<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>
[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 JUNE 30, 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 May
1, 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
<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>
[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
STATEMENT OF ADDITIONAL INFORMATION -- PART II
MAY 1, 1997
AS REVISED JUNE 30, 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 and New England Funds Trust II (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 (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")
</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
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
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
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
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
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 both
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 4 trusts
collectively, the "New England Funds Trusts"), comprising as of May 1,
1997 a total of 22 mutual fund portfolios, a retainer fee at the annual rate of
$40,000 and meeting attendance fees of $2,500 for each meeting of the boards he
or she attends and $1,500 for each meeting he or she attends of a committee of
the board of which he or she is a member. Each committee chairman receives an
additional retainer fee at the annual rate of $2,500. These fees are allocated
among the Funds and the 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 Retirement Total
Compensation Compensation Benefits Estimated Compensation
from from Accrued as Annual from the
New England New England Part of Fund Benefits New England
Funds Trust I Funds Trust II Expenses Upon Funds Trusts
Name of Trustee in 1996 in 1996 in 1996 Retirement in 1996
--------------- ------------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $30,251 $16,901 $0 $0 $54,500
Daniel M. Cain (a) $28,317 $16,113 $0 $0 $51,250
Kenneth J. Cowan $33,997 $18,946 $0 $0 $61,250
Richard Darman (a) $26,750 $15,242 $0 $0 $48,500
Sandra O. Moose $32,500 $18,537 $0 $0 $59,000
James H. Scott (b) $ 7,907 $ 4,166 $0 $0 $14,000
John A. Shane $32,501 $18,537 $0 $0 $59,000
Pendleton P. White $31,751 $17,992 $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. 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 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 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 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.
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, 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, $98,321 and $24,445, respectively.
- --------------------------------------------------------------------------------
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 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
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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 Growth Fund and the Municipal Income Fund currently
offer two classes of shares, the Government Securities, Star Worldwide and Star
Small Cap Funds, each currently offer three classes of shares and the Capital
Growth, Balanced, Value, International Equity, Star Advisers, Strategic Income
and Bond Income Funds each currently offers four classes of shares. Until
September 1986, the name of the Trust was "New England Life Government
Securities Trust"; from September 1986 to April 1994, its name was "The New
England Funds." Prior to January 5, 1996, the name of the Municipal Income Fund
was "New England Tax Exempt Income Fund." The initial portfolio of the Trust
(the Fund now called New England Government Securities Fund) commenced
operations on September 16, 1985. The International Equity Fund commenced
operations on May 22, 1992. The Capital Growth Fund was organized in 1992 and
commenced operations on August 3, 1992. The Star Advisers Fund was organized in
1994 and commenced operations on July 7, 1994. The Strategic Income Fund was
organized in 1995 and commenced operations on May 1, 1995. 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.
The Declarations of Trust of New England Funds Trust I and New England
Funds Trust II currently permit each Trust's trustees to issue an unlimited
number of full and fractional shares of each series. Each Fund is represented by
a particular series of shares. The Declarations of Trust further permit each
Trust's trustees to divide the shares of each series into any number of separate
classes, each having such rights and preferences relative to other classes of
the same series as the trustees may determine. The shares of each Fund do not
have any preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of each class of the Fund
are entitled to share pro rata in the net assets attributable to that class of
shares of the Fund available for distribution to shareholders. The Declarations
of Trust also permit the trustees to charge shareholders directly for custodial,
transfer agency and servicing expenses.
The shares of all the Funds (except as noted in the first two
paragraphs of this section) are divided into four classes, Class A, Class B,
Class C and Class Y. Each Fund offers such classes of shares as set forth in
such Fund's Prospectus. Class Y shares are available for purchase only by
certain eligible institutional investors and have higher minimum purchase
requirements than Classes A, B and C. All expenses of each Fund [excluding
transfer agency fees and expenses of printing and mailing Prospectuses to
shareholders ("Other Expenses")] are borne by its Class A, B, C and Y shares on
a pro rata basis, except for 12b-1 fees, which are borne only by Classes A, B
and C and may be charged at a separate rate to each such class. Other Expenses
of Classes A, B and C are borne by such classes on a pro rata basis, but Other
Expenses relating to the Class Y shares may be allocated separately to the Class
Y shares.
The assets received by each class of a Fund for the issue or sale of
its shares and all income, earnings, profits, losses and proceeds therefrom,
subject only to the rights of the creditors, are allocated to, and constitute
the underlying assets of, that class of a Fund. The underlying assets of each
class of a Fund are segregated and are charged with the expenses with respect to
that class of a Fund and with a share of the general expenses of the relevant
trust. Any general expenses of the Trust that are not readily identifiable as
belonging to a particular class of a Fund are allocated by or under the
direction of the trustees in such manner as the trustees determine to be fair
and equitable. While the expenses of each Trust are allocated to the separate
books of account of each Fund, certain expenses may be legally chargeable
against the assets of all of the Funds in a Trust.
The Declarations of Trust also permit each Trust's trustees, without
shareholder approval, to subdivide any series or class of shares or fund into
various sub-series or sub-classes with such dividend preferences and other
rights as the trustees may designate. While the trustees have no current
intention to exercise this power, it is intended to allow them to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The trustees may also,
without shareholder approval, establish one or more additional series or classes
or merge two or more existing series or classes.
The Declarations of Trust provide for the perpetual existence of the
Trusts. Either Trust or any Fund, however, may be terminated at any time by vote
of at least two-thirds of the outstanding shares of each Fund affected.
Similarly, any class within a Fund may be terminated by vote of at least
two-thirds of the outstanding shares of such class. While each Declaration of
Trust further provides that the board of trustees may also terminate the
relevant Trust upon written notice to its shareholders, the 1940 Act requires
that the Trust receive the authorization of a majority of its outstanding shares
in order to change the nature of its business so as to cease to be an investment
company.
Voting Rights
As summarized in the Prospectuses, shareholders are entitled to one
vote for each full share held (with fractional votes for each fractional share
held) and may vote (to the extent provided therein) in the election of trustees
and the termination of the Trust and on other matters submitted to the vote of
shareholders.
The Declarations of Trust provide that on any matter submitted to a
vote of all shareholders of a Trust, all Trust shares entitled to vote shall be
voted together irrespective of series or class unless the rights of a particular
series or class would be adversely affected by the vote, in which case a
separate vote of that series or class shall also be required to decide the
question. Also, a separate vote shall be held whenever required by the 1940 Act
or any rule thereunder. Rule 18f-2 under 1940 Act provides in effect that a
series or class shall be deemed to be affected by a matter unless it is clear
that the interests of each series or class in the matter are substantially
identical or that the matter does not affect any interest of such series or
class. On matters affecting an individual series or class, only shareholders of
that series or class are entitled to vote. Consistent with the current position
of the SEC, shareholders of all series and classes vote together, irrespective
of series or class, on the election of trustees and the selection of the Trust's
independent accountants, but shareholders of each series vote separately on
other matters requiring shareholder approval, such as certain changes in
investment policies of that series or the approval of the investment advisory
and subadvisory agreement relating to that series, and shareholders of each
class within a series vote separately as to the Rule 12b-1 plan (if any)
relating to that class.
There will normally be no meetings of shareholders for the purpose of
electing trustees except that, in accordance with the 1940 Act, (i) a Trust will
hold a shareholders' meeting for the election of trustees at such time as less
than a majority of the trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy on the board of trustees,
less than two-thirds of the trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with a Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of shares having a net asset value
of at least $25,000 or at least 1% of the outstanding shares stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
trustee, the Trusts have undertaken to provide a list of shareholders or to
disseminate appropriate materials (at the expense of the requesting
shareholders).
Except as set forth above, the trustees shall continue to hold office
and may appoint successor trustees. Shareholder voting rights are not
cumulative.
No amendment may be made to a Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the relevant Trust
except (i) to change the Trust's or a Fund's name or to cure technical problems
in the Declaration of Trust, (ii) to establish and designate new series or
classes of Trust shares and (iii) to establish, designate or modify new and
existing series or classes of Trust shares or other provisions relating to Trust
shares in response to applicable laws or regulations.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Trust.
However, the Declarations of Trust disclaim shareholder liability for acts or
obligations of a Trust and require that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by a Trust or
the trustees. The Declarations of Trust provide for indemnification out of each
Fund's property for all loss and expense of any shareholder held personally
liable for the obligations of the Fund by reason of owning shares of such Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and a Fund itself would be unable to meet
its obligations.
The Declarations of Trust further provide that the relevant board of
trustees will not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declarations of Trust protects a trustee against any
liability to which the trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. The By-Laws of each Trust provide
for indemnification by the Trust of trustees and officers of the relevant Trust,
except with respect to any matter as to which any such person did not act in
good faith in the reasonable belief that his or her action was in or not opposed
to the best interests of the Trust. Such persons may not be indemnified against
any liability to the Trust or the Trust's shareholders to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
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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.
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.
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REDEMPTIONS
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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.
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STANDARD PERFORMANCE MEASURES
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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.
