higher sales charge, shareholders will
pay the difference between any sales charge they have already paid on their
Adjustable Rate Fund shares and the higher sales charge of the Fund into which
they are exchanging. When an exchange is made from the Class B shares of one
Fund to the Class B shares of another Fund, the shares received in exchange will
have the same age characteristics as the shares exchanged. The age of the shares
determines the expiration of the CDSC and the conversion date. If you own Class
A or Class B shares, you may also elect to exchange your shares of any Fund for
shares of the same class of the Money Market Funds. Class C shares may also be
exchanged for Class A shares of the Money Market Funds. On all exchanges of
Class A shares subject to a CDSC and Class B shares into the Money Market Funds,
the exchange stops the aging period relating to the CDSC and, for Class B shares
only, conversion to Class A shares. The aging resumes only when an exchange is
made back into Class B shares of a Fund. If you own Class Y shares, you may
exchange those shares for Class Y shares of other Funds or for Class A shares of
the Money Market Funds. These options are summarized in the Prospectus. An
exchange may be effected, provided that neither the registered name nor address
of the accounts are different and provided that a certificate representing the
shares being exchanged has not been issued to the shareholder, by (1) a
telephone request to New England Funds, L.P. at 1-800-225-5478 or (2) a written
exchange request to New England Funds, P.O. Box 8551, Boston, MA 02266-8551. You
must acknowledge receipt of a current Prospectus for a Fund before an exchange
for that Fund can be effected.
The investment objectives of the Funds in the Trusts and the Money Market Funds
are as follows:
STOCK FUNDS:
NEW ENGLAND GROWTH FUND seeks long-term growth of capital through
investments in equity securities of companies whose earnings are expected to
grow at a faster rate than the United States economy.
NEW ENGLAND CAPITAL GROWTH FUND seeks long-term growth of capital.
NEW ENGLAND VALUE FUND seeks a reasonable long-term investment return
from a combination of market appreciation and dividend income from equity
securities.
NEW ENGLAND BALANCED FUND seeks a reasonable long-term investment
return from a combination of long-term capital appreciation and moderate current
income.
NEW ENGLAND GROWTH OPPORTUNITIES FUND seeks opportunities for long-term
growth of capital and income.
NEW ENGLAND INTERNATIONAL EQUITY FUND seeks total return from long-term
growth of capital and dividend income primarily through investment in a
diversified portfolio of marketable international equity securities.
NEW ENGLAND STAR ADVISERS FUND seeks long-term growth of capital.
NEW ENGLAND STAR WORLDWIDE FUND seeks long-term growth of capital.
NEW ENGLAND STAR SMALL CAP FUND seeks capital appreciation.
NEW ENGLAND EQUITY INCOME FUND seeks current income and capital growth.
BOND FUNDS:
NEW ENGLAND GOVERNMENT SECURITIES FUND seeks a high level of current
income consistent with safety of principal by investing in U.S. Government
securities and engaging in transactions involving related options, futures and
options on futures.
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND seeks a high current
return consistent with preservation of capital.
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND seeks a high level of
current income consistent with low volatility of principal.
NEW ENGLAND STRATEGIC INCOME FUND seeks high current income with a
secondary objective of capital growth.
NEW ENGLAND BOND INCOME FUND seeks a high level of current income
consistent with what the Fund considers reasonable risk. The Bond Income Fund
invests primarily in corporate and U.S. Government bonds.
NEW ENGLAND HIGH INCOME FUND seeks high current income plus the
opportunity for capital appreciation to produce a high total return.
NEW ENGLAND MUNICIPAL INCOME FUND seeks as high a level of current
income exempt from federal income taxes as is consistent with reasonable risk
and protection of shareholders' capital. The Municipal Income Fund invests
primarily in debt securities of municipal issuers, the interest of which is
exempt from federal income tax but may be subject to the federal alternative
minimum tax, and may engage in transactions in financial futures contracts and
options on futures.
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND seeks as high a level of
current income exempt from federal income tax and Massachusetts personal income
taxes as Back Bay Advisors, the Fund's subadviser, believes is consistent with
preservation of capital.
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA seeks as high
a level of current income exempt from federal income tax and its state personal
income tax as is consistent with preservation of capital.
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF NEW YORK seeks as high a
level of current income exempt from federal income tax and its state personal
income tax and New York City personal income tax as is consistent with
preservation of capital.
MONEY MARKET FUNDS:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum current income consistent with
preservation of capital and liquidity.
U.S. Government Series -- highest current income consistent with
preservation of capital and liquidity.
NEW ENGLAND TAX EXEMPT MONEY MARKET TRUST -- current income exempt from federal
income taxes consistent with preservation of capital and liquidity.
As of April 15, 1997, the net assets of the Funds and the Money Market
Funds totaled over $5.9 billion.
An exchange constitutes a sale of shares for federal income tax
purposes in which the investor may realize a long- or short-term capital gain or
loss.
Automatic Exchange Plan (Class A, B and C Shares)
As described in the Prospectus following the caption "Owning Fund
Shares," a shareholder may establish an Automatic Exchange Plan under which
shares of a Fund are automatically exchanged each month for shares of the same
class of one or more of the other Funds. 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 $100 or over. The Service Options
Form is available from New England Funds, L.P. or your financial representative
to establish an Automatic Exchange Plan.
- --------------------------------------------------------------------------------
REDEMPTIONS
- --------------------------------------------------------------------------------
The procedures for redemption of shares of a Fund are summarized in the
Prospectus. As described in the Prospectus, a CDSC may be imposed on certain
purchases of Class A shares and on purchases of Class B shares. For purposes of
the CDSC, an exchange of shares from one Fund to another Fund is not considered
a redemption or a purchase. For federal tax purposes, however, such an exchange
is considered a sale and a purchase and, therefore, would be considered a
taxable event on which you may recognize a gain or loss. In determining whether
a CDSC is applicable to a redemption of Class B shares, the calculation will be
determined in the manner that results in the lowest rate being charged.
Therefore, it will be assumed that the redemption is first of any Class A shares
in the shareholder's Fund account, second of shares held for over six years,
third of shares issued in connection with dividend reinvestment and fourth of
shares held longest during the six-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value of shares
since the time of purchase or reinvested distributions associated with such
shares. Unless you request otherwise at the time of redemption, the CDSC is
deducted from the redemption, not the amount remaining in the account.
To illustrate, assume an investor purchased 100 shares at $10 per share
(at a cost of $1,000) and in the second year after purchase, the net asset value
per share is $12 and, during such time, the investor has acquired 10 additional
shares under dividend reinvestment. If at such time the investor makes his or
her first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to the CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in the net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 4% (the
applicable rate in the second year after purchase).
Signatures on redemption requests must be guaranteed by an "Eligible
Guarantor Institution," as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934. However, a signature guarantee will not be required if the proceeds
of the redemption do not exceed $100,000 and the proceeds check is made payable
to the registered owner(s) and mailed to the record address.
If you select the telephone redemption service in the manner described
in the next paragraph, shares of a Fund may be redeemed by calling toll free
1-800-225-5478. A wire fee, currently $5.00, will be deducted from the proceeds.
Telephone redemption requests must be received by the close of regular trading
on the New York Stock Exchange. Requests made after that time or on a day when
the New York Stock Exchange is not open for business cannot be accepted and a
new request on a later day will be necessary. The proceeds of a telephone
withdrawal will normally be sent on the first business day following receipt of
a proper redemption request.
In order to redeem shares by telephone, a shareholder must either
select this service when completing the Fund application or must do so
subsequently on the Service Options Form, available from your investment dealer.
When selecting the service, a shareholder must designate a bank account to which
the redemption proceeds should be sent. Any change in the bank account so
designated may be made by furnishing to your investment dealer a completed
Service Options Form with a signature guarantee. Whenever the Service Options
Form is used, the shareholder's signature must be guaranteed as described above.
Telephone redemptions may only be made if the designated bank is a member of the
Federal Reserve System or has a correspondent bank that is a member of the
System. If the account is with a savings bank, it must have only one
correspondent bank that is a member of the System.
The redemption price will be the net asset value per share (less any
applicable CDSC) next determined after the redemption request and any necessary
special documentation are received by State Street Bank or your investment
dealer in proper form. Payment normally will be made by State Street Bank on
behalf of the Fund within seven days thereafter. However, in the event of a
request to redeem shares for which the Fund has not yet received good payment,
the Funds reserve the right to withhold payments of redemption proceeds if the
purchase of shares was made by a check which was deposited less than fifteen
days prior to the redemption request (unless the Fund is aware that the check
has cleared).
The CDSC may be waived on redemptions made from IRA accounts due to
attainment of age 59 1/2 for IRA shareholders who established accounts prior to
January 3, 1995. The CDSC may also be waived on redemptions made from IRA
accounts due to death, disability, return of excess contribution, required
minimum distributions at age 70 1/2 (waivers apply only to amounts necessary to
meet the required minimum amount), certain withdrawals pursuant to a systematic
withdrawal plan, not be exceed 10% annually of the value of the account, and
redemptions made from the account to pay custodial fees.
The CDSC may be waived on redemptions made from 403(b)(7) custodial
accounts due to attainment of age 59 1/2 for shareholders who established
custodial accounts prior to January 3, 1995.
The CDSC may also by waived on redemptions necessary to pay plan
participants or beneficiaries from qualified retirement plans under Section 401
of the Code, including profit sharing plans, money purchase plans, 401(k) and
custodial accounts under Section 403(b)(7) of the Code. Distributions necessary
to pay plan participants and beneficiaries include payment made due to death,
disability, separation from service, normal or early retirement as defined in
the plan document, loans from the plan and hardship withdrawals, return of
excess contributions, required minimum distributions at age 70 1/2 (waivers only
apply to amounts necessary to meet the required minimum amount), certain
withdrawals pursuant to a systematic withdrawal plan, not to exceed 10% annually
of the value of your account, and redemptions made from qualified retirement
accounts or Section 403(b)(7) custodial accounts necessary to pay custodial
fees.
A CDSC will apply in the event of plan level transfers, including
transfers due to changes in investment where assets are transferred outside of
New England Funds, including IRA and 403(b)(7) participant-directed transfers of
assets to other custodians (except for the reasons given above) or qualified
transfers of assets due to trustee-directed movement of plan assets due to
merger, acquisition or addition of additional funds to the plan.
The Funds will normally redeem shares for cash; however, the Funds
reserve the right to pay the redemption price wholly or partly in kind if the
relevant Trust's board of trustees determines it to be advisable and in the
interest of the remaining shareholders of a Fund. If portfolio securities are
distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Funds have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to
which the Funds are obligated to redeem shares solely in cash for any
shareholder during any 90-day period up to the lesser of $250,000 or 1% of the
total net asset value of the relevant Trust at the beginning of such period. The
Funds do not currently intend to impose any redemption charge (other than the
CDSC imposed by the Funds' distributor), although they reserve the right to
charge a fee not exceeding 1% of the redemption price. A redemption constitutes
a sale of shares for federal income tax purposes on which the investor may
realize a long- or short-term capital gain or loss. See also "Income Dividends,
Capital Gain Distributions and Tax Status," below.
Reinstatement Privilege (Class A shares only)
The 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 Funds should consult with their tax advisers with
respect to the effect of the "wash sale" rule if a loss is realized at the time
of the redemption.
- --------------------------------------------------------------------------------
STANDARD PERFORMANCE MEASURES
- --------------------------------------------------------------------------------
Calculations of Yield
Each Fund (except the Growth, Value, Growth Opportunities, Star
Advisers, Star Worldwide, Star Small Cap, International Equity and Capital
Growth Funds) may advertise the yield of its Class A, Class B, Class C and Class
Y shares. Yield for each class will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by the
maximum offering price per share of the relevant class (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
trading day of that period. Net investment income will reflect amortization of
any market value premium or discount of fixed-income securities (except for
obligations backed by mortgages or other assets) and may include recognition of
a pro rata portion of the stated dividend rate of dividend paying portfolio
securities. Each Fund's yield will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses of the
relevant Trust allocated to each Fund. These factors, possible differences in
the methods used in calculating yield and the tax exempt status of distributions
should be considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Fund's shares and to the
relative risks associated with the investment objectives and policies of the
Fund. Yields do not take into account any applicable sales charges or CDSC.
Yield may be stated with or without giving effect to any expense limitations in
effect for a Fund.
The Municipal Income Fund, the Massachusetts Fund, the California and
the New York Funds each may also advertise a taxable equivalent yield,
calculated as described above except that, for any given tax bracket, net
investment income will be calculated using as gross investment income an amount
equal to the sum of (i) any taxable income of the Fund plus (ii) the tax-exempt
income of the Fund divided by the difference between 1 and the effective federal
(or combined federal and state) income tax rate for taxpayers in that tax
bracket.
At any time in the future, yields and total return may be higher or
lower than past yields and there can be no assurance that any historical results
will continue.
Investors in the Funds are specifically advised that share prices,
expressed as the net asset values per share, will vary just as yield will vary.
An investor's focus on the yield of a Fund to the exclusion of the consideration
of the share price of that Fund may result in the investor's misunderstanding
the total return he or she may derive from the Fund.
Calculation of Total Return. Total return is a measure of the change in
value of an investment in a Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in shares
of the same class of that Fund rather than paid to the investor in cash. The
formula for total return used by the Funds is prescribed by the SEC and includes
three steps: (1) adding to the total number of shares of the particular class
that would be purchased by a hypothetical $1,000 investment in the Fund (with or
without giving effect to the deduction of sales charge or CDSC, if applicable)
all additional shares that would have been purchased if all dividends and
distributions paid or distributed during the period had been automatically
reinvested; (2) calculating the value of the hypothetical initial investment as
of the end of the period by multiplying the total of shares owned at the end of
the period by the net asset value per share of the relevant class on the last
trading day of the period; (3) dividing this account value for the hypothetical
investor by the amount of the initial investment, and annualizing the result for
periods of less than one year. Total return may be stated with or without giving
effect to any expense limitations in effect for a Fund.
Performance Comparisons
Yield and Total Return. Yields and total returns will generally be
higher for Class A shares than for Class B and Class C shares of the same Fund,
because of the higher levels of expenses borne by the Class B and Class C
shares. Because of its lower operating expenses, Class Y shares of each Fund can
be expected to achieve a higher yield and total return than the same Fund's
Class A, Class B and Class C shares. The Funds may from time to time include
their yield and total return in advertisements or in information furnished to
present or prospective shareholders. The Funds may from time to time include in
advertisements its total return and the ranking of those performance figures
relative to such figures for groups of mutual funds categorized by Lipper
Analytical Services as having similar investment objectives.
Total return may also be used to compare the performance of the Fund
against certain widely acknowledged standards or indices for stock and bond
market performance or against the U.S. Bureau of Labor Statistics' Consumer
Price Index.
The Standard & Poor's Composite Index of 500 Stocks (the "S&P 500") is
a market value-weighted and unmanaged index showing the changes in the aggregate
market value of 500 stocks relative to the base period 1941-43. The S&P 500 is
composed almost entirely of common stocks of companies listed on the New York
Stock Exchange, although the common stocks of a few companies listed on the
American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 400 industrial, 60 transportation and 40 financial
services concerns. The S&P 500 represents about 80% of the market value of all
issues traded on the New York Stock Exchange.
The Salomon Brothers World Government Bond Index includes a broad range
of institutionally-traded fixed-rate government securities issued by the
national governments of the nine countries whose securities are most actively
traded. The index generally excludes floating- or variable-rate bonds,
securities aimed principally at non-institutional investors (such as U.S.
Savings Bonds) and private-placement type securities.
The Shearson Lehman Government Bond Index (the "SL Government Index")
is a measure of the market value of all public obligations of the U.S. Treasury;
all publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized rated
agency.
The Lehman Brothers Municipal Bond Index is a composite measure of the
total return performance of the municipal bond market. This index is computed
from prices on approximate 1800 bonds.
The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.
The Merrill Lynch High Yield Index includes over 750 issues and
represents public debt greater than $10 million (original issuance rated BBB/BB
and below), and the First Boston High Yield Index includes over 350 issues and
represents all public debt greater than $100 million (original issuance and
rated BBB/BB and below).
The Salomon Brothers Broad Investment Grade Bond Index is a price
composite of a broad range of institutionally based U.S. Government
mortgage-backed and corporate debt securities of investment outstanding of at
least $1 million and with a remaining period to maturity of at least one year.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices of
goods and services in major expenditure groups.
Lipper Analytical Services, Inc. is an independent service that
monitors the performance of over 1,300 mutual funds, and calculates total return
for the funds grouped by investment objective. Lipper's Mutual Fund Performance
Analysis, Small Cap Company Analysis and Mutual Fund Indices measure total
return and average current yield for the mutual fund industry. Rankings of
individual mutual fund performance over specified time periods assume
reinvestment of all distributions, exclusive of sales charges.
The Russell 2000 Index represents the top 2,000 stocks traded on the
New York Stock Exchange, American Stock Exchange and National Association of
Securities Dealers Automated Quotations, by market capitalizations.
The Morgan Stanley Capital International Europe, Australasia and Far
East (Gross Domestic Product) Index (the "EAFE Index") is a market-value
weighted and unmanaged index of common stocks traded outside the U.S. The stocks
in the index are selected with reference to national and industry representation
and weighted in the EAFE Index according to their relative market value (market
price per share times the number of shares outstanding).
The Morgan Stanley Capital International Europe, Australasia and Far
East Index (the "EAFE (GDP) Index") is a market-value weighted and unmanaged
index of common stocks traded outside the U.S. The stocks in the index are
selected with reference to national and industry representation and weighted in
the EAFE (GDP) Index according to their relative market values. The relative
market value of each country is further weighted with reference to the country's
relative gross domestic product.
The International Equity and Star Worldwide Funds may compare their
performance to the Salomon-Russell Broad Market Index Global X-US and to
universes of similarly managed investment pools compiled by Frank Russell
Company and Intersec Research Corporation.
From time to time, the Adjustable Rate Fund's advertisements and other
materials and communications may cite statistics to reflect the Fund's
performance over time, utilizing comparisons to indexes including those based on
U.S. Treasury securities and those derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Commonly used indexes
include the one-, three-, five-, ten- and 30-year constant maturity Treasury
rates, the three-month and 180-day Treasury bill rate, rates on longer-term
Treasury certificates, the 11th District Federal Home Loan Bank Cost of Funds,
the National Median Cost of Funds, the one-month, three-month, six-month or
one-year London Interbank Offered Rate (LIBOR), the prime lending rate of one or
several banks, and commercial paper rates. Some indexes, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds
Index, tend to lag behind changes in market rate levels and tend to be somewhat
less volatile.
The current interest rate on many FNMA ARMs is set by reference to the
11th District Cost of Funds Index published monthly by the Federal Reserve.
Since June 1987, the current interest rate on these ARMs, measured on a monthly
basis, has been higher than the average yield of taxable money market funds
represented by Donoghue's Taxable Money Fund Average and current rates on newly
issued one year bank certificates of deposit. The interest rates on other ARMs
and the yield on the Adjustable Rate Fund's portfolio may be higher or lower
than the interest rates on FNMA ARMs and there is also no assurance that
historical yield relationships among different types of investments will
continue.
Advertising and promotional materials may refer to the maturity and
duration of the Bond Funds. Maturity refers to the period of time before a bond
or other debt instrument becomes due. Duration is a commonly used measure of the
price responsiveness of a fixed-income security to an interest rate change
(i.e., the change in price one can expect from a given change in yield).
Articles and releases, developed by the Funds and other parties, about
the Funds regarding performance, rankings, statistics and analyses of the
individual Funds' and the fund group's asset levels and sales volumes, numbers
of shareholders by Fund or in the aggregate for New England Funds, statistics
and analyses of industry sales volumes and asset levels, and other
characteristics may appear in advertising, promotional literature, publications,
including, but not limited to, those publications listed in Appendix B to this
Statement, and on various computer networks, for example, the Internet. In
particular, some or all of these publications may publish their own rankings or
performance reviews of mutual funds, including, but not limited to, Lipper
Analytical Services and Morning Star. References to these rankings or reviews or
reprints of such articles may be used in the Funds' advertising and promotional
literature. Such advertising and promotional material may refer to NEIC, its
structure, goals and objectives and the advisory subsidiaries of NEIC, including
their portfolio management responsibilities, portfolio managers and their
categories and background; their tenure, styles and strategies and their shared
commitment to fundamental investment principles and may identify specific
clients, as well as discuss the types of institutional investors who have
selected the advisers to manage their investment portfolios and the reasons for
that selection. The references may discuss the independent, entrepreneurial
nature of each advisory organization and allude to or include excerpts from
articles appearing in the media regarding NEIC, its advisory subsidiaries and
their personnel. For additional information about the Funds' advertising and
promotional literature, see Appendix C.
The Funds may use the accumulation charts below in their advertisements
to demonstrate the benefits of monthly savings at an 8% and 10% rate of return,
respectively.
<TABLE>
<CAPTION>
INVESTMENTS AT 8% RATE OF RETURN
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
75 5,548 13,812 26,126 44,471 71,802 112,522
100 7,396 18,417 34,835 59,295 95,737 150,029
150 11,095 27,625 52,252 88,942 143,605 225,044
200 14,793 36,833 69,669 118,589 191,473 300,059
500 36,983 92,083 174,173 296,474 478,683 750,148
INVESTMENTS AT 10% RATE OF RETURN
5 YRS. 10 15 20 25 30
------------ ----------- ----------- ------------ ------------ ------------
$ 50 3,904 10,328 20,896 38,285 66,895 113,966
75 5,856 15,491 31,344 57,427 100,342 170,949
100 7,808 20,655 41,792 76,570 133,789 227,933
150 11,712 30,983 62,689 114,855 200,684 341,899
200 15,616 41,310 83,585 153,139 267,578 455,865
500 39,041 103,276 208,962 382,848 668,945 1,139,663
</TABLE>
The Funds' advertising and sales literature may refer to historical,
current and prospective political, social, economic and financial trends and
developments that affect domestic and international investment as it relates to
any of the New England Funds. The Funds' advertising and sales literature may
include historical and current performance and total returns of investment
alternatives to the New England Funds. For example, the Adjustable Rate Fund's
advertising and sales literature may include the historical and current
performance and total returns of bank certificates of deposits, bank and mutual
fund money market accounts and other income investments; and the advertising and
sales literature of any of the New England Funds, but particularly that of the
Star Worldwide Fund and the International Equity Fund, may discuss all of the
above international developments, including, but not limited to, international
developments involving Europe, North and South America, Asia, the Middle East
and Africa, as well as events and issues affecting specific countries that
directly or indirectly may have had consequences for the New England Funds or
may have influenced past performance or may influence current or prospective
performance of the New England Funds. Articles, releases, advertising and
literature may discuss the range of services offered by the Trusts and New
England Funds, L.P., as distributor and transfer agent of the Funds, with
respect to investing in shares of the Funds and customer service. Such materials
may discuss the multiple classes of shares available through the Trusts and
their features and benefits, including the details of the pricing structure.
New England Funds, L.P. will make reference in its advertising and
sales literature to awards, citations and honors bestowed on it by industry
organizations and other observers and raters including, but not limited to
Dalbar's Quality Tested Service Seal and Key Honors Award. Such reference may
explain the criteria for the award, indicate the nature and significance of the
honor and provide statistical and other information about the award and New
England Funds, L.P.'s selection including, but not limited to, the scores and
categories in which New England Funds, L.P. excelled, the names of funds and
fund companies that have previously won the award and comparative information
and data about those against whom New England Funds, L.P. competed for the
award, honor or citation.
New England Funds, L.P. may publish, allude to or incorporate in its
advertising and sales literature testimonials from shareholders, clients,
brokers who sell or own shares, broker-dealers, industry organizations and
officials and other members of the public, including, but not limited to, fund
performance, features and attributes, or service and assistance provided by
departments within the organization, employees or associates of New England
Funds, L.P.
Advertising and sales literature may also refer to the beta coefficient
of the New England Funds. A beta coefficient is a measure of systematic or
undiversifiable risk of a stock. A beta coefficient of more than 1 means that
the company's stock has shown more volatility than the market index (e.g., the
S&P 500) to which it is being related. If the beta is less than 1, it is less
volatile than the market average to which it is being compared. If it equals 1,
its risk is the same as the market index. High variability in stock price may
indicate greater business risk, instability in operations and low quality of
earnings. The beta coefficients of the New England Funds may be compared to the
beta coefficients of other funds.
The Funds may enter into arrangements with banks exempted from
broker-dealer registration under the Securities Exchange Act of 1934.
Advertising and sales literature developed to publicize such arrangements will
explain the relationship of the bank to New England Funds and New England Funds,
L.P. as well as the services provided by the bank relative to the Funds. The
material may identify the bank by name and discuss the history of the bank
including, but not limited to, the type of bank, its asset size, the nature of
its business and services and its status and standing in the industry.
In addition, sales literature may be published concerning topics of
general investor interest for the benefit of registered representatives and the
Funds' prospective shareholders. These materials may include, but are not
limited to, discussions of college planning, retirement planning, reasons for
investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
- --------------------------------------------------------------------------------
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
- --------------------------------------------------------------------------------
As described in the Prospectus, it is the policy of each Fund to pay
its shareholders, as dividends, substantially all net investment income and to
distribute annually all net realized long-term capital gains, if any, after
offsetting any capital loss carryovers.
Income dividends and capital gain distributions are payable in full and
fractional shares of the relevant class of the particular Fund based upon the
net asset value determined as of the close of the New York Stock Exchange on the
record date for each dividend or distribution. Shareholders, however, may elect
to receive their income dividends or capital gain distributions, or both, in
cash. The election may be made at any time by submitting a written request
directly to New England Funds. In order for a change to be in effect for any
dividend or distribution, it must be received by New England Funds on or before
the record date for such dividend or distribution.
As required by federal law, detailed federal tax information will be
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code. In order to qualify, each Fund must,
among other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, gains from sale of
securities or foreign currencies, or other income (including, but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (ii) derive less
than 30% of its gross income from gains from the sale or other disposition of
securities held for less than three months; (iii) distribute at least 90% of its
dividend, interest and certain other taxable income each year; and (iv)
diversify its holdings so that at the end of each fiscal quarter, (a) at least
50% of the value of its total assets consists of cash, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited generally, with respect to any one issuer, to no more than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its assets
is 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 or businesses. So long as it qualifies for treatment as a regulated
investment company, a Fund will not be subject to federal income tax on income
paid to its shareholders in the form of dividends or capital gains
distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of each Fund's "required distribution" over its actual distributions in any
calendar year. Generally, the "required distribution" is 98% of the Fund's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or December 31, if
the Fund so elects) plus undistributed amounts from prior years. Each Fund
intends to make distributions sufficient to avoid imposition of the excise tax.
Distributions declared and payable by a Fund during October, November or
December to shareholders of record on a date in any such month and paid by the
Fund during the following January will be treated for federal tax purposes as
paid by the Fund and received by shareholders on December 31 of the year in
which declared.
Shareholders of each Fund will be subject to federal income taxes on
distributions made by the Fund (other than "exempt-interest dividends" paid by
the Municipal Income, Massachusetts, New York and California Funds, as described
in the relevant Prospectuses) whether received in cash or additional shares of
the Fund. Distributions by each Fund of net income and short-term capital gains,
if any, will be taxable to shareholders as ordinary income. Distributions of
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains, without regard to how long a shareholder has held shares of the
Fund. A loss on the sale of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gain dividend
paid to the shareholder with respect to such shares.
Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.
The International Equity, Star Worldwide and Star Small Cap Funds may
be eligible to make and, if eligible, may make an election under Section 853 of
the Code so that their shareholders will be able to claim a credit or deduction
on their income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid by
the Fund to foreign countries. The ability of shareholders of the Fund to claim
a foreign tax credit is subject to certain limitations imposed by Section 904 of
the Code, which in general limit the amount of foreign tax that may be used to
reduce a shareholder's U.S. tax liability to that amount of U.S. tax which would
be imposed on the amount and type of income in respect of which the foreign tax
was paid. A shareholder who for U.S. income tax purposes claims a foreign tax
credit in respect of Fund distributions may not claim a deduction for foreign
taxes paid by the Fund, regardless of whether the shareholder itemizes
deductions. Also, under Section 63 of the Code, no deduction in respect of
income taxes paid to foreign countries may be claimed by shareholders who do not
itemize deductions on their federal income tax returns. The Fund will notify
shareholders each year of the amount of dividends and distributions and the
shareholder's pro rata share of qualified taxes paid by the Fund to foreign
countries.
Each Fund's transactions, if any, in foreign currencies are likely to
result in a difference between the Fund's book income and taxable income. This
difference may cause a portion of the Fund's income distributions to constitute
a return of capital or capital gain for tax purposes or require the Fund to make
distributions exceeding book income to avoid excise tax liability and to qualify
as a regulated investment company.
The International Equity, Star Worldwide and Star Small Cap Funds 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, each Fund has elected to "mark to
market" annually its investments in such entities and to distribute any
resulting net gain to shareholders. As a result, each Fund may be required to
sell securities it would have otherwise continued to hold in order to make
distributions to shareholders in or order to avoid any Fund-level tax.
Redemptions and exchanges of each Fund's shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions. If
shares have been held for more than one year, gain or loss realized will be
long-term capital gain or loss, provided the shareholder holds the shares as a
capital asset. Furthermore, no loss will be allowed on the sale of Fund shares
to the extent the shareholder acquired other shares of the same Fund within 30
days prior to the sale of the loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions.
Dividends and distributions also may be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state or local taxes.
The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Funds (except the Star Small Cap Fund)
and the related reports of independent accountants included in the Funds' annual
reports for the year ended December 31, 1996 are incorporated herein by
reference. The unaudited financial statements of the Star Small Cap Fund for the
five-month period ended May 31, 1997 are attached hereto.
<PAGE>
[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
- --------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------
May 31, 1997
- -------------
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
PORTFOLIO COMPOSITION
Investments as of May 31, 1997
(unaudited)
COMMON STOCKS -- 97.4% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE(A)
- --------------------------------------------------------------------------------
AEROSPACE -- 0.8%
10,000 Logicon, Inc. $ 502,500
-----------
AIR TRAVEL -- 0.8%
7,100 Atlas Air, Inc. (c) 204,125
4,900 Expeditors International
Washington, Inc. 141,488
7,000 Southwest Airlines 180,250
-----------
525,863
-----------
APPAREL & TEXTILES -- 1.2%
6,500 Jones Apparel Group, Inc. (c) 304,688
8,600 Kenneth Cole Productions, Inc. 136,525
8,200 Mens Wearhouse, Inc. 273,675
-----------
714,888
-----------
AUTOMOTIVE & RELATED -- 0.3%
12,500 Miller Industries, Inc. 204,688
-----------
BANKS -- 2.8%
12,500 Bank Plus Corp. 135,938
5,000 Fidelity Bankshares, Inc. 93,750
30,000 Peoples Bank of Bridgeport,
Connecticut 708,750
11,300 Reliance Bancorp, Inc. 285,325
9,500 Roslyn Bancorp, Inc. 166,250
4,000 Union Planters Corp. 189,000
2,500 United States Bancorp 153,437
-----------
1,732,450
-----------
BROADCASTING -- 3.7%
12,000 Cablevision Systems Corp. (c) 391,500
32,000 Granite Broadcasting Corp. 332,000
10,300 HA-LO Industries, Inc. 240,763
4,900 Heftel Broadcasting Corp. 242,550
12,500 Metro Networks, Inc. 317,187
50,000 TCI Satellite Entertainment, Inc. (c) 481,250
10,700 Westwood One, Inc. 291,575
-----------
2,296,825
-----------
BUILDING MATERIAL & CONSTRUCTION -- 0.6%
22,000 NVR, Inc. 339,625
-----------
BUSINESS SERVICES -- 5.7%
9,100 Abacus Direct Corp. 236,600
15,800 Acxiom Corp. 268,600
9,600 Alternative Resources Corp. (c) 177,600
5,200 Analysts International Corp.,
Rights (c) 188,500
5,500 Caribiner International, Inc. 356,125
8,200 Childrens Comprehensive Services 125,050
3,900 Computer Task Group, Inc. 238,388
5,000 Corrections Corporation America 181,250
14,300 Equity Corporation International 343,200
5,800 Fair Issac & Company, Inc. 229,100
8,600 G & K Services 281,650
6,500 Kronos, Inc. 169,000
9,100 Outdoor Systems, Inc. 301,437
14,900 PMT Services, Inc. 238,400
8,700 United States Office Products Co. 215,325
-----------
3,550,225
-----------
CHEMICALS -- 1.3%
21,000 Advanced Technology Materials, Inc. 509,250
7,000 Giant Cement Holding, Inc. 122,500
8,200 Imperial Chemical Industries, Inc. 154,775
-----------
786,525
-----------
COMMUNICATION -- 0.4%
10,900 Natural Microsystems Corp. 269,775
-----------
COMMUNICATION SERVICES -- 1.0%
3,000 Cascade Communications Corp. (c) 114,750
5,500 PairGain Technologies, Inc. (c) 114,813
3,000 QUALCOMM, Inc. (c) 144,750
12,000 Westell Technologies 243,000
-----------
617,313
-----------
COMPUTER SOFTWARE & SERVICES -- 0.6%
4,000 CIBER, Inc. 165,500
20,000 UniComp, Inc. 175,000
-----------
340,500
-----------
COMPUTERS -- 0.3%
9,500 NeoMagic Corp. 190,000
-----------
COMPUTERS & BUSINESS EQUIPMENT -- 2.9%
5,000 3Com Corp. (c) 242,500
8,500 ADAC Labs 221,000
5,800 Black Box Corp. 204,450
4,000 Citrix Systems, Inc. 150,500
7,700 ENCAD, Inc. 286,825
22,500 Network Computing Devices, Inc. 284,062
10,000 Stormedia, Inc. 118,750
9,000 Vitesse Semiconductor Corp. 322,875
-----------
1,830,962
-----------
CONGLOMERATES -- 1.3%
22,000 U.S. Industries, Inc. 783,750
-----------
CONSTRUCTION MATERIALS -- 0.3%
7,000 Simpson Manufacturing, Inc. 183,750
-----------
CONSUMER GOODS & SERVICES -- 3.0%
15,000 First Brands Corp. 393,750
10,500 GC Companies, Inc. 446,250
11,000 Scotsman Industries, Inc. 292,875
25,000 Triarc Companies, Inc. 571,875
86,957 U-Ship, Inc. 129,392
-----------
1,834,142
-----------
CONSUMER PRODUCTS -- 0.5%
4,000 Libbey, Inc. 133,500
4,400 Samsonite Corp., New 197,450
-----------
330,950
-----------
DIVERSIFIED CONGLOMERATES -- 1.6%
11,500 Mathews International Corp. 393,875
25,000 The Carbide/Graphite Group, Inc. 625,000
-----------
1,018,875
-----------
DRUGS & HEALTH CARE -- 5.4%
1,800 Agouron Pharmaceuticals, Inc. 144,225
10,000 American Oncology Resources, Inc. 141,250
12,500 Columbia Labs, Inc. 243,750
12,500 Coventry Corp. 182,031
7,000 Cytyc Corp. 170,625
13,900 ESC Medical Systems, Ltd. 375,300
4,900 Gilead Sciences, Inc. 132,912
5,900 Guilford Pharmaceuticals, Inc. 150,450
4,500 Immunex Corp. New 141,187
6,000 Intercardia, Inc. 114,000
25,000 Laserscope 159,375
2,500 Living Centers of America, Inc. 95,313
10,000 Medical Resources, Inc. 138,750
25,000 Meridian Diognostic 212,500
14,500 Orthodontic Centers of America, Inc. 242,875
5,900 Playtex Products 56,788
9,100 Sepracor, Inc. 222,950
6,800 Tenet Healthcare Corp. 187,000
5,800 Theragenics Corp. 129,050
3,100 Vertex Pharmaceuticals, Inc. 125,550
-----------
3,365,881
-----------
ELECTRIC -- 0.7%
7,200 Sanmina Corp. 417,150
1,000 Westinghouse Electric Corp. 20,250
-----------
437,400
-----------
ELECTRICAL EQUIPMENT -- 0.6%
9,500 MRV Communications, Inc. 235,125
8,800 Woodhead Industries, (c) 154,000
-----------
389,125
-----------
ELECTRONIC COMPONENTS -- 1.1%
5,000 Cymer, Inc. 265,000
10,200 PRI Automation, Inc. 388,875
-----------
653,875
-----------
ELECTRONICS -- 6.5%
8,700 Actel Corp. 182,700
10,000 Avid Technology, Inc. 235,000
6,100 Boston Technology, Inc., New 175,375
12,700 Cambridge Technology Partners 387,350
5,000 CFM Technologies, Inc. 151,875
4,000 Comverse Technology, Inc. 183,000
9,000 Cypress Semiconductor Corp. 128,250
8,400 Genrad, Inc. 156,450
8,500 Input/Output, Inc. (c) 150,875
1,000 Intel Corp., Warrants 110,750
9,100 Kulicke & Soffa Industries, Inc. 307,125
7,700 Lam Research Corp. 280,087
15,900 Octel Communications Corp. 306,075
6,900 P-COMM, Inc. 222,525
10,300 SBS Technologies, Inc. 190,550
12,500 Scientific Atlanta, Inc. (c) 226,563
12,300 Sipex Corp. 369,000
5,400 Technology Solutions Co. 195,750
2,100 Uniphase Corp. 110,250
-----------
4,069,550
-----------
ENERGY -- 0.4%
10,300 Swift Energy Co. 275,525
-----------
FINANCIAL SERVICES -- 1.0%
15,200 BA Merchant Services, Inc. 248,900
12,000 Duff & Phelps Credit Rating Co. 348,000
-----------
596,900
-----------
FOOD - AGRIBUSINESS -- 0.5%
10,233 Delta & Pine Land Co. 310,827
-----------
FOOD & BEVERAGES -- 1.7%
21,500 International Multifoods Corp. 607,375
29,500 Ralcorp Holdings, Inc. 357,687
7,500 Tasty Baking Corp. 120,938
-----------
1,086,000
-----------
HEALTH CARE - MEDICAL TECHNOLOGY -- 2.9%
11,200 Arterial Vascular Engineering, Inc. 233,800
20,800 Cooper Companies, Inc. 431,600
7,400 Fisher Scientific International, Inc. 268,250
8,200 Maxicare Health Plans, Inc. 196,800
17,900 Novoste Corp. 272,975
5,800 Perclose, Inc. 134,850
9,200 Sola International, Inc. 263,350
-----------
1,801,625
-----------
HEALTH CARE - SERVICES -- 1.2%
11,000 CardioThoracic Systems, Inc. 152,625
4,000 FPA Medical Management, Inc. 80,000
5,900 Pediatrix Medical Group 234,525
10,700 Renal Treatment Centers, Inc. 307,625
-----------
774,775
-----------
HOUSEHOLD APPLIANCES & HOME FURNISHINGS -- 0.9%
3,000 Ethan Allen Interiors, Inc. 156,750
3,600 Kimball International, Inc., Class B 142,200
25,000 Southern Electronics Corp. 259,375
-----------
558,325
-----------
HOME BUILDERS -- 0.5%
10,000 Watsco, Inc. 290,000
-----------
HOTELS & RESTAURANTS -- 0.5%
12,200 Logans Roadhouse, Inc. 289,750
-----------
HOUSING & BUILDING MATERIALS -- 0.5%
8,200 Champion Enterprises, Inc. 150,675
6,900 Oakwood Homes Corp. 163,875
-----------
314,550
-----------
INDUSTRIAL GOODS & SERVICES -- 2.6%
22,000 MagneTek, Inc. 385,000
15,000 SPX Corp. 894,375
13,500 Zurn Industries, Inc. 357,750
-----------
1,637,125
-----------
INDUSTRIAL MACHINERY -- 1.5%
3,500 Applied Power, Inc. 154,000
15,000 Binks Manufacturing Co. 633,750
4,000 Graco, Inc. 112,000
-----------
899,750
-----------
INSURANCE -- 3.8%
16,500 Chartwell Re Corp. 443,437
3,500 Equitable Iowa Cos. 193,813
5,000 Hartford Life, Inc. 167,500
25,000 Highlands Insurance Group, Inc. 500,000
3,500 Provident Companies, Inc. 188,125
15,000 PXRE Corp. 405,000
7,500 RenaissanceRe Holdings, Ltd. 278,437
3,500 W. R. Berkley Corp. 181,563
-----------
2,357,875
-----------
INVESTMENT COMPANIES -- 0.3%
11,200 Ocwen Asset Investment Corp. 203,000
-----------
LEISURE & LODGING -- 0.7%
7,600 Interstate Hotels Co. 199,500
11,100 Prime Hospitality Corp. 206,738
-----------
406,238
-----------
LEISURE TIME -- 1.3%
11,500 Action Performance Companies, Inc. 276,719
3,000 Ascent Entertainment Group, Inc. 30,750
4,500 King World Productions, Inc. 169,312
17,200 Penn National Gaming, Inc. 309,600
-----------
786,381
-----------
MACHINERY -- 1.1%
20,000 Gardner Denver Machinery, Inc. 540,000
8,400 X-Rite, Inc. 156,450
-----------
696,450
-----------
MANUFACTURING -- 0.2%
10,000 MotivePower Industries, Inc. 140,000
-----------
MARKETING SERVICES -- 0.3%
9,400 Precision Response Corp. 215,025
-----------
MISCELLANEOUS -- 0.1%
2,700 American Retirement Corp. 41,850
-----------
NON-FERROUS METALS -- 0.3%
4,500 Sinter Metals, Inc. 165,938
-----------
OFFICE EQUIPMENT & SUPPLIES -- 0.9%
20,000 Corporate Express, Inc. (c) 275,000
7,300 Network Appliance, Inc. 296,106
-----------
571,106
-----------
OIL -- 0.3%
8,800 Hvide Marine, Inc. 211,200
-----------
OIL & GAS -- 1.7%
8,500 Chesapeake Energy Corp. 120,062
2,500 Cliffs Drilling Co. 174,688
4,500 Patterson Energy, Inc 162,281
7,600 Stone Energy Corp. 212,800
45,000 Titan Exploration, Inc. 410,625
-----------
1,080,456
-----------
OIL - INDEPENDANT PRODUCERS -- 0.5%
9,500 St. Mary Land & Exploration Co. 301,625
-----------
OIL SERVICES -- 0.3%
5,000 EVI, Inc. 188,125
-----------
PAPER -- 0.7%
9,100 Fine Host Corp. 277,550
20,000 Gaylord Container Corp. 163,750
-----------
441,300
-----------
PETROLEUM SERVICES -- 2.9%
3,500 Atwood Oceanics, Inc. 234,500
5,500 Camco International, Inc. 281,875
9,000 Drilex International, Inc. 131,625
17,500 Key Energy Group, Inc. (c) 288,750
10,800 Marine Drilling Companies, Inc. 217,350
4,000 Nabors Industries, Inc. 89,750
8,000 Pride Petroleum Services, Inc. (c) 178,000
7,500 Reading & Bates Corp., New (c) 190,312
4,000 Smith International, Inc. 209,500
-----------
1,821,662
-----------
PRODUCER OF GOODS -- 1.8%
5,000 Chicago Miniature Lamp, Inc. 120,000
20,000 Essex International, Inc. 425,000
18,000 Northwest Pipe Co. 292,500
8,600 Waters Corp. 277,350
-----------
1,114,850
-----------
PUBLISHING -- 1.9%
6,400 Applied Graphics Technologies 211,200
7,000 Central Newspapers, Inc. 423,500
15,000 Lee Enterprises, Inc. 378,750
6,200 World Color Press, Inc. 162,750
-----------
1,176,200
-----------
REAL ESTATE -- 3.0%
25,000 Castle & Cooke, Inc. 381,250
50,000 Catellus Development Corp. 843,750
10,000 CRIIMI MAE, Inc. 163,750
5,500 JP Reality, Inc. 142,312
12,000 Prime Retail, Inc. 151,500
7,500 Walden Residential Properties, Inc. 178,125
-----------
1,860,687
-----------
RETAIL -- 6.1%
12,700 AnnTaylor Stores 295,275
9,900 Borders Group, Inc. 215,325
20,000 Candies, Inc. 96,875
10,500 Carson Pirie Scott & Co. (c) 338,625
12,500 Central Garden & Pet Co. 301,563
12,500 Cole National Corp. (c) 473,437
10,000 Gadzooks, Inc. 331,875
9,000 Genesco, Inc. 123,750
8,000 Global DirectMail Corp. 190,000
6,800 Linens 'N Things, Inc. 175,950
7,400 Mac Frugals Bargains Closeouts 220,150
3,400 Neiman-Marcus Group, Inc. 90,100
8,000 Pier 1 Imports, Inc. 179,000
4,000 Quiksilver, Inc. 109,500
24,000 Vans, Inc. 300,000
12,200 Wet Seal, Inc. (c) 358,375
-----------
3,799,800
-----------
RETAIL - GROCERY -- 0.5%
9,400 Whole Foods Market, Inc. 294,925
-----------
SAVINGS & LOAN -- 1.9%
8,600 Astoria Financial Corp. 354,750
13,600 FirstFed Financial 370,600
5,000 Glendale Federal Savings Bank, Warrants 75,000
2,000 Great Western Financial Corp. 97,000
20,000 Northwest Savings Bank 290,000
-----------
1,187,350
-----------
SHIPBUILDING -- 0.3%
7,200 Halter Marine Group, Inc. 169,200
-----------
SOFTWARE -- 5.3%
3,000 Adobe Systems, Inc. 133,875
2,700 Aware, Inc. 37,125
10,000 Boole and Babbage, Inc. 207,500
7,750 Data Dimensions, Inc. 234,922
15,000 Discreet Logic, Inc. 245,625
8,250 Henry Jack & Associates, Inc. 184,594
8,500 JDA Software Group, Inc. 235,875
2,900 Keane, Inc. 163,487
12,500 Pure Atria Corp. 200,000
3,000 Registry, Inc. 144,750
8,900 Structural Dynamics Research Corp. 218,050
6,500 Sync Research, Inc. 27,219
16,500 Synopsys, Inc. 616,687
7,500 Veritas Software Co. 373,125
8,400 Wind River Systems, Inc. 285,600
-----------
3,308,434
-----------
STEEL -- 1.4%
20,000 Atchison Casting Corp. 342,500
5,000 Carpenter Technology Corp. 216,250
7,500 Lone Star Technologies, Inc. (c) 177,188
16,200 WHX Corp. 107,325
-----------
843,263
-----------
TELECOMMUNICATION -- 0.9%
9,500 ICG Communications, Inc. 152,000
20,000 Metromedia International Group, Inc. 218,750
6,000 WorldCom, Inc. (c) 177,750
-----------
548,500
-----------
TIRES & RUBBER -- 0.2%
6,000 Cooper Tire & Rubber Co. 134,250
-----------
TOBACCO -- 0.3%
6,000 General Cigar Holdings, Inc. 177,000
-----------
TRANSPORTATION -- 0.3%
7,200 Budget Group, Inc. 200,700
-----------
TRUCKING & FREIGHT FORWARDING -- 0.5%
15,000 Consolidated Freightways Corp. 185,625
6,000 USFreightways Corp. 145,500
-----------
331,125
-----------
Total Common Stocks (Identified Cost $54,272,384) 60,579,104
-----------
BONDS AND NOTES -- 0.3%
FACE
AMOUNT
- --------------------------------------------------------------------------------
U.S. GOVERNMENT -- 0.3%
$ 750,000 United States Treasury Security Strip,
Zero coupon, 11/15/17 177,750
-----------
Total Bonds and Notes (Identified Cost $171,598) 177,750
-----------
SHORT TERM INVESTMENTS -- 5.2%
- --------------------------------------------------------------------------------
2,270,000 Repurchase Agreement with State Street
Bank & Trust Co. dated 5/30/97 at
5.000% to be repurchased at $2,270,946
on 6/02/97 collateralized by
$2,310,000 U.S. Treasury Bonds,
6.375%, due 9/30/01 valued at
$2,322,590 2,270,000
975,000 Repurchase Agreement with State Street
Bank & Trust dated 5/30/97 at 5.000%
to be repurchased at $975,449 on
6/02/97 collateralized by $990,000
U.S. Treasury Bonds, 6.375%, due
9/30/01 valued at $995,396 975,000
----------
Total Short Term Investments (Identified
Cost $3,245,000) 3,245,000
----------
Total Investments -- 102.9% (Identified
Cost $57,688,982)(b) 64,001,854
Other assets less liabilities (1,801,012)
----------
Total Net Assets -- 100% 62,200,842
==========
<PAGE>
SECURITIES SOLD SHORT AGAINST THE BOX
SHARES ISSUER MARKET VALUE
- --------------------------------------------------------------------------------
4,000 CIBER, Inc. $ 165,500
2,500 Cliffs Drilling Co. 174,688
------------
Total Securities Sold Short (Total Proceeds $315,997) $ 340,188
============
- --------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
FOOTNOTES AS OF 5/31/97
(a) See Note 1a.
(b) Federal Tax Information: At May 31,
1997 the net unrealized appreciation on
investments based on cost of
$57,688,982 for federal income tax
purposes was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is
an excess of value over tax cost. $ 7,256,402
Aggregate gross unrealized depreciation
for all investments in which there is
an excess of tax cost over value. (943,530)
------------
Net unrealized appreciation $ 6,312,872
============
(c) Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
- -----------------------------------------
STATEMENT OF ASSETS & LIABILITIES
MAY 31, 1997
(unaudited)
ASSETS
Investments at value $64,001,854
Cash 2,079
Cash - Segregated (Proceeds from securities
sold short against the box) 315,997
Receivable for:
Fund shares sold 337,275
Securities sold 310,460
Dividends and interest 18,124
Prepaid expense 12,500
Unamortized organization expense 35,527
-----------
LIABILITIES 65,033,816
Payable for:
Securities purchased $2,335,800
Open short sales 340,188
Fund shares redeemed 35,358
Collateral for securities sold
short against the box 48,799
Accrued expenses:
Management fees 51,213
Deferred trustees' fees 179
Accounting and administrative 1,843
Other expenses 19,594
----------
2,832,974
-----------
NET ASSETS $62,200,842
===========
Net Assets consist of:
Capital paid in $59,374,308
Undistributed net investment loss (315,165)
Accumulated net realized losses (3,146,982)
Unrealized appreciation on investments
and securities 6,288,681
-----------
NET ASSETS $62,200,842
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($28,153,378 divided by 2,156,522 shares
of beneficial interest) $ 13.05
===========
Offering price per share ( 100/94.25 of $13.05 ) $ 13.85*
===========
Net asset value and offering price of Class B shares
($26,085,245 divided by 2,003,154 shares
of beneficial interest) $ 13.02**
===========
Net asset value and offering price of Class C shares
($7,962,219 divided by 611,408 shares
of beneficial interest) $ 13.02
===========
Identified cost of investments $57,688,982
===========
* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1997 THROUGH MAY 31, 1997
(unaudited)
INVESTMENT INCOME
Dividends $ 86,535 (a)
Interest 90,452
--------------
176,987
Expenses
Management fees $177,448
Service fees - Class A 19,434
Service and distribution fees - Class B 68,422
Service and distribution fees - Class C 22,842
Trustees' fees and expenses 3,082
Accounting and administrative 8,696
Custodian 91,386
Transfer agent 60,267
Audit and tax services 5,000
Legal 6,845
Printing 4,095
Registration 19,718
Amortization of organization expenses 2,147
Miscellaneous 2,770
--------
Total expenses 492,152
----------
Net investment loss (315,165)
REALIZED and UNREALIZED GAIN (LOSS) on INVESTMENTS and SHORT SALE TRANSACTIONS
Realized loss on:
Investments - net (3,095,752)
Short Sale Transactions - net (51,230)
---------
Total realized loss on investments
and short sale transactions (3,146,982)
---------
Unrealized appreciation on:
Investments - net 6,264,490
Short Sale Transactions - net 24,191
---------
Total unrealized gain on investments
and short sale transactions 6,288,681
---------
Net gain on investment transactions 3,141,699
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $2,826,534
==========
(a) Net of withholding taxes of $295.
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
STATEMENT OF CHANGES
FOR THE PERIOD JANUARY 1, 1997 THROUGH MAY 31, 1997
(unaudited)
FROM OPERATIONS
Net investment loss $ (315,165)
Net realized loss on investments (3,146,982)
Unrealized appreciation on investments 6,288,681
-----------
Increase in net assets from operations 2,826,534
-----------
Increase in net assets
derived from capital share transactions 59,374,308
-----------
Total increase in net assets 62,200,842
NET ASSETS
Beginning of the period 0
-----------
End of the period $62,200,842
===========
UNDISTRIBUTED NET INVESTMENT LOSS
Beginning of the period 0
===========
End of the period $ (315,165)
===========
See accompanying notes to financial statements.
<PAGE>
NEW ENGLAND STAR SMALL CAP FUND
FINANCIAL HIGHLIGHTS
MAY 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Class C
-------------- -------------- --------------
January 1, 1997 January 1, 1997 January 1, 1997
through through through
May 31, 1997 May 31, 1997 May 31, 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $12.50 $12.50 $12.50
Income (Loss) From Investment Operations
----------------------------------------
Net Investment Loss (a) (0.06) (0.10) (0.10)
Net Realized and Unrealized Gain
on Investments 0.61 0.62 0.62
Total From Investment Operations 0.55 0.52 0.52
Net Asset Value, End of Period $13.05 $13.02 $13.02
Total Return (%) (b) 4.4 4.2 4.2
Ratio of Operating Expenses to
Average Net Assets (%) 2.51 (c) 3.26 (c) 3.26 (c)
Ratio of Net Investment Loss to
Average Net Assets (%) (1.25)(c) (2.00)(c) (2.00)(c)
Portfolio Turnover Rate (%) 117 (c) 117 (c) 117 (c)
Average Commission Rate (d) $0.0541 $0.0541 $0.0541
Net Assets, End of Period (000) $28,153 $26,085 $ 7,962
</TABLE>
(a) Per share Net Investment Loss has been calculated using the average shares
outstanding during the year.
(b) A sales charge in the case of Class A Shares and a contingent deferred sales
charge in the case of Class B Shares are not reflected in total return
calculations. Periods less than one year are not annualized.
(c) Computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
May 31, 1997
(unaudited)
1. The Fund is a series of New England Funds Trust I, a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940,
as amended, (the "1940 Act") as an open-end management investment company. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series of shares a "Fund").
The Fund offers Class A, Class B, and Class C shares. The Fund commenced its
public offering of Class A, Class B and Class C shares on December 31, 1996.
Class A shares are sold with a maximum front end sales charge of 5.75%. Class B
shares do not pay a front end sales charge, but pay a higher ongoing
distribution fee than Class A shares for eight years (at which point they
automatically convert to Class A shares), and are subject to a contingent
deferred sales charge if those shares are redeemed within six years of purchase
(or five years if purchased before May 1, 1997). Class C shares do not pay front
end or contingent deferred sales charges and do not convert to any other class
of shares, but they do pay a higher ongoing distribution fee than Class A
shares. Expenses of the Fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 plan. Shares of each
class would receive their pro-rata share of the net assets of the Fund, if the
Fund were liquidated. In addition, the Trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
service provides the last reported sale price for securities listed on an
applicable securities exchange or on the NASDAQ national market system, or, if
no sale was reported and in the case of over-the-counter securities not so
listed, the last reported bid price. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by New England Funds Management, L.P.,
the Fund's adviser, under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date or when the Fund learns of
the dividend, and interest income is recorded on the accrual basis. In
determining net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
C. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities resulting from changes in the exchange rate.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for organization
costs and foreign currency transactions for book and tax purposes. Permanent
book and tax basis differences will result in reclassification to capital
accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Each sub-adviser is responsible for determining that
the value of the collateral is at all times at least equal to the repurchase
price. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party including possible delays or restrictions upon
the portfolio's ability to dispose of the underlying securities.
G. SHORT SALES. A short sale is a transaction in which the Fund sells securities
it does not own (but has borrowed) in anticipation of a decline in the market
price of the securities. When the Fund makes a short sale, the proceeds it
receives from the sale will be held on behalf of the broker effecting the sale
until the Fund replaces the borrowed securities. To deliver the securities to
the buyer, The Fund arranges through the broker to borrow the securities and, in
doing so, the Fund becomes obligated to replace the securities borrowed at their
market value at the time of replacement, whatever that price may be. The Fund
may have to pay a premium to borrow the securities and must pay any dividends or
interest payable on the borrowed securities until the securities are replaced.
H. SHORT SALES AGAINST THE BOX. In a short sale against the box, a Fund sells a
borrowed security, while at the same time owning an identical security in the
portfolio. While the short sale is outstanding, a Fund will not dispose of the
security hedged by the short sale.
When a Fund sells short against the box, it will establish a margin account with
the broker lending the security sold short. While the short sale is outstanding,
the broker retains the proceeds of the short sale, and the Fund pledges
securities or cash as additional collateral. The Fund earns interest from the
broker on the proceeds of the short sale and accrues such interest on a daily
basis.
I. ORGANIZATION EXPENSE. Costs incurred in connection with the Fund's
organization and initial registration, amounting to approximately $37,674 in the
aggregate, were paid by the Fund and are being amortized by the Fund over 60
months.
2. PURCHASES AND SALES OF SECURITIES. (excluding short-term investments) for the
Fund for the period May 31, 1997 were $82,058,348 and $24,786,066, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 1.05% of the Fund's average daily net assets.
NEFM pays the Fund's four investment sub-advisers, Harris Associates, L.P.,
Loomis, Sayles & Company, L.P., Montgomery Asset Management, L.P. and Robertson,
Stephens & Company Investment Management, L.P. a sub-advisory fee as follows:
Harris Associates, L.P., at the annual rate of 0.70% of the average daily net
assets of their segment of the Fund, Loomis, Sayles & Company, L.P. and
Robertson, Stephens & Company Investment Management, L.P. at the annual rate of
0.55% of the first $50 million of the average daily net assets of the segment of
the Fund which that sub-adviser manages, and 0.50% of such assets in excess of
$50 million, and Montgomery Asset Management, L.P. at the annual rate of 0.65%
of the first $50 million of the average daily net assets of the segment of the
Fund which that sub-adviser manages, and 0.50% of such assets in excess of $50
million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM, Harris Associates, L.P. and Loomis Sayles & Company, L.P. are wholly
owned subsidiaries of New England Investment Companies, L.P. which is a
subsidiary of Metropolitan Life Insurance Company. Fees earned by NEFM and the
sub-advisers under the management agreement in effect during the period ended
May 31, 1997, are as follows:
FEES EARNED
- -----------
$ 73,630 New England Funds Management, L.P.
31,487 Harris Associates, L.P.
21,854 Loomis, Sayles & Company, L.P.,
26,791 Montgomery Asset Management, L.P.
23,686 Robertson, Stephens & Company Investment Management, L.P.
- ---------
$ 177,448
=========
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of New England
Investment Companies, L.P. and performs certain accounting and administrative
services for the Fund. The Fund reimburses New England Funds for all or part of
New England Funds' expenses of providing these services which include the
following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing and financial reporting functions and clerical functions
relating to the Fund, (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder reports and
notices, proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the period ended May 31, 1997, these expenses
amounted to $8,696 and are shown separately in the financial statements as
accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the year ended December 31, 1996, the Fund
paid New England Funds $50,245 as compensation for its services in that
capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the period
ended May 31, 1997, the Fund paid New England Funds $19,434 in fees under the
Class A Plan.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the period ended May 31,
1997 the Fund paid New England Funds $17,105 and $5,710 in service fees under
the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds monthly
distribution fees at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in connection with the marketing or sale of Class B and Class C shares.
For the period ended May 31, 1997, the Fund paid New England Funds $51,317 and
$17,132 in distribution fees under the Class B and Class C plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the period ended May
31, 1997 amounted to $656,911.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of NEFM,
New England Funds, New England Investment Companies, L.P. or their affiliates,
other than registered investment companies. Each other trustee is compensated by
the Fund as follows:
Annual Retainer $ 714
Meeting Fee $ 114/meeting
Committee Meeting Fee $ 68/meeting
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund on the
normal payment date.
4. CAPITAL SHARE TRANSACTIONS. At May 31, 1997 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class C capital stock. Transactions in capital shares were as
follows:
FROM THE PERIOD JANUARY 1, 1997
THROUGH MAY 31, 1997
-------------------------------
CLASS A SHARES AMOUNT
- ------- ------ ------
Shares sold......................... 3,278,784 $ 40,453,053
Shares repurchased.................. (1,122,262) (13,701,921)
---------- ------------
Net increase........................ 2,156,522 $ 26,751,132
---------- ------------
FROM THE PERIOD JANUARY 1, 1997
THROUGH MAY 31, 1997
-------------------------------
CLASS B SHARES AMOUNT
- ------- ------ ------
Shares sold......................... 2,123,756 $ 26,400,797
Shares repurchased.................. (120,602) (1,435,315)
--------- ------------
Net increase........................ 2,003,154 $ 24,965,482
--------- ------------
FROM THE PERIOD JANUARY 1, 1997
THROUGH MAY 31, 1997
-------------------------------
CLASS C SHARES AMOUNT
- ------- ------ ------
Shares sold......................... 785,356 $ 9,816,716
Shares repurchased.................. (173,948) (2,159,022)
-------- ----------
Net increase........................ 611,408 7,657,694
------- ---------
Increase derived from capital
share transactions................ 4,771,084 $59,374,308
========= ===========
<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.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, if
fact, have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default of there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue
or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is not longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aa1, A1, Baa1, and B1.
FITCH INVESTOR SERVICES, INC.
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.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ABC and affiliates Fortune
Adam Smith's Money World Fox Network and affiliates
America On Line Fund Action
Anchorage Daily News Fund Decoder
Atlanta Constitution Global Finance
Atlanta Journal (the) Guarantor
Arizona Republic Hartford Courant
Austin American Statesman Houston Chronicle
Baltimore Sun INC
Bank Investment Marketing Indianapolis Star
Barron's Individual Investor
Bergen County Record (NJ) Institutional Investor
Bloomberg Business News International Herald Tribune
Bnai Brith Jewish Monthly Internet
Bond Buyer Investment Advisor
Boston Business Journal Investment Company Institute
Boston Globe Investment Dealers Digest
Boston Herald Investment Profiles
Broker World Investment Vision
Business Radio Network Investor's Daily
Business Week IRA Reporter
CBS and affiliates Journal of Commerce
CFO Kansas City Star
Changing Times KCMO (Kansas City)
Chicago Sun Times KOA-AM (Denver)
Chicago Tribune LA Times
Christian Science Monitor Leckey, Andrew (syndicated column)
Christian Science Monitor News Service Lears
Cincinnati Enquirer Life Association News
Cincinnati Post Lifetime Channel
CNBC Miami Herald
CNN Milwaukee Sentinel
Columbus Dispatch Money
CompuServe Money Maker
Dallas Morning News Money Management Letter
Dallas Times-Herald Morningstar
Denver Post Mutual Fund Market News
Des Moines Register Mutual Funds Magazine
Detroit Free Press National Public Radio
Donoghues Money Fund Report National Underwriter
Dorfman, Dan (syndicated column) NBC and affiliates
Dow Jones News Service New England Business
Economist New England Cable News
FACS of the Week New Orleans Times-Picayune
Fee Adviser New York Daily News
Financial News Network New York Times
Financial Planning Newark Star Ledger
Financial Planning on Wall Street Newsday
Financial Research Corp. Newsweek
Financial Services Week Nightly Business Report
Financial World Orange County Register
Fitch Insights Orlando Sentinel
Forbes Palm Beach Post
Fort Worth Star-Telegram Pension World
<PAGE>
Pensions and Investments Standard & Poor's Stock Guide
Personal Investor Stanger's Investment Advisor
Philadelphia Inquirer Stockbrokers Register
Porter, Sylvia (syndicated column) Strategic Insight
Portland Oregonian Tampa Tribune
Prodigy Time
Public Broadcasting Service Tobias, Andrew (syndicated column)
Quinn, Jane Bryant (syndicated column) Toledo Blade
Registered Representative UPI
Research Magazine US News and World Report
Resource USA Today
Reuters USA TV Network
Rocky Mountain News Value Line
Rukeyser's Business (syndicated column) Wall St. Journal
Sacramento Bee Wall Street Letter
San Diego Tribune Wall Street Week
San Francisco Chronicle Washington Post
San Francisco Examiner WBZ
San Jose Mercury WBZ-TV
Seattle Post-Intelligencer WCVB-TV
Seattle Times WEEI
Securities Industry Management WHDH
Smart Money Worcester Telegram
St. Louis Post Dispatch World Wide Web
St. Petersburg Times Worth Magazine
Standard & Poor's Outlook WRKO
</TABLE>
<PAGE>
APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to NEIC and its affiliates that perform advisory and
subadvisory functions for New England Funds also including, but not limited to:
Back Bay Advisors, Harris Associates L.P., Loomis Sayles, CGM and Westpeak.
Reference also may be made to the Funds of their respective fund groups, namely,
Loomis Sayles Fund and the Oakmark Funds.
References may be included in New England Funds' advertising and
promotional literature to other NEIC affiliates including, but not limited to,
New England Investment Associates, L. P., AEW Capital Management, L.P.,
Marlborough Capital Advisors, L.P., Reich & Tang Capital Management, Reich and
Tang Mutual Funds Group and Jurika & Voyles and their fund group.
References to subadvisers unaffiliated with NEIC that perform
subadvisory functions on behalf of New England Funds and their respective fund
groups may be contained in New England Funds' advertising and promotional
literature including, but not limited to, Berger, Janus Capital, Founders,
Montgomery and Robertson Stephens.
New England Funds' advertising and promotional material will include,
but is not limited to, discussions of the following information about both
affiliated and unaffiliated entities:
o Specific and general assessments and forecasts regarding U.S., world
economies, the economics of specific nations and their impact on the New
England Funds
o Specific and general investment emphasis, specialties, fields of expertise,
competencies, operations and functions
o Specific and general investment philosophies, strategies, processes,
techniques and types of analysis
o 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
o The corporate histories, founding dates and names of founders of the
entities
o Awards, honors and recognition given to the firms
The names of those with ownership interest and the percentage of ownership
o The industries and sectors from which clients are drawn and specific client
names and background information on current individual, corporate and
institutional clients, including pension and profit sharing plans
o Current capitalization, levels of profitability and other financial
information
o Identification of portfolio managers, researchers, economists, principals
and other staff members and employees
o 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
o Current and historical statistics about:
-total dollar amount of assets managed
-New England Funds' assets managed in total and by Fund
-the growth of assets
-asset types managed
-numbers of principal parties and employees, and the length of their
tenure, including officers, portfolio managers, researchers, economists,
technicians and support staff
-the above individuals' total and average number of years of industry
experience and the total and average length of their service to the
adviser or the subadviser
o The general and specific strategies applied by the advisers in the
management of New England Funds portfolios including, but not limited to:
-the pursuit of growth, value, income oriented, risk management or other
strategies
-the manner and degree to which the strategy is pursued
-whether the strategy is conservative, moderate or extreme and an
explanation of other features, attributes
-the types and characteristics of investments sought and specific
portfolio holdings
-the actual or potential impact and result from strategy implementation
-through its own areas of expertise and operations, the value added by
subadvisers to the management process
-the disciplines it employs, e.g., in the case of Loomis Sayles, the strict
buy/sell guidelines and focus on sound value it employs and goals and
benchmarks that it establishes in management, e.g., CGM pursues growth
50% above the S&P 500
-the systems utilized in management, the features and characteristics of
those systems and the intended results from such computer analysis, e.g.,
Westpeak's efforts to identify overvalued and undervalued issues.
o 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. 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 Funds and other funds managed by the Funds' adviser and subadvisers,
including, but not limited to, those provided by Morningstar, Lipper
Analytical Services, Forbes and Worth.
In addition, communications and materials developed by New England
Funds will make reference to the following information about NEIC and its
affiliates:
NEIC is one of the largest publicly traded managers in the U.S. listed
on the New York Stock Exchange. NEIC maintains over $100 billion in assets under
management. In addition, promotional materials may include:
o Specific and general references to New England Funds multi-manager approach
through NEIC affiliates and outside firms including, but not limited to, the
following:
-that each adviser/manager operates independently on a day-to-day basis
and maintains an image and identity separate from NEIC and the other
investment managers
-other fund companies are limited to a "one size fits all" approach but
New England Funds draws upon the talents of multiple managers whose
expertise best matches the fund objective
-in this and other contexts reference may be made to New England Funds
slogan "Where The Best Minds Meet"(R) and that New England Funds ability
to match the talent to the task is one more reason it is becoming known
as "Where The Best Minds Meet."
Financial Adviser Services ("FAS"), a division of NEIC, may be
referenced in Fund advertising and promotional literature concerning the
marketing services it provides to NEIC-affiliated fund groups including: New
England Funds, Loomis Sayles Funds, Oakmark Funds and Reich & Tang Funds.
FAS will provide marketing support to NEIC affiliated fund groups
targeting financial advisers, financial intermediaries and institutional clients
who may transact purchases and other fund-related business directly with these
fund groups. Communications will contain information including, but not limited
to: descriptions of clients and the marketplaces to which it directs its
efforts; the mission and goals of FAS and the types of services it provides
which may include: seminars; its 1-800 number, web site, Internet or other
electronic facilities; qualitative information about the funds' investment
methodologies; information about specific strategies and management techniques;
performance data and features of the funds; institutional oriented research and
portfolio manager insight and commentary. Additional information contained in
advertising and promotional literature may include: rankings and ratings of the
funds including, but not limited to, those of Morningstar and Lipper Analytical
Services; statistics about the advisers', fund groups' or a specific fund's
assets under management; the histories of the advisers and biographical
references to portfolio managers and other staff including, but not limited to,
background, credentials, honors, awards and recognition received by the advisers
and their personnel; and commentary about the advisers, their funds and their
personnel from third-party sources including newspapers, magazines, periodicals,
radio, television or other electronic media.
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:
o 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.
o 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.
o Specific and general discussion of economic, legislative, and other
environmental factors affecting 401(k) and retirement plans, including, but
not limited to, statistics, detailed explanations or broad summaries of:
-past, present and prospective tax regulation, Internal Revenue Service
requirements and rules, including, but not limited to, reporting
standards, minimum distribution notices, Form 5500, Form 1099R and other
relevant forms and documents, Department of Labor rules and standards and
other regulation. This includes past, current and future initiatives,
interpretive releases and positions of regulatory authorities about the
past, current or future eligibility, availability, operations,
administration, structure, features, provisions or benefits of 401(k) and
retirement plans
-information about the history, status and future trends of Social
Security and similar government benefit programs including, but not
limited to, eligibility and participation, availability, operations and
administration, structure and design, features, provisions, benefits and
costs
-current and prospective ERISA regulation and requirements.
o Specific and general discussion of the benefits of 401(k) investment and
retirement plans, and, in particular, the New England Funds 401(k) and
retirement plans, to the participant and plan sponsor, including
explanations, statistics and other data, about:
-increased employee retention
-reinforcement or creation of morale
-deductibility of contributions for participants
-deductibility of expenses for employers
-tax deferred growth, including illustrations and charts
-loan features and exchanges among accounts
-educational services materials and efforts, including, but not limited
to, videos, slides, presentation materials, brochures, an investment
calculator, payroll stuffers, quarterly publications, releases and
information on a periodic basis and the availability of wholesalers and
other personnel.
Specific and general reference to the benefits of investing in mutual funds
for 401(k) and retirement plans, and, in particular, New England Funds and
investing in its 401(k) and retirement plans, including, but not limited
to:
-the significant economies of scale experienced by mutual fund companies in
the 401(k) and retirement benefits arena
-broad choice of investment options and competitive fees
-plan sponsor and participant statements and notices
-the plan prototype, summary descriptions and board resolutions
-plan design and customized proposals
-trusteeship, record keeping and administration
-the services of State Street Bank, including, but not limited to, trustee
services and tax reporting
-the services of DST and BFDS, including, but not limited to, mutual fund
processing support, participant 800 numbers and participant 401(k)
statements
-the services of Trust Consultants Inc. (TCI), including, but not limited
to, sales support, plan record keeping, document service support, plan
sponsor support, compliance testing and Form 5500 preparation.
o 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.
<PAGE>
APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock .................................... ---%
Short-term Obligations and Other Assets ............ 1.6%
Debt-- Unrated ..................................... 5.0%
Debt-- Standard and Poor's Rating
AAA ....................................... 15.6%
AA ........................................ 6.3%
A ......................................... 9.5%
BBB........................................ 55.0%
BB......................................... 7.0%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the Municipal Income Fund for the
fiscal year ended December 31, 1996, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
Municipal Income Fund's net assets invested in each category as of the end of
each month during the year. Back Bay Advisors does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
BOND INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock .................................... ---%
Short-term Obligations and Other Assets ............ 0.5%
Debt-- Unrated ..................................... ---%
Debt-- Standard and Poor's Rating
AAA ....................................... 26.3%
AA ........................................ 14.1%
A ......................................... 8.8%
BBB........................................ 30.8%
BB......................................... 19.5%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the Bond Income Fund for the fiscal
year ended December 31, 1996, with the debt securities rated by S&P separated
into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the Bond
Income Fund's net assets invested in each category as of the end of each month
during the year. Back Bay Advisors does not rely primarily on ratings designed
by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
CALIFORNIA FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PERCENTAGE
OF NET
SECURITY ASSETS
-------- ------
Preferred Stock .................................... ---%
Short-term Obligations and Other Assets ............ 2.0%
Debt-- Unrated ..................................... 10.0%
Debt-- Standard and Poor's Rating
AAA ....................................... 29.0%
AA ........................................ 5.0%
A ......................................... 28.0%
BBB........................................ 26.0%
BB......................................... ---%
B.......................................... ---%
CCC........................................ ---%
C/D........................................ ---%
The chart above indicates the composition of the California Fund for the fiscal
year ended December 31, 1996, with the debt securities rated by S&P separated
into the indicated categories. The percentages were calculated on a
dollar-weighted average basis by determining monthly the percentage of the
California Fund's net assets invested in each category as of the end of each
month during the year. Back Bay Advisors does not rely primarily on ratings
designed by any rating agency in making investment decisions. The chart does not
necessarily indicate what the composition of the Fund's portfolio will be in
subsequent fiscal years.
<PAGE>
Registration Nos. 2-98326
811-4323
NEW ENGLAND FUNDS TRUST I
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a)(1) Financial Highlights for the Registrant's New England Star Small Cap
Fund are included in Part A hereof. The following financial statements
of New England Star Small Cap Fund are included in Part II of the
Statement of Additional Information filed as Part B hereof.
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(a)(2) Per share income and capital changes for all series of the Registrant
other than New England Star Small Cap Fund and New England Municipal
Income Fund are included in the prospectuses filed in Part A hereof.
The following financial statements are incorporated in Part II of the
statement of additional information filed as Part B hereof by reference
to the annual reports to shareholders of the series of the Registrant
listed below for the fiscal year ended December 31, 1996, which were
filed with the Commission on the dates appearing in parentheses below:
(1) New England Balanced Fund (March 6, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(2) New England Growth Fund (March 7, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(3) New England Value Fund (March 4, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(4) New England Star Advisers Fund (March 6, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(5) New England International Equity Fund (March 4, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(6) New England Capital Growth Fund (March 3, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(7) New England Bond Income Fund (March 4, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(8) New England Muncipal Income Fund (March 5, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(9) New England Government Securities Fund (March 3, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(10) New England Strategic Income Fund (March 5, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(11) New England Star Worldwide Fund (March 7, 1997)
(i) Portfolio Composition
(ii) Statement of Assets & Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Per Share Data and Ratios
(b) Exhibits:
1.(a) Amended and Restated Agreement and Declaration of Trust of the
Registrant is incorporated herein by reference to Exhibit 1(a)
to Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996.
(b) Amendment No. 5 to Amended and Restated Agreement and
Declaration of Trust of the Registrant is incorporated herein
by reference to Exhibit 1(b) to Post-Effective Amendment No.
31 to this Registration Statement, filed on April 12, 1996.
(c) Amendment No. 10 to Amended and Restated Agreement and
Declaration of Trust is incorporated herein by reference to
Exhibit 1(d) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997.
2.(a) Bylaws of the Registrant are incorporated herein by reference
to Exhibit 2(a) to Post-Effective Amendment No. 32 to this
Registration Statement, filed on July 30, 1996.
(b) Amendment to the Bylaws of the Registrant is incorporated
herein by reference to Exhibit 2(b) to Post-Effective
Amendment No. 32 to this Registration Statement, filed on July
30, 1996.
3. None.
4. Rights of shareholders are described in Article III, Section 6
of the Amended and Restated Agreement and Declaration of Trust
of the Registrant incorporated by reference as Exhibit 1(a) to
this Registration Statement.
5.(a) Advisory Agreement between the Registrant, on behalf of its
New England Growth Fund, and Capital Growth Management Limited
Partnership ("CGM") is incorporated herein by reference to
Post-Effective Amendment No. 32 to this Registration
Statement, filed on July 30, 1996.
(b) Advisory Agreements between the Registrant and New England
Funds Management, L.P. ("NEFM"), relating to the following
series of the Registrant, are incorporated herein by reference
to Exhibit 5(b) to Post-Effective Amendment No. 31 to this
Registration Statement, filed on April 12, 1996:
(i) New England Capital Growth Fund
(ii) New England Balanced Fund
(iii) New England International Equity Fund
(iv) New England Star Advisers Fund
(v) New England Value Fund
(vi) New England Star Worldwide Fund
(vii) New England Government Securities Fund
(viii) New England Strategic Income Fund
(ix) New England Bond Income Fund
(x) New England Municipal Income Fund
(c) Advisory Agreement between the Registrant, relating to its New
England Small Cap Fund, and NEFM is incorporated herein by
reference to Exhibit 5(c) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
(d) Subadvisory Agreements relating to the following series of the
Registrant, between NEFM and the subadvisers indicated in
parentheses, are incorporated herein by reference to Exhibit
5(c) to Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996:
(i) New England Capital Growth Fund (Loomis Sayles &
Company, L.P. ["Loomis Sayles"])
(ii) New England Balanced Fund (Loomis Sayles)
(iii) New England Star Advisers Fund (Berger Associates,
Inc. ["Berger"])
(iv) New England Star Advisers Fund (Founders Asset
Management, Inc. ["Founders"])
(v) New England Star Advisers Fund (Janus Capital
Corporation ["Janus Capital"])
(vi) New England Star Advisers Fund (Loomis Sayles)
(vii) New England Value Fund (Loomis Sayles)
(viii) New England Star Worldwide Fund (Harris Associates
L.P. ["Harris"])
(ix) New England Star Worldwide Fund (Montgomery Asset
Management ["Montgomery"])
(x) New England Star Worldwide Fund (Founders)
(xi) New England Star Worldwide Fund (Janus Capital)
(xii) New England Government Securities Fund (Back Bay
Advisors ["Back Bay Advisors"])
(xiii) New England Strategic Income Fund (Loomis Sayles)
(xiv) New England Bond Income Fund (Back Bay Advisors)
(xv) New England Municipal Income Fund (Back Bay Advisors)
(e) Subadvisory Agreements relating to the Registrant's New
England Star Small Cap Fund, between NEFM and each of the
following subadvisers are incorporated herein by reference to
Exhibit 5(e) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997:
(i) Robertson Stephens & Company Investment Management,
L.P.
(ii) Montgomery
(iii) Loomis Sayles
(iv) Harris
(f) Form of Subadvisory Agreement relating to the Registrant's New
England International Equity Fund, between NEFM and Loomis
Sayles is incorporated herein by reference to Exhibit 5(f) to
Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997.
6.(a) Form of Distribution Agreement between the Registrant, on
behalf of each of the following series, and New England Funds,
L.P. is incorporated herein by reference to Exhibit 6(a) to
Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996:
(i) New England Capital Growth Fund
(ii) New England Balanced Fund
(iii) New England Growth Fund
(iv) New England International Equity Fund
(v) New England Star Advisers Fund
(vi) New England Value Fund
(vii) New England Government Securities Fund
(viii) New England Strategic Income Fund
(ix) New England Bond Income Fund
(x) New England Municipal Income Fund
(xi) New England Star Worldwide Fund
(b) Distribution Agreement between the Registrant, on behalf of
its New England Star Small Cap Fund, and New England Funds,
L.P. is incorporated herein by reference to Exhibit 6(b) to
Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997.
7. None.
8.(a) Custodian Contract dated April 13, 1988 between the Registrant
and State Street Bank and Trust Company ("State Street"),
including form of subcustodian agreement, is incorporated
herein by reference to Exhibit 8(a) to Post-Effective
Amendment No. 32 to this Registration Statement, filed on July
30, 1996.
(b) Amendment No. 1 to Custodian Contract dated April 12, 1988
between the Registrant and State Street Bank and Trust Company
is incorporated herein by reference to Exhibit 8(b) to
Post-Effective Amendment No. 32 to this Registration
Statement, filed on July 30, 1996.
(c) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England International Equity Fund is incorporated herein by
reference to Exhibit 8(c) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
(d) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England Capital Growth Fund is incorporated herein by
reference to Exhibit 8(d) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
(e) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England Star Advisers Fund is incorporated herein by reference
to Exhibit 8(e) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997.
(f) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England Strategic Income Fund is incorporated herein by
reference to Exhibit 8(f) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
(g) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England Star Worldwide Fund is incorporated herein by
reference to Exhibit 8(g) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
(h) Letter Agreement between the Registrant and State Street
relating to the applicability of the Custodian Contract to New
England Star Small Cap Fund is incorporated herein by
reference to Exhibit 8(h) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
9.(a) Transfer Agency Agreement between the Registrant and New
England Funds, L.P. (formerly TNE Investment Services
Corporation) is incorporated herein by reference to
Post-Effect Amendment No. 32 to this Registration Statement,
filed on July 30, 1996.
(b) Form of Service Agreement between New England Securities
Corporation ("New England Securities") and Back Bay Advisors
is incorporated herein by reference to Post-Effective
Amendment No. 3 to this Registration Statement, filed on
November 7, 1986.
(c) Form of Service Agreement between New England Securities and
Loomis Sayles is incorporated herein by reference to
Post-Effective Amendment No. 3 to this Registration Statement,
filed on November 7, 1986.
(d) Form of Service Agreement between New England Securities and
CGM is incorporated herein by reference to Post-Effective
Amendment No. 10 to this Registration Statement, filed on May
1, 1990.
(e) Form of Administrative Agreement between New England
Securities and Registrant is incorporated herein by reference
to Post-Effective Amendment No. 3 to this Registration
Statement, filed on November 7, 1986.
(f) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Capital Growth Fund
and TNE Investment Services Corporation is incorporated herein
by reference to Post-Effective Amendment No. 35 to this
Registration Statement, filed on April 18, 1997.
(g) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Strategic Income
Fund, and New England Funds, L.P. is incorporated herein by
reference to Post-Effective Amendment No. 31 to this
Registration Statement, filed on April 12, 1996.
(h) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Star Worldwide Fund,
and New England Funds, L.P. is incorporated herein by
reference to Exhibit 9(j) to Post-Effective Amendment No. 31
to this Registration Statement, filed April 12, 1996.
(i) Sub-Transfer Agency Agreement between New England Funds, L.P.
(formerly TNE Investment Services Corporation) and State
Street is incorporated herein by reference to Exhibit 9(k) to
Post-Effective Amendment No. 33 to this Registration
Statement, filed on October 3, 1996.
(j) Expense Agreement between the Registrant, on behalf of its
Strategic Income Fund, and NEFM is incorporated herein by
reference to Exhibit 9(l) to Post-Effective Amendment No. 32
to this Registration Statement, filed on July 30, 1996.
(k) Form of Class B Shares Remittance Agreement between the
Registrant and New England Funds, L.P., relating to each
series of the Registrant other than New England Growth Fund,
is incorporated herein by reference to Exhibit 9(m) to
Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996.
(l) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its Star Small Cap Fund, and New
England Funds, L.P. is incorporated herein by reference to
Exhibit 9(n) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997.
(m) Letter Agreement between the Registrant and State Street
relating to the applicability of the Sub-Transfer Agency
Agreement to New England Star Small Cap Fund is incorporated
herein by reference to Exhibit 9(o) to Post-Effective
Amendment No. 34 to this Registration Statement, filed on
February 14, 1997.
(n) Class B Shares Remittance Agreement between the Registrant and
New England Funds, L.P. relating to New England Star Small Cap
Fund is incorporated herein by reference to Exhibit 9(p) to
Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997.
10.(a) Opinion and consent of counsel relating to the Registrant's
New England Growth Fund, New England Equity Income Fund, New
England Value Fund, New England Bond Income Fund and New
England Municipal Income Fund is incorporated herein by
reference to Post-Effective Amendment No. 3 to this
Registration Statement, filed on November 7, 1986.
(b) Opinion and consent of counsel relating to the Registrant's
New England Government Securities Fund is incorporated herein
by reference to Post-Effective Amendment No. 35 to this
Registration Statement, filed on April 18, 1997.
(c) Opinion and consent of counsel relating to the Registrant's
New England International Equity Fund is incorporated herein
by reference to Post-Effective Amendment No. 17 to this
Registration Statement, filed on October 20, 1992.
(d) Opinion and consent of counsel relating to the Registrant's
issuance of multiple classes of shares is incorporated herein
by reference to Post-Effective Amendment No. 20 to this
Registration Statement, filed on December 22, 1993.
(e) Opinion and consent of counsel relating to the Registrant's
New England Capital Growth Fund is incorporated herein by
reference to Post-Effective Amendment No. 24 to this
Registration Statement, filed on June 20, 1994.
(f) Opinion and consent of counsel relating to the Registrant's
New England Star Advisers Fund is incorporated herein by
reference to Post-Effective Amendment No. 24 to this
Registration Statement, filed on June 20, 1994.
(g) Opinion and consent of counsel relating to the Registrant's
New England Strategic Income Fund is incorporated herein by
reference to Post-Effective Amendment No. 28 to this
Registration Statement, filed on October 13, 1995.
(h) Opinion and consent of counsel relating to the Registrant's
New England Star Worldwide Fund is incorporated herein by
reference to Exhibit 10(h) to Post-Effective Amendment No. 31
to this Registration Statement, filed on April 12, 1996.
(i) Opinion and consent of counsel relating to the Registrant's
New England Star Small Cap Fund is incorporated herein by
reference to Exhibit 10(I) to Post-Effective Amendment No. 34
to this Registration Statement, filed on February 14, 1997.
11. Consent of Price Waterhouse LLP is filed herewith.
12. None.
13. Investment Letter of New England Securities is incorporated
herein by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed on September 11, 1985.
14. The following are incorporated herein by reference to Exhibit
14 to Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997: (i) New England Funds,
L.P. Tax Sheltered Custodial Account Agreement; (ii) New
England Funds, L.P. Keogh Plan; (iii) New England Funds, L.P.
Simplified Employee Pension Plan; (iv) New England Funds, L.P.
Individual Retirement Plan Prototype; and (v) New England
Funds, L.P. 401(k) Plan Prototype.
15.(a) Rule 12b-1 Plans relating to the Class A shares of the
Registrant's New England Balanced Fund, New England Growth
Fund, New England Value Fund, New England International Equity
Fund, New England Capital Growth Fund, New England Bond Income
Fund, New England Municipal Income Fund and New England
Government Securities Fund are incorporated herein by
reference to Exhibit 15(a) to Post-Effective Amendment No. 32
to this Registration Statement, filed on July 30, 1996.
(b) Rule 12b-1 Plan relating to the Class A shares of the
Registrant's New England Star Advisers Fund is incorporated
herein by reference to Exhibit 15(b) to Post-Effective
Amendment No. 32 to this Registration Statement, filed on July
30, 1996.
(c) Form of Rule 12b-1 Plan relating to the Class C shares of the
Registrant's New England Star Advisers Fund is incorporated
herein by reference to Post-Effective Amendment No. 24 to this
Registration Statement, filed on June 20, 1994.
(d) Rule 12b-1 Plans relating to the Class C shares of the
Registrant's New England International Equity Fund, New
England Value Fund, New England Balanced Fund, New England
Capital Growth Fund and New England Bond Income Fund are
incorporated herein by reference to Post-Effective Amendment
No. 25 to this Registration Statement, filed on February 15,
1995.
(e) Form of Rule 12b-1 Plan relating to the Class A shares of the
Registrant's New England Strategic Income Fund is incorporated
herein by reference to Exhibit 15 to Post-Effective Amendment
No. 25 to this Registration Statement, filed February 15,
1995.
(f) Form of Rule 12b-1 Plan relating to the Class C shares of the
Registrant's New England Strategic Income Fund is incorporated
herein by reference to Exhibit 15 to Post-Effective Amendment
No. 25 to this Registration Statement, filed February 15,
1995.
(g) Forms of Rule 12b-1 Plan relating to the Class A and Class C
shares of New England Star Worldwide Fund are incorporated
herein by reference to Post-Effective Amendment No. 28 to this
Registration Statement, filed on October 13, 1995.
(h) Form of Rule 12b-1 Plan relating to Class B shares of each
series of the Registrant other than New England Growth Fund is
incorporated herein by reference to Exhibit 15(h) to
Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996.
(i) 12b-1 Plan relating to Class A shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by
reference to Exhibit 15(i) to Post-Effective Amendment No. 33
to this Registration Statement, filed on October 3, 1996.
(j) 12b-1 Plan relating to Class B shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by
reference to Exhibit 15(j) to Post-Effective Amendment No. 33
to this Registration Statement, filed on October 3, 1996.
(k) 12b-1 Plan relating to Class C shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by
reference to Exhibit 15(k) to Post-Effective Amendment No. 33
to this Registration Statement, filed on October 3, 1996.
16. Schedule for computation of performance quotations is
incorporated herein by reference to Post-Effective Amendment
No. 9 to this Registration Statement, filed on May 1, 1989.
17. Financial Data Schedule is filed herewith.
18. Plan pursuant to Rule 18f-3 under the Investment Company Act
of 1940 as amended effective January 31, 1997 is incorporated
herein by reference to Post-Effective Amendment No. 35 to this
Registration Statement, filed on April 18, 1997.
19.(a) Powers of Attorney designating Edward A. Benjamin, Frank
Nesvet, Henry L.P. Schmelzer and Robert P. Connolly as
attorneys to sign for Kenneth J. Cowan, Peter S. Voss, Henry
L.P. Schmelzer, Graham T. Allison, Jr., Pendleton P. White,
John A. Shane and Sandra O. Moose are incorporated herein by
reference to Post-Effective Amendment No. 27 to this
Registration Statement, filed on October 12, 1995.
(b) Powers of Attorney designating Edward A. Benjamin, Frank
Nesvet, Henry L.P. Schmelzer and Robert P. Connolly as
attorneys to sign for Daniel M. Cain and Richard Darman are
incorporated herein by reference to Post-Effective Amendment
No. 31 to this Registration Statement, filed on April 12,
1996.
Item 25. Persons Controlled by or Under Common Control with the Registrant
None.
Item 26. Number of Holders of Securities
The following table sets forth the number of record holders of each class of
securities of the Registrant as of May 31, 1997:
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
New England Growth Fund 72,282 765 -- --
New England Value Fund 16,312 7,035 387 5
New England Balanced Fund 12,987 6,818 255 7
New England Bond Income Fund 10,940 3,253 344 6
New England Government Securities Fund 7,950 495 -- 2
New England Municipal Income Fund 5,094 497 -- --
New England Star Advisers Fund 28,518 37,716 5,530 7
New England International Equity Fund 9,127 5,883 279 6
New England Capital Growth Fund 11,669 5,431 115 --
New England Strategic Income Fund 5,163 6,433 1,596 --
New England Star Small Cap Fund 3,161 3,295 657 --
New England Star Worldwide Fund 9,449 11,501 1,624 --
</TABLE>
Item 27. Indemnification
Incorporated herein by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed on September 11, 1985.
Item 28. Business and Other Connections of Investment Adviser
(a) Loomis Sayles, the subadviser of the Registrant's New England Value
Fund, New England International Equity Fund, New England Balanced Fund,
New England Capital Growth Fund, New England Strategic Income Fund and
New England High Income Fund and a subadviser of New England Star
Advisers Fund and New England Star Small Cap Fund, provides investment
advice to a number of other registered investment companies and to
other organizations and individuals. Loomis Sayles' general partner,
directors and officers have been engaged during the past two fiscal
years in the following other businesses, professions, vocations or
employments of a substantial nature:
<PAGE>
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Loomis Sayles Other Affiliations Connection
------------- ------------------ ----------
<S> <C> <C>
Loomis Sayles & Company, Incorporated None None
("LSCI")
General Partner
Robert J. Blanding, None None
President and Chief Executive Officer
Daniel J. Fuss, None None
Executive Vice President
Jeffrey L. Meade, None None
Executive Vice President and Chief
Operating Officer
Sandra P. Tichenor, None None
Vice President, General Counsel and
Secretary
Meri Anne Beck, None None
Vice President
Mary C. Champagne, None None
Vice President
Paul Drexler, None None
Vice President
Richard W. Hurkes, None None
Vice President
Scott A. Pape, None None
Vice President
Douglas D. Ramos, None None
Vice President
Carol C. McMurtie, None None
Vice President
Tricia H. Mills, None None
Vice President
Jeffery C. Petherick, None None
Vice President
(b) CGM, the adviser of the Registrant's New England Growth Fund, provides
investment advice to a number of other registered investment companies
and to other organizations and individuals. CGM's general partner,
directors and officers have been engaged during the past two fiscal
years in the following other businesses, professions, vocations or
employments of a substantial nature.
<CAPTION>
Name and Office with Name and Address of Nature of
CGM Other Affiliations Connection
<S> <C> <C>
Kenbob, Inc. None None
General Partner
(c) Back Bay Advisors, the subadviser of the Registrant's New England Bond
Income Fund, New England Government Securities Fund and New England
Municipal Income Fund, is wholly owned by NEIC. Back Bay Advisors
serves as investment adviser to a number of other registered investment
companies. Back Bay Advisors' general partner, directors and officers
have been engaged during the past two fiscal years in the following
businesses, professions, vocations or employments of a substantial
nature (former affiliations are marked with an asterisk):
<CAPTION>
Name and Office with Name and Address of Nature of
Back Bay Advisors Other Affiliations Connection
<S> <C> <C>
Back Bay Advisors, Inc. None None
General Partner
Charles T. Wallis, NEF Corporation Director
President and Chief Executive 399 Boylston Street
Officer Boston, MA 02116
Back Bay Advisors, Inc. President, Chief Executive
399 Boylston Street Officer and Director
Boston, MA 02116
Charles G. Glueck, None None
Senior Vice President
Scott A. Millimet, Back Bay Advisors, Inc. Executive Vice President
Executive Vice President
Edgar M. Reed, Aetna Capital Management* Head of Fixed Income Management
Executive Vice President and Chief 151 Farmington Avenue Group
Investment Officer Hartford, CT 06156
J. Scott Nicholson, None None
Senior Vice President
Kimberly J. Forsyth, Legg Mason Incorporated* Senior Vice President and
Senior Vice President 7 East Redwood Street Director of Tax-Exempt Credit
Baltimore, MD 21202 Research
Via International City/County Independent Consultant to
Management Association Bulgaria
777 North Capital Street, NE
Washington, DC 20002
Catherine Bunting, None None
Senior Vice President
Nathan R. Wentworth, None None
Vice President
Paul Zamagni, None None
Vice President and Treasurer
Peter Palfrey, None None
Vice President
Harold B. Bjornson, None None
Vice President
Eric Gutterson, None None
Vice President
(d) Berger, a subadviser to the Registrant's New England Star Advisers
Fund, serves as investment adviser to mutual funds, pension and profit
sharing plans and other institutional and private investors. Berger's
directors and officers have been engaged during the past two fiscal
years in the following other businesses, professions, vocations or
employments of a substantial nature (former affiliations are marked
with an asterisk):
<CAPTION>
Name and Office with Name and Address of Nature of
Berger Other Affiliations Connection
<S> <C> <C>
William M. B. Berger, None None
Director
Patrick S. Adams, Zurich Kemper Investments, Inc.* Senior Vice President
Senior Vice President 222 South Riverside
Chicago, IL
Founders Asset Management, Inc.* Portfolio Manager
2930 East Third Ave.
Denver, CO 80206
William R. Keithler, INVESCO Trust Company* Senior Vice President
Vice President 7800 East Union Ave; Suite 800
Denver, CO 80237
Kevin R. Fay, None None
Vice President, Secretary and Treasurer
Brian S. Ferrie, United Services Advisors, Inc.* Compliance Officer
Compliance Officer 7900 Callaghan Road
San Antonio, TX 78229
David J. Schultz, Smith, Brock and Gwinn* Partner
Controller 650 South Cherry Street
Denver, CO 80222
Gerard M. Lavin, DST Systems Inc. Senior Officer
President and Director 1055 Broadway, 9th Floor
Kansas City, MO 64105
Investors Fiduciary Trust Co.* President and Chief Executive
127 West 10th Street Officer
Kansas City, MO 64105
Landon H. Rowland, Kansas City Southern Industries, Inc. President and Chief Executive
Director ("KCSI") Officer
114 West 11th Street
Kansas City, MO 64105
(e) Founders, a subadviser to the Registrant's New England Star Advisers
Fund and New England Star Worldwide Fund, has been an investment
adviser since 1938 and serves as an investment adviser to mutual funds
and other accounts. Founders' directors and officers have been engaged
during the past two fiscal years in the following other businesses,
professions, vocations or employments of a substantial nature:
<CAPTION>
Name and Office with Name and Address of Nature of
Founders Other Affiliations Connection
<S> <C> <C>
Bjorn K. Borgen, None None
Director, Chief Executive Officer and
Secretary
David L. Ray, None None
Vice President, Assistant Secretary and
Treasurer
Michael K. Haines, None None
Senior Vice President
Michael Gerding, None None
Vice President
Charles Hooper, None None
Vice President
Linda Ripley, None None
Assistant Vice President
Roberto Galindo, Jr., None None
Assistant Vice President
Thomas Mauer, None None
Assistant Vice President
Gregory Contillo, None None
Vice President
James Rankin, None None
Vice President
(f) Janus Capital, a subadviser to the Registrant's New England Star
Advisers Fund and New England Star Worldwide Fund, serves as investment
adviser to mutual funds and individual, corporate, charitable and
retirement accounts. Janus Capital's directors and officers have been
engaged during the past two fiscal years in the following businesses,
professions, vocations or employments of a substantial nature:
<CAPTION>
Name and Office with Name and Address of Nature of
Janus Other Affiliations Connection
<S> <C> <C>
Thomas H. Bailey, IDEX Management, Inc. ("IDEX") Chairman and Director
Chairman, Director, President and Chief 201 Highland Avenue
Executive Officer Largo, FL 34690
James P. Craig, None
Vice President and Chief Investment
Officer
Thomas F. Marsico, None
Vice President
James P. Goff, None None
Vice President
Warren B. Lammert, None None
Vice President
Ronald V. Speaker, None None
Vice President
Helen Young Hayes, None None
Vice President
Sharon S. Pichler, None None
Vice President
Scott W. Schoelzel, None None
Vice President
David C. Tucker, Janus Service Corporation ("Janus Service") Vice President, General Counsel
Vice President, Secretary and General 100 Fillmore Street and Director
Counsel Denver, CO 80206
Janus Distributors, Inc. ("Janus Vice President, General Counsel
Distributors") and Director
100 Fillmore Street
Denver, CO 80206
Steven R. Goodbarn, Janus Service Vice President of Finance,
Vice President of Finance, Treasurer and Treasurer and Chief Financial
Chief Financial Officer Officer
Janus Distributors Vice President of Finance,
Treasurer and Chief Financial
Officer
IDEX Director
Michael E. Herman, Ewing Marion Kauffman Foundation Chairman of Finance Committee
Director 4900 Oak
Kansas City, MO 64112
Michael N. Stolper, Stolper & Company, Inc. President
Director 525 B Street
San Diego, CA
Thomas A. McDonnell, DST Systems, Inc. President, Chief Executive
Director 1055 Broadway Officer and Director
Kansas City, MO 64105
KCSI Executive Vice President and
Director
(g) NEFM, adviser to all the series of the Registrant except New England
Growth Fund, was organized in 1995. NEFM also serves as adviser to all
of the series of New England Funds Trust II and to New England Cash
Management Trust, New England Tax Exempt Money Market Trust and New
England Equity Income Fund. NEFM's general partner, directors and
officers have been engaged during the past two fiscal years in the
following businesses, professions, vocations or employments of a
substantial nature (former affiliations are marked with an asterisk):
<CAPTION>
Name and Office with Name and Address of Nature of
NEFM Other Affiliations Connection
<S> <C> <C>
NEF Corporation New England Funds, L.P. General Partner
General Partner 399 Boylston Street
Boston, MA 02116
Henry L.P. Schmelzer, New England Funds, L.P. President and Chief Executive Officer
President and Chief Executive Officer
NEF Corporation President, Chief Executive Officer
and Director
Back Bay Advisors, Inc. Director
New England Securities Corporation* Director
399 Boylston Street
Boston, MA 02116
Frank Nesvet, New England Funds, L.P. Senior Vice President and Chief
Senior Vice President, Chief Financial Financial Officer
Officer and Treasurer
NEF Corporation Senior Vice President, Chief
Financial Officer and Treasurer
Robert P. Connolly, NEF Corporation Senior Vice President, General
Senior Vice President, General Counsel, Counsel, Secretary and Clerk
Assistant Secretary and Clerk
New England Funds, L.P. Senior Vice President, General
Counsel, Secretary and Clerk
Kroll Associates, Inc.* Managing Director and General Counsel
900 3rd Avenue
New York, NY 10022
Bruce R. Speca, NEF Corporation Executive Vice President
Executive Vice President
New England Funds, L.P. Executive Vice President
Peter H. Duffy, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Martin G. Dyer, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Ralph M. Greggs, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Beatriz A. Pina-Smith, NEF Corporation Assistant Controller
Assistant Controller
New England Funds, L.P. Assistant Controller
(h) Montgomery is a subadviser to the Registrant's New England Star
Worldwide Fund and New England Star Small Cap Fund. Montgomery's
general partner, directors and officers have been engaged during the
past two fiscal years in the following businesses, professions,
vocations or employments of a substantial nature (former affiliations
are marked with an asterisk):
<CAPTION>
Name and Office with Name and Address of Other Nature of
Montgomery Affiliations Connection
<S> <C> <C>
Montgomery Asset Management, Inc. None None
General Partner
R. Stephen Doyle Montgomery Asset Management, Inc. Chairman and Director
Chairman, Managing Director of 600 Montgomery Street
Mutual Funds and Executive Vice San Francisco, CA 94111
President
Montgomery Securities Managing Director
600 Montgomery Street
San Francisco, CA 94111
Mark B. Geist Montgomery Asset Management, Inc. Director and President
President
John T. Story None None
Managing Director of Mutual Funds
and Executive Vice President
Mary Jane Fross None None
Manager of Mutual Fund
Administration and Finance
Josephine Jimenez None None
Managing Director and Portfolio
Manager
Bryan L. Sudweeks None None
Managing Director and Portfolio
Manager
Stuart O. Roberts None None
Managing Director and Portfolio
Manager
John H. Brown Merus Capital Management* Portfolio Manager and Analyst
Managing Director and Senior 475 Sansome Street
Portfolio Manger San Francisco, CA 94111
William C. Stevens None None
Managing Director and Portfolio
Manager
Roger Honour None None
Managing Director and Senior
Portfolio Manager
Oscar Castro None None
Managing Director and Portfolio
Manager
John Boich None None
Managing Director and Portfolio
Manager
(i) Harris serves as a subadviser to the Registrant's New England Star
Worldwide Fund and New England Star Small Cap Fund and is wholly owned
by NEIC. Harris serves as investment adviser to mutual funds,
individuals, trusts, retirement plans, endowments and foundations, and
manages several private partnerships, and is a registered commodity
trading adviser and commodity pool operator. Harris's general partner,
directors and officers have been engaged during the past two fiscal
years in the following business, professions, vocations or employments
of a substantial nature:
<CAPTION>
Name and Office with Name and Address of Nature of
Harris Other Affiliations Connection
<S> <C> <C>
Harris Associates Inc. Harris Associates Securities, L.P. General Partner
General Partner Two North LaSalle Street
Chicago, IL 60602
Victor Morgenstern None None
Executive and Chief Executive
Officer
Donald Terao None None
Chief Financial Officer,
Treasurer and Secretary
Robert M. Levy None None
President
Roxanne M. Martino None None
Vice President
Anita Nagler None None
Vice President
(j) Robertson Stephens Investment Management, L.P. ("RSIM L.P."), a
subadviser to the Registrant's Star Small Cap Fund provides investment
advice to various clients including public mutual funds, private
limited partnerships and separate accounts. RSIM's directors and
officers have been engaged in the following businesses, professions,
vacations or employments of a substantial nature during the past two
fiscal years (former affiliations are marked with an asterisk):
<CAPTION>
Name and Office with Name and Address of Other Nature of
RSIM, L.P. Affiliations Connection
<S> <C> <C>
George R. Hecht Robertson Stephens & Company LLC Chief Operating Officer and
President (affiliate of/distributor for RSIM, L.P.) Managing Director
555 California Street
San Francisco, CA 94104
Robertson, Stephens & Company Group, L.L.C. Member and Executive
555 California Street Committee Member
San Francisco, CA 94104
Terry R. Otton Robertson Stephens & Company LLC Chief Financial Officer and
Chief Financial Officer Managing Director
Robertson, Stephens & Company Group, L.L.C. Member
Dana K. Welch Robertson Stephens & Company LLC General Counsel
General Counsel
Paul H. Stephens Robertson Stephens & Company LLC Managing Director
Chief Investment Officer
Robertson, Stephens & Company Group, L.L.C. Member and Executive
Committee Member
Amy Hoffman KPMG Peat Marwick* Employee/Senior Manager
Controller 345 Park Avenue
New York, NY 10154
Robert Greenwood Putnam Investments* Project Manager Compliance
Compliance Director One Post Office Square Systems
Boston, MA 02109
Item 29. Principal Underwriter
(a) New England Funds, L.P., the principal underwriter of the Registrant,
also serves as principal underwriter for:
New England Tax Exempt Money Market Trust
New England Cash Management Trust
New England Funds Trust II
New England Funds Trust III
(b) The general partner and officers of the Registrant's principal
underwriter, New England Funds, L.P., and their addresses are as
follows:
<CAPTION>
Positions and Offices with Positions and Offices
Name Principal Underwriter with Registrant
<S> <C> <C>
NEF Corporation General Partner None
Henry L.P. Schmelzer Managing Director, President President and Trustee
and Chief Executive Officer
Bruce R. Speca Managing Director and Executive Vice President Executive Vice President
Robert P. Connolly Managing Director, Senior Vice President, Secretary
General Counsel, Secretary and Clerk
Frank Nesvet Managing Director, Senior Vice President Treasurer
and Chief Financial Officer
James H. Davis Managing Director and Senior Vice President None
Caren I. Leedom Managing Director and Senior Vice President None
Munish Agrawal Vice President None
Elizabeth P. Burns Vice President None
Peter H. Duffy Vice President None
Martin G. Dyer Vice President and Assistant Secretary None
Tracy A. Fagan Vice President None
Raymond K. Girouard Senior Vice President, Treasurer and None
Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Marie G. McKenzie Vice President None
Robert E. O'Hare Vice President, Senior Counsel, Assistant None
Secretary and Assistant Clerk
Kristine E. Swanson Vice President None
Beatriz A. Pina-Smith Vice President and Assistant Controller None
Sharon Wratchford Vice President None
</TABLE>
The principal business address of all the above persons or entities is 399
Boylston Street, Boston, MA 02116.
(c) Not applicable.
<PAGE>
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents required by the
specified rules:
(a) Registrant
Rule 31a-1(b)(4); Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a); Rule 31a-1(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(i) For New England Growth Fund:
Capital Growth Management Limited Partnership
One International Place
Boston, Massachusetts 02110
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(ii) For series of the Registrant managed by Back Bay
Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Back Bay Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(iii) For New England Star Advisers Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Berger Associates, Inc.
210 University Blvd., Suite 900
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
<PAGE>
Founders Asset Management, Inc.
2930 East Third Ave.
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(iv) For New England Star Worldwide Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Janus Capital Corporation
100 Fillmore Street
East Third Avenue
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Founders Asset Management, Inc.
2930 East Third Avenue
Denver, Colorado 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Montgomery Asset Management, L.P.
600 Montgomery Street
San Francisco, California 94111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(v) For the series of the Registrant managed by Loomis Sayles:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
<PAGE>
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, MA 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(vi) For New England Star Small Cap Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, IL 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Montgomery Asset Management, L.P.
600 Montgomery Street
San Francisco, CA 94111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, MA 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Robertson Stephens & Company
555 California Street
San Francisco, CA 94101
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(d) New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a - 1(d)
Rule 31a - 2(c)
Item 31. Management Services
None.
Item 32. Undertakings
(a) The Registrant undertakes to provide the annual report of any of its series
to any person who receives a prospectus for such series and who requests the
annual report.
<PAGE>
NEW ENGLAND FUNDS TRUST I
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment No. 36 to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
Boston, in the Commonwealth of Massachusetts on the 30th day of June, 1997.
NEW ENGLAND FUNDS TRUST I
By: PETER S. VOSS*
-------------------------
Peter S. Voss
Chief Executive Officer
*By: /s/ ROBERT P. CONNOLLY
-------------------------
Robert P. Connolly
Attorney-In-Fact
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board;
Chief Executive Officer;
Principal Executive
PETER S. VOSS* Officer; Trustee June 30, 1997
- -------------------------
Peter S. Voss
/s/ FRANK NESVET Chief Financial Officer June 30, 1997
- -------------------------
Frank Nesvet
HENRY L. P. SCHMELZER* Trustee June 30, 1997
- -------------------------
Henry L. P. Schmelzer
GRAHAM T. ALLISON, JR.* Trustee June 30, 1997
- -------------------------
Graham T. Allison, Jr.
DANIEL M. CAIN* Trustee June 30, 1997
- -------------------------
Daniel M. Cain
KENNETH J. COWAN* Trustee June 30, 1997
- -------------------------
Kenneth J. Cowan
RICHARD DARMAN* Trustee June 30, 1997
- -------------------------
Richard Darman
SANDRA O. MOOSE* Trustee June 30, 1997
- -------------------------
Sandra O. Moose
JOHN A. SHANE* Trustee June 30, 1997
- -------------------------
John A. Shane
PENDLETON P. WHITE* Trustee June 30, 1997
- -------------------------
Pendleton P. White
*By: /s/ ROBERT P. CONNOLLY
----------------------
Robert P. Connolly
Attorney-In-Fact
June 30, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
EX-99.11 Consent of Price Waterhouse LLP
EX-27 Financial Data Schedule
<PAGE>
EX-99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 36 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 7, 1997 relating to the financial
statements and the financial highlights appearing in the December 31, 1996
Annual Report to Shareholders of New England Funds Trust I, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Independent Accountants" in such
Prospectuses and to the reference to us under the heading "Financial Statements"
in the Statement of Additional Information.
/s/ Price Waterhouse LLP
- ----------------------------
Price Waterhouse LLP
Boston, Massachusetts
June 23, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK>
<NAME>
<SERIES>
<NUMBER> 131
<NAME> NEW ENGLAND STAR SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 57,688,985
<INVESTMENTS-AT-VALUE> 64,001,854
<RECEIVABLES> 665,859
<ASSETS-OTHER> 318,076
<OTHER-ITEMS-ASSETS> 48,027
<TOTAL-ASSETS> 1,031,962
<PAYABLE-FOR-SECURITIES> 2,335,800
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME>
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<NAME> NEW ENGLAND STAR SMALL CAP FUND
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