-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/g8s5ZkdpkeZGFSeAHN5kNyQfYSCS1PfhEC7fcN70XiQvJh8kkTlZllAoNLARC1 5gzCItvMkrxFUhRkHp6Ryg== 0000950156-98-000188.txt : 19980302 0000950156-98-000188.hdr.sgml : 19980302 ACCESSION NUMBER: 0000950156-98-000188 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980227 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 002-11101 FILM NUMBER: 98551677 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-00242 FILM NUMBER: 98551678 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: INVESTMENT TRUST OF BOSTON FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WORLD INVESTMENT TRUST DATE OF NAME CHANGE: 19680529 485APOS 1 NEF TRUST II Registration Nos. 2-11101 811-242 ------------------------------------- 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. 108 [X ] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X ] ACT OF 1940 Amendment No. 42 [X ] (Check appropriate box or boxes) ------------------------------------- NEW ENGLAND FUNDS TRUST II (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. NEW ENGLAND FUNDS TRUST II (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 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 [GRAPHIC OMITTED] New England Funds(R) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK Prospectus and Application -- May 1, 1998 New England Intermediate Term Tax Free Fund of California (the "California Fund") and New England Tax Free Income Fund of New York (formerly, New England Intermediate Term Tax Free Fund of New York) (the "New York Fund") (collectively the "Funds") are non-diversified mutual funds. The Funds are series of New England Funds Trust II (the "Trust"), a registered open-end management investment company. The other series of the Trust are described in separate prospectuses. The Trust, New England Funds Trust I and New England Funds Trust III are referred to in this prospectus as the "Trusts." Each Fund seeks as high a level of current income exempt from federal income tax and its state's personal income tax (and New York City personal income tax, in the case of the New York Fund) as is consistent with preservation of capital. There can be no assurance that a Fund will achieve its investment objective. Each Fund offers two classes of shares to the general public. The offering price is based on the net asset value per share next determined after an order is received. Class A share purchases generally involve a sales charge at the time of purchase. No initial sales charge applies to Class B share purchases. A contingent deferred sales charge (a "CDSC"), however, is imposed upon certain redemptions of Class B shares, which also bear higher annual 12b-1 fees than Class A shares. Class B shares automatically convert to Class A shares eight years after purchase. See "Buying Fund Shares -- Sales Charges." 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. (the "Distributor"), 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, material 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page
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 5 How The Funds Pursue Their Objectives - ------------------------------------------------------------------------------------------------------------------------------------ 9 INVESTMENT RISKS It is important to understand the risks inherent in a Fund before you invest. - ------------------------------------------------------------------------------------------------------------------------------------ 12 FUND MANAGEMENT - ------------------------------------------------------------------------------------------------------------------------------------ BUYING FUND SHARES 13 Minimum Investment Everything you need to know to open and add to 13 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 14 Sales Charges 16 Reduced Sales Charges (Class A Shares Only) - ------------------------------------------------------------------------------------------------------------------------------------ OWNING FUND SHARES 18 Exchanging Among New England Funds New England Funds offers three convenient ways to 18 Fund Dividend Payments exchange Fund shares. - ------------------------------------------------------------------------------------------------------------------------------------ SELLING FUND SHARES 20 5 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 21 Repurchase Option (Class A Shares Only) An opportunity to reinvest your redemption proceeds within 120 days for no sales charge. - ------------------------------------------------------------------------------------------------------------------------------------ FUND DETAILS 23 How Fund Share Price Is Determined Additional information you may find important. 23 Income Tax Considerations 24 The Funds' Expenses 25 Performance Criteria 26 Additional Facts About The Funds
- -------------------------------------------------------------------------------- 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 the Funds and estimated annual expenses for each class of the Funds' shares. The Example shows the cumulative expenses attributable to a hypothetical $1,000 investment in each class of shares of the Funds for the periods specified. Shareholder transaction expenses
California Fund New York Fund ------------------- ------------------- Class A Class B Class A Class B -------- -------- -------- -------- Maximum Initial Sales Charge Imposed on a Purchase (as a percentage of offering price)(1)(2) 2.50% None 2.50% None Maximum Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)(2) (3) 5.00% (3) 5.00%
(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 one 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)
California Fund New York Fund -------------------- -------------------- Class A Class B Class A Class B ------- ------- ------- ------- Management Fees (after voluntary fee waiver and expense reduction) ............ %*** %*** %**** %**** 12b-1 Fees ...................... 0.2 1.0** 0.2 1.0** Other Expenses (after voluntary fee waiver and expense reduction for the New York Fund) ........ **** **** Total Fund Operating Expenses (after voluntary fee waiver and expense reduction) ............ *** *** **** ****
** 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 ___% for both classes, and Total Fund Operating Expenses would be ___% for Class A shares and ___% for Class B shares. These voluntary limitations can be terminated by the Fund's adviser at any time. See "Fund Management." **** Without the voluntary fee waiver and expense reduction by the Fund's adviser, Management Fees and Other Expenses would be ___% and ___%, respectively, for both classes, and Total Fund Operating Expenses would be ___% for Class A shares and ___% for Class B shares. These voluntary limitations can be terminated by the Fund's adviser at any time. See "Fund Management." 1 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 the end of each time period. 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.
California Fund New York Fund ----------------------- -------------------------- Class A Class B Class A Class B ------- -------------- ------- -------------- (1) (2) (1) (2) 1 year............................. $ $ $ $ $ $ 3 years ........................... $ $ $ $ $ $ 5 years ........................... $ $ $ $ $ $ 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," and "The Funds' Expenses." A wire fee (currently $5.00) will be deducted from your proceeds if you elect to transfer redemption proceeds by wire. 2 Financial Highlights (For a share of each Fund outstanding throughout the indicated periods.) The Financial Highlights presented below have been included in the financial statements of the Funds, which have been examined by Price Waterhouse LLP (and by Coopers & Lybrand LLP, for pre-1997 data), independent accountants, whose report thereon 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. The Funds' annual reports contain additional performance information and are available upon request and without charge. New England Intermediate Term Tax Free Fund of California
Class A Class B ---------------------------------------------- ------------------------------------------- April 23(a) Sept.13#(a) Year Ended through Year Ended December 31, through December 31, Dec. 31, ---------------------------------- Dec. 31, -------------------------------- 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Net asset value, beginning of period $7.50 $7.84 $7.08 $7.65 $7.92 $7.84 $7.07 $7.63 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Income from investment operations Net investment income 0.26 0.38 0.39 0.39 0.10 0.32 0.33 0.33 Net gains or losses on investments (both realized and unrealized) 0.38 (0.76) 0.57 0.00 (0.04) (0.77) 0.56 0.01 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Total income (loss) from investment operations 0.64 (0.38) 0.96 0.39 0.06 (0.45) 0.89 0.34 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Less distributions Distributions (from net investment income) (0.26) (0.38) (0.39) (0.38) (0.10) (0.32) (0.33) (0.33 Distributions (in excess of net investment income) (0.04) 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Total distributions (0.30) (0.38) (0.39) (0.38) (0.14) (0.32) (0.33) (0.33 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Net asset value, end of period $7.84 $7.08 $7.65 $7.66 $7.84 $7.07 $7.63 $7.64 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Total return (%)(d) 8.6 (4.9) 13.9 5.3 0.8 (5.8) 12.9 4.6 Ratios/Supplemental data Net assets, end of period (000) $28,938 $30,293 $32,707 $35,972 $1,849 $5,713 $5,617 $7,590 Ratio of operating expenses to average net assets (%)(b) 0.70(c) 0.70 0.70 0.75 1.45(c) 1.45 1.45 1.50 Ratio of net investment income to average net assets (%) 4.88(c) 5.07 5.24 5.18 3.68(c) 4.32 4.49 4.43 Portfolio turnover rate (%) 121 212 167 161 121 212 167 161
(a) The Funds commenced operations on April 23, 1993. Class B shares were first offered on September 13, 1993. (b) Commencing April 23, 1993, expenses were voluntarily limited to 0.70% of Class A average net assets and, effective September 13, 1993, 1.45% of Class B average net assets, in each case through 8/30/96. Effective September 1, 1996 expenses were voluntarily limited to 0.85% of Class A average net assets and 1.60% of Class B average net assets. The ratio of operating expenses to average net assets for Class A shares without giving effect to this expense limitation would have been 1.49% (annualized) for the period April 23, 1993 through December 31, 1993 and 1.33%, 1.31%, 1.34% and ___%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997; the ratio of operating expenses to average net assets for Class B shares would have been 2.24% (annualized) for the period September 13, 1993 through December 31, 1993 and 2.08%, 2.06%, 2.09% and __%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997. (c) Computed on an annualized basis. (d) A sales charge of 2.50% (maximum) in the case of the Class A shares and a contingent deferred sales charge in the case of the Class B shares are not reflected in total return calculations. Periods of less than one year are not annualized. 3 New England Tax Free Income Fund of New York
Class A Class B ---------------------------------------------- ------------------------------------------- April 23(a) Sept.13(a) through Year Ended December 31, through Year Ended December 31, Dec. 31, ---------------------------------- Dec. 31, -------------------------------- 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 ------ ------ ------ -------------- ------ ------ ----------------------- Net asset value, beginning of period $7.50 $7.76 $7.07 $7.68 $7.85 $7.76 $7.06 $7.67 ------ ------ ------ -------------- ------ ------ ----------------------- Income from investment operations Net investment income 0.26 0.37 0.38 0.39 0.10 0.32 0.33 0.34 Net gains or losses on investments (both realized and unrealized) 0.29 (0.68) 0.62 (0.05) (0.05) (0.69) 0.62 (0.06) ------ ------ ------ -------------- ------ ------ ----------------------- Total income (loss) from investment operations 0.55 (0.31) 1.00 0.34 0.05 (0.37) 0.95 0.28 ------ ------ ------ -------------- ------ ------ ----------------------- Less distributions Distributions (from net investment income) (0.25) (0.38) (0.39) (0.38) (0.10) (0.33) (0.34) (0.33) Distributions (in excess of net investment income) (0.04) 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 ------ ------ ------ -------------- ------ ------ ----------------------- Total distributions (0.29) (0.38) (0.39) (0.38) (0.14) (0.33) (0.34) (0.33) ------ ------ ------ -------------- ------ ------ ----------------------- Net asset value, end of period $7.76 $7.07 $7.68 $7.64 $7.76 $7.06 $7.67 $7.62 ====== ====== ====== ============== ====== ====== ======================= Total return(%)(d) 7.4 (4.1) 14.5 4.6 0.5 (4.9) 13.7 3.7 Ratios/Supplemental data Net assets, end of period (000) $21,122 $15,875 $16,388 $18,854 $555 $1,152 $1,718 $2,154 Ratio of operating expenses to average net assets (%)(b) 0.70(c) 0.70 0.70 0.75 1.45(c) 1.45 1.45 1.50 Ratio of net investment income to average net assets (%) 4.88(c) 5.13 5.18 5.15 3.68(c) 4.38 4.43 4.40 Portfolio turnover rate (%) 121 219 155 99 121 219 155 99
(a) The Funds commenced operations on April 23, 1993. Class B shares were first offered beginning September 13, 1993. (b) Commencing April 23, 1993, expenses were voluntarily limited to 0.70% of Class A average net assets and, effective September 13, 1993, 1.45% of Class B average net assets, in each case through 8/30/96. Effective September 1, 1996 expenses were voluntarily limited to 0.85% of Class A average net assets and 1.60% of Class B average net assets. The ratio of operating expenses to average net assets for Class A shares without giving effect to the expense limitations would have been 2.11% (annualized) for the period April 23, 1993 through December 31, 1993, and 1.79%, 1.88%, 1.93% and ___%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997. The ratio of operating expenses to average net assets for Class B shares would have been 2.86% (annualized) for the period September 13, 1993 through December 31, 1993, and 2.54 %, 2.63%, 2.68% and ___%, respectively, for the years ended December 31, 1994, 1995, 1996 and 1997. (c) Computed on an annualized basis. (d) A sales charge of 2.50% (maximum) in the case of the Class A shares and a contingent deferred sales charge in the case of the Class B shares are not reflected in total return calculations. Periods of less than one year are not annualized. 4 - -------------------------------------------------------------------------------- INVESTMENT STRATEGY - -------------------------------------------------------------------------------- How the Funds Pursue Their Objectives The Funds invest primarily in the tax exempt securities of their named state ("State Tax Exempt Securities"), which are described below. The law of each Fund's named state provides that, to the extent distributions by a Fund are derived from interest on State Tax Exempt Securities, they shall be exempt from that state's personal income taxes and, in the case of the New York Fund, from New York City income tax (other than the possible incidence of any alternative minimum taxes). It is a fundamental policy of each Fund that at least 80% of its income distributions will be exempt from federal income tax, from personal income taxes of its named state and, in the case of the New York Fund, from New York City income tax, except during times of adverse market conditions when a Fund is investing for temporary defensive purposes (in which case more than 20% of a Fund's income distributions could be subject to federal income tax and/or personal income taxes of its named state and, in the case of the New York Fund, New York City income tax). Each Fund currently expects that at least 90% of its income each year will be exempt from federal income taxes, the personal income tax of its named state and, in the case of the New York Fund, from New York City income tax. The Funds may invest in "private activity bonds," which pay interest that, although exempt from ordinary income taxes, may be subject to federal or state alternative minimum taxes. It is a fundamental policy of each Fund that distributions of interest income on such bonds, together with distributions of interest income from investments other than State Tax Exempt Securities (including any income subject to federal alternative minimum tax), will not normally exceed 20% of the total amount of the Fund's income distributions. The Funds currently do not expect such distributions to exceed 10% of the total amount of each Fund's income distributions. The Funds may invest up to 5% of their respective assets in so-called "inverse-floating obligations" or "residual interest bonds." Securities purchased by the Funds will be largely of investment grade quality. At least 85% of each Fund's assets will consist of securities rated (at the time of investment) AAA, AA, A or BBB by Standard & Poor's Ratings Group ("S&P") or Fitch Investor Services, Inc. ("Fitch") or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"), or that are not rated by S&P, Fitch or Moody's but that are determined by Back Bay Advisors(R), L.P. ("Back Bay Advisors"), the Funds' subadviser, to be of comparable quality to securities in those rating categories. The other 15% of each Fund's assets may be invested in securities rated below investment grade (below BBB or Baa) or unrated securities that the subadviser determines are of comparable quality to bonds rated below BBB or Baa. Bonds rated BBB or Baa are considered investment grade but may have speculative characteristics. See "Investment Risks -- Lower Quality Fixed-Income Securities" for more information about these bonds. Each Fund may invest in bonds rated in the lowest rating categories, D by S&P or Fitch or C by Moody's. These classes of bonds can be regarded as having extremely poor prospects of ever attaining any real investment standing. Although the Funds' investment objectives refer to preservation of capital, the net asset values of the Funds' shares will fluctuate based on changes in prevailing market rates and other factors. The California Fund will ordinarily seek to maintain an average dollar-weighted maturity of three to ten years. The New York Fund will not seek to maintain any particular average dollar-weighted maturity. "Duration" is a commonly used measure of the price responsiveness of a fixed-income security or a portfolio of fixed-income securities to an interest rate change (i.e., the change in price one can expect from a given change in yield). Many investors and investment analysts consider duration to be a more useful measure of price sensitivity than "maturity." The prices (i.e., values) of securities having shorter durations generally fluctuate less than those of securities with longer durations. The New York Fund will not seek to maintain any particular average portfolio duration. The greater the average duration the greater the risk of loss an investor will face due to rising interest rates. For example, a 1% increase in interest rates would be expected to result in a price decrease of approximately 6% for a portfolio with an average duration of six years and a price decrease of 8% for a portfolio with an average duration of eight years. Conversely, a 1% decrease in interest rates would be expected to result in similar increases in value. These expectations represent Back Bay Advisors' estimate of portfolio volatility based 6 upon historic data collected under a wide variety of market conditions, but there is no assurance that actual volatility will be consistent with such expectations. For temporary purposes (such as pending new investments), for liquidity purposes (such as to meet repurchase or redemption obligations, or to pay expenses), or for temporary defensive purposes, a Fund may invest in taxable obligations such as obligations of the U.S. Government, its agencies or instrumentalities, other debt securities rated within the four highest grades by either Moody's, S&P or Fitch, commercial paper rated in the two highest grades by either of such rating services, certificates of deposit, bankers acceptances and repurchase agreements. A Fund may also hold its assets in other cash equivalents or in cash. The Funds may also purchase and sell interest rate futures contracts and tax exempt bond index futures contracts and may write and purchase related options. The Funds expect that transactions involving futures and options on futures will help to reduce the volatility of the Funds' net asset values, although these results cannot be assured. Although the yield of a tax-exempt fund generally will be lower than that of a taxable income fund, the net after-tax return to investors may be greater. The following table illustrates what tax-free investing can mean for you. The following table does not take into account the effect of income taxes on social security benefits which may arise as a result of receiving tax-exempt income, or any alternative minimum tax. Also, a portion of the Funds' distributions may consist of ordinary income, short-term capital gain, or long-term capital gain, (i.e., "20% Rate Gain" or 28% Rate Gain") and will be taxable to you as such. The following table shows, for different assumed levels of taxable income and marginal tax rates, the equivalent taxable yield that would be required to achieve certain levels of tax-exempt yield. Yields shown do not represent actual yields achieved by the Funds and are not intended as a prediction of future yields. TAX FREE INVESTING [THE FOLLOWING CHARTS WILL BE UPDATED FOR 1998] California Fund
1997 Combined Taxable Income* Federal and If Tax Exempt Yield is - --------------------------------------------- California ------------------------------------------------------- Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00% Return ($) Return ($) Tax Rate** then the Equivalent Taxable Yield would be: - -------------------------------------------------------------------------------------------------------------------- 11,633 - 18,357 23,265 - 36,714 18.40% 4.90% 6.13% 7.35% 8.58% 9.80% 18,358 - 24,650 36,715 - 41,200 20.10% 5.01% 6.26% 7.51% 8.76% 10.01% 24,651 - 25,484 41,201 - 50,968 32.32% 5.91% 7.39% 8.87% 10.34% 11.82% 25,485 - 32,207 50,969 - 64,414 33.76% 6.04% 7.55% 9.06% 10.57% 12.08% 32,208 - 59,750 64,415 - 99,600 34.70% 6.13% 7.66% 9.19% 10.72% 12.25% 59,751 - 111,695 99,601 - 151,750 37.42% 6.39% 7.99% 9.59% 11.19% 12.78% 111,696 - 124,650 37.90% 6.44% 8.05% 9.66% 11.27% 12.88% 151,751 - 223,390 41.95% 6.89% 8.61% 10.34% 12.06% 13.78% 124,651 - 223,390 223,391 - 271,050 42.40% 6.94% 8.68% 10.42% 12.15% 13.89% 223,391 - 271,050 43.04% 7.02% 8.78% 10.53% 12.29% 14.04% 271,051 - 446,780 45.64% 7.36% 9.20% 11.04% 12.88% 14.72% over - 271,050 over - 446,780 46.24% 7.44% 9.30% 11.16% 13.02% 14.88%
New York Fund
1997 Combined Taxable Income* Federal and If Tax Exempt Yield is - --------------------------------------------- New York ------------------------------------------------------- Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00% Return ($) Return ($) Tax Rate** then the Equivalent Taxable Yield would be: - -------------------------------------------------------------------------------------------------------------------- 8,001 - 11,000 16,001 - 22,000 18.83% 4.93% 6.16% 7.39% 8.62% 9.86% 11,001 - 13,000 22,001 - 26,000 19.46% 4.97% 6.21% 7.45% 8.69% 9.93% 13,001 - 20,000 26,001 - 40,000 20.02% 5.00% 6.25% 7.50% 8.75% 10.00% 20,001 - 24,650 40,001 - 41,200 20.82% 5.05% 6.31% 7.58% 8.84% 10.10% 24,651 - 59,750 41,201 - 99,600 32.93% 5.96% 7.46% 8.95% 10.44% 11.93%
7
59,751 - 124,650 99,601 - 151,750 35.73% 6.22% 7.78% 9.34% 10.89% 12.45% 124,651 - 271,050 151,751 - 271,050 40.38% 6.71% 8.39% 10.06% 11.74% 13.42% over - 271,050 over - 271,050 43.74% 7.11% 8.89% 10.66% 12.44% 14.22%
8
1997 Combined Federal and New York Taxable Income* State and If Tax Exempt Yield is**** - --------------------------------------------- City -------------------------------------------------------- Single Joint Marginal 4.00% 5.00% 6.00% 7.00% 8.00% Return ($) Return ($) Tax Rate*** then the Equivalent Taxable Yield would be: - -------------------------------------------------------------------------------------------------------------------- 8,001 - 11,000 16,001 - 21,600 21.81% 5.12% 6.39% 7.67% 8.95% 10.23% 11,001 - 12,000 21,601 - 22,000 22.45% 5.16% 6.45% 7.74% 9.03% 10.32% 12,001 - 13,000 22,001 - 26,000 23.11% 5.20% 6.50% 7.80% 9.10% 10.40% 13,001 - 20,000 26,001 - 40,000 23.66% 5.24% 6.55% 7.86% 9.17% 10.48% 20,001 - 24,650 40,001 - 41,200 24.47% 5.30% 6.62% 7.94% 9.27% 10.59% 24,651 - 25,000 41,201 - 45,000 36.02% 6.25% 7.81% 9.38% 10.94% 12.50% 25,001 - 50,000 45,001 - 90,000 36.07% 6.26% 7.82% 9.38% 10.95% 12.51% 50,001 - 59,750 90,001 - 99,600 36.12% 6.26% 7.83% 9.39% 10.96% 12.52% 59,751 - 124,650 99,601 - 151,750 38.78% 6.53% 8.17% 9.80% 11.43% 13.07% 124,651 - 271,050 151,751 - 271,050 43.21% 7.04% 8.81% 10.57% 12.33% 14.09% over - 271,050 over - 271,050 46.41% 7.46% 9.33% 11.20% 13.06% 14.93%
* This amount represents taxable income as defined in the Internal Revenue Code of 1986, as amended. It is assumed that taxable income as defined in the Internal Revenue Code of 1986, as amended, is the same as under the New York State, New York City or California Personal Income Tax law; however, New York State, New York City or California taxable income may differ due to differences in exemptions, itemized deductions and other items. ** For federal tax purposes, these combined rates reflect the applicable marginal rates for 1997, indexing for inflation. These rates include the effect of deducting state taxes on your Federal return. *** For federal tax purposes, these combined rates reflect the applicable marginal rates for 1997, including indexing for inflation. These rates include the effect of deducting state and city taxes on your Federal return. For New York purposes, these combined rates reflect the expected New York State and City tax and surcharge rates for 1997. **** These represent New York State, City and Federal tax equivalent yields. State Tax Exempt Securities State Tax Exempt Securities are debt obligations issued by a Fund's named state and its respective political subdivisions (for example, counties, cities, towns, villages, districts and authorities), the interest from which is, in the opinion of bond counsel, exempt from both federal income tax and personal income taxes of the relevant state and, in the case of the New York Fund, New York City personal income taxes (other than the possible incidence of any alternative minimum taxes). State Tax Exempt Securities are issued to obtain funds for various public purposes, such as the construction of public facilities, the payment of general operating expenses, the refunding of outstanding debts, or the lending of funds to public or private institutions for the construction of housing, educational or medical facilities. They may also include certain types of industrial development bonds or private activity bonds issued by public authorities to finance privately owned or operated facilities. State Tax Exempt Securities also include debt obligations issued by other governmental entities (for example, U.S. possessions such as Puerto Rico) if such debt obligations generate interest income that is exempt from federal income taxes, the relevant state's personal income taxes and, in the case of the New York Fund, New York City income taxes. The two principal classifications of State Tax Exempt Securities are general obligation and limited obligation (limited purpose or revenue) bonds. General obligation bonds involve the credit of an issuer possessing taxing power and are payable from the issuer's general unrestricted revenues. Their payment may depend on an appropriation by the issuer's legislative body. The characteristics and methods of enforcement of general obligation bonds vary according to the law applicable to the particular issuer. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities, or a specific revenue source, and generally are not payable from the unrestricted revenues of the issuer. Industrial development and private activity bonds are in most cases limited obligation bonds, the creditworthiness of which is directly related to that of the user of the facilities. Although the California Fund will maintain an average portfolio maturity in the intermediate range, either Fund may be primarily invested in short-term State Tax Exempt Securities when yields on such securities are greater than yields available on long-term State Tax Exempt Securities, to stabilize net asset value or for temporary defensive purposes. Also included within the general category of State Tax Exempt Securities are participants in lease obligations or installment purchase contract obligations ("lease obligations") of municipal authorities or entities. Although lease obligations do not 9 constitute general obligations of the municipality for which the municipality's taxing power is pledged, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In addition to the "non-appropriation" risk, these securities represent a relatively new type of financing and may not be as marketable as more conventional securities. Although "non-appropriation" lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult. In addition, the tax treatment of such obligations in the event of non-appropriation is unclear. The Funds' investments, if any, in these securities will be subject to procedures adopted by the trustees of the Trust from time to time. State Tax Exempt Securities may have fixed or variable interest rates. Each Fund may purchase floating and variable rate demand notes, which are securities normally having a stated maturity in excess of one year, but which permit the holder to tender the notes for purchase at the principal amount thereof. The interest rate on a floating rate demand note is based on a known lending rate, such as a bank's prime rate, and is adjusted periodically based on changes in such lending rate. The interest rate on a variable rate demand note is adjusted at specified intervals. There generally is no secondary market for these notes, although they may be tendered for redemption at face value. In some cases, the Funds must give more than seven days' notice before tender. Variable rate demand notes with such a notice feature are "illiquid securities" for purposes of the policy limiting the Funds' investments in illiquid securities to 15% of net assets. 10 - -------------------------------------------------------------------------------- INVESTMENT RISKS - -------------------------------------------------------------------------------- It is important to understand the following risks inherent in a Fund before you invest. o General The value of a Fund's investments will change as the general level of interest rates fluctuates. During periods of falling interest rates, the values of fixed-income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. The value of a Fund's shares will fluctuate with the value of its investments. Certain State Tax Exempt Securities which may be held by a Fund may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem State Tax Exempt Securities held by a Fund during a time of declining interest rates, that Fund may not be able to reinvest the proceeds in tax-exempt securities providing as high a level of investment return as the securities redeemed. During a period of declining interest rates, many of each Fund's portfolio investments will likely bear coupon rates which are higher than current market rates, regardless of whether such securities were originally purchased at a premium. Such securities would generally carry market values greater than the principal amounts payable on maturity, which would be reflected in the net asset value of each Fund's shares. The value of such "premium" securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching a call date). As a result, an investor who holds shares of a Fund during such periods would initially receive higher monthly distributions (derived from the higher coupon rates payable on such Fund's investments) than might be available from alternative investments bearing current market interest rates, but may face an increased risk of capital loss as these higher coupon securities approach maturity (or the call date). In evaluating the potential performance of an investment in each Fund, investors may find it useful to compare each Fund's current dividend rate with that Fund's "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "Fund Details -- Performance Criteria." o State Tax Exempt Securities A Fund's ability to achieve its investment objective depends on the ability of its named state and its political subdivisions to meet their continuing obligations to pay principal and interest. Since the Funds invest primarily in State Tax Exempt Securities, the value of a Fund's shares may be especially affected by factors pertaining to the economy of a Fund's named state and other factors specifically affecting the ability of that state (and its political subdivisions) to meet their obligations. As a result, the value of a Fund's shares may fluctuate more widely than the value of shares of a portfolio investing in securities relating to a number of different states. The ability of a state and its political subdivisions to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amount of tax and other revenues available to governmental issuers of State Tax Exempt Securities may be affected from time to time by economic, political and demographic conditions within the relevant state. In addition, constitutional or statutory restrictions may limit a government's power to raise revenues or increase taxes. The availability of federal, state and local aid to an issuer of State Tax Exempt Securities may also affect that issuer's ability to meet its obligations. Payments of principal and interest on limited obligation securities will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made, which in turn could be affected by economic, political and demographic conditions in a Fund's named state or a particular locality. Any reduction in the actual or perceived ability of an issuer of State Tax Exempt Securities to meet its obligations (including a reduction in the rating of its outstanding securities) would likely affect adversely the market value and marketability of its obligations and could affect adversely the values of State Tax Exempt Securities of other issuers as well. The amount of publicly-available information about the financial condition of an issuer of State Tax Exempt Securities may not be as extensive as that which is made available by corporations whose securities are publicly traded. As a result, monitoring the credit-worthiness of issuers of State Tax Exempt Bonds may be more difficult than with corporate bonds. Investing in New York. New York suffered significant adverse effects from the disruption of financial markets in the late 1980s and the most recent recession. These effects included the loss of substantial numbers of jobs, declining real estate values and reduced tax receipts. Future weakness in the economy generally, or in those sectors that are especially important to the New York economy (such as financial services), could adversely affect the credit ratings and creditworthiness of State Tax Exempt Securities of New York issuers, which in turn could adversely affect the value of an investment in the New York Fund. 11 Investing in California. Although California has the largest and one of the most diversified economies of any state, it has suffered significant adverse effects from the most recent recession and from the continuing weakness of certain key industries, such as the defense and aerospace industries. Among these effects are significant job losses, declining real estate values and reduced tax receipts. Continued or future weakness in the economy generally or in those sectors that are especially important to the California economy could adversely affect the credit ratings and creditworthiness of State Tax Exempt Securities of California issuers, which in turn could adversely affect the value of an investment in the California Fund. Back Bay Advisors believes that, in general, the secondary market for State Tax Exempt Securities is less liquid than that for many other fixed-income securities. Accordingly, the ability of a Fund to buy and sell securities may be limited. o Options and Futures The Funds may purchase and sell financial futures contracts and options for hedging purposes. Futures contracts on a Municipal Bond Index are traded on the Chicago Board of Trade. This index is intended to represent a numerical measure of market performance for long-term tax exempt bonds. An "index future" is a contract to buy or sell units of a particular securities index at an agreed price on a specified future date. Depending on the change in value of the index between the time when a Fund enters into and terminates an index futures contract, such Fund will realize a gain or loss. The Funds may purchase and sell futures contracts on this index (or any other tax-exempt bond index approved for trading by the Commodity Futures Trading Commission) to hedge against general changes in market values of State Tax Exempt Securities which the Funds own or expect to purchase. The Funds may also purchase and sell put and call options on index futures, or on an index directly, in addition to or as an alternative to purchasing and selling financial futures contracts. The Funds may also, for hedging purposes, purchase and sell futures contracts and options with respect to U.S. Treasury securities, including U.S. Treasury bills, notes and bonds. Treasury security futures and related options would be used in a way similar to the Funds' use of index futures and related options. The Funds will purchase or sell Treasury security futures or related options only when, in the opinion of Back Bay Advisors, price movements in Treasury security futures and related options are likely to correlate closely with price movements in the State Tax Exempt Securities which are the subject of the hedge. The use of futures and options may result in taxable income or capital gains and involves certain special risks. Futures and options transactions involve costs and may result in losses. The successful use of futures and options will usually depend on Back Bay Advisors' ability to forecast interest rate movements correctly. The Funds' ability to hedge their portfolio positions through Treasury security futures and options also depends on the degree of correlation between the municipal bond index or U.S. Treasury security underlying the futures or options purchased and sold by the Funds and the State Tax Exempt Securities that are the subject of the hedge. The successful use of futures and options also depends on the availability of a liquid secondary market to enable the Funds to close their positions on a timely basis. There can be no assurance that such a market will exist at a particular time. 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 and options transactions. A Fund will not purchase or sell futures contracts or related options if, as a result, the sum of initial margin deposits on a Fund's existing futures contracts and options plus premiums paid for outstanding options on futures contracts would exceed 5% of the Fund's net assets. (For options that are "in-the-money" at the time of purchase, the amount by which the option is "in-the-money" is excluded from this calculation.) A more detailed explanation of futures and options transactions and the risks associated with them is included in Part II of the Statement. o Lower Quality Fixed-Income Securities Lower quality fixed-income securities generally provide higher yields than higher quality securities, but are subject to greater credit and market risk. 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 fund investing in lower quality fixed-income securities may be more dependent on the fund's subadviser's own credit analysis than is the case 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 quality fixed-income securities. This lack of liquidity at certain times may affect the valuation of these securities and may make the valuation and sale of these securities more difficult. Securities below investment grade quality are considered high yield, high risk securities and are commonly known as "junk bonds." During the fiscal year ended December 31, 1997, __% and __% of the average month-end net assets of the California Fund and the New 12 York Fund, respectively, were invested in fixed-income securities rated in the rating categories below investment grade (BBB/Baa). For more information, including a detailed description of the ratings assigned by S&P, Fitch and Moody's, please refer to the Statement's "Appendix A -- Description of Bond Ratings." o Miscellaneous Each Fund reserves the right to enter into repurchase agreements. Under a repurchase agreement, the Fund buys securities from a seller, usually a bank or brokerage firm, with the understanding that the seller will repurchase the securities at a higher price at a later date. 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. These transactions must be fully collateralized at all times, but may involve some credit risk to the Fund. A Fund may also purchase securities for future delivery (i.e., forward commitments), which may increase its overall investment exposure. Part II of the Statement contains more detailed information about these transactions and about limitations designed to reduce the risks associated with them. Each Fund is "non-diversified" and as such is not required to meet any diversification requirements under the Investment Company Act of 1940, as amended (the "1940 Act"), although each Fund must meet certain diversification standards to qualify as a regulated investment company under the Code. Since the Funds may invest a relatively high percentage of their assets in the obligations of a limited number of issuers, each Fund may be more susceptible than a more widely-diversified fund to any single economic, political or regulatory occurrence. In periods of rapidly fluctuating interest rates, there may be frequent changes in investments. From time to time, consistent with its investment objective, each Fund may also trade securities for the purpose of seeking short-term profits. A change in the securities held by the Funds is known as "portfolio turnover." Portfolio turnover generally involves some expense to the Funds, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. To the extent that such sales result in net realized capital gains, shareholders ordinarily are taxed on such gains at applicable income tax rates. Back Bay Advisors expects that the Funds' turnover rates may exceed 100% annually. Recent portfolio turnover rates for the Funds are set forth above under "Financial Highlights." 13 - -------------------------------------------------------------------------------- FUND MANAGEMENT - -------------------------------------------------------------------------------- New England Funds Management, L.P. ("NEFM"), 399 Boylston Street, Boston, Massachusetts 02116, serves as the Funds' adviser. NEFM oversees, evaluates and monitors Back Bay Advisors' provision of subadvisory services to the Funds and provides general business management and administration to the Funds. NEFM was organized in 1995 and also serves as adviser to most of the other New England Funds. NEFM does not determine what investments will be purchased by the Funds. The Funds' subadviser is Back Bay Advisors, 399 Boylston Street, Boston, Massachusetts 02116. Subject to overall supervision by NEFM and the Trust's trustees, Back Bay Advisors furnishes a continuous investment program for each Fund and recommends what securities should be purchased or sold by each Fund. Back Bay Advisors provides discretionary investment management services to mutual funds and other institutional investors. Formed in 1986, Back Bay Advisors now manages ___ mutual fund portfolios and over $__ billion of securities. James S. Welch, Vice President of Back Bay Advisors, has served as the portfolio manager of the Funds since their inception in April 1993. Each Fund pays NEFM a management fee at the annual rate of 0.525% of the first $200 million of such Fund's average daily net assets, 0.500% of the next $300 million of such assets and 0.475% of such assets in excess of $500 million. NEFM has agreed, however, to reduce its fees, and, if necessary, to bear certain expenses associated with operating the Funds in order to limit each Fund's expenses to an annual rate of 0.85% of the average daily net assets of the Fund's Class A shares and 1.60% of the average daily net assets of the Fund's Class B shares. NEFM may terminate these voluntary agreements at any time. In that event the Funds would supplement their prospectus. NEFM pays Back Bay Advisors for providing subadvisory services to each Fund a subadvisory fee at the annual rate of 0.2625% of the first $200 million of each Fund's average daily net assets, 0.2500% of the next $300 million of such assets and 0.2375% of such assets in excess of $500 million. The Funds pay no direct fees to Back Bay Advisors. The transfer and dividend paying agent for the funds is New England Funds Service Corporation ("NEFSCO"), 399 Boylston Street, Boston, Massachusetts 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, Back Bay Advisors and the Distributor, 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. In placing portfolio transactions for the Funds, Back Bay Advisors seeks the most favorable price and execution available. Subject to applicable regulatory restrictions and such policies as the Trust's trustees may adopt, Back Bay Advisors may consider sales of shares of the Funds and shares of the other mutual funds it manages as a factor in the selection of broker-dealers to effect portfolio transactions for the Funds. See "Portfolio Transactions and Brokerage" in Part II of the Statement. The Trust's Board of Trustees supervises the affairs of the Funds as conducted by NEFM and Back Bay Advisors. 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. 14 - -------------------------------------------------------------------------------- BUYING FUND SHARES - -------------------------------------------------------------------------------- Minimum Investment $2,500 is the minimum for an initial investment in either Fund and $100 is the minimum for each subsequent investment. There are special initial investment minimums for the following plans: o $100 on initial and subsequent investments for automatic investing through the Investment Builder program. 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 6 Ways to Buy Fund Shares You may purchase 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. 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 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. 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. 15 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 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. 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 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. o By Exchange from Another New England Fund: You may also purchase shares of the Funds 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. 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. 16 Sales Charges The Funds offer two classes of shares: 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. 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 $100,000 2.50% 2.56% 2.15% $100,000 - $249,999 2.00% 2.04% 1.70% $250,000 - $499,999 1.50% 1.52% 1.25% $500,000 - $999,999 1.25% 1.27% 1.00% $1,000,000 or more None None * * 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 the excess over $3 million. These commissions are not payable if the purchase represents the reinvestment of a redemption made during the previous 12 calendar months. ** A 1.5% sales charge applies to investments of less than $500,000 of distributions from unit investment trusts. The dealer concession is 1.5% on these sales. - -------------------------------------------------------------------------------- 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). - -------------------------------------------------------------------------------- Contingent Deferred Sales Charge (Class A shares only). For purchases of $1,000,000 or more of Class A shares of either Fund, a CDSC, at the rate of 1% of the lesser of the purchase price or the net asset value at the time of redemption, applies to redemptions within one year after the shares were purchased. 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 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. - -------------------------------------------------------------------------------- Choosing Between Class A and B Shares Whether you purchase Class A or Class B shares depends on your investing goals. If you qualify for a reduced sales charge, or invest for the long term, you might consider purchasing Class A. Class A shares have lower annual fees and as a result, pay higher dividends per share. If you make a smaller investment, you might consider Class B shares since 100% of your purchasing dollars are invested immediately and the amount of your deferred sales charge diminishes over time. Consult your financial representative for help in deciding which class is appropriate for you. - -------------------------------------------------------------------------------- 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 another series of the Trusts. If the exchange is made to Class B shares of a Money Market Fund, then the holding period will stop and 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 17 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. Contingent Deferred Sales Charge as a Percentage of Dollar Year Since Purchase Amount 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," 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 2.75% and advances the first year's service fee (up to 0.25%) on purchases of Class B shares. Deciding Which Class to Purchase The decision as to whether Class A or Class B 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. Investors making smaller investments might consider Class B shares because 100% of the purchase price is invested immediately. 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 charge 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 to 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, no CDSC applies to certain withdrawals pursuant to a Systematic Withdrawal Plan. See "Selling Fund Shares -- 5 Ways to Sell Fund Shares -- By Systematic Withdrawal Plan" below. 18 Each Fund receives the net asset value next determined after the 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 the Funds' shares. 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 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 and B 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. 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 the 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 $500,000 may be invested in shares of either Fund at a sales charge of 1.50% of the public offering price (or 1.52% of the net amount invested). The dealer concession (as a percentage of the public offering price) is 1.5% on these sales. o Clients of an adviser or subadviser -- no sales charge or CDSC applies to investments of $100,000 or more in the Funds by 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. 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, and 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. Investors may be charged a fee if they effect transactions through a broker or agent. 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 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 Back Bay 19 Advisors out of their own assets, or may be paid indirectly by the Fund in the form of servicing, distribution or transfer agent fees. 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 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"), 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 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 & Tang Government Securities Trust may exchange their shares of that fund for Class A shares of the Funds at net asset value and without the imposition of a sales charge. The reduction or elimination of the sales charge in connection with sales described above reflects the absence or reduction of expenses associated with such sales. 20 - -------------------------------------------------------------------------------- OWNING FUND SHARES - -------------------------------------------------------------------------------- Exchanging Among New England Funds Class A Shares. Except as indicated in the next two sentences, you may exchange Class A shares of any series of the Trusts (and Class A shares of the Money Market Funds acquired through exchanges from any 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 the 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 them for at least six months; otherwise, sales charges apply to the exchange. 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 the 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. 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, write New England Funds or call New England Funds Personal Access Line(TM) at 1-800-346-5984 twenty-four hours a day. Exchange requests accepted after 4:00 p.m. (Eastern time), or after the Exchange closes if it closes earlier than 4:00 p.m., will be processed at the net asset value determined at the close of regular trading on the next day that the Exchange is open. The exchange must be for a minimum of $1,000 (or the total net asset value of the 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 fund into which you are exchanging. The exchange privilege may be exercised only in those states where shares of such other fund may be legally sold. 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. 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 specific 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 Fund's total net assets. 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. 21 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 22 Fund Dividend Payments The Funds declare dividends daily and pay them monthly. Each Fund pays as dividends substantially all net investment income (tax-exempt and taxable income other than long-term capital gains) each year and distributes annually all net realized long-term capital gains (after applying any available capital loss carryovers). Each Fund distributes net realized short-term capital gains annually. 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 ordinary income 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 the servicing agent 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 a 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. - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- SELLING FUND SHARES - -------------------------------------------------------------------------------- 5 Ways to Sell Fund Shares You may sell 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 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 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. 24 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 Check: Checkwriting is available on Class A shares of the Funds. To elect checkwriting for your account, select the checkwriting option on your application and complete the attached signature card. To add checkwriting to an existing Fund account, please call 1-800-225-5478 for our Service Options Form. The Fund will send you checks drawn on State Street Bank. You will continue to earn dividends on shares redeemed by check until the check clears. Each check must be written for $500 or more. The checkwriting privilege does not apply to shares for which you have requested share certificates to be issued. Checkwriting is not available for investor accounts containing Class A shares subject to a CDSC or Class B shares. If you use withdrawal checks, you will be subject to State Street Bank's rules governing checking accounts. The Funds and the Distributor are in no way responsible for any checkwriting account established with State Street Bank. You may not close your account by withdrawal check because the exact balance of your account will not be known until after the check is received by State Street Bank. 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, a 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 to redemptions under powers of attorney. Please call your investment dealer or the Distributor for more information. Telephone redemptions are not available for Fund shares in certificate form. If certificates have been issued for your investment, you must send them to New England Funds, L.P. 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. 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 the entire proceeds within 120 days after your redemption and 25 notify New England Funds or your investment dealer at the time of reinvestment that you are taking advantage of this privilege. You may reinvest the proceeds either by returning the redemption check or by sending your check for the entire 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. 26 - -------------------------------------------------------------------------------- FUND DETAILS - -------------------------------------------------------------------------------- How Fund Share Price is Determined Back Bay Advisors, under the direction of the Trust's trustees, determines the value of the total net assets of each Fund as of the close of regular trading (ordinarily 4:00 p.m. Eastern time) on the Exchange each day the Exchange is open. Securities for which market quotations are readily available are generally valued at market value on the basis of market quotations. In all other cases, the value of a Fund's assets is determined in good faith by Back Bay Advisors, or by a pricing service selected by it, subject to the general supervision of the trustees of the Trust. The net asset value per share of each class is determined by dividing the value of the assets of the Fund attributable to such class, less all liabilities (including accrued expenses) attributable to such class, by the number of shares of the class outstanding. The public offering price of a Fund's Class A shares is determined by adding the applicable sales charge to the net asset value. See "Buying Fund Shares -- Sales Charges" above. The public offering price of Class B shares is the net asset value per share. The exact price you pay for a share will be determined by the next set of calculations made after your order is accepted by the Distributor. 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 shares is the NAV. Income Tax Considerations The Funds intend to qualify each year as a regulated investment company for federal income tax purposes. The Funds also intend to meet all requirements of the Code necessary to ensure that they qualify to pay "exempt-interest dividends," which in general means that a Fund can pass on to shareholders the federal tax-exempt status of interest received by it from obligations paying tax-exempt interest. Such dividends derived from interest on State Tax Exempt Securities are also exempt from state personal income taxes of the relevant state and, in the case of the New York Fund, New York City personal income taxes. For federal income tax, state personal income tax and, in the case of the New York Fund, New York City personal income tax purposes, your proportionate share of taxable dividends derived from a Fund's other net interest income, other ordinary income and short-term capital gains, if any, will be taxable as ordinary income, whether received in cash or additional shares. 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 as such, regardless of how long you have held your Fund shares. However, certain capital gain distributions may qualify for exemption from state personal income taxes of the relevant state. Distributions by the Funds are not eligible for the dividends-received deduction for corporations. In general, any gain realized upon the sale, exchange or redemption 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, as 20% Rate Gain if the shares have been held for more than 18 months, and otherwise as a short-term gain, assuming the shares are held as capital assets. In general, any loss realized upon a taxable disposition of shares will be treated as long-term loss if the shares have been held for more than one year, and otherwise as short-term capital loss. Howeve, losses incurred on the taxable disposition of shares of a Fund held for six months or less will be disallowed as deductions for federal income tax purposes to the extent of exempt-interest dividends received with respect to such shares and thereafter treated as long-term capital, rather than short-term capital losses, 27 to the extent of long-term capital gain distributions received with respect to such shares. Furthermore, no loss will be allowed on the sale of Fund shares to the extent you acquired other shares of the Fund within 30 days prior to the sale of the loss shares or 30 days after such sale. If you receive social security or railroad retirement benefits, you may be taxed on a portion of those benefits as a result of receiving exempt-interest dividends. Also, interest on certain private activity bonds issued after August 7, 1986 is an item of tax preference for purposes of the federal alternative minimum tax at the maximum rate of 28% for individuals and 20% for corporations. If the Funds invest in such private activity bonds, shareholders may become subject to, or have increased liability under, the alternative minimum tax. Exempt-interest dividends are included in "adjusted current earnings" for purposes of computing the alternative minimum tax applicable to corporations. Seventy-five percent of the excess of adjusted current earnings over the amount of income otherwise subject to the alternative minimum tax is added to the corporation's alternative minimum taxable income, potentially giving rise to alternative minimum tax liability. To avoid an excise tax, each Fund intends to distribute prior to calendar year end virtually all its ordinary income earned during that calendar year, and virtually all of the capital gain net income it realized during the twelve months ending October 31, plus any retained amount from the prior year. Distributions declared and payable in October, November or December to shareholders of record on a date in those months and paid the following January will be considered for federal income tax purposes to have been received by shareholders on December 31 of the year in which declared. If at least 95% of each Fund's dividends are "exempt-interest dividends," federal back-up withholding rules do not apply. However, if the percentage for a Fund should ever drop below 95%, the Fund will be required to withhold 31% of all income dividends and capital gain distributions it pays to you if you do not provide a correct, certified taxpayer identification number, if the Fund is notified that you have underreported income in the past, or if you fail to certify to the Fund that you are not subject to such withholding. In addition, the Funds will be required to withhold 31% of the gross proceeds of Fund shares you redeem if you have not provided a correct, certified taxpayer identification number. If you are a tax-exempt shareholder, however, these back-up withholding rules will not apply so long as you furnish the Funds with an appropriate certification. Annually, if you earn more than $10 in taxable income from a Fund, you will receive a Form 1099 from the Fund 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 and alternative minimum tax that may apply to such distributions. Be sure to keep the Form 1099 as a permanent record. A fee may be charged for any duplicate information requested. The foregoing is a summary of certain federal, state and, in the case of the New York Fund, New York City income tax consequences of an investment in the Funds. Shareholders should consult a competent tax adviser as to the effect of an investment in the Funds on their particular federal, state and local tax situations. The Funds' Expenses In addition to the management fee paid to NEFM, each Fund pays all expenses not borne by NEFM, Back Bay Advisors or the Distributor, including, but not limited to, the charges and expenses of the Fund's custodian and transfer agent, independent auditors and legal counsel for the Fund and the Trust's independent trustees, 12b-1 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 MetLife, NELICO, NEFM, Back Bay Advisors or their affiliates, other than affiliated registered investment companies. Under plans adopted pursuant to Rule 12b-1 under the 1940 Act, each Fund pays the Distributor a monthly service fee at the annual rate of 0.25% of the Fund's average daily net assets attributable to its Class A and Class B 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 28 services to investors in shares of the Fund and/or maintenance of shareholder accounts [on a quarterly basis unless other arrangements are made between the Distributor and the securities dealer]. In the case of the Class A shares, the Distributor may also use all or any portion of the fee to pay its expenses in connection with the provision of personal services to investors and/or the maintenance of shareholder accounts. In the case of the Class B shares, the Distributor retains the balance of the service fee as compensation for providing personal services to investors and/or the maintenance of shareholder accounts. In the case of the Class B shares, the Distributor currently 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. Both Funds' Class B shares pay the Distributor a monthly distribution fee at an annual rate not to exceed 0.75% of the average net assets of such Fund's Class B shares. The Distributor may pay up to the entire amount of the distribution 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. The Distributor retains the balance of the distribution fee as compensation for the Distributor's services as distributor of the Class B 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 Fund, (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 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. Performance Criteria Each class may include taxable-equivalent yield, current yield and total return information in advertisements or other written sales material. Each class may show its 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 an 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 imposition of the CDSC relevant to the period of time quoted in the case of Class B shares). Each class may also show total return over other periods, or on an aggregate basis for the period presented, or without deduction of a sales charge or CDSC. If a sales charge or CDSC is not deducted in calculating total return, the class's total return will be higher. Yield is computed in accordance with the SEC's standardized formula by dividing the adjusted net investment income per share earned during a recent 30 day period by the maximum offering price of a share of the relevant class on the last day of the period (reduced by any earned income expected to be declared shortly as a dividend). For this purpose, net investment income is calculated in accordance with SEC regulations and may differ from the class's net investment income as determined for financial reporting purposes. SEC regulations require that net investment income be calculated on a maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. Each class's current dividend rate is based on the class's net investment income as determined for financial statement purposes, which reflects amortization only as to the amount of any premium paid by the Fund for securities. Taxable-equivalent yield is the taxable yield an investor would have to earn to receive the equivalent of the class's yield after payment of federal income tax and state personal income taxes. Taxable-equivalent yield is calculated by adjusting a class's standardized yield for a recent 30 day period, using effective combined federal and state tax rates for individuals. Each class may also present one or more distribution rates in its sales literature. These rates will be determined by annualizing the class's distributions from net investment income and net short-term capital gains over a recent 12-month, 3-month or 30-day period and dividing that amount by the maximum offering price or the net asset value on the last day of such period. If the net asset value rather than the maximum offering price is used to calculate the distribution rate, the rate will be higher. Total return will generally be higher for Class A shares than for Class B shares of the same Fund, because of the higher levels of expenses borne by the Class B 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 shares. All performance information is based on past performance and does not predict future performance. Additional Facts About the Funds 29 o The Trust 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 Funds commenced operations in April 1993. o When you invest in a Fund, you acquire freely transferable shares of beneficial interest that entitle you to receive dividends and to cast a vote for each share you own at shareholder meetings. Shares of a 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 Rule 12b-1 plans, on which only shares of the class to which the particular plan relates are entitled to vote. o The Trust does not hold regular shareholder meetings and will do so only when required by law. Shareholders may remove trustees from office by votes cast at a shareholder meeting or by written consent. o The Trust's trustees have the authority without shareholder approval to issue other classes of shares of the Funds that represent interests in the Funds' portfolios but that have different sales load and fee arrangements. o Except for matters that are explicitly identified as "fundamental" in this prospectus or Part I of the Statement, the investment policies of the Funds may be changed by the trustees of the Trust without shareholder approval and, in most cases, without prior notice. The investment objectives of the Funds are not fundamental. If there is a change in a Fund's objective, shareholders of the Fund should consider whether the Fund remains an appropriate investment in light of their current financial position and needs. o If the balance in your account is less than a minimum dollar amount set by the Trust's trustees from time to time (currently $1,000 for all accounts, except for those indicated below), the Funds 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 to accounts that have fallen below the minimum solely because of fluctuations in a Fund's net asset value. o The Funds' annual reports contain additional performance information and are 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 and Class B structure could be terminated should certain IRS rulings be rescinded. 30 Printed on Recycled Paper XT51-0597 31 [NEW ENGLAND FUNDS LOGO](R) NEW ENGLAND FUNDS(R) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK 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 New England Intermediate Term Tax Free Fund of California (the "California Fund") and New England Tax Free Income Fund of New York (the "New York Fund") (collectively, the "Funds"). 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 (the "Prospectus"). The Statement should be read together with the Prospectus. Investors may obtain a free copy of the Prospectus from New England Funds, L.P., Prospectus Fulfillment Desk, 399 Boylston Street, Boston, MA 02116. 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 a series of New England Funds Trust II (the "Trust"), a registered management investment company that offers a total of seven series. Table of Contents Page ---- Part I Investment Restrictions ii Fund Charges and Expenses iii Ownership of Fund Shares v Investment Performance of the Funds vi Part II Miscellaneous Investment Practices 2 Management of the Trusts 14 Portfolio Transactions and Brokerage 24 Description of the Trusts and Ownership of Shares 31 How to Buy Shares 34 Net Asset Value and Public Offering Price 35 Reduced Sales Charges 36 Shareholder Services 38 Redemptions 42 Standard Performance Measures 44 Income Dividends, Capital Gain Distributions and Tax Status 48 Financial Statements 50 Appendix A - Description of Bond Ratings 51 Appendix B - Publications That May Contain Fund Information 53 Appendix C - Advertising and Promotional Literature 55 Appendix D - Portfolio Composition of the Municipal Income, Bond Income and California Funds 60 Appendix E - Growth Fund of Israel 62 i - -------------------------------------------------------------------------------- INVESTMENT RESTRICTIONS - -------------------------------------------------------------------------------- The following is a description of restrictions on the investments to be made by the Funds. The restrictions marked with an asterisk may not be changed without the vote of a majority of the outstanding voting securities of a Fund. The other restrictions set forth below are not fundamental policies and may be changed by the Trust's Board of Trustees. Except in the case of restriction (12) below, the percentages set forth below and the percentage limitations set forth in the Prospectus will apply at the time of the purchase of a security and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of a purchase of such security. The Investment Company Act of 1940 (the "1940 Act") provides that a "vote of a majority of the outstanding voting securities" of a Fund means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. The Funds may not: (1) With respect to 50% of their total assets, purchase any security (other than U.S. Government securities) if, as a result, more than 5% of a Fund's total assets (taken at current value) would then be invested in securities of a single issuer; *(2) Purchase securities (other than securities of the U.S. Government, its agencies or instrumentalities or State Tax Exempt Securities (as defined in the Prospectus), except obligations backed only by the assets and revenues of nongovernmental users) if as a result of such purchases more than 25% of the value of a Fund's total assets would be invested in any one industry. Governmental issuers of State Tax Exempt Securities are not considered part of any "industry." However, State Tax Exempt Securities backed only by the assets and revenues of nongovernmental users may for this purpose be deemed to be issued by such nongovernmental users, and this 25% limitation would apply to such obligations. Thus, no more than 25% of a Fund's assets will be invested in obligations deemed to be issued by nongovernmental users in any one industry and in taxable obligations of issuers in the same 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 Funds 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 Funds 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 (taking all preferred stock issues of an issuer as a single class and all debt issues of an issuer as a single class) or acquire more than 10% of the outstanding voting securities of an issuer; *(5) Borrow money in excess of 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 a Fund's portfolio securities; ii *(8) Buy or sell oil, gas or other mineral leases, rights or royalty contracts, real estate or commodities or commodity contracts, except that the Funds may buy and sell futures contracts and related options. (This restriction does not prevent the Funds 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 Back Bay Advisors, L.P. ("Back Bay Advisors") or accounts under its management to reduce brokerage commissions, to average prices among them or to facilitate such transactions is not considered a trading account in securities for purposes of this restriction); (11) Write, purchase or sell options, except that the Funds may (a) write, purchase and sell put and call options on securities, securities indices or financial futures contracts and (b) enter into currency forward contracts; (12) Invest more than 15% of their respective 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). *(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 the Trust'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. - -------------------------------------------------------------------------------- FUND CHARGES AND EXPENSES - -------------------------------------------------------------------------------- MANAGEMENT FEES Pursuant to separate advisory agreements, each dated August 30, 1996, New England Funds Management, L.P. ("NEFM") has agreed, subject to the supervision of the Board of Trustees of the Trust, to manage the investment and reinvestment of the assets of the Funds and to provide a range of administrative services to the Funds. For the services described in the advisory agreements, each Fund has agreed to pay NEFM a management fee at the annual rate of 0.525% of the first $200 million of the Fund's average daily net assets, 0.50% of the next $300 million of such assets and 0.475% of such assets in excess of $500 million. The advisory agreements each provide that NEFM may delegate its responsibilities thereunder to other parties. Pursuant to separate subadvisory agreements, each dated August 30, 1996, NEFM has delegated responsibility for managing the investment and reinvestment of each Fund's assets to Back Bay Advisors, as subadviser. For providing such subadvisory services to the Funds, NEFM pays Back Bay Advisors a subadvisory fee at the annual rate of 0.2625% of the first $200 million of each Fund's average daily net assets, 0.25% of the next $300 million of such assets and 0.2375% of such assets in excess of $500 million. The Funds pay no direct fees to Back Bay Advisors. From January 2, 1996 to August 30, 1996, NEFM served as adviser and Back Bay Advisors served as subadviser to the Funds under separate advisory and separate subadvisory agreements providing for management fees and subadvisory fees at the same rates as are currently in effect for the Funds. Prior to January 2, 1996, Back Bay Advisors served as adviser to the Funds pursuant to separate advisory agreements, each of which provided for an advisory fee payable by the Fund to Back Bay Advisors at the annual rate of 0.40% of the iii first $200 million of the Fund's average daily net assets, 0.375% of the next $300 million of such assets and 0.35% of such assets in excess of $500 million. Back Bay Advisors' compensation under such advisory agreements was subject to reduction to the extent that in any year a Fund's expenses, including Back Bay Advisors' fee, but exclusive of brokerage commissions, taxes, interest, distribution expenses and extraordinary items, exceeded any expense limitation on investment company expenses imposed by any statute or regulatory authority of any jurisdiction in which shares of the Fund were qualified for offer and sale. Prior to January 2, 1996, under administrative services agreements between each of the Funds and New England Funds, L.P. (the "Distributor"), the Funds' distributor, the Distributor provided the Funds with office space, facilities and equipment, services of executive and other personnel and certain administrative services. Under these agreements, each Fund paid the Distributor a fee at the annual rate of 0.125% of the Fund's average daily net assets. The Funds' current management fee rate represents the sum of the fee rates payable under the prior advisory and administrative services agreements. NEFM and the Distributor have voluntarily agreed for an indefinite period to reduce their fees and, if necessary, to bear certain expenses associated with operating the Funds in order to limit each Fund's expenses to an annual rate of 0.85% of the daily average net assets attributable to the Fund's Class A shares and 1.60% of such assets attributable to the Fund's Class B shares. Prior to September 1, 1996 these limits were 0.70% and 1.45% for Class A shares and Class B shares, respectively. Prior to January 2, 1996, similar voluntary limitations were in effect with respect to Back Bay Advisors, the Distributor and each Fund, in addition to the contractual expense limitations described above. As a result of voluntary expense limitations in effect, the Funds paid Back Bay Advisors and NEFM no advisory or management fees for the fiscal years ended December 31, 1995, 1996 and 1997. Had the voluntary limitations for the California Fund not been in effect, Back Bay Advisors would have been paid $150,341 in advisory fees by the Fund for the fiscal year ended December 31, 1995 and NEFM would have been paid $210,469 and $________, respectively, in management fees for the fiscal years ended December 31, 1996 and 1997. Had the voluntary limitations for the New York Fund not been in effect, Back Bay Advisors would have been paid $70,795 in advisory fees by the Fund for the fiscal year ended December 31, 1995 and NEFM would have been paid $100,284 and $_______, respectively, in management fees for the fiscal years ended December 31, 1996 and 1997. For the fiscal years ended December 31, 1996 and 1997, NEFM paid Back Bay Advisors $-0- and $_____, respectively, in subadvisory fees for the New York Fund, after voluntary expense limitations. Had the voluntary limitations not been in effect, Back Bay Advisors' subadvisory fees for the New York Fund would have been $50,142 and $________, respectively. For the fiscal years ended December 31, 1996 and 1997, NEFM paid Back Bay Advisors $-0- and $_______, respectively, in subadvisory fees for the California Fund, after voluntary expense limitations. Had the voluntary limitations not been in effect, Back Bay Advisors' subadvisory fees for the California Fund would have been $105,234 and $______, respectively. BROKERAGE COMMISSIONS For the fiscal years ended December 31, 1995, 1996 and 1997, the Funds paid no brokerage commissions on portfolio transactions. For more information about Fund 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 Funds pay the Distributor fees under separate plans adopted pursuant to Rule 12b-1 under the 1940 Act relating to their Class A and Class B shares. For the fiscal years ended December 31, 1995, 1996 and 1997, these fees amounted to $79,473, $84,706 and $81,769, respectively, for the California Fund's Class A shares, and $57,947, $63,402 and $81,901, respectively, for the California Fund's Class B shares. For the fiscal years ended December 31, 1995, 1996 and 1997, these fees amounted to iv $40,660, $42,803 and $49,186, respectively, for the New York Fund's Class A shares, and $14,352, $20,550 and $24,838, respectively, for the New York Fund's Class B shares. During the fiscal year ended December 31, 1997, on sales of the California Fund's and the New York Fund's Class A shares, the Distributor paid $81,688 and $49,200, respectively, as compensation to investment dealers and $104,521 and $99,137, respectively, as compensation to its sales personnel and other related costs. During the fiscal year ended December 31, 1997, on sales of the California Fund's and the New York Fund's Class B shares, the Distributor paid $56,571 and $31,067, respectively, as compensation to investment dealers and $100,438 and $95,644, respectively, as compensation to sales personnel and other related costs. Of the amounts paid to investment dealers, $20,209 and $19,022 was paid to New England Securities Corporation ("New England Securities"), a broker-dealer affiliate of the Distributor, for the California Fund's Class A shares and Class B shares, respectively, and $25,064 and $12,586 was paid to New England Securities for the New York Fund's Class A shares and Class B shares, respectively. 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 2, 1998, to the Trusts' knowledge, the following persons owned of record or beneficially 5% or more of the outstanding Class A shares or Class B shares of the indicated Funds: California Fund Class B shares William L. Spangler 7.00% 111 East Kilbourn Avenue Milwaukee, WI 53202-6611 MLPF&S for the Sole Benefit of its 5.56% Customers 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 Allen Kelly & Margaret Kelly, TTEES 5. Kelly Family Trust 317% 19980 Angus Ct. Saratoga, CA 95070-4406 New York Fund Class A shares NFSC FEBO 7.49% Good Earth Organics Corp. 5960 Broadway Lancaster, NY 14086-9531 Class A shares MLPF&S for the Sole Benefit of its 5.67% Customers 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 v Class B shares PaineWebber for the Benefit of 6.25% Nathan R. Lorman and Vivian Lorman 201 East 63rd Street New York, NY 10021-7334 Class A shares MLPF&S for the Sole Benefit of its 5.56% Customers 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 Class B shares NFSC FEBO 6.87% The Michael J. Cardito Personnel Tr. 400 East 56th Street New York, NY 10022-4147 Rose Eannone 6.30% 19 Carldon Road Commack, NY 11725-1610 Prudential Securities Inc. 7.21% FBO Dr. Jochanan M. Weisenfreund 201 W. 70th Street New York, NY 10023-4338 vi James P. Donovan 6.19% 60 Newport Road Island Park, NY 11558-1013 PaineWebber for the Benefit of 5.17% Nathan R. Lorman and Vivian Lorman 201 East 63rd Street New York, NY 10021-7334 - -------------------------------------------------------------------------------- INVESTMENT PERFORMANCE OF THE FUNDS - -------------------------------------------------------------------------------- PERFORMANCE RESULTS - PERCENT CHANGE For the Periods Ended 12/31/97* California Fund*** Aggregate Average Annual Total Return Total Return ------------------------- --------------------- Since Since Class A shares: As a % of 1 Year 4/23/93** 4/23/93** - -------------------------------- ------ --------- --------- Net Asset Value 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 Net Asset Value Redemption at End of Period New York Fund**** Aggregate Average Annual Total Return Total Return ------------------------- --------------------- Since Since Class A shares: As a % of 1 Year 4/23/93** 4/23/93** - -------------------------------- ------ --------- --------- Net Asset Value Net Asset Value Maximum Offering Price Aggregate Average Annual Total Return Total Return ------------------------- --------------------- vii Since Since Class B shares: As a % of 1 Year 9/13/93** 9/13/93** - -------------------------------- ------ --------- --------- Net Asset Value Net Asset Value Maximum Offering Price 1.98 20.41 5.16 Redemption at End of Period * Federal regulations require this example to be calculated using a $1,000 investment. The normal minimum initial investment in shares of each Fund is $2,500, however. ** Commencement of Fund operations or offering of Class B shares. *** Assuming deduction of current maximum sales load, the California Fund's Class A shares' since-inception average annual total return would have been ___% had a voluntary expense limitation for certain periods not been in effect, and their aggregate one-year and since-inception total returns would have been ___% and ___%, respectively. Based on net asset values, the 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, without the voluntary limitation. Assuming redemption at the end of the period, the California Fund's Class B shares' average annual total return for the since-inception period 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. **** Assuming deduction of current maximum sales load, the New York Fund's Class A shares' since-inception average annual total returns would have been ___% had a voluntary expense limitation for certain periods not been in effect, and their aggregate one-year and since-inception total returns would have been ___% and ___%, respectively. Based on net asset values, the Fund's Class A shares' since-inception average annual total returns would have been ___%, and their aggregate one-year and since-inception total returns would have been ___% and ___%, respectively, without the voluntary limitation. Assuming redemption at the end of the period, the New York Fund's Class B shares' average annual total returns for the since-inception period 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 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. DISTRIBUTION RATE OF RETURN Each class of the Funds may include in their written sales material rates of return based on that class's distributions from net investment income and short-term capital gains for a recent 30-day, three-month or one-year period. Distributions of less than one year are annualized by multiplying the factor necessary to produce 12 months of distributions. The distribution rates are determined by dividing the amount of a class's distributions per share over the relevant period by either the maximum offering price in the case of Class A shares or the price assuming redemption at the end of the period in the case of Class B shares or the net asset value of a share of a class on the last day of the period. DISTRIBUTION RATES For Periods Ending 12/31/97 As a % of 30 day 3 months 12 months -------------------------------------- ------ -------- --------- California Fund (Class A shares) Net Asset Value....................... viii Maximum Offering Price................ (Class B shares) Net Asset Value....................... New York Fund (Class A shares) Net Asset Value....................... Maximum Offering Price................ Maximum Offering Price................ (Class B shares) Net Asset Value....................... ix [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: 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 - -------------------------------------
1 New England Equity Income Fund (the "Equity Income Fund")
2 - -------------------------------------------------------------------------------- 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 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 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 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. 6 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, 7 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. 8 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 9 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 10 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 11 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 12 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 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 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 - -------------------------------------------------------------------------------- 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 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 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.
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 --------------- ------- ------- ------- ------- ---------- ------- Graham T. Allison, Jr. $ $ $ $ $ $ Daniel M. Cain $ $ $ $ $ $ Kenneth J. Cowan $ $ $ $ $ $ Richard Darman $ $ $ $ $ $ Sandra O. Moose $ $ $ $ $ $ John A. Shane $ $ $ $ $ $ Pendleton P. White $ $ $ $ $ $
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 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 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 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 21 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 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 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. 24 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 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. 26 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 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 28 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. 29 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. 30 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. 31 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 32 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 33 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 34 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 35 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. - -------------------------------------------------------------------------------- HOW TO BUY SHARES - -------------------------------------------------------------------------------- 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 36 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. - -------------------------------------------------------------------------------- NET ASSET VALUE AND PUBLIC OFFERING PRICE - -------------------------------------------------------------------------------- The method for determining the public offering price and net asset value per share is summarized in the Prospectus. The total net asset value of each class of shares of 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. 37 - -------------------------------------------------------------------------------- REDUCED SALES CHARGES Class A Shares Only - -------------------------------------------------------------------------------- Special purchase plans are enumerated in the text of the Prospectus. Cumulative Purchase Discount. A Fund shareholder making an additional purchase of Class A shares may be entitled to a discount on the sales charge payable on that purchase. This discount will be available if the shareholder's "total investment" in the Fund reaches the breakpoint for a reduced sales charge in the table under "Buying Fund Shares -- Sales Charges" in the Prospectus. The total investment is determined by adding the amount of the additional purchase, including sales charge, to the current public offering price of all series and classes of shares of 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 38 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 39 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. - -------------------------------------------------------------------------------- SHAREHOLDER SERVICES - -------------------------------------------------------------------------------- Open Accounts A shareholder's investment is automatically credited to an open account maintained for the shareholder by State Street Bank. Following each transaction in the account, a shareholder will receive a confirmation statement disclosing the current balance of shares owned and the details of recent transactions in the account. After the close of each calendar year, State Street Bank will send each shareholder a statement providing federal tax information on dividends and distributions paid to the shareholder during the year. This statement should be retained as a permanent record. 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. 40 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. 41 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. 42 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. 43 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. - -------------------------------------------------------------------------------- REDEMPTIONS - -------------------------------------------------------------------------------- The procedures for redemption of shares of a Fund are summarized in the Prospectus. As described in the Prospectus, a CDSC may be imposed on certain purchases of Class A 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). 44 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. 45 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. 46 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 47 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). 48 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. 49 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 50 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. - -------------------------------------------------------------------------------- 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 51 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. 52 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 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. 54 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. 55 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 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 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 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 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 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 -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. 62 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 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 65 Registration Nos. 2-11101 811-242 NEW ENGLAND FUNDS TRUST II PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) None. 1 Registration Nos. 2-11101 811-242 (b) Exhibits: 1.(a) Second Amended and Restated Agreement and Declaration of Trust of the Registrant is incorporated herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. (b) Amendment No. 6 to Second Amended and Restated Agreement and Declaration of Trust of the Registrant is incorporated herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. 2.(a) Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit 2(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. (b) Amendment to the By-Laws of the Registrant is incorporated herein by reference to Exhibit 2(b) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. 3. Not applicable. 4. Rights of shareholders are described in Article III, Section 6 of the Second 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 and New England Funds Management, L.P. ("NEFM") relating to the Registrant's New England High Income Fund is incorporated herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. (b) Advisory Agreements between the Registrant and NEFM relating to the following series of the Registrant are incorporated herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996: (i) New England Growth Opportunities Fund (ii) New England Limited Term U.S. Government Fund (iii) New England Adjustable Rate U.S. Government Fund (iv) New England Massachusetts Tax Free Income Fund (v) New England Intermediate Term Tax Free Fund of California (vi) New England Intermediate Term Tax Free Fund of New York (c) Sub-Advisory Agreement relating to the Registrant's New England High Income Fund between NEFM and Loomis, Sayles & Company, L.P. ("Loomis Sayles") is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (d) Sub-Advisory Agreements relating to the following series of the Registrant between NEFM and the subadvisers indicated in parentheses are incorporated herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996: 2 Registration Nos. 2-11101 811-242 (i) New England Growth Opportunities Fund (Westpeak Investment Advisors, L.P. ["Westpeak"]) (ii) New England Limited Term U.S. Government Fund (Back Bay Advisors, L.P. ["Back Bay Advisors"]) (iii) New England Adjustable Rate U.S. Government Fund (Back Bay Advisors) (iv) New England Massachusetts Tax Free Income Fund (Back Bay Advisors) (v) New England Intermediate Term Tax Free Fund of California (Back Bay Advisors) (vi) New England Intermediate Term Tax Free Fund of New York (Back Bay Advisors) 6.(a) Form of Distribution Agreement between the Registrant, on behalf of each of its series, and New England Funds, L.P. is incorporated herein by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. 7. Not applicable. 8.(a) Letter Agreement between the Registrant and State Street Bank and Trust Company relating to the applicability of the Custodian Contract and the Transfer and Service Agency Agreement to New England Adjustable Rate U.S. Government Fund is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (b) Letter Agreement between the Registrant and State Street Bank and Trust Company relating to the applicability of the Custodian Contract and the Transfer Agency and Service Agreement to New England Intermediate Term Tax Free Fund of California and New England Intermediate Term Tax Free Fund of New York is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (c) Form of Letter Agreement between the Registrant and State Street Bank and Trust Company relating to the applicability of the Custodian Contract and the Transfer Agency and Service Agreement to Growth Fund of Israel is incorporated herein by reference to Post-Effective Amendment No. 100 to this Registration Statement, filed on October 11, 1995. (d) Custodian Agreement between the Registrant and State Street Bank and Trust Company is incorporated herein by reference to Exhibit 8(d) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. 9.(a) Form of Service Agreement between Back Bay Advisors and the Distributor is incorporated herein by reference to Post-Effective Amendment No. 83 to this Registration Statement, filed on November 4, 1988. (b) Shareholder Servicing and Transfer Agent Agreement between the Registrant and TNE Investment Services Corporation is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (c) Form of Dealer Agreement of New England Funds, L.P., the Registrant's principal underwriter, is incorporated herein by reference to Post-Effective Amendment No. 88 to this Registration Statement, filed on August 2, 1991. (d) Organizational Expense Reimbursement Agreement between the Registrant, on behalf of its New England Intermediate Term Tax Free Fund of California and New England Intermediate Term Tax Free Fund of New York, and New England Funds, L.P. is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. 3 Registration Nos. 2-11101 811-242 (e) Form of Class B Shares Remittance Agreement between the Registrant and New England Funds, L.P., relating to each series of the Registrant, is incorporated by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. (f) Organizational Expense Reimbursement Agreement between the Registrant, on behalf of its Growth Fund of Israel, and New England Funds, L.P. is incorporated by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. (g) Sub-Transfer Agency and Service Agreement between TNE Investment Services Corporation and State Street Bank and Trust Company is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. 10.(a)Opinion and consent of counsel with respect to the Registrant's New England Growth Opportunities Fund, New England High Income Fund, New England Limited Term U.S. Government Fund, and New England Massachusetts Tax Free Income Fund is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (b) Opinion and consent of counsel with respect to the Registrant's New England Adjustable Rate U.S. Government Fund is incorporated by reference to Post-Effective Amendment No. 88 to this Registration Statement, filed on August 2, 1991. (c) Opinions and consents of counsel with respect to the Registrant's New England Intermediate Term Tax Free Fund of California and New England Intermediate Term Tax Free Fund of New York are incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (d) Opinion and consent of counsel with respect to offering multiple classes of shares for all series of the Registrant is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (e) Opinion and consent of counsel with respect to the Registrant's Rule 24e-2 Notice is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. (f) Opinion and consent of counsel with respect to the Registrant's Rule 24e-2 Notice is incorporated herein to Post-Effective Amendment No. 104 to this Registration Statement filed on April 19, 1996. 11. None. 12. None. 13. Not applicable. 14. Model Retirement Plans. (a) Keogh Plan is incorporated herein by reference to Exhibit 14(a) to Post-Effective Amendment No. 78 to this Registration Statement, filed on August 1, 1985. (b) IRA Plan is incorporated herein by reference to Exhibit 14(b) to Post-Effective Amendment No. 78 to this Registration Statement, filed on August 1, 1985. 4 Registration Nos. 2-11101 811-242 15.(a)Rule 12b-1 Plans relating to Class A shares of the Registrant's New England Massachusetts Tax Free Income Fund, New England Intermediate Term Tax Free Fund of California, New England Intermediate Term Tax Free Fund of New York, New England High Income Fund, New England Growth Opportunities Fund, New England Limited Term U.S. Government Fund and New England Adjustable Rate U.S. Government Fund are incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. (b) Form of Rule 12b-1 Plan relating to the Class B shares of each series of the Registrant is incorporated by reference to Post-Effective Amendment No. 104 to this Registration Statement, filed on April 19, 1996. (c) Rule 12b-1 Plan relating to the Class C shares of New England Limited Term U.S. Government Fund is incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. (d) Rule 12b-1 Plan relating to Class C shares of New England Growth Opportunities Fund is incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 105 to this Registration Statement, filed on August 15, 1996. 16. Schedule for computation of performance quotations is incorporated herein by reference to Exhibit 16 to Post-Effective Amendment No. 83 to this Registration Statement, filed on November 4, 1988. 17. Financial Data Schedule is incorporated herein by reference to Post-Effective Amendment No. 106 to this Registration Statement, filed on April 18, 1997. 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. 106 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 filed herein. Item 25. Persons Controlled by or under Common Control with Registrant None. Item 26. Number of Holders of Securities The following table sets forth the number of record holders of each class of securities of the Registrant as of May 31, 1997. 5 Registration Nos. 2-11101 811-242 Number of Record Holders ------------------------ Title of Series Class A Class B Class C Class Y - --------------- ------- ------- ------- ------- New England Adjustable Rate U.S. Government Fund 3,049 318 --- --- New England Growth Opportunities Fund 10,418 7,504 372 --- New England Limited Term U.S. Government Fund 10,522 1,248 466 5 New England High Income Fund 2,753 1,905 --- --- New England Massachusetts Tax Free Income Fund 2,848 298 --- --- New England Intermediate Term Tax Free Fund of California 534 166 --- --- New England Tax Free Income Fund of New York 544 116 --- --- Item 27. Indemnification See Article 4 of the Trust's Amended and Restated By-Laws, filed as Exhibit 2(B) to Post-Effective Amendment No. 83 to Registration Statement, filed on November 4, 1988, which is incorporated herein by reference. In addition, New England Investment Companies, L.P. ("NEIC"), the parent company of the Registrant's adviser and distributor, maintains a directors and officers liability insurance policy with maximum coverage of $15 million, under which the trustees and officers of the Registrant are named insured. Item 28. Business and Other Connections of Investment Adviser (a) Back Bay Advisors, the subadviser of the Registrant's New England Massachusetts Tax Free Income Fund, New England Intermediate Term Tax Free Fund of California, New England Intermediate Term Tax Free Income Fund of New York, New England Limited Term U.S. Government Fund and New England Adjustable Rate U.S. Government Fund, is wholly owned by NEIC Operating Partnership, L.P. ("NEIC"). Back Bay Advisors serves as investment adviser to a number of other registered investment companies. Back Bay Advisors' general partner, directors and officers have been engaged during the past two fiscal years in the following businesses, professions, vocations or employments of a substantial nature (former affiliations are marked with an asterisk): 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 399 Boylston Street Executive Officer and Boston, MA 02116 Director 6 Registration Nos. 2-11101 811-242 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 151 Farmington Avenue Management Group and Chief Investment Hartford, CT 06156 Officer 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 Harold B. Bjornson, None None Vice President Peter Palfrey, None None Vice President Eric Gutterson, None None Vice President (b) NEFM, a registered investment adviser that is wholly owned by NEICOP, serves as investment adviser to each of the series of the Registrant. NEFM, organized in 1995, also serves as investment adviser to most of the series of New England Funds Trust I 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): Name and Office with Name and Address of Nature of NEFM Other Affiliations Connection ---- ------------------ ---------- 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. Managing Director, President and Chief President and Chief Executive Officer Executive Officer NEF Corporation President, Chief Executive Officer and Director 7 Registration Nos. 2-11101 811-242
New England Funds Service Chief Executive Officer Corporation ("NEFSCO") 399 Boylston Street Boston, MA 02116 Back Bay Advisors, Inc. Director New England Securities Director Corporation* 399 Boylston Street Boston, MA 02116 Frank Nesvet, New England Funds, L.P. Managing Director, Senior Senior Vice President, Vice President and Chief Chief Financial Officer Financial 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, Senior Vice President, General Counsel, Secretary General Counsel, Assistant and Clerk Secretary and Clerk New England Funds, L.P. Managing Director, Senior Vice President, General Counsel, Secretary and Clerk NEFSCO Senior Vice President, General Counsel and Chief Legal Officer Funds Distributor* Vice President and Boston, MA General Counsel Bruce R. Speca, NEF Corporation Executive Vice President Executive Vice President New England Funds, L.P. Managing Director and 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
8 Registration Nos. 2-11101 811-242 Martin G. Dyer, NEF Corporation Vice President and Vice President and Assistant Secretary Assistant Secretary New England Funds, L.P. Vice President and Assistant Secretary NEFSCO Vice President and Chief Compliance Officer Ralph M. Greggs, NEF Corporation Vice President Vice President New England Funds, L.P. Vice President (c) Westpeak serves as subadviser to the Registrant's New England Growth Opportunities Fund, and is wholly owned by NEIC. 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): Name and Office with Name and Address of Nature of Westpeak Other Affiliations Connection -------- ------------------ ---------- 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, Secretary, Chief 399 Boylston Street Clerk, Secretary and Legal Officer Boston, MA 02116 General Counsel NEIC Inc. Executive Vice President, 399 Boylston Street Clerk, Secretary and Boston, MA 02116 General Counsel Marlborough Capital Assistant Clerk Advisors, Inc. 399 Boylston Street Boston, MA 02116 New England Investment Secretary Associates, Inc. ("NEIA") 399 Boylston Street Boston, MA 02116 Robert A. Franz None None Senior Vice President 9 Registration Nos. 2-11101 811-242 Philip J. Cooper None None Vice President Portfolio Management (d) Loomis Sayles, the subadviser of the Registrant's New England High Income 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 10 Registration Nos. 2-11101 811-242 11 Registration Nos. 2-11101 811-242 Item 29. Principal Underwriter (a) New England Funds, L.P., the Registrant's principal underwriter, also serves as principal underwriter for: New England Funds Trust I New England Funds Trust III New England Tax Exempt Money Market Trust New England Cash Management Trust (b) The general partner and officers of the Registrant's principal underwriter, New England Funds, L.P., and their address are as follows: Positions and Offices with Positions and Offices Name Principal Underwriter with Registrant ---- --------------------- --------------- NEF Corporation General Partner None Henry L.P. Schmelzer Managing Director, President President and Trustee and Chief Executive Officer Bruce R. Speca Managing Director and Executive Vice President Executive Vice President John E. Pelletier Managing Director, Senior Secretary Vice President, General Counsel, Secretary and Clerk Frank Nesvet Managing Director, Senior Treasurer Vice President and Chief Financial Officer James H. Davis Managing Director and Senior None Vice President Caren I. Leedom Managing Director and Senior None Vice President Elizabeth P. Burns Vice President None Peter H. Duffy Vice President None Martin G. Dyer Vice President and Assistant None Secretary Tracy A. Fagan Vice President None Raymond K. Girouard Senior Vice President, None reasurer and Controller Ralph M. Greggs Vice President None Lynne H. Johnson Vice President None Marie G. McKenzie Vice President None 12 Registration Nos. 2-11101 811-242 Robert E. O'Hare Vice President, Senior None Counsel, Assistant Secretary and Assistant Clerk Bernard M. Shavelson Vice President None Kristine E. Swanson Vice President None Beatriz A. Pina-Smith Vice President and Assistant None Controller 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(b)(1), (2), (3), (5), (6), (7), (8) Rule 31a-2(d) (c) (i) 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), (e) Back Bay Advisors, L.P. 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), (e) (ii) For New England Growth Opportunities 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), (e) 13 Registration Nos. 2-11101 811-242 Westpeak Investment Advisors, L.P. 1011 Walnut Street Boulder, Colorado 80302 Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f) Rule 31a-2(d), (e) (iii) For New England High Income 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), (e) Loomis, Sayles & Company, L.P. One Financial Center Boston, Massachusetts 02110 Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f); Rule 31a-2(d), (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 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. 14 Registration Nos. 2-11101 811-242 NEW ENGLAND FUNDS TRUST II 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. 108 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 II By: PETER S. VOSS* ------------------------------ Peter S. Voss Chief Executive Officer *By: /s/JOHN E. PELLETIER ------------------------------ John E. Pelletier Attorney-In-Fact 15 Registration Nos. 2-11101 811-242 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Signature Signature Title Date --------- ----- ---- PETER S. VOSS* Chairman of the Board; February 27, 1998 - ------------------------ Chief Executive Officer; Peter S. Voss Principal Executive Officer; Trustee /s/ Frank Nesvet - ------------------------ Frank Nesvet Treasurer February 27, 1998 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 - ------------------------ Pendleton P. White *By: /s/ John E. Pelletier ------------------------ John E. Pelletier Attorney-In-Fact February 27, 1998 16 Registration Nos. 2-11101 811-242 NEW ENGLAND FUNDS TRUST II EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT -------------- ------- EX - 19(a) Powers of Attorney EX - 19(b) Powers of Attorney 17 EX-99.19(A) 2 POWERS OF ATTORNEY 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. SCHMELZER ----------------------------------- Henry L.P. Schmelzer - Trustee EX-99.19(B) 3 POWERS OF ATTORNEY 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 -----END PRIVACY-ENHANCED MESSAGE-----