Registration Nos. 2-98326
811-4323
- - - - - - - - - - - - - - -
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- - - - - - - - - - - - - - -
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 37 [ X ]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [ X ]
ACT OF 1940
Amendment No. 38 [ X ]
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(Check appropriate box or boxes)
- - - - - - - - - - - - - - -
NEW ENGLAND FUNDS TRUST I
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices, including Zip Code)
(617) 578-1388
(Registrant's Telephone Number, including Area Code)
- - - - - - - - - - - - - - -
John E. Pelletier, Esq.
New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Copy to:
Edward A. Benjamin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
- - - - - - - - - - - - - - -
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[X ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
NEW ENGLAND FUNDS TRUST I
(Prospectus and Statement of Additional Information)
CROSS-REFERENCE SHEET
Items required by Form N-1A
Item No. of
Form N-1A Caption in Prospectus
--------- ---------------------
1 . . . . . . . . . Cover page
2 . . . . . . . . . Schedule of Fees
3 . . . . . . . . . Financial Highlights
4 . . . . . . . . . Cover page; Additional Facts About
the Funds; Investment Objectives; How
the Funds Pursue Their Objectives;
Fund Investments; Investment Risks
5 . . . . . . . . . Fund Management; Additional Facts
About the Funds
5A . . . . . . . . . None
6 . . . . . . . . . Cover page; Additional Facts About
the Funds; Buying Fund Shares; Owning
Fund Shares; Income Tax Considerations
7 . . . . . . . . . Cover page; Schedule of Fees; Buying
Fund Shares; Owning Fund Shares;
Selling Fund Shares; How Fund Share
Price is Determined; Fund Management
8 . . . . . . . . . Selling Fund Shares; Exchanging Among
New England Funds
9 . . . . . . . . . None
<PAGE>
Item No. of Caption in Statement of
Form N-1A Additional Information
--------- ----------------------
10 . . . . . . . . . Cover page
11 . . . . . . . . . Table of Contents
12 . . . . . . . . . Description of the Trusts and
Ownership of Shares
13 . . . . . . . . . Miscellaneous Investment Practices;
Investment Restrictions
14 . . . . . . . . . Management of the Trusts
15 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
16 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
17 . . . . . . . . . Fund Charges and Expenses; Portfolio
Transactions and Brokerage
18 . . . . . . . . . Description of the Trusts and
Ownership of Shares
19 . . . . . . . . . How to Buy Shares; Net Asset Value
and Public Offering Price; Reduced
Sales Charges; Shareholder Services;
Redemptions
20 . . . . . . . . . Income Dividends, Capital Gain
Distributions and Tax Status
21 . . . . . . . . . Fund Charges and Expenses; Management
of the Trusts
22 . . . . . . . . . Performance Criteria (in Prospectus);
Investment Performance of the Funds;
Standard Performance Measures
23 . . . . . . . . . Financial Statements
<PAGE>
[NEW ENGLAND FUNDS LOGO](R)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND EQUITY INCOME FUND
Prospectus and Application -- May 1, 1998
New England Capital Growth Fund, New England Balanced Fund, New England Growth
Fund, New England International Equity Fund and New England Value Fund, each a
series of New England Funds Trust I, and New England Growth Opportunities Fund,
a series of New England Funds Trust II and New England Equity Income Fund, a
series of New England Funds Trust III, are separate mutual funds (the "Funds"
and each a "Fund"). New England Funds Trust I , New England Funds Trust II and
New England Funds Trust III are referred to in this prospectus as the "Trusts."
Each Fund offers three classes of shares to the general public (Classes A, B and
C), except as described in the next paragraph. The offering price is based on
the net asset value per share next determined after an order is received. Class
A share purchases generally involve a sales charge at the time of purchase. No
initial sales charge applies to Class B and Class C share purchases. A
contingent deferred sales charge (a "CDSC"), however, is imposed upon certain
redemptions of Class B and Class C shares. Class B shares automatically convert
to Class A shares eight years after purchase. Class C shares do not have a
conversion feature. Class B shares and Class C shares bear higher annual 12b-1
fees than Class A shares. See "Buying Fund Shares -- Sales Charges." Through a
separate prospectus, New England Capital Growth Fund, New England Balanced Fund,
New England International Equity Fund, New England Value Fund, New England
Growth Opportunities Fund and New England Equity Income Fund also offer an
additional class of shares, Class Y shares, to certain institutional investors.
To obtain more information about Class Y shares, please call New England Funds,
L.P. (the "Distributor") toll-free at 1-800-225-5478.
New England Growth Fund currently offers only Class A and Class B shares, but
may at a later date offer Class C shares to the general public and/or Class Y
shares to certain institutional investors. If and when New England Growth Fund
offers such additional classes of shares for sale, the Fund will supplement its
prospectus.
This prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Funds dated May
1, 1998 has been filed with the Securities and Exchange Commission (the "SEC")
and is available free of charge. Write to New England Funds, L.P., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at
1-800-225-5478. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the Statement, materials incorporated by reference, and other
information regarding each of the Funds. The Statement contains more detailed
information about the Funds and is incorporated into this prospectus by
reference.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
For general information on the Funds or any of their services and for assistance
in opening an account, contact your investment dealer or call the Distributor
toll free at: 1-800-225-5478.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Page
<S> <C> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
3 Financial Highlights Historical information on the Funds' performance.
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT STRATEGY
12 Investment Objectives The investment goal for each Fund.
12 New England Investment Companies and the
Funds' Adviser and Subadvisers
13 How The Funds Pursue Their Objectives
13 Fund Investments
- ------------------------------------------------------------------------------------------------------------------------------------
15 INVESTMENT RISKS It is important to understand the risks inherent in a
Fund before you invest.
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20 FUND MANAGEMENT
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BUYING FUND SHARES
22 Minimum Investment Everything you need to know to open and add to
22 6 Ways to Buy Fund Shares a New England Funds account.
o Through your investment dealer
o By mail
o By wire transfer of Federal Funds
o By Investment Builder
o By electronic purchase through ACH
o By exchange from another New England Fund
23 Sales Charges
26 Reduced Sales Charges (Class A Shares Only)
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OWNING FUND SHARES
28 Exchanging Among New England Funds New England Funds offers three convenient ways to
29 Fund Dividend Payments exchange Fund shares.
- ------------------------------------------------------------------------------------------------------------------------------------
SELLING FUND SHARES
30 4 Ways to Sell Fund Shares How to withdraw money or close your account.
o Through your investment dealer
o By telephone
o By mail
o By check
o By Systematic Withdrawal Plan
31 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
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FUND DETAILS
32 How Fund Share Price Is Determined Additional information you may find important.
32 Income Tax Considerations
33 The Funds' Expenses
34 Performance Criteria
34 Additional Facts About The Funds
36 Glossary of Terms
</TABLE>
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FUND EXPENSES AND FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Schedule of Fees
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum
3
<PAGE>
transaction costs from investing in Class A, B and C shares of the Funds and
estimated annual expenses for the Funds' Class A, B and C shares. The Example on
the following page shows the cumulative expenses attributable to a hypothetical
$1,000 investment in Class A, B and C shares of the Funds for the periods
specified.
Shareholder transaction expenses
<TABLE>
<CAPTION>
All Funds
----------------------------------
Class A Class B Class C
--------- --------- ----------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(1)(2) .......... 5.75% None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)(2) ........................ (3) 5.00% 1.00%
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See
'"Buying Fund Shares -- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any
portion of certain purchases of Class A shares greater than $1,000,000
redeemed within 1 year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
New England New England New England
Capital Growth Fund Balanced Fund International Equity Fund
------------------------------- -------------------------------- --------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees (in the case
of New England
International Equity Fund,
after voluntary fee
waiver and expense % % % % % % %** %** %**
reduction)...............
12b-1 Fees ................. 0.25 1.00* 0.25 1.00* 1.00* 0.25 1.00* 1.00* 1.00*
Other Expenses .............
Total Fund Operating Expenses
(in the case of New
England International
Equity Fund, after
voluntary fee waiver
and expense reduction)... ** ** **
<CAPTION>
New England New England Growth New England
Value Fund Opportunities Fund Growth Fund
------------------------------- -------------------------------- --------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees ............. % % % % % % % %
12b-1 Fees .................. 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25* 1.00*
Other Expenses ..............
Total Fund Operating
Expenses ....................
</TABLE>
New England Equity Income
Fund
---------------------------------
Class A Class B Class C
---------------------------------
Management Fees ............. % % %
12b-1 Fees .................. 0.25 1.00* 1.00*
Other Expenses ..............
Total Fund Operating
Expenses ....................
* 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.
** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.89% for all classes and Total Fund
Operating Expenses would be 1.79% for Class A shares, 2.54% for Class B
shares and 2.54% for Class C shares. These voluntary limitations can be
terminated by the Fund's adviser at any time. See "Fund Management."
2
<PAGE>
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 may be more or less than
those shown.
<TABLE>
<CAPTION>
New England New England New England
Value Fund Balanced Fund International Equity Fund
------------------------------- -------------------------------- --------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
1 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
3 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
5 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
10 years* ..... $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
<CAPTION>
New England New England New England
Value Fund Opportunities Fund Growth Fund
------------------------------- -------------------------------- ----------------------
Class A Class B Class C Class A Class B Class C Class A Class B
--------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
1 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $
3 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $
5 year ........ $ $ $ $ $ $ $ $ $ $ $ $ $
10 years* ..... $ $ $ $ $ $ $ $ $ $ $ $ $
</TABLE>
New England
Equity Income Fund
-------------------------------
Class A Class B Class C
--------- --------- ---------
(1) (2) (1) (2)
1 year ........ $ $ $ $ $
3 year ........ $ $ $ $ $
5 year ........ $ $ $ $ $
10 years* ..... $ $ $ $ $
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years 9
and 10.
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management," "The Funds" Expenses" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
3
<PAGE>
Financial Highlights
(For Class A, B and C shares of each Fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 3 through __ have been included in
financial statements for the Funds. The financial statements for the Class A, B
and C shares of New England Capital Growth Fund, New England Balanced Fund, New
England International Equity Fund, New England Value Fund, New England Growth
Opportunities Fund and New England Equity Income Fund and the financial
statements for the Class A shares of New England Growth Fund (which had only one
class of shares outstanding through 1996) have been examined by Price Waterhouse
LLP (and by Coopers & Lybrand, LLP, for pre-1997 data), independent accountants.
The reports of Price Waterhouse LLP and Coopers & Lybrand LLP are incorporated
by reference in Part II of the Statement and may be obtained by shareholders.
The Financial Highlights should be read in conjunction with the financial
statements and the notes thereto incorporated by reference in Part II of the
Statement. Each Fund's annual report contains additional performance information
and is available upon request and without charge.
New England Capital Growth Fund
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------
Aug. 3(a)
through Year Ended December 31,
Dec. 31, -------------------------------------------------
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period $ 12.50 $ 14.23 $ 15.27 $ 15.02 $ 18.41
---------- ---------- ---------- ---------- ----------
Income from investment
operations
Net investment income
(loss) 0.02 0.00 (0.08) (0.11) (0.14))(f)
Net gain or (loss) on
investments (both
realized and unrealized) 1.84 1.12 (0.17) 4.74 3.22
---------- ---------- ---------- ---------- ----------
Total income (loss)
from investment
operations 1.86 1.12 (0.25) 4.63 3.08
---------- ---------- ---------- ---------- ----------
Less distributions
Distributions (from net
investment income) (0.02) 0.00 0.00 0.00 0.00
Distributions (from net
realized capital
gains) (0.11) (0.08) 0.00 (1.24) (2.22)
---------- ---------- ---------- ---------- ----------
Total distributions (0.13) (0.08) 0.00 (1.24) (2.22)
---------- ---------- ---------- ---------- ----------
Net asset value, end of $ 14.23 $ 15.27 $ 15.02 $ 18.41 $ 19.27
period ========== ========== ========== ========== ==========
Total return (%)(c) 14.9 7.9 (1.6) 30.7 17.1
Ratios/Supplemental data
Net assets, end of
period (000) $ 34,772 $ 98,735 $ 95,803 $ 123,504 $ 141,326
Ratio of operating
expenses to average
net assets (%)(d) 1.00(b) 1.23 1.63 1.61 1.50
Ratio of net investment
income (loss) to
average net assets (%) 0.74(b) (0.03) (0.45) (0.67) (0.71)
Portfolio turnover
rate(%) 15 77 82 69 74
Average commission rate
paid(g) -- -- -- -- $ 0.0509
</TABLE>
4
<PAGE>
New England Capital Growth Fund
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------------ ------------------------------------
Sept. 13(a) Year Ended
through Year Ended December 31, December 31,
Dec. 31, ------------------------------------------------ ------------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period $ 14.79 $ 15.24 $ 14.89 $ 18.09 $ 14.89 $ 18.08
--------- --------- --------- --------- --------- --------- --------- ---------
Income from investment
operations
Net investment income
(loss) 0.00 (0.08) (0.16)(e) (0.28) (0.09) (0.28)(f)
Net gain or (loss) on
investments (both
realized and
unrealized) 0.53 (0.27) 4.60 3.15 4.52 3.16
--------- --------- --------- --------- --------- --------- --------- ---------
Total income (loss)
from investment
operations 0.53 (0.35) 4.44 2.87 4.43 2.88
--------- --------- --------- --------- --------- --------- ---------
Less distributions
Distributions (from net
investment income) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions (from net
realized capital
gains) (0.08) 0.00 (1.24) (2.22) (1.24) (2.22)
--------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.08) 0.00 (1.24) (2.22) (1.24) (2.22)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of $ 15.24 $ 14.89 $ 18.09 $ 18.74 $ 18.08 $ 18.74
period
========= ========= ========= ========= ========= ========= ========= =========
Total return (%)(c) 3.6 (2.3) 29.7 16.2 29.7 16.2
Ratios/Supplemental data
Net assets, end of
period (000) $ 6,748 $ 15,390 $ 26,234 $ 37,439 $ 354 $ 504
Ratio of operating
expenses to average
net assets
(%)(d) 2.29(b) 2.38 2.36 2.25 2.36 2.25
Ratio of net investment
income (loss) to
average net
assets (%) (1.15)(b) (1.20) (1.42) (1.46) (1.42) (1.46)
Portfolio turnover
rate (%) 77 82 69 74 69 74
Average commission rate
paid(g) -- -- -- $ 0.0509 -- $ 0.0509
</TABLE>
(a) The Fund commenced operations on August 3, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on
January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving
effect to the voluntary expense limitations in effect from August 3, 1992
through September 30, 1993 would have been: (%)
Class A Class B
----------------------------------- ----------------
8/3/92 Year Ended_ 9/13/93-
12/31/92 12/31/93 12/31/93
---------------- ---------------- ----------------
2.20(b) 1.58 2.97(b)
(e) Per share net investment income (loss) does not reflect current period's
reclassification of permanent differences between book and tax basis net
investment income (loss).
(f) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 16, 1998. These
financial highlights reflect results achieved by the previous subadvisor.
5
<PAGE>
New England Growth Fund
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.59 $7.46 $8.49 $8.85 $11.19 $10.08
---------------------------------------------------------------------------------------
Income from investment operations
Net investment
income (loss) 0.28 0.09 0.07 0.10 0.09 0.02
Net gains or losses on investments
(both realized and unrealized) (0.17) 1.56 0.38 4.92 (0.83) 1.12
---------------------------------------------------------------------------------------
Total income (loss) from
investment operations 0.11 1.65 0.45 5.02 (0.74) 1.14
---------------------------------------------------------------------------------------
Less distributions
Distributions (from net
investment income) (0.24) (0.11) (0.09) (0.10) (0.09) (0.01)
Distributions (from net
realized capital gains) 0.00 (0.46) 0.00 (2.57) (0.28) (0.77)
Distributions (from
paid-in capital) 0.00 (0.05) 0.00 (0.01) 0.00 0.00
---------------------------------------------------------------------------------------
Total distributions (0.24) (0.62) (0.09) (2.68) (0.37) (0.78)
---------------------------------------------------------------------------------------
Net asset value,
end of period $7.46 $8.49 $8.85 $11.19 $10.08 $10.44
=======================================================================================
Total return (%)(b) 1.5 22.3 5.1 56.7 (6.6) 11.3
Ratios/Supplemental data
Net assets, end of
period (000) $462,495 $555,659 $614,018 $996,813 $1,173,948 $1,200,515
Ratio of operating expenses to
average net assets (%) 1.26 1.22 1.23 1.14 1.15 1.18
Ratio of net investment income
to average net assets (%) 3.64 1.19 0.77 0.89 0.89 0.16
Portfolio turnover rate (%) 283 203 185 186 218 145
Average commission
rate paid(c) -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
-----------------------------------------------------
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $10.44 $8.87 $10.55
-----------------------------------------------------
Income from investment operations
Net investment
income (loss) 0.11 0.05 0.04
Net gains or losses on investments
(both realized and unrealized) (0.84) 3.30 2.07
-----------------------------------------------------
Total income (loss) from
investment operations (0.73) 3.35 2.11
-----------------------------------------------------
Less distributions
Distributions (from net
investment income) (0.11) (0.05) (0.04)
Distributions (from net
realized capital gains) (0.73) (1.62) (0.99)
Distributions (from
paid-in capital) 0.00 0.00 0.00
-----------------------------------------------------
Total distributions (0.84) (1.67) (1.03)
-----------------------------------------------------
Net asset value,
end of period $8.87 $10.55 $11.63
=====================================================
Total return (%)(b) (7.1) 38.1 20.9
Ratios/Supplemental data
Net assets, end of
period (000) $988,430 $1,201,110 $1,296,542
Ratio of operating expenses to
average net assets (%) 1.19 1.20 1.18
Ratio of net investment income
to average net assets (%) 1.05 0.42 0.33
Portfolio turnover rate (%) 141 235 199
Average commission
rate paid(c) -- -- $0.0668
</TABLE>
6
<PAGE>
New England Growth Fund continued
Class B
-------
February ___,
through
Dec. 31,
1997
----
Net asset value,
beginning of period
Income from investment operations
Net investment
income (loss)
Net gains or losses on investments
(both realized and unrealized)
Total income (loss) from
investment operations
Less distributions
Distributions (from net
investment income)
Distributions (from net
realized capital gains)
Distributions (from
paid-in capital)
Total distributions
Net asset value,
end of period
Total return (%)(b)
Ratios/Supplemental data
Net assets, end of
period (000)
Ratio of operating expenses to
average net assets (%)
Ratio of net investment income
to average net assets (%)
Portfolio turnover rate (%)
Average commission
rate paid(c)
(a) Net investment income per share has been calculated based upon the
averages of monthly shares outstanding.
(b) A sales charge was not reflected in total return calculations.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
7
<PAGE>
New England Balanced Fund (a)
<TABLE>
<CAPTION>
Class A
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.94 $ 9.50 $ 9.47 $ 8.11 $ 10.15 $ 11.16
--------- --------- --------- --------- --------- ---------
Income from investment
operations
Net investment income 0.39 0.34 0.35 0.30 0.30 0.31
Net gains or losses on
investments (both
realized and
unrealized) 050 0.65 (1.34) 2.05 1.10 1.26
--------- --------- --------- --------- --------- ---------
Total income (loss)
from investment
operations 0.89 0.99 (0.99) 2.35 1.40 1.57
--------- --------- --------- --------- --------- ---------
Less distributions
Distributions (from net
investment income) (0.33) (0.41) (0.35) (0.30) (0.30) (0.31)
Distributions (from net
realized capital
gains) 0.00 (0.61) 0.00 0.00 (0.09) (0.29)
Distributions (from
paid-in capital) 0.00 0.00 (0.02) (0.01) 0.00 0.00
--------- --------- --------- --------- --------- ---------
Total distributions (0.33) (1.02) (0.37) (0.31) (0.39) (0.60)
--------- --------- --------- --------- --------- ---------
Net asset value, end of
period $ 9.50 $ 9.47 $ 8.11 $ 10.15 $ 11.16 $ 12.13
========= ========= ========= ========= ========= =========
Total return (%)(d) 10.0 10.4 (10.6) 29.2 13.9 14.2
Ratios/Supplemental data
Net assets, end of
period (000) $ 51,902 $ 59,405 $ 52,134 $ 67,467 $ 90,527 $ 158,308
Ratio of operating
expenses to average
net assets (%) 1.52 1.52 1.58 1.53 1.48 1.40
Ratio of net investment
income to average net
assets (%) 4.19 3.35 4.00 3.18 2.84 2.66
Portfolio turnover
rate (%) 58 111 68 51 38 50
Average commission
rate paid (e) -- -- -- -- -- --
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.13 $ 11.27 $ 13.14
--------- --------- --------- ---------
Income from investment
operations
Net investment income 0.33 0.42 0.38
Net gains or losses on
investments (both
realized and
unrealized) (0.65) 2.49 1.76
--------- --------- --------- ---------
Total income (loss)
from investment
operations (0.32) 2.91 2.14
--------- --------- --------- ---------
Less distributions
Distributions (from net
investment income) (0.33) (0.40) (0.39)
Distributions (from net
realized capital
gains) (0.21) (0.64) (0.95)
Distributions (from
paid-in capital) 0.00 0.00 0.00
--------- --------- --------- ---------
Total distributions (0.54) (1.04) (1.34)
--------- --------- --------- ---------
Net asset value, end of
period $ 11.27 $ 13.14 $ 13.94
========= ========= ========= =========
Total return (%)(d) (2.7) 26.3 17.1
Ratios/Supplemental data
Net assets, end of
period (000) $ 158,332 $ 196,514 $ 219,626
Ratio of operating
expenses to average
net assets (%) 1.40 1.36 1.33
Ratio of net investment
income to average net
assets (%) 2.91 3.37 2.79
Portfolio turnover
rate (%) 36 54 70
Average commission
rate paid (e) -- -- $ 0.0577
</TABLE>
(a) The Fund was changed from an "equity income" fund to a "balanced" fund on
March 1, 1990. Results for periods prior to March 1, 1990 reflect former
investment policies and are not necessarily representative of results that
would have been achieved had the Fund's current investment policies then
been in effect.
(b) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(e) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
8
<PAGE>
New England Balanced Fund (a) continued
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------------------------------------
Sept. 13(b)
through Year Ended December 31, Year Ended December 31,
Dec. 31, ------------------------------ -------- ----------------------------------
1993 1994 1995 1996 1997 1995(b) 1996 1997
-------- -------- -------- ------------------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.16 $12.11 $11.24 $13.08 $11.24 $13.05
-------- -------- -------- ------------------- -------- --------------------
Income from investment operations
Net investment income 0.16 0.26 0.34 0.29 0.35 0.29
Net gains or losses on investments
(both realized and unrealized) 0.24 (0.66) 2.46 1.74 2.44 1.73
-------- -------- -------- ------------------- -------- --------------------
Total income (loss) from investment
operations 0.40 (0.40) 2.80 2.03 2.79 2.02
-------- -------- -------- ------------------- -------- --------------------
Less distributions
Distributions (from net investment
income) (0.16) (0.26) (0.32) (0.30) (0.34) (0.30)
Distributions (from net realized
capital gains) (0.29) (0.21) (0.64) (0.95) (0.64) (0.95)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- ------------------- -------- --------------------
Total distributions (0.45) (0.47) (0.96) (1.25) (0.98) (1.25)
-------- -------- -------- ------------------- -------- --------------------
Net asset value, end of period $12.11 $11.24 $13.08 $13.86 $13.05 $13.82
======== ======== ======== =================== ======== ====================
Total return (%)(d) 3.3 (3.4) 25.3 16.3 25.2 16.2
Ratios/Supplemental data
Net assets, end of period (000) $4,691 $21,607 $40,361 $58,367 $718 $2,538
Ratio of operating expenses to
average net assets (%) 2.36(c) 2.15 2.11 2.08 2.11 2.08
Ratio of net investment income to
average net assets (%) 1.92(c) 2.16 2.62 2.04 2.62 2.04
Portfolio turnover rate (%) 50 36 54 70 54 70
Average commission rate paid (e) -- -- -- $0.0577 -- $0.0577
</TABLE>
(a) The Fund was changed from an "equity income" fund to a "balanced" fund on
March 1, 1990. Results for periods prior to March 1, 1990 reflect former
investment policies and are not necessarily representative of results that
would have been achieved had the Fund's current investment policies then
been in effect.
(b) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(c) Computed on an annualized basis.
(d) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(e) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
9
<PAGE>
New England International Equity Fund
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------
May 21(a)
through Year Ended December 31,
Dec. 31, ------------------------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $12.50 $11.80 $14.85 $15.50 $16.13
--------- --------- --------- --------- ------------------------
Income from investment
operations
Net investment income
(loss) 0.01 0.11 0.00 0.27 0.02(e)
Net gains or losses on
investments (both
realized and
unrealized) (0.63) 3.37 1.19 0.63 0.51
--------- --------- --------- --------- ------------------------
Total income (loss)
from investment
operations (0.62) 3.48 1.19 0.90 0.53
--------- --------- --------- --------- ------------------------
Less distributions
Distributions (from net
investment income) (0.01) (0.11) 0.00 (0.27) (0.02)
Distributions (from net
realized capital
gains) 0.00 (0.32) (0.53) 0.00 (0.33)
Distributions (from paid
in capital) (0.07) 0.00 (0.01) 0.00 0.00
--------- --------- --------- --------- ------------------------
Total distributions (0.08) (0.43) (0.54) (0.27) (0.35)
========= ========= ========= ========= ========================
Net asset value, end of
period $11.80 $14.85 $15.50 $16.13 $16.31
Total return (%)(c) (5.0) 29.4 8.1 5.8 3.3
Ratios/Supplemental data
Net assets, end of
period (000) $21,731 $80,937 $142,917 $136,848 $109,773
Ratio of operating
expenses to average
net assets (%)(d) 1.50(b) 1.60 1.75 1.75 1.75
Ratio of net investment
income (loss) to
average net assets (%) 0.10(b) 0.24 0.01 1.24 0.14
Portfolio turnover
rate (%) 62 101 123 119 59
Average commission rate
paid (f) -- -- -- -- $0.0180
</TABLE>
10
<PAGE>
New England International Equity Fund continued
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------------------- ------------------------------------
Year Ended December 31, Year Ended December 31,
---------------------------------------------------------- ------------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $15.19 $14.81 $15.35 $15.93 $15.35 $15.96
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income
(loss) 0.12 0.00 0.19 (0.10)(e) 0.19 (0.10)(e)
Net gains or losses on
investments (both
realized and
unrealized) (0.06) 1.08 0.58 0.50 0.61 0.50
-------- -------- -------- -------- -------- --------
Total income (loss)
from investment
operations 0.06 1.08 0.77 0.40 0.80 0.40
-------- -------- -------- -------- -------- --------
Less distributions
Distributions (from net
investment income) (0.12) 0.00 (0.19) 0.00 (0.19) 0.00
Distributions (from net
realized capital
gains) (0.32) (0.53) 0.00 (0.33) 0.00 (0.33)
Distributions (from paid
in capital) 0.00 (0.01) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions (0.44) (0.54) (0.19) (0.33) (0.19) (0.33)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $14.81 $15.35 $15.93 $16.00 $15.96 $16.03
======== ======== ======== ======== ======== ========
Total return (%)(c) 0.3 7.3 5.0 2.5 5.2 2.5
Ratios/Supplemental data
Net assets, end of
period (000) $9,176 $41,601 $52,895 $45,974 $1,066 $850
Ratio of operating
expenses to average
net assets
(%)(d) 2.50(b) 2.50 2.50 2.50 2.50 2.50
Ratio of net investment
income (loss) to
average net assets (%) (1.69)(b) (0.74) 0.49 (0.61) 0.49 (0.61)
Portfolio turnover
rate (%) 101 123 119 59 119 59
Average commission rate
paid (f) -- -- -- $0.0180 -- $0.0180
</TABLE>
(a) The Fund commenced operations on May 21, 1992. Class B shares were first
offered on September 13, 1993. Class C shares were first offered on
January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) The ratio of operating expenses to average net assets without giving
effect to the voluntary expense limitations would have been: (%)
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------- ------------------------------------ -----------------
May 21 Sept. 13 Year Ended
through Year Ended December 31, through Year Ended December 31, December 31,
Dec. 31, ------------------------------------- Dec. 31, -------------------------- -----------------
1992 1993 1994 1995 1996 1993 1994 1995 1996 1995(a) 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2.89(b) 2.16 1.79 1.83 1.79 3.36(b) 2.54 2.58 2.54 2.58 2.54
</TABLE>
(e) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(f) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
The Fund's current subadviser assumed that function on February 14, 1997. These
financial highlights reflect results achieved by the previous subadviser under
different investment policies.
11
<PAGE>
New England Value Fund
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $6.42 $6.07 $6.51 $5.44 $6.69 $7.28 $7.87
-------- -------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.20 0.12 0.16 0.13 0.09 0.07 0.08
Net gains or losses on
investments (both realized and
unrealized) (0.34) 1.25 (1.04) 1.35 1.02 1.16 (0.19)
-------- -------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations (0.14) 1.37 (0.88) 1.48 1.11 1.23 (0.11)
-------- -------- -------- -------- -------- -------- --------
Less distributions
Distributions (from net
investment income) (0.21) (0.12) (0.16) (0.13) (0.09) (0.07) (0.08)
Distributions (from net
realized capital gains) 0.00 (0.80) 0.00 (0.10) (0.43) (0.57) (0.41)
Distributions (from paid-in
capital) 0.00 (0.01) (0.03) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.21) (0.93) (0.19) (0.23) (0.52) (0.64) (0.49)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $6.07 $6.51 $5.44 $6.69 $7.28 $7.87 $7.27
======== ======== ======== ======== ======== ======== ========
Total return (%)(c) (2.2) 22.6 (13.6) 27.1 16.6 17.0 (1.4)
Ratios/Supplemental data
Net assets, end of period
(000) 136,443 $146,831 $139,248 $145,790 $156,240 $189,779 $190,869
Ratio of operating expenses
to average net assets (%) 1.29 1.29 1.31 1.28 1.32 1.34 1.37
Ratio of net investment income
to average net assets (%) 3.13 1.69 2.87 1.84 1.26 0.83 1.00
Portfolio turnover rate (%) 243 298 8 33 38 40 29
Average commission rate
paid (d) -- -- -- -- -- -- --
</TABLE>
--------------------------------
--------------------------------
1995 1996 1997
-------- -------- --------
Net asset value, beginning of
period $7.27 $8.78
-------- -------- --------
Income from investment operations
Net investment income 0.10 0.06
Net gains or losses on
investments (both realized and
unrealized) 2.21 2.12
-------- -------- --------
Total income (loss) from
investment operations 2.31 2.18
-------- -------- --------
Less distributions
Distributions (from net
investment income) (0.09) (0.06)
Distributions (from net
realized capital gains) (0.71) (1.30)
Distributions (from paid-in
capital) 0.00 0.00
-------- -------- --------
Total distributions (0.80) (1.36)
-------- -------- --------
Net asset value, end of period $8.78 $9.60
======== ======== ========
Total return (%)(c) 32.3 26.3
Ratios/Supplemental data
Net assets, end of period
(000) $241,038 $297,581
Ratio of operating expenses
to average net assets (%) 1.37 1.31
Ratio of net investment income
to average net assets (%) 1.22 0.78
Portfolio turnover rate (%) 52 64
Average commission rate
paid (d) -- $0.0574
(a) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
12
<PAGE>
New England Value Fund continued
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------- -------------------------------
Sept. 13(a)
through Year Ended December 31, Year Ended December 31,
Dec. 31, ---------------------------------------- -------------------------------
1993 1994 1995 1996 1997 1995(a) 1996 1997
------ ------- ------- ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.97 $7.85 $7.23 $8.70 $7.23 $8.70
------ ------- ------- ------------------ ------ ------
Income from investment operations
Net investment income 0.11 0.04 0.05 0.01 0.05 0.01
Net gains or losses on investments (both
realized and unrealized) 0.39 (0.20) 2.18 2.07 2.18 2.06
------ ------- ------- ------------------ ------ ------
Total income (loss) from investment
operations 0.50 (0.16) 2.23 2.08 2.23 2.07
------ ------- ------- ------------------ ------ ------
Less distributions
Distributions (from net investment income) (0.05) (0.05) (0.05) (0.01) (0.05) (0.01)
Distributions (from net realized capital
gains) (0.57) (0.41) (0.71) (1.30) (0.71) (1.30)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------- ------- ------------------ ------ ------
Total distributions (0.62) (0.46) (0.76) (1.31) (0.76) (1.31)
------ ------- ------- ------------------ ------ ------
Net asset value, end of period $7.85 $7.23 $8.70 $9.47 $8.70 $9.46
====== ======= ======= ================== ====== ===== ======
Total return (%)(c) 6.5 (2.0) 31.3 25.4 31.3 25.2
Ratios/Supplemental data
Net assets, end of period (000) $2,182 $13,830 $27,941 $48,210 $1,224 $3,735
Ratio of operating expenses to average net
assets (%) 2.16(b) 2.12 2.12 2.06 2.12 2.06
Ratio of net investment income to average
net assets (%) 0.05(b) 0.25 0.47 0.03 0.47 0.03
Portfolio turnover rate (%) 40 29 52 64 52 64
Average commission rate paid (d) -- -- -- $0.0574 -- $0.0574
</TABLE>
(a) Class B shares were first offered on September 13, 1993. Class C shares
were first offered on January 3, 1995.
(b) Computed on an annualized basis.
(c) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Periods of less than one year are not annualized.
(d) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
13
<PAGE>
<TABLE>
<CAPTION>
New England Growth Opportunities Fund
Class A
--------------------------------------------------------------------------------------------------
Seven
Months
Year Ended Ended
May 31, December 31, Year Ended December 31,
------------------ ----------------------------------------------------------
1987 1988(b) 1988(b) 1989 1990 1991 1992 1993(a)
------ ------- ------- ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.70 $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20
------ ------ ------ ----- ------ ----- ------ ------
Income from investment
operations
Net investment income 0.35 0.33 0.19 0.29 0.30 0.26 0.23 0.21
Net gains or losses on
investments (both
realized and unrealized) 0.73 (1.22) 0.25 2.32 (0.76) 2.63 0.86 0.75
------ ------ ------ ----- ------ ----- ------ ------
Total income (loss) from
investment operations 1.08 (0.89) 0.44 2.61 (0.46) 2.89 1.09 0.96
------ ------ ------ ----- ------ ----- ------ ------
Less distributions
Distributions
(from net investment income) (0.34) (0.35) (0.18) (0.29) (0.30) (0.26) (0.23) (0.21)
Distributions (in excess of
net
investment income) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01)
Distributions (from net
realized capital gains) (1.52) (0.30) (1.08) (0.95) (0.56) (0.38) (0.45) (0.27)
Distributions (from paid-in
capital) 0.00 (0.01) 0.00 (0.04) (0.02) 0.00 0.00 0.00
------ ------ ------ ----- ------ ----- ------ ------
Total distributions (1.86) (0.66) (1.26) (1.28) (0.88) (0.64) (0.68) (0.49)
------ ------ ------ ----- ------ ----- ------ ------
Net asset value, end of
period $11.92 $10.37 $9.55 $10.88 $9.54 $11.79 $12.20 $12.67
------ ------ ------ ----- ------ ----- ------ ------
Total return (%)(f) 8.9 (7.3) 7.3(e) 27.6 (4.3) 30.6 9.3 8.0
Ratios/Supplemental data
Net assets, end
of period (000) $70,427 $58,552 $55,041 $62,688 $55,726 $70,263 $90,945 $109,168
Ratio of operating expenses
to average net assets (%) 1.24 1.25(d) 1.33(e) 1.15 1.18 1.23 1.94 1.21
Ratio of net investment
income to average net
assets (%) 2.65 2.90 3.10(e) 2.68 2.92 2.28 1.18 1.70
Portfolio turnover rate (%) 25 8 83(e) 17 6 12 10 4
Average commission rate
paid (g) -- -- -- -- -- -- -- --
<CAPTION>
Class A
-----------------------------------
Year Ended December 31,
-----------------------------------
1994 1995 1996 1997
------ ------ ------ ----
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $12.67 $12.41 $14.39
------ ------ ------
Income from investment
operations
Net investment income 0.22 0.18 0.13
Net gains or losses on
investments (both
realized and unrealized) (0.10) 4.01 2.07
------ ------ ------
Total income (loss) from
investment operations 0.12 4.19 2.20
------ ------ ------
Less distributions
Distributions
(from net investment income) (0.21) (0.18) (0.13)
Distributions (in excess of
net
investment income) 0.00 0.00 0.00
Distributions (from net
realized capital gains) (0.17) (2.03) (2.59)
Distributions (from paid-in
capital) 0.00 0.00 0.00
------ ------ ------
Total distributions (0.38) (2.21) (2.72)
------ ------ ------
Net asset value, end of
period $12.41 $14.39 $13.87
------ ------ ------
Total return (%)(f) 1.00 35.1 17.2
Ratios/Supplemental data
Net assets, end
of period (000) $104,081 $150,693 $166,963
Ratio of operating expenses
to average net assets (%) 1.28 1.38 1.30
Ratio of net investment
income to average net
assets (%) 1.75 1.31 0.92
Portfolio turnover rate (%) 6 69 127
Average commission rate
paid (g) -- -- $0.0348
</TABLE>
(a) As of January 1, 1993, the Fund discontinued the use of equalization
accounting.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's
former adviser, Back Bay Advisors, L.P., assumed that function on July 27,
1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P.,
voluntarily agreed to limit total Fund expenses to 1.25% of the Fund's
average annual net assets. Without such limitation, the ratio of operating
expenses to average net assets for the year ended May 31, 1988 would have
been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Unless otherwise indicated, periods of less than one year
are not annualized.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
14
<PAGE>
New England Growth Opportunities Fund continued
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------- ---------------------------
Sept. May
13(c) 1(c) Year
through through Ended
Dec. 31, Year Ended December 31, Dec. 31, Dec. 31,
----------------------------------- -------------
1993(a) 1994 1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.95 $12.66 $12.42 $14.40 $13.84 $14.39
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income 0.06 0.16 0.10 0.03 0.06 0.04
Net gains or losses on investments (both
realized and unrealized) 0.01 (0.09) 4.01 2.07 2.58 2.05
------ ------ ------ ------ ------ ------
Total income from investment operations 0.07 0.07 4.11 2.10 2.64 2.09
------ ------ ------ ------ ------ ------
Less distributions
Distributions (from net investment income) (0.03) (0.14) (0.10) (0.04) (0.06) (0.04)
Distributions (in excess of net (0.06) 0.00 0.00 0.00 0.00 0.00
investment income)
Distributions (from net realized capital gains) (0.27) (0.17) (2.03) (2.59) (2.03) (2.59)
Distributions (from paid-in capital) 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions (0.36) (0.31) (2.13) (2.63) (2.09) (2.63)
------ ------ ------ ------ ------ ------
Net asset value, end of period $12.66 $12.42 $14.40 $13.87 $14.39 $13.85
------ ------ ------ ------ ------ ------
Total return (%)(f) 0.6 0.6 34.3 16.3 20.2 16.3
Ratios/Supplemental data
Net assets, end of period (000) $1,498 $5,185 $29,026 $46,856 $4,707 $3,912
Ratio of operating expenses to average 2.08(e) 1.93 2.11 2.05 2.11(e) 2.05
net assets (%)
Ratio of net investment income to average 0.71(e) 1.10 0.56 0.17 0.56(e) 0.17
net assets (%)
Portfolio turnover rate (%) 4 6 69 127 69 127
Average commission rate paid (g) -- -- -- $0.0348 -- $0.0348
</TABLE>
15
<PAGE>
New England Equity Income Fund
<TABLE>
<CAPTION>
Class A Class B Class C
- ----------------------------------------------------------------------- ------------ -----------
Nov. 28(a) Year Sept. 15 Sept. 15
through Ended through through
Dec. 31, Dec 31, Dec. 31, Dec. 31,
------------
1995 1996 1997 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $12.86
- --------------------------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------------------------
Net investment income 0.04 0.31
- --------------------------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) 0.36 3.11
------ ------
- --------------------------------------------------------------------------------------------------
Total income from investment operations 0.40 3.42
------ ------
- --------------------------------------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------------------------------------
Dividends (from net investment income) (0.04) (0.30)
- --------------------------------------------------------------------------------------------------
Distributions (from net realized
capital gains) 0.00 0.83
------ ------
- --------------------------------------------------------------------------------------------------
Total Distributions (0.04) (1.13)
------ ------
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $12.86 $15.15
------ ------
- --------------------------------------------------------------------------------------------------
Total return (%)(c) 3.2 26.6
- --------------------------------------------------------------------------------------------------
Ratios/Supplemental data
Net assets, end of period (000) $2,064 $2,613
- --------------------------------------------------------------------------------------------------
Ratio of operating expenses
to average net assets (%)(d) 1.50(b) 1.50
- --------------------------------------------------------------------------------------------------
Ration of net income to average
net assets (%) 3.58(b) 2.06
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0 45
- --------------------------------------------------------------------------------------------------
Average commission rate paid(e) -- $0.0608
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) As of January 1, 1993, the Fund discontinued the use of equalization
accounting.
(b) Fiscal year end changed in 1988 from May 31 to December 31. The Fund's
former adviser, Back Bay Advisors, L.P., assumed that function on July 27,
1988.
(c) Commencement of offering of Class B or Class C shares.
(d) Until May 18, 1988, the Fund's former adviser, Back Bay Advisors, L.P.,
voluntarily agreed to limit total Fund expenses to 1.25% of the Fund's
average annual net assets. Without such limitation, the ratio of operating
expenses to average net assets for the year ended May 31, 1988 would have
been 1.31%.
(e) Computed on an annualized basis.
(f) A sales charge in the case of the Class A shares and a CDSC in the case of
the Class B and Class C shares are not reflected in total return
calculations. Unless otherwise indicated, periods of less than one year
are not annualized.
(g) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
markups, markdowns or spreads on shares traded on a principal basis.
The Fund's current adviser and subadviser assumed those functions on May 1,
1995. These financial highlights prior to that date reflect results achieved by
earlier advisers under investment policies that are no longer in effect.
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
Investment Objectives
New England Capital Growth Fund
(The "Capital Growth Fund")
The Fund seeks long-term growth of capital.
Subadviser: Westpeak Investment Advisors, L.P. ("Westpeak")
New England Balanced Fund
(The "Balanced Fund")
The Fund seeks a reasonable long-term investment return from a combination of
long-term capital appreciation and moderate current income.
Subadviser: Loomis Sayles, Pasadena, CA
New England Growth Fund
(The "Growth Fund")
The Fund seeks long-term growth of capital through investment in equity
securities of companies whose earnings are expected to grow at a faster rate
than the United States economy. Adviser: Capital Growth Management Limited
Partnership
New England International Equity Fund
(The "International Equity Fund")
The Fund seeks total return from long-term growth of capital and dividend
income, primarily through investment in international equity securities.
Subadviser: Loomis Sayles, Boston, MA
New England Value Fund
(The "Value Fund")
The Fund seeks a reasonable long-term investment return from a combination of
market appreciation and dividend income from equity securities.
Subadviser: Loomis Sayles, Pasadena, CA
New England Growth Opportunities Fund
(The "Growth Opportunities Fund")
The Fund seeks opportunities for long-term growth of capital and income.
Subadviser: Westpeak
New England Equity Income Fund
(The "Equity Income Fund")
The Fund seeks current income and capital growth.
Subadviser: Loomis Sayles, Boston, MA
New England Investment Companies and the Funds' Advisers and Subadvisers
The subadvisers of each of the Funds are independently operated subsidiaries of
NEIC Operating Partnership, L.P. ("NEICOP"), which is part of an affiliated
group including New England Investment Companies, L.P. a publicly traded company
listed on the New York Stock Exchange. New England Funds Management, L.P.
("NEFM"), the adviser to each of the Funds except the Growth Fund, is also an
independently operated subsidiary
18
<PAGE>
of NEICOP. NEICOP's 14 principal subsidiary or affiliated asset management
firms, collectively, had more than $120 billion of assets under management as of
September 30, 1997. Each subadviser operates independently and is staffed by
experienced investment professionals. All the subadvisers apply specialized
knowledge and careful analysis to the pursuit of each Fund's objectives.
New England Funds Management, L.P. is the adviser to each of the Funds except
the Growth Fund, as well as most of the other New England Funds.
Loomis, Sayles & Company, L.P. with over $50 billion of assets under management,
manages portfolios for mutual funds and other institutional investors and
individuals. Loomis Sayles serves as the subadviser to the International Equity,
Balanced, Value and Equity Income Funds.
Capital Growth Management Limited Partnership ("CGM"), adviser of the Growth
Fund, has $6.6 billion of assets under management. CGM specializes in managing
aggressive growth-oriented equity portfolios for mutual funds and other
institutions.
Westpeak Investment Advisors, L.P. ("Westpeak") acts as subadviser to the Growth
Opportunities Fund and the Captial Growth Fund and also provides investment
management services to other mutual funds and institutional clients, including
accounts of New England Life Insurance Company ("NELICO").
How the Funds Pursue Their Objectives
Investments in each Fund will be pooled with money from other investors in that
Fund to invest in a managed portfolio consisting of securities appropriate to
each Fund's investment objective and policies. There can be no assurance that
any Fund will achieve its objective. Each Fund is a "diversified" mutual fund.
Fund Investments
o Capital Growth Fund
The Capital Growth Fund seeks to attain its objective by investing
substantially all of its assets in equity securities. Investments are
selected based on their growth potential; current income is not a
consideration. The Fund normally will invest primarily in equity
securities of companies with medium or large market capitalization
(capitalization of $1 billion to $5 billion and over $5 billion,
respectively), but will also invest a portion of its assets in equity
securities of companies with relatively small market capitalization (under
$1 billion).
The Fund's subadviser selects investments based upon fundamental research
and analysis of individual companies and industries. The subadviser
selects investments for the Fund based on qualitative and quantitative
criteria including, among others, industry dominance and competitive
position, consistent earnings growth, a history of high profitability, the
subadviser's expectation of continued high profitability and overall
financial strength, although not every investment will have all of these
characteristics. The Fund may invest in foreign securities.
o Growth Fund
Most of the Growth Fund's investments are normally in common stocks,
although the Fund may invest in any type of equity securities. The Fund
does not consider current income as a factor in selecting its investments.
The Fund may invest in foreign securities.
o Value Fund
Substantially all of the Value Fund's investments are normally in equity
securities. In selecting investments for the Fund, the emphasis is
ordinarily placed on undervalued securities. Although long-term market
appreciation is ordinarily the basis for security selection, current
income may be a significant consideration when yields appear to be
favorable compared to overall opportunities for capital appreciation. The
Fund may invest in foreign securities.
o Balanced Fund
The Balanced Fund is "flexibly managed" in that sometimes it invests more
heavily in equity securities and at other times it invests more heavily in
fixed-income securities, depending on the Fund's subadviser's view of the
economic and investment outlook. Most of its equity investments are
normally in dividend-paying common stocks of recognized investment quality
that are expected to achieve growth in earnings and dividends over the
long term. In selecting equity investments for the Fund, an emphasis is
ordinarily placed on undervalued securities. Fixed-income securities
include notes, bonds, non-convertible preferred
19
<PAGE>
stock and money market instruments. The Fund invests at least 25% of its
assets in fixed-income securities and, under normal market conditions,
more than 50% of its assets in equity securities. The Fund may invest in
foreign securities.
o International Equity Fund
The International Equity Fund seeks to achieve its objective by investing
primarily in common stocks, although the Fund may invest in any type of
equity securities. Normally the Fund will invest at least 65% of its total
assets in equity securities of issuers headquartered outside the United
States or that derive a substantial part of their revenues or profits from
countries outside the United States. Under normal conditions the Fund's
portfolio will contain equity securities of issuers from at least three
countries outside the United States. The Fund may also invest in
closed-end investment companies domiciled in the United States that invest
primarily in securities issued by foreign companies. In addition, the Fund
may invest up to 20% of its assets in bonds issued or guaranteed by
foreign governments (including their political subdivisions, agencies,
authorities and/or instrumentalities), supranational agencies or foreign
companies, including but not limited to convertible debt and below
investment grade or unrated debt. The Fund may also engage in certain
options and futures transactions.
The Fund's subadviser will make investment decisions on behalf of the Fund
by selecting a group of attractively valued countries and then selecting
securities within such countries that are expected to offer the best value
based on its valuation and earnings growth expectations.
o Growth Opportunities Fund
It is normally the policy of the Growth Opportunities Fund to invest in a
diversified portfolio of common stocks considered by the Fund's subadviser
to have possibilities for long-term appreciation of capital and income.
Emphasis will be given to both undervalued securities ("value" style) and
securities of companies with growth potential ("growth" style). The Fund
will ordinarily invest substantially all of its assets in equity
securities. The Fund may invest in foreign securities that are traded in
U.S. markets.
o Equity Income Fund
Under normal market circumstances, the Fund will invest at least 80% of
its assets in dividend-paying common or preferred stocks. The Fund's
portfolio will be selected to seek a current dividend yield which is
comparable to the published composite yield of the Standard & Poor's
Composite Index of 500 Common Stocks (the "S&P 500") and long-term capital
appreciation. The Fund may also invest in non-dividend paying stocks,
other equity securities, zero coupon bonds and strips, foreign securities
and repurchase agreements.
o Additional Information
The Capital Growth, Growth, Growth Opportunities, International Equity,
Value and Equity Income Funds seek to attain their objectives by normally
investing in equity securities. When the particular Fund's subadviser
deems it appropriate, however, the International Equity, Capital Growth,
Growth, Growth Opportunities, Value and Equity Income Funds may, for
temporary defensive purposes, hold a substantial portion of their assets
in cash or fixed-income investments, including U.S. Government
obligations, investment grade (and comparable unrated) corporate bonds or
notes, money market instruments and repurchase agreements. Corporate
obligations in the lowest investment grade category (rated BBB by Standard
& Poor's Ratings Group ["S&P"] or Baa by Moody's Investors Service, Inc.
["Moody's"]) have some speculative characteristics and may be more
adversely affected by changing economic conditions than are higher grade
obligations. No estimate can be made as to when or for how long a Fund
will employ defensive strategies. Under some market conditions, the
Balanced Fund may, for temporary purposes, invest less than 50% of its
assets in equity securities and the balance in cash and fixed-income
investments.
20
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in a Fund before you
invest.
o Equity Securities
Equity securities are securities that represent an ownership interest (or
the right to acquire such an interest) in a company and include common and
preferred stocks and securities exercisable for or convertible into common
or preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock). While offering greater potential for
long-term growth, equity securities are more volatile and more risky than
some other forms of investment. Therefore, the value of your investment in
a Fund may sometimes decrease instead of increase. Each Fund may invest in
equity securities of companies with relatively small market
capitalization. Securities of such companies may be more volatile than the
securities of larger, more established companies and the broad equity
market indices. See "Small Companies" below. Each Fund's investments may
include securities traded "over-the-counter" as well as those traded on a
securities exchange. Some over-the-counter securities may be more
difficult to sell under some market conditions.
Each Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other
securities, such as warrants, that provide an opportunity for equity
participation. Because convertible securities can be converted into equity
securities, their values will normally increase or decrease as the values
of the underlying equity securities increase or decrease. The movements in
the prices of convertible securities, however, may be smaller than the
movements in the value of the underlying equity securities. The value of
convertible securities that pay dividends or interest, like the value of
other fixed-income securities, generally fluctuates inversely with changes
in interest rates. Warrants have no voting rights, pay no dividends and
have no rights with respect to the assets of the corporation issuing them.
They do not represent ownership of the securities for which they are
exercisable, but only the right to buy such securities at a particular
price. Less than 35% of each Fund's (other than the Equity Income Fund's)
respective net assets will be invested in convertible securities rated
below investment grade and unrated convertible securities of comparable
quality. Less than 20% of the Equity Income Fund's net assets will be
invested in convertible or fixed-income securities rated below investment
grade and unrated convertible or fixed-income securities of comparable
quality.
o Small Companies
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed
those of companies with larger capitalization. Such growth rates may in
turn be reflected in more rapid share price appreciation. However,
companies with smaller capitalization often have limited product lines,
markets or financial resources and may be dependent upon a relatively
small management group. The securities may have limited marketability and
may be subject to more abrupt or erratic movements in price than
securities of companies with larger capitalization or market averages in
general. The net asset value of funds that invest in companies with
smaller capitalization therefore may fluctuate more widely than market
averages.
o Foreign Securities
Investments in foreign securities present risks not typically associated
with investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Fund may be
affected favorably or unfavorably by changes in currency exchange rates or
exchange control regulations. Because the Funds may purchase securities
denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S.
dollar value of the Fund's assets and the Fund's income available for
distribution.
In addition, although a Fund's income may be received or realized in
foreign currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the value of a currency relative
to the U.S. dollar declines after a Fund's income has been earned in that
currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the
amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in such currency of such expenses at the time they were
incurred.
There may be less information publicly available about a foreign corporate
or government issuer than about a U.S. issuer, and foreign corporate
issuers are not generally subject to accounting, auditing and financial
reporting standards and practices
21
<PAGE>
comparable to those in the United States. The securities of some foreign
issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities
custody costs are often higher than those in the United States, and
judgments against foreign entities may be more difficult to obtain and
enforce. With respect to certain foreign countries, there is a possibility
of governmental expropriation of assets, confiscatory taxation, political
or financial instability and diplomatic developments that could affect the
value of investments in those countries. The receipt of interest on
foreign government securities may depend on the availability of tax or
other revenues to satisfy the issuer's obligations.
The International Equity Fund's investments in foreign securities may
include investments in emerging or developing countries, whose economies
or securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations
regarding foreign investments generally) may include, among others,
greater political uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development assistance,
currency transfer restrictions, highly limited numbers of potential buyers
for such securities and delays and disruptions in securities settlement
procedures.
The Funds may invest in foreign equity securities either by purchasing
such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an
interest in equity securities held by arrangement with the bank.
Depository receipts can be either "sponsored" or "unsponsored." Sponsored
depository receipts are issued by banks in cooperation with the issuer of
the underlying equity securities. Unsponsored depository receipts are
arranged without involvement by the issuer of the underlying equity
securities. Less information about the issuer of the underlying equity
securities may be available in the case of unsponsored depository
receipts.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies'
activities, and include such entities as the International Bank of
Reconstruction and Development (the World Bank), the Asian Development
Bank, the European Coal and Steel Community and the Inter-American
Development Bank.
In determining whether to invest in securities of foreign issuers, the
adviser or subadviser of each Fund will consider the likely effects of
foreign taxes on the net yield available to the Fund and its shareholders.
Compliance with foreign tax law may reduce the Fund's net income available
for distribution to shareholders.
o Foreign Currency
Most foreign securities in the Funds' portfolios will be denominated in
foreign currencies or traded in securities markets in which settlements
are made in foreign currencies. Similarly, any income on such securities
is generally paid to the Fund in foreign currencies. The value of these
foreign currencies relative to the U.S. dollar varies continually, causing
changes in the dollar value of the Fund's portfolio investments (even if
the local market price of the investments is unchanged) and changes in the
dollar value of the Fund's income available for distribution to its
shareholders. The effect of changes in the dollar value of a foreign
currency on the dollar value of the Fund's assets and on the net
investment income available for distribution may be favorable or
unfavorable.
The Funds may incur costs in connection with conversions between various
currencies. In addition, the Funds may be required to liquidate portfolio
assets, or may incur increased currency conversion costs, to compensate
for a decline in the dollar value of a foreign currency occurring between
the time when the Fund declares and pays a dividend, or between the time
when the Fund accrues and pays an operating expense in U.S. dollars.
o Fixed-Income Securities
Fixed-income securities include a broad array of short, medium and long
term obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed
by specific assets (such as mortgages or other receivables) that have been
set aside as collateral for the issuer's obligation. Fixed-income
securities generally involve an obligation of the issuer to pay interest
or dividends on either a current basis or at the maturity of the security,
as well as the obligation to repay the principal amount of the security at
maturity.
Fixed-income securities involve both credit risk and market risk. Credit
risk is the risk that the security's issuer will fail to fulfill its
obligation to pay interest, dividends or principal on the security. Market
risk is the risk that the value of security will fall because of changes
in market rates of interest. (Generally, the value of fixed-income
securities falls when market rates of interest are rising.) Some
fixed-income securities also involve prepayment or call risk. This is the
risk that the issuer will repay a Fund the principal on the security
before it is due, thus depriving the Fund of a favorable stream of future
interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a
fund that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income
securities will cause a Fund's net asset value to increase or decrease.
22
<PAGE>
All non-convertible fixed-income securities purchased by the Funds other
than the International Equity, Balanced and Equity Income Funds, will, at
the time of purchase, either be rated investment grade by at least one
major rating agency or be unrated but determined to be of investment grade
quality by the Fund's subadviser.
o Lower Quality Fixed-Income Securities
(International Equity, Balanced and Equity Income Funds)
Fixed-income securities rated BB or lower by S&P or Ba or lower by Moody's
(and comparable unrated securities) are below "investment grade" quality.
Lower quality fixed-income securities generally provide higher yields, but
are subject to greater credit and market risk, than higher quality
fixed-income securities. Lower quality fixed-income securities are
considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. Achievement of the
investment objective of a mutual fund investing in lower quality
fixed-income securities may be more dependent on the fund's Adviser's or
subadviser's own credit analysis than for a fund investing in higher
quality bonds. The market for lower quality fixed-income securities may be
more severely affected than some other financial markets by economic
recession or substantial interest rate increases, by changing public
perceptions of this market or by legislation that limits the ability of
certain categories of financial institutions to invest in these
securities. In addition, the secondary market may be less liquid for lower
rated fixed-income securities. This lack of liquidity at certain times may
affect the valuation of these securities and may make the valuation and
sale of these securities more difficult. During the fiscal year ended
December 31, 1997, the International Equity, Balanced and Equity Income
Funds had on average __% and )__% of their assets, respectively,
invested in fixed-income securities rated below investment grade.
Securities of below investment grade quality are considered high yield,
high risk securities and are commonly known as "junk bonds." For more
information, including a detailed description of the ratings assigned by
S&P and Moody's, please refer to the Statement's "Appendix A - Description
of Bond Ratings."
o Asset-Backed Securities (Balanced Fund)
The Balanced Fund may invest up to 25% of its total assets in asset-backed
securities, which represent a direct or indirect participation, or are
secured by and payable from, pools of assets, such as motor vehicle
installment sales contracts, installment loan contracts, leases on various
types of real and personal property and receivables from revolving credit
(e.g., credit card) agreements. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters
of credit.
o Repurchase Agreements
Under a repurchase agreement, a Fund buys securities from a seller,
usually a bank or brokerage firm, with the understanding that the seller
will repurchase the securities at a higher price at a later date. If the
seller fails to repurchase the securities, the Fund has rights to sell the
securities to third parties. Repurchase agreements can be regarded as
loans by the Fund to the seller, collateralized by the securities that are
the subject of the agreement. Repurchase agreements afford an opportunity
for the Fund to earn a return on available cash at relatively low credit
risk, although the Fund may be subject to various delays and risks of loss
if the seller fails to meet its obligation to repurchase. The staff of the
SEC is currently of the view that repurchase agreements maturing in more
than 7 days are illiquid securities.
o Investments In Other Investment Companies
(International Equity Fund, Growth Fund, Growth Opportunities Fund)
The International Equity Fund may invest up to 10% of its total assets in
securities of other investment companies. Because of restrictions on
direct investment by U.S. entities in certain countries, investing
indirectly in such countries (by purchasing shares of another fund that is
permitted to invest in such countries) may be the most practical or
efficient way for the Fund to invest in such countries. In other cases,
where the Fund's adviser or subadviser desires to make only a relatively
small investment in a particular country, investing through another fund
that holds a diversified portfolio in that country may be more effective
than investing directly in issuers in that country. As an investor in
another investment company, the Fund will indirectly bear its share of the
expenses of that investment company. These expenses are in addition to the
Fund's own costs of operations. In some cases, investing in an investment
company may involve the payment of a premium over the value of the assets
held in that investment company's portfolio.
o Short-Term Trading
Although each Fund seeks long-term growth or return (current income and
capital growth for Equity Income Fund), each Fund may, consistent with its
investment objective, engage in portfolio trading in anticipation of, or
in response to, changing economic or market conditions and trends. These
policies may result in higher turnover rates in the Fund's portfolio,
which may produce higher transaction costs and a higher level of taxable
capital gains. Portfolio turnover considerations will not limit any
adviser's or subadviser's investment discretion in managing a Fund's
assets.
23
<PAGE>
Recent portfolio turnover rates of each Fund are set forth above under
"Financial Highlights."
o Options, Futures, Swap Contracts and Currency Transactions
(International Equity and Growth Opportunities Funds)
The International Equity Fund may buy, sell or write options on
securities, securities indexes, currencies or futures contracts. The Fund
may buy and sell futures contracts on securities, securities indexes or
currencies. The Fund may also enter into swap contracts. The Fund may
engage in these transactions either for the purpose of enhancing
investment return, or to hedge against changes in the value of other
assets that the Fund owns or intends to acquire. The Fund may also conduct
foreign currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market.
The Growth Opportunities Fund may buy and sell futures contracts on a
variety of stock indexes. The Fund would buy such a futures contract only
when the Fund is experiencing significant cash inflows, and then only for
the purpose of maintaining the Fund's exposure to the equity markets
during the time before the Fund has fully invested incoming cash in equity
securities directly. Similarly, the Fund would sell stock index futures
only during periods of cash outflows from the Fund, for the purpose of
reducing equity market exposure before holdings of stock are liquidated.
The Fund will not use futures contracts for speculative purposes or to
hedge against changes in the value of the Fund's securities portfolios.
Options, futures and swap contracts fall into the broad category of
financial instruments known as "derivatives" and involve special risks.
Use of options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are
involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer" and
the "buyer." A call option gives the buyer the right to buy a security or
other asset (such as an amount of currency or a futures contract) from,
and a put option the right to sell a security or other asset to, the
option writer at a specified price, on or before a specified date. The
buyer of an option pays a premium when purchasing the option, which
reduces the return on the underlying security or other asset if the option
is exercised, and results in a loss if the option expires unexercised. The
writer of an option receives a premium from writing an option, which may
increase its return if the option expires or is closed out at a profit. If
a Fund as the writer of an option is unable to close out an unexpired
option, it must continue to hold the underlying security or other asset
until the option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and
in the amount specified in the contract. Although many futures contracts
call for the delivery (or receipt) of the specified instrument, futures
are usually closed out before the settlement date through the purchase (or
sale) of a comparable contract. If the price of the sale of the futures
contract by a Fund exceeds (or is less than) the price of the offsetting
purchase, the Fund will realize a gain (or loss). A Fund may not purchase
or sell futures contracts or purchase related options if immediately
thereafter the sum of the amount of deposits for initial margin or
premiums on the existing futures and related options positions would
exceed 5% of the market value of the Fund's net assets. Transactions in
futures and related options involve the risks of (1) imperfect correlation
between the price movement of the contracts and the underlying securities,
(2) significant price movement in one but not the other market because of
different hours, (3) the possible absence of a liquid secondary market at
any point in time, and the risk that if the subadviser's prediction on
interest rates or other economic factors is inaccurate, the Fund may be
worse off than if it had not hedged. Futures transactions involve
potentially unlimited risk of loss.
The Funds may enter into interest rate, currency and securities index
swaps. The Funds will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations or to protect against
an increase in the price of securities a Fund anticipates purchasing at a
later date. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap
is an agreement to exchange cash flows on a notional amount based on
changes in the relative values of the specified currencies. An index swap
is an agreement to make or receive payments based on the different returns
that would be achieved if a notional amount were invested in a specified
basket of securities (such as the Standard & Poor's Composite Index of 500
Stocks [the "S&P 500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on
a variety of market and economic factors. In some cases, the fluctuations
may offset (or be offset by) changes in the value of securities held in
the Fund's portfolio. All transactions in options, futures or swaps
involve the possible risk of loss to the Fund of all or a significant part
of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Fund's investment. The Fund will be required, however,
to set aside with its custodian bank certain
24
<PAGE>
assets in amounts sufficient at all times to satisfy its obligations under
options, futures and swap contracts.
The successful use of options, futures and swaps will usually depend on
the subadvisers' ability to forecast stock market, currency or other
financial market movements correctly. A Fund's ability to hedge against
adverse changes in the value of securities held in its portfolio through
options, futures and swap transactions also depends on the degree of
correlation between the changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities. The
successful use of futures and exchange-traded options also depends on the
availability of a liquid secondary market to enable the Fund to close its
positions on a timely basis. There can be no assurance that such a market
will exist at any particular time. In the case of swap contracts and of
options that are not traded on an exchange ("over-the-counter" options),
the Fund is at risk that the other party to the transaction will default
on its obligations, or will not permit the Fund to terminate the
transaction before its scheduled maturity. As a result of these
characteristics, the Fund will treat most swap contracts and
over-the-counter options (and the assets it segregates to cover its
obligations thereunder) as illiquid. Certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and certain regulatory
requirements may limit a Fund's ability to engage in futures, options and
swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most
cases by less liquidity than are the U.S. markets. In addition, foreign
markets may be subject to less detailed reporting requirements and
regulatory controls than U.S. markets. Furthermore, investments by the
Funds in options and futures in foreign markets are subject to many of the
same risks as are the Fund's other foreign investments. See "Foreign
Securities" above. For further information, see "Miscellaneous Investment
Practices -- Futures, Options and Swap Contracts" in Part II of the
Statement.
o Currency Hedging Transactions (International Equity Fund)
The International Equity Fund may, at the discretion of its subadviser,
engage in foreign currency exchange transactions, in connection with the
purchase and sale of portfolio securities, to protect the value of
specific portfolio positions or in anticipation of changes in relative
values of currencies in which current or future Fund portfolio holdings
are denominated or quoted. Currency hedging transactions may include
forward contracts (contracts with another party to buy or sell a currency
at a specified price on a specified date), futures contracts (which are
similar to forward contracts but are traded on an exchange) and swap
contracts. For more information on foreign currency hedging transactions,
see Part II of the Statement.
o Zero Coupon Bonds and Strips
The Equity Income Fund may invest in zero coupon bonds and in "strips."
Zero coupon bonds do not make regular interest payments; rather, they are
sold at a discount from face value. Principal and accrued discount
(representing interest accrued but not paid) are paid in maturity.
"Strips" are debt securities that are stripped of their interest payments
after the securities are issued, but otherwise are comparable to zero
coupon bonds. The market values of "strips" and zero coupon bonds
generally fluctuate in response to changes in interest rates to a greater
degree than do interest-paying securities of comparable term and quality.
Under market conditions, investments in such securities may be illiquid,
making it difficult for the Fund to dispose of them or determine their
current value.
o Securities Lending
The Equity Income Fund may lend its portfolio securities to broker-dealers
or other parties under contracts calling for the deposit by the borrower
with the Fund's custodian of cash collateral equal to at least the market
value of the securities loaned, marked to market on a daily basis. The
Fund will continue to benefit from interest or dividends on the securities
loaned and will also receive interest through investment of the cash
collateral in short-term liquid investments. No loans will be made if, as
a result, the aggregate amount of such loans outstanding at any time would
exceed 331/3% of the Fund's total assets (taken at current value). Any
voting rights or rights to consent relating to the loaned securities pass
to the borrower. However, if a material event affecting the investment
occurs, such loans will be called so that the securities may be voted by
the Fund. The Fund pays various fees in connection with such loans,
including shipping fees and reasonable custodial or placement fees.
o Miscellaneous
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable, which
may include securities whose disposition is restricted by federal
securities laws.
The Balanced, International Equity and Equity Income Funds may purchase
Rule 144A securities. These are privately offered securities that can be
resold only to certain qualified institutional buyers. Investing in Rule
144A securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified institutional buyers become, for
a time, uninterested in purchasing these securities. Rule 144A securities
are treated as illiquid, unless a subadviser has determined,
25
<PAGE>
under guidelines established by each Trust's trustees, that the particular
issue of Rule 144A securities is liquid. Investment in restricted or other
illiquid securities involves the risk that a Fund may be unable to sell
such a security at the desired time. Also, a Fund may incur expenses,
losses or delays in the process of registering restricted securities prior
to resale.
The International Equity and Equity Income Fund may purchase securities on
a "when-issued" or "delayed-delivery" basis. This means that the Fund
enters into a commitment to buy the security before the security has been
issued, or, in the case of a security that has already been issued, to
accept delivery of the security on a date beyond the usual settlement
period. If the value of a security purchased on a "when-issued" or
"delayed delivery" basis falls or market rates of interest increase
between the time the Fund commits to buy the security and the delivery
date, the Fund may sustain a loss in value of or yield on the security.
For more information on "when-issued" and "delayed delivery" securities,
see Part II of the Statement.
26
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
NEFM, 399 Boylston Street, Boston, Massachusetts, 02116, serves as the adviser
to each Fund except the Growth Fund (for which CGM serves as adviser). NEFM
oversees, evaluates and monitors the subadvisory services provided to each Fund
except the Growth Fund and furnishes general business management and
administration to each such Fund. NEFM does not determine what investments will
be purchased by the Funds.
The subadviser of the International Equity Fund, the Balanced Fund, the Value
Fund and the Equity Income Fund is Loomis Sayles. Founded in 1926, Loomis
Sayles, One Financial Center, Boston, Massachusetts 02111, is one of the
country's oldest and largest investment counsel firms. Paul Drexler, Vice
President of Loomis Sayles, has served as the portfolio manager of the
International Equity Fund since February 14, 1997. Since June 30, 1996, Bruce A.
Ebel, Vice President of Loomis Sayles, has also served as co-portfolio manager
of the Capital Growth Fund. Carol C. McMurtrie, Tricia H. Mills and (beginning
in August 1997) Roderic Dillon are the portfolio managers of the Value Fund. Ms.
McMurtrie and Ms. Mills have served in that capacity since 1993. Ms. McMurtrie,
Ms. Mills and (beginning in August 1997) Mr. Dillon are also the portfolio
managers of the equity portion of the Balanced Fund and are responsible for
allocating the assets of the Balanced Fund between equity and fixed-income
securities. Ms. McMurtrie and Ms. Mills have served in these capacities since
July 1997. The portfolio management team for the fixed-income portion of the
Balanced Fund consists of Meri Ann Beck, John Hyll and Barr Segal, who have had
portfolio management responsibility for the Fund's fixed-income investments
since 1990, 1994 and 1996, respectively. Messrs. Dillon, Hyll and Segal are Vice
Presidents of Loomis Sayles. Ms. Beck is also a Vice President of Loomis Sayles.
Mr. Hyll has been employed by Loomis Sayles for more than five years. Mr. Segal
was a Senior Portfolio Manager at TCW Group before joining Loomis Sayles in
1996. Mr. Dillon rejoined Loomis Sayles in August 1997 following several years
as principal of Dillon Capital Management. Mr. Drexler and Mr. Ebel who, prior
to the time they joined Loomis Sayles, were Deputy Manager, Brown Brothers
Harriman & Co., and Senior Vice President, Kemper Asset Management,
respectively. Mauricio F. Cevallos, Vice President and Manager of Loomis Sayles,
Peter Ramsden, Vice President of Loomis Sayles, and Tom Kolefas, Vice President
of Loomis Sayles, act as portfolio managers of the Equity Income Fund. Mr.
Kolefas joined Loomis Sayles in 1996 and has been a portfolio manager of the
Fund since May 1996. Prior to May 1996, Mr. Kolefas was employed as a portfolio
manager at Mackay Shields Financial Corporation. Mr. Ramsden and Mr. Cevallos
have been employed by Loomis Sayles for more than five years, and have served as
portfolio managers of the Fund since its inception in November 1995.
The adviser of the Growth Fund is CGM, One International Place, Boston,
Massachusetts 02110. CGM, organized in 1989, serves as investment adviser to
seven mutual funds and to other institutional investors. The general partner of
CGM is a corporation controlled equally by Robert L. Kemp and G. Kenneth
Heebner. Mr. Heebner, Senior Portfolio Manager of CGM, has served as portfolio
manager of the Growth Fund since 1976. NEIC owns a majority limited partnership
interest in CGM. In 1996, the Growth Fund paid 0.68% of its average net assets
in advisory fees to CGM. The Distributor has agreed to provide certain
administrative services to the Growth Fund at CGM's expense.
The subadviser of the Growth Opportunities Fund and the Capital Growth Fund is
Westpeak, 1011 Walnut Street, Boulder, Colorado 80302. The portfolio manager of
the Growth Opportunities Fund and the Capital Growth Fund is Gerald H. Scriver,
President and Chief Executive Officer of Westpeak. He has been with Westpeak
since its inception in 1991. He has been portfolio manager of the Growth
Opportunities Fund since May 1995 and the portfolio manager of the Capital
Growth Fund since February, 1998.
Each Fund other than the Growth Fund pays NEFM a management fee at the annual
rate set forth in the following table:
Management fee paid by fund to NEFM
(as a percentage of average daily
Fund net assets of the Fund)
---- -----------------------
Balanced Fund, ............... 0.75% of the first $200 million
Capital Growth Fund, and 0.70% of the next $300 million
Value Fund 0.65% of amounts in excess of $500 million
Growth Opportunities Fund, ... 0.70% of the first $200 million
and Equity Income Fund 0.65% of the next $300 million
27
<PAGE>
0.60% of amounts in excess of $500 million
International Equity
Fund................. 0.90% of the first $200 million
0.85% of the next $300 million
0.80% of amounts in excess of $500 million
The management fee rates payable by the Balanced, Capital Growth, International
Equity and Value Funds are higher than those paid by most other mutual funds but
are comparable to fee rates paid by some mutual funds with similar investment
objectives and policies to these Funds.
Subject to the supervision of NEFM, each subadviser manages the portfolio(s) of
each Fund to which it serves as subadviser in accordance with the Fund's
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities for the Fund, and employs
professional advisers and securities analysts who provide research services to
the Fund. The Funds pay no direct fees to their subadvisers.
NEFM pays the subadvisers of the following Funds a subadvisory fee at the annual
rate set forth in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to
subadviser (as a percentage of
Fund Subadviser average daily net assets of the fund)
- ------- --------- -------------------------------------
<S> <C> <C>
Balanced Fund and............... Loomis Sayles 0.535% of the first $200 million
Value Fund 0.350% of the next $300 million
0.300% of amounts in excess of $500
million
Capital Growth Fund............. Westpeak 0.400% of the first $200 million
0.350% of the next $300 million
0.300% of amounts in excess
of $500 million
Growth Opportunities Fund ...... Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200
million
International Equity Fund ...... Loomis Sayles 0.400% of the first $200 million
0.350% of amounts in excess of $200
million
Equity Income Fund ............. Loomis Sayles 0.400% of the first $200 million
0.325% of the next $300 million
0.275% of amounts in excess of $500
million
</TABLE>
Prior to January 2, 1996, the current subadvisers to the Balanced and Value
Funds served as those Funds' respective advisers. From December 29, 1995 to
February 14, 1997, Draycott Partners, Ltd. (" Draycott") served as subadviser to
the International Equity Fund. Prior to December 29, 1995, Draycott served as
the International Equity Fund's adviser. From December 29, 1995 to February 16,
1997 Loomis Sayles served as the subadviser to the Captial Growth Fund and prior
to December 29, 1995 was the adviser to the Capital Growth Fund.
Loomis Sayles, as subadviser to the International Equity Fund, has voluntarily
agreed to waive the entire subadvisory fee payable to Loomis Sayles by NEFM
through February 14, 1998. This waiver by Loomis Sayles will not reduce the
management fee payable by the Fund to NEFM. In addition, NEFM and the
Distributor have voluntarily agreed to reduce their fees and to bear certain
operating expenses charged to the International Equity Fund to the extent that
the total of such fees and expenses would exceed 1.75%, 2.50% and 2.50% annually
of the average daily net assets of the Fund's Class A, B and C shares,
respectively.
Loomis Sayles has voluntarily agreed, until further notice to the Equity Income
Fund, to waive its entire subadvisory fee. This waiver by Loomis Sayles does not
reduce the Fund's expenses. This agreement may be terminated by Loomis Sayles at
any time. In addition, under an expense deferral arrangement, which NEFM may
terminate at any time, NEFM has agreed to defer its management fee for the Fund
and, if necessary, to bear certain expenses associated with the Fund to the
extent necessary to limit the Fund's expenses to the annual rate of 1.50% for
Class A shares, 2.25% for Class B shares and 2.25 for Class C shares, subject to
the
28
<PAGE>
obligation of the Fund to pay NEFM such deferred fees and expenses in later
periods to the extent that the Fund's expenses fall below the annual rate of
1.50% for Class A shares, 2.25% for Class B shares and 2.25% for Class C shares;
provided, however, that the Fund is not obligated to pay any such deferred fees
or expenses more than two years after the end of the fiscal year in which the
fee expense was deferred.
NEFM and the Distributor may terminate these voluntary limitations at any time.
In such event, the Funds would supplement its prospectus.
The transfer and dividend paying agent for the Funds is New England Funds
Service Corporation ("NEFSCO") 399 Boylston Street, Boston, MA 02116. NEFSCO has
subcontracted certain of its obligations as such to State Street Bank and Trust
Company ("State Street Bank"), 225 Franklin Street, Boston, MA 02110.
The general partners of each of NEFM, Loomis Sayles, Westpeak and New England
Funds, L.P., and the sole shareholder of NEFSCO, are special purpose
corporations that are indirect, wholly-owned subsidiaries of NEIC Operating
Partnership, L.P. ("NEICOP"). NEICOP's managing general partner, New England
Investment Companies, Inc. ("NEIC, Inc."), is an indirect wholly-owned
subsidiary of Metropolitan Life Insurance Company ("MetLife"), a mutual life
insurance company. MetLife owns directly 46% (and in the aggregate, directly and
indirectly, 47%) of the limited partnership interests in NEICOP. NEICOP's
advising general partner, New England Investment Companies, L.P. ("NEIC") is a
publicly-traded company listed on the New York Stock Exchange. NEIC, Inc. is the
sole general partner of NEIC.
Subject to applicable regulatory restrictions and such policies as the Trusts'
trustees may adopt, the Funds' advisers and subadvisers may consider sales of
shares of the Funds and other mutual funds they manage as a factor in the
selection of broker-dealers to effect portfolio transactions for the Funds.
Subject to procedures adopted by the trustees of the Trusts, Fund brokerage
transactions may be executed by brokers that are affiliated with NEIC, NEFM, CGM
or any subadviser. See "Portfolio Transactions and Brokerage" in Part II of the
Statement.
NEFM and, in the case of the Growth Fund, CGM provide executive and other
personnel for the management of the Trusts. Each Trust's Board of Trustees
supervises the affairs of that Trust as conducted by the Funds' advisers and
subadvisers.
The Funds (excepting the Growth Fund) have received an exemptive order from the
SEC to permit NEFM, subject to certain conditions, to enter into subadvisory
agreements with subadvisers other than the existing subadvisers of the Funds
when approved by the relevant Trust's Board of Trustees, without obtaining
shareholder approval. The exemptive order also permits, without shareholder
approval, the terms of an existing subadvisory agreement to be changed or the
employment of an existing subadviser to be continued after events that would
otherwise cause an automatic termination of a subadvisory agreement, when such
changes or continuation are approved by the relevant Trust's Board of Trustees.
Shareholders will be notified of any subadviser changes.
29
<PAGE>
- --------------------------------------------------------------------------------
SUBADVISER'S PAST PERFORMANCE
- --------------------------------------------------------------------------------
The first table below presents information about the investment performance on
an average annual total return basis of the Loomis Sayles High Yield Equity
Composite (the "Loomis Sayles Composite"). The past performance data for the
Loomis Sayles Composite has been adjusted to reflect the Fund's operating
expenses (after giving effect to the Fund's voluntary expense deferral
arrangement with NEFM). The performance information for the Loomis Sayles
Composite 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.
Some of the accounts which make up the Loomis Sayles Composite have not been
subject to the same types of expenses to which the Fund is subject nor to the
diversification requirements, investment limitations and other restrictions to
which the Fund is subject under the Investment Company Act of 1940 or the
Internal Revenue Code of 1986, as amended (the "Code"). The performance results
for the Loomis Sayles Composite might have been less favorable had such accounts
been subject to regulations as investment companies under relevant federal laws.
The average annual total returns shown below for the Loomis Sayles Composite
represent composite returns derived from performance data furnished by Loomis
Sayles relating to certain accounts managed by Loomis Sayles, which have been
adjusted to reflect the Fund's operating expenses. Each of the accounts included
in the Loomis Sayles Composite has investment objectives substantially similar
to that of the Fund and was managed using investment policies and strategies
substantially similar (although not necessarily identical) to those of the Fund.
The accounts represented by the Loomis Sayles Composite include all of the
accounts (including the Fund) with investment objectives substantially similar
to that of the Fund and managed by Loomis Sayles during the relevant time
periods using investment policies substantially similar to those employed by
Loomis Sayles in managing the Fund.
The information regarding the performance of the Loomis Sayles Composite does
not represent the Fund's performance. Such information should not be considered
a prediction of future performance of the Fund.
The line graphs below illustrate (i) the growth of a $10,000 investment in the
Loomis Sayles Composite from its inception to June 30, 1997 versus the growth of
a $10,000 investment in the Lipper Equity Income Fund Average over the same
period and (ii) the growth of a $10,000 investment in the Fund from the Fund's
inception on November 28, 1995 to December 31, 1997 versus the growth in the
Lipper Equity Income Fund Average from November 30, 1995 to December 31, 1997.
[CHART TO BE UPDATED]
Average Annual Total Return
---------------------------------------------
Period Ended Loomis Sayles Lipper Equity
December 31, Composite Income Fund Average
1997
- --------------------- --------------------- ---------------------
Since Inception* 16.87% 13.68%
7 years 19.94% 17.31%
5 years 20.44% 17.00%
3 years 28.91% 25.49%
1 year 33.37% 27.36%
* Inception date July 1, 1989.
Average Annual Total Return
---------------------------------------------
Period Ended New England Equity Lipper Equity
December 31, 1997 Income Fund Income Fund Average
- --------------------- --------------------- ---------------------
Since Inception* 21.83% 23.49%
1 year 15.62% 27.36%
* The Fund's inception is November 28, 1995; Lipper Equity Income Fund Average
has been calculated from November 30, 1995.
[Graphic Omitted]
[Graphic Omitted]
30
<PAGE>
31
<PAGE>
- --------------------------------------------------------------------------------
BUYING FUND SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Using New England Funds Personal Access Line(TM) 1-800-346-5984 New England
Funds Personal Access Line(TM) is New England Funds' automated service system
that gives you 24-hour access to your account. Through your touch-tone
telephone, you can receive your current account balance, your recent
transactions, Fund prices and recent performance information. You can also
purchase, sell or exchange Class A shares of any New England Fund. For a free
brochure about New England Funds Personal Access Line(TM) including a convenient
wallet card, call us at 1-800-225-5478.
- --------------------------------------------------------------------------------
Minimum Investment
$2,500 is the minimum for an initial investment in any Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
o $25 (for initial and subsequent investments) for payroll deduction
investment programs for 401(k), SARSEP, SEP, SIMPLE Plans, 403(b)(7)
retirement plans and certain other retirement plans.
o $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
o $250 on initial and $100 on subsequent investments for retirement plans
with tax benefits such as corporate pension and profit sharing plans and
Keogh plans.
o $2,000 on initial and $100 on subsequent investments for accounts
registered under the Uniform Gifts to Minors Act or the Uniform Transfers
to Minors Act.
o $500 on initial and $100 on subsequent investments for IRAs.
6 Ways to Buy Fund Shares
You may purchase Class A, Class B and (in the case of the Limited Term U.S.
Government, Strategic Income and Bond Income Funds) Class C shares of the Funds
in the following ways:
o Through your investment dealer:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
o By Mail:
For An Initial Investment, simply complete an application and return it, with a
check payable to New England Funds, to P.O. Box 8551, Boston, MA 02266-8551.
For Subsequent Investments, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under certain
circumstances approved by the Distributor. When purchases are made by check or
periodic account investment, redemptions may not be allowed until the investment
being redeemed has been in the account for a minimum of ten calendar days.
o By Wire Transfer of Federal Funds:
For An Initial Investment, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business to obtain an
account number and wire transfer instructions.
32
<PAGE>
For Subsequent Investments, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and Class of shares), Shareholder Name, Shareholder Account Number. Funds may be
transferred between 9:00 a.m. and 4:00 p.m. (Eastern time) on a day when the
Funds are open for business.
Your bank may charge a fee for this service.
o By Investment Builder:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
For An Initial Investment, please indicate that you would like to begin an
automatic investment plan through Investment Builder. Indicate the amount of the
monthly investment on the enclosed application and enclose a check marked "Void"
or a deposit slip from your bank account.
To Add Investment Builder To An Existing Account, please call us at
1-800-225-5478 for a Service Options Form.
o By Electronic Purchase Through ACH:
You may purchase additional shares electronically through the Automated Clearing
House ("ACH") system as long as your bank or credit union is a member of the ACH
system and you have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling New England Funds Personal Access
Line(TM) at 1-800-346-5984 twenty- four hours a day. Under normal circumstances,
the New York Stock Exchange (the "Exchange") closes at 4:00 p.m. (Eastern time).
Purchase orders accepted through ACH or New England Funds Personal Access
Line(TM) will be complete only upon the receipt by New England Funds of funds
from your bank and, on the day that funds are received, will be processed at the
net asset value determined at the close of regular trading on the Exchange on
days that the Exchange is open. Proceeds of redemptions of Fund shares purchased
through ACH may not be available for up to ten days after the purchase date.
o By Exchange from another New England Fund:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for complete details.
General
All purchase orders are subject to acceptance by the Funds and will be effected
at the net asset value next determined after the order is received in proper
form by State Street Bank (except orders received by your investment dealer
before the close of trading on the Exchange and transmitted to the Distributor
by 5:00 p.m. [Eastern time] on the same day, which will be effected at the net
asset value determined on that day). Although the Funds do not anticipate doing
so, they reserve the right to suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to persons
whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you request
them in writing from the Distributor. The Funds' "open account" system for
recording your investment eliminates the problems and expense of handling and
safekeeping certificates. Certificates will not be issued for Class B or Class C
shares. If you wish transactions in your account to be effected by another
person under a power of attorney from you, special rules apply. Please contact
your investment dealer or the Distributor for details.
Sales Charges
- --------------------------------------------------------------------------------
To make investing even easier, you can also order personalized investment slips
by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.(Eastern time).
- --------------------------------------------------------------------------------
Each Fund offers two (or, in the case of the Limited Term U.S. Government Fund,
Strategic Income Fund and Bond Income Fund, three) classes of shares to the
general public:
33
<PAGE>
Class A Shares
Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% annual
service fee and, in the case of the Limited Term U.S. Government Fund, a 0.10%
annual distribution fee. Class A shares are offered subject to the following
sales charges:
<TABLE>
<CAPTION>
Sales Charge as a % of Dealer's
---------------------------------------------- Concession
Value of Total Investment Offering Price Net Amount Invested as a % of Offering Price
<S> <C> <C> <C>
Less than $100,000 5.75% 6.10% 5.00%
$50,000 - $100,000 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
</TABLE>
+ [Growth Fund Only.] For accounts established prior to February 28, 1997 having
a total investment value of between (and including) $25,000 and $49,999, a
reduced sales charge of 5.50% as a percentage of offering price (or 5.82% of
the net amount invested), with a dealer's concession of 4.25% as a percentage
of offering price, will be charged on the sale of additional Class A shares of
the Growth Fund if the total investment value of the Growth Fund account after
such sale is between (and including) $25,000 and $49,999.
* The Distributor may, at its discretion, pay investment dealers who initiate
and are responsible for such purchases (except investments by plans under
Sections 401(a) or 401(k) of the Code whose total investments amount to $1
million or more or that have 100 or more eligible employees ["Retirement
Plans"]) a commission of up to the following amounts: 1% on the first $3
million invested and 0.50% on the excess over $3 million. For investments by
Retirement Plans, the Distributor may, at its discretion, pay investment
dealers who initiate and are responsible for such purchases a commission of up
to the following amounts: 1% on the first $3 million invested and 0.50% on
amounts over $3 million and up to $10 million. These commissions are not
payable if the purchase represents the reinvestment of a redemption made
during the previous 12 calendar months. Section 401(a), 401(k), 457 and 403(b)
plans that have total investment assets of at least $10 million are eligible
to purchase Class Y shares of certain Funds, which are described in a separate
prospectus.
Contingent Deferred Sales Charge (Class A shares only). For purchases of
$1,000,000 or more of Class A shares of the Funds or purchases by Retirement
Plans as defined above, a CDSC, at the rate of 1% of the lesser of the purchase
price or the net asset value at the time of redemption applies to redemptions of
shares within one year after purchase. If an exchange is made to Class A shares
of any of New England Cash Management Trust Money Market Series or New England
Tax Exempt Money Market Trust (the "Money Market Funds"), then the one-year
holding period for purposes of determining the expiration of the CDSC will stop
and will resume only when an exchange is made back into Class A shares of a
series of the Trusts. If the Money Market Fund shares are redeemed rather than
exchanged back into the Trusts, then a CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held the longest are the
first to be redeemed.
Class B Shares
Class B shares are offered at net asset value, without an initial sales charge,
and are subject to a 0.25% annual service fee, a 0.75% annual distribution fee
for 8 years (at which time they automatically convert to Class A shares) and a
CDSC if they are redeemed within 6 years of purchase. The holding period for
purposes of timing the conversion to Class A shares and determining the CDSC
will continue to run after an exchange to Class B shares of a series of the
Trusts. If the exchange is made to Class B shares of a Money Market Fund, then
the holding period stops and will resume only when an exchange is made back into
Class B shares of a series of the Trusts. If the Money Market Fund shares are
redeemed rather than exchanged back into a series of the Trusts, then a CDSC
applies to the redemption, at the same rate as if the Class B shares of the Fund
had been redeemed at the time they were exchanged for Money Market Fund shares.
For the purpose of the CDSC it is assumed that the shares held the longest are
the first to be redeemed.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. The CDSC equals the following percentages of the
dollar amounts subject to the charge:
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<PAGE>
Contingent Deferred
Sales Charge as a
Percentage Of Dollar Amount
Year Since Purchase Subject To Charge*
------------------- ----------------------------
1st ...................... 5%
2nd ...................... 4%
3rd ...................... 3%
4th ...................... 3%
5th ...................... 2%
6th ...................... 1%
thereafter...................... 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
*As set forth in Part II of the Statement under "Redemptions," for Class B
shares purchased prior to May 1, 1997, the CDSC will be calculated according to
a different schedule.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% and advances the first year's service fee (up to 0.25%) on purchases of
Class B shares.
Class C Shares
Class C shares are offered at net asset value, without an initial sales charge,
are subject to a 0.25% annual service fee and a 0.75% annual distribution fee,
are subject to a CDSC of 1.00% on redemptions made within one year from the date
of purchase and do not convert to another class.
The Distributor pays to investment dealers at the time of sale a commission of
1.00% of the sales price of Class C shares sold by such investment dealer. The
Distributor will retain the service and distribution fees assessed against Class
C shares in the first year of investment, and the entire amount of the CDSC paid
by Class C shareholders upon redemption in the first year, in order to
compensate the Distributor for providing distribution-related services to the
Fund in connection with the sale of Class C shares, and to reimburse the
Distributor, in whole or in part, for the commissions paid (and related
financing cost) to investment dealers at the time of sale of Class C shares.
There are no conversion features associated with Class C shares; therefore, if
Class C shares are held for more than eight years, Class C shares will be
subject to higher distribution fees than shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of a series of the Trusts. If an exchange is made to
Class C shares of a Money Market Fund, then the holding period for purposes of
determining the expiration of the CDSC will stop and resumes only when an
exchange is made back into Class C shares of a series of the Trusts. If the
Money Market Fund shares are redeemed rather than exchanges back into a series
of the Trusts, then a CDSC applies to the redemption. For purposes of the CDSC,
it is assumed that the shares held the longest are the first to be redeemed. The
first year of purchase ends one year after the day on which the purchase was
accepted.
Deciding Which Class to Purchase
The decision as to whether Class A, Class B or Class C shares are more
appropriate for an investor depends on the amount and intended length of the
investment. Investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because Class A shares have lower
12b-1 fees and pay correspondingly higher dividends per share. For these
reasons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the
relevant section of your application that you have been informed of the relative
advantages and disadvantages of Class A and C shares. Investors making smaller
investments might consider Class B or Class C shares because 100% of the
purchase is invested immediately. Investors making smaller investments who
anticipate redeeming their shares within six years may find Class C shares more
favorable than Class B shares, because Class B shares are subject to a CDSC on
redemptions made within six years after purchase. Class B shares are more
favorable than Class C shares for investors who anticipate holding their
investment for more than eight years, since Class B shares convert to
35
<PAGE>
Class A shares (and thus bear lower ongoing fees) after eight years. Consult
your investment dealer for advice applicable to your particular circumstances.
- --------------------------------------------------------------------------------
A, B or C Shares -- Which Should You Choose?
Your choice of share class depends on the size of your investment and how long
you intend to hold your shares. In general, there are only minor differences in
performance results for the different classes if held for the long term. Consult
your financial representative for help in deciding which class is appropriate
for you.
- --------------------------------------------------------------------------------
General
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gains distributions.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested, and is paid to the
Distributor. The CDSC may be eliminated for certain persons and organizations.
See the discussion that follows in this section.
No CDSC on any class of shares applies in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2)
distributions from an IRA due to death, disability or a tax-free return of an
excess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability (as
defined in Section 72(m)(7) of the Code) of a shareholder if the redemption is
made within one year after the shareholder's death or disability. In addition,
there is no CDSC on certain withdrawals pursuant to a Systematic Withdrawal
Plan. See "Selling Fund Shares -- 4 Ways to Sell Fund Shares -- By Systematic
Withdrawal Plan" below.
Each Fund receives the net asset value next determined after an order is
received on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a
purchase and, therefore, would be considered a taxable event on which you may
recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares of each Fund to investment dealers from time to
time. The staff of the SEC is of the view that dealers receiving all or
substantially all of the sales charge may be deemed underwriters of a Fund's
shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible
governmental authority 0.025% of the average daily net assets of an account at
the end of each calendar quarter for up to one year. These commissions are not
payable if the purchase represents the reinvestment of redemption proceeds from
any series of the Trusts or if the account is registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who have sold or
may sell significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A, B and C shares; or (iii)
financial assistance programs to dealers in connection with conferences, sales
or training programs, seminars, advertising and sales campaigns and/or
shareholder services arrangements. Certain dealers who have sold or may sell
significant amounts of shares also may receive compensation in the form of
payment for travel expenses, including lodging, incurred in connection with
trips taken by invited registered representatives to
36
<PAGE>
locations, within or outside of the U.S., for educational seminars or meetings
of a business nature.
The Distributor may provide non-cash incentives for achievement of specified
sales levels by representatives of participating broker-dealers and financial
institutions. Such incentives include, but are not limited to, merchandise from
gift catalogues or other sources. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or financial
institution with which the representative is associated.
Reduced Sales Charges
(Class A Shares Only)
o Letter Of Intent -- if aggregate purchases of all series and classes of
the Trusts over a 13-month period will reach a breakpoint (a dollar amount
at which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
o Combining Accounts -- purchases by all qualifying accounts of all series
and classes of the Trusts (which do not include the Money Market Funds
unless the shares were purchased through an exchange from a series of the
Trusts) may be combined with purchases of qualifying accounts of a spouse,
parents, children, siblings, grandparents or grandchildren, individual
fiduciary accounts, sole proprietorships and/or single trust estates. The
values of all accounts are combined to determine the sales charge.
o Unit holders of unit investment trusts -- unit investment trust
distributions of less than $1 million 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).
o Eligible governmental authorities -- no sales charge or CDSC applies to
investments by any state, county or city or any instrumentality,
department, authority or agency thereof that has determined that 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.
o Clients of an adviser or subadviser -- no sales charge or CDSC applies to
investments of $25,000 or more in the Funds by (1) clients of an adviser
or subadviser to any series of the Trusts, any director, officer or
partner of a client of an adviser or subadviser to any series of the
Trusts and the parents, spouses and children of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a prototype
Plan document of an adviser or subadviser to any series of the Trusts if
at least one participant in the plan qualifies under category (1) above;
and (3) an individual who invests through an IRA and is a participant in
an employee benefit plan that is a client of an adviser or subadviser to
any series of the Trusts. Any investor eligible or these arrangements
should so indicate in writing at the time of the purchase.
o Shares of the Funds 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.
o Shares of the Funds are available at net asset value for investments by
participant-directed 401(a) and 401(k) plans that have 100 or more
eligible employees.
o Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies, but are unavailable if the trust department or
institution is part of an organization not principally engaged in banking
or trust activities.
o Current shareholders of the Growth Opportunities Fund who were
participants in a certain Trust Securities Program, administered through
State Street Bank, may purchase additional shares of the Growth
Opportunities Fund at net asset value.
o Shares of the Funds 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.
o There is no sales charge, CDSC or initial investment minimum related to
investments by current and retired employees of the Trusts' investment
advisers or subadvisers, the Distributor, NELICO or MetLife or any other
company affiliated with NELICO or MetLife; current and former directors
and trustees of the Trusts, NELICO or MetLife 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
who have selling arrangements with the Distributor; the spouse, parents,
children, siblings, in-laws, grandparents or grandchildren of the persons
listed above; any trust, pension, profit sharing or other benefit plan for
any of the foregoing persons; and any separate account of NELICO or
37
<PAGE>
MetLife or of any insurance company affiliated with NELICO or MetLife.
o 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 expenses associated with
such sales.
38
<PAGE>
- --------------------------------------------------------------------------------
OWNING FUND SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Automatic Exchange Plan
The Funds have an automatic exchange plan under which shares of a class of a
Fund are automatically exchanged each month for shares of the same class of
other series of the Trusts. The minimum monthly exchange amount under the plan
is $100. There is no fee for exchanges made pursuant to this program, but there
may be a sales charge as described on this page. Shares of the Adjustable Rate
Fund that are subject to a differential sales charge as described on this page
may not participate in this program.
- --------------------------------------------------------------------------------
Exchanging Among New England Funds
Class A Shares
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California and New
England Intermediate Term Tax Free Fund of New York (the "California and New
York Funds") (and shares of the Money Market Funds acquired through exchanges of
such shares) may be exchanged for Class A shares of another series of the Trusts
at net asset value only if you have held the California or New York Fund shares
for at least six months; otherwise, you will pay the difference between any
sales charge you have already paid on your California or New York Fund shares
and the higher sales charge of the series into which you are exchanging. If you
exchange Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) for shares of another series of the Trusts that has a
higher sales charge, you will pay the difference between any sales charge you
have already paid on your Adjustable Rate Fund shares and the higher sales
charge of the series into which you are exchanging. In addition, you may redeem
Class A shares of any Money Market Fund that were not acquired through exchanges
from any series of the Trusts and have the proceeds directly applied to the
purchase of shares of a series of the Trusts at the applicable sales charge.
Class B Shares
You may exchange Class B shares of any series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. Such exchanges will be made at the next-determined net
asset value of the shares. Class B shares will automatically convert on a
tax-free basis to Class A shares eight years after they are purchased (excluding
the time the shares are held in a Money Market Fund). See "Sales Charges --
Class B Shares" above.
Class C Shares
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust - Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
Class Y Shares
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection with
deferred compensation plans offered by NELICO for Class Y shares of any series
of the Trusts which offers Class Y shares. To obtain a prospectus and more
information about Class Y shares, please call the Distributor toll free at
1-800-225-5478.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business, call New England
Funds Personal Access Line(TM) at 1-800-346-5984 twenty-four hours a day or
write to New England Funds. Exchange requests after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes earlier than 4:00 p.m., will be processed
at the net asset value determined at the close of regular trading on the next
day that the Exchange is open. The exchange must be for a minimum of $1,000 (or
the total net asset value of your account, whichever is less), except that under
the Automatic Exchange Plan the minimum is $100. All exchanges are subject to
the eligibility requirements of the series into which you are exchanging. In
connection with any exchange, you must obtain and carefully read a current
prospectus of the series into which you are exchanging. The exchange privilege
may be exercised only in those states where shares of such other series may be
legally sold.
39
<PAGE>
40
<PAGE>
You have the automatic privilege to exchange your Fund shares by telephone. The
Funds and NEFSCO will employ reasonable procedures to confirm that your
telephone instructions are genuine, and, if it does not, it may be liable for
any losses due to unauthorized or fraudulent instructions. The Funds and NEFSCO
will require a form of personal identification prior to acting upon your
telephone instructions, will provide you with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
Except as otherwise permitted by SEC rule, shareholders will receive at least 60
days' advance notice of any material change to the exchange privilege.
Market Timer Restrictions. Purchases and exchanges into the Funds should be made
for investment purposes only. The Funds and the Distributor reserve the right to
refuse or limit any purchase or exchange order by a particular purchaser (or
group of related purchasers) when such transaction is deemed harmful to the nest
interest of the Fund's other shareholders or would disrupt the management of the
Fund. Without limiting the generality of the foregoing , the Funds and the
Distributor reserve the right to restrict (e.g., by limiting to a specified
maximum dollar amount) purchases and exchanges for the account of "market
timers." An account will be deemed to be the account of a market timer if (i)
more than two exchange purchases of a give Fund are effected for the account in
a calendar quarter or (ii) the account effects one or more exchange purchases of
a given Fund in a calendar quarter in an aggregate amount in excess of 1% of the
Fund's total net assets.
Fund Dividend Payments
The Capital Growth Fund, the Growth Fund, the International Equity Fund and the
Value Fund pay dividends annually, the Growth Opportunities Fund pays dividends
semi-annually and the Balanced Fund pays dividends quarterly. Each Fund pays as
dividends substantially all net investment income (other than long-term capital
gains) each year and distributes annually all net realized long- and short-term
capital gains (after applying any available capital loss carryovers). The
trustees of the Trusts may adopt a different schedule as long as payments are
made at least annually. If you intend to purchase shares of a Fund shortly
before it declares a capital gain distribution, you should be aware that a
portion of the purchase price may be returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from dividends and interest in cash while
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in
writing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested. No interest will accrue on
amounts represented by uncashed distribution on redemption checks.
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DIVIDEND DIVERSIFICATION PROGRAM
- --------------------------------------------------------------------------------
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in shares
of the same class of another New England Fund, subject to the investor
eligibility requirements of that other fund and to state securities law
requirements. Shares will be purchased at the selected fund's net asset value
(without a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration (shareholder name) as
the distributing fund account and, if a new account in the purchased fund is
being established, the purchased fund's minimum investment requirements must be
met. Before establishing a dividend diversification program into any other New
England Fund, you must obtain and carefully read a copy of that fund's
prospectus.
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41
<PAGE>
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SELLING FUND SHARES
- --------------------------------------------------------------------------------
4 Ways to Sell Fund Shares
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
o Through Your Investment Dealer:
Call your authorized investment dealer for information.
o By Telephone:
You or your investment dealer may redeem (sell) shares by telephone using any of
the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business. Class A and Class C shares only may also be
redeemed by calling New England Funds Personal Access Line(TM) at 1-800-346-5984
twenty-four hours a day. The proceeds (less any applicable CDSC) generally will
be wired on the next business day to the bank account previously chosen by you
on your application. A wire fee (currently $5.00) will be deducted from the
proceeds.
Your bank must be a member of the Federal Reserve System or have a correspondent
bank that is a member. If your account is with a savings bank, it must have only
one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business and requesting that a check for the proceeds (less
any applicable CDSC) be mailed to the address on your account, provided that the
address has not changed over the previous month and that the proceeds are for
$100,000 or less. Generally, the check will be mailed to your address of record
on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business or, for Class A and C shares
only, call New England Funds Personal Access Line(TM) at 1-800-346-5984
twenty-four hours a day. The proceeds (less any applicable CDSC) generally will
arrive at your bank within three business days; their availability will depend
on your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that the
Exchange is open.
o By Mail:
You may redeem your shares at their net asset value (less any applicable CDSC)
next determined after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian or under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by the Funds and NEFSCO. Signature guarantees by notaries
public are not acceptable.
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<PAGE>
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
o By Systematic Withdrawal Plan:
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized
basis, 10% of the value of your Fund account (based on the day you establish
your plan). Redemption of shares pursuant to the plan will not be subject to a
CDSC. For information, contact the Distributor or your investment dealer. Since
withdrawal payments may have tax consequences, you should consult your tax
adviser before establishing such a plan.
General. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time on the same day will
receive that day's net asset value). Redemption proceeds (less any applicable
CDSC) will normally be mailed to you within seven days after State Street Bank
or the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10 days
after such purchase or transfer, the Fund may withhold redemption proceeds until
the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above. Requests are processed at the
net asset value next determined after the request is received.
Special rules apply with respect to redemptions under powers of attorney. Please
call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax-qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors. The Fund(s) reserve the right to suspend account services or refuse
transaction requests when notice has been received by the Fund of a dispute
between the registered or beneficial owners of an account or there is suspicion
or evidence that a fraudulent act may result.
If a Fund's adviser or subadviser determines, in its or their sole discretion,
that it would be detrimental to the best interests of the remaining shareholders
of the Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of readily
marketable securities held by the Fund in lieu of cash. Securities used to
redeem Fund shares in kind will be valued in accordance with the Funds'
procedures for valuation described under "Fund Details -- How Fund Share Price
Is Determined." Securities distributed by a Fund in kind will be selected by the
Fund's subadviser in light of the Fund's objective and will not generally
represent a pro rata distribution of each security held in the Fund's portfolio.
Investors may incur brokerage charges on the sale of any such securities so
received in payment of redemptions. The Funds' right to pay redemptions in kind
is limited by an election made by the Funds under Rule 18f-1 under the
Investment Company Act of 1940, as amended (the "1940 Act"). See "Redemptions"
in Part II of the Statement.
Repurchase Option (Class A Shares Only)
You may apply your proceeds from the redemption of Class A shares of the Funds
(without a sales charge) to the repurchase of Class A shares of any series of
the Trusts. To qualify, you must reinvest some or all of the proceeds within 120
days after your redemption and notify New England Funds or your investment
dealer at the time of reinvestment that you are taking advantage of this
privilege.
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<PAGE>
You may reinvest the proceeds either by returning the redemption check or by
sending your check for some or all of the redemption amount. Please note: For
federal income tax purposes, a redemption is a sale that involves tax
consequences (even if the proceeds are later reinvested). Please consult your
tax adviser.
44
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FUND DETAILS
- --------------------------------------------------------------------------------
How Fund Share Price Is Determined
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. [Eastern time]) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity securities
are valued at the most recent sales prices on an applicable exchange or NASDAQ,
or, in the case of unlisted securities (or listed securities which were not
traded during the day), at the last quoted bid prices. Price information on
listed securities is generally taken from the closing price on the exchange
where the security is primarily traded. Securities traded primarily on an
exchange outside the United States which closes before the close of the Exchange
generally will be valued for purposes of calculating the Fund's net asset value
at the last sale or bid price on that non-U.S. exchange, except that when an
occurrence after the closing of that exchange is likely to have materially
changed such a security's value, such security will be valued at fair value as
determined by or under the direction of each Fund's Board of Trustees as of the
close of regular trading on the Exchange. An option that is written by the Fund
generally will be valued at the last sale price or, in the absence of the last
sale price, the last offer price. A futures contract will be valued at the
unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price. A settlement price may not be used if
the market makes a limit move with respect to a particular futures contract or
if the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price is not used, futures contracts will be valued at their fair value as
determined by or under the direction of each Trust's Board of Trustees.
Short-term notes are valued at cost, or, where applicable, amortized cost, which
method is intended to approximate market value. All other securities and assets
of each Fund's portfolio are valued at their fair market value as determined in
good faith by the adviser or subadviser of that Fund (or a pricing service
selected by the adviser or subadviser) under the supervision of each Trust's
Board of Trustees. The value of any assets for which the market price is
expressed in terms of a foreign currency will be translated into U.S. dollars at
the prevailing market rate on the date of the net asset value computation, or,
if no such rate is quoted at such time, at such other appropriate rate as may be
determined by or under the direction of each Trust's Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (determined as explained above) plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number of shares of
such class outstanding. The public offering price of each Fund's Class A shares
is determined by adding the applicable sales charge to the net asset value. See
"Buying Fund Shares -- Sales Charges" above. The public offering price of each
Fund's Class B and Class C shares is the net asset value per share.
The price you pay for a share will be determined using the next set of
calculations made after your order is accepted by New England Funds, L.P. In
other words, if, on a Tuesday morning, your properly completed application is
received, your wire is received or your dealer places your trade for you, the
price you pay will be determined by the calculations made as of the close of
regular trading on the Exchange on Tuesday. If you buy shares through your
investment dealer, the dealer must receive your order by the close of regular
trading on the Exchange and transmit it to the Distributor by 5:00 p.m. (Eastern
time) (or, under limited circumstances, such other time no later than 8:00 p.m.
(Eastern time) as may be agreed upon between the dealer and the Distributor) to
receive that day's public offering price.
- --------------------------------------------------------------------------------
CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets -- Liabilities = Net Asset Value (NAV)
-----------------------------------------------------
Total Number of Outstanding Shares in a Class
The public offering price for Class A shares is the NAV plus
the applicable sales charge. The public offering price for
Class B and Class C shares is the NAV
- --------------------------------------------------------------------------------
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary to qualify as a
"regulated investment company" and thus does not expect to pay any federal
income tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and ordinary income
are taxable to you as ordinary income. (A portion of these distributions may
qualify for the dividends-received deduction for corporations.) Distributions
designated by the Fund as deriving from net gains on securities held for more
than one year but not more than 18 months ("28% Rate Gain") and from net gains
on securities held for more than 18 months ("20% Rate Gain") are taxable to you
as
45
<PAGE>
such, regardless of how long you have owned shares in the Fund. Both income
distribution and capital gains distributions are taxable whether you elected to
receive them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar
year-end virtually all the Fund's ordinary income earned during that calendar
year, and virtually all of the capital gain net income the Fund realized during
the twelve months ending October 31 but has not previously distributed. If
declared in December to shareholders of record in that month, and paid the
following January, these distributions will be considered for federal income tax
purposes to have been received by shareholders on December 31 of the year in
which declared.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if a Fund is notified that you have underreported income
in the past or if you fail to certify to a Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold 31% of the
gross proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number. If you are a tax-exempt shareholder,
however, these backup withholding rules will not apply so long as you furnish
the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The International Equity Fund may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in the Fund's portfolio. The Fund may in some circumstances be eligible to, and
in its discretion may, make an election under the Code which would allow Fund
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax return. If the Fund
makes the election, the amount of each shareholder's distribution reported on
the information returns filed by the Fund with the Internal Revenue Service must
be increased by the amount of the shareholder's portion of the Fund's foreign
tax paid.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an
investment in a Fund on their particular federal, state and local tax
situations. Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under foreign laws.
The Funds' Expenses
In addition to the management fee paid to its adviser, each Fund pays all
expenses not borne by its adviser or subadviser or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trusts' independent trustees, 12b-1 fees, all brokerage commissions and transfer
taxes in connection with portfolio transactions, all taxes and filing fees, the
fees and expenses for registration or qualification of its shares under federal
and state securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and the
compensation of trustees who are not directors, officers or employees of NELICO
or MetLife or their affiliates, other than affiliated registered investment
companies. In the case of Funds that offer Class Y shares, certain expenses may
be allocated differently between the Fund's Class A, Class B and Class C shares,
on the one hand, and its Class Y shares, on the other hand. (See "Additional
Facts about the Funds" below.)
Under Service Plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund
pays the Distributor a monthly service fee at an annual rate not to exceed 0.25%
of the Fund's average daily net assets attributable to the Class A, Class B and
Class C shares. The Distributor may pay up to the entire amount of this fee to
securities dealers who are dealers of record with respect to the Fund's shares,
on a quarterly basis, unless other arrangements are made between the Distributor
and the securities dealer, for providing personal services to investors in
shares of the Fund and/or the maintenance of shareholder accounts. In the case
of the Class B shares, the Distributor pays investment dealers at the time of
sale the first year's service fee, in the amount of up to 0.25% of the amount
invested. The Class A service fee for all Funds is payable only to reimburse the
Distributor for amounts it pays or expends in connection with the provision of
personal services to investors and/or the maintenance of shareholder accounts.
To the extent that the Distributor's reimbursable expenses in any year exceed
the maximum amount payable under the relevant Service Plan for that year,
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<PAGE>
such expenses may be carried forward for reimbursement in future years in which
the Plan remains in effect. The amounts of unreimbursed Class A expenses carried
over into 1997 from previous plan years were $563,284 for the Capital Growth
Fund, $2,041,399 for the Balanced Fund, $2,030,882 for the Growth Fund, $514,256
for the International Equity Fund and $1,651,994 for the Value Fund. The Class B
and C service fees for all Funds which have such classes of shares, and the
Class A service fee for the Growth Opportunities Fund, are payable regardless of
the amount of the Distributor's related expenses.
Each Fund's Class B and Class C shares also pay the Distributor a monthly
distribution fee at an annual rate not to exceed 0.75% of the average net assets
of the respective Fund's Class B and Class C shares. The Distributor may pay up
to the entire amount of this fee to securities dealers who are dealers of record
with respect to the Fund's shares, as distribution fees in connection with the
sale of the Fund's shares on a quarterly basis, unless other arrangements are
made between the Distributor and the securities dealer. The Distributor retains
the balance of the fee as compensation for its services as distributor of the
Class B and Class C shares.
In addition, NEFM performs certain accounting and administrative services for
the Funds. For those services, each Fund reimburses NEFM for all or part of its
expenses of providing these services to the Fund, which includes the following:
(i) expenses for personnel performing bookkeeping, accounting, internal
auditing, financial reporting and clerical functions relating to the Funds, (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices, proxy
solicitation materials furnished to shareholders of the Funds or regulatory
authorities and reports and questionnaires for SEC compliance, and (iii)
registration, filing and other fees in connection with requirements of
regulatory authorities.
Performance Criteria
Each Fund may include total return information for each class of shares in
advertisements or other written sales material. Each Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter, or, in the case of the Growth Opportunities Fund's Class A shares, from
July 27, 1988, when there was a change in that Fund's investment adviser, to the
end of the most recent calendar quarter. Total return is measured by comparing
the value of a hypothetical $1,000 investment in a class at the beginning of the
relevant period to the value of the investment at the end of the period
(assuming deduction of the current maximum sales charge on Class A shares,
automatic reinvestment of all dividends and capital gains distributions and, in
the case of Class B shares, imposition of the CDSC relevant to the period
quoted). Total return may be quoted with or without giving effect to any
voluntary expense limitations in effect for the class in question during the
relevant period. The class may also show total return over other periods, on an
aggregate basis for the period presented, or without deduction of a sales
charge. If a sales charge is not deducted in calculating total return, the
class's total return will be higher.
The Balanced Fund may also include the yield of its Class A, Class B and Class C
shares, accompanied by the total return, in advertising and other written
material. Yield will be computed in accordance with the SEC's standardized
formula by dividing the adjusted net investment income per share earned during a
recent thirty-day period by the maximum offering price of a share of the
relevant class (reduced by any earned income expected to be declared shortly as
a dividend) on the last day of the period. Yield calculations will reflect any
voluntary expense limitations in effect for the Fund during the relevant period.
The Balanced Fund may also present one or more distribution rates for each class
in its sales literature. These rates will be determined by annualizing the
class's distributions from net investment income and net short-term capital gain
over a recent 12-month, 3-month or 30-day period and dividing that amount by the
maximum offering price or the net asset value on the last day of such period. If
the net asset value, rather than the maximum offering price, is used to
calculate the distribution rate, the rate will be higher.
Total return 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. An investor should balance this expected
lower total return against the benefit gained by 100% immediate investment of
the purchase price of Class B or Class C shares. As a result of lower operating
expenses, Class Y shares of each Fund that offers such shares can be expected to
achieve a higher investment return than the Fund's Class A, Class B or Class C
shares.
All performance information is based on past results and is not an indication of
likely future performance.
Additional Facts About The Funds
o New England Funds Trust I, an open-end management investment company, was
organized in 1985 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple
series. The Growth, Value and
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<PAGE>
Balanced Funds were organized prior to 1985 and conducted investment
operations as separate corporations until their reorganization as series
of New England Funds Trust I in January 1987. The International Equity
Fund and the Capital Growth Fund were organized in 1992.
o New England Funds Trust II, an open-end management investment company, was
organized in 1931 as a Massachusetts business trust and is authorized to
issue an unlimited number of full and fractional shares in multiple
series. The Growth Opportunities Fund is the original series of shares of
the Trust and has been in operation since 1931.
o New England Funds Trust III was organized in 1995 as a Massachusetts
business trust and is authorized to issue and unlimited number of full and
fractional shares in multiple series.
o When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive annual or quarterly
dividends as determined by the respective Trust's trustees and to cast a
vote for each share you own at shareholder meetings. Shares of each Fund
vote separately from shares of other series of the same Trust, except as
otherwise required by law. Shares of all classes of a Fund vote together,
except as to matters relating to a class's Rule 12b-1 plan, on which only
shares of that class are entitled to vote.
o Except for matters that are explicitly identified as "fundamental" in this
prospectus or the Statement, the investment policies of each Fund may be
changed by the relevant Trust's trustees without shareholder approval or,
in most cases, prior notice. The investment objectives of the Growth,
Value and Balanced Funds are fundamental. The investment objectives of the
Capital Growth, International Equity and Equity Income Funds are not
fundamental. The investment objective of the Growth Opportunities Fund is
not fundamental but, as a matter of policy, the trustees would not change
the objective without shareholder approval. If there is a change in the
objective of the Capital Growth, International Equity, Equity Income or
Growth Opportunities Fund, shareholders should consider whether these
Funds remain appropriate investments in light of their current financial
position and needs.
o Each Fund (except the Growth Fund) also offers Class Y shares to certain
qualified investors. Class Y shares are identical to Class A, Class B and
Class C shares. eExcept for an annual service fee of up to 0.25% of the
Class Y shares of the Money Market Funds, Class Y shares have no sales
charge or CDSC, bear no Rule 12b-1 fees and have separate voting rights in
certain circumstances. Class Y may bear its own transfer agency and
prospectus printing costs and, if so, will not bear any portion of those
costs relating to other classes of shares.
o The Trusts do not generally hold regular shareholder meetings and will do
so only when required by law. Shareholders of a Trust may remove the
trustees of that Trust from office by votes cast at a shareholder meeting
or by written consent.
o If the balance in your account with a Fund is less than a minimum amount
set by the trustees of the Trusts from time to time (currently $1,000 for
all accounts, except for those indicated below), that Fund may close your
account and send the proceeds to you. Shareholders who are affected by
this policy will be notified of the Fund's intention to close the account
and will have 60 days immediately following the notice to bring the
account up to the minimum. The minimum does not apply to Keogh, pension
and profit sharing plans, automatic investment plans or accounts that have
fallen below the minimum solely because of fluctuations in a Fund's net
asset value per share.
o The Trusts, together with the Money Market Funds, constitute the New
England Funds. Each Trust offers only its own funds' shares for sale, but
it is possible that a Trust might become liable for any misstatements in
this prospectus that relate to the other Trust. The trustees of each Trust
have considered this possible liability and approved the use of this
combined prospectus for Funds of both Trusts.
o Each Fund's annual report contains additional performance information and
is available upon request and without charge. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more
than one shareholder of record with the same last name has indicated that
mail is to be delivered. Shareholders may request additional copies of any
annual or semi-annual report in writing or by telephone.
o The Class A, Class B, Class C and Class Y structure could be terminated
should certain IRS rulings be rescinded.
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o The Trust's trustees have the authority without shareholder approval to
issue other classes of shares of a Fund that represent interest in the
Fund's portfolio but that have different sales load and fee arrangements.
49
<PAGE>
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GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
Capital gain distributions -- Payments to shareholders of profits earned from
selling securities in the fund's portfolio. Capital gain distributions are
usually paid once a year.
Contingent Deferred Sales Charge (CDSC) -- A fee that may be charged when a
shareholder sells fund shares.
Distribution fee -- An annual asset-based sales charge that is used to pay for
sales-related expenses.
Income Distributions -- Payments to shareholders resulting from interest or
dividend income earned by a fund's portfolio.
Mutual fund -- The pooled assets of a group of investors, professionally managed
in pursuit of a specific objective.
Net asset value (NAV) -- The market value of one share of a mutual fund on any
given day without sales charge or CDSC. Determined by dividing the fund's total
net assets by the number of fund shares outstanding.
New England Funds, L.P. -- The distributor of the New England Funds.
New England Funds Management, L.P. -- The investment adviser to most of the New
England Funds.
New England Funds Service Corporation -- The transfer and dividend dispersing
agent of the New England Funds.
Open end investment management company -- A mutual fund that allows investors to
redeem fund shares directly from the fund company on any business day.
Public offering price -- The price of one share of a mutual fund, including its
initial sales charge, if there is one.
Record date -- The date on which mutual fund investors must own a fund's shares
to be eligible to receive specific income or capital gain distributions.
Service fee -- Payments by a fund to the fund's distributor or a financial
representative for personal services to investors and/or for maintenance of
shareholder accounts.
Total Return -- The change in value of an investment in a fund over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
Yield -- The rate at which a fund earns income, expressed as a percentage. Yield
calculations are standardized among mutual funds, based on a formula developed
by the SEC.
12b-1 fees -- Fees paid by a mutual fund under a plan adopted under 1940 Act
Rule 12b-1. Can include both distribution fees and service fees.
50
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[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet
- --------------------------------------------------------------------------------
NEW ENGLAND STAR ADVISERS FUND
NEW ENGLAND STAR WORLDWIDE FUND
NEW ENGLAND STAR SMALL CAP FUND
Prospectus and Application -- May 1, 1998
New England Star Advisers Fund, New England Star Worldwide Fund and New England
Star Small Cap Fund are separate mutual funds (the "Funds" and each a "Fund").
Each Fund is a multi-manager mutual fund that allocates its investment capital
on an equal basis among multiple segments of the Fund advised by independent
investment management organizations that employ different investment styles and
strategies. Each Fund is a series of New England Funds Trust I (the "Trust"), a
registered open-end management investment company. The Trust, New England Funds
Trust II and new England Funds Trust III are referred to in this prospectus as
the "Trusts." Other series of the Trust are described in separate prospectuses.
The investment objective of New England Star Advisers Fund and New England Star
Worldwide Fund is long-term growth of capital. The investment objective of New
England Star Small Cap Fund is capital appreciation. There can be no assurance
that any Fund will achieve its objective, which may be changed without
shareholder approval.
Each Fund offers three classes of shares to the general public (Classes A, B and
C). The offering price is based on the net asset value per share next determined
after an order is received. Class A share purchases generally involve a sales
charge at the time of purchase. No initial sales charge applies to Class B share
purchases. A contingent deferred sales charge (a "CDSC"), however, is imposed
upon certain redemptions of Class B and Class C shares. Class B shares
automatically convert to Class A shares eight years after purchase. Class C
shares do not have a conversion feature. Class B shares and Class C shares bear
higher annual 12b-1 fees than Class A shares. See "Buying Fund Shares--Sales
Charges." Through a separate prospectus, New England Star Advisers Fund also
offers an additional class of shares, Class Y shares, to certain institutional
investors. To obtain more information about Class Y shares, please call New
England Funds, L.P. (the "Distributor") toll-free at 1-800-225-5478.
This prospectus sets forth information you should know before investing in the
Funds. Please read it carefully and keep it for future reference. A statement of
additional information in two parts (the "Statement") about the Funds dated May
1, 1998 has been filed with the Securities and Exchange Commission (the "SEC")
and is available free of charge. Write to New England Funds, L.P., SAI
Fulfillment Desk, 399 Boylston Street, Boston, MA 02116 or call toll free at
1-800-225-5478. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the Statement, materials incorporated by reference, and other
information regarding each of the Funds. The Statement contains more detailed
information about the Funds and is incorporated into this prospectus by
reference.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
For general information on the Funds or any of their services and for assistance
in opening an account, contact your investment dealer or call the Distributor
toll free at 1-800-225-5478.
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<PAGE>
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TABLE OF CONTENTS
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Page
<TABLE>
<C> <S> <C>
FUND EXPENSES AND FINANCIAL INFORMATION
1 Schedule of Fees Sales charges, yearly operating expenses.
2 Financial Highlights Historical information on the Funds' performance.
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INVESTMENT STRATEGY
4 Investment Objectives The investment goal for each Fund.
4 New England Investment Companies and the
Funds' Adviser and Subadvisers.
4 How The Funds Pursue Their Objectives
4 Fund Investments and Subadvisers' Investment
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9 INVESTMENT RISKS It is important to understand the risks inherent in a
Fund before you invest.
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21 FUND MANAGEMENT
- -----------------------------------------------------------------------------------------------------------------------
BUYING FUND SHARES
24 Minimum Investment Everything you need to know to open and add to
24 6 Ways to Buy Fund Shares a New England Funds account.
o Through your investment dealer
o By mail
o By wire transfer of Federal Funds
o By Investment Builder
o By electronic purchase through ACH
o By exchange from another New England Fund
25 Sales Charges
28 Reduced Sales Charges (Class A Shares Only)
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OWNING FUND SHARES
30 Exchanging Among New England Funds New England Funds offers three convenient ways to
31 Fund Dividend Payments exchange Fund shares.
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SELLING FUND SHARES
32 4 Ways to Sell Fund Shares How to withdraw money or close your account.
o Through your investment dealer
o By telephone
o By mail
o By Systematic Withdrawal Plan
34 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds
within 120 days for no sales charge.
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FUND DETAILS
34 How Fund Share Price Is Determined Additional information you may find important.
35 Income Tax Considerations
36 The Funds' Expenses
37 Performance Criteria
37 Additional Facts About The Funds
</TABLE>
<PAGE>
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FUND EXPENSES AND FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Schedule of Fees
Expenses are one of several factors to consider when you invest in the Funds.
The following tables summarize your maximum transaction costs from investing in
Class A, B and C shares of the Funds and estimated annual expenses of the Funds'
Class A, B and C shares. The Example on the following page shows the cumulative
expenses attributable to a hypothetical $1,000 investment in Class A, B and C
shares of the Funds for the periods specified.
Shareholder transaction expenses
<TABLE>
<CAPTION>
All Funds
---------------------------------------------
Class A Class B Class C
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(1)(2) ....................... 5.75% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or redemption
proceeds, as applicable)(2) ................................... (3) 5.00% 1.00%
</TABLE>
(1) A reduced sales charge on Class A shares applies in some cases. See
"Buying Fund Shares-- Reduced Sales Charges (Class A Shares Only)."
(2) Does not apply to reinvested distributions.
(3) A 1.00% contingent deferred sales charge applies with respect to any
portion of certain purchases of Class A shares greater than $1,000,000
redeemed within 1 year after purchase, but not to any other purchases or
redemptions of Class A shares. See "Buying Fund Shares -- Sales Charges."
Annual Fund operating expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
New England New England New England
Star Advisers Fund Star Worldwide Fund Star Small Cap Fund
-------------------------------- --------------------------------- ---------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............. % % % % % % % % %
12b-1 Fees ................. 0.25 1.00* 1.00* 0.25 1.00* 1.00* 0.25 1.00* 1.00*
Other Expenses..............
Total Fund Operating
Expenses..................
</TABLE>
* 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.
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.
<TABLE>
<CAPTION>
New England New England Star New England
Star Advisers Fund Worldwide Fund Start Small Cap Fund
--------------------------------- ----------------------------------- -------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
(1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
3 years $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
5 years $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
10 years* $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
</TABLE>
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years
9 and 10.
1
<PAGE>
The purpose of this fee schedule is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly if you invest in
the Funds. For additional information about the Funds' management fees and other
expenses, please see "Fund Management," "The Funds' Expenses" and "Additional
Facts About the Funds."
A wire fee (currently $5.00) will be deducted from your proceeds if you elect to
transfer redemption proceeds by wire.
2
<PAGE>
Financial Highlights
(For Class A, B and C shares of each fund outstanding throughout the indicated
periods.)
The Financial Highlights presented on pages 2 through 3 have been included in
financial statements for the funds. The financial statements for the Class A, B
and C shares of the funds have been examined by Price Waterhouse LLP,
independent accountants. The report of Price Waterhouse LLP is incorporated by
reference in Part II of the Statement and may be obtained by shareholders. The
Financial Highlights should be read in conjunction with the financial statements
and the notes thereto incorporated by reference in Part II of the Statement.
Each Fund's annual reports contain additional performance information and is
available upon request and without charge.
New England Star Advisers Fund
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- -------------------------------------------
July 7(a) July 7(a)
through Year Ended Dec. 31, through Year Ended Dec. 31,
Dec. 31, --------------------------------- Dec. 31, -------------------------------
1994 1995 1996 1997 1994 1995 1996 1997
-------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $13.25 $16.78 $12.50 $13.23 $16.63
-------------------------------------------- -------------------------------------------
Income from investment operations
Net investment income (loss) 0.05 0.00 (0.06)(e) 0.02 0.00 (0.20)(e)
Net gains or losses on investments
(both realized and unrealized) 0.75 4.52 3.17 0.73 4.39 3.14
-------------------------------------------- -------------------------------------------
Total income from investment
operations 0.80 4.52 3.11 0.75 4.39 2.94
-------------------------------------------- -------------------------------------------
Less distributions
Distributions (from net
investment income) (0.05) 0.00 0.00 (0.02) 0.00 0.00
Distributions (from net realized
capital gains) 0.00 (0.99) (1.71) 0.00 (0.99) (1.71)
-------------------------------------------- -------------------------------------------
Total distributions (0.05) (0.99) (1.71) (0.02) (0.99) (1.71)
-------------------------------------------- -------------------------------------------
Net asset value, end of period $13.25 $16.78 $18.18 $13.23 $16.63 $17.86
============================================ ===========================================
Total return (%)(c) 6.4 34.4 19.0 6.0 33.4 18.1
Ratios/Supplemental data
Net assets, end of period (000) $91,218 $223,596 $348,573 $72,889 $220,017 $366,314
Ratio of operating expenses to
average net assets (%)(d) 1.94(b) 1.82 1.68 2.69(b) 2.57 2.43
Ratio of net investment income to
average net assets (%) 1.06(b) (0.33) (0.36) 0.31(b) (1.08) (1.11)
Portfolio turnover rate (%) 100 142 127 100 142 127
Average commission rate paid(f) -- -- $0.0595 -- -- $0.0595
Class C
--------------------------------------------
July 7(a)
through Year Ended Dec. 31,
Dec. 31, ---------------------------------
1994 1995 1996 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.50 $13.24 $16.65
--------------------------------------------
Income from investment operations
Net investment income (loss) 0.02 0.00 (0.20)(e)
Net gains or losses on investments
(both realized and unrealized) 0.74 4.40 3.13
--------------------------------------------
Total income from investment
operations 0.76 4.40 2.93
--------------------------------------------
Less distributions
Distributions (from net
investment income) (0.02) 0.00 0.00
Distributions (from net realized
capital gains) 0.00 (0.99) (1.71)
--------------------------------------------
Total distributions (0.02) (0.99) (1.71)
--------------------------------------------
Net asset value, end of period $13.24 $16.65 $17.87
============================================
Total return (%)(c) 6.0 33.4 18.0
Ratios/Supplemental data
Net assets, end of period (000) $20,096 $45,672 $80,312
Ratio of operating expenses to
average net assets (%)(d) 2.69(b) 2.57 2.43
Ratio of net investment income to
average net assets (%) 0.31(b) (1.08) (1.11)
Portfolio turnover rate (%) 100 142 127
Average commission rate paid(f) -- -- $0.0595
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a CDSC in the case of
Class B shares are not reflected in total return calculations. Periods of
less than one year are not annualized.
(d) The ratio of operating expenses to average net assets (computed on an
annualized basis) for Class A, B and C shares without giving effect to the
voluntary expense limitations in effect from July 7, 1994 through December
31, 1994 would have been 1.98%, 2.75% and 2.75%, respectively.
(e) Per share net investment loss has been calculated using the average shares
outstanding during the year.
2
<PAGE>
(f) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate paid per share for trades
on which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
On July 25, 1997, Harris Associates, L.P. succeeded Berger Associates, Inc.
("Berger"), as the subadvisor of one of the five segments of the Fund. These
financial highlights incorporate results achieved by this segment prior to July
25, 1997 by Berger under different investment policies.
3
<PAGE>
New England Star Worldwide Fund
<TABLE>
<CAPTION>
Class A Class B Class C
--------------------- -------------------- ---------------------
Year Ended Dec. 31, Year Ended Dec. 31, Year Ended Dec. 31,
--------------------- -------------------- ---------------------
1996 1997 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from investment
operations
Net investment loss (a) (0.03)(b) (0.12)(b) (0.12)(b)
Net realized and unrealized gain on
investments 2.11 2.10 2.11
------- ------- ------- ------- ------- -------
Total income from investment
operations 2.08 1.98 1.99
------- ------- ------- ------- ------- -------
Less Distributions
------- ------- ------- ------- ------- -------
Distributions (from net
investment income) 0.00 0.00 0.00
------- ------- ------- ------- ------- -------
Distributions (from net realized
capital gains) (0.18) (0.18) (0.18)
------- ------- ------- ------- ------- -------
Total Distributions (0.18) (0.18) (0.18)
------- ------- ------- ------- ------- -------
Net asset value, end of period 14.40 14.30 14.31
======= ======= ======= ======= ======= =======
Total return (%)(b) 16.7 15.9 15.9
Ratios/Supplemental data
Net assets, end of period (000) $68,509 $65,367 $17,980
Ratio of operating expenses to
average net assets (%) 2.58 3.33 3.33
Ratio of net investment income
(loss) to average net assets (%) (0.21) (0.96) (0.96)
Portfolio turnover rate (%) 57 57 57
Average commission rate (d) $0.0004 $0.0004 $0.0004
</TABLE>
(a) A sales charge in the case of the Class A shares and a CDSC in the case of
Class B shares are not reflected in total return calculations. Periods of
less than one year are not annualized.
(b) Per share net investment loss has been calculated using the average shares
outstanding during the year.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs or spreads on shares traded on a principal basis.
4
<PAGE>
New England Star Small Cap Fund
<TABLE>
<CAPTION>
Class A Class B Class C
--------------------- -------------------- ---------------------
Year Ended Dec. 31, Year Ended Dec. 31, Year Ended Dec. 31,
--------------------- -------------------- ---------------------
1996 1997 1996 1997 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <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 income from investment
operations 0.55 0.52 0.52
------- ------- ------- ------- ------- -------
Net asset value, end of period $13.05 $13.02 $13.02
======= ======= ======= ======= ======= =======
Total return (%)(b) 4.4 4.2 4.2
Ratios/Supplemental data
Net assets, end of period (000) $28,153 $26,085 $7,962
Ratio of operating expenses to 2.51(c) 3.26(c) 3.26(c)
average net assets (%) 2.57 2.57
Ratio of net investment loss to (1.25)(c) (2.00)(c) (2.00)(c)
average net assets (%) 117(c) 117(c) 117(c)
Portfolio turnover rate (%) 142 142 142
Average commission rate (d) $0.0541 $0.0541 $0.0541
</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. 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 principal basis.
5
<PAGE>
7
<PAGE>
8
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
- --------------------------------------------------------------------------------
Investment Objectives
New England Star Advisers Fund (the "Star Advisers Fund")
The Fund seeks long-term growth of capital.
Subadvisers: Harris Associates L.P., Founders Asset Management, Inc., Janus
Capital Corporation and Loomis, Sayles & Company, L.P.
New England Star Worldwide Fund
(the "Star Worldwide Fund")
The Fund seeks long-term growth of capital.
Subadvisers: Harris Associates L.P., Montgomery Asset Management, L.P., Founders
Asset Management, Inc. and Janus Capital Corporation
New England Star Small Cap Fund
(the "Star Small Cap Fund")
The Fund seeks capital appreciation.
Subadvisers: Robertson, Stephens & Company Investment Management, L.P.,
Montgomery Asset Management, L.P., Loomis, Sayles & Company, L.P. and Harris
Associates L.P.
New England Investment Companies and the Funds' Advisers and Subadvisers
New England Funds Management, L.P. ("NEFM"), the adviser to each of the Funds,
is an independently operated subsidiary of NEIC Operating Partnership, L.P.
("NEICOP"), which is part of an affiliated group including New England
Investment Companies, L.P. ("NEIC") a publicly traded company listed on the New
York Stock Exchange. NEICOP's 14 principal subsidiary or affiliated asset
management firms, collectively, had more than $120 billion of assets under
management as of September 30, 1997. Each subadviser operates independently and
is staffed by experienced investment professionals. All the subadvisers apply
specialized knowledge and careful analysis to the pursuit of each Fund's
objectives.
New England Funds Management, L.P. is the adviser to each of the Funds as well
as to most of the other New England Funds.
How the Funds Pursue Their Objectives
Capital invested in each Fund will be allocated equally among the different
segments of the Fund's portfolio, managed by the different subadvisers. For each
Fund, each subadviser will manage its segment or segments of the Fund's assets
in accordance with the Fund's objective and the subadviser's own investment
style and strategy. The subadvisers' styles and strategies are outlined below.
See also "Fund Management." NEFM is the adviser of each Fund and oversees the
segments' investment activities as conducted by the subadvisers.
Fund Investments and Subadvisers' Investment Styles
o Star Advisers Fund
The Star Advisers Fund seeks to attain its objective by investing
primarily in equity securities. The Fund may also invest in other
securities, as described below. Under normal market conditions, however,
at least 65% of the Fund's assets will be invested in equity securities.
Capital invested in the Fund will be allocated on an equal basis among
four different subadvisers. Each subadviser will manage its segment of the
Fund's assets in accordance with that subadviser's own investment style
and strategy. The Fund, in the discretion of each subadviser, may invest
without limit in securities of companies with smaller
9
<PAGE>
capitalization. The Fund may in the discretion of each of its subadvisers
invest without limit in securities of foreign issuers (including issuers
in emerging markets) as well as in securities of U.S. issuers.
The investment styles described below will be those applied by each of the
subadvisers to the segment of the Fund's portfolio for which that
subadviser is responsible.
Harris Associates L.P. ("Harris Associates") Harris Associates' investment
philosophy is predicated on the belief that over time market price and
value converge and that investment in securities priced significantly
below long-term value presents the best opportunity to achieve long term
growth of capital. Its segment of the Fund's portfolio invests primarily
in common stocks and securities convertible into common stock, but may
also invest in other securities that are suited to the Fund's investment
objective, including preferred stocks, and fixed income securities
(including lower quality fixed-income securities).
Founders Asset Management, Inc.'s ("Founders") segment of the portfolio
will invest primarily in common stocks of well-established, high-quality
growth companies. Founders manages its segment of the Fund's portfolio by
investing primarily in established companies with above-average prospects
for growth in earnings per share. This segment will invest primarily in
mid-cap and large capitalization stocks. Founders believes that mid-cap
companies (companies with between $1.0 billion and $5.0 billion of market
capitalization) may produce returns comparable to those of smaller-cap
companies, but with less risk because of their generally stronger
infrastructures and performance records and more solid market positions,
and that large-capitalization stocks add stability to the portfolio. These
companies tend to have strong performance records, with continuous
operating records of three years or more. Founders' approach to investment
management gives greater emphasis to the fundamental financial, marketing
and operating characteristics of individual companies, and is less
concerned with the short-term impact of changes in macroeconomic and
market conditions, than some other investment firms. This segment of the
portfolio may invest in bonds, debentures and other corporate obligations
when Founders believes that these investments offer opportunity for growth
of capital. This segment of the portfolio may also invest in Rule 144A
securities and may enter into futures contracts or options thereon for
hedging purposes.
Janus Capital Corporation ("Janus Capital") pursues the Fund's investment
objective by investing substantially all of Janus Capital's segment of the
portfolio in common stocks when its portfolio manager believes that the
relevant market environment favors profitable investing in such
securities. Janus Capital manages its segment of the portfolio to seek
long-term capital growth primarily from investing in common stocks of
companies of any size, including large, well-established companies and
smaller, emerging growth companies. Janus Capital's analysis and selection
process focus on stocks with earnings growth potential that may not be
recognized by the market. This segment of the portfolio may also invest in
preferred stocks, warrants, government securities, corporate bonds and
debentures or other debt securities or repurchase agreements when its
portfolio manager perceives an opportunity for capital growth from such
securities or to receive a return on idle cash. Janus Capital's segment
may also invest in Rule 144A securities and may enter into options,
futures and forward contracts.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") manages its segment of
the portfolio by investing primarily in stocks of small cap companies with
good earnings growth potential that Loomis Sayles believes are undervalued
by the market. Such companies typically have market capitalization (shares
outstanding times market price per share) of less than $1 billion, have
better than average growth rates at below average price/earnings ratios
and have strong balance sheets and cash flow. Loomis Sayles seeks to build
a core small cap portfolio of solid growth company stocks, with a smaller
emphasis on special situations and turnarounds (companies that have
experienced significant business problems but which Loomis Sayles believes
have favorable prospects for recovery), as well as unrecognized stocks.
o Star Worldwide Fund
The Star Worldwide Fund seeks long-term growth of capital by investing
primarily in equity securities both within the United
10
<PAGE>
States and around the world. The Fund is a global fund, which means it
will seek to invest in equity securities traded on foreign stock markets
as well as the stock markets of the United States. Foreign markets
represent two-thirds of the value of all stocks traded in the world, and
offer many opportunities for investment in addition to those found in the
United States. Foreign markets may be located in large, developed
countries such as Great Britain or in smaller, developing markets like
Singapore. The Fund may also invest in other securities, as described
below. Under normal market conditions, however, at least 65% of each
segment of the Fund's portfolio, and at least 65% of the Fund's total
assets, will be invested in equity securities. The Fund may, in the
discretion of each of its subadvisers (see below), invest without limit in
securities of foreign issuers (including issuers in emerging markets) as
well as in securities of U.S. issuers. Under normal market conditions, the
Fund will invest in securities of issuers in at least three different
countries, one of which will be the United States. As a temporary,
defensive measure, however, the Fund may invest without limit in
securities of U.S. issuers, including corporate and government debt
obligations, or in cash or cash equivalents. For more information about
investments in foreign securities, see "Investment Risks -- Foreign
Securities."
Capital invested in the Fund will be allocated equally among five
different segments of the portfolio, managed by four different
subadvisers. Each subadviser will manage its segment or segments of the
Fund's assets in accordance with that subadviser's own investment style
and strategy. The subadvisers' styles and strategies are outlined below.
Harris Associates manages two segments of the Fund's portfolio, a U.S.
segment and an international segment. Harris Associates' investment
philosophy is predicated on the belief that over time market price and
value converge and that investment in securities priced significantly
below long-term value presents the best opportunity to achieve long term
growth of capital. The U.S. segment invests primarily in equity securities
of U.S. issuers, whereas the international segment invests primarily in
markets outside the U.S., which may include both mature and emerging
markets. The segments of the Fund managed by Harris Associates invest
primarily in common stocks and securities convertible into common stock,
but may also invest in other securities that are suited to the Fund's
investment objective, including preferred stocks and fixed-income
securities (including lower quality fixed-income securities).
Montgomery Asset Management, L.P. ("Montgomery") normally will invest at
least 65% of its segment of the Fund's portfolio in equity securities in
emerging market countries. Montgomery selects investments for its segment
based on a combination of quantitative screening techniques, "top-down"
industry selection and "bottom-up" stock selection, using fundamental
analysis.
Founders' segment of the portfolio may invest in both small and
established growth companies, in both emerging and established markets
throughout the world. Founders' approach to investment management gives
greater emphasis to the fundamental financial, marketing and operating
characteristics of individual companies, and is less concerned with the
short-term impact of changes in macroeconomic and market conditions, than
some other investment firms. This segment of the portfolio may invest in
bonds, debentures and other fixed-income securities (including lower
quality fixed-income securities) when Founders' believes that these
investments offer opportunity for growth of capital.
Janus Capital pursues the Fund's investment objective by investing its
segment of the portfolio in U.S. and foreign (including emerging) markets,
using a "bottom-up" approach. Janus Capital seeks to identify companies
with earnings growth potential that may not be recognized by the market at
large. This segment of the portfolio invests primarily in common stocks,
and may also invest, to a lesser degree, in preferred stocks, warrants,
government securities, corporate bonds and debentures or other
fixed-income securities (including lower quality fixed-income securities).
o Star Small Cap Fund
The Star Small Cap Fund seeks to attain its objective of capital
appreciation by investing primarily in equity securities of small
capitalization companies, which the Fund currently considers to be
companies having total market capitalization (shares outstanding times
market price per share), at the time of purchase, of under $1 billion
("Small Cap Companies"). Under normal market conditions, at least 65% of
the Fund's net assets will be invested in Small Cap Companies. The Fund
may also invest its assets in companies having larger market
capitalization and in other securities, including foreign and fixed-income
securities. Foreign securities, including equity securities that are
traded over-the-counter or on foreign exchanges, may constitute up to 25%
of the Fund's net assets. There are no geographic limits on the Fund's
foreign investments. For more information about investment in foreign and
fixed-income securities, see "Investment Risks -- Foreign Securities" and
"Investment Risks -- Fixed-Income Securities."
The investment styles below will be those applied by each of the
subadvisers to the segment of the Fund's portfolio for which that
subadviser manages.
11
<PAGE>
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens") pursues the Fund's investment objective by selecting securities
for its segment based on a flexible, research-driven, bottom up approach
to value recognition and trend analysis. Stock selection focuses on a
growth catalyst that is expected to drive earnings and valuations higher
over a 1 to 3 year time horizon. The catalyst may be a new product launch,
a new management team, expansion into new markets, realization of
undervalued assets, or some other change expected to result in growth.
Once identified, that catalyst becomes the primary reason for owning the
stock.
Montgomery seeks to identify companies at an early stage or a transitional
point of the companies' development, such as the introduction of new
products, favorable management changes, new marketing opportunities or
increased market share for existing product lines. Using fundamental
research, Montgomery targets businesses having positive internal dynamics
that can outweigh unpredictable macro-economic factors, such as interest
rates, commodity prices, foreign currency rates and overall stock market
volatility. Montgomery searches for companies with potential to gain
market share within their respective industries, achieve and maintain high
and consistent profitability, produce increased quarterly earnings and
provide solutions to current and pending problems in their respective
industries or society at large.
Loomis Sayles intends to manage its segment of the Fund by investing in
companies that offer distinctive products, services or technologies. These
companies are expected to exhibit the potential for dynamic earnings
growth as a result of rising sales and improving profitability. Most of
these companies will have market capitalizations between $100 million and
$1 billion at the time of initial purchase. Loomis Sayles also places a
significant amount of importance on the quality of management of these
smaller companies because it is Loomis Sayles' belief that ultimately it
is the skill of the management team that will enable these small companies
to mature into large, successful companies. Loomis Sayles employs a
fundamental research approach to identify and invest in these companies.
Some of the factors evaluated include historical results, competitive
position, including market share gains and losses, the impact of
technology, secular trends in the economy and management history.
Projections are made for both current and the following year's results and
for longer term (3-5 years) growth rates. Typically, only companies with a
projected long term earnings growth rate in excess of 20% per year are
purchased for the portfolio. Positions are typically eliminated from the
portfolio when the company begins to evidence slowing growth trends
usually associated with larger companies.
Harris Associates' approach in selecting investments for its segment of
the Fund is oriented to individual stock selection and is driven by the
size of the discount of the security's market price relative to the
economic value of the security as determined by Harris Associates. Harris
Associates' investment philosophy is predicated on the belief that over
time market price and value converge and that investment in securities
priced significantly below long-term value presents the best opportunity
to achieve long-term capital appreciation. In managing its segment, Harris
Associates uses several qualitative and quantitative methods in analyzing
economic value, but considers the primary determinant of value to be the
company's long-term ability to generate cash for its owners. Once Harris
Associates has determined that a security is undervalued, it will be
considered for purchase, taking into account the quality and motivation of
the management, the firm's market position within its industry and its
degree of purchasing power. Harris Associates believes that the risks of
equity investment are often reduced if management's interests are strongly
aligned with the interests of stockholders.
o General
Under unusual market conditions as determined by any of the subadvisers,
all or any portion of the segment of the portfolio managed by that
subadviser may be invested, for temporary, defensive purposes, in
short-term debt instruments or in cash. In addition, under normal
conditions, a portion of each segment's assets may be invested in
short-term assets for liquidity purposes or pending investment in other
securities. Short-term investments may include U.S. Government securities,
certificates of deposit, commercial paper and other obligations of
corporate issuers rated in the top two rating categories by a major rating
agency or, if unrated, determined to be of comparable quality by the
subadviser, and repurchase agreements that are fully collateralized by
cash, U.S. Government securities or high-quality money market instruments.
Although each segment of the Funds' portfolios will normally be invested
primarily in equity securities (including, but not limited to, common and
preferred stocks, warrants and options), each segment may also engage in
various investment techniques and practices. See "Investment Risks" below.
12
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RISKS
- --------------------------------------------------------------------------------
It is important to understand the following risks inherent in a Fund
before you invest.
o Equity Securities
Equity securities are securities that represent an ownership interest (or
the right to acquire such an interest) in a company and include common and
preferred stocks and securities exercisable for or convertible into common
or preferred stocks (such as warrants, convertible debt securities and
convertible preferred stock). While offering greater potential for
long-term growth, equity securities are more volatile and more risky than
some other forms of investment. Therefore, the value of your investment in
a Fund may sometimes decrease instead of increase. Each Fund may invest in
equity securities of companies with relatively small market
capitalization. Securities of such companies may be more volatile than the
securities of larger, more established companies and the broad equity
market indices. See "Small Companies" below. Each Fund's investments may
include securities traded "over-the-counter" as well as those traded on a
securities exchange. Some over-the-counter securities may be more
difficult to sell under some market conditions.
Each Fund may invest in convertible securities, including corporate bonds,
notes or preferred stocks that can be converted into common stocks or
other equity securities. Convertible securities also include other
securities, such as warrants, that provide an opportunity for equity
participation. Because convertible securities can be converted into equity
securities, their values will normally increase or decrease as the values
of the underlying equity securities increase or decrease. The movements in
the prices of convertible securities, however, may be smaller than the
movements in the value of the underlying equity securities. The value of
convertible securities that pay dividends or interest, like the value of
other fixed-income securities, generally fluctuates inversely with changes
in interest rates. Less than 35% of each Fund's respective net assets will
be invested in convertible securities rated below investment grade and
unrated convertible securities of comparable quality.
o Small Companies
The Star Advisers and Star Worldwide Funds, in the discretion of each of
their subadvisers, may invest without limit in the securities of companies
with smaller capitalization. The Star Small Cap Fund invests primarily in
securities of companies with market capitalization of under $1 billion.
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with more established companies.
These companies often have sales and earnings growth rates which exceed
those of companies with larger capitalization. Such growth rates may in
turn be reflected in more rapid share price appreciation. However,
companies with smaller capitalization often have limited product lines,
markets or financial resources and may be dependent upon a relatively
small management group. The securities may have limited marketability and
may be subject to more abrupt or erratic movements in price than
securities of companies with larger capitalization or market averages in
general. The net asset value of funds that invest in companies with
smaller capitalization therefore may fluctuate more widely than market
averages.
o Warrants
The Funds may invest in warrants. A warrant is an instrument that gives
the holder a right to purchase a given number of shares of a particular
security at a specified price until a stated expiration date. Buying a
warrant generally can provide a greater potential for profit or loss than
an investment of equivalent amounts in the underlying common stock. The
market value of a warrant does not necessarily move with the value of the
underlying securities. If a holder does not sell the warrant, it risks the
loss of its entire investment if the market price of the underlying
security does not, before the expiration date, exceed the exercise price
of the warrant plus the cost thereof. Investment in warrants is a
speculative activity. Warrants pay no dividends and confer no rights
(other than the right to purchase the underlying securities) with respect
to the assets of the issuer.
o Foreign Securities
Investments in foreign securities present risks not typically associated
with investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or
traded primarily in securities markets in which settlements are made in
foreign currencies, the value of these investments and the net investment
income available for distribution to shareholders of a Fund may be
affected favorably or unfavorably by changes in currency exchange rates or
exchange control regulations. Because the Funds may purchase securities
denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S.
dollar value of the Fund's assets and the Fund's income available for
distribution.
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In addition, although a Fund's income may be received or realized in
foreign currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the value of a currency relative
to the U.S. dollar declines after a Fund's income has been earned in that
currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the
amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in such currency of such expenses at the time they were
incurred.
There may be less information publicly available about a foreign corporate
or government issuer than about a U.S. issuer, and foreign corporate
issuers are not generally subject to accounting, auditing and financial
reporting standards and practices comparable to those in the United
States. The securities of some foreign issuers are less liquid and at
times more volatile than securities of comparable U.S. issuers. Foreign
brokerage commissions and securities custody costs are often higher than
those in the United States, and judgments against foreign entities may be
more difficult to obtain and enforce. With respect to certain foreign
countries, there is a possibility of governmental expropriation of assets,
confiscatory taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may
depend on the availability of tax or other revenues to satisfy the
issuer's obligations.
Investments in foreign securities may include investments in emerging or
developing countries, whose economies or securities markets are not yet
highly developed. Special considerations associated with these investments
(in addition to the considerations regarding foreign investments
generally) may include, among others, greater political uncertainties, an
economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such
securities and delays and disruptions in securities settlement procedures.
The Funds may invest in foreign equity securities either by purchasing
such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an
interest in equity securities held by arrangement with the bank.
Depository receipts can be either "sponsored" or "unsponsored." Sponsored
depository receipts are issued by banks in cooperation with the issuer of
the underlying equity securities. Unsponsored depository receipts are
arranged without involvement by the issuer of the underlying equity
securities. Less information about the issuer of the underlying equity
securities may be available in the case of unsponsored depository
receipts.
In addition, the Funds may invest in securities issued by supranational
agencies. Supranational agencies are those agencies whose member nations
determine to make capital contributions to support the agencies'
activities, and include such entities as the International Bank of
Reconstruction and Development (the World Bank), the Asian Development
Bank, the European Coal and Steel Community and the Inter-American
Development Bank.
In determining whether to invest in securities of foreign issuers, NEFM or
the subadviser of each Fund will consider the likely effects of foreign
taxes on the net yield available to the Fund and its shareholders.
Compliance with foreign tax law may reduce the Fund's net income available
for distribution to shareholders.
o Foreign Currency
Most foreign securities in the Funds' portfolios will be denominated in
foreign currencies or traded in securities markets in which settlements
are made in foreign currencies. Similarly, any income on such securities
is generally paid to the Fund in foreign currencies. The value of these
foreign currencies relative to the U.S. dollar varies continually, causing
changes in the dollar value of the Fund's portfolio investments (even if
the local market price of the investments is unchanged) and changes in the
dollar value of the Fund's income available for distribution to its
shareholders. The effect of changes in the dollar value of a foreign
currency on the dollar value of the Fund's assets and on the net
investment income available for distribution may be favorable or
unfavorable.
The Funds may incur costs in connection with conversions between various
currencies. In addition, the Funds may be required to liquidate portfolio
assets, or may incur increased currency conversion costs, to compensate
for a decline in the dollar value of a foreign currency occurring between
the time when the Fund declares and pays a dividend, or between the time
when the Fund accrues and pays an operating expense in U.S. dollars.
o Privatizations
In a number of countries around the world, governments have undertaken to
sell to investors interests in enterprises that the government has
historically owned or controlled. These transactions are known as
"privatizations" and may in some cases
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represent opportunities for significant capital appreciation. In some
cases, the ability of U.S. investors, such as the Funds, to participate in
privatizations may be limited by local law, or the terms of participation
may be less advantageous than for local investors. Also, there is no
assurance that privatized enterprises will be successful, or that an
investment in such an enterprise will retain its value or appreciate in
value.
o Fixed-Income Securities
Fixed-income securities include a broad array of short, medium and long
term obligations issued by the U.S. or foreign governments, government or
international agencies and instrumentalities, and corporate issuers of
various types. Some fixed-income securities represent uncollateralized
obligations of their issuers; in other cases, the securities may be backed
by specific assets (such as mortgages or other receivables) that have been
set aside as collateral for the issuer's obligation. Fixed-income
securities generally involve an obligation of the issuer to pay interest
or dividends on either a current basis or at the maturity of the security,
as well as the obligation to repay the principal amount of the security at
maturity.
Fixed-income securities involve both credit risk and market risk. Credit
risk is the risk that the security's issuer will fail to fulfill its
obligation to pay interest, dividends or principal on the security. Market
risk is the risk that the value of the security will fall because of
changes in market rates of interest. (Generally, the value of fixed-income
securities falls when market rates of interest are rising.) Some
fixed-income securities also involve prepayment or call risk. This is the
risk that the issuer will repay a Fund the principal on the security
before it is due, thus depriving the Fund of a favorable stream of future
interest or dividend payments.
Because interest rates vary, it is impossible to predict the income of a
fund that invests in fixed-income securities for any particular period.
Fluctuations in the value of a Fund's investments in fixed-income
securities will cause a Fund's net asset value to increase or decrease.
o Lower Quality Fixed-Income Securities
Fixed-income securities rated BB or lower by Standard & Poor's Ratings
Group ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's") (and comparable unrated securities) are below "investment
grade" quality. Lower quality fixed-income securities generally provide
higher yields, but are subject to greater credit and market risk, than
higher quality fixed-income securities. Lower quality fixed-income
securities are considered predominantly speculative with respect to the
ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a mutual fund investing in lower quality
fixed-income securities may be more dependent on the fund's subadviser's
own credit analysis than for a fund investing in higher quality bonds. The
market for lower quality fixed-income securities may be more severely
affected than some other financial markets by economic recession or
substantial interest rate increases, by changing public perceptions of
this market or by legislation that limits the ability of certain
categories of financial institutions to invest in these securities. In
addition, the secondary market may be less liquid for lower rated
fixed-income securities. This lack of liquidity at certain times may
affect the valuation of these securities and may make the valuation and
sale of these securities more difficult. During the fiscal year ended
December 31, 1997, both the Star Advisers and Star Worldwide Funds had
[none] of their assets invested in fixed-income securities rated below
investment grade. Securities of below investment grade quality are
considered high yield, high risk securities and are commonly known as
"junk bonds." For more information, including a detailed description of
the ratings assigned by S&P and Moody's, please refer to the Statement's
"Appendix A -- Description of Bond Ratings."
o Asset-Backed Securities (Star Small Cap Fund)
The Star Small Cap Fund may invest up to 25% of its total assets in
asset-backed securities, which represent a direct or indirect
participation, or are secured by and payable from, pools of assets, such
as motor vehicle installment sales contracts, installment loan contracts,
leases on various types of real and personal property and receivables from
revolving credit (e.g., credit card) agreements. Payments or distributions
of principal and interest on asset-backed securities may be supported by
credit enhancements, such as various forms of cash collateral accounts or
letters of credit.
o Zero Coupon, Pay-In-Kind and Step Coupon Securities and "Strips" (Star
Advisers and Star Worldwide Funds)
The Star Advisers and Star Worldwide Funds may invest in zero coupon bonds
and in "strips." Zero coupon bonds do not make regular interest payments;
rather, they are sold at a discount from face value. Principal and accrued
discount (representing interest accrued but not paid) are paid at
maturity. "Strips" are debt securities that are stripped of their interest
payments after the securities are issued, but otherwise are comparable to
zero coupon bonds. The Star Advisers Fund may also invest in pay-in-kind
and step coupon securities. Step coupon bonds trade at a discount from
their face value and pay coupon interest. The coupon rate is low for an
initial period and then increases to a higher coupon rate thereafter.
Pay-in-kind bonds normally
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give the issuer an option to pay cash at a coupon payment date or give the
holder of the security a similar bond with the same coupon rate and a face
value equal to the amount of the coupon payment that would have been made.
The market values of "strips" and zero coupon, pay-in-kind and step coupon
securities generally fluctuate in response to changes in interest rates to
a greater degree than do conventional interest-paying securities of
comparable term and quality. Under many market conditions, investments in
such securities may be illiquid, making it difficult for the Fund to
dispose of them or determine their current value.
o Repurchase Agreements
Under a repurchase agreement, a Fund buys securities from a seller,
usually a bank or brokerage firm, with the understanding that the seller
will repurchase the securities at a higher price at a later date. If the
seller fails to repurchase the securities, the Fund has rights to sell the
securities to third parties. Repurchase agreements can be regarded as
loans by the Fund to the seller, collateralized by the securities that are
the subject of the agreement. Repurchase agreements afford an opportunity
for the Fund to earn a return on available cash at relatively low credit
risk, although the Fund may be subject to various delays and risks of loss
if the seller fails to meet its obligation to repurchase. The staff of the
SEC is currently of the view that repurchase agreements maturing in more
than 7 days are illiquid securities.
o Investments in Other Investment Companies
The Star Worldwide and Star Small Cap Funds may each invest up to 10% of
their total assets in securities of other investment companies. Because of
restrictions on direct investment by U.S. entities in certain countries,
investing indirectly in such countries (by purchasing shares of another
fund that is permitted to invest in such countries) may be the most
practical or efficient way for the Fund to invest in such countries. In
other cases, where one of the Fund's subadvisers desires to make only a
relatively small investment in a particular country, investing through
another fund that holds a diversified portfolio in that country may be
more effective than investing directly in issuers in that country. As an
investor in another investment company, the Fund will indirectly bear its
share of the expenses of that investment company. These expenses are in
addition to the Fund's own costs of operations. In some cases, investing
in an investment company may involve the payment of a premium over the
value of the assets held in that investment company's portfolio.
o Short-Term Trading
Although each Fund seeks long-term growth or capital appreciation, each
Fund may, consistent with its investment objective, engage in portfolio
trading in anticipation of, or in response to, changing economic or market
conditions and trends. These policies may result in higher turnover rates
in the Fund's portfolio, which may produce higher transaction costs and a
higher level of taxable capital gains. Portfolio turnover considerations
will not limit any subadviser's investment discretion in managing its
segment or segments of a Fund's assets.
Recent portfolio turnover rates of the Star Advisers and Star Worldwide
Funds are set forth above under "Financial Highlights."
Although it is not possible to predict the Star Small Cap Fund's portfolio
turnover rate with certainty, the Fund's four subadvisers expect their
respective segments not to exceed an annual turnover rate of 200%.
o Options, Futures, Swap Contracts and Currency Transactions
Each Fund may buy, sell or write options on securities, securities
indexes, currencies or futures contracts. Each Fund may buy and sell
futures contracts on securities, securities indexes or currencies. Each
Fund may also enter into swap contracts. Each Fund may engage in these
transactions either for the purpose of enhancing investment return, or to
hedge against changes in the value of other assets that the Fund owns or
intends to acquire. Each Fund may also conduct foreign currency exchange
transactions on a spot (i.e. cash) basis at the spot rate prevailing in
the foreign currency exchange market.
Options, futures and swap contracts fall into the broad category of
financial instruments known as "derivatives" and involve special risks.
Use of options, futures or swaps for other than hedging purposes may be
considered a speculative activity, involving greater risks than are
involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer" and
the "buyer." A call option gives the buyer the right to buy a security or
other asset (such as an amount of currency or a futures contract) from,
and a put option the right to sell a security or other asset to, the
option writer at a specified price, on or before a specified date. The
buyer of an option pays a premium when purchasing the option, which
reduces the return on the underlying security or other asset if the option
is exercised, and results in a loss if the option expires unexercised. The
writer of an
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option receives a premium from writing an option, which may increase the
return if the option expires or is closed out at a profit. If a Fund as
the writer of a call option is unable to close out an unexpired option, it
must continue to hold the underlying security or other asset until the
option expires, to "cover" its obligations under the option.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and
in the amount specified in the contract. Although many futures contracts
call for the delivery (or receipt) of the specified instrument, futures
are usually closed out before the settlement date through the purchase (or
sale) of a comparable contract. If the price of the sale of the futures
contract by a Fund exceeds (or is less than) the price of the offsetting
purchase, the Fund will realize a gain (or loss). A Fund may not purchase
or sell futures contracts or purchase related options if immediately
thereafter the sum of the amount of deposits for initial margin or
premiums on the existing futures and related options positions would
exceed 5% of the market value of the Fund's net assets. Transactions in
futures and related options involve the risks of (1) imperfect correlation
between the price movement of the contracts and the underlying securities,
(2) significant price movement in one but not the other market because of
different hours, (3) the possible absence of a liquid secondary market at
any point in time, and the risk that if the subadviser's prediction on
interest rates or other economic factors is inaccurate, the Fund may be
worse off than if it had not hedged. Futures transactions involve
potentially unlimited risk of loss.
Each Fund may enter into interest rate, currency and securities index
swaps. Each Fund will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations or to protect against
an increase in the price of securities a Fund anticipates purchasing at a
later date. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap
is an agreement to exchange cash flows on a notional amount based on
changes in the relative values of the specified currencies. An index swap
is an agreement to make or receive payments based on the different returns
that would be achieved if a notional amount were invested in a specified
basket of securities (such as the Standard & Poor's Composite Index of 500
Stocks [the "S&P 500"]) or in some other investment (such as U.S. Treasury
securities).
The value of options purchased by a Fund, futures contracts held by a Fund
and a Fund's positions in swap contracts may fluctuate up or down based on
a variety of market and economic factors. In some cases, the fluctuations
may offset (or be offset by) changes in the value of securities held in
the Fund's portfolio. All transactions in options, futures or swaps
involve the possible risk of loss to the Fund of all or a significant part
of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Fund's investment. The Fund will be required, however,
to set aside with its custodian bank certain assets in amounts sufficient
at all times to satisfy its obligations under options, futures and swap
contracts.
The successful use of options, futures and swaps will usually depend on
the subadvisers' ability to forecast stock market, currency or other
financial market movements correctly. A Fund's ability to hedge against
adverse changes in the value of securities held in its portfolio through
options, futures and swap transactions also depends on the degree of
correlation between changes in the value of futures, options or swap
positions and changes in the values of the portfolio securities. The
successful use of futures and exchange traded options also depends on the
availability of a liquid secondary market to enable the Fund to close its
positions on a timely basis. There can be no assurance that such a market
will exist at any particular time. In the case of swap contracts and of
options that are not traded on an exchange ("over-the-counter" options),
the Fund is at risk that the other party to the transaction will default
on its obligations, or will not permit the Fund to terminate the
transaction before its scheduled maturity. As a result of these
characteristics, the Funds will treat most swap contracts and
over-the-counter options (and the assets it segregates to cover its
obligations thereunder) as illiquid. Certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and other regulatory
requirements may limit a Fund's ability to engage in futures, options and
swap transactions.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most
cases by less liquidity than are the U.S. markets. In addition, foreign
markets may be subject to less detailed reporting requirements and
regulatory controls than U.S. markets. Furthermore, investments by the
Funds in options and futures in foreign markets are subject to many of the
same risks as are the Funds' other foreign investments. See "Foreign
Securities" above. For further information, see "Miscellaneous Investment
Practices -- Futures, Options and Swap Contracts" in Part II of the
Statement.
o Currency Hedging Transactions
Each Fund may, at the discretion of its subadvisers, engage in foreign
currency exchange transactions, in connection with the purchase and sale
of portfolio securities, to protect the value of specific portfolio
positions or in anticipation of changes in relative values of currencies
in which current or future Fund portfolio holdings are denominated, quoted
or exposed. Currency
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hedging transactions may include forward contracts (contracts with another
party to buy or sell a currency at a specified price on a specified date),
futures contracts (which are similar to forward contracts but are traded
on an exchange) and swap contracts. For more information on foreign
currency hedging transactions, see Part II of the Statement.
o Securities Lending
The Funds may lend their portfolio securities to broker-dealers or other
parties under contracts calling for the deposit by the borrower with the
Fund's custodian of cash collateral equal to at least the market value of
the securities loaned, marked to market on a daily basis. The Fund will
continue to benefit from interest or dividends on the securities loaned
and will also receive interest through investment of the cash collateral
in short-term liquid investments. No loans will be made if, as a result,
the aggregate amount of such loans outstanding at any time would exceed 33
1/3% of the Fund's total assets (taken at current value). Any voting
rights, or rights to consent, relating to securities loaned pass to the
borrower. However, if a material event affecting the investment occurs,
such loans will be called o that the securities may be voted by the Fund.
The Fund pays various fees in connection with such loans, including
shipping fees and reasonable custodial or placement fees.
Securities loans must be fully collateralized at all times, but involve
some credit risk to the Fund if the borrower defaults on its obligation
and the Fund is delayed or prevented from recovering the collateral.
o Structured Notes
The Star Worldwide and Star Small Cap Funds may invest in a broad category
of instruments known as "structured notes." These instruments are debt
obligations issued by industrial corporations, financial institutions or
governmental or international agencies. Traditional debt obligations
typically obligate the issuer to repay the principal plus a specified rate
of interest. Structured notes, by contrast, obligate the issuer to pay
amounts of principal or interest that are determined by reference to
changes in some external factor or factors. For example, the issuer's
obligations could be determined by reference to changes in the value of a
commodity (such as gold or oil), a foreign currency, an index of
securities (such as the S&P 500) or an interest rate (such as the U.S.
Treasury bill rate). In some cases, the issuer's obligations are
determined by reference to changes over time in the difference (or
"spread") between two or more external factors (such as the U.S. prime
lending rate and the total return of the stock market in a particular
country, as measured by a stock index). In some cases, the issuer's
obligations may fluctuate inversely with changes in an external factor or
factors (for example, if the U.S. prime lending rate goes up, the issuer's
interest payment obligations are reduced). In some cases, the issuer's
obligations may be determined by some multiple of the change in an
external factor or factors (for example, three times the change in the
U.S. Treasury bill rate). In some cases, the issuer's obligations remain
fixed (as with a traditional debt instrument) so long as an external
factor or factors do not change by more than the specified amount (for
example, if the value of a stock index does not exceed some specified
maximum), but if the external factor or factors change by more than the
specified amount, the issuer's obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of a
mutual fund. For example, they can be used to increase the fund's exposure
to changes in the value of assets that the fund would not ordinarily
purchase directly (such as stocks traded in a market that is not open to
U.S. investors). They can also be used to hedge the risks associated with
other investments the fund holds. For example, if a structured note has an
interest rate that fluctuates inversely with general changes in a
country's stock market index, the value of the structured note would
generally move in the opposite direction to the value of holdings of
stocks in that market, thus moderating the effect of stock market
movements on the value of the fund's portfolio as a whole.
Structured notes involve special risks. As with any debt obligation,
structured notes involve the risk that the issuer will become insolvent or
otherwise default on its payment obligations. This risk is in addition to
the risk that the issuer's obligations (and thus the value of the Fund's
investment) will be reduced because of adverse changes in the external
factor or factors to which the obligations are linked. The value of
structured notes will in many cases be more volatile (that is, will change
more rapidly or severely) than the value of traditional debt instruments.
Volatility will be especially high if the issuer's obligations are
determined by reference to some multiple of the change in the external
factor or factors. Many structured notes have limited or no liquidity, so
that the Fund would be unable to dispose of the investment prior to
maturity. (The Funds are not permitted to invest more than 15% of their
net assets in illiquid investments.) As with all investments, successful
use of structured notes depends in significant part on the accuracy of the
relevant subadviser's analysis of the issuer's creditworthiness and
financial prospects, and of the subadviser's forecast as to changes in
relevant economic and financial market conditions and factors. In
instances where the issuer of a structured note is a foreign entity, the
usual risks associated with investments in foreign securities (described
above) apply.
o Short Sales (Star Small Cap Fund)
The Star Small Cap Fund may engage in short sales. A short sale is a
transaction in which the Fund sells securities it does not
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own (but has borrowed) in anticipation of a decline in the market price of
the securities. When the Fund makes a short sale, the proceeds it receives
from the sale will be held by the broker effecting the sale on behalf of
the Fund until the Fund replaces the borrowed securities. To deliver the
securities to the buyer, the Fund will need to arrange through the broker
to borrow the securities and, in doing so, the Fund will be obligated to
replace the securities borrowed at their market value at the time of
replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest
payable until the securities are replaced. For further information, see
"Miscellaneous Investment Practices -- Short Sales" in Part II of the
Statement.
All short sales must be fully collaterized, and no segment of the Star
Small Cap Fund will sell securities short if, immediately after and as a
result of the sale, the value of all securities sold short by that segment
would exceed 25% of that segment's total assets. Each segment of the Fund
limits short sales of any one issuer's securities to 2% of that segment's
total assets and to 2% of any one class of the issuer's securities.
o Short Sales Against the Box
A short sale is a transaction in which a party borrows a security and then
sells the borrowed security to another party. The Star Worldwide Fund may
engage in short sales only if the Fund owns (or has the right to acquire
without further consideration) the security it has sold short, a practice
known as selling short "against the box." Short sales against the box may
protect the Fund against the risk of losses in the value of its portfolio
securities because any unrealized losses with respect to such securities
should be wholly or partially offset by a corresponding gain in the short
position. However, any potential gains in such securities would be wholly
or partially offset by a corresponding loss in the short position. Short
sales against the box may be used to lock in a profit on a security when,
for tax reasons or otherwise, a subadviser does not want to sell the
security. The Star Worldwide Fund does not currently expect that more than
20% of its total assets would be involved in short sales against the box.
For a more complete explanation, please refer to Part II of the Statement.
o When-Issued Securities and Forward Commitments
The Funds may purchase securities on a "when-issued" basis and "delayed
delivery" basis. Additionally, the Star Small Cap Fund may purchase and
sell securities on a "forward commitment" or "delayed delivery" basis. In
these transactions, the price is fixed at the time the commitment is made,
but delivery and payment for the securities ("settlement") takes place at
a later date. When-issued securities and forward commitments may be sold
prior to settlement date, but the Funds normally will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income
accrues on securities that have been purchased pursuant to a forward
commitment or on a when-issued basis prior to delivery to the Fund. There
is a risk that the securities may not be delivered and the Fund may incur
a loss. If the Fund disposes of the right to acquire a when-issued
security prior to acquisition or disposes of its right to deliver or
receive against a forward commitment, the Fund may incur a gain or loss.
In connection with transactions on a when- issued or forward commitment
basis, the Fund will set aside with its custodian certain assets to
provide for satisfaction of its obligations under when-issued or forward
commitments transactions.
o Miscellaneous
No Fund will invest more than 15% of its net assets in "illiquid
securities," that is, securities which are not readily resalable, which
may include securities whose disposition is restricted by federal
securities laws.
The Funds may purchase Rule 144A securities. These are privately offered
securities that can be resold only to certain qualified institutional
buyers. The Funds may also purchase commercial paper issued under Section
4(2) of the Securities Act of 1933, as amended. Rule 144A securities and
Section 4(2) commercial paper are treated as illiquid, unless a subadviser
has determined, under guidelines established by the Trust's trustees, that
the particular issue of Rule 144A securities or commercial paper is
liquid. Investment in restricted or other illiquid securities involves the
risk that a Fund may be unable to sell such a security at the desired
time. Also, a Fund may incur expenses, losses or delays in the process of
registering restricted securities prior to resale.
To the extent that any of the Funds may invest in derivative securities
for other than bona fide hedging purposes, such investments may be
speculative in nature and may involve additional risks.
[The Star Advisers Fund is a "non-diversified" fund and as such is not
required to meet any diversification requirements under the Investment
Company Act of 1940, as amended (the "1940 Act"), although the Fund must
meet certain diversification standards to qualify as a "regulated
investment company" under the Code. Since the Fund may invest a relatively
high percentage of its assets in the obligations of a limited number of
issuers, the Fund may be more susceptible than a more widely-diversified
fund to any single economic, political or regulatory occurrence.]
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o Special Considerations Regarding the Multi-Adviser Approach
NEFM believes that a multi-adviser approach to equity investing -- one
that combines the varied styles of the subadvisers in selecting securities
for the Funds' portfolios -- offers a different investment opportunity
than funds managed by a single adviser using a single style. NEFM believes
that assigning portfolio management responsibility for a Fund to several
subadvisers, whose varying management styles have resulted in records of
success, may increase the likelihood that the Fund may produce superior
results for its shareholders, with less variability of return and less
risk of persistent under-performance than a single-adviser fund. Of
course, past results should not be considered a prediction of future
performance, and there is no assurance that a Fund will in fact achieve
superior results over any period of time.
On a daily basis, capital activity will be allocated equally by NEFM among
the segments of the Fund. However, NEFM may, subject to review of the
Trust's Board of Trustees, allocate new investment capital differently
among any of the subadvisers. This action may be necessary, if, for
example, a subadviser determines that it desires no additional investment
capital. Similarly, because each segment of each Fund will perform
differently from the other segments of the Fund depending upon the
investments it holds and changing market conditions, one segment may be
larger or smaller at various times than other segments. For example, as of
December 31, 1997, the percentages of the Star Advisers Fund's net assets
held in the segments of the Fund managed by Harris Associates, Founders,
Janus Capital and Loomis Sayles were -- %,-- %, --% and --%, respectively.
As of December 31, 1997, the percentages of the Star Worldwide Fund's net
assets held in the segments of the Fund managed by Harris Associates
(international segment), Harris Associates (domestic segment), Montgomery,
Founders and Janus Capital were 20%, 20%, 19%, 20% and 21%, respectively.
As of December 31, 1997, the percentages of the Star Small Cap Fund's net
assets held in the segment of the Fund managed by Robertson Stephens,
Montgomery, Loomis Sayles and Harris Associates were --%, --%, --%, and
--%, respectively. Although it reserves the right to do so, subject to the
review of the Trust's trustees, NEFM does not intend to reallocate the
assets of any Fund among the segments to reduce these differences in size.
NEFM oversees the portfolio management services provided to the Funds by
each of the subadvisers. Subject to the review of the Trust's trustees,
NEFM monitors each subadviser to assure that the subadviser is managing
its segment of a Fund consistently with the Fund's investment objective
and restrictions and applicable laws and guidelines, including, but not
limited to, compliance with the diversification requirements set forth in
the 1940 Act and Subchapter M of the Code. In addition, NEFM also provides
each Fund with administrative services which include, among other things,
day-to-day administration of matters related to the Fund's existence,
maintenance of its records, preparation of reports and assistance in the
preparation of the Fund's registration statement under federal and state
laws. NEFM does not, however, determine what investments will be purchased
or sold for any segment of any Fund. Because each subadviser will be
managing its segment of the portfolio independently from the others, the
same security may be held in two different segments of a Fund or may be
acquired for one segment of the Fund at a time when the subadviser of
another segment deems it appropriate to dispose of the security from that
other segment. Similarly, under some market conditions, one or more of the
subadvisers may believe that temporary, defensive investments in
short-term instruments or cash are appropriate when another subadviser or
subadvisers believe continued exposure to the equity markets is
appropriate for their segment of the Fund. Because each subadviser directs
the trading for its own segment of the Fund, and does not aggregate its
transactions with those of the other subadvisers, the Fund may incur
higher brokerage costs than would be the case if a single adviser or
subadviser were managing the entire Fund.
NEFM may terminate any subadvisory agreement without shareholder approval.
In such case, NEFM may either enter into an agreement with another
subadviser to manage the segment or will allocate the segment's assets
among the other segments of the Fund.
20
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21
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22
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FUND MANAGEMENT
- --------------------------------------------------------------------------------
NEFM, 399 Boylston Street, Boston, Massachusetts 02116, serves as the adviser to
each of the Funds as well as most of the other New England Funds. NEFM oversees,
evaluates and monitors the subadvisers' provision of subadvisory services to the
Funds and provides general business management and administration to the Funds.
The Star Small Cap Fund and the Star Worldwide Fund pay NEFM a management fee at
the annual rate of 1.05% of the Fund's average daily net assets. The Star
Advisors Fund pays NEFM a management fee rate at the annual rate of 1.05% of the
first $1 billion of the Fund's average daily net assets and 1.00% of such assets
in excess of $1 billion. These fee rates payable by the Funds are higher than
that paid by most other mutual funds, but are believed to be appropriate for the
services received by the Funds and to be comparable to fees paid by some other
mutual funds investing in a manner similar to the Funds. The higher fee rate is
partially due to the multi-adviser format.
NEFM pays each subadviser of the Star Advisers Fund except Harris Associates a
subadvisory fee at the annual rate of 0.55% of the first $50 million of the
average daily net assets of the segment of the Fund that the subadviser manages
and 0.50% of such assets in excess of $50 million. For the Star Worldwide Fund,
NEFM pays each of Harris Associates, Founders and Janus Capital a subadvisory
fee at the annual rate of 0.65% of the first $50 million of the average daily
net assets of each segment of the Fund that that subadviser manages, 0.60% of
the next $50 million of such assets and 0.55% of such assets in excess of $100
million, and NEFM pays Montgomery a subadvisory fee at the annual rate of 0.90%
of the first $25 million of the average daily net assets of the segment of the
Fund that Montgomery manages, 0.70% of the next $25 million of such assets and
0.55% of such assets in excess of $50 million. For the Star Small Cap Fund, NEFM
pays Robertson Stephens and Loomis Sayles a subadvisory fee at an annual rate of
0.55% of the first $50 million of the average daily assets of the segment of the
Fund that each such subadviser manages, and 0.50% of such assets in excess of
$50 million. NEFM pays Montgomery a subadvisory fee at an annual rate of 0.65%
of the first $50 million of the average daily net assets of the segment that
Montgomery manages and 0.50% of such assets in excess of $50 million, and NEFM
pays Harris Associates a subadvisory fee at the annual rate of 0.70% of the
average daily net assets of the segment that Harris Associates manages.
Subject to the supervision of NEFM, each subadviser manages its segment or
segments of each Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for its segment or segments
of the Fund, places orders to purchase and sell securities for its segment or
segments of the Fund and employs professional advisers and securities analysts
who provide research services relating to its segment or segments of the Fund.
The Funds pay no direct fees to any of the subadvisers.
Below is a brief description of the subadvisers of the Funds.
Founders, 2930 East Third Avenue, Denver, Colorado 80206, has acted as an
investment adviser since 1938. To facilitate day-to-day investment management,
Founders employs a unique team-and-lead-manager system. The management team for
a portfolio or fund is comprised of Founders' Chief Investment Officer, Bjorn K.
Borgen, a lead portfolio manager, portfolio traders and research analysts. Team
members share responsibility for providing ideas, information, knowledge and
expertise in the management of Founders' segments of the Star Advisers and Star
Worldwide Funds. Daily decisions on portfolio selection rest with the lead
portfolio manager, who, through participation in the team process, utilizes the
input, research and advice of other team members in making purchase and sale
determinations. Edward F. Keely has been lead portfolio manager for the segment
of the Star Advisers Fund that is managed by Founders since the Fund's inception
in 1994. Mr. Keely is a Vice President of Investments at Founders, where he has
been employed since 1989. Michael W. Gerding has been lead portfolio manager for
the segment of the Star Worldwide Fund managed by Founders since the Fund's
inception in 1995. Mr. Gerding is a Vice President of Investments at Founders
and has managed portfolios at Founders since 1990. Mr. Borgen has served as
Founders' Chief Investment Officer since 1969 and owns all of Founders'
outstanding shares. Founders has informed the Funds that it has entered into an
agreement with Mellon Bank, N.A. ("Mellon") pursuant to which Founders will be
merged into a subsidiary of Mellon ("New Founders"). Mellon is part of a global
financial services company with $1.8 trillion in assets under management or
administration. Completion of the merger is subject to a number of conditions,
including certain regulatory approvals, and is expected to take place in the
first quarter of 1998.
23
<PAGE>
The merger does not contemplate any changes in the portfolio managers of the
segments of the Funds managed by Founders, or in Founders' services to the
Funds. The merger will result in the automatic termination of the current
subadvisory agreements between NEFM and Founders for these segments. New
subadvisory agreements for these segments between NEFM and Founders will be
effective simultaneously with the merger. The new subadvisory agreement
folllowing the complietion of the Mellon/Founder merger are substantially
similar to the current subadvisory agreements for these segments. On January 30,
1998 the Board of Trustees of New England Funds Trust I approved an information
statement regarding this transaction that will be sent to shareholders.
Janus Capital, 100 Fillmore Street, Denver, Colorado 80206, has managed mutual
funds since 1970 and also advises individual, corporate, charitable and
retirement accounts. Warren B. Lammert has, since the Fund's inception in 1994,
had day-to-day management responsibility for those assets of the Star Advisers
Fund allocated to Janus Capital, where he serves as a portfolio manager and Vice
President of Investments. Helen Young Hayes has had day-to- day management
responsibility for those assets of the Star Worldwide Fund allocated to Janus
Capital since the Fund's inception. Ms. Hayes is a portfolio manager and Vice
President of Janus Capital, where she has been employed since 1987, and has
managed the Janus Capital segment of the Star Worldwide Fund since the Fund's
inception. Laurence Chang is an assistant portfolio manager of Janus Capital,
where he has been employed since 1993 and became co- portfolio manager of the
Star Worldwide Fund in May 1997. KCSI owns approximately 83% of the outstanding
voting stock of Janus Capital. Thomas H. Bailey, President and Chairman of the
Board of Janus Capital, owns approximately 12% of Janus Capital's voting stock
and, by agreement with KCSI, selects a majority of Janus Capital's board of
directors.
Loomis Sayles, One Financial Center, Boston, Massachusetts, 02110, Jeffrey C.
Petherick and Mary Champagne, Vice Presidents of Loomis Sayles, have day-to-day
management responsibility for the segment of the Star Advisers Fund that is
allocated to Loomis Sayles. Mr. Petherick, who joined Loomis Sayles in 1990, has
co-managed the Loomis Sayles segment of the Fund since the Fund's inception. Ms.
Champagne has co-managed the Loomis Sayles segment of the Fund since July 1995.
Prior to joining Loomis Sayles in 1993, Ms. Champagne served as a portfolio
manager at NBD Bank for 10 years. Messrs. Christopher Ely, Phil Fine and David
Smith have had day-to-day management responsibilities for the segment of the
Star Small Cap Fund managed by Loomis Sayles since the Fund's inception, with
Mr. Ely as the lead manager. Messrs. Ely, Fine and Smith joined Loomis Sayles in
July 1996. Mr. Ely is a Vice President of Loomis Sayles. Prior to July 1996, he
was Senior Vice President and Portfolio Manager with Keystone Investment
Management Co., Inc. Messrs. Smith and Fine are Vice Presidents of Loomis
Sayles. Prior to July 1996, Mr. Smith and Mr. Fine were each a Vice President
and Portfolio Manager at Keystone Investment Management Co., Inc.
Harris Associates, Two North LaSalle Street, Chicago, Illinois 60602, has
advised and managed mutual funds since 1970. Harris Associates also serves as
investment adviser to individuals, trusts, retirement plans, endowments and
foundations, and manages several private partnerships. Robert J. Sanborn, CFA,
is the portfolio manager for the U.S. segment of the Star Worldwide Fund managed
by Harris Associates. Mr. Sanborn joined Harris Associates as a portfolio
manager and analyst in 1988. David G. Herro, CFA, and Michael J. Welsh, CFA, CPA
are the portfolio managers for the international segment of the Star Worldwide
Fund and the segment of the Star Advisers Fund managed by Harris Associates. Mr.
Herro joined Harris Associates in 1992 from the State of Wisconsin Investment
Board, where he managed a $700 million international equity fund from 1989
through July 1992. Mr. Welsh joined Harris Associates as an international
analyst in 1992. Previously, he had been a senior associate, valuation services,
with Coopers & Lybrand. Steven Reid is the portfolio manager for the segment of
the Star Small Cap Fund managed by Harris Associates. Mr. Reid joined Harris
Associates as an accountant in 1980 and has been a Partner of Harris Associates
since 1992. He is also Portfolio Manager of the Oakmark Small Cap Fund. Messrs.
Sanborn, Herro, Welsh and Reid have been managing their respective segments
since the Funds' respective inceptions.
Montgomery, 101 California Street, San Francisco, California 94111, was formed
in 1997. Montgomery is the successor to Montgomery Asset Management, L.P. ("MAM,
L.P."), the prior subadviser to the segments of the Star Small Cap Fund and the
Star Worldwide Fund. On July 31, 1997, MAM, L.P., completed the sale of
substantially all of its assets to Montgomery, a subsidiary of Commerzbank AG, a
German commercial bank. The portfolio managers for the segment of the Star
Worldwide Fund managed by Montgomery are Josephine S. Jimenez, CFA, Managing
Director and Senior Portfolio Manager, and Bryan L. Sudweeks, Ph.D., CFA
Managing Director and Senior Portfolio Manager. Ms. Jimenez and Mr. Sudweeks
joined MAM, L.P. in 1991, and have been the portfolio managers for this segment
since the Fund's inception. The portfolio manager for the segment of the Star
Small Cap Fund managed by Montgomery in Andrew Pratt. Mr. Pratt joined MAM,
L.P., in 1993. He is currently a member of Montgomery's growth equity team that
manages the Montgomery Growth Fund, the Montgomery Micro Cap Fund and the
Montgomery Small Cap Opportunities Fund. From 1988 until he joined MAM, L.P., he
was an equity analyst at Hewlett Parkard Company, where he managed a portfolio
of small capitalization technology companies, and researched private placement
and venture capital investments.
24
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Robertson Stephens, 555 California Street, San Francisco, California 94104, was
formed in 1993 and provides advisory services to both private and public
investment funds. Prior to October 1, 1997 the sole general partner of Robertson
Stephens was Robertson Stephens & Company, Inc. On October 1, 1997 Robertson
Stephens became a wholly-owned indirect subsidiary of Bank America Corporation,
a global financial services company. The portfolio manager for the segment of
the Star Small Cap Fund managed by Robertson Stephens is John Wallace, Managing
Director and Portfolio Manager of Robertson Stephens, who has managed such
segment since the Fund's inception. Mr. Wallace joined Robertson Stephens in
1995 and has been responsible for managing Robertson Stephens' Growth & Income
Fund since its inception in July 1995 and The Robertson Stephens' Diversified
Growth Fund since its inception in August 1996. Prior to joining Robertson
Stephens, he was Vice President of Oppenheimer Funds, Inc. where he was
portfolio manager of the Oppenheimer Main Street Income and Growth Fund. Since
1997, John H. Seabern has been a co-portfolio manager for the segment of the New
England Star Small Cap Fund managed by Robertson Stephens. Mr. Seabern, who
joined Robertson Stephens in 1993, is also a co-manager of the Robertson
Stephens Diversified Growth Fund and a research analyst for the Robertson
Stephens Growth & Income Fund. Prior to joining Robertson Stephens, he served as
a performance analyst at Duncan-Hurst Capital Management.
The Distributor in its discretion may, but is not obligated to, pay an incentive
bonus to the subadviser of the Star Advisers and Star Worldwide Funds whose
segment of the Fund's portfolio has the highest relative total return for the
prior year versus that segment's investment peer group as tracked by a major
independent mutual fund reporting service.
Prior to January 2, 1996, NEIC served as adviser to the Star Advisers Fund.
Prior to July 25, 1997, Berger Associates, Inc. ("Berger") served as the
subadviser to the segment of the Star Advisers Fund managed by Harris
Associates. Harris Associates agreed to waive the entire sub-advisory fee
payable to it by NEFM through August 31, 1997, and NEFM paid such waived fees to
Berger. Neither the change in sub-advisory fee rate payable to Harris Associates
nor this waiver by Harris Associates will affect the management fee payable by
the fund to NEFM.
The transfer and dividend paying agent for the Funds is New England Funds
Service Corporation ("NEFSCO"), 399 Boylston Street, Boston, MA 02116. NEFSCO
has subcontracted certain of its obligations as such to State Street Bank and
Trust Company ("State Street Bank"), 225 Franklin Street, Boston, MA 02110.
The general partners of each of NEFM, Loomis Sayles, Harris, and the
Distributor, and the sole shareholder of NEFSCO, are special purpose
corporations that are indirect, wholly-owned subsidiaries of NEICOP. NEICOP's
managing general partner, New England Investment Companies, Inc., ("NEIC, Inc.")
is an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"), a mutual life insurance company. MetLife owns directly 46% (and in
the aggregate, directly and indirectly, 47%) of the limited partnership
interests in NEICOP. NEICOP's advising general partner, NEIC is a publicly
traded company listed on the New York Stock Exchange. NEIC, Inc. Is the sole
general partner of NEIC.
Subject to applicable regulatory restrictions and such policies as the Trust's
trustees may adopt, the Funds' subadvisers may consider sales of shares of the
Funds and other mutual funds they manage as a factor in the selection of
broker-dealers to effect portfolio transactions for the Funds. Subject to
procedures adopted by the trustees of the Trusts, Fund brokerage transactions
may be executed
25
<PAGE>
by brokers that are affiliated with NEIC, NEFM or any subadviser. See "Portfolio
Transactions and Brokerage" in Part II of the Statement.
NEFM provides executive and other personnel for the management of the Trust. The
Trust's Board of Trustees supervises the affairs of the Trust as conducted by
NEFM and the subadvisers.
The Funds have received an exemptive order from the SEC to permit NEFM, subject
to certain conditions, to enter into subadvisory agreements with subadvisers
other than the existing subadvisers of the Funds when approved by the Trust's
Board of Trustees, without obtaining shareholder approval. The exemptive order
also permits, without shareholder approval, the terms of an existing
subadvisory agreement to be changed or the employment of an existing subadviser
to be continued after events that would otherwise cause an automatic termination
of a subadvisory agreement, when such changes or continuation are approved by
the Trust's Board of Trustees. Shareholders will be notified of any subadviser
changes.
26
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BUYING FUND SHARES
- --------------------------------------------------------------------------------
Minimum Investment
$2,500 is the minimum for an initial investment in any Fund and $100 is the
minimum for each subsequent investment. There are special initial investment
minimums for the following plans:
o $25 (for initial and subsequent investments) for payroll deduction
investment programs for 401(k), SARSEP, SEP, SIMPLE Plans, 403(b)(7)
retirement plans and certain other retirement plans.
o $100 on initial and subsequent investments for automatic investing through
the Investment Builder program.
o $250 on initial and $100 on subsequent investments for retirement plans
with tax benefits such as corporate pension and profit sharing plans and
Keogh plans.
o $2,000 on initial and $100 on subsequent investments for accounts
registered under the Uniform Gifts to Minors Act or the Uniform Transfers
to Minors Act.
o $500 on initial and $100 on subsequent investments for IRAs.
6 Ways to Buy Fund Shares
You may purchase Class A, Class B and Class C shares of the Funds in the
following ways:
o Through your investment dealer:
Many investment dealers have a sales agreement with the Distributor and would be
pleased to accept your order.
o By mail:
For an initial investment, simply complete an application and return it, with a
check payable to New England Funds, P.O. Box 8551, Boston, MA 02266-8551.
For subsequent investments, please mail your check to New England Funds, P.O.
Box 8551, Boston, MA 02266-8551 along with a letter of instruction or an
additional deposit slip from your statements. To make investing even easier, you
can also order personalized investment slips by calling 1-800-225-5478 between
8:00 a.m. and 7:00 p.m. (Eastern time).
All purchases made by check should be in U.S. dollars and made payable to New
England Funds, or, in the case of a retirement account, the custodian or
trustee. Third party checks will generally not be accepted except under certain
circumstances approved by the Distributor. When purchases are made by check or
periodic account investment, redemptions may not be allowed until the investment
being redeemed has been in the account for a minimum of 10 calendar days.
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Using New England Funds Personal Access Line(TM) 1-800-346-5984
New England Funds Personal Access Line(TM) is New England Funds' automated
service system that gives you 24-hour access to your account. Through your
touch-tone telephone, you can receive your current account balance, your recent
transactions, Fund prices and recent performance information. You can also
purchase, sell or exchange Class A shares of any New England Fund. For a free
brochure about New England Funds Personal Access Line(TM) including a convenient
wallet card, call us at 1-800-225-5478.
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o By wire transfer of Federal Funds:
For an initial investment, call us at 1-800-225-5478 between 8:00 a.m. and 7:00
p.m. (Eastern time) on a day when the Funds are open for business to obtain an
account number and wire transfer instructions.
27
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For subsequent investments, direct your bank to transfer funds to State Street
Bank and Trust Company, ABA #011000028, DDA #99011538, Credit Fund (Fund name
and class of shares), Shareholder Name, Shareholder Account Number. Funds may be
transferred between 9:00 a.m. and 4:00 p.m. (Eastern time) on a day when the
Funds are open for business. Your bank may charge a fee for this service.
o By Investment Builder:
Investment Builder is New England Funds' automatic investment plan. You may
authorize automatic monthly transfers of $100 or more from your bank checking or
savings account to purchase shares of one or more New England Funds.
For an initial investment, please indicate that you would like to begin an
automatic investment plan through Investment Builder on the enclosed
application. Indicate the amount of the monthly investment and enclose a check
marked "Void" or a deposit slip from your bank account.
To add Investment Builder to an existing account, please call us at
1-800-225-5478 for a Service Options Form.
o By electronic purchase through ACH:
You may purchase additional shares electronically through the Automated Clearing
House ("ACH") system as long as your bank or credit union is a member of the ACH
system and you have a completed, approved ACH application on file with the Fund.
To purchase through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business. You may also
purchase shares through ACH by calling New England Funds Personal Access
Line(TM) at 1-800-346-5984 twenty- four hours a day. Under normal circumstances,
the New York Stock Exchange (the "Exchange") closes at 4:00 p.m. (Eastern time).
Purchase orders accepted through ACH or New England Funds Personal Access
Line(TM) will be complete only upon the receipt by New England Funds of funds
from your bank and, on the day that funds are received, will be processed at the
net asset value next determined at the close of regular trading on the Exchange
on days that the Exchange is open. Proceeds of redemptions of Fund shares
purchased through ACH may not be available for up to ten days after the purchase
date.
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To make investing even easier, you can also order personalized investment slips
by calling 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.(Eastern time).
- --------------------------------------------------------------------------------
o By exchange from another New England Fund:
You may also purchase shares of a Fund by exchanging shares from another New
England Fund. Please see "Owning Fund Shares -- Exchanging Among New England
Funds" for complete details.
General
All purchase orders are subject to acceptance by the Funds and will be effected
at the net asset value next determined after the order is received in proper
form by State Street Bank (except orders received by your investment dealer
before the close of trading on the Exchange and transmitted to the Distributor
by 5:00 p.m. [Eastern time] on the same day, which will be effected at the net
asset value determined on that day). Although the Funds do not anticipate doing
so, they reserve the right to suspend or change the terms of sales of shares.
Class B shares and certain shareholder features may not be available to persons
whose shares are held in street name accounts.
You will not receive any certificates for your Class A shares unless you request
them in writing from the Distributor. The Funds' "open account" system for
recording your investment eliminates the problems and expense of handling and
safekeeping certificates. Certificates will not be issued for Class B shares or
Class C shares. If you wish transactions in your account to be effected by
another person under a power of attorney from you, special rules apply. Please
contact your investment dealer or the Distributor for details.
Sales Charges
Each Fund offers three classes of shares to the general public:
Class A Shares
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Class A shares are offered at net asset value plus a sales charge which varies
depending on the size of your purchase. They are also subject to a 0.25% annual
service fee. Class A shares are offered subject to the following initial sales
charges:
Sales charge as a % of Dealer's
------------------------ Concession
Net as a % of
Value of Total Offering Amount Offering
Investment Price Invested Price
- ----------------- --------- --------- ----------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.15%
$500,000 - $999,999 2.00% 2.04% 1.70%
$1,000,000 or more None None *
* The Distributor may, at its discretion, pay investment dealers who
initiate and are responsible for such purchases (except investments by
plans under Sections 401(a) or 401(k) of the Code whose total investments
amount to $1 million or more or that have 100 or more eligible employees
["Retirement Plans"]) a commission of up to the following amounts: 1% on
the first $3 million invested, and 0. 50% on the excess over $3 million.
For investments by Retirement Plans, the Distributor may, at its
discretion, pay investment dealers who initiate and are responsible for
such purchases a commission of up to the following amounts: 1% on the
first $3 million invested and 0.50% on amounts over $3 million and up to
$10 million. These commissions are not payable if the purchase represents
the of a redemption made during the previous 12 calendar months. Section
401(a), 401(k), 457 and 403(b) plans that have total investment assets of
at least $10 million are eligible to purchase Class Y shares of the Star
Advisers Fund, which are described in a separate prospectus.
Contingent Deferred Sales Charge (Class A shares only). For purchases of
$1,000,000 or more of Class A shares of the Funds or purchases by Retirement
Plans as defined above, a CDSC, at the rate of 1% of the lesser of the purchase
price or the net asset value at the time of redemption, applies to redemptions
of shares within one year after purchase. If an exchange is made to Class A
shares of any of New England Cash Management Trust Money Market Series or New
England Tax Exempt Money Market Trust (the "Money Market Funds"), then the
one-year holding period for purposes of determining the expiration of the CDSC
will stop and will resume only when an exchange is made back into Class A shares
of a series of the Trusts. If the Money Market Fund shares are redeemed rather
than exchanged back into the Trusts, then a CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held the longest are the
first to be redeemed.
Class B Shares
Class B shares are offered at net asset value, without an initial sales charge,
and are subject to a 0.25% annual service fee, a 0.75% annual distribution fee
for eight years (at which time they automatically convert to Class A shares) and
a CDSC if they are redeemed within six years of purchase. The holding period for
purposes of timing the conversion to Class A shares and determining the CDSC
will continue to run after an exchange to Class B shares of a series of the
Trusts. If the exchange is made to Class B shares of a Money Market Fund, then
the holding period stops and will resume only when an exchange is made back into
Class B shares of a series of the Trusts. If the Money Market Fund shares are
redeemed rather than exchanged back into a series of the Trusts, then a CDSC
applies to the redemption, at the same rate as if the Class B shares of the Fund
had been redeemed at the time they were exchanged for Money Market Fund shares.
For the purposes of the CDSC it is assumed that the shares held the longest are
the first to be redeemed.
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A, B or C Shares -- Which Should You Choose?
Your choice of share class depends on the size of your investment and how long
you intend to hold your shares. In general, there are only minor differences in
performance results for the different classes if held for the long term. Consult
your financial representative for help in deciding which class is appropriate
for you.
- --------------------------------------------------------------------------------
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B
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shares until the time of redemption of such shares. The CDSC equals the
following percentages of the dollar amounts subject to the charge:
Contingent Deferred
Sales Charge as a
Percentage of Dollar
Year Since Amount Subject to
Purchase Charge*
- ------------------ -----------------------
1st ............................ 5%
2nd ........................... 4%
3rd ........................... 3%
4th ........................... 3%
5th ............................ 2%
6th ............................ 1%
thereafter .................... 0%
Year one ends one year after the day on which the purchase was accepted, and so
on.
* As set forth in Part II of the Statement under "Redemptions," Class B
shares purchased prior to May 1, 1997, the CDSC will be calculated
according to a different schedule.
At the time of sale, the Distributor pays investment dealers a commission of
3.75% and advances the first year's service fee (up to 0.25%) on purchases of
Class B shares.
Class C Shares
Class C shares are offered at net asset value, without an initial sales charge,
are subject to a 0.25% annual service fee and a 0.75% annual distribution fee,
are subject to a CDSC of 1.00% on redemptions made within one year from the date
of purchase and do not convert to another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such investment
dealer. The Distributor will retain the service and distribution fees assessed
against Class C shares in the first year of investment, and the entire amount of
the CDSC paid by Class C shareholders upon redemption in the first year, in
order to compensate the Distributor for providing distribution-related services
to the Fund in connection with the sale of Class C shares, and to reimburse the
Distributor, in whole or in part, for the commissions paid (and related
financing costs) to investment dealers at the time of a sale of Class C shares.
There are no conversion features associated with Class C shares; therefore, if
Class C shares are held for more than eight years Class C shareholders will
thereafter be subject to higher distribution fees than shareholders of other
classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of a series of the Trusts. If an exchange is made to
Class C shares of a Money Market Fund, then the one-year holding period for
purposes of determining the expiration of the CDSC will stop and resumes only
when an exchange is made back into Class C shares of a series of the Trusts, if
the Money Market Fund shares are redeemed rather than exchanged back into a
series of the Trusts, then a CDSC applies to the redemption. For purposes of the
CDSC, it is assumed that the shares held longest are the first to be redeemed.
The first year of the purchase ends one year after the day on which the purchase
was accepted.
Deciding Which Class to Purchase
The decision as to whether Class A, Class B or Class C shares are more
appropriate for an investor depends on the amount and intended length of the
investment. Investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because Class A shares have lower
12b-1 fees and pay correspondingly higher dividends per share. For these
reasons, the Distributor will treat any order of $1 million or more for Class B
shares as a Class A order. Any order of $1 million or more for Class C shares
will be treated as an order for Class A shares, unless you indicate on the
relevant section of your application that you
30
<PAGE>
have been informed of the relevant advantages and disadvantages of Class A and C
shares. Investors making smaller investments might consider Class B or Class C
shares because 100% of the purchase is invested immediately. Investors making
smaller investments who anticipate redeeming their shares within six years may
find Class C shares more favorable than Class B shares, because Class B shares
are subject to a CDSC on redemptions made within six years after purchase. Class
B shares are more favorable than Class C shares for investors who anticipate
holding their investment for more than eight years, since Class B shares convert
to Class A shares (and thus bear lower ongoing fees) after eight years. Consult
your investment dealer for advice applicable to your particular circumstances.
General
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gain distributions. The
CDSC is deducted from the proceeds of the redemption, not the amount remaining
in the account, unless otherwise requested, and is paid to the Distributor. The
CDSC may be eliminated for certain persons and organizations. See the discussion
that follows in this section.
No CDSC on any class of shares applies in connection with (1) redemptions by
retirement plans qualified under Code Sections 401(a) or 403(b)(7) when such
redemptions are necessary to make distributions to plan participants; (2)
distributions from an IRA due to death, disability or a tax-free return of an
excess contribution; (3) distributions by other employee benefit plans to pay
benefits; and (4) distributions by a Section 401(a) plan due to death. For
403(b)(7) and IRA accounts established before January 3, 1995, the CDSC is
waived for redemptions made after attainment of age 59 1/2. The CDSC is waived
for redemptions made to make required minimum distributions after attainment of
age 70 1/2 for 403(b)(7) and IRA accounts established on or after January 3,
1995. There is also no CDSC on redemptions following the death or disability (as
defined in Section 72(m)(7) of the Code) of a shareholder if the redemption is
made within one year after the shareholder's death or disability. In addition,
there is no CDSC on certain withdrawals pursuant to a Systematic Withdrawal
Plan. See "Selling Fund Shares -- 4 Ways to Sell Fund Shares -- By Systematic
Withdrawal Plan" below.
Each Fund receives the net asset value next determined after an order is
received on sales of each class of shares. The sales charge is allocated between
the investment dealer and the Distributor. The Distributor receives the CDSC.
For purposes of the CDSC, an exchange from one series of the Trusts to another
series of the Trusts is not considered a redemption or a purchase. For federal
tax purposes, however, such an exchange is considered a redemption and a
purchase and, therefore, would be considered a taxable event on which you may
recognize a gain or a loss.
The Distributor may, at its discretion, reallow the entire sales charge imposed
on the sale of Class A shares of each Fund to investment dealers from time to
time. The staff of the SEC is of the view that dealers receiving all or
substantially all of the sales charge may be deemed underwriters of a Fund's
shares.
For new amounts invested, the Distributor may, at its expense, pay investment
dealers who sell shares of the Funds at net asset value to an eligible
governmental authority 0.025% of the average daily net assets of an account at
the end of each calendar quarter for up to one year. These commissions are not
payable if the purchase represents the reinvestment of redemption proceeds from
any series of the Trusts or if the account is registered in street name.
The Distributor may, at its expense, provide additional promotional incentives
or payments to dealers who sell shares of the Funds (including in some cases,
exclusively to New England Securities Corporation, a broker-dealer affiliate of
the Distributor, and MetLife). In some instances additional compensation is
provided to certain dealers who achieve certain sales goals or who have sold or
may sell significant amounts of shares. Such compensation may include (i) full
reallowance of the sales charge on the Class A shares; (ii) additional
compensation with respect to the sale of Class A, B and C shares; or (iii)
financial assistance programs to dealers in connection with conferences, sales
or training programs, seminars, advertising and sales campaigns and/or
shareholder services arrangements. Certain dealers who have sold or may sell
significant amounts of shares also may receive compensation in the form of
payment for travel expenses, including lodging, incurred in connection with
trips taken by invited registered representatives to locations, within or
outside of the U.S., for educational seminars or meetings of a business nature.
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<PAGE>
The Distributor may provide non-cash incentives for achievement of specified
sales levels by representatives of participating broker-dealers and financial
institutions. Such incentives include, but are not limited to, merchandise from
gift catalogues or other sources. The participation of representatives in such
incentive programs is at the discretion of the broker-dealer or financial
institution with which the representative is associated.
Reduced Sales Charges (Class A Shares Only)
o Letter of Intent -- if aggregate purchases of all series and classes of
the Trusts over a 13-month period will reach a breakpoint (a dollar amount
at which a lower sales charge applies), smaller individual amounts can be
invested at the sales charge applicable to that breakpoint.
o Combining Accounts -- purchases by all qualifying accounts of all series
and classes of the Trusts (which do not include the Money Market Funds
unless the shares were purchased through an exchange from a series of the
Trusts) may be combined with purchases of qualifying accounts of a spouse,
parents, children, siblings, grandparents or grandchildren, individual
fiduciary accounts, sole proprietorships and/or single trust estates. The
values of all accounts are combined to determine the sales charge.
o Unit holders of unit investment trusts -- unit investment trust
distributions of less than $1 million 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).
o Eligible governmental authorities -- no sales charge or CDSC applies to
investments by any state, county or city or any instrumentality,
department, authority or agency thereof that has determined that 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.
o Clients of an adviser or subadviser -- no sales charge or CDSC applies to
investments of $25,000 or more in the Funds by (1) clients of an adviser
or subadviser to any series of the Trusts, any director, officer or
partner of a client of an adviser or subadviser to any series of the
Trusts and the parents, spouses and children of the foregoing; (2) any
individual who is a participant in a Keogh or IRA Plan under a prototype
Plan document of an adviser or subadviser to any series of the Trusts if
at least one participant in the plan qualifies under category (1) above;
and (3) an individual who invests through an IRA and is a participant in
an employee benefit plan that is a client of an adviser or subadviser to
any series of the Trusts. Any investor eligible for these arrangements
should so indicate in writing at the time of the purchase.
o Shares of the Funds 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.
o Shares of the Funds are available at net asset value for investments by
participant-directed 401(a) and 401(k) plans that have 100 or more
eligible employees.
o Shares of the Funds are available at net asset value for investments by
non-discretionary and non-retirement accounts of bank trust departments or
trust companies, but are unavailable if the trust department or
institution is part of an organization not principally engaged in banking
or trust activities.
o Shares of the Funds 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.
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<PAGE>
o There is no sales charge, CDSC or initial investment minimum related to
investments by current and retired employees of the Trusts' investment
advisers or subadvisers, the Distributor, New England Life Insurance
Company ("NELICO") or MetLife or any other company affiliated with NELICO
or MetLife; current and former directors and trustees of the Trusts,
NELICO or MetLife 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 who have selling arrangements
with the Distributor; the spouse, parents, children, siblings, in-laws,
grandparents or grandchildren of the persons listed above; any trust,
pension, profit sharing or other benefit plan for any of the foregoing
persons; and any separate account of NELICO or MetLife or of any insurance
company affiliated with NELICO or MetLife.
o 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 expenses associated with
such sales.
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<PAGE>
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OWNING FUND SHARES
- --------------------------------------------------------------------------------
Automatic Exchange Plan
The Funds have an automatic exchange plan under which shares of a class of a
Fund are automatically exchanged each month for shares of the same class of
other series of the Trusts. The minimum monthly exchange amount under the plan
is $100. There is no fee for exchanges made pursuant to this program, but there
may be a sales charge as described on this page. Shares of the Adjustable Rate
Fund that are subject to a differential sales charge as described on this page
may not participate in this program.
Exchanging Among New England Funds
Class A Shares
Except as indicated in the next two sentences, you may exchange Class A shares
of any series of the Trusts (and Class A shares of the Money Market Funds
acquired through exchanges from any series of the Trusts) for Class A shares of
any other series of the Trusts without paying a sales charge; such exchanges
will be made at the next-determined net asset value of the shares. Class A
shares of New England Intermediate Term Tax Free Fund of California and New
England Intermediate Term Tax Free Fund of New York (the "California and New
York Funds") (and shares of the Money Market Funds acquired through exchanges of
such shares) may be exchanged for Class A shares of another series of the Trusts
at net asset value only if you have held the California or New York Fund shares
for at least six months; otherwise, you will pay the difference between any
sales charge you have already paid on your California or New York Fund shares
and the higher sales charge of the series into which you are exchanging. If you
exchange Class A shares of New England Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund") (and shares of the Money Market Funds acquired through
exchanges of such shares) for shares of another series of the Trusts that has a
higher sales charge, you will pay the difference between any sales charge you
have already paid on your Adjustable Rate Fund shares and the higher sales
charge of the series into which you are exchanging. In addition, you may redeem
Class A shares of any Money Market Fund that were not acquired through exchanges
from any series of the Trusts and have the proceeds directly applied to the
purchase of shares of a series of the Trusts at the applicable sales charge.
Class B Shares
You may exchange Class B shares of any series of the Trusts (and Class B shares
of the Money Market Funds or Class A shares of the Money Market Funds that have
not been subject to a previous sales charge) for Class B shares of any other
series of the Trusts. Such exchanges will be made at the next- determined net
asset value of the shares. Class B shares will automatically convert on a
tax-free basis to Class A shares eight years after they are purchased (excluding
the time the shares are held in a Money Market Fund). See "Sales Charges --
Class B Shares" above.
Class C Shares
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust-Money Market Series. Such exchanges
will be made at the next-determined net asset value of the shares.
Class Y Shares
Agents, general agents, directors and senior officers of NELICO and its
insurance company subsidiaries may, at the discretion of NELICO, elect to
exchange Class A shares of any series of the Trusts acquired in connection with
deferred compensation plans offered by NELICO for Class Y shares of any series
of the Trusts which offers Class Y shares. To obtain a prospectus and more
information about Class Y shares, please call the Distributor toll free at
1-800-225-5478.
To make an exchange, please call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m.
(Eastern time) on a day when the Funds are open for business, call New England
Funds Personal Access Line(TM) at 1-800-346-5984 twenty-four hours a day or
write to New England Funds. Exchange requests after 4:00 p.m. (Eastern time), or
after the Exchange closes if it closes earlier than 4:00 p.m., will be processed
at the net asset value determined at the close of regular trading on the next
day that the Exchange is open. The exchange must be for a minimum of $1,000 (or
the total net asset value of your account, whichever is less), except that under
the Automatic Exchange Plan the minimum is $100. All exchanges are subject to
the eligibility requirements of the series into which you are exchanging. In
connection with any exchange, you must obtain and carefully read a current
prospectus of the series into which you are exchanging. The exchange privilege
may be exercised only in those states where shares of such other series may be
legally sold.
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<PAGE>
You have the automatic privilege to exchange your Fund shares by telephone. The
Funds and NEFSCO will employ reasonable procedures to confirm that your
telephone instructions are genuine, and, if it does not, it may be liable for
any losses due to unauthorized or fraudulent instructions. The Funds and NEFSCO
will require a form of personal identification prior to acting upon your
telephone instructions, will provide you with written confirmations of such
transactions and will record your instructions.
For federal tax purposes, an exchange of shares of one series of the Trusts for
shares of another series is considered to be a redemption and purchase and,
therefore, is considered to be a taxable event on which you may recognize a gain
or a loss.
Except as otherwise permitted by SEC rule, shareholders will receive at least 60
days' advance notice of any material change to the exchange privilege.
Market Timer Restrictions. Purchases and exchanges into the Funds should be made
for investment purposes only. The Funds and the Distributor reserve the right to
refuse or limit any purchase or exchange order by a particular purchaser (or
group of related purchasers) when such transaction is deemed harmful to the best
interests of the Fund's other shareholders or would disrupt the management of
the Fund. Without limiting the generality of the foregoing, the Funds and the
Distributor reserve the right to restrict (e.g., by limiting to a specified
maximum dollar amount) purchases and exchanges for the account of "market
timers." An account will be deemed to be the account of a market timer if (I)
more than two exchange purchases of a given Fund are effected for the account in
a calendar quarter or (ii) the account effects one or more exchange purchases of
a given fund in a calendar quarter in an aggregate amount in excess of 1% of the
Funds total net assets.
Fund Dividend Payments
The Funds pay dividends annually. Each Fund pays as dividends substantially all
net investment income (other than long-term capital gains) each year and
distributes annually all net realized long- and short-term capital gains (after
applying any available capital loss carryovers). The trustees of the Trust may
adopt a different schedule as long as payments are made at least annually. If
you intend to purchase shares of a Fund shortly before it declares a capital
gain distribution, you should be aware that a portion of the purchase price may
be returned to you as a taxable distribution.
You have the option to reinvest all distributions in additional shares of the
same class of the Fund or in shares of the same class of other series of the
Trusts, to receive distributions from dividends and interest in cash while
reinvesting distributions from capital gains in additional shares of the same
class of the Fund or the same class of shares of other series of the Trusts, or
to receive all distributions in cash. Income distributions and capital gains
distributions will be reinvested in shares of the same class of the Fund at net
asset value (without a sales charge or CDSC) unless you select another option.
You may change your distribution option by notifying New England Funds in
writing or by calling 1-800-225-5478. If you elect to receive your dividends in
cash and the dividend checks sent to you are returned "undeliverable" to the
Fund or remain uncashed for six months, your cash election will automatically be
changed and your future dividends will be reinvested. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
- --------------------------------------------------------------------------------
DIVIDEND DIVERSIFICATION PROGRAM
- --------------------------------------------------------------------------------
You may also establish a dividend diversification program, which allows you to
have all dividends and any other distributions automatically invested in shares
of the same class of another New England Fund, subject to the investor
eligibility requirements of that other fund and to state securities law
requirements. Shares will be purchased at the selected fund's net asset value
(without a sales charge or CDSC) on the dividend record date. A dividend
diversification account must be in the same registration (shareholder name) as
the distributing fund account and, if a new account in the purchased fund is
being established, the purchased fund's minimum investment requirements must be
met. Before establishing a dividend diversification program into any other New
England Fund, you must obtain and carefully read a copy of that fund's
prospectus.
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SELLING FUND SHARES
- --------------------------------------------------------------------------------
4 Ways to Sell Fund Shares
You may sell Class A, Class B and Class C shares of the Funds in the following
ways:
o Through your investment dealer:
Call your authorized investment dealer for information.
o By telephone:
You or your investment dealer may redeem (sell) shares by telephone using any of
the three methods described below:
Wired to Your Bank Account -- If you have previously selected the telephone
redemption privilege on your account, shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business. Class A and Class C shares only may also be
redeemed by calling New England Funds Personal Access Line(TM) at 1-800-346-5984
twenty-four hours a day. The proceeds (less any applicable CDSC) generally will
be wired on the next business day to the bank account previously chosen by you
on your application. A wire fee (currently $5.00) will be deducted from the
proceeds.
Your bank must be a member of the Federal Reserve System or have a correspondent
bank that is a member. If your account is with a savings bank, it must have only
one correspondent bank that is a member of the System.
Mailed to Your Address of Record -- Shares may be redeemed by calling
1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern time) on a day when the
Funds are open for business and requesting that a check for the proceeds (less
any applicable CDSC) be mailed to the address on your account, provided that the
address has not changed over the previous month and that the proceeds are for
$100,000 or less. Generally, the check will be mailed to your address of record
on the business day after your redemption request is received.
Through ACH -- Shares may be redeemed electronically through the ACH system,
provided that you have an approved ACH application on file with the Fund. To
redeem through ACH, call 1-800-225-5478 between 8:00 a.m. and 7:00 p.m. (Eastern
time) on a day when the Funds are open for business or, for Class A and C shares
only, call New England Funds Personal Access Line(TM) at 1-800-346-5984
twenty-four hours a day. The proceeds (less any applicable CDSC) generally will
arrive at your bank within three business days; their availability will depend
on your bank's particular rule.
Redemption requests accepted after 4:00 p.m. (Eastern time), or after the
Exchange closes if it closes before 4:00 p.m., will be processed at the net
asset value determined at the close of regular trading on the next day that the
Exchange is open.
o By mail:
You may redeem your shares at their net asset value (less any applicable CDSC)
next determined after receipt of your request in good order by sending a written
request (including any necessary special documentation) to New England Funds,
P.O. Box 8551, Boston, MA 02266-8551.
The request must include the name of the Fund, your account number, the exact
name(s) in which your shares are registered, the number of shares or the dollar
amount to be redeemed and whether you wish the proceeds mailed to your address
of record, wired to your bank account or transmitted through ACH. All owners of
the shares must sign the request in the exact names in which the shares are
registered (this appears on your confirmation statement) and indicate any
special capacity in which they are signing (such as trustee, custodian, under
power of attorney or on behalf of a partnership, corporation or other entity).
If you are redeeming shares worth less than $100,000 and the proceeds check is
made payable to the registered owner(s) and mailed to the record address, no
signature guarantee is required. Otherwise, you generally must have your
signature guaranteed by an eligible guarantor institution in accordance with
procedures established by the Funds and NEFSCO. Signature guarantees by notaries
public are not acceptable.
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<PAGE>
Additional written information may be required for redemptions by certain
benefit plans and IRAs. Contact the Distributor or your investment dealer for
details.
If you hold certificates for your Class A shares, you must enclose them with
your redemption request or your request will not be honored. The Funds recommend
that certificates be sent by registered mail.
o By Systematic Withdrawal Plan:
You may establish a Systematic Withdrawal Plan that allows you to redeem shares
and receive payments on a regular schedule. In the case of shares subject to a
CDSC, the amount or percentage you specify may not exceed, on an annualized
basis, 10% of the value of your Fund account (based on the day you establish
your plan). Redemption of shares pursuant to the plan will not be subject to a
CDSC. For information, contact the Distributor or your investment dealer. Since
withdrawal payments may have tax consequences, you should consult your tax
adviser before establishing such a plan.
General. Redemption requests will be effected at the net asset value next
determined after your redemption request is received in proper form by State
Street Bank or your investment dealer (except that orders received by your
investment dealer before the close of regular trading on the Exchange and
transmitted to the Distributor by 5:00 p.m. Eastern time on the same day will
receive that day's net asset value). Redemption proceeds (less any applicable
CDSC) will normally be sent to you within seven days after State Street Bank or
the Distributor receives your request in good order. However, in those cases
where you have recently purchased your shares by check or an electronic funds
transfer through the ACH system and you make a redemption request within 10 days
after such purchase or transfer, the Fund may withhold redemption proceeds until
the Fund knows that the check or funds have cleared.
During periods of substantial economic or market change, telephone redemptions
may be difficult to implement. If you are unable to contact the Distributor by
telephone, shares may be redeemed by delivering the redemption request in person
to the Distributor or by mail as described above.
Requests are processed at the net asset value next determined after the request
is received.
Special rules apply with respect to redemptions under powers of attorney. Please
call your investment dealer or the Distributor for more information.
Telephone redemptions are not available for tax-qualified retirement plans or
for Fund shares held in certificate form. If certificates have been issued for
your investment, you must send them to New England Funds along with your request
before a redemption request can be honored. See the instructions for redemption
by mail above.
The Funds may suspend the right of redemption and may postpone payment for more
than seven days when the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the SEC when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds to
dispose of their securities or to determine fairly the value of their net
assets, or during any other period permitted by the SEC for the protection of
investors.
If NEFM determines, in its sole discretion, that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption price in whole or in part by
a distribution in kind of readily marketable securities held by the Fund in lieu
of cash. Securities used to redeem Fund shares in kind will be valued in
accordance with the Funds' procedures for valuation described under "Fund
Details --How Fund Share Price Is Determined." Securities distributed by a Fund
in kind will be selected by NEFM and the Fund's subadviser(s) in light of the
Fund's objective and will not generally represent a pro rata distribution of
each security held in the Fund's portfolio. Investors may incur brokerage
charges on the sale of any such securities so received in payment of
redemptions. The Funds' right to pay redemptions in kind is limited by an
election made by the Funds under Rule 18f-1 under the 1940 Act. See
"Redemptions" in Part II of the Statement.
The Fund(s) reserve the right to suspend account services or refuse transaction
requests when notice has been received by the Fund of a dispute between the
registered or beneficial owners of an account or there is suspicion or evidence
that a fraudulent act may result.
Repurchase Option (Class A Shares Only)
You may apply your Class A share proceeds from the redemption of Class A shares
of the Funds (without a sales charge) to the repurchase of Class A shares of any
series of the Trusts. To qualify, you must reinvest some or all of the proceeds
within 120 days after your redemption and notify New England Funds or your
investment dealer at the time of reinvestment that you are taking
37
<PAGE>
advantage of this privilege. You may reinvest the proceeds either by returning
the redemption check or by sending your check for some or all of the redemption
amount. Please note: For federal income tax purposes, a redemption is a sale
that involves tax consequences (even if the proceeds are later reinvested).
Please consult your tax adviser.
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FUND DETAILS
- --------------------------------------------------------------------------------
How Fund Share Price Is Determined
The net asset value of each Fund's shares is determined as of the close of
regular trading (normally 4:00 p.m. [Eastern time]) on the Exchange on each day
that the Exchange is open for trading. Each Fund's holdings of equity securities
are valued at the most recent sales prices on an applicable exchange or NASDAQ,
or, in the case of unlisted securities (or listed securities which were not
traded during the day), at the last quoted bid prices. Price information on
listed securities is generally taken from the closing price on the exchange
where the security is primarily traded. Securities traded primarily on an
exchange outside the United States, except equity securities traded on the
London Stock Exchange ("British Equities"), which closes before the close of the
Exchange, generally will be valued for purposes of calculating the Fund's net
asset value at the last sale or bid price on that non-U.S. exchange, except that
when an occurrence after the closing of that exchange is likely to have
materially changed such a security's value, such security will be valued at fair
value as determined by or under the direction of the Trust's Board of Trustees
as of the close of regular trading on the Exchange. British Equities will be
valued at the mean between the last bid and last asked price. An option that is
written by the Fund generally will be valued at the last sale price or, in the
absence of the last sale price, the last offer price. A futures contract will be
valued at the unrealized gain or loss on the contract that is determined by
marking the contract to the current settlement price. A settlement price may not
be used if the market makes a limit move with respect to a particular futures
contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price is not used, futures contracts will be valued at their
fair value as determined by or under the direction of the Trust's Board of
Trustees. Short-term notes are valued at cost, or, where applicable, amortized
cost, which method is intended to approximate market value. All other securities
and assets of each segment of each Fund's portfolio are valued at their fair
market value as determined in good faith by the adviser or subadviser of that
segment (or a pricing service selected by the adviser or subadviser) under the
supervision of the Trust's Board of Trustees. The value of any assets for which
the market price is expressed in terms of a foreign currency will be translated
into U.S. dollars at the prevailing market rate on the date of the net asset
value computation, or, if no such rate is quoted at such time, at such other
appropriate rate as may be determined by or under the direction of the Trust's
Board of Trustees.
The net asset value per share of each class is determined by dividing the value
of each class's securities (determined as explained above) plus any cash and
other assets (including dividends and interest receivable but not collected)
less all liabilities (including accrued expenses), by the number of shares of
such class outstanding. The public offering price of each Fund's Class A shares
is determined by adding the applicable sales charge to the net asset value. See
"Buying Fund Shares -- Sales Charges" above. The public offering price of each
Fund's Class B and Class C shares is the net asset value per share.
The price you pay for a share will be determined using the next set of
calculations made after your order is accepted by New England Funds, L.P. In
other words, if, on a Tuesday morning, your properly completed application is
received, your wire is received or your dealer places your trade for you, the
price you pay will be determined by the calculations made as of the close of
regular trading on the Exchange on Tuesday. If you buy shares through your
investment dealer, the dealer must receive your order by the close of regular
trading on the Exchange and transmit it to the Distributor by 5:00 p.m. (Eastern
time) or under limited circumstances, such other time no later than 8:00 p.m.
(Eastern time) as may be agreed upon between the dealer and the distributor to
receive that day's public offering price.
CALCULATING THE PRICE OF SHARES
Total Market Value of Other Any
Portfolio Securities + Assets - Liabilities = Net Asset Value (NAV)
-------------------------------------------------
Total Number of Outstanding Shares in a Class
The public offering price for Class A shares is the NAV plus the
applicable sales charge. The public offering price for Class B and Class C
shares is the NAV.
Income Tax Considerations
Each Fund intends to meet all requirements of the Code necessary to qualify as a
"regulated investment company" and thus does not expect to pay any federal
income tax on investment income and capital gains distributed to shareholders in
cash or in additional shares. Unless you are a tax-exempt entity, your
distributions derived from a Fund's short-term capital gains and ordinary income
are taxable to you as ordinary income. (A portion of these distributions may
qualify for the dividends-received deduction for
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corporations.) Distributions designated by the Fund as deriving from net gains
on securities held for more than one year but not more than 18 months ("28% Rate
Gain") and from net gains on securities held for more than 18 months ("20% Rate
Gain"), are taxable to you as such, regardless of how long you have owned shares
in the Fund. Both income distribution and capital gains distributions are
taxable whether you elected to receive them in cash or additional shares.
To avoid an excise tax, each Fund intends to distribute prior to calendar year
end virtually all the Fund's ordinary income earned during that calendar year,
and virtually all of the capital gain net income the Fund realized during the
twelve months ending October 31, plus any retained amount from the prior year.
If declared in December to shareholders of record in that month, and paid the
following January, these distributions will be considered for federal income tax
purposes to have been received by shareholders on December 31 of the year in
which declared.
Each Fund is required to withhold 31% of all income dividends and capital gains
distributions it pays to you if you do not provide a correct, certified taxpayer
identification number, if a Fund is notified that you have underreported income
in the past or if you fail to certify to a Fund that you are not subject to such
withholding. In addition, each Fund will be required to withhold 31% of the
gross proceeds of Fund shares you redeem if you have not provided a correct,
certified taxpayer identification number. If you are a tax-exempt shareholder,
however, these backup withholding rules will not apply so long as you furnish
the Fund with an appropriate certification.
Annually, if you earn more than $10 in taxable income from a Fund, you will
receive a Form 1099 to assist you in reporting the prior calendar year's
distributions on your federal income tax return. You should consult your tax
adviser about any state or local taxes that may apply to such distributions. Be
sure to keep the Form 1099 as a permanent record. A fee may be charged for any
duplicate information requested.
The Star Worldwide and Star Small Cap Funds may be liable to foreign governments
for taxes relating primarily to investment income or capital gains on foreign
securities in the Funds' portfolios. The Funds may in some circumstances be
eligible to, and in its discretion may, make an election under the Code which
would allow Fund shareholders who are U.S. citizens or U.S. corporations to
claim a foreign tax credit or deduction (but not both) on their U.S. income tax
return. If a Fund makes the election, the amount of each shareholder's
distribution reported on the information returns filed by the Fund with the
Internal Revenue Service must be increased by the amount of the shareholder's
portion of the Fund's foreign tax paid.
The foregoing is a summary of certain federal income tax consequences of an
investment in a Fund for shareholders who are U.S. citizens or corporations.
Shareholders should consult a competent tax adviser as to the effect of an
investment in a Fund on their particular federal, state and local tax
situations. Shareholders of the International Equity Fund should also consult
their tax advisers about consequences of their investment under foreign laws.
The Funds' Expenses
In addition to the management fee paid to its adviser, each Fund pays all
expenses not borne by its adviser, subadvisers or the Distributor, including,
but not limited to, the charges and expenses of each Fund's custodian and
transfer agent, independent auditors and legal counsel for the Fund and the
Trust's independent trustees, 12b-1 fees, all brokerage commissions and transfer
taxes in connection with portfolio transactions, all taxes and filing fees, the
fees and expenses for registration or qualification of its shares under federal
and state securities laws, all expenses of shareholders' and trustees' meetings,
preparing, printing and mailing prospectuses and reports to shareholders and the
compensation of trustees who are not directors, officers or employees of NELICO
or MetLife or their affiliates, other than affiliated registered investment
companies. In the case of the Star Advisers Fund, certain expenses may be
allocated differently between the Fund's Class A, Class B and Class C shares, on
the one hand, and its Class Y shares, if any, on the other hand. (See
"Additional Facts About the Funds" below.)
Under Service plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund
pays the Distributor a monthly service fee at an annual rate not to exceed 0.25%
of the Fund's average daily net assets attributable to the Class A, Class B and
Class C shares. The Distributor may pay up to the entire amount of this fee to
securities dealers who are dealers of record with respect to the Fund's shares,
for providing personal services to investors in shares of the Fund and/or the
maintenance of shareholder accounts. In the case of the Class B shares, the
Distributor pays investment dealers at the time of sale the first year's service
fee, in the amount of up to 0.25% of the amount invested. The Class A service
fee is payable only to reimburse the Distributor [on a quarterly basis, unless
other arrangements are made between the Distributor and the securities dealer]
for amounts it pays or expends in connection with the provision of personal
services to investors and/or the maintenance of shareholder accounts. To the
extent that the Distributor's reimbursable expenses in any year exceed the
maximum amount payable under the relevant Service Plan for that year, such
expenses
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<PAGE>
may be carried forward for reimbursement in future years in which the
Plan remains in effect. The Funds had no unreimbursed Class A expenses carried
over into 1997 from previous plan years. The Class B and C service fees are
payable regardless of the amount of the Distributor's related expenses.
Each Fund's Class B and Class C shares also pay the Distributor a monthly
distribution fee at an annual rate not to exceed 0.75% of the average net assets
of the respective Fund's Class B and Class C shares. The Distributor may pay up
to the entire amount of this fee to securities dealers who are dealers of record
with respect to the Fund's shares, as distribution fees in connection with the
sale of the Fund's shares on a quarterly basis, unless other arrangements are
made between the Distributor and the securities dealer. The Distributor retains
the balance of the fee as compensation for its services as distributor of the
Class B and Class C shares.
In addition, NEFM performs certain accounting and administrative services for
the Funds. For those services, each Fund reimburses NEFM for all or part of its
expenses of providing these services to the Fund, which includes the following:
(i) expenses for personnel performing bookkeeping, accounting, internal
auditing, financial reporting and clerical functions relating to the Funds, (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices, proxy
solicitation materials furnished to shareholders of the Funds or regulatory
authorities and reports and for SEC compliance, and (iii) registration, filing
and other fees in connection with requirements of regulatory authorities.
Performance Criteria
Each Fund may include total return information for each class of shares in
advertisements or other written sales material. Each Fund may show each class's
average annual total return for the one-, five- and ten-year periods (or the
life of the class, if shorter) through the end of the most recent calendar
quarter. Total return is measured by comparing the value of a hypothetical
$1,000 investment in a class at the beginning of the relevant period to the
value of the investment at the end of the period (assuming deduction of the
current maximum sales charge on Class A shares, automatic reinvestment of all
dividends and capital gains distributions and, in the case of Class B and C
shares, imposition of the CDSC relevant to the period quoted). Total return may
be quoted with or without giving effect to any voluntary expense limitations in
effect for the class in question during the relevant period. The class may also
show total return over other periods, on an aggregate basis for the period
presented, or without deduction of a sales charge. If a sales charge is not
deducted in calculating total return, the class's total return will be higher.
Total return will generally be higher for Class A shares than for Class B and
Class C shares of the same Fund, because of the higher levels of expenses borne
by the Class B and Class C shares. An investor should balance this expected
lower total return against the benefit gained by 100% immediate investment of
the purchase price of Class B or Class C shares. As a result of lower operating
expenses, Class Y shares of the Star Advisers Fund that offers such shares can
be expected to achieve a higher investment return than the Fund's Class A, Class
B or Class C shares.
All performance information is based on past results and is not an indication of
likely future performance.
Additional Facts About the Funds
o The Trust was organized in 1985 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Star Advisers Fund was organized in 1994, the Star
Worldwide Fund was organized in 1995 and the Star Small Cap Fund was
organized in 1996.
o When you invest in a Fund, you acquire freely transferable shares of
beneficial interest that entitle you to receive annual or quarterly
dividends as determined by the Trust's trustees and to cast a vote for
each share you own at shareholder meetings. Shares of each Fund vote
separately from shares of other series of the Trust, except as otherwise
required by law. Shares of all classes of a Fund vote together, except as
to matters relating to a class's Rule 12b-1 plan, on which only shares of
that class are entitled to vote.
o Except for matters that are explicitly identified as "fundamental" in this
prospectus or Part I of the Statement, the investment policies of each
Fund may be changed by the Trust's trustees without shareholder approval
or, in most cases, prior notice. The investment objectives of the Funds
are not fundamental. If there is a change in the objective of any Fund,
shareholders should consider whether the Fund remains an appropriate
investments in light of their current financial position and needs.
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<PAGE>
o The Star Advisers Fund also offers Class Y shares to certain qualified
investors. Class Y shares are identical to Class A, Class B, and Class C
shares, except that Class Y shares have no sales charge or CDSC, bear no
Rule 12b-1 fees and have separate voting rights in certain circumstances.
Class Y may bear its own transfer agency and prospectus printing costs and
does not bear any portion of those costs relating to other classes of
shares. Class Y shares may be offered in the future by Star Worldwide Fund
and Star Small Cap Fund.
o The Trust does not generally hold regular shareholder meetings and will do
so only when required by law. Shareholders of the Trust may remove the
trustees of the Trust from office by votes cast at a shareholder meeting
or by written consent.
o If the balance in your account with a Fund is less than a minimum amount
set by the trustees of the Trust from time to time (currently $1,000 for
all accounts, except for those indicated below), that Fund may close your
account and send the proceeds to you. Shareholders who are affected by
this policy will be notified of the Fund's intention to close the account
and will have 60 days immediately following the notice to bring the
account up to the minimum. The minimum does not apply to automatic
investment plans or accounts that have fallen below the minimum solely
because of fluctuations in a Fund's net asset value per share.
o Each Fund's annual report contains additional performance information and
is available upon request and without charge. Each Fund will send a single
copy of its annual and semi-annual reports to an address at which more
than one shareholder of record with the same last name has indicated that
mail is to be delivered. Shareholders may request additional copies of any
annual or semi-annual report in writing or by telephone.
o The Class A, Class B, Class C, and (for the Star Advisers Fund) Class Y
structure could be terminated should certain IRS rulings be rescinded.
The Trust's trustees have the authority without shareholder approval to issue
other classes of shares of a Fund that represent interests in the Fund's
portfolio but that have different sales load and fee arrangements.
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43
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[NEW ENGLAND FUNDS LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
NEW ENGLAND CAPITAL GROWTH FUND
NEW ENGLAND BALANCED FUND
NEW ENGLAND GROWTH FUND
NEW ENGLAND GROWTH OPPORTUNITIES FUND
NEW ENGLAND INTERNATIONAL EQUITY FUND
NEW ENGLAND VALUE FUND
NEW ENGLAND EQUITY INCOME FUND
Statement of Additional Information -- PART I
May 1, 1998
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, 1998 for Class A, Class B and Class C shares or the Prospectus of the
Funds dated May 1, 1998 for Class Y shares (the "Prospectus" or "Prospectuses").
The Statement should be read together with the Prospectus. Investors may obtain
a free copy of the Prospectus from New England Funds, L.P., Prospectus
Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds.
New England Growth Fund, New England Capital Growth Fund, New England
Balanced Fund, New England International Equity Fund and New England Value Fund
are series of New England Funds Trust I, a registered management investment
company that offers a total of twelve series, and New England Growth
Opportunities Fund is a series of New England Funds Trust II, a registered
management investment company that offers a total of seven series. New England
Equity Income Fund is a series of New England Funds Trust III, a registered
management investment company that offers a total of two series. New England
Funds Trust I, New England Funds Trust II and New England Funds Trust III are
collectively referred to in this Statement as the "Trusts" and are each referred
to as a "Trust."
Table of Contents
Part I Page
----
Investment Restrictions ii
Fund Charges and Expenses vii
Ownership of Fund Shares xii
Investment Performance of the Funds xv
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
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 48
Status
Financial Statements 50
Appendix A - Description of Bond Ratings 51
i
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Appendix B - Publications That May Contain Fund
Information 53
Appendix C - Advertising and Promotional Literature 55
Appendix D - Portfolio Composition of the Municipal
Income, Bond Income and California Funds 59
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following is a description of restrictions on the investments to be
made by the Funds, some of which restrictions (which are marked with an
asterisk) may not be changed without the vote of a majority of the outstanding
voting securities of the relevant Fund (as defined in the Investment Company Act
of 1940 [the "1940 Act"]). Except in the case of restrictions marked with a
dagger (+) below, the percentages set forth below and the percentage limitations
set forth in the Prospectus will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
New England Growth Fund, New England Value Fund and New England Balanced Fund
New England Growth Fund (the "Growth Fund"), New England Value Fund (the "Value
Fund") and New England Balanced Fund (the "Balanced Fund") each will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or 25% of the
Fund's total assets (taken at current value) would be invested in any one
industry;
*(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
the Fund will not deposit or pledge more than 10% of its total assets
(taken at current value) as collateral for such sales;
*(3) Acquire more than 10% of any class of securities of an issuer (taking all
preferred stock issues of an issuer as a single class and all debt issues
of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer;
*(4) Borrow money in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower, and then
only as a temporary measure for extraordinary or emergency purposes;
*(5) Pledge more than 15% of its total assets (taken at cost);
*(6) Invest more than 5% of its total assets (taken at current value) in
securities of businesses (including predecessors) less than three years
old;
*(7) Purchase or retain securities of any issuer if officers and trustees of
New England Funds Trust I or of the investment adviser of the Fund who
individually own more than 1/2 of 1% of the shares or securities of that
issuer together own more than 5%;
*(8) Make loans, except by purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which are a part of
an issue to the public or to financial institutions;
*(9) Buy or sell oil, gas or other mineral leases, rights or royalty contracts,
real estate or commodities or commodity contracts. Also, the Value Fund
will not buy or sell real estate or interests in real estate which are not
readily marketable. (This restriction does not prevent such Funds from
purchasing securities of companies investing in the foregoing);
*(10) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws;
*(11) Make investments for the purpose of exercising control or management;
*(12) Participate on a joint or joint and several basis in any trading account
in securities;
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*(13) Purchase options or warrants if, as a result, more than 1% of its total
assets (taken at current value) would be invested in such securities;
*(14) Write options or warrants;
*(15) Invest in the securities of other investment companies, except by
purchases in the open market involving only customary brokers'
commissions. (Under the 1940 Act, the Growth Fund, the Value Fund and the
Balanced Fund each may not (a) invest more than 10% of its total assets
[taken at current value] in such securities, (b) own securities of any one
investment company having a value in excess of 5% of the total assets of
such Fund [taken at current value], or (c) own more than 3% of the
outstanding voting stock of any one investment company);
*(16) Issue senior securities. For the purpose of this restriction, none of the
following is deemed to be a senior security: any borrowing permitted by
restriction (4) above; any pledge or other encumbrance of assets permitted
by restriction (5) above; any collateral arrangements with respect to
options, forward contracts, futures contracts, swap contracts and other
similar contracts and options on futures contracts and with respect to
initial and variation margin; the purchase or sale of options, forward
contracts, futures contracts, swap contracts and other similar contracts
or options on futures contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of New England
Funds Trust I's Agreement and Declaration of Trust and by the 1940 Act,
the rules thereunder, or any exemption therefrom; or
+(17) Invest more than 15% of the Fund's total net assets in illiquid securities
(excluding Rule 144A securities deemed to be liquid under guidelines
established by the Trust's Trustees and certain Section 4(2) commercial
paper.)
New England Capital Growth Fund
New England Capital Growth Fund (the "Capital Growth Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other than
U.S. Government securities) if, as a result, more than 5% of the Fund's
total assets (taken at current value) would then be invested in securities
of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current value)
would be invested in any one industry (in the utilities category, gas,
electric, water and telephone companies will be considered as being in
separate industries, and each foreign country's government [together with
subdivisions thereof] will be considered to be a separate industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
the Fund will not deposit or pledge more than 10% of its total assets
(taken at current value) as collateral for such sales. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin);
(4) Acquire more than 10% of any class of securities of an issuer (other than
U.S. Government securities and taking all preferred stock issues of an
issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower, and then
only as a temporary measure for extraordinary or emergency purposes;
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(6) Pledge more than 15% of its total assets (taken at cost). (For the purpose
of this restriction, collateral arrangements with respect to options,
futures contracts and options on futures contracts and with respect to
initial and variation margin are not deemed to be a pledge of assets);
*(7) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's portfolio
securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty contracts,
real estate or commodities or commodity contracts, except that the Fund
may buy and sell futures contracts and related options. (This restriction
does not prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the Securities and
Exchange Commission (the "SEC"), participate on a joint or joint and
several basis in any trading account in securities. (The "bunching" of
orders for the purchase or sale of portfolio securities with Loomis,
Sayles & Company, L.P. ["Loomis Sayles"] or accounts under its management
to reduce brokerage commissions, to average prices among them or to
facilitate such transactions is not considered a trading account in
securities for purposes of this restriction.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities or securities indexes
and (b) enter into currency forward contracts;
+(12) Invest more than 15% of its net assets (taken at current value) in
illiquid securities (excluding Rule 144A securities deemed to be liquid
under guidelines established by the Trust's Trustees and certain Section
4(2) commercial paper); or
*(13) Issue senior securities. (For the purpose of this restriction, none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts and
with respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.)
New England International Equity Fund
New England International Equity Fund (the "International Equity Fund") may not:
(1) With respect to 75% of its total assets, purchase any security (other than
U.S. Government securities) if, as a result, more than 5% of the Fund's
total assets (taken at current value) would then be invested in securities
of a single issuer;
*(2) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current value)
would be invested in any one industry (in the utilities category, gas,
electric, water and telephone companies will be considered as being in
separate industries, and each foreign country's government [together with
subdivisions thereof] will be considered to be a separate industry);
(3) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
the Fund will not deposit or pledge more than 10% of its total assets
(taken at current value) as collateral for such sales. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin);
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(4) Acquire more than 10% of any class of securities of an issuer (other than
U.S. Government securities and taking all preferred stock issues of an
issuer as a single class and all debt issues of an issuer as a single
class) or with respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of an issuer;
*(5) Borrow money in excess of 10% of its total assets (taken at cost) or 5% of
its total assets (taken at current value), whichever is lower, and then
only as a temporary measure for extraordinary or emergency purposes;
(6) Pledge more than 15% of its total assets (taken at cost). (For the purpose
of this restriction, collateral arrangements with respect to options,
futures contracts and options on futures contracts and with respect to
initial and variation margin are not deemed to be a pledge of assets);
*(7) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's portfolio
securities;
*(8) Buy or sell oil, gas or other mineral leases, rights or royalty contracts,
real estate or commodities or commodity contracts, except that the Fund
may buy and sell futures contracts and related options. (This restriction
does not prevent the Fund from purchasing securities of companies
investing in the foregoing);
*(9) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws;
(10) Except to the extent permitted by rule or order of the SEC, participate on
a joint or joint and several basis in any trading account in securities.
(The "bunching" of orders for the purchase or sale of portfolio securities
with Loomis Sayles or accounts under its management to reduce brokerage
commissions, to average prices among them or to facilitate such
transactions is not considered a trading account in securities for
purposes of this restriction.);
(11) Write, purchase or sell options, except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indexes,
currencies, futures contracts, swap contracts and other similar
instruments and (b) enter into currency forward contracts;
+(12) Purchase any illiquid security if, as a result, more than 15% of its total
assets (taken at current value) would be invested in such securities
(excluding Rule 144A securities deemed to be liquid under guidelines
established by the Trust's Trustees and certain Section 4(2) commercial
paper); or
*(13) Issue senior securities. For the purpose of this restriction none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (6) above; any borrowing
permitted by restriction (5) above; any collateral arrangements with
respect to options, futures contracts and options on futures contracts and
with respect to initial and variation margin; the purchase or sale of
options, forward contracts, futures contracts or options on futures
contracts; and the issuance of shares of beneficial interest permitted
from time to time by the provisions of New England Funds Trust I's
Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom.
The staff of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are subject to restriction (12) above.
vi
<PAGE>
New England Growth Opportunities Fund
New England Growth Opportunities Fund (the "Growth Opportunities Fund") will
not:
*(1) Purchase securities of an issuer if such purchase would cause more than 5%
of the market value of the total Fund assets to be invested in the
securities of such issuer (exclusive of United States or Canadian
government obligations), or if such purchase would cause more than 10% of
the securities of such issuer to be held by the Fund;
*(2) Purchase or retain the securities of any issuer if the officers and
trustees of New England Funds Trust II owning beneficially 1/2 of 1% of
the securities of such issuer together own beneficially more than 5% of
the securities of such issuer;
*(3) Purchase the securities issued by any other investment company, except
that a purchase involving no commission or profit to a sponsor or dealer
(other than a customary broker's commission) is permitted and except that
a purchase that is part of a plan of merger or consolidation is permitted;
*(4) Purchase securities issued by companies with a record (including that of
their predecessors) of less than three years' continuous operation;
*(5) Purchase securities for the portfolio on margin, make short sales or make
loans to persons affiliated with New England Funds Trust II;
*(6) Act as underwriter of securities of other issuers, or invest directly in
real estate or in commodities or commodity contracts; or
*(7) Make loans to other persons, provided, however, that this restriction
shall not prohibit the Fund from entering into repurchase agreements with
respect to not more than 25% of the Fund's total assets taken at current
value. The purchase of a portion of an issue of bonds, notes or debentures
publicly distributed or of a type customarily purchased by institutional
investors does not constitute the making of loans within the meaning of
this restriction;
*(8) The Growth Opportunities Fund may make secured or unsecured bank
borrowings, provided that an asset coverage of at least 300% for all such
borrowings (including the amount then being borrowed) is maintained as
required by the 1940 Act;
*(9) Issue senior securities. For the purpose of this restriction, none of the
following is deemed to be a senior security; any borrowing permitted by
restriction (8) above; any collateral arrangements with respect to
options, futures contracts, swap contracts and other similar contracts and
options on futures contracts and with respect to initial and variation
margin; the purchase or sale of options, forward contracts, futures
contracts, swap contracts and other similar contracts or options on
futures contracts; and the issuance of shares of beneficial interest
permitted from time to time by the provisions of New England Funds Trust
II's Agreement and Declaration of Trust and by the 1940 Act, the rules
thereunder, or any exemption therefrom;
+(10) Invest more than 15% of the Fund's total net assets in illiquid securities
(excluding Rule 144A securities deemed to be liquid under guidelines
established by the Trust's Trustees and certain Section 4(2) commercial
paper).
It is a fundamental policy of the Growth Opportunities Fund that it will
not concentrate its assets in the securities of issuers in the same industry.
The Fund intends to abide by the views of the SEC staff on what constitutes
industry concentration. Accordingly, the Fund will not make an investment if,
immediately thereafter, the Fund would hold more than 25% of its total assets in
securities of issuers in any one industry. This limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Growth Opportunities Fund has no present intention of borrowing money
except on a temporary basis, as may be needed, to cover redemptions of shares.
Should this intention change, the Prospectus will be amended.
vii
<PAGE>
New England Equity Income Fund
New England Equity Income Fund (the "Equity Income" Fund) will not:
*(1) Purchase any security (other than U.S. Government securities) if, as a
result, more than 25% of the Fund's total assets (taken at current value)
would be invested in any one industry (in the utilities category, gas,
electric, water and telephone companies will be considered as being in
separate industries, and each foreign country's government (together with
subdivisions thereof) will be considered to be a separate industry);
(2) Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities), or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equivalent in kind and amount to those sold, and
the Fund will not deposit or pledge more than 10% of its total assets
(taken at current value) as collateral for such sales. (For this purpose,
the deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin);
*(3) Borrow money in excess of 25% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes;
(4) Pledge more than 25% of its total assets (taken at cost). (For the purpose
of this restriction, collateral arrangements with respect to options,
futures contracts, options on futures contracts and swap contracts and
with respect to initial and variation margin are not deemed to be a pledge
of assets);
*(5) Make loans, except by entering into repurchase agreements or by purchase
of bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the public or
to financial institutions, or through the lending of the Fund's portfolio
securities;
*(6) Buy or sell oil, gas or other mineral leases, rights or royalty contracts,
real estate or commodities or commodity contracts, except that the Fund
may buy and sell futures contracts, swap contracts and related options.
(This restriction does not prevent the Fund from purchasing securities of
companies investing in the foregoing);
*(7) Act as underwriter, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws;
(8) Participate on a joint or joint and several basis in any trading account
in securities. (The "bunching" of orders for the purchase or sale of
portfolio securities with any investment adviser or subadviser of the Fund
or accounts under any such investment adviser's or subadviser's management
to reduce brokerage commissions, to average prices among them or to
facilitate such transactions is not considered a trading account in
securities for purposes of this restriction.);
(9) Write, purchase or sell options except that the Fund may (a) write,
purchase and sell put and call options on securities, securities indexes
or futures contracts and (b) enter into currency forward contracts;
+(10) Purchase any illiquid security if, as a result, more than 15% of its net
assets (taken at current value) would be invested in such securities;
*(11) Issue senior securities. (For the purpose of this restriction none of the
following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restrictions (2) or (5) above; any
borrowing permitted by restriction (4) above; any collateral arrangements
with respect to forward contracts, options, futures contracts, swap
contracts and options on futures contracts or swap contracts and with
respect to initial and variation margin; the purchase or sale of options,
forward contracts, futures contracts, swap contracts or options on futures
contracts or swap contracts; and the issuance of shares of beneficial
interest permitted from time to time by the provisions of the Trust's
Declaration of Trust and by the Investment Company Act of 1940 (the "1940
Act"), the rules thereunder, or any exemption therefrom.)
viii
<PAGE>
- --------------------------------------------------------------------------------
FUND CHARGES AND EXPENSES
- --------------------------------------------------------------------------------
MANAGEMENT FEES
Pursuant to an advisory agreement dated August 30, 1996, Capital Growth
Management Limited Partnership ("CGM") has agreed to manage the investment and
reinvestment of the assets of the Growth Fund, subject to the supervision of the
Board of Trustees of New England Funds Trust I. Under the advisory agreement,
the Fund pays CGM an advisory fee at the annual rate of 0.75% of the first $200
million of the Fund's average daily net assets, 0.70% of the next $300 million
of such assets and 0.65% of such assets in excess of $500 million.
Pursuant to separate advisory agreements, each dated August 30, 1996, New
England Funds Management, L.P. ("NEFM") has agreed, subject to the supervision
of the Board of Trustees of the relevant Trust, to manage the investment and
reinvestment of the assets of the Capital Growth, Value, Balanced, International
Equity, Growth Opportunities and Equity Income Funds and to provide a range of
administrative services to such Funds. For the services described in the
advisory agreements, each such Fund has agreed to pay NEFM a management fee at
the annual rate set forth in the following table:
Management fee payable by Fund to NEFM
Fund (as a percentage of average daily net
assets of the Fund)
- ------------------------------ --------------------------------------------
Balanced Fund, 0.750% of the first $200 million
Capital Growth Fund and 0.700% of the next $300 million
Value Fund 0.650% of amounts in excess of $500 million
Growth Opportunities Fund and 0.700% of the first $200 million
Equity Income Fund 0.650% of the next $300 million
0.600% of amounts in excess of $500 million
International Equity Fund 0.900% of the first $200 million
0.850% of the next $300 million
0.800% of amounts in excess of $500 million
The advisory agreements for the Capital Growth, Value, Balanced,
International Equity, Growth Opportunities and Equity Income Funds each provide
that NEFM may delegate its responsibilities thereunder to other parties.
Pursuant to separate subadvisory agreements, each dated August 30, 1996
(February 14, 1997 and April __, 1998, in the case of the International Equity
Fund and the Capital Growth Fund, respectively), NEFM has delegated
responsibility for managing the investment and reinvestment of each of these
Funds' assets to a subadviser. The subadviser is Loomis Sayles, in the case of
the International Equity, Balanced, Value and Equity Income Funds; and Westpeak
Investment Advisors, L.P. ("Westpeak"), in the case of the Growth Opportunities
and Capital Growth Funds. The Funds pay no direct fees to the subadvisers. For
providing such subadvisory services to the Funds, NEFM pays each subadviser a
subadvisory fee at the annual rate set forth in the following table:
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- -------------------------- ------------- ---------------------------------------------------------
<S> <C> <C>
Balanced Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Capital Growth Fund Westpeak 0.600% of the first $25 million
0.550% of the next $75 million
0.500% of the next $100 million
0.350% of the next $300 million
0.300% of amounts in excess of $500 million
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
Subadvisory fee payable by NEFM to subadviser
Fund Subadviser (as a percentage of average daily net assets of the Fund)
- -------------------------- ------------- ---------------------------------------------------------
<S> <C> <C>
Growth Opportunities Fund Westpeak 0.500% of the first $25 million
0.400% of the next $75 million
0.350% of the next $100 million
0.300% of amounts in excess of $200 million
International Equity Fund Loomis 0.400% of the first $200 million
Sayles 0.350% of amounts in excess of $200 million
Value Fund Loomis 0.535% of the first $200 million
Sayles 0.350% of the next $300 million
0.300% of amounts in excess of $500 million
Equity Income Fund Loomis 0.400% of the first $200 million
Sayles 0.325% of the next $300 million
0.275% of amounts in excess of $500 million
</TABLE>
Loomis Sayles voluntarily agreed to waive in its entirety its subadvisory
fee for the International Equity Fund through February 14, 1998.
Since September 1, 1997, Loomis Sayles has voluntarily agreed, until
further notice to the Fund, to waive its entire subadvisory fee payable to
Loomis Sayles by NEFM. This waiver by Loomis Sayles does not reduce the Fund's
expenses. This agreement may be terminated by Loomis Sayles at any time. In
addition, under an expense deferral arrangement, which NEFM may terminate at any
time, NEFM has agreed to defer its management fee for the Fund until further
notice and, if necessary, to bear certain expenses associated with the Fund to
the extent necessary to limit the Fund's expenses to the annual rate of 1.50% of
average daily net assets for Class A shares, 2.25% for Class B shares, 2.25% for
Class C shares and 1.25% for Class Y shares, subject to the obligation of the
Fund to pay NEFM such deferred fees in later periods to the extent that the
Fund's expenses fall below the annual rate of 1.50% of average daily net assets
for Class A shares, 2.25% for Class B shares, 2.25% for Class C shares and 1.25%
for Class Y shares; provided, however, that the Fund is not obligated to pay any
such deferred fees more than two years after the end of the fiscal year in which
the fee was deferred.
From January 2, 1996 to August 30, 1996, NEFM served as adviser and Loomis
Sayles served as subadviser to the Capital Growth, Balanced and Value Funds
pursuant to separate advisory and subadvisory agreements providing for the same
management and subadvisory fees as are currently in effect for these Funds.
Prior to August 30, 1996, CGM served as adviser to the Growth Fund pursuant to
an advisory agreement providing for an advisory fee at the same rate as
currently in effect for such Fund. Prior to January 2, 1996, Loomis Sayles
served as adviser to the Capital Growth, Balanced and Value Funds pursuant to
separate advisory agreements, each of which provided for an advisory fee payable
by such Fund to Loomis Sayles at the same rate as the management fee currently
payable by such Fund to NEFM.
From May 1, 1995 until August 30, 1996, NEFM served as adviser and
Westpeak served as subadviser to the Growth Opportunities Fund pursuant to
advisory and subadvisory agreements providing for the same management and
subadvisory fee rates as are currently in effect for the Fund. Prior to May 1,
1995, Back Bay Advisors, L.P. ("Back Bay Advisors") served as adviser to the
Growth Opportunities Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Back Bay Advisors at the annual rate of
0.50% of the Fund's average daily net assets.
From December 29, 1995 until February 14, 1997, Draycott Partners, Ltd.
("Draycott") served as subadviser to the International Equity Fund pursuant to
subadvisory agreements providing for a subadvisory fee payable by NEFM to
Draycott at the annual rate of 0.54% of the first $200 million of the Fund's
average daily net assets, 0.49% of the next $300 million of such assets and
0.44% of such assets in excess of $500 million. From December 29, 1995 to August
30, 1996, NEFM served as adviser to the International Equity Fund pursuant to an
advisory agreement providing for a management fee at the same rate as is
currently in effect for such Fund.
x
<PAGE>
Prior to December 29, 1995, Draycott served as adviser to the
International Equity Fund pursuant to an advisory agreement providing for an
advisory fee payable by the Fund to Draycott at the annual rate of 0.80% of the
first $200 million of the Fund's average daily net assets, 0.75% of the next
$300 million of such assets and 0.70% of such assets in excess of $500 million.
Prior to December 29, 1995, short-term cash management services were
provided to the International Equity Fund by Back Bay Advisors, as subadviser to
Draycott. For these services, Draycott had agreed to compensate Back Bay
Advisors at the annual rate of 0.08% of average daily net assets of the Fund.
Back Bay Advisors voluntarily agreed to waive this fee in its entirety.
Prior to December 29, 1995, New England Funds, L.P. (the "Distributor"),
of which Draycott was then an affiliate, furnished or paid the expenses of the
International Equity Fund for office space, facilities and equipment, services
of executive and other personnel of New England Funds Trust I and certain
administrative services, pursuant to an administrative services agreement. Under
this agreement, the Fund paid the Distributor a fee at the annual rate of 0.10%
of the average daily net assets attributable to the Fund's Class A, Class B and
Class C shares and 0.05% of the average daily net assets attributable to the
Fund's Class Y shares. The International Equity Fund's current management fee
rate represents, with respect to the Fund's Class A, Class B and Class C shares,
the sum of the fee rates under the prior advisory and administrative services
agreements.
Since December 29, 1995 and until further notice to the International
Equity Fund, NEFM has voluntarily agreed to reduce its fees and, if necessary,
to bear certain expenses related to operating the Fund in order to limit the
Fund's expenses to an annual rate of 1.75% of the average daily net assets of
the Fund's Class A shares, 2.50% of the average daily net assets of the Fund's
Class B shares, 2.50% of the average daily net assets of the Fund's Class C
shares and 1.15% of the average daily net assets of the Fund's Class Y shares.
NEFM may terminate this voluntary limitation at any time. Prior to December 31,
1996, the limit was 1.00% for Class Y shares. Prior to December 29, 1995,
similar voluntary limitations were in effect with respect to Draycott, the
Distributor and the Fund.
For the last three fiscal years, the advisory or management fees payable
by the Funds (before any voluntary fee reductions) were as follows:
Fund 1995 1996 1997**
------------------------- ---- ---- ----
Growth Fund $7,631,203 $8,300,884
Capital Growth Fund $ 989,864 $1,245,009
Value Fund $1,811,567 $2,241,498
Balanced Fund $1,906,665 $2,355,084
International Equity Fund* $2,025,005 $2,439,442
Growth Opportunities Fund $ 856,469 $1,414,997
* As a result of the voluntary expense limitation in effect, the
International Equity Fund paid $1,756,405, $2,183,655 and $__________,
respectively, in advisory fees for the fiscal years ended December 31,
1995, 1996 and 1997.
** For the fiscal year ended December 31, 1997, NEFM paid subadvisory fees of
$________, $________ and $________ to Loomis Sayles for the Balanced,
Capital Growth and Value Funds, respectively. For the fiscal year ended
December 31, 1997, NEFM paid subadvisory fees of $________ to Loomis
Sayles (after the waiver) and $________ to Westpeak for the International
Equity and Growth Opportunities Funds, respectively.
For the period from November 28, 1995 to December 31, 1995, and the fiscal
year ended December 31, 1996, the management fees payable by the Fund (before
any voluntary fee reductions) were $1,277 and $16,222,
xi
<PAGE>
respectively. As a result of the voluntary expense limitations in effect, the
Fund paid no management fees for the period November 28, 1995 to December 31,
1995 or the fiscal year ended December 31, 1996.
For more information about the Funds' advisory and subadvisory agreements,
see "Management of the Trusts" in Part II of this Statement.
xii
<PAGE>
BROKERAGE COMMISSIONS
In 1995, 1996 and 1997, brokerage transactions for the Growth Fund
aggregating $608,932,282, $729,976,367 and $__________, respectively, were
allotted to brokers providing research services, and $525,823, $804,468 and
$___________, respectively, in commissions were paid on these transactions in
such years. During 1995, 1996 and 1997 the Fund paid total brokerage commissions
of $5,784,166, $6,700,404 and $__________, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Value Fund
aggregating $14,560,184, $27,447,729 and $_____________, respectively, were
allotted to brokers providing research services, and $28,143, $42,841 and
$___________, respectively, in commissions were paid on these transactions in
such years. During 1995, 1996 and 1997, the Fund paid total brokerage
commissions of $658,975, $563,181 and $____________, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Balanced Fund
aggregating $12,187,184, $17,564,632 and $___________, respectively, were
allotted to brokers providing research services, and $30,368, $26,139 and
$___________, respectively, in commissions were paid on these transactions in
such years. During 1995, 1996 and 1997, the Fund paid total brokerage
commissions of $415,773, $373,304 and $___________, respectively.
In 1995, 1996 and 1997, brokerage transactions for the Growth
Opportunities Fund aggregating $43,047,123, $180,664,244 and $___________,
respectively, were allotted to brokers providing research services and $41,640,
$157,185 and $___________, respectively, in commissions were paid on these
transactions in such years. During 1995, 1996 and 1997, the Fund paid total
brokerage commissions of $138,878, $352,661 and $____________, respectively.
For the fiscal year ended December 31, 1995, brokerage transactions for
the International Equity Fund aggregating $________________ were allocated to
brokers providing research services, and $_______________ in commissions were
paid on these transactions. During 1995, the International Equity Fund paid
total brokerage commissions of $____________. For the fiscal year ended December
31, 1996, brokerage transactions for the International Equity Fund aggregating
$____________ were allocated to brokers providing research services and
$_____________ in commissions were paid on these transactions. During 1996, the
International Equity Fund paid total brokerage commissions of approximately
$______________. For the fiscal year ended December 31, 1997, brokerage
transactions for the International Equity Fund aggregating $_______________ were
allocated to brokers providing research services, and $____________ in
commissions were paid on these transactions. During 1997, the International
Equity Fund paid total brokerage commissions of $_____________.
For the fiscal year ended December 31, 1995, brokerage transactions for
the Capital Growth Fund aggregating $____________ were allocated to brokers
providing research services, and $_____________ in commissions were paid on
these transactions. During 1995, the Capital Growth Fund paid total brokerage
commissions of $_____________. For the fiscal year ended December 31, 1996,
brokerage transactions for the Capital Growth Fund aggregating $________________
were allocated to brokers providing research services and $_____________ in
commissions were paid on these transactions. During 1996, the Capital Growth
Fund paid total brokerage commissions of approximately
xiii
<PAGE>
$_______________. For the fiscal year ended December 31, 1997, brokerage
transactions for the Capital Growth Fund aggregating $________________ were
allocated to brokers providing research services, and $__________ in commissions
were paid on these transactions. During 1997, the International Equity Fund paid
total brokerage commissions of $_________________.
For the period from November 28, 1995 through December 31, 1995, brokerage
transactions for the Equity Income Fund aggregating $1,999,812 were allocated to
brokers providing research services and $624 in commission were paid on these
transactions. During this period, the Equity Income Fund paid total brokerage
commissions of $3,150. For the fiscal year ended December 31, 1996, brokerage
transactions for the Equity Income Fund aggregating $1,981,029 were allocated to
brokers providing research services and $48 in commissions were paid on these
transactions. During the period, the Equity Income Fund paid total brokerage
commissions of $3,140. For the fiscal year ended December 31, 1997, brokerage
transactions for the Equity Income Fund aggregating $____ were allocated to
brokers providing research services and $____ in commissions were paid on these
transactions. During this period, the Equity Income Fund paid total brokerage
commissions of $________.
For more information about the Funds' portfolio transactions, see
"Portfolio Transactions and Brokerage" in Part II of this Statement.
SALES CHARGES AND 12B-1 FEES
As explained in Part II of this Statement, the Class A, Class B and Class
C shares of each Fund pay fees under plans adopted pursuant to Rule 12b-1 under
the 1940 Act. The following table shows the amounts of Rule 12b-1 fees paid by
each Fund during the fiscal years ended December 31, 1995, 1996 and 1997:
Fund 1995 1996 1997
----------------------- ---- ---- ----
Growth Fund*** $2,800,465 $3,058,031 $3,600,444 (Class A)
$71,751 (Class B)
Value Fund $545,439 $646,962 $819,873 (Class A)
$206,005 $359,799 $661,091 (Class B)
$3,915 $21,301 $52,413 (Class C)*
Balanced Fund $445,951 $510,417 $567,385 (Class A)
$301,592 $486,789 $680,894 (Class B)
$3,017 $15,702 $36,278 (Class C)*
Growth Opportunities Fund $340,216 $397,330 $487,914 (Class A)
$107,138 $389,526 $626,148 (Class B)
$3,589 $45,844 $52,227 (Class C)**
International Equity Fund $346,710 $316,834 $197,567 (Class A)
$476,345 $513,700 $347,998 (Class B)
$5,831 $10,445 $8,626 (Class C)*
xiv
<PAGE>
Capital Growth Fund $277,682 $333,455 $370,089 (Class A)
$207,706 $321,106 $426,954 (Class B)
$1,362 $5,079 $9,244 (Class C)*
Equity Income**** $6,377 (Class A)
$12,154 (Class B)
$2,076 (Class C)
* Class C shares were first offered on January 3, 1995.
** Growth Opportunities Fund Class C shares were first offered on May 1,
1995.
*** The Growth Fund offered only Class A shares during 1995 and 1996. Class
B shares were first offered on February __, 1997.
**** Equity Income Fund Class A, B and C shares first became available to the
public on September 15, 1997.
xv
<PAGE>
During the fiscal year ended December 31, 1997, expenses relating to each
Fund's 12b-1 plans were as follows:
Growth Fund
(Class A shares)
Compensation to Investment Dealers $3,594,936
Compensation to Distributor's Sales Personnel and Other
Related Costs $270,055
TOTAL $3,864,991
(Class B shares)
Compensation to Investment Dealers $606, 739
Compensation to Distributor's Sales Personnel and Other
Related Costs $145,529
TOTAL $752,268
Value Fund
(Class A shares)
Compensation to Investment Dealers $819,230
Compensation to Distributor's Sales Personnel and Other
Related Costs $131,139
TOTAL $950,369
(Class B shares)
Compensation to Investment Dealers $1,072,831
Compensation to Distributor's Sales Personnel and Other
Related Costs $115,919
TOTAL $1,188,750
(Class C shares)
Compensation to Investment Dealers $52,413
Compensation to Distributor's Sales Personnel and Other
Related Costs $86,939
TOTAL $139,352
Balanced Fund
(Class A shares)
Compensation to Investment Dealers $567,218
Compensation to Distributor's Sales Personnel and Other
Related Costs $109,369
TOTAL $676,587
(Class B shares)
Compensation to Investment Dealers $785,841
xvi
<PAGE>
Compensation to Distributor's Sales Personnel and Other
Related Costs $208,429
TOTAL $994,270
(Class C shares)
Compensation to Investment Dealers $36,278
Compensation to Distributor's Sales Personnel and Other
Related Costs $82,924
TOTAL $119,202
Growth Opportunities Fund
(Class A shares)
Compensation to Investment Dealers $485,783
Compensation to Distributor's Sales Personnel and Other
Related Costs $110,549
TOTAL $596,332
(Class B shares)
Compensation to Investment Dealers $946,221
Compensation to Distributor's Sales Personnel and Other
Related Costs $111,145
TOTAL $1,057,366
(Class C shares)
Compensation to Investment Dealers $52,227
Compensation to Distributor's Sales Personnel and Other
Related Costs $84,033
TOTAL $136,260
International Equity Fund
(Class A shares)
Compensation to Investment Dealers $196,696
Compensation to Distributor's Sales Personnel and Other
Related Costs $87,975
xvii
<PAGE>
TOTAL $284,671
(Class B shares)
Compensation to Investment Dealers $198,910
Compensation to Distributor's Sales Personnel and Other
Related Costs $84,525
Other Distribution Costs $55,746
TOTAL $339,181
(Class C shares)
Compensation to Investment Dealers $8,626
Compensation to Distributor's Sales Personnel and Other
Related Costs $80,848
TOTAL $89,474
Capital Growth Fund
(Class A shares)
Compensation to Investment Dealers $370,137
Compensation to Distributor's Sales Personnel and Other
Related Costs $96,505
TOTAL $466,642
(Class B shares)
Compensation to Investment Dealers $410,109
Compensation to Distributor's Sales Personnel and Other
Related Costs $92,037
TOTAL $502,146
(Class C shares)
Compensation to Investment Dealers $9,244
Compensation to Distributor's Sales Personnel and Other
Related Costs $81,066
TOTAL $90,310
Equity Income Fund
(Class A shares)
Compensation to Investment Dealers $6,790
Compensation to Distributor's Sales Personnel and Other
Related Costs $30,911
TOTAL $37,701
(Class B shares)
Compensation to Investment Dealers $327,632
Compensation to Distributor's Sales Personnel and Other
Related Costs $31,294
TOTAL $358,926
(Class C shares)
Compensation to Investment Dealers $2,076
Compensation to Distributor's Sales Personnel and Other
Related Costs $21,448
TOTAL $23,524
xviii
<PAGE>
Of the amounts listed above as compensation to investment dealers, the
following amounts were paid by the Distributor to New England Securities
Corporation ("New England Securities"), a broker-dealer affiliate of the
Distributor: $2,741,737 relating to the Class A shares and $414,051 relating o
the Class B shares of the Growth Fund; $641,294 relating to the Class A shares,
$849,786 relating to the Class B shares and $12,592 relating to the Class C
shares of the Value Fund; $460,233 relating to the Class A shares, $599,204
relating to the Class B shares and $10,362 relating to the Class C shares of the
Balanced Fund; $190,891 relating to the Class A shares, $660,764 relating to the
Class B shares and $6,225 relating to the Class C shares of the Growth
Opportunities Fund; $134,784 relating to the Class A shares, $125,310 relating
to the Class B shares and $1,877 relating to the Class C shares of the
International Equity Fund; $278,383 relating to the Class A shares, $346,685
relating to the Class B shares and $5,374 relating to the Class C shares of the
Capital Growth Fund; and $2,810 relating to the Class A shares, $225,417
relating to the Class B shares and $405 relating to the Class C shares of the
Equity Income Fund. New England Securities paid substantially all of the fees it
received from the Distributor (a) in commissions to its sales personnel and (b)
to defray sales-related overhead costs.
- --------------------------------------------------------------------------------
OWNERSHIP OF FUND SHARES
- --------------------------------------------------------------------------------
As of February 1, 1998, to the Trusts' knowledge, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the following Funds:
Capital Growth Fund
Class C shares
NFSC FEBO 6.04%
DIANA PISCOPO
59 SILVER LAKE ROAD
STATEN ISLAND, NY 10301-3012
ROMANO B. LAMONACA 6.09%
MARIA L. LAMONACA JT TEN
1212 SNYDER AVE.
PHILADELPHIA, PA 19148-5513
LARRY MINNICK 9.47%
8105 BROMLAY PL.
INDIANAPOLIS, IN
46219-2851
Balanced Fund
Class C shares
xix
<PAGE>
Class Y shares
Growth Opportunities Fund
Class C shares
International Equity Fund
Class C shares
Class Y shares
xx
<PAGE>
Value Fund
Class C shares
Class Y shares
Equity Income Fund
Class __ shares
xxi
<PAGE>
xxii
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- --------------------------------------------------------------------------------
Performance Results - Percent Change*
For The Periods Ended 12/31/97
Growth Fund**
Aggregate Average Annual
Total Return Total Return
------------------------ -------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
Net Asset Value
Maximum Offering Price
Aggregate
Total Return
Since
Class B shares: As a % of 2/__/97***
Net Asset Value
Redemption at End of Period
Redemption at End of Period 21.35 69.49 17.34
Value Fund
Aggregate Average Annual
Total Return Total Return
------------------------ -------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------ -------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- -------------------------- ------ ---------- ----------
Net Asset Value 25.35 71.49 17.76
Redemption at End of Period 12.26 43.42 11.55
xxiii
<PAGE>
Aggregate Annualized
Total Return Total Return
------------------------- --------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------- ------ ----------- -----------
Net Asset Value
Aggregate Annualized
Total Return Total Return
------------------------ -------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- -------------------------- ------ ---------- ----------
Net Asset Value
Balanced Fund
Aggregate Average Annual
Total Return Total Return
------------------------- ------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- -------------------------- ------ ---------- ----------
Net Asset Value 16.26 45.42 12.02
Redemption at End of Period 12.48 56.10 14.45
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------- ------ ----------- -----------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class Y shares: As a % of 1 Year 3/8/94*** 3/08/94***
- -------------------------- ------ --------- ----------
Net Asset Value
xxiv
<PAGE>
Growth Opportunities Fund****
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Class A shares: As a % of 1 Year 5 Years 10 Years 5 Years 10 Years
- -------------------------- ------ ------- -------- ------- --------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- -------------------------- ------ ---------- ----------
Net Asset Value
Redemption at End of Period
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class C shares: As a % of 1 Year 5/1/95*** 5/1/95***
- -------------------------- ------ --------- ---------
Net Asset Value
Aggregate Annualized
Total Return Total Return
------------------------- --------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- -------------------------- ------ ---------- ----------
Net Asset Value n/a n/a n/a
International Equity Fund*****
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class A shares: As a % of 1 Year 5/21/92*** 5/21/92***
- -------------------------- ------ ---------- ----------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- -------------------------- ------ ---------- ----------
Net Asset Value
Redemption at End of Period
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------- ------ ----------- -----------
Net Asset Value
xxv
<PAGE>
Aggregate Average Annual
Total Return Total Return
------------------------- ---------------------
Since Since
Class Y shares: As a % of 1 Year 9/9/93*** 9/13/93***
- -------------------------- ------ --------- ----------
Net Asset Value
Capital Growth Fund******
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class A shares: As a % of 1 Year 8/3/92*** 8/3/92***
- -------------------------- ------ --------- ---------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class B shares: As a % of 1 Year 9/13/93*** 9/13/93***
- -------------------------- ------ ---------- ----------
Net Asset Value
Redemption at End of Period
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class C shares: As a % of 1 Year 12/30/94*** 12/30/94***
- -------------------------- ------ ----------- -----------
Net Asset Value
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class Y shares: As a % of 1 Year 3/31/94*** 3/31/94***
- -------------------------- ------ ---------- ----------
Net Asset Value n/a n/a n/a
Equity Income Fund*******
Aggregate Average Annual
Total Return Total Return
------------------------- --------------------
Since Since
Class A shares: As a % of 1 Year Inception******** Inception********
- --------------------------------
Net Asset Value
Maximum Offering Price
* Federal regulations require this example to be calculated using a
$1,000 investment. The normal minimum initial investment in shares of
the Funds is $2,500, however.
** The numbers presented reflect the maximum initial sales charge
currently in effect. Prior to March 3, 1997, a higher maximum initial
sales charge was in effect, so that the total returns achieved by
investors may have been lower than those shown above.
*** Commencement of Fund operations or offering of specified class of
shares.
xxvi
<PAGE>
**** Assuming deduction of the current maximum sales load, the Growth
Opportunities Fund's Class A shares' ten-year average annual total
return would have been ____%, had a voluntary expense limitation by
the Fund's former investment adviser not been in effect, and their
ten-year aggregate total return would have been _____%. Based on net
asset values, the Fund's Class A shares' ten-year average annual
total return would have been ____%, had this limitation not been in
effect, and their ten-year aggregate total return would have been
____%.
***** Assuming deduction of the current maximum sales load, the
International Equity Fund's Class A shares' since-inception average
annual total return would have been ____%, and their aggregate
one-year and since-inception total returns would have been ____% and
____%, respectively, had a voluntary expense limitation not been in
effect. Based on net asset values, the Fund's Class A shares'
since-inception average annual total return would have been ____%,
and their one-year and since-inception aggregate total returns would
have been ____% and ____%, respectively, without the voluntary
limitation. Assuming redemption at the end of the period, the Fund's
Class B shares' since-inception average annual total return would
have been ____%, had a voluntary expense limitation not been in
effect, and their aggregate total returns for the one-year and
since-inception periods would have been ____% and ____%,
respectively. Based on net asset values, the Fund's Class B shares'
average annual total return for the since-inception period would have
been ____%, and their aggregate total returns for the one-year and
since-inception periods would have been ____% and ____%,
respectively, without the voluntary limitation. The Fund's Class C
and Class Y shares' annualized total returns for the since-inception
period would have been ____% and ____%, respectively, and their
since-inception aggregate total returns would have been ____% and
____%, respectively, without the voluntary limitation.
****** Assuming deduction of the current maximun sales load, the Capital
Growth Fund's Class A shares' since-inception average annual total
return would have been ___%, and their aggregate one-year and
since-inception total returns would have been ___% and ___%,
respectiveley, had a vountary expense limitation not been in effect.
Based on net asset values, their since-inception average total return
would have been ___%, and their since-inception aggregate total would
have been ___% without the voluntary limitation.
******* Assuming deduction of the current maximum sales load, the Equity
Income Fund's Class A shares' since __ inception average annual total
return would have been ___% had the voluntary expense limitation not
been in effect, and their aggregate one year and since-inception
total returns would have been ___% and ___%, respectively, had the
voluntary expense limitation not been in effect. Based on net asset
values, their since-inception average annual total return would have
been ___%, and their since-inception aggregate total return would
have been ___% without the vountary limitation.
******** The Equity Income Fund's inception date is November 29, 1995. The
Equity Income Fund first became available to the public on September
15,1997.
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.
xxvii
<PAGE>
xxviii
<PAGE>
[NEW ENGLAND FUNDS 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, 1998
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, 1998 for Class A, Class B and Class C shares or the Prospectus dated May
1, 1998 for Class Y shares (the "Prospectus" or "Prospectuses"). The Statement
should be read together with the Prospectus. Investors may obtain a free copy of
the Prospectus from New England Funds, L.P., Prospectus Fulfillment Desk, 399
Boylston Street, Boston, Massachusetts 02116.
Part I of this Statement contains specific information about the Funds.
Part II includes information about the Funds and other New England Funds. The
Funds are series of New England Funds Trust I (the "Trust"), a registered
management investment company that offers a total of twelve series.
T a b l e o f C o n t e n t s
Page
----
Part I
Investment Restrictions ii
Fund Charges and Expenses v
Ownership of Fund Shares ix
Investment Performance of the Funds x
Part II
Miscellaneous Investment Practices 2
Management of the Trusts 15
Portfolio Transactions and Brokerage 25
Description of the Trusts and Ownership of Shares 31
How to Buy Shares 34
Net Asset Value and Public Offering Price 35
Reduced Sales Charges 36
Shareholder Services 38
Redemptions 42
Standard Performance Measures 44
Income Dividends, Capital Gain Distributions and Tax Status 48
Financial Statements 50
Appendix A - Description of Bond Ratings 51
Appendix B - Publications That May Contain Fund Information 53
Appendix C - Advertising and Promotional Literature 55
Appendix D - Portfolio Composition of the Municipal Income,
Bond Income and California Funds 59
i
<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.);
ii
<PAGE>
(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);
iii
<PAGE>
*(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;
iv
<PAGE>
(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 (in the case of the Star Advisers
Fund, as amended May 9, 1997) 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,
the Star Worldwide and Star Small Cap Funds have each agreed to pay NEFM a
management fee at the annual rate of 1.05% of the Fund's average daily net
assets and the Star Advisers Fund has agreed to pay NEFM a management fee at the
annual rate of 1.05% of the first $1 billion of the Fund's average daily net
assets,
v
<PAGE>
and 1.00% of such assets in excess of $1 billion. Prior to May 9, 1997, the
management fee rate paid by the Star Advisers Fund to NEFM was 1.05% of the
Fund's 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, NEFM has delegated
responsibility for the investment and reinvestment of assets of the segments of
the Star Advisers Fund's portfolio to four different subadvisers: Founders Asset
Management, Inc. ("Founders"), Janus Capital Corporation ("Janus Capital"),
Loomis, Sayles & Company, L.P. ("Loomis Sayles") and Harris Associates L.P.
("Harris"). The subadvisory agreement with Janus Capital is dated August 30,
1996. The subadvisory agreements with Founders, Loomis Sayles and Harris are
dated October 17, 1997. For providing such subadvisory services to the Star
Advisers Fund, NEFM pays Janus Capital for managing its segment a subadvisory
fee at the annual rate of 0.55% of the first $50 million of the average net
assets of the segment that each manages and 0.50% of such assets in excess of
$50 million. NEFM pays Harris, for providing subadvisory services to a segment
of the Star Advisers Fund, a subadvisory fee at the annual rate of 0.65% of the
first $50 million of average net assets it manages in its segment, 0.60% of the
next $50 million of such assets and 0.55% of such assets in excess of $100
million. Harris voluntarily agreed to waive its entire subadvisory fee from July
25, 1997 to August 31, 1997. This waiver by Harris did not reduce the management
fee paid by the Star Advisers Fund to NEFM during this period. NEFM paid the
waived fees to Berger Associates, Inc. ("Berger"), the former subadviser to the
segment of the Fund currently managed by Harris. NEFM pays Founders and Loomis
Sayles subadvisory fees at the annual rate of 0.55% of the first $50 million of
the average daily net assets of the segment of the Star Advisers Fund that each
manages, 0.50% of the next $50 million of such assets and 0.475% of such assets
in excess of $250 million.
Pursuant to separate subadvisory agreements, 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, which manages two of the five
segments, and Founders, Janus Capital and Montgomery Asset Management, LLC
("Montgomery"), each of which manage one of the five segments. The subadvisory
agreements with Harris, Founders and Janus Capital are each dated August 30,
1996. The subadvisory agreement with Montgomery is dated July 31, 1997. 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, 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. The subadvisory
agreements with Robertson Stephens, Loomis Sayles and Harris are each dated
August 30, 1996. The subadvisory agreement with Montgomery is dated July 31,
1997. NEFM pays Robertson
vi
<PAGE>
Stephens and Loomis Sayles a separate subadvisory fee at an annual rate of 0.55%
of the first $50 million of the average daily net 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, 1995, 1996
and 1997 were $3,599,730, $6,821,099 and $___________, respectively.
Management fees for the Star Worldwide Fund for the fiscal years ended
December 31, 1996 and 1997 were $780,469 and $________ respectively. The Fund
commenced operations on December 29, 1995.
For the Star Advisers Fund, NEFM paid $796,201 and $____________;
$884,453 and $__________; $835,227 and $________; and $832,262 and $____________
in subadvisory fees to Berger, Founders, Janus Capital and Loomis Sayles,
respectively, for the fiscal years ended December 31, 1996 and 1997.
For the Star Worldwide Fund, NEFM paid $192,641 and $__________; $95,549
and $___________; $102,157 and $___________; and $122,665 and $__________ in
subadvisory fees to Harris, Founders, Janus Capital and Montgomery,
respectively, for the fiscal years ended December 31, 1996 and 1997. Without the
voluntary fee waiver described above, NEFM would have paid Montgomery $128,198
in subadvisory fees for the fiscal year ended December 31, 1996.
Prior to July 31, 1997, Montgomery Asset Management, L.P. served as
subadviser to the segments of the Star Worldwide and Star Small Cap Funds
currently managed by Montgomery, pursuant to subadvisory agreements providing
for the same management and subadvisory fees as are currently in effect in the
subadvisory agreements with Montgomery.
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 (with the exception of Harris Associates and its segment of the Star
Advisers Fund) 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 (with the exception of Harris Associates)
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. Prior to July
25, 1997, Berger served as subadviser to the segment of the Star Advisers Fund
currently managed by Harris, pursuant to a subadvisory agreement providing for a
management and 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 Star Advisers Fund
that it managed, and 0.50% of such assets in excess of $50 million. From July
25, 1997 to October 17, 1997, Harris served as the subadviser to the segment of
the Star Advisers Fund that it currently manages pursuant to an interim
subadvisory agreement providing for 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 Star Advisers Fund that it managed, 0.50% of the next $200 million of such
assets and 0.475% of such assets in excess of $250 million.
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.
vii
<PAGE>
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 fiscal years ended December 31, 1995, 1996 and 1997, brokerage
transactions for the Star Advisers Fund aggregating $191,214,413, $136,608,000
and $_____________, respectively, were allocated to brokers providing research
services, and $614,183, $169,415 and $____________, respectively, in commissions
were paid on these transactions. For the fiscal years ended December 31, 1995,
1996 and 1997, the Fund paid total brokerage commissions of $614,183, $1,428,492
and $___________, respectively. For the period December 29, 1995 (commencement
of operations) to December 31, 1996 and for the fiscal year ending December 31,
1997, brokerage transactions for the Star Worldwide Fund aggregating $39,348,000
and $____________, respectively, were allocated to brokers providing research
services and $29,778 and $__________, respectively, in commissions were paid on
these transactions. For the period December 29, 1995 to December 31, 1996 and
for the fiscal year ending December 31, 1997, the Fund paid total brokerage
commissions of $402,403 and $__________, respectively.
For the period December 31, 1996 (commencement of operations) to December
31, 1997, brokerage transactions for the Star Small Cap Fund aggregating
$__________ were allocated to brokers providing research services and $________
in commissions were paid on these transactions. For the period December 31, 1996
to December 31, 1997, the Funds paid total brokerage commissions of
$___________.
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 1995 1996 1997
Star Advisers Fund* $404,530 $711,078 $967,853 (Class A)
$1,458,476 $2,916,149 $4,220,821 (Class B)
$327,977 $627,802 $875,440 (Class C)
Star Worldwide Fund** --- $85,683 $261,744 (Class A)
--- $305,294 $1,037,171 (Class B)
--- $95,265 $241,824 (Class C)
Star Small Cap Fund*** --- $79,699 (Class A)
--- $304,818 (Class B)
--- $86,522 (Class C)
* The Star Advisers Fund commenced operations on July 7, 1994.
** The Star Worldwide Fund commenced operations on December 29, 1995.
*** The Star Small Cap Fund commenced operations on December 31, 1996.
During the fiscal year ended December 31, 1997, expenses relating to each
Fund's 12b-1 plans were as follows:
viii
<PAGE>
Star Advisers Fund
(Class A shares)
Compensation to Investment Dealers $967,192
Compensation to Distributor's Sales Personnel
and Other Related Costs $197,834
TOTAL $1,165,026
(Class B shares)
Compensation to Investment Dealers $4,060,843
Compensation to Distributor's Sales Personnel
and Other Related Costs $218,738
TOTAL $4,279,581
(Class C shares)
Compensation to Investment Dealers $875,440
Compensation to Distributor's Sales Personnel
and Other Related Costs $136,664
TOTAL $1,012,104
Star Worldwide Fund
(Class A shares)
Compensation to Investment Dealers $262,518
Compensation to Distributor's Sales Personnel
and Other Related Costs $136,794
TOTAL $399,312
(Class B shares)
Compensation to Investment Dealers $2,186,649
Compensation to Distributor's Sales Personnel
and Other Related Costs $169,174
TOTAL $2,355,823
(Class C shares)
Compensation to Investment Dealers $241,824
Compensation to Distributor's Sales Personnel
and Other Related Costs $114,255
TOTAL $356,079
ix
<PAGE>
Star Small Cap Fund
(Class A shares)
Compensation to Investment Dealers $80,201
Compensation to Distributor's Sales Personnel
and Other Related Costs $133,158
TOTAL $213,359
(Class B shares)
Compensation to Investment Dealers $1,707,685
Compensation to Distributor's Sales Personnel
and Other Related Costs $146,606
TOTAL $1,854,291
(Class C shares)
Compensation to Investment Dealers $86,522
Compensation to Distributor's Sales Personnel
and Other Related Costs $103,896
TOTAL $190,418
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: $592,627 relating to the Class A shares, $2,168,693 relating to the
Class B shares and $101,374 relating to the Class C shares of the Star Advisers
Fund; and $151,096 relating to the Class A shares, $1,058,356 relating to the
Class B shares and $18,050 relating to the Class C shares of the Star Worldwide
Fund; and $42,020 relating to the Class A shares, $915,935 relating to the Class
B shares and $8,154 relating to the Class C shares of the Star Small Cap 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 March 26, 1998, 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. 71.98%
Separate Investment Accounting
Attn: Victor Soohoo
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
Metropolitan Life Insurance Co. 14.87%
C/O GADC - Gerald Hart - Agency
Operations NELICO
501 Boylston Street - 10th Floor
Boston, MA 02116-3706
New England Life Insurance Co. 11.37%
Insurance Acctg & Reporting
Attn: Michael Crowley
501 Boylston Street - 6th Floor
Boston, MA 02116-3706
x
<PAGE>
Star Small Cap Fund
Class B shares
Class C shares
xi
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PERFORMANCE OF THE FUNDS
- --------------------------------------------------------------------------------
Performance Results - Percent Change*
For The Periods Ended 12/31/97
Star Advisers Fund
<TABLE>
<CAPTION>
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
<S> <C> <C> <C>
Since Since
Class A shares: As a % of 1 Year 7/7/94** 7/7/94**
- -------------------------------------
Net Asset Value
Maximum Offering Price
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
Redemption at End of Period
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
Aggregate Annualized
Total Return Total Return
------------------------------------ ---------------------------------
Since 11/15/94** Since
Class Y shares: As a % of 1 Year 11/15/94**
- -------------------------------------
Net Asset Value
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
Maximum Offering Price
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
</TABLE>
xii
<PAGE>
<TABLE>
<CAPTION>
Redemption at End of Period
Aggregate Annualized
Total Return Total Return
------------------------------------ ----------------------------------
<S> <C> <C> <C>
Since Since
Class C shares: As a % of 1 Year 12/29/95** 12/29/95**
- -------------------------------------
Net Asset Value
</TABLE>
xiii
<PAGE>
<TABLE>
<CAPTION>
Star Small Cap Fund
Aggregate Average Annual
Total Return Total Return
------------------------------------ ---------------------------------
Since Since
<S> <C> <C> <C>
Class A shares: As a % of 1 Year 12/31/96** 12/31/96**
- -------------------------------------
Net Asset Value
Maximum Offering Price
Aggregate Average Annual
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class B shares: As a % of 1 Year 12/31/96** 12/31/96**
- -------------------------------------
Net Asset Value
Redemption at End of Period
Aggregate Annualized
Total Return Total Return
------------------------------------ ----------------------------------
Since Since
Class C shares: As a % of 1 Year 12/31/96** 12/31/96**
- -------------------------------------
Net Asset Value
</TABLE>
* Federal regulations require this example to be calculated using a $1,000
investment. The normal minimum initial investment in shares of the Funds
is $2,500, however.
** 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.
xiv
<PAGE>
[NEW ENGLAND FUNDS LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS TRUST I
NEW ENGLAND FUNDS TRUST II
NEW ENGLAND FUNDS TRUST III
Statement of Additional Information -- PART II
May 1, 1998
The following information applies generally to the funds listed below (the
"Funds" and each a "Fund"). The Funds constitute all of the series of New
England Funds Trust I, New England Funds Trust II and New England Funds Trust
III (the "Trusts" and each a "Trust"). In certain cases, the discussion applies
to some but not all of the Funds. Certain data applicable to particular Funds is
found in Part I of this Statement of Additional Information (the "Statement") as
well as in the Prospectuses of the Funds dated May 1, 1998 for Class A, Class B
and Class C shares and May 1, 1998 for Class Y shares (the "Prospectus" or
"Prospectuses"). The following Funds are described in this Statement:
<TABLE>
<S> <C>
Series of New England Funds Trust I
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 (the "California Fund')
of California
New England Tax Free Income Fund of New York (the "New York Fund")
Series of New England Funds Trust III
- -------------------------------------
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
New England Equity Income Fund (the "Equity Income Fund")
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
The following information relates to certain investment practices in which
certain Funds may engage. The table below indicates which Funds may engage in
each of these practices.
Practices Funds
Loans of Portfolio Securities Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
High Income Fund
Adjustable Rate Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Equity Income Fund
U.S. Government Securities All Funds
When-Issued Securities Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Government Securities Fund
Bond Income Fund
Municipal Income Fund
High Income Fund
Limited Term U.S. Government Fund
California Fund
Massachusetts Fund
New York Fund
Adjustable Rate Fund
Strategic Income Fund
International Equity Fund
Equity Income Fund
Repurchase Agreements All Funds
Zero Coupon Securities All Funds
Convertible Securities Value Fund
Balanced Fund
Growth Opportunities Fund
High Income Fund
International Equity Fund
Capital Growth Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Equity Income Fund
Tax Exempt Bonds Municipal Income Fund
California Fund
Massachusetts Fund
3
<PAGE>
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 Swap Contracts Government Securities Fund
Municipal Income Fund
Limited Term U.S. Government Fund
International Equity Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
California Fund
New York Fund
Strategic Income Fund
Bond Income Fund
High Income Fund
Massachusetts Fund
Growth Opportunities Fund
Equity Income Fund
Foreign Currency Hedging Transactions International Equity Fund
Balanced Fund
Capital Growth Fund
Value Fund
Star Advisers Fund
Star Worldwide Fund
Star Small Cap Fund
Strategic Income Fund
Bond Income Fund
Equity Income Fund
Loans of Portfolio Securities. The Fund may lend its portfolio securities to
broker-dealers under contracts calling for cash collateral equal to at least the
market value of the securities loaned, marked to 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.
4
<PAGE>
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. A 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 a 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 a 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 a 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. A 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, a 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. A Fund may enter into repurchase agreements, by which a
Fund purchases a security and obtains a simultaneous commitment from the seller
to repurchase the security at an agreed-upon price and
5
<PAGE>
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.
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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,
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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.
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Short Sales. The Star Small Cap and Star Worldwide Funds may 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
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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
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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
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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
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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
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
- --------------------------------------------------------------------------------
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 (54); 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20004; Partner, and former Managing Director, The Carlyle Group
(investments); Public Service Professor, Harvard Graduate School of
Government; Trustee, Council for Excellence in Government (not for
profit); Director, Frontier Ventures (personal investment); Director,
Telcom Ventures (telecommunications); Director, Genesis Cable (cable
communications); Director, Prime Communications (cable communications);
Director, Neptune Communications (undersea cable systems); formerly,
Director of the U.S. Office of Management and Budget and a member of
President Bush's Cabinet; former Director, HighwayMaster Communications
(mobile communications); former Director, Sequana Therapeutics
(biotechnology).
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 (54); 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").
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).
- --------
* Trustee deemed an "interested person" of the Trusts, as defined in the
Investment Company Act of 1940 (the "1940 Act").
16
<PAGE>
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") and NEIC Operating Partnership, L.P. ("NEICOP");
Chairman of the Board and 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.
PENDELTON 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 (54); 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).
JOHN E. PELLETIER -- Secretary and Clerk (33); 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, Senior Vice President and General Counsel, Fund
Distributor, Inc.; Counsel, The Boston Company Advisors, Inc.; Associate,
Ropes and Gray.
Each person listed above holds the same position(s) with all three Trusts.
Previous positions during the past five years with NELICO or Metropolitan Life
Insurance Company ("MetLife"), New England Funds, L.P. or NEFM are omitted, if
not materially different from a trustee's or officer's current position with
such entity. Each of the Trusts' trustees is also a trustee of certain other
investment companies for which New England Funds, L.P. acts as principal
underwriter. Except as indicated above, the address of each trustee and officer
of the Trusts is 399 Boylston Street, Boston, Massachusetts 02116.
Trustee Fees
The Trusts pay no compensation to their officers or to their trustees who
are interested persons thereof.
Each trustee who is not an interested person of the Trusts receives, in
the aggregate for serving on the boards of the Trusts and New England Cash
Management Trust and New England Tax Exempt Money Market Trust (all five trusts
collectively, the "New England Funds Trusts"), comprising as of May 1, 1998 a
total of 23 mutual fund portfolios, a retainer fee at the annual rate of [$] and
meeting attendance fees of [$] for each meeting of the boards he or she attends
and [$] 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 [$]. These fees are allocated among the Funds and the
three other mutual
17
<PAGE>
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, 1997, the persons who were then
trustees of the Trusts received the amounts set forth in the following table for
serving as a trustee of the Trusts and for also serving on the governing boards
of the other New England Funds Trusts.
<TABLE>
<CAPTION>
Pension or
Aggregate Aggregate Aggregate Retirement Total
Compensation Compensation Compensation Benefits Estimated Compensation
from from from New Accrued as Annual from the New
New England New England England Funds Part of Fund Benefits England Funds
Funds Trust I Funds Trust II Trust III Expenses Upon Trusts
Name of Trustee in 1997 in 1997 in 1997 in 1997 Retirement in 1997
--------------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Graham T. Allison, Jr. $ $ $ $ $ $
Daniel M. Cain $ $ $ $ $ $
Kenneth J. Cowan $ $ $ $ $ $
Richard Darman $ $ $ $ $ $
Sandra O. Moose $ $ $ $ $ $
John A. Shane $ $ $ $ $ $
Pendleton P. White $ $ $ $ $ $
</TABLE>
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 February 2, 1998, 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,
18
<PAGE>
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 in turn is a wholly-owned subsidiary of NEIC Operating
Partnership, L.P. ("NEICOP"). NEF Corporation is also the sole general partner
of New England Funds, L.P., the distributor of the Funds, and the sole
shareholder of New England Funds Service Corporation ("NEFSCO"), the transfer
and dividend disbursing agent of the Funds. NEICOP owns the entire limited
partnership interest in each of NEFM and New England Funds, L.P.
NEICOP's managing general partner, New England Investment Companies, Inc.,
is a wholly-owned subsidiary of MetLife New England Holdings, Inc., which in
turn is a wholly-owned subsidiary of Metropolitan Life Insurance Company, a
mutual life insurance company ("MetLife"). MetLife owns directly 46% (and in the
aggregate, directly and indirectly, 47%) of the outstanding limited partnership
interests in NEICOP. NEICOP's advising general partner, New England Investment
Companies, L.P. ("NEIC"), is a publicly-traded company listed on the New York
Stock Exchange. New England Investment Companies, Inc. is the sole general
partner of NEIC. NEICOP's 14 principal subsidiary or affiliated asset management
firms, collectively, had more than $120 billion of assets under management as of
September 30, 1997.
Back Bay Advisors, formed in 1986, is a limited partnership whose sole
general partner, BBAI, is a wholly-owned subsidiary of NEIC Holdings. NEICOP
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 $__ billion in total assets.
19
<PAGE>
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. NEICOP 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.
NEICOP 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. NEICOP owns the entire limited partnership interest
in Westpeak.
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 __% of the
outstanding voting stock of Janus Capital. Thomas H. Bailey, President and
Chairman of the Board of Janus Capital, owns approximately __% 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 Holdings. Harris was
acquired by NEIC Holdings in 1995. Harris also serves as investment adviser to
individuals, trusts, retirement plans, endowments and foundations, and manages
numerous private partnerships.
Montgomery Asset Management, LLC ("Montgomery"), a Delaware limited
liability company, was formed in 1997 as an investment adviser. Montgomery is
the successor to Montgomery Asset Management, L.P., a California limited
partnership formed in 1990. On July 31, 1997, Montgomery Asset Management, L.P.
completed the sale of substantially all of its assets to Montgomery. Montgomery
is a wholly-owned subsidiary of Commerzbank AG, a German commercial bank.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), a California limited partnership, was formed in 1993. Prior to
October 1, 1997, the general partner of Robertson Stephens was Robertson,
Stephens & Company, Inc., and the principal limited partner was Robertson,
Stephens & Company Group, L.L.C. On
20
<PAGE>
October 1, 1997 Robertson, Stephens & Company Group, L.L.C. and Robertson,
Stephens & Company, Inc. became wholly-owned subsidiaries of BankAmerica
Corporation, a global financial services company. Robertson Stephens and its
affiliates have in excess of $__ 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 Detroit office buys
and sells portfolio securities for the segments of the Star Advisers and Star
Small Cap Funds' portfolios that are managed (or subadvised) by Loomis Sayles,
the Boston office buys and sells portfolio securities for the Strategic Income
Fund and the International Equity Fund and the New York office buys and sells
portfolio securities for the High Income Fund and the Equity Income Fund. These
offices buy and sell securities independently of one another. The other
investment companies and clients served by Loomis Sayles sometimes invest in
securities in which the Value, Balanced, Star Advisers, Star Small Cap, High
Income, Strategic Income, Equity Income and International Equity Funds also
invest. If one of these Funds and such other clients advised by the same office
of Loomis Sayles desire to buy or sell the same portfolio securities at about
the same time, purchases and sales will be allocated, to the extent practicable,
on a pro rata basis in proportion to the amounts desired to be purchased or sold
for each. It is recognized that in some cases the practices described in this
paragraph could have a detrimental effect on the price or amount of the
securities which each of the Funds purchases or sells. In other cases, however,
it is believed that these practices may benefit the relevant Fund. It is the
opinion of the Trusts' trustees that the desirability of retaining Loomis Sayles
as subadviser for the Strategic Income, Value, Balanced, Star Advisers, Star
Small Cap, High Income, Equity Income and International Equity Funds outweighs
the disadvantages, if any, which might result from these practices.
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
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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 and the Capital Growth Fund
also may invest. When the Funds 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 Funds 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 Advisers, 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 Advisers, 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 Advisers, 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
22
<PAGE>
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
23
<PAGE>
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 NEICOP. 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 (NEICOP and MetLife), no interested
person of the Trusts nor any trustee of the Trusts had any direct or indirect
financial interest in the operation of the Plans or any related agreement.
Benefits to the Funds and their shareholders resulting from the Plans are
believed to include (1) enhanced shareholder service, (2) asset retention, (3)
enhanced bargaining position with third party service providers and economies of
scale arising from having higher asset levels and (4) portfolio management
opportunities arising from having an enhanced positive cash flow.
New England Funds, L.P. controls the words "New England" in the names of
the Trusts and the Funds and if it should cease to be the distributor, New
England Funds Trust I, New England Funds Trust II, New England Funds Trust III
or the affected Fund may be required to change their names and delete these
words or letters. New England Funds, L.P. also acts as general distributor for
New England Cash Management Trust and New England Tax Exempt Money Market Trust.
During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sale of Class A shares of New England
Funds Trust I aggregating $8,779,918, $10,735,444 and $_______________,
respectively, of which $7,706,937, $9,418,244 and $___________, respectively,
was allowed to other securities dealers and the balance retained by New England
Funds, L.P. During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received CDSCs on the redemption of Class A and Class B shares of
New England Funds Trust I aggregating $899,482, $1,256,009 and $____________,
respectively, of which $879,085, $1,236,000 and $___________, 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, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sale of the Class A shares of New
England Funds Trust II aggregating $1,913,291, $1,674,883 and $_________,
respectively, of which $1,752,050, $1,429,970 and $___________, respectively,
were reallowed to other securities dealers and the balance retained by New
England Funds, L.P. During the years ended December 31, 1995, 1996 and 1997, New
England Funds, L.P. received CDSCs on the redemption of Class A and Class B
shares of New England Funds Trust II aggregating $234,390, $318,167 and
$_____________, respectively, of which $173,421, $313,465 and $__________,
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 II's investment
advisers and subadvisers or the Funds directly for providing certain
administrative services relating to New England Funds Trust II.
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<PAGE>
During the years ended December 31, 1995, 1996 and 1997, New England
Funds, L.P. received commissions on the sales of the Class A shares of New
England Funds Trust III aggregating $-0-, $-0- and $__________, respectively, of
which $-0-, $-0- and $__________, respectively, were reallowed to other
securities dealers and the balance retained by New England Funds, L.P. During
the years ended December 31, 1995, 1996 and 1997, New England Funds, L.P.
received CDSCs on the redemption of Class A and Class B shares of New England
Funds Trust III aggregating $-0-, $-0- and $__________, respectively, of which
$-0-, $-0- and $__________, 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 III's investment advisers and subadvisers or the Funds directly for
providing certain administrative services relating to New England Funds Trust
III.
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.
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. 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, 1997 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, 1995, 1996 and
1997, New England Securities received $1,369,323, $1,473,212 and $_____________,
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
25
<PAGE>
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 Service
Corporation, New England Funds Service Corporation 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 Service Corporation 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 Service
Corporation 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
Service Corporation pays BFDS a monthly per account fee of $0.95 for the
California Fund, New York Fund, Bond Income Fund, Municipal Income Fund,
Adjustable Rate Fund, Government Securities Fund and Strategic Income Fund;
$0.87 for the Massachusetts Fund, High Income Fund and Limited Term U.S.
Government Fund; $0.78 for the International Equity Fund, Capital Growth Fund,
Balanced Fund, Value Fund, Growth Fund, Star Advisers Fund, Star Worldwide Fund
and Star Small Cap Fund; and $0.70 for the Growth Opportunities Fund. The Equity
Income Fund pays a $250 monthly fee to New England Funds Service Corporation for
these services which New England Funds Service Corporation pays in full to State
Street Bank for it to provide through its subsidiary, Boston Financial Data
Services ("BFDS"), transaction processing and other services.
In addition, during the fiscal year ended December 31, 1997 NEFM performed
certain accounting and administrative services for the Funds. Each Fund
reimbursed NEFM 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.
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During the fiscal year ended December 31, 1996, NEFM received legal and
accounting services fees paid by the Growth Fund, Balanced Fund, Value Fund,
Bond Income Fund, Municipal Income Fund, Government Securities Fund,
International Equity Fund, Capital Growth Fund, Equity Income 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, $0, $98,321 and $24,445,
respectively.
During the fiscal year ended December 31, 1997, NEFM received legal and
accounting services fees paid by the Growth Fund, Balanced Fund, Value Fund,
Bond Income Fund, Municipal Income Fund, Government Securities Fund,
International Equity Fund, Capital Growth Fund, Equity Income Fund, Star
Advisers Fund and Star Worldwide Fund in the amounts of $____________,
$____________, $_____________, $____________, $____________, $____________,
$____________, $____________, $____________, $____________ and $____________.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
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 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
27
<PAGE>
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
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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 Balanced Fund, International Equity
Fund, Value Fund, Equity Income Fund and the segments of the Star Advisers Fund
and the Star Small Cap Fund advised by Loomis Sayles, Loomis Sayles follows the
same policies as for the other Funds for which it acts as subadviser, except
that Loomis Sayles may cause these Funds or segments to pay a broker-dealer that
provides brokerage and research services to Loomis Sayles an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount another broker-dealer would have charged for effecting that transaction.
Loomis Sayles must determine in good faith that such greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of that particular
transaction or Loomis Sayles' overall responsibilities to the Fund and its other
clients. Loomis Sayles' authority to cause these Funds or segments to pay such
greater commissions is also subject to such policies as the trustees of the
Trusts may adopt from time to time.
Growth Opportunities Fund and Capital Growth 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.
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Star Advisers, 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 Advisers, 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 Advisers, 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 Advisers, 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.
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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.
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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
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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 NEICOP 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.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE TRUSTS AND OWNERSHIP OF SHARES
- --------------------------------------------------------------------------------
New England Funds Trust I is organized as a Massachusetts business trust
under the laws of Massachusetts by an Agreement and Declaration of Trust (a
"Declaration of Trust") dated June 7, 1985, as amended, and is a "series"
company as described in Section 18(f)(2) of the 1940 Act. The Trust has twelve
separate portfolios. The Municipal Income Fund currently offers two classes of
shares, the Government Securities and Growth Funds each currently offer three
classes of shares and the Capital Growth, Balanced, Value, International Equity,
Star Advisers, Star Worldwide, Star Small Cap, Strategic Income and Bond Income
Funds each currently offers four classes of shares. Until September 1986, the
name of the Trust was "New England Life Government Securities Trust"; from
September 1986 to April 1994, its name was "The New England Funds." Prior to
January 5, 1996, the name of the Municipal Income Fund was "New England Tax
Exempt Income Fund." The initial portfolio of the Trust (the Fund now called New
England Government Securities Fund) commenced operations on September 16, 1985.
The International Equity Fund commenced operations on May 22, 1992. The Capital
Growth Fund was organized in 1992 and commenced operations on August 3, 1992.
The Star Advisers Fund was organized in 1994 and commenced operations on July 7,
1994. The
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Strategic Income Fund was organized in 1995 and commenced operations on May 1,
1995. The Star Worldwide Fund was organized in 1995 and commenced operations on
December 29, 1995. The Star Small Cap Fund was organized in 1996 and commenced
operations on December 31, 1996. The remaining Funds in the Trust are successors
to the following corporations which commenced operations in the years indicated:
Corporation Date of Commencement
----------- --------------------
NEL Growth Fund, Inc. 1968
NEL Retirement Equity Fund, Inc.* 1969
NEL Equity Fund, Inc.** 1968
NEL Income Fund, Inc.*** 1973
NEL Tax Exempt Bond Fund, Inc.**** 1976
* Predecessor of the Value Fund
** Predecessor of the Balanced Fund
*** Predecessor of the Bond Income Fund
**** Predecessor of the Municipal Income Fund
New England Funds Trust II is organized as a Massachusetts business trust
pursuant to a Declaration of Trust dated May 6, 1931, as amended, and consisted
of a single investment portfolio (now the Growth Opportunities Fund) until
January 1989, when the Trust was reorganized as a "series" company as described
in Section 18(f)(2) of the 1940 Act. The Trust has seven separate portfolios.
The High Income, Massachusetts, California and New York Funds each currently
offers two classes of shares, the Adjustable Rate Fund currently offers three
classes of shares and the Growth Opportunities and Limited Term U.S. Government
Funds each currently offers four classes of shares. Until December 1988, the
name of the Trust was "Investment Trust of Boston"; from December 1988 until
April 1992, its name was "Investment Trust of Boston Funds"; from April 1992
until April 1994, its name was "TNE Funds Trust." The High Income Fund and the
Massachusetts Fund are successors to separate investment companies that were
organized in 1983 and 1984, respectively, and reorganized as series of the Trust
in January 1989. The Limited Term U.S. Government Fund was organized in 1988 and
commenced operations in January 1989. The Adjustable Rate Fund was organized in
1991 and commenced operations on October 18 of that year. The California and New
York Funds were organized in 1993 and commenced operations on April 23 of that
year.
New England Funds Trust III was organized as a Massachusetts business
trust pursuant to a Declaration of Trust dated August 22, 1995. The Trust has
two separate portfolios (the New England Bullseye Fund and the Equity Income
Fund) each currently offering four classes of shares, Classes A, B, C and Y.
The Declarations of Trust of New England Funds Trust I, New England Funds
Trust II and New England Funds Trust III currently permit each Trust's trustees
to issue an unlimited number of full and fractional shares of each series. Each
Fund is represented by a particular series of shares. The Declarations of Trust
further permit each Trust's trustees to divide the shares of each series into
any number of separate classes, each having such rights and preferences relative
to other classes of the same series as the trustees may determine. The shares of
each Fund do not have any preemptive rights. Upon termination of any Fund,
whether pursuant to liquidation of the Trust or otherwise, shareholders of each
class of the Fund are entitled to share pro rata in the net assets attributable
to that class of shares of the Fund available for distribution to shareholders.
The Declarations of Trust also permit the trustees to charge shareholders
directly for custodial, transfer agency and servicing expenses.
The shares of all the Funds (except as noted in the preceding paragraphs
of this section) are divided into four classes, Class A, Class B, Class C and
Class Y. Each Fund offers such classes of shares as set forth in such Fund's
Prospectus. Class Y shares are available for purchase only by certain eligible
institutional investors and have higher minimum purchase requirements than
Classes A, B and C. All expenses of each Fund [excluding transfer agency fees
and expenses of printing and mailing Prospectuses to shareholders ("Other
Expenses")] are borne by its Class A, B, C and Y shares on a pro rata basis,
except for 12b-1 fees, which are borne only by Classes A, B and C and may be
charged at a separate rate to each such class. Other Expenses of Classes A, B
and C are
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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 the 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
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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
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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 NEFSCO 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 all 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 NEFSCO, or, if communicated by a
telephone exchange or order, at the date of telephoning provided a signed
Letter, in good order, reaches NEFSCO 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
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investor, including sole proprietorships, in either Trust may be treated as
purchases by a single individual for purposes of determining the availability of
a reduced sales charge. Purchases for a single trust estate or a single
fiduciary account may also be treated as purchases by a single individual for
this purpose, as may purchases on behalf of a participant in a tax-qualified
retirement plan and other employee benefit plans, provided that the investor is
the sole participant in the plan.
Combining with Other Series and Classes of the Trusts. A shareholder's
total investment for purposes of the cumulative purchase discount and purchases
under a Letter of Intent includes the value at the current public offering price
of any shares of series and classes of the Trusts that the shareholder owns
(which includes shares of New England Cash Management Trust and New England Tax
Exempt Money Market Trust [the "Money Market Funds"] if such shares were
purchased by exchanging shares of either of the Trusts). Shares owned by persons
described in the preceding paragraph may also be included.
Unit Holders of Unit Investment Trusts. Unit investment trust
distributions may be invested in Class A shares of 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 current and retired employees of the Trusts' investment
advisers or subadvisers, New England Funds, L.P., NELICO or MetLife or any other
company affiliated with NELICO or MetLife; current and former directors and
trustees of the Trusts, NELICO or MetLife 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, in-laws,
grandparents or grandchildren of the persons listed above and any trust,
pension, profit sharing or other benefit plan for any of the foregoing persons
and any separate account of NELICO or MetLife or any insurance 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
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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. NEFSCO 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 NEFSCO 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 NEFSCO upon
notice to existing plan participants.
The Investment Builder Program plan may be discontinued at any time by the
investor by written notice to NEFSCO, 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.
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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, at least $500 for IRAs and at
least $100 for any 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.
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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 already paid on their Adjustable
Rate Fund shares and the higher sales charge of the fund into which they are
exchanging at the time of the exchange. When an exchange is made from the Class
A, Class B or Class C shares of one fund to the same class of shares of another
fund, the shares received by the shareholder in exchange will have the same age
characteristics as the shares exchanged. The age of the shares determines the
expiration of the CDSC and, for the Class B shares, the conversion date. If you
own Class A, Class B or Class C shares, you may also elect to exchange your
shares of any fund for shares of the same class of the Money Market Funds. On
all exchanges of Class A, B or C shares into the Money Market Funds, the
exchange stops the aging period relating to the CDSC, if any, and, for Class B
shares only, conversion to Class A shares. The aging resumes only when an
exchange is made back into shares of a fund of the Trusts. 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 the fund or New England Funds Service Corporation
at 1-800-225-5478 or (2) a written exchange request to the fund or New England
Funds Service Corporation, 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 minimum amount for an exchange is $1,000.
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.
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New England International Equity Fund seeks total return from long-term
growth of capital and dividend income primarily through investment in a
diversified portfolio of marketable international equity securities.
New England Star Advisers Fund seeks long-term growth of capital.
New England Star Worldwide Fund seeks long-term growth of capital.
New England Star Small Cap Fund seeks capital appreciation.
New England Equity Income Fund seeks current income and capital growth.
New England Bullseye Fund seeks
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 Tax Free Income 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.
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Money Market Funds:
NEW ENGLAND CASH MANAGEMENT TRUST -
Money Market Series -- maximum 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 February 15, 1998, the net assets of the Funds and the Money Market
Funds totaled over $__ 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 NEFSCO is notified in writing to terminate the plan. Exchanges may be made
in amounts of $100 or more. The Service Options Form is available from NEFSCO 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 and Class C 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 or Class C
shares, the calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, for Class B shares 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. For Class C shares, it will be assumed that the redemption is first of
any shares that have been in the shareholder's fund account for over a year, and
second of any shares that have been in the shareholder's fund account for under
a year. 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).
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For Class B shares purchased prior to May 1, 1997, the CDSC will be
calculated as follows: 4% if redemption occurs within the first year, 3% if
redemption occurs within the second year or third year, 2% if redemption occurs
within the fourth year, 1% if redemption occurs within the 5th year and no CDSC
for redemptions after the fifth year.
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.
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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.
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Reinstatement Privilege (Class A shares only)
The Prospectus describes redeeming shareholders' reinstatement privileges
for Class A shares. Written notice and the investment check from persons wishing
to exercise this reinstatement privilege must be received by your investment
dealer within 120 days after the date of the redemption. The reinstatement or
exchange will be made at net asset value next determined after receipt of the
notice and the investment check and will be limited to the amount of the
redemption proceeds or to the nearest full share if fractional shares are not
purchased.
Even though an account is reinstated, the redemption will constitute a
sale for federal income tax purposes. Investors who reinstate their accounts by
purchasing shares of the Funds should consult with their tax advisers with
respect to the effect of the "wash sale" rule if a loss is realized at the time
of the redemption.
- --------------------------------------------------------------------------------
STANDARD PERFORMANCE MEASURES
- --------------------------------------------------------------------------------
Calculations of Yield
Each Fund (except the Growth, Value, Growth Opportunities, Star Advisers,
Star Worldwide, Star Small Cap, International Equity, Equity Income 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
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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).
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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 3000 Index is a capitalization weighted index which is
comprised of 3000 of the largest capitalized U.S. domiciled companies whose
common stock traded in the United States on the New York Stock Exchange,
American Stock Exchange and National Association of Securities Dealers Automated
Quotations. 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.
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<PAGE>
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 NEICOP, its structure, goals
and objectives and the advisory subsidiaries of NEICOP, 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 NEICOP, 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.
Investments At 8% Rate of Return
5 yrs. 10 15 20 25 30
------- ------- ------- ------- ------- -------
$ 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
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
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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, the distributor, and the 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.
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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
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<PAGE>
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 the 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) distribute
at least 90% of its dividend, interest and certain other taxable income each
year; and (iii) 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
designated by the Fund as deriving from net gains on securities held for more
than one year but not more than 18 months ("28% Rate Gain") and from net gains
on securities held for more than 18 months ("20% Rate Gain") will be taxable to
shareholders as such, 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.
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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. Each Fund may also elect to treat the
passive foreign investment company as a "qualified electing fund." 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 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. In
general, any gain realized upon a taxable disposition of shares will be treated
as 28% Rate Gain if the shares have been held for more than one year but not
more than 18 months, and as 20% Rate Gain if the shares have been held for than
18 months. Otherwise the gain on the sale, exchange or redemption of fund shares
will be treated as short-term capital gain. 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 and the related reports of
independent accountants included in the Funds' annual reports for the year ended
December 31, 1997 are incorporated herein by reference.
53
<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.
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<PAGE>
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.
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APPENDIX B
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
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
B'nai B'rith 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 Lear's
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
56
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Pensions and Investments Standard & Poor's Stock Guide
Personal Investor Stanger's Investment Advisor
Philadelphia Inquirer Stockbroker's 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
57
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APPENDIX C
ADVERTISING AND PROMOTIONAL LITERATURE
References may be included in New England Funds' advertising and
promotional literature to NEICOP 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 NEICOP affiliates including, but not limited to,
New England Investment Associates, L. P. ("NEIC"), 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 NEICOP 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, 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. and world
economies, and 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 entities;
o The names of those with ownership interest and the percentage of ownership
interest;
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 capitalizations, levels of profitability and other financial and
statistical information;
o Identification of portfolio managers, researchers, economists, principals
and other staff members and employees; and
o The
58
<PAGE>
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.
59
<PAGE>
o Current and historical statistics regarding:
-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 sub-adviser
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 and 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
sub-advisers 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' advisers and
sub-advisers, 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 NEICOP and its
affiliates:
NEICOP is part of an affiliated group including NEIC, a publicly traded
company listed on the New York Stock Exchange. NEICOP has 14 principal
subsidiary or affiliated asset management firms, which collectively had more
than $120 billion of assets under management as of September 30, 1997. In
addition, promotional materials may include:
o Specific and general references to New England Funds multi-manager
approach through NEICOP 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 NEICOP 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."
60
<PAGE>
Financial Adviser Services ("FAS"), a division of NEICOP, may be
referenced in Fund advertising and promotional literature concerning the
marketing services it provides to NEICOP-affiliated fund groups including: New
England Funds, Loomis Sayles Funds, Oakmark Funds and Reich & Tang Funds.
FAS will provide marketing support to NEICOP 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, 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 references 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 regulations. 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; and
-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
61
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-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.
o 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.
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APPENDIX D
AVERAGE MONTHLY PORTFOLIO COMPOSITION TABLE OF THE
MUNICIPAL INCOME FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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, 1997, 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, 1997
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, 1997, 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
63
<PAGE>
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, 1997
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, 1997, 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.
64
<PAGE>
65
<PAGE>
Registration Nos. 2-98326
811-4323
NEW ENGLAND FUNDS TRUST I
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) None.
1
<PAGE>
Registration Nos. 2-98326
811-4323
2
<PAGE>
Registration Nos. 2-98326
811-4323
(b) Exhibits:
1.(a) Amended and Restated Agreement and Declaration of Trust of the
Registrant is incorporated herein by reference to Exhibit 1(a) to
Post-Effective Amendment No. 31 to this Registration Statement,
filed on April 12, 1996.
(b) Amendment No. 5 to Amended and Restated Agreement and Declaration of
Trust of the Registrant is incorporated herein by reference to
Exhibit 1(b) to Post-Effective Amendment No. 31 to this Registration
Statement, filed on April 12, 1996.
(c) Amendment No. 10 to Amended and Restated Agreement and Declaration
of Trust is incorporated herein by reference to Exhibit 1(d) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
3
<PAGE>
Registration Nos. 2-98326
811-4323
2.(a) Bylaws of the Registrant are incorporated herein by reference to
Exhibit 2(a) to Post-Effective Amendment No. 32 to this Registration
Statement, filed on July 30, 1996.
(b) Amendment to the Bylaws of the Registrant is incorporated herein by
reference to Exhibit 2(b) to Post-Effective Amendment No. 32 to this
Registration Statement, filed on July 30, 1996.
3. None.
4. Rights of shareholders are described in Article III, Section 6 of
the Amended and Restated Agreement and Declaration of Trust of the
Registrant incorporated by reference as Exhibit 1(a) to this
Registration Statement.
5.(a) Advisory Agreement between the Registrant, on behalf of its New
England Growth Fund, and Capital Growth Management Limited
Partnership ("CGM") is incorporated herein by reference to
Post-Effective Amendment No. 32 to this Registration Statement,
filed on July 30, 1996.
(b) Advisory Agreements between the Registrant and New England Funds
Management, L.P. ("NEFM"), relating to the following series of the
Registrant, are incorporated herein by reference to Exhibit 5(b) to
Post-Effective Amendment No. 31 to this Registration Statement,
filed on April 12, 1996:
(i) New England Capital Growth Fund
(ii) New England Balanced Fund
(iii) New England International Equity Fund
(iv) New England Star Advisers Fund
(v) New England Value Fund
(vi) New England Star Worldwide Fund
(vii) New England Government Securities Fund
(viii) New England Strategic Income Fund
(ix) New England Bond Income Fund
(x) New England Municipal Income Fund
(c) Advisory Agreement between the Registrant, relating to its New
England Small Cap Fund, and NEFM is incorporated herein by reference
to Exhibit 5(c) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997.
(d) Subadvisory Agreements relating to the following series of the
Registrant, between NEFM and the subadvisers indicated in
parentheses, are incorporated herein by reference to Exhibit 5(c) to
Post-Effective Amendment No. 31 to this Registration Statement,
filed on April 12, 1996:
(i) New England Balanced Fund (Loomis Sayles & Company, L.P.
["Loomis Sayles"])
(ii) New England Star Advisers Fund (Janus Capital Corporation
["Janus Capital"])
(iii) New England Value Fund (Loomis Sayles)
(iv) New England Star Worldwide Fund (Harris Associates L.P.
["Harris"])
(v) New England Star Worldwide Fund (Founders Asset Management,
Inc. ["Founders"])
(vi) New England Star Worldwide Fund (Janus Capital)
(vii) New England Government Securities Fund (Back Bay Advisors
["Back Bay Advisors"])
(viii) New England Strategic Income Fund (Loomis Sayles)
(ix) New England Bond Income Fund (Back Bay Advisors)
(x) New England Municipal Income Fund (Back Bay Advisors)
4
<PAGE>
Registration Nos. 2-98326
811-4323
(e) Subadvisory Agreements relating to the Registrant's New England Star
Small Cap Fund, between NEFM and each of the following subadvisers
are incorporated herein by reference to Exhibit 5(e) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997:
(i) Robertson Stephens & Company Investment Management, L.P.
(ii) Loomis Sayles
(iii) Harris
(f) Subadvisory Agreements relating to the following series of the
Registrant, between NEFM and the subadvisers indicated in
parentheses, are filed herein.
(i) New England International Equity Fund (Loomis Sayles)
(ii) New England Star Advisers Fund (Harris) - Interim Agreement
(iii) New England Star Advisers Fund (Harris) - Current Agreement
(iv) New England Star Advisers Fund (Loomis Sayles)
(v) New England Star Advisers Fund (Founders)
(vi) New England Star Worldwide Fund (Montgomery)
(vii) New England Star Small cap Fund ( Montgomery)
(viii)New England Capital Growth Fund (Westpeak Investment Advisors,
L.P. ["Westpeak"]) - Interim Agreement
(g) Amendment to Advisory Agreement between New England Star Advisers
Fund and NEFM, is filed herein.
6.(a) Form of Distribution Agreement between the Registrant, on behalf of
each of the following series, and New England Funds, L.P. is
incorporated herein by reference to Exhibit 6(a) to Post-Effective
Amendment No. 31 to this Registration Statement, filed on April 12,
1996:
(i) New England Capital Growth Fund
(ii) New England Balanced Fund
(iii) New England Growth Fund
(iv) New England International Equity Fund
(v) New England Star Advisers Fund
(vi) New England Value Fund
(vii) New England Government Securities Fund
(viii) New England Strategic Income Fund
(ix) New England Bond Income Fund
(x) New England Municipal Income Fund
(xi) New England Star Worldwide Fund
(b) Distribution Agreement between the Registrant, on behalf of its New
England Star Small Cap Fund, and New England Funds, L.P. is
incorporated herein by reference to Exhibit 6(b) to Post-Effective
Amendment No. 34 to this Registration Statement, filed on February
14, 1997.
7. None.
8.(a) Custodian Contract dated April 13, 1988 between the Registrant and
State Street Bank and Trust Company ("State Street"), including form
of subcustodian agreement, is incorporated herein by reference to
Exhibit 8(a) to Post-Effective Amendment No. 32 to this Registration
Statement, filed on July 30, 1996.
(b) Amendment No. 1 to Custodian Contract dated April 12, 1988 between
the Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 8(b) to Post-Effective
Amendment No. 32 to this Registration Statement, filed on July 30,
1996.
5
<PAGE>
Registration Nos. 2-98326
811-4323
(c) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England
International Equity Fund is incorporated herein by reference to
Exhibit 8(c) to Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997.
(d) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England Capital
Growth Fund is incorporated herein by reference to Exhibit 8(d) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
(e) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England Star
Advisers Fund is incorporated herein by reference to Exhibit 8(e) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
(f) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England Strategic
Income Fund is incorporated herein by reference to Exhibit 8(f) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
(g) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England Star
Worldwide Fund is incorporated herein by reference to Exhibit 8(g)
to Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
(h) Letter Agreement between the Registrant and State Street relating to
the applicability of the Custodian Contract to New England Star
Small Cap Fund is incorporated herein by reference to Exhibit 8(h)
to Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
9.(a) Transfer Agency Agreement between the Registrant and New England
Funds, L.P. (formerly TNE Investment Services Corporation) is
incorporated herein by reference to Post-Effect Amendment No. 32 to
this Registration Statement, filed on July 30, 1996.
(b) Form of Service Agreement between New England Securities and CGM is
incorporated herein by reference to Post-Effective Amendment No. 10
to this Registration Statement, filed on May 1, 1990.
(c) Form of Administrative Agreement between New England Securities and
Registrant is incorporated herein by reference to Post-Effective
Amendment No. 3 to this Registration Statement, filed on November 7,
1986.
(d) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Capital Growth Fund and TNE
Investment Services Corporation is incorporated herein by reference
to Post-Effective Amendment No. 35 to this Registration Statement,
filed on April 18, 1997.
(e) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Strategic Income Fund, and
New England Funds, L.P. is incorporated herein by reference to
Post-Effective Amendment No. 31 to this Registration Statement,
filed on April 12, 1996.
(f) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its New England Star Worldwide Fund, and
New England Funds, L.P. is incorporated herein by reference to
Exhibit 9(j) to Post-Effective Amendment No. 31 to this Registration
Statement, filed April 12, 1996.
6
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Registration Nos. 2-98326
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(g) Sub-Transfer Agency Agreement between New England Funds, L.P.
(formerly TNE Investment Services Corporation) and State Street is
incorporated herein by reference to Exhibit 9(k) to Post-Effective
Amendment No. 33 to this Registration Statement, filed on October 3,
1996.
(h) Expense Agreement between the Registrant, on behalf of its Strategic
Income Fund, and NEFM is incorporated herein by reference to Exhibit
9(l) to Post-Effective Amendment No. 32 to this Registration
Statement, filed on July 30, 1996.
(i) Form of Class B Shares Remittance Agreement between the Registrant
and New England Funds, L.P., relating to each series of the
Registrant other than New England Growth Fund, is incorporated
herein by reference to Exhibit 9(m) to Post-Effective Amendment No.
31 to this Registration Statement, filed on April 12, 1996.
(j) Organizational Expense Reimbursement Agreement between the
Registrant, on behalf of its Star Small Cap Fund, and New England
Funds, L.P. is incorporated herein by reference to Exhibit 9(n) to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997.
(k) Letter Agreement between the Registrant and State Street relating to
the applicability of the Sub-Transfer Agency Agreement to New
England Star Small Cap Fund is incorporated herein by reference to
Exhibit 9(o) to Post-Effective Amendment No. 34 to this Registration
Statement, filed on February 14, 1997.
(l) Class B Shares Remittance Agreement between the Registrant and New
England Funds, L.P. relating to New England Star Small Cap Fund is
incorporated herein by reference to Exhibit 9(p) to Post-Effective
Amendment No. 34 to this Registration Statement, filed on February
14, 1997.
10.(a) Opinion and consent of counsel relating to the Registrant's New
England Growth Fund, New England Equity Income Fund, New England
Value Fund, New England Bond Income Fund and New England Municipal
Income Fund is incorporated herein by reference to Post-Effective
Amendment No. 3 to this Registration Statement, filed on November 7,
1986.
(b) Opinion and consent of counsel relating to the Registrant's New
England Government Securities Fund is incorporated herein by
reference to Post-Effective Amendment No. 35 to this Registration
Statement, filed on April 18, 1997.
(c) Opinion and consent of counsel relating to the Registrant's New
England International Equity Fund is incorporated herein by
reference to Post-Effective Amendment No. 17 to this Registration
Statement, filed on October 20, 1992.
(d) Opinion and consent of counsel relating to the Registrant's issuance
of multiple classes of shares is incorporated herein by reference to
Post-Effective Amendment No. 20 to this Registration Statement,
filed on December 22, 1993.
(e) Opinion and consent of counsel relating to the Registrant's New
England Capital Growth Fund is incorporated herein by reference to
Post-Effective Amendment No. 24 to this Registration Statement,
filed on June 20, 1994.
(f) Opinion and consent of counsel relating to the Registrant's New
England Star Advisers Fund is incorporated herein by reference to
Post-Effective Amendment No. 24 to this Registration Statement,
filed on June 20, 1994.
(g) Opinion and consent of counsel relating to the Registrant's New
England Strategic Income Fund is incorporated herein by reference to
Post-Effective Amendment No. 28 to this Registration Statement,
filed on October 13, 1995.
7
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Registration Nos. 2-98326
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(h) Opinion and consent of counsel relating to the Registrant's New
England Star Worldwide Fund is incorporated herein by reference to
Exhibit 10(h) to Post-Effective Amendment No. 31 to this
Registration Statement, filed on April 12, 1996.
(i) Opinion and consent of counsel relating to the Registrant's New
England Star Small Cap Fund is incorporated herein by reference to
Exhibit 10(I) to Post-Effective Amendment No. 34 to this
Registration Statement, filed on February 14, 1997.
11. None.
12. None.
13. None.
14. The following are incorporated herein by reference to Exhibit 14 to
Post-Effective Amendment No. 34 to this Registration Statement,
filed on February 14, 1997: (i) New England Funds, L.P. Tax
Sheltered Custodial Account Agreement; (ii) New England Funds, L.P.
Keogh Plan; (iii) New England Funds, L.P. Simplified Employee
Pension Plan; (iv) New England Funds, L.P. Individual Retirement
Plan Prototype; and (v) New England Funds, L.P. 401(k) Plan
Prototype.
15.(a) Rule 12b-1 Plans relating to the Class A shares of the Registrant's
New England Balanced Fund, New England Growth Fund, New England
Value Fund, New England International Equity Fund, New England
Capital Growth Fund, New England Bond Income Fund, New England
Municipal Income Fund and New England Government Securities Fund are
incorporated herein by reference to Exhibit 15(a) to Post-Effective
Amendment No. 32 to this Registration Statement, filed on July 30,
1996.
(b) Rule 12b-1 Plan relating to the Class A shares of the Registrant's
New England Star Advisers Fund is incorporated herein by reference
to Exhibit 15(b) to Post-Effective Amendment No. 32 to this
Registration Statement, filed on July 30, 1996.
(c) Form of Rule 12b-1 Plan relating to the Class C shares of the
Registrant's New England Star Advisers Fund is incorporated herein
by reference to Post-Effective Amendment No. 24 to this Registration
Statement, filed on June 20, 1994.
(d) Rule 12b-1 Plans relating to the Class C shares of the Registrant's
New England International Equity Fund, New England Value Fund, New
England Balanced Fund, New England Capital Growth Fund and New
England Bond Income Fund are incorporated herein by reference to
Post-Effective Amendment No. 25 to this Registration Statement,
filed on February 15, 1995.
(e) Form of Rule 12b-1 Plan relating to the Class A shares of the
Registrant's New England Strategic Income Fund is incorporated
herein by reference to Exhibit 15 to Post-Effective Amendment No. 25
to this Registration Statement, filed February 15, 1995.
(f) Form of Rule 12b-1 Plan relating to the Class C shares of the
Registrant's New England Strategic Income Fund is incorporated
herein by reference to Exhibit 15 to Post-Effective Amendment No. 25
to this Registration Statement, filed February 15, 1995.
(g) Forms of Rule 12b-1 Plan relating to the Class A and Class C shares
of New England Star Worldwide Fund are incorporated herein by
reference to Post-Effective Amendment No. 28 to this Registration
Statement, filed on October 13, 1995.
(h) Form of Rule 12b-1 Plan relating to Class B shares of each series of
the Registrant other than New England Growth Fund is incorporated
herein by reference to Exhibit 15(h) to Post-Effective Amendment No.
31 to this Registration Statement, filed on April 12, 1996.
8
<PAGE>
(i) 12b-1 Plan relating to Class A shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by reference to
Exhibit 15(i) to Post-Effective Amendment No. 33 to this
Registration Statement, filed on October 3, 1996.
(j) 12b-1 Plan relating to Class B shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by reference to
Exhibit 15(j) to Post-Effective Amendment No. 33 to this
Registration Statement, filed on October 3, 1996.
(k) 12b-1 Plan relating to Class C shares of the Registrant's New
England Star Small Cap Fund is incorporated herein by reference to
Exhibit 15(k) to Post-Effective Amendment No. 33 to this
Registration Statement, filed on October 3, 1996.
16. Schedule for computation of performance quotations is incorporated
herein by reference to Post-Effective Amendment No. 9 to this
Registration Statement, filed on May 1, 1989.
17. Not applicable.
18. Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940
as amended effective January 31, 1997 is incorporated herein by
reference to Post-Effective Amendment No. 35 to this Registration
Statement, filed on April 18, 1997.
19.(a)Powers of Attorney designating Edward A. Benjamin, Frank Nesvet and
John E. Pelletier as attorneys to sign for Henry L.P. Schmelzer are
filed herein.
(b) Powers of Attorney designating Edward A. Benjamin, Frank Nesvet,
Henry L.P. Schmelzer and John E. Pelletier as attorneys to sign for
Graham T. Allison, Daniel M. Cain, Kenneth J. Cowan, Richard Darman,
Sandra O. Moose, John A. Shane, Peter S. Voss and Pendelton P. White
are herein filed.
Item 25. Persons Controlled by or Under Common Control with the Registrant
None.
Item 26. Number of Holders of Securities
The following table sets forth the number of record holders of each class of
securities of the Registrant as of December 31, 1997:
Title of Series Number of Record Holders
--------------- ------------------------
Class A Class B Class C Class Y
New England Growth Fund 71,291 2,732 -- --
New England Value Fund 16,769 8,369 547 5
New England Balanced Fund 12,780 7,435 325 5
New England Bond Income Fund 10,517 3,536 427 5
New England Government Securities Fund 7,227 517 -- 2
New England Municipal Income Fund 4,779 481 -- --
9
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Registration Nos. 2-98326
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New England Star Advisers Fund 29,150 40,127 6,026 6
New England International Equity Fund 7,427 4,907 319 6
New England Capital Growth Fund 11,195 5,631 135 --
New England Strategic Income Fund 6,257 7,934 2,124 --
New England Star Small Cap Fund 4,806 6,022 1,118 --
New England Star Worldwide Fund 11,247 14,742 2,044 --
Item 27. Indemnification
Incorporated herein by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed on September 11, 1985.
10
<PAGE>
Registration Nos. 2-98326
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Item 28. Business and Other Connections of Investment Adviser
(a) Loomis Sayles, the subadviser of the Registrant's New England Value Fund,
New England International Equity Fund, New England Balanced Fund, New
England Strategic Income Fund and New England High Income Fund and a
subadviser of New England Star Advisers Fund and New England Star Small
Cap Fund, provides investment advice to a number of other registered
investment companies and to other organizations and individuals. Loomis
Sayles' general partner, directors and officers have been engaged during
the past two fiscal years in the following other businesses, professions,
vocations or employments of a substantial nature:
Name and Office with Name and Address of Nature of
Loomis Sayles Other Affiliations Connection
------------- ------------------ ----------
Loomis Sayles & Company, None None
Incorporated ("LSCI")
General Partner
Robert J. Blanding, None None
President and Chief Executive
Officer
Daniel J. Fuss, None None
Executive Vice President
Jeffrey L. Meade, None None
Executive Vice President and
Chief Operating Officer
Sandra P. Tichenor, None None
Vice President, General
Counsel and Secretary
Meri Anne Beck, None None
Vice President
Mary C. Champagne, None None
Vice President
Paul Drexler, None None
Vice President
Richard W. Hurkes, None None
Vice President
Carol C. McMurtie, None None
Vice President
Tricia H. Mills, None None
Vice President
Jeffery C. Petherick, None None
Vice President
(b) CGM, the adviser of the Registrant's New England Growth Fund, provides
investment advice to a number of other registered investment companies and
to other organizations and individuals. CGM's general partner, directors
and officers have been engaged during the past two fiscal years in the
following other businesses, professions, vocations or employments of a
substantial nature.
11
<PAGE>
Registration Nos. 2-98326
811-4323
Name and Office with Name and Address of Nature of
CGM Other Affiliations Connection
--- ------------------ ----------
Kenbob, Inc. None None
General Partner
(c) Back Bay Advisors, the subadviser of the Registrant's New England Bond
Income Fund, New England Government Securities Fund and New England
Municipal Income Fund, is wholly owned by NEIC Operating Partnership, L.P.
("NEICOP"). Back Bay Advisors serves as investment adviser to a number of
other registered investment companies. Back Bay Advisors' general partner,
directors and officers have been engaged during the past two fiscal years
in the following businesses, professions, vocations or employments of a
substantial nature (former affiliations are marked with an asterisk):
Name and Office with Name and Address of Nature of
Back Bay Advisors Other Affiliations Connection
----------------- ------------------ ----------
Back Bay Advisors, Inc. None None
General Partner
Charles T. Wallis, NEF Corporation Director
President and Chief 399 Boylston Street
Executive Officer Boston, MA 02116
Back Bay Advisors, Inc. President, Chief Executive
399 Boylston Street Officer and Director
Boston, MA 02116
Charles G. Glueck, None None
Senior Vice President
Scott A. Millimet, Back Bay Advisors, Inc. Executive Vice
Executive Vice President President
Edgar M. Reed, Aetna Capital Management* Head of Fixed Income
Executive Vice President and 151 Farmington Avenue Management Group
ChiefInvestment Officer Hartford, CT 06156
J. Scott Nicholson, None None
Senior Vice President
Catherine Bunting, None None
Senior Vice President
Nathan R. Wentworth, None None
Vice President
Paul Zamagni, None None
Vice President and Treasurer
Peter Palfrey, None None
Vice President
Harold B. Bjornson, None None
Vice President
12
<PAGE>
Registration Nos. 2-98326
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Eric Gutterson, None None
Vice President
(d) Westpeak serves as subadviser to the Registrant's New England Capital
Growth Fund, and is wholly owned by NEICOP. Organized in 1991, Westpeak
provides investment management services to other mutual funds and
institutional clients. Westpeak's general partner, directors and officers
have been engaged during the past two fiscal years in the following
businesses, professions, vocations or employments of a substantial nature
(former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Westpeak Other Affiliations Connection
-------- ------------------ ----------
<S> <C> <C>
Westpeak Investment None None
Advisors, Inc.
General Partner
Gerald H. Scriver None None
President, Chief Executive
Officer and
Chief Investment Officer
Edward N. Wadsworth NEIC Executive Vice President, Clerk,
Clerk, Secretary, Chief 399 Boylston Street Secretary and General Counsel
Legal Officer Boston, MA 02116
NEIC Inc. Executive Vice President, Clerk,
399 Boylston Street Secretary and General Counsel
Boston, MA 02116
Marlborough Capital Advisors, Inc. Assistant Clerk
399 Boylston Street
Boston, MA 02116
New England Investment Associates, Secretary
Inc. ("NEIA")
399 Boylston Street
Boston, MA 02116
Robert A. Franz None None
Senior Vice President
Philip J. Cooper None None
Vice President Portfolio Management
</TABLE>
(e) Founders, a subadviser to the Registrant's New England Star Advisers Fund
and New England Star Worldwide Fund, has been an investment adviser since
1938 and serves as an investment adviser to mutual funds and other
accounts. Founders' directors and officers have been engaged during the
past two fiscal years in the following other businesses, professions,
vocations or employments of a substantial nature:
Name and Office with Name and Address of Nature of
Founders Other Affiliations Connection
-------- ------------------ ----------
13
<PAGE>
Registration Nos. 2-98326
811-4323
<TABLE>
<CAPTION>
<S> <C> <C>
Bjorn K. Borgen, None None
Director, Chief Executive
Officer and Secretary
David L. Ray, None None
Vice President, Assistant
Secretary and Treasurer
Michael K. Haines, None None
Senior Vice President
Kenneth Chrsitoffersen INVESCO Funds Group, Inc.; Vice President and Assistant
Vice President and General Counsel INVESCO Trust Co. General Counsel
Denver, CO
Michael Gerding, None None
Vice President
Charles Hooper, None None
Vice President
Linda Ripley, None None
Assistant Vice President
Roberto Galindo, Jr., None None
Assistant Vice President
Thomas Mauer, None None
Assistant Vice President
Gregory Contillo, None None
Vice President
James Rankin, None None
Vice President
</TABLE>
(f) Janus Capital, a subadviser to the Registrant's New England Star Advisers
Fund and New England Star Worldwide Fund, serves as investment adviser to
mutual funds and individual, corporate, charitable and retirement
accounts. Janus Capital's directors and officers have been engaged during
the past two fiscal years in the following businesses, professions,
vocations or employments of a substantial nature:
14
<PAGE>
Registration Nos. 2-98326
811-4323
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Janus Other Affiliations Connection
----- ------------------ ----------
<S> <C> <C>
Thomas H. Bailey, IDEX Management, Inc. ("IDEX") Chairman and Director
Chairman, Director, President 201 Highland Avenue
and Chief Executive Officer Largo, FL 34690
James P. Craig, None
Vice President and Chief Investment
Officer
Thomas F. Marsico, None
Vice President
James P. Goff, None None
Vice President
Warren B. Lammert, None None
Vice President
Ronald V. Speaker, None None
Vice President
Helen Young Hayes, None None
Vice President
Sharon S. Pichler, None None
Vice President
Scott W. Schoelzel, None None
Vice President
David C. Tucker, Janus Service Corporation ("Janus Service") Vice President, General Counsel
Vice President, Secretary and General 100 Fillmore Street and Director
Counsel Denver, CO 80206
Janus Distributors, Inc. ("Janus Vice President, General Counsel
Distributors") and Director
100 Fillmore Street
Denver, CO 80206
Steven R. Goodbarn, Janus Service Vice President of Finance,
Vice President of Finance, Treasurer Treasurer and Chief Financial
and Chief Financial Officer Officer
Janus Distributors Vice President of Finance,
Treasurer and Chief Financial
Officer
IDEX Director
Michael E. Herman, Ewing Marion Kauffman Foundation Chairman of Finance Committee
Director 4900 Oak
Kansas City, MO 64112
</TABLE>
15
<PAGE>
Registration Nos. 2-98326
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<TABLE>
<CAPTION>
<S> <C> <C>
Michael N. Stolper, Stolper & Company, Inc. President
Director 525 B Street
San Diego, CA
Thomas A. McDonnell, DST Systems, Inc. President, Chief Executive
Director 1055 Broadway Officer and Director
Kansas City, MO 64105
KCSI Executive Vice President and
Director
</TABLE>
(g) NEFM, adviser to all the series of the Registrant except New England
Growth Fund, was organized in 1995. NEFM also serves as adviser to all of
the series of New England Funds Trust II and to New England Cash
Management Trust, New England Tax Exempt Money Market Trust and New
England Equity Income Fund. NEFM's general partner, directors and officers
have been engaged during the past two fiscal years in the following
businesses, professions, vocations or employments of a substantial nature
(former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
NEFM Other Affiliations Connection
---- ------------------ ----------
<S> <C> <C>
NEF Corporation New England Funds, L.P. General Partner
General Partner 399 Boylston Street
Boston, MA 02116
Henry L.P. Schmelzer, New England Funds, L.P. President and Chief Executive Officer
President and Chief Executive Officer
NEF Corporation President, Chief Executive Officer
and Director
New England Funds Service Corporation Chief Executive Officer
("NEFSCO")
399 Boylston Street
Boston, MA 02116
Back Bay Advisors, Inc. Director
New England Securities Corporation* Director
399 Boylston Street
Boston, MA 02116
Frank Nesvet, New England Funds, L.P. Senior Vice President and Chief
Senior Vice President, Chief Financial Financial Officer
Officer and Treasurer
NEF Corporation Senior Vice President, Chief
Financial Officer and Treasurer
NEFSCO Senior Vice President and Chief
Financial Officer
John E. Pelletier, NEF Corporation Senior Vice President, General
Senior Vice President, General Counsel, Counsel, Secretary and Clerk
Assistant Secretary and Clerk
</TABLE>
16
<PAGE>
Registration Nos. 2-98326
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<TABLE>
<CAPTION>
<S> <C> <C>
New England Funds, L.P. Senior Vice President, General
Counsel, Secretary and Clerk
NEFSCO Senior Vice President, General
Counsel and Chief Legal Officer
Funds Distributor* Senior Vice President
Boston, MA and General Counsel
Bruce R. Speca, NEF Corporation Executive Vice President
Executive Vice President
New England Funds, L.P. Executive Vice President
NEFSCO Executive Vice President and Chief
Operating Officer
Peter H. Duffy, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Martin G. Dyer, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
NEFSCO Vice President and Chief Compliance
Officer
Ralph M. Greggs, NEF Corporation Vice President
Vice President
New England Funds, L.P. Vice President
Beatriz A. Pina-Smith, NEF Corporation Assistant Controller
Assistant Controller
New England Funds, L.P. Assistant Controller
</TABLE>
(h) Montgomery is a subadviser to the Registrant's New England Star Worldwide
Fund and New England Star Small Cap Fund. Montgomery's directors and
officers have been engaged during the past two fiscal years in the
following businesses, professions, vocations or employments of a
substantial nature (former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Other Nature of
Montgomery Affiliations Connection
---------- ------------ ----------
<S> <C> <C>
Montgomery Asset Management, None None
LLC
General Partner
</TABLE>
17
<PAGE>
Registration Nos. 2-98326
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<TABLE>
<CAPTION>
<S> <C> <C>
R. Stephen Doyle Montgomery Asset Management, LLC Chairman and Director
Chairman, Managing Director of 600 Montgomery Street
Mutual Funds and Executive Vice San Francisco, CA 94111
President
Montgomery Securities Managing Director
600 Montgomery Street
San Francisco, CA 94111
Mark B. Geist Montgomery Asset Management, LLC Director and President
President
John T. Story None None
Managing Director of Mutual Funds
and Executive Vice President
Mary Jane Fross None None
Manager of Mutual Fund
Administration and Finance
Josephine Jimenez None None
Managing Director and Portfolio
Manager
Bryan L. Sudweeks None None
Managing Director and Portfolio
Manager
Stuart O. Roberts None None
Managing Director and Portfolio
Manager
John H. Brown Merus Capital Management* Portfolio Manager and Analyst
Managing Director and Senior 475 Sansome Street
Portfolio Manger San Francisco, CA 94111
William C. Stevens None None
Managing Director and Portfolio
Manager
Roger Honour None None
Managing Director and Senior
Portfolio Manager
Oscar Castro None None
Managing Director and Portfolio
Manager
John Boich None None
Managing Director and Portfolio
Manager
</TABLE>
(i) Harris serves as a subadviser to the Registrant's New England Star
Advisers Fund, New England Star Worldwide Fund and New England Star Small
Cap Fund and is wholly owned by NEICOP. Harris serves as investment
adviser to mutual funds, individuals, trusts, retirement plans, endowments
and foundations, and manages several private partnerships, and is a
registered commodity trading adviser and commodity pool
18
<PAGE>
Registration Nos. 2-98326
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operator. Harris's general partner, directors and officers have been
engaged during the past two fiscal years in the following business,
professions, vocations or employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Harris Other Affiliations Connection
------ ------------------ ----------
<S> <C> <C>
Harris Associates Inc. Harris Associates Securities, L.P. General Partner
General Partner Two North LaSalle Street
Chicago, IL 60602
Victor Morgenstern None None
Chairman
Robert M. Levy None None
President and Chief Executive
Officer
Donald Terao None None
Chief Financial Officer,
Treasurer and Secretary
Roxanne M. Martino None None
Vice President
Anita Nagler None None
Vice President
</TABLE>
(j) Robertson Stephens Investment Management, L.P. ("RSIM L.P."), a subadviser
to the Registrant's Star Small Cap Fund provides investment advice to
various clients including public mutual funds, private limited
partnerships and separate accounts. RSIM's directors and officers have
been engaged in the following businesses, professions, vacations or
employments of a substantial nature during the past two fiscal years
(former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Other Nature of
RSIM, L.P. Affiliations Connection
---------- ------------ ----------
<S> <C> <C>
George R. Hecht Robertson Stephens & Company LLC Chief Operating Officer and
President (affiliate of/distributor for RSIM, L.P.) Managing Director
555 California Street
San Francisco, CA 94104
Robertson, Stephens & Company Group, L.L.C. Member and Executive
555 California Street Committee Member
San Francisco, CA 94104
Terry R. Otton Robertson Stephens & Company LLC Chief Financial Officer and
Chief Financial Officer Managing Director
Robertson, Stephens & Company Group, L.L.C. Member
Dana K. Welch Robertson Stephens & Company LLC General Counsel
General Counsel
</TABLE>
19
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Registration Nos. 2-98326
811-4323
<TABLE>
<CAPTION>
<S> <C> <C>
Paul H. Stephens Robertson Stephens & Company LLC Managing Director
Chief Investment Officer
Robertson, Stephens & Company Group, L.L.C. Member and Executive
Committee Member
Amy Hoffman KPMG Peat Marwick* Employee/Senior Manager
Controller 345 Park Avenue
New York, NY 10154
Robert Greenwood Putnam Investments* Project Manager Compliance
Compliance Director One Post Office Square Systems
Boston, MA 02109
</TABLE>
Item 29. Principal Underwriter
(a) New England Funds, L.P., the principal underwriter of the Registrant, also
serves as principal underwriter for:
20
<PAGE>
Registration Nos. 2-98326
811-4323
New England Tax Exempt Money Market Trust
New England Cash Management Trust
New England Funds Trust II
New England Funds Trust III
(b) The general partner and officers of the Registrant's principal
underwriter, New England Funds, L.P., and their addresses are as follows:
<TABLE>
<CAPTION>
Positions and Offices with Positions and Offices
Name Principal Underwriter with Registrant
---- --------------------- ---------------
<S> <C> <C>
NEF Corporation General Partner None
Henry L.P. Schmelzer Managing Director, President and Chief President and Trustee
Executive Officer
Bruce R. Speca Managing Director and Executive Vice Executive Vice President
President
John E. Pelletier Managing Director, Senior Vice President, Secretary
General Counsel, Secretary and Clerk
Frank Nesvet Managing Director, Senior Vice President Treasurer
and Chief Financial Officer
James H. Davis Managing Director and Senior Vice President None
Caren I. Leedom Managing Director and Senior Vice President None
Elizabeth P. Burns Vice President None
Peter H. Duffy Vice President None
Martin G. Dyer Vice President and Assistant Secretary None
Tracy A. Fagan Vice President None
Raymond K. Girouard Senior Vice President, Treasurer and None
Controller
Ralph M. Greggs Vice President None
Lynne H. Johnson Vice President None
Marie G. McKenzie Vice President None
Robert E. O'Hare Vice President, Senior Counsel, Assistant None
Secretary and Assistant Clerk
Kristine E. Swanson Vice President None
Beatriz A. Pina-Smith Vice President and Assistant Controller None
</TABLE>
21
<PAGE>
Registration Nos. 2-98326
811-4323
Sharon Wratchford Vice President None
The principal business address of all the above persons or entities is 399
Boylston Street, Boston, MA 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The following companies maintain possession of the documents required by the
specified rules:
(a) Registrant
Rule 31a-1(b)(4); Rule 31a-2(d)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a); Rule 31a-1(b)(1), (2), (3), (5), (6), (7), (8)
Rule 31a-2(d)
(i) For New England Growth Fund:
Capital Growth Management Limited Partnership
One International Place
Boston, Massachusetts 02110
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(ii) For series of the Registrant managed by Back Bay
Advisors:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Back Bay Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(iii) For New England Star Advisers Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206
22
<PAGE>
Registration Nos. 2-98326
811-4323
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Founders Asset Management, Inc.
2930 East Third Ave.
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(iv) For New England Star Worldwide Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Janus Capital Corporation
100 Fillmore Street
East Third Avenue
Denver, CO 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Founders Asset Management, Inc.
2930 East Third Avenue
Denver, Colorado 80206
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Montgomery Asset Management, LLC
600 Montgomery Street
San Francisco, California 94111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(v) For the series of the Registrant managed by Loomis Sayles:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Loomis, Sayles & Company, L.P.
23
<PAGE>
Registration Nos. 2-98326
811-4323
One Financial Center
Boston, MA 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(vi) For New England Star Small Cap Fund:
New England Funds Management, L.P.
399 Boylston Street
Boston, MA 02116
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Harris Associates L.P.
Two North LaSalle Street
Chicago, IL 60602
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Montgomery Asset Management, LLC
600 Montgomery Street
San Francisco, CA 94111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, MA 02111
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
Robertson Stephens & Company
555 California Street
San Francisco, CA 94101
Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f)
Rule 31a-2(d); Rule 31a-2(e)
(d) New England Funds, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Rule 31a - 1(d)
Rule 31a - 2(c)
Item 31. Management Services
None.
Item 32. Undertakings
(a) The Registrant undertakes to provide the annual report of any of its series
to any person who receives a prospectus for such series and who requests the
annual report.
24
<PAGE>
Registration Nos. 2-98326
811-4323
NEW ENGLAND FUNDS TRUST I
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it has duly
caused this Post-Effective Amendment No. 37 to its Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Boston, in the Commonwealth of Massachusetts on the 27th day of February,
1998.
NEW ENGLAND FUNDS TRUST I
By: PETER S. VOSS*
-----------------------------
Peter S. Voss
Chief Executive Officer
*By: /s/ JOHN E. PELLETIER
------------------------------
John E. Pelletier
Attorney-In-Fact
25
<PAGE>
Registration Nos. 2-98326
811-4323
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
PETER S. VOSS* Chairman of the Board; Chief Executive February 27, 1998
- ------------------------------- Officer; Principal Executive Officer;
Peter S. Voss Trustee
/s/ Frank Nesvet Chief Financial Officer February 27, 1998
- -------------------------------
Frank Nesvet
HENRY L. P. SCHMELZER* Trustee February 27, 1998
- -------------------------------
Henry L. P. Schmelzer
GRAHAM T. ALLISON, JR.* Trustee February 27, 1998
- -------------------------------
Graham T. Allison, Jr.
DANIEL M. CAIN* Trustee February 27, 1998
- -------------------------------
Daniel M. Cain
KENNETH J. COWAN* Trustee February 27, 1998
- -------------------------------
Kenneth J. Cowan
RICHARD DARMAN* Trustee February 27, 1998
- -------------------------------
Richard Darman
SANDRA O. MOOSE* Trustee February 27, 1998
- -------------------------------
Sandra O. Moose
JOHN A. SHANE* Trustee February 27, 1998
- -------------------------------
John A. Shane
PENDELTON P. WHITE* Trustee February 27, 1998
- -------------------------------
Pendelton P. White
</TABLE>
*By: /s/ John E. Pelletier
-----------------------------
John E. Pelletier
Attorney-In-Fact
February 27, 1998
26
<PAGE>
Registration Nos. 2-98326
811-4323
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
EX - 5(f)(i) Subadvisory Agreement - International Equity Fund
EX - 5(f)(ii) Interim Subadvisory Agreement - Star Advisers Fund (Harris)
EX - 5(f)(iii) Subadvisory Agreement - Star Advisers Fund (Harris)
EX - 5(f)(iv) Subadvisory Agreement - Star Advisers Fund (Loomis Sayles)
EX - 5(f)(v) Subadvisory Agreement - Star Advisers Fund (Founders)
EX - 5(f)(vi) Subadvisory Agreement - Star Worldwide Fund (Montgomery)
EX - 5(f)(vii) Subadvisory Agreement - Star Small Cap Fund (Montgomery)
EX - 5(f)(viii) Interim Subadvisory Agreement - Capital Growth Fund
EX - 5(g) Amendment to Advisory Agreement - Star Advisers Fund
EX - 19(a) Powers of Attorney
EX - 19(b) Powers of Attorney
27
NEW ENGLAND INTERNATIONAL EQUITY FUND
Sub-Advisory Agreement
(Loomis, Sayles & Company, L.P.)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
February 14, 1997 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Loomis, Sayles & Company, L.P., a
Delaware limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England International Equity Fund, a series of
the Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the Trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
(a) The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of the assets of the Series. The
Sub-Adviser shall manage the Series in conformity with (1) the investment
objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the
Manager or by the Trust's trustees that have been furnished in writing to
the Sub-Adviser and (3) the provisions of the Internal Revenue Code (the
"Code") applicable to "regulated investment companies" (as defined in
Section 851 of the Code), all as from time to time in effect
(collectively, the "Policies"), and with all applicable provisions of law,
including without limitation all applicable provisions of the Investment
Company Act of 1940 (the "1940 Act") and the rules and regulations
thereunder. Subject to the foregoing, the Sub-Adviser is authorized, in
its discretion and without prior consultation with the Manager, to buy,
sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the Series, without regard to the
length of time the securities have been held and the resulting rate of
portfolio turnover or any tax considerations; and the majority or the
whole of the Series may be invested in such proportions of stocks, bonds,
other securities or investment instruments, or cash, as the Sub-Adviser
shall determine.
(b) The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions
and performance of the Series in such form as may be mutually agreed upon,
and agrees to review the Series and discuss the management of it. The
Sub-Adviser shall permit all books and records with respect to the
-1-
<PAGE>
Series to be inspected and audited by the Manager and the Administrator at
all reasonable times during normal business hours, upon reasonable notice.
The Sub-Adviser shall also provide the Manager with such other information
and reports as may reasonably be requested by the Manager from time to
time, including without limitation all material requested by or required
to be delivered to the Trustees of the Trust.
(c) The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission and a list of the persons whom the Sub-Adviser wishes to have
authorized to give written and/or oral instructions to custodians of
assets of the Series.
2. Obligations of the Manager.
(a) The Manager shall provide (or cause the Fund's custodian to
provide) timely information to the Sub-Adviser regarding such matters as
the composition of assets of the Series, cash requirements and cash
available for investment in the Series, and all other information as may
be reasonably necessary for the Sub-Adviser to perform its
responsibilities hereunder.
(b) The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and
agrees during the continuance of this Agreement to furnish the Sub-Adviser
copies of any revisions or supplements thereto at, or, if practicable,
before the time the revisions or supplements become effective. The Manager
agrees to furnish the Sub-Adviser with minutes of meetings of the Trustees
of the Trust applicable to the Series to the extent they may affect the
duties of the Sub-Adviser, and with copies of any financial statements or
reports made by the Series to its shareholders, and any further materials
or information which the Sub-Adviser may reasonably request to enable it
to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series' agreement with the custodian designated to hold the assets of the Series
(the "Custodian") and any modifications thereto (the "Custody Agreement"),
copies of such modifications to be provided to the Sub-Adviser a reasonable time
in advance of the effectiveness of such modifications. The assets of the Series
shall be maintained in the custody of the Custodian identified in, and in
accordance with the terms and conditions of, the Custody Agreement (or any
sub-custodian properly appointed as provided in the Custody Agreement). The
Sub-Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is taken in reliance upon instruction given to the
Custodian by a representative of the Sub-Adviser properly authorized to give
such instruction under the Custody Agreement. Any assets added to the Series
shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the
Sub-Adviser is the sole owner of the name and mark "Loomis, Sayles & Company,
L.P." and that all use of any designation consisting in whole or part of
"Loomis, Sayles & Company, L.P." (a "Loomis Sayles Mark") under this Agreement
shall inure to the benefit of the Sub-Adviser. The Manager on its own behalf and
on behalf of the Series agrees not to use any Loomis Sayles Mark in any
advertisement or sales literature or other materials promoting the Series,
except with the prior written consent of the Sub-Adviser. Without the prior
written consent of the Sub-Adviser, the Manager shall not, and the Manager
shall use its best efforts to cause the Series not to, make representations
regarding the Sub-Adviser in any disclosure document, advertisement or sales
literature or other materials relating to the Series. Upon termination of this
Agreement for any reason, the Manager shall cease, and the Manager
-2-
<PAGE>
shall use its best efforts to cause the Series to cease, all use of any Loomis
Sayles Mark(s) as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for
the purchase and sale of securities for the Series with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940
Act in all respects. To the extent consistent with applicable law, purchase or
sell orders for the Series may be aggregated with contemporaneous purchase or
sell orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its
best efforts to obtain execution of transactions for the Series at prices which
are advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.40 %
of the first $200 million of the average daily net assets of the Series that the
Sub-Adviser manages and 0.35 % of the amount in excess of $200 million. Such
compensation shall be payable monthly in arrears or at such other intervals, not
less frequently than quarterly, as the Manager is paid by the Series pursuant to
the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for
-3-
<PAGE>
whom it or they may be acting, provided that such activities do not adversely
affect or otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Series or the Manager in any way or
otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties. The Manager shall hold harmless and indemnify the
Sub-Adviser for any loss, liability, cost, damage or expense (including
reasonable attorneys fees and costs) arising from any claim or demand by any
past or present shareholder of the Series that is not based upon the obligations
of the Sub-Adviser under this Agreement.
10. Effective Date and Termination. This Agreement shall become effective
as of the date of its execution, and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Series, and (ii) by
vote of a majority of the trustees of the Trust who are not interested
persons of the Trust, the Manager or the Sub-Adviser, cast in person at a
meeting called for the purpose of voting on such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
(d) this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
-4-
<PAGE>
12. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
(a) The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person;
provided, however, that the persons identified in the prospectus of the
Series shall perform the portfolio management duties described therein
until the Sub-Adviser notifies the Manager that one or more other
employees, officers or agents of the Sub-Adviser, identified in such
notice, shall assume such duties as of a specific date.
(b) If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By: /s/ Robert P. Connolly
-----------------------------
Name: Robert P. Connolly
Title: Senior Vice President
LOOMIS, SAYLES & COMPANY, L.P.
By: /s/ Jeffrey Meade
----------------------------
Name: Jeffrey Meade
-------------------------
Title: Chief Operating Officer
-------------------------
-5-
NEW ENGLAND STAR ADVISERS FUND
SUB-ADVISORY AGREEMENT
Harris Associates L.P.
This Sub-Advisory Agreement (this "Agreement") is entered into as of July
25, 1997 by and between New England Funds Management, L.P., a Delaware limited
partnership (the "Manager"), and Harris Associates L.P., a Delaware limited
partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Star Advisers Fund, a series of the Trust
(the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"), manage
the investment and reinvestment of such portion of the assets of the Series as
the Manager may from time to time allocate to the Sub-Adviser for management
(such portion, the "Segment"), and the Sub-Adviser shall have the authority on
behalf of the Series to vote all proxies and exercise all other rights of the
Series as a security holder of companies in which the Segment from time to time
invests. The Sub-Adviser shall manage the Segment in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. For purposes of compliance with the Policies, the
Sub-Adviser shall be entitled to treat the Segment as though the Segment
constituted the entire Series, and the Sub-Adviser shall not be responsible in
any way for the compliance of any assets of the Series, other than the Segment,
with the Policies, or for the compliance of the Series, taken as a whole, with
the Policies. Subject to the foregoing, the Sub-Adviser is
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<PAGE>
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the Series, without regard to the length
of time the securities have been held and the resulting rate of portfolio
turnover or any tax considerations; and the majority or the whole of the Segment
may be invested in such proportions of stocks, bonds, other securities or
investment instruments, or cash, as the Sub-Adviser shall determine.
Notwithstanding the foregoing provisions of this Section 1.a, however, the
Sub-Adviser shall, upon written instructions from the Manager, effect such
portfolio transactions for the Segment as the Manager shall determine are
necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning transactions and performance of
the Segment in such form as may be mutually agreed upon, and agrees to review
the Segment and discuss the management of it. The Sub-Adviser shall permit all
books and records with respect to the Segment to be inspected and audited by the
Manager and the Administrator at all reasonable times during normal business
hours, upon reasonable notice. The Sub-Adviser shall also provide the Manager
with such other information and reports as may reasonably be requested by the
Manager from time to time, including without limitation all material requested
by or required to be delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to give
written and/or oral instructions to custodians of assets of the Series.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-Adviser
regarding such matters as the composition of assets in the Segment, cash
requirements and cash available for investment in the Segment, and all other
information as may be reasonably necessary for the Sub-Adviser to perform its
responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Segment shall be maintained in the
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<PAGE>
custody of the Custodian identified in, and in accordance with the terms and
conditions of, the Custody Agreement (or any sub-custodian properly appointed as
provided in the Custody Agreement). The Sub-Adviser shall have no liability for
the acts or omissions of the Custodian, unless such act or omission is taken in
reliance upon instruction given to the Custodian by a representative of the
Sub-Adviser properly authorized to give such instruction under the Custody
Agreement. Any assets added to the Segment shall be delivered directly to the
Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the
Sub-Adviser is the sole owner of the name "Harris Associates L.P." and "Oakmark"
and that all use of any designation consisting in whole or part of "Harris
Associates L.P." or "Oakmark" (a "Harris/Oakmark Mark") under this Agreement
shall inure to the benefit of the Sub-Adviser. The Manager on its own behalf and
on behalf of the Series agrees not to use any Harris Mark in any advertisement
or sales literature or other materials promoting the Series, except with the
prior written consent of the Sub-Adviser. Without the prior written consent of
the Sub-Adviser, the Manager shall not, and the Manager shall use its best
efforts to cause the Series not to, make representations regarding the
Sub-Adviser or the Oakmark Funds in any disclosure document, advertisement or
sales literature or other materials relating to the Series. Upon termination of
this Agreement for any reason, the Manager shall cease, and the Manager shall
use its best efforts to cause the Series to cease, all use of any Harris/Oakmark
Mark(s) as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Segment with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Segment may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Segment at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an
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<PAGE>
amount of commission for effecting a securities transaction in excess of the
amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.55%
of the first $50 million of the average daily net assets (including cash or cash
equivalents) of the Segment for such period as compensation is payable, 0.50% of
the next $200 million of such assets and 0.475% of such assets in excess of $250
million. Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser with
respect to the Segment under this Agreement.
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<PAGE>
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising out of any act or omission of any other sub-adviser
to the Series, or for any loss arising out of the failure of the Series to
comply with the Policies, except for losses arising out of the Sub-Adviser's
failure to comply with the Policies with respect to the Segment. The Manager
acknowledges and agrees that the Sub-Adviser makes no representation or
warranty, express or implied, that any level of performance or investment
results will be achieved by the Series or the Segment or that the Series or the
Segment will perform comparably with any standard or index, including other
clients of the Sub-Adviser, whether public or private.
10. Effective Date and Termination. This Agreement shall become effective
as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority of
the outstanding voting securities of the Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on sixty
days' written notice to the Manager and the Trust, or by the Manager on sixty
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
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<PAGE>
13. General.
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled to
the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the portfolio management duties described therein until the Sub-Adviser
notifies the Manager that one or more other employees, officers or agents of the
Sub-Adviser, identified in such notice, shall assume such duties as of a
specific date.
b. If any term or provision or this Agreement or the application
thereof to any person or circumstances is held to be invalid or unenforceable to
any extent, the remainder of this Agreement or the application of such provision
to other persons or circumstances shall not be affected thereby and shall be
enforced to the fullest extent permitted by law.
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS
MANAGEMENT, L.P.
By NEF Corporation, its general partner
By: /s/ BRUCE R. SPECA
------------------------------
Name: Bruce R. Speca
Title: Executive Vice President
HARRIS ASSOCIATES L.P.
By Harris Associates Inc., its general partner
By: /s/ ROBERT M. LEVY
------------------------------
Name: Robert M. Levy
Title: Chief Executive Officer
-6-
NEW ENGLAND STAR ADVISERS FUND
SUB-ADVISORY AGREEMENT
Harris Associates L.P.
This Sub-Advisory Agreement (this "Agreement") is entered into as of
October 17, 1997 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Harris Associates L.P., a Delaware
limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Star Advisers Fund, a series of the Trust
(the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"), manage
the investment and reinvestment of such portion of the assets of the Series as
the Manager may from time to time allocate to the Sub-Adviser for management
(such portion, the "Segment"), and the Sub-Adviser shall have the authority on
behalf of the Series to vote all proxies and exercise all other rights of the
Series as a security holder of companies in which the Segment from time to time
invests. The Sub-Adviser shall manage the Segment in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. For purposes of compliance with the Policies, the
Sub-Adviser shall be entitled to treat the Segment as though the Segment
constituted the entire Series, and the Sub-Adviser shall not be responsible in
any way for the compliance of any assets of the Series, other than the Segment,
with the Policies, or for the compliance of the Series, taken as a whole, with
the Policies. Subject to the foregoing, the Sub-Adviser is authorized, in its
discretion and without prior consultation with the Manager, to buy, sell, lend
and otherwise trade in any stocks, bonds and other securities and investment
instruments on behalf of the Series, without regard to the length of time the
securities have been held and the resulting rate of portfolio turnover or any
tax considerations; and the majority or the whole of the Segment may be invested
in such proportions of stocks, bonds, other securities or investment
instruments, or cash, as the Sub-Adviser shall determine. Notwithstanding the
foregoing provisions of this Section 1.a, however, the Sub-Adviser shall, upon
written instructions from the Manager, effect such portfolio transactions for
the Segment as the Manager shall determine are necessary in order for the Series
to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning transactions and performance of
the Segment in such form as may be mutually agreed upon, and agrees to review
the Segment and discuss the management of it. The Sub-Adviser shall permit all
books and records with respect to the Segment to be inspected and audited by the
Manager and the Administrator at all reasonable times during normal business
hours, upon reasonable notice. The Sub-Adviser
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<PAGE>
shall also provide the Manager with such other information and reports as may
reasonably be requested by the Manager from time to time, including without
limitation all material requested by or required to be delivered to the Trustees
of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to give
written and/or oral instructions to custodians of assets of the Series.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the Sub-Adviser
regarding such matters as the composition of assets in the Segment, cash
requirements and cash available for investment in the Segment, and all other
information as may be reasonably necessary for the Sub-Adviser to perform its
responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
the Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Segment shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Segment shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the
Sub-Adviser is the sole owner of the name "Harris Associates L.P." and "Oakmark"
and that all use of any designation consisting in whole or part of "Harris
Associates L.P." or "Oakmark" (a "Harris/Oakmark Mark") under this Agreement
shall inure to the benefit of the Sub-Adviser. The Manager on its own behalf and
on behalf of the Series agrees not to use any Harris Mark in any advertisement
or sales literature or other materials promoting the Series, except with the
prior written consent of the Sub-Adviser. Without the prior written consent of
the Sub-Adviser, the Manager shall not, and the Manager shall use its best
efforts to cause the Series not to, make representations regarding the
Sub-Adviser or the Oakmark Funds in any disclosure document, advertisement or
sales literature or other materials relating to the Series. Upon termination of
this Agreement for any reason, the Manager shall cease, and the Manager shall
use its best efforts to cause the Series to cease, all use of any Harris/Oakmark
Mark(s) as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
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<PAGE>
6. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Segment with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Segment may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Segment at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.65% of the first $50 million of the average daily net assets (including
cash or cash equivalents) of the Segment for such period as compensation is
payable, 0.60% of the next $50 million of such assets and 0.55% of such assets
in excess of $100 million. Such compensation shall be payable monthly in arrears
or at such other intervals, not less frequently than quarterly, as the Manager
is paid by the Series pursuant to the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser with
respect to the Segment under this Agreement.
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising out of any act or omission of any other sub-adviser
to the Series, or for any loss arising out of the failure of the Series to
comply with the Policies, except for losses arising out of the Sub-Adviser's
failure to comply with the Policies with respect to the Segment.
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<PAGE>
The Manager acknowledges and agrees that the Sub-Adviser makes no representation
or warranty, express or implied, that any level of performance or investment
results will be achieved by the Series or the Segment or that the Series or the
Segment will perform comparably with any standard or index, including other
clients of the Sub-Adviser, whether public or private.
10. Effective Date and Termination. This Agreement shall become
effective as of the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a majority of
the outstanding voting securities of the Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on sixty
days' written notice to the Manager and the Trust, or by the Manager on sixty
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the Trust, the Manager
or the Sub-Adviser, cast in person at a meeting called for the purpose of voting
on such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
a. The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled to
the advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the portfolio management duties described therein until the Sub-Adviser
notifies the Manager that one or more other employees, officers or agents of the
Sub-Adviser, identified in such notice, shall assume such duties as of a
specific date.
b. If any term or provision of this Agreement or the application
thereof to any person or circumstances is held to be invalid or unenforceable to
any extent, the remainder of this Agreement or the application of such provision
to other persons or circumstances shall not be affected thereby and shall be
enforced to the fullest extent permitted by law.
4
<PAGE>
c. This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By NEF Corporation, its general partner
By: /s/ Bruce R. Speca
-------------------------------------
Name: Bruce R. Speca
Title: Executive Vice President
HARRIS ASSOCIATES L.P.
By Harris Associates Inc., its general partner
By: /s/ Robert M. Levy
-------------------------------------
Name: Robert M. Levy
Title: Chief Executive Officer
5
NEW ENGLAND STAR ADVISERS FUND
SUB-ADVISORY AGREEMENT
Loomis, Sayles & Company, L.P.
This Sub-Advisory Agreement (this "Agreement") is entered into as of
October 17, 1997 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Loomis, Sayles & company, L.P., a
Delaware limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust (the "Trust"),
pursuant to which the Manager provides portfolio management and administrative
services to New England Star Advisers Fund, a series of the Trust (the
"Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the Manager and of
any administrator appointed by the Manager (the "Administrator"), manage the
investment and reinvestment of such portion of the assets of the Series as the
Manager may from time to time allocate to the Sub-Adviser for management (such
portion, the "Segment"). The Sub-Adviser shall manage the Segment in conformity
with (1) the investment objective, policies and restrictions of the Series set
forth in the Trust's prospectus and statement of additional information relating
to the Series, (2) any additional policies or guidelines established by the
Manager or by the Trust's trustees that have been furnished in writing to the
Sub-Adviser and (3) the provisions of the Internal Revenue Code (the "Code")
applicable to "regulated investment companies" (as defined in Section 851 of the
Code), all as from time to time in effect (collectively, the "Policies"), and
with all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940 Act") and
the rules and regulations thereunder. For purposes of compliance with the
Policies, the Sub-Adviser shall be entitled to treat the Segment as though the
Segment constituted the entire Series, and the Sub-Adviser shall not be
responsible in any way for the compliance of any assets of the Series, other
than the Segment, with the Policies, or for the compliance of the Series, taken
as a whole, with the Policies. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on
-1-
<PAGE>
behalf of the Series, without regard to the length of time the securities have
been held and the resulting rate of portfolio turnover or any tax
considerations; and the majority or the whole of the Segment may be invested in
such proportions of stocks, bonds, other securities or investment instruments,
or cash, as the Sub-Adviser shall determine. Notwithstanding the foregoing
provisions of this Section 1.a, however, the Sub-Adviser shall, upon written
instructions from the Manager, effect such portfolio transactions for the
Segment as the Manager shall determine are necessary in order for the Series to
comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning transactions and performance of
the Segment in such form as may be mutually agreed upon, and agrees to review
the Segment and discuss the management of it. The Sub-Adviser shall permit all
books and records with respect to the Segment to be inspected and audited by the
Manager and the Administrator at all reasonable times during normal business
hours, upon reasonable notice. The Sub-Adviser shall also provide the Manager
with such other information and reports as may reasonably be requested by the
Manager from time to time, including without limitation all material requested
by or required to be delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to give
written and/or oral instructions to custodians of assets of the Series.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Series' Custodian (as defined
in Section 3 hereof) to provide) timely information to the Sub-Adviser regarding
such matters as the composition of assets in the Segment, cash requirements and
cash available for investment in the Segment, and all other information as may
be reasonably necessary for the Sub-Adviser to perform its responsibilities
hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus and
statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any revisions
or supplements thereto at, or, if practicable, before the time the revisions or
supplements become effective. The Manager agrees to furnish the Sub-Adviser with
minutes of meetings of the trustees of the Trust applicable to the Series to the
extent they may affect the duties of the Sub-Adviser, and with copies of any
financial statements or reports made by the Series to its shareholders, and any
further materials or information which the Sub-Adviser may reasonably request to
enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Segment shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-
-2-
<PAGE>
Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is taken in reliance upon instruction given to the
Custodian by a representative of the Sub-Adviser properly authorized to give
such instruction under the Custody Agreement. Any assets added to the Segment
shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-Adviser
is the sole owner of the name "Loomis,Sayles & Company, L.P." and that all use
of any designation consisting in whole or part of "Loomis,Sayles & Company,
L.P." under this Agreement shall inure to the benefit of the Sub-Adviser. The
Manager on its own behalf and on behalf of the Series agrees not to use any such
designation in any advertisement or sales literature or other materials
promoting the Series, except with the prior written consent of the Sub-Adviser.
Without the prior written consent of the Sub-Adviser, the Manager shall not, and
the Manager shall use its best efforts to cause the Series not to, make
representations regarding the Sub-Adviser in any disclosure document,
advertisement or sales literature or other materials relating to the Series.
Upon termination of this Agreement for any reason, the Manager shall cease, and
the Manager shall use its best efforts to cause the Series to cease, all use of
any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid by
the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. Absent instructions from the Manager to the
contrary, the Sub-Adviser shall place all orders for the purchase and sale of
securities for the Segment with brokers or dealers selected by the Sub-Adviser,
which may include brokers or dealers affiliated with the Sub-Adviser, provided
such orders comply with Rule 17e-1 under the 1940 Act in all respects. To the
extent consistent with applicable law, purchase or sell orders for the Segment
may be aggregated with contemporaneous purchase or sell orders of other clients
of the Sub-Adviser. The Sub-Adviser shall use its best efforts to obtain
execution of transactions for the Segment at prices which are advantageous to
the Series and at commission rates that are reasonable in relation to the
benefits received. However, the Sub-Adviser may select brokers or dealers on the
basis that they provide brokerage, research or other services or products to the
Series and/or other accounts serviced by the Sub-Adviser. To the extent
consistent with applicable law, the Sub-Adviser may pay a broker or dealer an
amount of commission for effecting a securities transaction in excess of the
amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
-3-
<PAGE>
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.55%
of the first $50 million of the average daily net assets (including cash or cash
equivalents) of the Segment; 0.50% of the next $200 million of such assets and
0.475% of such assets in excess of $250 million (or such lesser amount as the
Sub-Adviser may from time to time agree to receive). Such compensation shall be
payable monthly in arrears or at such other intervals, not less frequently than
quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of the
Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties hereunder. The Manager shall hold harmless and
indemnify the Sub-Adviser for any loss, liability, cost, damage or expense
(including reasonable attorneys fees and costs) arising from any claim or demand
by any past or present shareholder of the Series that is not based upon the
obligations of the Sub-Adviser with respect to the Segment under this Agreement.
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising out of any act or omission of any other sub-adviser
to the Series, or for any loss arising out of
-4-
<PAGE>
the failure of the Series to comply with the Policies, except for losses arising
out of the Sub-Adviser's failure to comply with the Policies with respect to the
Segment. The Manager acknowledges and agrees that the Sub-Adviser makes no
representation or warranty, express or implied, that any level of performance or
investment results will be achieved by the Series or the Segment or that the
Series or the Segment will perform comparably with any standard or index,
including other clients of the Sub-Adviser, whether public or private.
10. Effective Date and Termination. This Agreement shall become effective as of
the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in effect
for two years from the date of execution, and from year to year thereafter so
long as such continuance is specifically approved at least annually (i) by the
Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the Series, and (ii) by vote of a majority of the trustees
of the Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities of the Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on sixty days'
written notice to the Manager and the Trust, or by the Manager on sixty days'
written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent of
the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote of a
majority of the outstanding voting securities," "interested person," "affiliated
person" and "assignment" shall have their respective meanings defined in the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under the 1940 Act.
13. General.
a. The Sub-Adviser may perform its services through any employee, officer
or agent of the Sub-Adviser, and the Manager shall not be entitled to the
advice, recommendation or judgment of any specific person; provided, however,
that the persons identified in the
-5-
<PAGE>
prospectus of the Series shall perform the portfolio management duties described
therein until the Sub-Adviser notifies the Manager that one or more other
employees, officers or agents of the Sub-Adviser, identified in such notice,
shall assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application thereof
to any person or circumstances is held to be invalid or unenforceable to any
extent, the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby and shall be
enforced to the fullest extent permitted by law.
c. This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS
MANAGEMENT, L.P.
By NEF Corporation, its general partner
By: /s/ BRUCE R. SPECA
------------------
Name: Bruce R. Speca
Title: Executive Vice President
LOOMIS, SAYLES & COMPANY, L.P.
By Loomis, Sayles & Company, Incorporated,
its general partner
By: /s/ MARK W. HOLLAND
-------------------
Name: Mark W. Holland
Title: Vice President, Finance and
Administration
-6-
NEW ENGLAND STAR ADVISERS FUND
SUB-ADVISORY AGREEMENT
Founders Asset Management, Inc.
This Sub-Advisory Agreement (this "Agreement") is entered into as of
October 17, 1997 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Founders Asset Management, Inc., a
Delaware corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Star Advisers Fund, a series of the Trust
(the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the Manager and of
any administrator appointed by the Manager (the "Administrator"), manage the
investment and reinvestment of such portion of the assets of the Series as the
Manager may from time to time allocate to the Sub-Adviser for management (such
portion, the "Segment"). The Sub-Adviser shall manage the Segment in conformity
with (1) the investment objective, policies and restrictions of the Series set
forth in the Trust's prospectus and statement of additional information relating
to the Series, (2) any additional policies or guidelines established by the
Manager or by the Trust's trustees that have been furnished in writing to the
Sub-Adviser and (3) the provisions of the Internal Revenue Code (the "Code")
applicable to "regulated investment companies" (as defined in Section 851 of the
Code), all as from time to time in effect (collectively, the "Policies"), and
with all applicable provisions of law, including without limitation all
applicable provisions of the Investment Company Act of 1940 (the "1940 Act") and
the rules and regulations thereunder. For purposes of compliance with the
Policies, the Sub-Adviser shall be entitled to treat the Segment as though the
Segment constituted the entire Series, and the Sub-Adviser shall not be
responsible in any way for the compliance of any assets of the Series, other
than the Segment, with the Policies, or for the compliance of the Series, taken
as a whole, with the Policies. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend
-1-
<PAGE>
and otherwise trade in any stocks, bonds and other securities and investment
instruments on behalf of the Series, without regard to the length of time the
securities have been held and the resulting rate of portfolio turnover or any
tax considerations; and the majority or the whole of the Segment may be invested
in such proportions of stocks, bonds, other securities or investment
instruments, or cash, as the Sub-Adviser shall determine. Notwithstanding the
foregoing provisions of this Section 1.a, however, the Sub-Adviser shall, upon
written instructions from the Manager, effect such portfolio transactions for
the Segment as the Manager shall determine are necessary in order for the Series
to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning transactions and performance of
the Segment in such form as may be mutually agreed upon, and agrees to review
the Segment and discuss the management of it. The Sub-Adviser shall permit all
books and records with respect to the Segment to be inspected and audited by the
Manager and the Administrator at all reasonable times during normal business
hours, upon reasonable notice. The Sub-Adviser shall also provide the Manager
with such other information and reports as may reasonably be requested by the
Manager from time to time, including without limitation all material requested
by or required to be delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
a list of the persons whom the Sub-Adviser wishes to have authorized to give
written and/or oral instructions to custodians of assets of the Series.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Series' Custodian (as defined
in Section 3 hereof) to provide) timely information to the Sub-Adviser regarding
such matters as the composition of assets in the Segment, cash requirements and
cash available for investment in the Segment, and all other information as may
be reasonably necessary for the Sub-Adviser to perform its responsibilities
hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus and
statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any revisions
or supplements thereto at, or, if practicable, before the time the revisions or
supplements become effective. The Manager agrees to furnish the Sub-Adviser with
minutes of meetings of the trustees of the Trust applicable to the Series to the
extent they may affect the duties of the Sub-Adviser, and with copies of any
financial statements or reports made by the Series to its shareholders, and any
further materials or information which the Sub-Adviser may reasonably request to
enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Segment shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or
-2-
<PAGE>
any sub-custodian properly appointed as provided in the Custody Agreement). The
Sub-Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is taken in reliance upon instruction given to the
Custodian by a representative of the Sub-Adviser properly authorized to give
such instruction under the Custody Agreement. Any assets added to the Segment
shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-Adviser
is the sole owner of the name and mark "Founders" and that all use of any
designation consisting in whole or part of "Founders" (a "Founders Mark") under
this Agreement shall inure to the benefit of the Sub-Adviser. The Manager on its
own behalf and on behalf of the Series agrees not to use any Founders Mark in
any advertisement or sales literature or other materials promoting the Series,
except with the prior written consent of the Sub-Adviser. Without the prior
written consent of the Sub-Adviser, the Manager shall not, and the Manager shall
use its best efforts to cause the Series not to, make representations regarding
the Sub-Adviser in any disclosure document, advertisement or sales literature or
other materials relating to the Series. Upon termination of this Agreement for
any reason, the Manager shall cease, and the Manager shall use its best efforts
to cause the Series to cease, all use of any Founders Mark as soon as reasonably
practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid by
the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. Absent instructions from the Manager to the
contrary, the Sub-Adviser shall place all orders for the purchase and sale of
securities for the Segment with brokers or dealers selected by the Sub-Adviser,
which may include brokers or dealers affiliated with the Sub-Adviser, provided
such orders comply with Rule 17e-1 under the 1940 Act in all respects. To the
extent consistent with applicable law, purchase or sell orders for the Segment
may be aggregated with contemporaneous purchase or sell orders of other clients
of the Sub-Adviser. The Sub-Adviser shall use its best efforts to obtain
execution of transactions for the Segment at prices which are advantageous to
the Series and at commission rates that are reasonable in relation to the
benefits received. However, the Sub-Adviser may select brokers or dealers on the
basis that they provide brokerage, research or other services or products to the
Series and/or other accounts serviced by the Sub-Adviser. To the extent
consistent with applicable law, the Sub-Adviser may pay a broker or dealer an
amount of commission for effecting a securities transaction in excess of the
amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the
-3-
<PAGE>
value of the brokerage and research products and/or services provided by such
broker or dealer. This determination, with respect to brokerage and research
services or products, may be viewed in terms of either that particular
transaction or the overall responsibilities which the Sub-Adviser and its
affiliates have with respect to the Series or to accounts over which they
exercise investment discretion. Not all such services or products need be used
by the Sub-Adviser in managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.55%
of the first $50 million of the average daily net assets (including cash or cash
equivalents) of the Segment; 0.50% of the next $200 million of such assets and
0.475% of such assets in excess of $250 million (or such lesser amount as the
Sub-Adviser may from time to time agree to receive). Such compensation shall be
payable monthly in arrears or at such other intervals, not less frequently than
quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of the
Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties hereunder. The Manager shall hold harmless and
indemnify the Sub-Adviser for any loss, liability, cost, damage or expense
(including reasonable attorneys fees and costs) arising from any claim or demand
by any past or present shareholder of the Series that is not based upon the
obligations of the Sub-Adviser with respect to the Segment under this Agreement.
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising
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<PAGE>
out of any act or omission of any other sub-adviser to the Series, or for any
loss arising out of the failure of the Series to comply with the Policies,
except for losses arising out of the Sub-Adviser's failure to comply with the
Policies with respect to the Segment. The Manager acknowledges and agrees that
the Sub-Adviser makes no representation or warranty, express or implied, that
any level of performance or investment results will be achieved by the Series or
the Segment or that the Series or the Segment will perform comparably with any
standard or index, including other clients of the Sub-Adviser, whether public or
private.
10. Effective Date and Termination. This Agreement shall become effective as of
the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in effect
for two years from the date of execution, and from year to year thereafter so
long as such continuance is specifically approved at least annually (i) by the
Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the Series, and (ii) by vote of a majority of the trustees
of the Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities of the Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on sixty days'
written notice to the Manager and the Trust, or by the Manager on sixty days'
written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent of
the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote of a
majority of the outstanding voting securities," "interested person," "affiliated
person" and "assignment" shall have their respective meanings defined in the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under the 1940 Act.
13. General.
a. The Sub-Adviser may perform its services through any employee, officer
or agent of the Sub-Adviser, and the Manager shall not be entitled to the
advice, recommendation
-5-
<PAGE>
or judgment of any specific person; provided, however, that the persons
identified in the prospectus of the Series shall perform the portfolio
management duties described therein until the Sub-Adviser notifies the Manager
that one or more other employees, officers or agents of the Sub-Adviser,
identified in such notice, shall assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application thereof
to any person or circumstances is held to be invalid or unenforceable to any
extent, the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby and shall be
enforced to the fullest extent permitted by law.
c. This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS
MANAGEMENT, L.P.
By NEF Corporation, its general partner
By: /s/ BRUCE R. SPECA
--------------------------------
Name: Bruce R. Speca
Title: Executive Vice President
FOUNDERS ASSET MANAGEMENT, INC.
By: /s/ DAVID L. RAY
-------------------------------
Name: David L. Ray
Title: Vice President and Treasurer
-6-
NEW ENGLAND STAR WORLDWIDE FUND
Sub-Advisory Agreement
Montgomery Asset Management, L.L.C.
This Sub-Advisory Agreement (this "Agreement") is entered into as of July
31,1997 by and between New England Funds Management, L.P., a Delaware limited
partnership (the "Manager"), and Montgomery Asset Management, L.L.C., a Delaware
limited liability corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Star Worldwide Fund, a series of the
Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the Trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
(a) The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of Such portion of the assets of
the Series as the Manager may from time to time allocate to the
Sub-Adviser for management (such portion, the "Segment"). The Sub-Adviser
shall manage the Segment in conformity with (1) the investment objective,
policies and restrictions of the Series set forth in the Trust's
prospectus and statement of additional information relating to the Series,
(2) any additional policies or guidelines established by the Manager or by
the Trust's Trustees that have been furnished in writing to the
Sub-Adviser and (3) the provisions of the Internal Revenue Code (the
"Code") applicable to "regulated investment companies" (as defined in
Section 851 of the Code), all as from time to time in effect
(collectively, the "Policies"), and with all applicable provisions of law,
including without limitation all applicable provisions of the Investment
Company Act of 1940 (the "1940 Act") and the rules and regulations
thereunder. For purposes of compliance with the Policies, the Sub-Adviser
shall be entitled to treat the Segment as though the Segment constituted
the entire Series, and the Sub-Adviser shall not be responsible in any way
for the compliance of any assets of the Series, other than the Segment,
with the Policies, or for the compliance of the Series, taken as a whole,
with the Policies. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the
Manager, to buy, sell, lend and otherwise trade in any stocks, bonds and
other securities and investment instruments on behalf of the Series,
without regard to the length of time the securities have been held and the
resulting rate of portfolio turnover or any tax considerations; and the
majority or the whole of the Segment may be invested in such proportions
of stocks, bonds, other securities or investment
-1-
<PAGE>
instruments, or cash, as the Sub-Adviser shall determine. Notwithstanding
the foregoing provisions of this Section 1.a; however, the Sub-Adviser
shall, upon written instructions from the Manager, effect such portfolio
transactions for the Segment as the Manager shall determine are necessary
in order for the Series to comply with the Policies.
(b) The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions
and performance of the Segment in such form as may be mutually agreed
upon, and agrees to review the Segment and discuss the management of it.
The Sub-Adviser shall permit all books and records with respect to the
Segment to be inspected and audited by the Manager and the Administrator
at all reasonable times during normal business hours, upon reasonable
notice. The Sub-Adviser shall also provide the Manager with such other
information and reports as may reasonably be requested by the Manager from
time to time, including without limitation all material requested by or
required to be delivered to the Trustees of the Trust.
(c) The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission and a list of the persons whom the Sub-Adviser wishes to have
authorized to give written and/or oral instructions to custodians of
assets of the Series.
2. Obligations of the Manager.
(a) The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the
Sub-Adviser regarding such matters as the composition of assets of the
Segment, cash requirements and cash available for investment in the
Segment, and all other information as may be reasonably necessary for the
Sub-Adviser to perform its responsibilities hereunder.
(b) The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and
agrees during the continuance of this Agreement to furnish the Sub-Adviser
copies of any revisions or supplements thereto at, or, if practicable,
before the time the revisions or supplements become effective. The Manager
agrees to furnish the Sub-Adviser with minutes of meetings of the Trustees
of the Trust applicable to the Series to the extent they may affect the
duties of the Sub-Adviser, and with copies of any financial statements or
reports made by the Series to its shareholders, and any further materials
or information which the Sub-Adviser may reasonably request to enable it
to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series' agreement with the custodian designated to hold the assets of the Series
(the "Custodian") and any modifications thereto (the "Custody Agreement"),
copies of such modifications to be provided to the Sub-Adviser a reasonable time
in advance of the effectiveness of such modifications. The assets of the Segment
shall be maintained in the custody of the Custodian identified in, and in
accordance with the terms and conditions of, the Custody Agreement (or any
sub-custodian properly appointed as provided in the Custody Agreement). The
Sub-Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is taken in reliance upon instruction given to the
-2-
<PAGE>
Custodian by a representative of the Sub-Adviser properly authorized to give
such instruction under the Custody Agreement. Any assets added to the Segment
shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the
Sub-Adviser is the sole owner of the name and mark "Montgomery Asset Management,
L.L.C." and that all use of any designation consisting in whole or part of
"Montgomery Asset Management, L.L.C." (a "Montgomery Mark") under this Agreement
shall inure to the benefit of the Sub-Adviser. The Manager on its own behalf and
on behalf of the Series agrees not to use any Montgomery Mark in any
advertisement or sales literature or other materials promoting the Series,
except with the prior written consent of the Sub-Adviser. Without the prior
written consent of the Sub-Adviser, the Manager shall not, and the Manager shall
use its best efforts to cause the Series not to, make representations regarding
the Sub-Adviser in any disclosure document, advertisement or sales literature or
other materials relating to the Series. Upon termination of this Agreement for
any reason, the Manager shall cease, and the Manager shall use its best efforts
to cause the Series to cease, all use of any Montgomery Mark(s) as soon as
reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or Trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Segment with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Segment may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Segment at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates
-3-
<PAGE>
have with respect to the Series or to accounts over which they exercise
investment discretion. Not all such services or products need be used by the
Sub-Adviser in managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.90%
of the first $25 million of the average daily net assets (including cash or cash
equivalents) of the Segment, 0.70% of the next $25 million of such assets and
0.55% of such assets in excess of $50 million. Such compensation shall be
payable monthly in arrears or at such other intervals, not less frequently than
quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties. The Manager shall hold harmless and indemnify the
Sub-Adviser for any loss, liability, cost, damage or expense (including
reasonable attorneys fees and costs) arising from any claim or demand by any
past or present shareholder of the Series that is not based upon the obligations
of the Sub-Adviser with respect to the Segment under this Agreement.
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising out of any act or omission of any other sub-adviser
to the Series, or for any loss arising out of the failure of the Series to
comply with the Policies, except for losses arising out of the Sub-Adviser's
failure to comply with the Policies with respect to the Segment. The Manager
acknowledges and agrees that the Sub-Adviser makes no representation or
warranty, express or implied, that any level of performance or investment
results will be achieved by the Series or the Segment or that the Series or the
Segment will perform
-4-
<PAGE>
comparably with any standard or index, including other client of the
Sub-Adviser, whether public or private.
10. Effective Date and Termination. This Agreement shall become effective
as of the date of its execution, and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Series, and (ii) by
vote of a majority of the trustees of the Trust who are not interested
persons of the Trust, the Manager or the Sub-Adviser, cast in person at a
meeting called for the purpose of voting on such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
(d) this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
(a) The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person;
provided, however, that the persons identified in the prospectus of the
Series shall perform the portfolio management duties described therein
until the Sub-Adviser notifies the Manager that one or more other
employees, officers or agents of the Sub-Adviser, identified in such
notice, shall assume such duties as of a specific date.
-5-
<PAGE>
(b) If any term or provision or this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By: /s/ BRUCE R. SPECA
---------------------------
Name: Bruce R. Speca
---------------------------
Title: Managing Director and Executive Vice President
----------------------------------------------
MONTGOMERY ASSET MANAGEMENT, L.L.C.
By: /s/ DANA SCHMIDT
--------------------
Name: Dana Schmidt
--------------------
Title: Principal
--------------------
-6-
NEW ENGLAND STAR SMALL CAP FUND
Sub-Advisory Agreement
Montgomery Asset Management, L.L.C.
This Sub-Advisory Agreement (this "Agreement") is entered into as of July
31, 1997 by and between New England Funds Management, L.P., a Delaware limited
partnership (the "Manager"), and Montgomery Asset Management, L.L.C., a Delaware
limited liability corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated December
31, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to Star Small Cap Fund, a series of the Trust (the
"Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the Trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
(a) The Sub-Adviser shall, subject to the supervision of the Manager
and of any administrator appointed by the Manager (the "Administrator"),
manage the investment and reinvestment of Such portion of the assets of
the Series as the Manager may from time to time allocate to the
Sub-Adviser for management (such portion, the "Segment"). The Sub-Adviser
shall manage the Segment in conformity with (1) the investment objective,
policies and restrictions of the Series set forth in the Trust's
prospectus and statement of additional information relating to the Series,
(2) any additional policies or guidelines established by the Manager or by
the Trust's Trustees that have been furnished in writing to the
Sub-Adviser and (3) the provisions of the Internal Revenue Code (the
"Code") applicable to "regulated investment companies" (as defined in
Section 851 of the Code), all as from time to time in effect
(collectively, the "Policies"), and with all applicable provisions of law,
including without limitation all applicable provisions of the Investment
Company Act of 1940 (the "1940 Act") and the rules and regulations
thereunder. For purposes of compliance with the Policies, the Sub-Adviser
shall be entitled to treat the Segment as though the Segment constituted
the entire Series, and the Sub-Adviser shall not be responsible in any way
for the compliance of any assets of the Series, other than the Segment,
with the Policies, or for the compliance of the Series, taken as a whole,
with the Policies. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the
Manager, to buy, sell, lend and otherwise trade in any stocks, bonds and
other securities and investment instruments on behalf of the Series,
without regard to the length of time the securities have been held and the
resulting rate of portfolio turnover or any tax considerations; and the
majority or the whole of the Segment may be invested in such proportions
of stocks, bonds, other securities or investment
-1-
<PAGE>
instruments, or cash, as the Sub-Adviser shall determine. Notwithstanding
the foregoing provisions of this Section 1.a; however, the Sub-Adviser
shall, upon written instructions from the Manager, effect such portfolio
transactions for the Segment as the Manager shall determine are necessary
in order for the Series to comply with the Policies.
(b) The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions
and performance of the Segment in such form as may be mutually agreed
upon, and agrees to review the Segment and discuss the management of it.
The Sub-Adviser shall permit all books and records with respect to the
Segment to be inspected and audited by the Manager and the Administrator
at all reasonable times during normal business hours, upon reasonable
notice. The Sub-Adviser shall also provide the Manager with such other
information and reports as may reasonably be requested by the Manager from
time to time, including without limitation all material requested by or
required to be delivered to the Trustees of the Trust.
(c) The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission and a list of the persons whom the Sub-Adviser wishes to have
authorized to give written and/or oral instructions to custodians of
assets of the Series.
2. Obligations of the Manager.
(a) The Manager shall provide (or cause the Series' Custodian (as
defined in Section 3 hereof) to provide) timely information to the
Sub-Adviser regarding such matters as the composition of assets of the
Segment, cash requirements and cash available for investment in the
Segment, and all other information as may be reasonably necessary for the
Sub-Adviser to perform its responsibilities hereunder.
(b) The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and
agrees during the continuance of this Agreement to furnish the Sub-Adviser
copies of any revisions or supplements thereto at, or, if practicable,
before the time the revisions or supplements become effective. The Manager
agrees to furnish the Sub-Adviser with minutes of meetings of the Trustees
of the Trust applicable to the Series to the extent they may affect the
duties of the Sub-Adviser, and with copies of any financial statements or
reports made by the Series to its shareholders, and any further materials
or information which the Sub-Adviser may reasonably request to enable it
to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series' agreement with the custodian designated to hold the assets of the Series
(the "Custodian") and any modifications thereto (the "Custody Agreement"),
copies of such modifications to be provided to the Sub-Adviser a reasonable time
in advance of the effectiveness of such modifications. The assets of the Segment
shall be maintained in the custody of the Custodian identified in, and in
accordance with the terms and conditions of, the Custody Agreement (or any
sub-custodian properly appointed as provided in the Custody Agreement). The
Sub-Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is taken in reliance upon instruction given to the
-2-
<PAGE>
Custodian by a representative of the Sub-Adviser properly authorized to give
such instruction under the Custody Agreement. Any assets added to the Segment
shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the
Sub-Adviser is the sole owner of the name and mark "Montgomery Asset Management,
L.L.C." and that all use of any designation consisting in whole or part of
"Montgomery Asset Management, L.L.C." (a "Montgomery Mark") under this Agreement
shall inure to the benefit of the Sub-Adviser. The Manager on its own behalf and
on behalf of the Series agrees not to use any Montgomery Mark in any
advertisement or sales literature or other materials promoting the Series,
except with the prior written consent of the Sub-Adviser. Without the prior
written consent of the Sub-Adviser, the Manager shall not, and the Manager shall
use its best efforts to cause the Series not to, make representations regarding
the Sub-Adviser in any disclosure document, advertisement or sales literature or
other materials relating to the Series. Upon termination of this Agreement for
any reason, the Manager shall cease, and the Manager shall use its best efforts
to cause the Series to cease, all use of any Montgomery Mark(s) as soon as
reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid
by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or Trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
6. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Segment with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Segment may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Segment at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates
-3-
<PAGE>
have with respect to the Series or to accounts over which they exercise
investment discretion. Not all such services or products need be used by the
Sub-Adviser in managing the Segment.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.65%
of the first $50 million of the average daily net assets (including cash or cash
equivalents) of the Segment and 0.50% of such assets in excess of $50 million.
Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Advisory Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of
the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser may provide advice to or take action
with respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Series. The Sub-Adviser shall for all purposes hereof
be deemed to be an independent contractor and shall, unless otherwise provided
or authorized, have no authority to act for or represent the Series or the
Manager in any way or otherwise be deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties. The Manager shall hold harmless and indemnify the
Sub-Adviser for any loss, liability, cost, damage or expense (including
reasonable attorneys fees and costs) arising from any claim or demand by any
past or present shareholder of the Series that is not based upon the obligations
of the Sub-Adviser with respect to the Segment under this Agreement.
Without limiting the foregoing, it is expressly understood and agreed that
the Manager and the Series shall hold harmless and indemnify the Indemnified
Parties for any loss arising out of any act or omission of any other sub-adviser
to the Series, or for any loss arising out of the failure of the Series to
comply with the Policies, except for losses arising out of the Sub-Adviser's
failure to comply with the Policies with respect to the Segment. The Manager
acknowledges and agrees that the Sub-Adviser makes no representation or
warranty, express or implied, that any level of performance or investment
results will be achieved by the Series or the Segment or that the Series or the
Segment will perform
-4-
<PAGE>
comparably with any standard or index, including other client of the
Sub-Adviser, whether public or private.
10. Effective Date and Termination. This Agreement shall become effective
as of the date of its execution, and
(a) unless otherwise terminated, this Agreement shall continue in
effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Series, and (ii) by
vote of a majority of the trustees of the Trust who are not interested
persons of the Trust, the Manager or the Sub-Adviser, cast in person at a
meeting called for the purpose of voting on such approval;
(b) this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Series;
(c) this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
(d) this Agreement may be terminated by the Sub-Adviser on ninety
days' written notice to the Manager and the Trust, or by the Manager on
ninety days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
11. Amendment. This Agreement may be amended at any time by mutual consent
of the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
13. General.
(a) The Sub-Adviser may perform its services through any employee,
officer or agent of the Sub-Adviser, and the Manager shall not be entitled
to the advice, recommendation or judgment of any specific person;
provided, however, that the persons identified in the prospectus of the
Series shall perform the portfolio management duties described therein
until the Sub-Adviser notifies the Manager that one or more other
employees, officers or agents of the Sub-Adviser, identified in such
notice, shall assume such duties as of a specific date.
-5-
<PAGE>
(b) If any term or provision or this Agreement or the application
thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the
application of such provision to other persons or circumstances shall not
be affected thereby and shall be enforced to the fullest extent permitted
by law.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS MANAGEMENT, L.P.
By: /s/ BRUCE R. SPECA
-----------------
Name: Bruce R. Speca
-----------------
Title: Managing Director and Executive Vice President
-----------------------------------------------
MONTGOMERY ASSET MANAGEMENT, L.L.C.
By: /s/ DANA SCHMIDT
----------------
Name: Dana Schmidt
----------------
Title: Principal
----------------
-6-
NEW ENGLAND CAPITAL GROWTH FUND
Interim Sub-Advisory Agreement
(Westpeak Investment Advisors, L.P.)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
February 16, 1998 by and between New England Funds Management, L.P., a Delaware
limited partnership (the "Manager"), and Westpeak Investment Advisors, L.P., a
Delaware limited partnership (the "Sub-Adviser").
WHEREAS, the Manager has entered into an Advisory Agreement dated August
30, 1996 (the "Advisory Agreement") with New England Funds Trust I (the
"Trust"), pursuant to which the Manager provides portfolio management and
administrative services to New England Capital Growth Fund, a series of the
Trust (the "Series");
WHEREAS, the Advisory Agreement provides that the Manager may delegate any
or all of its portfolio management responsibilities under the Advisory Agreement
to one or more sub-advisers;
WHEREAS, the Manager and the trustees of the Trust desire to retain the
Sub-Adviser to render portfolio management services in the manner and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the Manager and of
any administrator appointed by the Manager (the "Administrator"), manage
the investment and reinvestment of the assets of the Series, and have the
authority on behalf of the Series to vote all proxies and exercise all
other rights of the Series as a security holder of companies in which the
Series from time to time invests. The Sub-Adviser shall manage the Series
in conformity with (1) the investment objective, policies and restrictions
of the Series set forth in the Trust's prospectus and statement of
additional information relating to the Series, (2) any additional policies
or guidelines established by the Manager or by the Trust's trustees that
have been furnished in writing to the Sub-Adviser and (3) the provisions
of the Internal Revenue Code (the "Code") applicable to "regulated
investment companies" (as defined in Section 851 of the Code), all as from
time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the
rules and regulations thereunder. Subject to the foregoing, the
Sub-Adviser is authorized, in its discretion and without prior
consultation with the Manager, to buy, sell, lend and otherwise trade in
any
-1-
<PAGE>
stocks, bonds and other securities and investment instruments on behalf of
the Series, without regard to the length of time the securities have been
held and the resulting rate of portfolio turnover or any tax
considerations; and the majority or the whole of the Series may be
invested in such proportions of stocks, bonds, other securities or
investment instruments, or cash, as the Sub-Adviser shall determine.
b. The Sub-Adviser shall furnish the Manager and the Administrator
monthly, quarterly and annual reports concerning portfolio transactions
and performance of the Series in such form as may be mutually agreed upon,
and agrees to review the Series and discuss the management of it. The
Sub-Adviser shall permit all books and records with respect to the Series
to be inspected and audited by the Manager and the Administrator at all
reasonable times during normal business hours, upon reasonable notice. The
Sub-Adviser shall also provide the Manager with such other information and
reports as may reasonably be requested by the Manager from time to time,
including without limitation all material requested by or required to be
delivered to the Trustees of the Trust.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission and a list of the persons whom the Sub-Adviser wishes to have
authorized to give written and/or oral instructions to custodians of
assets of the Series.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Series' Custodian (as defined
in Section 3 hereof) to provide) timely information to the Sub-Adviser
regarding such matters as the composition of assets of the Series, cash
requirements and cash available for investment in the Series, and all
other information as may be reasonably necessary for the Sub-Adviser to
perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the prospectus and
statement of additional information of the Series and agrees during the
continuance of this Agreement to furnish the Sub-Adviser copies of any
revisions or supplements thereto at, or, if practicable, before the time
the revisions or supplements become effective. The Manager agrees to
furnish the Sub-Adviser with minutes of meetings of the trustees of the
Trust applicable to the Series to the extent they may affect the duties of
the Sub-Adviser, and with copies of any financial statements or reports
made by the Series to its shareholders, and any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement.
-2-
<PAGE>
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series's agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is taken in reliance upon instruction
given to the Custodian by a representative of the Sub-Adviser properly
authorized to give such instruction under the Custody Agreement. Any assets
added to the Series shall be delivered directly to the Custodian.
4. Proprietary Rights. The Manager agrees and acknowledges that the Sub-Adviser
is the sole owner of the name "Westpeak Investment Advisors, L.P." and that all
use of any designation consisting in whole or part of "Westpeak Investment
Advisors, L.P." under this Agreement shall inure to the benefit of the
Sub-Adviser. The Manager on its own behalf and on behalf of the Series agrees
not to use any such designation in any advertisement or sales literature or
other materials promoting the Series, except with the prior written consent of
the Sub-Adviser. Without the prior written consent of the Sub-Adviser, the
Manager shall not, and the Manager shall use its best efforts to cause the
Series not to, make representations regarding the Sub-Adviser in any disclosure
document, advertisement or sales literature or other materials relating to the
Series. Upon termination of this Agreement for any reason, the Manager shall
cease, and the Manager shall use its best efforts to cause the Series to cease,
all use of any such designation as soon as reasonably practicable.
5. Expenses. Except for expenses specifically assumed or agreed to be paid by
the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
organizational, operational or business expenses of the Manager or the Trust
including, without limitation, (a) interest and taxes, (b) brokerage commissions
and other costs in connection with the purchase or sale of securities or other
investment instruments with respect to the Series, and (c) custodian fees and
expenses. Any reimbursement of advisory fees required by any expense limitation
provision of any law shall be the sole responsibility of the Manager. The
Manager and the Sub-Adviser shall not be considered as partners or participants
in a joint venture. The Sub-Adviser will pay its own expenses incurred in
furnishing the services to be provided by it pursuant to this Agreement. Neither
the Sub-Adviser nor any affiliated person thereof shall be entitled to any
compensation from the Manager or the Trust with respect to service by any
affiliated person of the Sub-Adviser as an officer or trustee of the Trust
(other than the compensation to the Sub-Adviser payable by the Manager pursuant
to Section 7 hereof).
-3-
<PAGE>
6. Purchase and Sale of Assets. The Sub-Adviser shall place all orders for the
purchase and sale of securities for the Series with brokers or dealers selected
by the Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination, with respect to brokerage and research services or
products, may be viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Series.
7. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation at the annual rate of 0.600%
of the first $25 million of the average daily net assets of the Series, 0.550%
of the next $75 million of the average daily net assets of the Series, 0.500% of
the next $100 million of the average daily net assets of the Series, 0.350% of
the next $300 million of the average daily net assets of the Series, and 0.300%
in excess of $500 million of such assets, respectively (or such lesser amount as
the Sub-Adviser may from time to time agree to receive). Such compensation shall
be payable monthly in arrears or at such other intervals, not less frequently
than quarterly, as the Manager is paid by the Series pursuant to the Advisory
Agreement.
8. Non-Exclusivity. The Manager and the Series agree that the services of the
Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager or the Administrator may otherwise agree from time
to time in writing before or after the date hereof. This Agreement shall not in
any way limit or restrict the Sub-Adviser or any of its directors, officers,
employees or agents from buying, selling or trading any securities or other
investment instruments for its or their own account or for the account of others
for whom it or they may be acting, provided that such activities do not
adversely affect or otherwise impair the performance by the Sub-Adviser of its
duties and obligations under this Agreement. The Manager and the Series
recognize and agree that the Sub-Adviser
-4-
<PAGE>
may provide advice to or take action with respect to other clients, which advice
or action, including the timing and nature of such action, may differ from or be
identical to advice given or action taken with respect to the Series. The
Sub-Adviser shall for all purposes hereof be deemed to be an independent
contractor and shall, unless otherwise provided or authorized, have no authority
to act for or represent the Series or the Manager in any way or otherwise be
deemed an agent of the Series or the Manager.
9. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, partners, employees or agents (the "Indemnified Parties") shall be
subject to any liability to the Manager, the Trust, the Series or any
shareholder of the Series for any error of judgment, any mistake of law or any
loss arising out of any investment or other act or omission in the course of,
connected with, or arising out of any service to be rendered under this
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Sub-Adviser's duties or by reason of
reckless disregard by the Sub-Adviser of its obligations and duties hereunder.
The Manager shall hold harmless and indemnify the Sub-Adviser for any loss,
liability, cost, damage or expense (including reasonable attorneys fees and
costs) arising from any claim or demand by any past or present shareholder of
the Series that is not based upon the obligations of the Sub-Adviser under this
Agreement.
10. Effective Date and Termination. This Agreement shall become effective as of
the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue in effect
for two years from the date of execution, and from year to year thereafter
so long as such continuance is specifically approved at least annually (i)
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Series, and (ii) by vote of a
majority of the trustees of the Trust who are not interested persons of
the Trust, the Manager or the Sub-Adviser, cast in person at a meeting
called for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days' written
notice to the Sub-Adviser either by vote of the Board of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Series;
c. this Agreement shall automatically terminate in the event of its
assignment or upon the termination of the Advisory Agreement;
d. this Agreement may be terminated by the Sub-Adviser on ninety days'
written notice to the Manager and the Trust, or by the Manager on ninety
days' written notice to the Sub-Adviser.
Termination of this Agreement pursuant to this Section 10 shall be without
the payment of any penalty.
-5-
<PAGE>
11. Amendment. This Agreement may be amended at any time by mutual consent of
the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
12. Certain Definitions. For the purpose of this Agreement, the terms "vote of a
majority of the outstanding voting securities," "interested person," "affiliated
person" and "assignment" shall have their respective meanings defined in the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under the 1940 Act.
13. General.
a. The Sub-Adviser may perform its services through any employee, officer
or agent of the Sub-Adviser, and the Manager shall not be entitled to the
advice, recommendation or judgment of any specific person; provided,
however, that the persons identified in the prospectus of the Series shall
perform the day-to-day portfolio management duties described therein until
the Sub-Adviser notifies the Manager that one or more other employees,
officers or agents of the Sub-Adviser, identified in such notice, shall
assume such duties as of a specific date.
b. If any term or provision of this Agreement or the application thereof
to any person or circumstances is held to be invalid or unenforceable to
any extent, the remainder of this Agreement or the application of such
provision to other persons or circumstances shall not be affected thereby
and shall be enforced to the fullest extent permitted by law.
c. This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
NEW ENGLAND FUNDS WESTPEAK INVESTMENT
MANAGEMENT, L.P. ADVISORS, L.P.
By NEF Corporation, its general partner By Westpeak Investment Advisors,
Inc., its general partner
By: /s/ JOHN E. PELLETIER By: /s/ PHILLIP J. COOPER
--------------------- ---------------------
Name: John E. Pelletier Name: Phillip J. Cooper
Title: Managing Director, Senior Vice -----------------
President, General Counsel, Title: Executive Vice President
Secretary & Clerk ------------------------
-6-
[NEW ENGLAND FUNDS(R) LETTERHEAD]
May 9, 1997
New England Funds Trust I
New England Star Advisers Fund
399 Boylston Street
Boston, MA 02116
Re: Star Advisers Fund Advisory Agreement Addendum
Dear Sir:
The Advisory Agreement dated August 30, 1996 between New England Funds Trust I
("the Fund") with respect to its New England Star Advisers Fund ("the Series")
and New England Funds Management, L.P. ("the Manager") is hereby amended by
deleting section 7 and replacing it with the following:
7. As full compensation for all services rendered, facilities furnished and
expenses borne by the Manager hereunder, the Fund shall pay the Manager
compensation at the annual rate of 1.05% of the first $1 billion of the average
daily net assets of the Series, and 1.00% of such assets in excess of 1 billion
(or such lesser amount as the Manager may from time to time agree to receive).
Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Board of Trustees of the
Fund may from time to time determine and specify in writing to the Manager. The
Manager hereby acknowledges that the Fund's obligation to pay such compensation
is binding only on the assets and property belonging to the Series.
To indicate your approval and acceptance of the terms of this letter, please
sign below where indicated.
Sincerely,
/s/ Robert E. O'Hare
Robert E. O'Hare
Assistant Secretary
New England Funds Management, L.P.
<PAGE>
ACCEPTED AND AGREED TO:
New England Funds Trust I for
New England Star Advisers Fund
By: /s/ FRANK NESVET
----------------------
Frank Nesvet
Title: Treasurer
Date: May 9, 1997
POWER OF ATTORNEY
I, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet and
John E. Pelletier, each of them singly, my true and lawful attorneys, with full
power to them and each of them to sign for me, and in my name in the capacity
indicated below, any and all registration statements and any and all amendments
thereto to be filed with the Securities and Exchange Commission for the purpose
of registering from time to time investment companies of which I am now or
hereafter a Director or Trustee and to register the shares of such companies and
generally to do all such things in my name and in my behalf to enable such
registered investment companies to comply with the provisions of the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and
all requirements and regulations of the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by my said
attorneys and any and all registration statements and amendments thereto.
Witness my hand on the 31st day of October, 1997.
/s/ HENRY L.P. SHCMELZER
--------------------------------
Henry L.P. Schmelzer - Trustee
POWER OF ATTORNEY
We, the undersigned, hereby constitute Edward A. Benjamin, Frank Nesvet,
Henry L.P. Schmelzer and John E. Pelletier, each of them singly, our true and
lawful attorneys, with full power to them and each of them to sign for us, and
in our names in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which we are now or hereafter a Director or Trustee and
to register the shares of such companies and generally to do all such things in
our names and on our behalf to enable such registered investment companies to
comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as it may be signed by our said attorneys and any and all
registration statements and amendments thereto.
Witness our hands on the 31st day of October, 1997.
/s/ GRAHAM T. ALLISON /s/ SANDRA O. MOOSE
- ---------------------------- ----------------------------
Graham T. Allison - Trustee Sandra O. Moose - Trustee
/s/ DANIEL M. CAIN /s/ JOHN A. SHANE
- ---------------------------- ----------------------------
Daniel M. Cain - Trustee John A. Shane
/s/ KENNETH J. COWAN /s/ PETER S. VOSS
- ---------------------------- ----------------------------
Kenneth J. Cowan - Trustee Peter S. Voss - Trustee
/s/ RICHARD DARMAN /s/ PENDELTON P. WHITE
- ---------------------------- ----------------------------
Richard Darman - Trustee Pendelton P. White - Trustee
