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[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet
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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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NEW ENGLAND
TAX EXEMPT INCOME
FUND
[ARTWORK APPEARS HERE]
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JUNE 30, 1995
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July 20, 1995
DEAR SHAREHOLDER:
We have good news to present in this Semiannual Report for New England Tax
Exempt Income Fund, which includes your Portfolio Manager's commentary and
complete financial information.
MARKET OVERVIEW
Investors who stayed the course in 1995 were amply rewarded. Major U.S. stock
market indices soared to record highs and the bond market staged a spectacular
comeback from its 1994 lows. Fueling the rally was clear evidence that the
economy had begun to slow down as a result of the interest rate hikes engineered
by the Federal Reserve Board to keep inflation in check. Indeed, with declining
housing starts and rising unemployment numbers reported in the first half of
1995, expectations grew that the Fed's next move would be downward, to prevent
the slowing economy from slipping into recession.
The bond market surged at the prospect of lower rates, and the stock market
followed suit, with the Standard & Poor's 500(R) Index gaining 20.14% during the
first half of the year. The large, blue-chip companies led the way, in part
because a weak U.S. dollar gave them a competitive advantage overseas and
contributed to surprisingly healthy earnings reports. Finally, on July 6, just
after this reporting period ended, the Fed lowered a key short-term rate by
0.25%, a relatively modest move, but a significant psychological change in
direction.
YOUR FINANCIAL ADVISER -- A TRUSTED ALLY
As a shareholder in New England Funds, you have a valuable ally you can turn
to at all times -- your financial adviser. This experienced
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professional can help you design an asset allocation program suitable to your
goals and risk tolerance. Most important, during times of market volatility or
uncertainty, your adviser can help you avoid making costly mistakes, such as
trying to "time" the market. Investors who go it alone can overreact to
short-term market events, buying and selling on the basis of this week's
headlines, or chasing the latest "hot" investment. Such behavior can derail an
otherwise prudent investment program. But investors who work with a financial
adviser receive guidance throughout the market's ups and downs. Your adviser
will help you place short-term market swings in their proper perspective and
keep you focused on your long-term investment program.
Your adviser is just one of the experts whose talents we have tapped in our
effort to bring the best minds in the business to the task of managing your
money. These experts are a vital part of the investment process at New England
Funds, and we encourage you to take advantage of their skills to the fullest.
We invite you to read the accompanying management commentary and financial
highlights. If you have any questions or comments, please contact your financial
adviser or New England Funds directly at 800-225-5478. Once again, we appreciate
your continued confidence and investment in New England Funds.
Sincerely,
/s/Peter S. Voss /s/Henry L.P. Schmelzer
---------------- -----------------------
Peter S. Voss Henry L.P. Schmelzer
Chairman President
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NEW ENGLAND TAX EXEMPT INCOME FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1995
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
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A $10,000 Investment in Class A Shares
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A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares compared to Lehman Municipal Index(4) and
the Cost of Living(5). The data points from the graph are as follows:
New England Tax Exempt Income Fund - Net Asset Value(1)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
6/85 $10,000
6/86 $11,918
6/87 $12,502
6/88 $13,416
6/89 $15,058
6/90 $15,821
6/91 $16,978
6/92 $19,161
6/93 $21,449
6/94 $21,160
6/95 $22,813
</TABLE>
New England Tax Exempt Income Fund - With Maximum Sales Charge(2)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
6/85 $ 9,550
6/86 $11,382
6/87 $11,939
6/88 $12,812
6/89 $14,380
6/90 $15,109
6/91 $16,214
6/92 $18,299
6/93 $20,484
6/94 $20,207
6/95 $21,786
</TABLE>
Lehman Municipal Index(4)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
6/85 $10,000
6/86 $11,651
6/87 $12,655
6/88 $13,594
6/89 $15,143
6/90 $16,174
6/91 $17,631
6/92 $19,706
6/93 $22,063
6/94 $22,107
6/95 $24,051
</TABLE>
Cost of Living(5)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
6/85 $10,000
6/86 $10,174
6/87 $10,552
6/88 $10,968
6/89 $11,535
6/90 $12,074
6/91 $12,641
6/92 $13,031
6/93 $13,421
6/94 $13,710
6/95 $14,099
</TABLE>
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share
performance will be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance
assumes reinvested distributions.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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AVERAGE ANNUAL TOTAL RETURNS 6/30/95*
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<TABLE>
<CAPTION>
CLASS A (Inception 9/16/85) YEAR TO DATE 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Net Asset Value(1) 10.32% 7.80% 7.59% 8.60%
With Max. Sales Charge(2) 5.40 2.94 6.60 8.10
Lipper General Muni. Average(6) 9.01 7.08 7.78 8.66
</TABLE>
<TABLE>
<CAPTION>
CLASS B (Inception 9/21/93) YEAR TO DATE 1 YEAR SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1) 9.75% 6.84% 0.69%
With CDSC(3) 5.75 2.84 -0.84
Lehman Municipal Index(4) 9.65 8.79 3.00
Lipper General Muni. Average(6) 9.01 7.68 n/a
</TABLE>
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YIELDS AS OF 6/30/95*
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<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
SEC Yield 5.28% 4.78%
Taxable Equivalent Yield 8.74 7.91
</TABLE>
SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines. Taxable equivalent yield is based on the maximum federal income
tax bracket of 39.6%. The alternative minimum tax may apply. Some federal
and state taxes may apply.
* These returns represent past performance. Investment return and principal
value will fluctuate so that shares, upon redemption, may be worth more or
less than original cost.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.50% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) Lehman Municipal Index is an unmanaged index of bonds issued by states,
municipalities and other governmental entities having maturities of more
than one year. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives
as calculated by Lipper Analytical Services, an independent mutual fund
ranking service.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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[PHOTO]
NEW ENGLAND TAX EXEMPT
INCOME FUND
Portfolio Manager: Nathan Wentworth
Back Bay Advisors, L.P.(R)
The bond market staged a massive rally during the first half of 1995 amid
expectations that the Federal Reserve Board would soon lower interest rates to
prevent a slowing economy from slipping into recession. Municipal markets went
along for the ride, particularly through April and May, but began to pull back
in June as concerns grew over the developments in Orange County, California, and
the various tax reform proposals being discussed in Washington. At mid-year, the
prevailing mood in the municipal markets was uncertainty; consequently, we
adopted a more cautious stance to position the Fund for the remainder of 1995.
How Your Fund Performed
New England Tax Exempt Income Fund posted a solid gain of 10.32.% (for Class A
shares at net asset value) for the first half of the year, outpacing the Lipper
General Municipal Average's return of 9.01%.6 As of June 30, the Fund's SEC
yield was 5.28% for Class A shares, which translated into a taxable equivalent
yield of 8.74% for investors in the maximum federal tax bracket of 39.6%.*
* The alternative minimum tax may apply. Some federal and state taxes may apply.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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How We Positioned Your Fund
As we reported to you in December 1994, we were very positive about the outlook
for the municipal markets in 1995 and positioned the Fund aggressively to take
advantage of a market upswing. At the start of 1995, we were fully invested and
maintained an average maturity much longer than our peer group (prices of
long-term bonds move much more dramatically than shorter-term bonds in response
to interest rate fluctuations). We bought a fair number of bonds priced at a
discount in expectation that rates would drop and that these discount bonds
would appreciate. As it happened, this strategy proved extremely successful
going into the new year as the market raced ahead. Interest rates dropped and
the long bonds in our portfolio rebounded in price.
During the first half of the year, we remained well diversified across more than
20 states. For the most part, we remained cautious regarding general obligation
(GO) bonds (those secured by the state's taxing authority) in favor of revenue
bonds (those secured by a specific revenue source). It's worth mentioning that
because of this strategy we avoided the Orange County fallout completely. We do
hold a sizable stake in Massachusetts GOs, and we regard this as an improving
situation.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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One of our largest sector holdings in the Fund is debt secured by a pledge of
New York State appropriations, which is a very liquid sector and has been a nice
yield generator for the Fund. Elsewhere, we have completely eliminated our
positions in the healthcare sector, due to our continuing concerns over
consolidation in the industry and the potential negative effects budget reform
could have on Medicare and Medicaid.
Outlook for the Future
For the remainder of 1995 we plan to maintain a cautious stance as a result of
two primary concerns: First, there is a great deal of uncertainty in the
municipal markets because of the tax reform discussions and the continuing
fallout from Orange County. While a favorable demand/supply scenario is still in
place to add support to prices, we have seen demand fall off in recent months
because of this mood of uncertainty in the municipal market. Second, we remain
concerned about the threat of inflation and the chance that it might regain
force should the Federal Reserve Board move to lower rates aggressively in the
latter part of 1995.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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In light of this outlook, we have pulled back somewhat from our bullish posture
of earlier in the year to a more market-neutral position. In June we began
shortening the average maturity of the Fund and shedding discount bonds in favor
of more conservative premium-priced issues. Should the Federal Reserve Board
ease significantly on rates in the summer and fall as is anticipated, we would
expect to increase our defensive positioning.
We are confident that a more cautious, conservative approach is most appropriate
for investors in the tax-free market through the remainder of 1995.
PORTFOLIO QUALITY AS OF 6/30/95
A pie chart appears here, illustrating the portfolio quality of New England Tax
Exempt Income Fund at June 30, 1995. The pie chart is broken in pieces
representing credit ratings in the following percentages:
<TABLE>
<CAPTION>
Credit Ratings Percentage
<S> <C>
AAA 21%
AA 10%
A 18%
BBB 40%
BB/not rated 11%
</TABLE>
Average Portfolio Quality = A- Average Portfolio Maturity = 11 Years
Quality ratings provided by Standard & Poor's.
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NEW ENGLAND TAX EXEMPT INCOME FUND
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Glossary for Mutual Fund Investors
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by the
Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the portfolio.
DURATION - A measure, stated in years, of a bond or bond fund's sensitivity to
interest rates. Duration is a means to directly compare the volatility of
different instruments. As a general rule, for every 1% move in interest rates, a
fund is expected to fluctuate in value as indicated by its duration. For
example, if interest rates fall by 1%, a fund with a duration of 4 years should
rise in value 4%. Conversely, the fund should decline 4% if interest rates rise
1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from treasury securities is exempt from state
and local income taxes, but not from federal income taxes. There are three types
of treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and in most
cases from state and local income taxes. The two main types are General
Obligation (GO) Bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and Revenue Bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
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[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet
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PORTFOLIO COMPOSTION, FINANCIAL STATEMENTS AND HIGHLIGHTS
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NEW ENGLAND
TAX EXEMPT INCOME
FUND
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JUNE 30, 1995
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1995
(unaudited)
TAX EXEMPT BONDS--97.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (C)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
<S> <C> <C> <C> <C>
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ARIZONA--1.2%
$2,300,000 University of Arizona, 6.350%, 6/1/14.......... -- A+ $ 2,365,412
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CALIFORNIA--10.0%
1,500,000 California Housing Finance Agency Revenue Bond,
8.100%, 8/01/07.............................. Aa A+ 1,579,920
525,000 California Housing Finance Agency Revenue Bond,
8.125%, 8/01/19 ............................. Aa A+ 552,878
5,000,000 California State Department Water Resource
Authority,
5.750%, 12/01/13............................. Aa AA 4,834,500
4,300,000 Foothill/Eastern Transportation Corridor,
6.500%, 1/01/32.............................. -- BBB- 4,160,250
2,000,000 Los Angeles Convention & Exhibition Authority,
9.000%, 12/01/20............................. Aaa AAA 2,665,800
5,000,000 Los Angeles Electric Plant Revenue Bond,
5.875%, 9/01/30.............................. Aaa AAA 4,774,900
2,000,000 Sacramento, California, 6.500%, 7/01/21........ -- BBB- 1,967,940
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20,536,188
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COLORADO--5.2%
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/06............................. Baa BBB 1,623,525
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/12............................. Baa BBB 1,603,755
5,000,000 Denver City & County Airport Revenue Bond,
7.750%, 11/15/21............................. Baa BBB 5,346,750
2,000,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/23............................. Baa BBB 2,117,420
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10,691,450
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CONNECTICUT--1.0%
2,000,000 Connecticut State Housing Finance Authority,
6.125%, 5/15/18.............................. Aa AA 1,964,820
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</TABLE>
See accompanying notes to financial statements.
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PORTFOLIO COMPOSITION--CONTINUED
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Investments as of June 30, 1995
(unaudited)
TAX EXEMPT BONDS--CONTINUED
<TABLE>
<CAPTION>
RATINGS (C)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
<S> <C> <C> <C> <C>
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FLORIDA--12.8%
$3,000,000 Dade County, 6.250%, 10/01/21.................. -- -- $ 3,083,100
5,000,000 Escambia County Pollution Control,
6.900%, 8/01/22.............................. Baa1 BBB 5,179,750
1,430,000 Florida State, 6.400%, 7/01/22................. Aaa AAA 1,469,497
2,000,000 Florida State Board of Education Capital Outlay
6.625%, 6/01/22.............................. Aa AA 2,101,980
1,890,000 Gainesville Utilities System Revenue Bond,
6.500%, 10/1/22.............................. Aa AA 1,998,580
1,000,000 Martin County Industrial Development Authority,
7.875%, 12/15/25............................. Baa3 BBB- 1,086,030
2,500,000 Palm Beach County, 6.950%, 1/01/22............. -- -- 2,473,100
2,000,000 Palm Beach County Solid Waste Revenue Bond,
6.850%, 1/01/14.............................. -- -- 1,971,140
1,500,000 Palm Beach County Solid Waste Revenue Bond,
8.750%, 7/01/10.............................. A A- 1,644,075
2,500,000 Pasco County, Pollution Control Revenue Bond,
6.350%, 2/01/22.............................. Aaa AAA 2,597,550
2,350,000 Seminole County Gas, Tax Revenue Bond,
6.375%, 10/01/18............................. Aaa AAA 2,458,992
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26,063,794
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GEORGIA--1.3%
2,500,000 Atlanta Special Purpose Facilities Revenue
Bond,
7.900%, 12/01/18............................. Ba3 BB 2,641,100
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GUAM--2.2%
5,000,000 Guam Government, 5.400%, 11/15/18.............. Aaa AAA 4,392,150
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ILLINOIS--5.7%
2,250,000 Chicago O'Hare International Airport Supplies,
8.200%, 12/01/24............................. Aaa AAA 2,574,743
6,000,000 Illinois Development Financial Authority
Pollution Control
7.250%, 6/01/11.............................. Baa2 BBB 6,315,720
2,500,000 Illinois Development Financial Authority
Pollution Control
7.375%, 7/01/21.............................. Baa2 BBB 2,729,750
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11,620,213
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INDIANA--1.9%
1,000,000 Indiana State Development Financial Authority
Pollution Control,
6.850%, 12/01/12............................. Ba3 BB 999,900
2,800,000 Indianapolis International Airport Authority,
7.100%, 1/15/17.............................. Baa2 BBB 2,897,272
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3,897,172
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</TABLE>
See accompanying notes to financial statements.
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PORTFOLIO COMPOSITION--CONTINUED
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Investments as of June 30, 1995
(unaudited)
TAX EXEMPT BONDS--CONTINUED
<TABLE>
<CAPTION>
RATINGS (C)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
KENTUCKY--1.5%
$2,000,000 Kenton County Airport Board Revenue Bond,
7.500%, 2/01/12.............................. Ba1 BB $ 2,087,000
860,000 Kentucky Housing Corp. Housing Revenue Bond,
7.450%, 1/01/23.............................. Aa1 AAA 890,255
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2,977,255
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MASSACHUSETTS--9.6%
9,000,000 Massachusetts Bay Transportation Authority,
6.100%, 3/01/23.............................. A1 A+ 8,927,820
5,000,000 Massachusetts State, 5.750%, 5/01/12........... A1 A+ 4,888,900
2,500,000 Massachusetts State Housing Finance Agency,
6.300%, 10/01/13............................. A1 A+ 2,494,325
3,395,000 Massachusetts State Housing Finance Agency,
6.375%, 4/01/21.............................. A1 A+ 3,375,445
-----------
19,686,490
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NEVADA--3.1%
6,500,000 Clark County, Passenger Facilities, 6.000%,
7/01/22...................................... Aaa AAA 6,330,545
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NEW YORK--15.8%
2,450,000 New York City Revenue Bonds, 7.500%, 2/01/05... Baa1 A- 2,664,914
3,000,000 New York City Revenue Bonds, 6.250%, 8/01/08... Baa1 A- 2,960,370
1,000,000 New York City Revenue Bonds, 7.100%, 2/01/10... Aaa AAA 1,069,110
4,000,000 New York State Dormitory Authority, 5.500%,
5/15/13...................................... Baa1 BBB+ 3,699,800
1,350,000 New York State Dormitory Authority, 5.625%,
5/15/13...................................... Baa1 BBB+ 1,238,126
1,880,000 New York State Dormitory Authority, 7.500%,
5/15/13...................................... Baa1 BBB+ 2,150,344
2,740,000 New York State Dormitory Authority, 5.750%,
7/01/13...................................... Baa2 BBB 2,590,396
2,040,000 New York State Dormitory Authority, 5.375%,
5/15/16...................................... Baa1 BBB+ 1,788,142
575,000 New York State Medical Care Facilities,
7.300%, 8/15/11.............................. Baa1 BBB+ 630,942
1,955,000 New York State Medical Care Facilities,
6.500%, 8/15/12.............................. Aaa AAA 2,032,398
2,500,000 New York State Medical Care Facilities,
5.375%, 2/15/14.............................. Baa1 BBB+ 2,233,375
4,150,000 New York State Medical Care Facilities,
5.250%, 8/15/14.............................. Baa1 BBB+ 3,644,363
2,500,000 New York State Medical Care Facilities,
6.500%, 8/15/24.............................. Aaa AAA 2,583,700
3,430,000 New York State Urban Development Corp.,
5.500%, 1/01/18.............................. Baa1 BBB 3,053,385
-----------
32,339,365
-----------
</TABLE>
See accompanying notes to financial statements.
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PORTFOLIO COMPOSITION--CONTINUED
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Investments as of June 30, 1995
(unaudited)
TAX EXEMPT BONDS--CONTINUED
<TABLE>
<CAPTION>
RATINGS (C)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NORTH CAROLINA--1.9%
$2,545,000 North Carolina Eastern Municipal Power,
6.125%, 1/01/09.............................. A A- $ 2,511,686
1,500,000 North Carolina Eastern Municipal Power,
6.000%, 1/01/22.............................. A A- 1,402,215
-----------
3,913,901
-----------
OHIO--1.6%
3,000,000 Cleveland Public Power Systems Revenue Bond,
7.000%, 11/15/24............................. Aaa AAA 3,273,780
-----------
OREGON--0.5%
1,000,000 Western Generation Agency 7.400%, 1/01/16...... -- -- 1,040,390
-----------
PENNSYLVANIA--9.7%
3,000,000 Delaware County Pollution Control, 7.375%,
4/01/21...................................... Baa1 BBB+ 3,189,000
2,725,000 Pennsylvania Convention Center, 6.700%,
9/01/14...................................... Ba BB 2,765,276
2,000,000 Pennsylvania Convention Center, 6.750%,
9/01/19...................................... Ba BB 2,029,480
4,000,000 Pennsylvania Economic Development Financing
Authority, 7.150%, 12/01/18.................. -- BBB- 4,174,000
3,000,000 Pennsylvania Economic Development Financing
Authority, 6.600%, 1/01/19................... -- -- 2,906,160
1,500,000 Pennsylvania Economic Development Financing
Authority, 7.600%, 12/01/20.................. Baa2 BBB 1,608,435
3,000,000 Pennsylvania Economic Development Financing
Authority, 7.600%, 12/01/24.................. Baa1 BBB+ 3,229,980
-----------
19,902,331
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PUERTO RICO--1.4%
2,845,000 Commonwealth of Puerto Rico, Highway and
Transportation Authority, 6.625%, 7/01/18.... Baa1 A 2,947,107
-----------
SOUTH DAKOTA--.5%
1,000,000 South Dakota, Student Loan Financing Authority,
7.700%, 8/01/07.............................. -- A+ 1,062,120
-----------
TENNESSEE--1.2%
2,500,000 Maury County, Individual Development Board,
6.500%, 9/01/24.............................. -- BBB+ 2,515,475
-----------
TEXAS--1.4%
2,825,000 Dallas Fort Worth International Airport,
7.250%, 11/01/30............................. Baa2 BB+ 2,907,377
-----------
</TABLE>
See accompanying notes to financial statements.
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PORTFOLIO COMPOSITION--CONTINUED
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Investments as of June 30, 1995
(unaudited)
TAX EXEMPT BONDS--CONTINUED
<TABLE>
<CAPTION>
RATINGS (C)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
UTAH--1.5%
$2,000,000 Intermountain Power Agency, 8.625%, 7/01/21.... Aa AA $ 2,200,520
750,000 Utah State Board of Regents Student Loan
Revenue Bond, 7.450%, 11/01/08............... Aaa AAA 805,854
-----------
3,006,374
-----------
VIRGIN ISLANDS--2.3%
4,500,000 Virgin Islands, Public Finance Authority,
7.250%, 10/01/18............................. -- -- 4,648,950
-----------
WASHINGTON--4.1%
1,000,000 Washington Public Power Supply, 6.800%,
7/01/07...................................... Aa AA 1,070,450
1,270,000 Washington Public Power Supply, 7.000%,
7/01/11...................................... Aa AA 1,332,000
3,000,000 Washington Public Power Supply, 7.000%,
7/01/12...................................... Aa AA 3,155,160
3,000,000 Washington Public Power Supply, 5.375%,
7/01/15...................................... Aaa AAA 2,741,250
-----------
8,298,860
-----------
Total Tax Exempt Bonds
(Identified Cost $191,607,742)............... 199,022,619
-----------
SHORT-TERM INVESTMENT--1.7%
3,455,000 Household Finance Corp., 5.800%, 7/5/95........ 3,452,773
-----------
Total Short-Term Investment
(Identified Cost $3,452,773)................. 3,452,773
-----------
Total Investments--99.1%
(Identified Cost $195,060,515)(b)............ 202,475,392
Cash and Receivables........................... 3,772,567
Liabilities.................................... (1,827,113)
-----------
Total Net Assets--100%......................... $204,420,846
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 17
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION--CONTINUED
--------------------------------------------------------------------------------
Investments as of June 30, 1995
(unaudited)
WRITTEN U.S. TREASURY BOND PUT OPTION
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACTS EXPIRATION STRIKE PRICE DEPRECIATION
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
200 July 21, 1995 $ 109.00 ($29,225)
</TABLE>
WRITTEN U.S. TREASURY BOND CALL OPTION
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACTS EXPIRATION STRIKE PRICE DEPRECIATION
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
200 July 21, 1995 $ 111.00 ($ 1,300)
</TABLE>
WRITTEN INTEREST RATE FUTURES CONTRACT
<TABLE>
<CAPTION>
AGGREGATE MARKET NET UNREALIZED
CONTRACTS EXPIRATION FACE VALUE VALUE APPRECIATION
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
250 September 1995 $28,643,218 $28,337,487 $305,731
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1995 the net unrealized
appreciation on investments based on cost of $195,060,515 for federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost............................ $ 8,233,152
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value............................ (818,275)
-----------
Net unrealized appreciation.......................................... $ 7,414,877
===========
(c) The ratings shown are believed to be the most recent ratings
available at June 30, 1995. Securities are generally rated at the
time of issuance. The rating agencies may revise their ratings from
time to time. As a result, there can be no assurance that the same
ratings would be assigned if the securities were rated at June 30,
1995. The Fund's adviser independently evaluates the Fund's portfolio
securities and in making investment decisions does not rely solely on
the ratings of agencies.
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 18
-------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value......................................... $202,475,392
Cash......................................................... 3,215
Receivable for:
Fund shares sold........................................... 17,320
Accrued Interest........................................... 3,752,032
-----------
206,247,959
LIABILITIES
Payable for:
Securities purchased....................................... $ 1,006,660
Fund shares redeemed....................................... 127,730
Dividends declared......................................... 267,473
Written options outstanding, at market (premiums received
$160,100)................................................ 190,625
Futures variation margin................................... 70,313
Accrued expenses:
Management fees............................................ 74,270
Deferred trustees' fees.................................... 37,220
Accounting and administrative.............................. 4,071
Other expenses............................................. 48,751
---------
1,827,113
-----------
$204,420,846
===========
NET ASSETS
Net Assets consist of:
Capital paid in............................................ $203,868,281
Undistributed net investment income........................ 121,812
Accumulated net realized losses............................ (7,259,331)
Unrealized appreciation on investments, options and futures
contracts................................................ 7,690,084
-----------
NET ASSETS..................................................... $204,420,846
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($193,267,279 divided by 26,308,873 shares of beneficial
interest).................................................... $7.35
====
Offering price per share (100/95.50 of $7.35).................. $7.70*
====
Net asset value and offering price of Class B shares
($11,153,567 divided by 1,518,775 shares of beneficial
interest).................................................... $7.34**
====
Identified cost of investments................................. $195,060,515
===========
</TABLE>
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of these amounts.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
8
<PAGE> 19
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-------------------------------------------------------------------------------
Six Months Ended June 30, 1995
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................... $ 6,618,758
Expenses
Management fees............................................ $ 440,390
Service fees--Class A...................................... 240,164
Service and distribution fees--Class B..................... 48,418
Trustees' fees and expenses................................ 12,302
Accounting and administrative.............................. 25,952
Custodian.................................................. 55,591
Transfer agent............................................. 97,223
Audit and tax services..................................... 22,000
Legal...................................................... 12,994
Printing................................................... 17,118
Registration............................................... 10,912
Miscellaneous.............................................. 7,064 990,128
---------- ----------
Net investment income........................................ 5,628,630
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND
FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net............................................. 2,637,687
Futures contracts closed--net................................ (3,297,425)
Options closed--net.......................................... 150,491
----------
Total realized loss on investment transactions............... (509,247)
Unrealized appreciation (depreciation) on:
Investments--net............................................. 13,997,728
Futures contracts--net....................................... 305,731
Options--net................................................. (30,525)
----------
Total unrealized appreciation on investment transactions..... 14,272,934
----------
Net gain on investment transactions.......................... 13,763,687
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $19,392,317
==========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 20
-------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995
----------- ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income................................ $ 11,571,475 $ 5,628,630
Net realized loss on investment transactions......... (6,747,827) (509,247)
Unrealized appreciation (depreciation) on
investments........................................ (23,242,432) 14,272,934
----------- -------------
Increase (decrease) in net assets from operations.... (18,418,784) 19,392,317
----------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A............................................ (11,356,838) (5,323,463)
Class B............................................ (315,692) (229,939)
----------- -------------
(11,672,530) (5,553,402)
----------- -------------
Decrease from capital share transactions............. (7,986,345) (1,616,748)
----------- -------------
Total increase (decrease) in net assets.............. (38,077,659) 12,222,167
NET ASSETS
Beginning of the period.............................. 230,276,338 192,198,679
----------- -------------
End of the period.................................... $192,198,679 $204,420,846
=========== =============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period.............................. $ 0 $ 46,584
=========== =============
End of the period.................................... $ 46,584 $ 121,812
=========== =============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 21
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 7.29 $ 7.21 $ 7.53 $ 7.54 $ 7.87 $ 6.85
------- ------- ------- ------- ------- --------
Income From Investment Operations
Net Investment Income............ 0.46 0.45 0.44 0.40 0.39 0.21
Net Realized and Unrealized Gain
(Loss) on Investments.......... (0.08) 0.35 0.21 0.53 (1.01) 0.49
------- ------- ------- ------- ------- --------
Total From Investment
Operations..................... 0.38 0.80 0.65 0.93 (0.62) 0.70
------- ------- ------- ------- ------- --------
Less Distributions
Dividends From Net Investment
Income......................... (0.46) (0.43) (0.46) (0.42) (0.40) (0.20)
Distributions From Net Realized
Capital Gains.................. 0.00 (0.01) (0.18) (0.18) 0.00 0.00
Distributions From Paid-in
Capital........................ 0.00 (0.04) 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- --------
Total Distributions.............. (0.46) (0.48) (0.64) (0.60) (0.40) (0.20)
------- ------- ------- ------- ------- --------
Net Asset Value, End of Period... $ 7.21 $ 7.53 $ 7.54 $ 7.87 $ 6.85 $ 7.35
======= ======= ======= ======= ======= =======
Total Return (%)................. 5.5 11.6 8.9 12.7 (8.0) 10.3(b)
Ratio of Operating Expenses to
Average Net Assets (%)......... 0.97 0.95 0.95 0.91 0.92 0.95(a)
Ratio of Net Investment Income to
Average Net Assets (%)......... 6.46 6.18 5.80 5.27 5.44 5.62(a)
Portfolio Turnover Rate (%)...... 85 126 85 86 88 158(a)
Net Assets, End of
Period (000)................... $146,232 $162,991 $183,276 $226,881 $184,202 $193,267
</TABLE>
(a) Computed on an annualized basis.
(b) Not computed on an annualized basis.
See accompanying notes to financial statements.
11
<PAGE> 22
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED
-----------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
----------------------------
SEPTEMBER 13,(A) YEAR SIX MONTHS
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995
--------------- ----------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 8.03 $ 7.86 $ 6.85
---------- -------- -------
Income From Investment Operations
Net Investment Income.......................... 0.07 0.34 0.18
Net Realized and Unrealized Gain (Loss) on
Investments.................................. 0.01 (1.01) 0.49
---------- -------- -------
Total From Investment Operations............... 0.08 (0.67) 0.67
---------- -------- -------
Less Distributions
Dividends From Net Investment Income........... (0.07) (0.34) (0.18)
Distributions From Net Realized Capital
Gains........................................ (0.18) 0.00 0.00
---------- -------- -------
Total Distributions............................ (0.25) (0.34) (0.18)
---------- -------- -------
Net Asset Value, End of Period................. $ 7.86 $ 6.85 $ 7.34
========== ====== ======
Total Return (%)............................... 1.0(c) (8.6) 9.8(c)
Ratio of Operating Expenses to Average
Net Assets (%)............................... 1.65(b) 1.67 1.70(b)
Ratio of Net Investment Income to Average
Net Assets (%)............................... 3.91(b) 4.69 4.87(b)
Portfolio Turnover Rate (%).................... 86 88 158(b)
Net Assets, End of Period (000)................ $3,395 $7,997 $11,154
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
12
<PAGE> 23
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 13, 1993. Class A shares are sold with a
maximum front end sales charge of 4.50%. Class B shares do not pay a front end
sales charge, but pay a higher ongoing distribution fee than Class A shares, and
are subject to a contingent deferred sales charge if those shares are redeemed
within five years of purchase. Expenses of the Fund are borne pro-rata by the
holders of both classes of shares, except that each class bears expenses unique
to that class (including the Rule 12b-1 service and distribution fees applicable
to such class), and votes as a class only with respect to its own Rule 12b-1
Plan. Shares of each class would receive their pro-rata share of the net assets
attributable to their Class, if the Fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION. The Fund's investment adviser, Back Bay Advisors, L.P.
("Back Bay Advisors"), under the supervision of the Fund's trustees, determines
the value of the Fund's portfolio of securities, using valuations provided by a
pricing service selected by Back Bay Advisors and other information with respect
to transactions in securities, including quotations from securities dealers.
Valuations of securities and other assets owned by the Fund for which market
quotations are readily available are based on those quotations. Short-term
obligations that will mature in 60 days or less are stated at amortized cost,
which approximates market value. All other securities and assets are valued at
their fair value as determined in good faith by Back Bay Advisors under the
supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income for the Fund is increased by the
accretion of original issue discount. Interest income is reduced by the
amortization of premium. In determining net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
C. WHEN-ISSUED SECURITIES. Delivery and payment for securities purchased on a
when-issued or delayed basis can take place one month or more after the date of
the
13
<PAGE> 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
--------------------------------------------------------------------------------
June 30, 1995
(unaudited)
transaction. The securities so purchased are subject to market fluctuation
during this period. At June 30, 1995 the Fund held no such securities.
D. OPTIONS AND FUTURES
CALLS AND PUTS
The Fund may write (sell) call and put options on securities to manage its
exposure to interest rates and the bond market. Buying futures, writing puts,
and buying calls tend to increase the fund's exposure to the underlying
instrument. Selling futures, buying puts, and writing calls tend to decrease the
fund's exposure to the underlying instrument, or hedge other fund investments.
When a fund writes a call or put option, an amount equal to the premium received
by the fund is included in the fund's statement of assets and liabilities as an
asset and as an equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current market value of the option
written. The current value of a written option is the closing price on the
principal exchange on which such option is traded. If an option which the fund
has written either expires on its stipulated expiration date, or if the fund
enters into a closing purchase transaction, the fund realizes a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
If a call option which the fund has written is exercised, the fund realizes a
capital gain or loss from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received. If a put option
which the fund has written is exercised, the amount of the premium originally
received will reduce the cost of the security which the fund purchases upon
exercise of the option.
The premium paid by a fund for the purchase of a call or a put option is
included in the asset section of the fund's statement of assets and liabilities
as an investment and subsequently adjusted to the current market value of the
option. The current value of a purchased option is the closing price on the
principal exchange on which such option is traded. If an option which the fund
has purchased expires on the stipulated expiration date, the fund will realize a
loss in the amount of the cost of the option. If the fund enters into a closing
sale transaction, the fund will realize a gain or loss, depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. If the fund exercises a purchased put option, it will
realize a gain or loss from the sale of the underlying security and the proceeds
form such sale will be decreased by the premium originally paid. If the fund
exercises a purchased call option, the cost of the security which the fund
purchases upon exercise will be increased by the premium originally paid.
14
<PAGE> 25
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
The risk in writing a call option is that the fund relinquishes the opportunity
to profit if the market price of the underlying security increases and the
option is exercised. In writing a put option, the fund assumes the risk of
incurring a loss if the market price decreases and the option is exercised. In
addition, there is the risk the fund may not be able to enter into a closing
transaction because of an illiquid secondary market.
INTEREST RATE FUTURES CONTRACTS
The Fund may enter into interest rate futures contracts to hedge against changes
in the values of securities the fund owns or expects to purchase. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price (or to deliver an amount of cash) on a future date.
Upon entering into such a contract, the purchasing fund is required to pledge to
the broker an amount of cash, U.S. Government securities or other high quality
debt securities equal to the minimum "initial margin" requirements of the
exchange, currently up to $3,000 per contract. Pursuant to the contract, the
fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as "variation margin," and are recorded by the fund as unrealized gains or
losses. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations, which
may differ from generally accepted accounting principles. Permanent book and tax
basis differences will result in reclassification to the capital accounts.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the six months ended June 30, 1995 were $156,917,288 and $162,222,550
respectively.
15
<PAGE> 26
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
Transactions in written options and futures contracts for the Fund for the six
months ended June 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
SALES OF FUTURES
CONTRACTS
--------------------
AGGREGATE
NUMBER FACE VALUE
OF OF
CONTRACTS CONTRACTS
----- ------------
<S> <C> <C>
Contracts opened................................ 2,525 $270,121,656
Contracts closed................................ 2,275 (241,478,438)
----- ------------
Open at June 30, 1995........................... 250 $ 28,643,218
===== ============
</TABLE>
<TABLE>
<CAPTION>
WRITTEN OPTIONS
-------------------
NUMBER
OF PREMIUMS
CONTRACTS RECEIVED
------ ---------
<S> <C> <C>
Contracts opened................................. 1,450 $ 554,556
Contracts closed................................. (1,050) (394,456)
------ ---------
Open at June 30, 1995............................ 400 $ 160,100
====== =========
</TABLE>
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. During the six
months ended June 30, 1995, the Fund incurred management fees payable to its
investment adviser, Back Bay Advisors. Certain officers and directors of the
adviser and its affiliated companies are also officers or trustees of the Fund.
Back Bay Advisors is a wholly owned subsidiary of New England Investment
Companies, L.P. ("NEIC"), which is a majority owned subsidiary of New England
Mutual Life Insurance Company. The management agreement in effect during the six
months ended June 30, 1995 provided for fees as set forth below:
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
FEES EARNED RATE ANNUAL NET ASSET VALUE LEVELS
---------- ------------------- ------------------------------
<S> <C> <C>
$440,390 0.500% the first $100 million
0.375% the excess over $100 million
</TABLE>
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New England
Funds"), the Fund's distributor, performs certain accounting and administrative
services for the Fund. The Fund reimburses New England Funds for all or part of
New England Funds' expenses of providing these services which include the
following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing and financial reporting functions and related clerical
functions relating to the Fund, (ii) expenses for services required in
connection with the preparation of registration statements and prospectuses,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance, and (iii) registration, filing and other fees
in connection with requirements of regulatory authorities. For the six months
16
<PAGE> 27
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
ended June 30, 1995 these expenses amounted to $25,952 and are shown separately
in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1995, the Fund
paid New England Funds $69,138 as compensation for its services in that
capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1995, the Fund paid New England Funds $240,164 in fees
under the Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect. The
amount of unreimbursed expenses carried forward into 1995 is $1,700,600.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class B shares and/or the maintenance of shareholder accounts.
For the six months ended June 30, 1995, the Fund paid New England Funds $12,105
in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who may
be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the six months
ended June 30, 1995, the Fund paid New England Funds $36,313 in distribution
fees under the Class B Plan.
17
<PAGE> 28
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors of shares of the Fund during the six months ended
June 30, 1995 amounted to $142,620.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of Back Bay
Advisors, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
<TABLE>
<S> <C>
Annual Retainer $2,400
Meeting Fee $125/meeting
Committee Meeting Fee $75/meeting
Committee Chairman Retainer $125/year
</TABLE>
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have had, had it been invested in the Fund on the
normal payment date.
4. CONCENTRATION OF CREDIT. The Fund had the following industry concentrations
in excess of 10% at June 30, 1995 as a percentage of the Fund's total net
assets: Electric 12.1%. The Fund also had more than 10% of its total net assets
invested in: California 10.0%, Florida 12.8% and New York 15.8% at June 30,
1995. Certain risks arise from concentrating investments in any state. Certain
revenue or tax related events in a state may impair the ability of issuers of
municipal securities to pay principal and interest on their obligations.
5. CAPITAL SHARES. At June 30, 1995 there was an unlimited number of shares of
beneficial interest authorized divided into two classes, Class A and Class B
capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------------- -----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold....................... 3,542,005 $ 26,128,781 916,056 $ 6,634,717
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income............. 1,101,789 7,965,454 532,855 3,890,412
--------- ----------- --------- -----------
4,643,794 34,094,235 1,448,911 10,525,129
Shares redeemed................... (6,611,073) (47,557,785) (2,016,658) (14,683,171)
--------- ----------- --------- -----------
Net decrease...................... (1,967,279) $(13,463,550) (567,747) $ (4,158,042)
========= =========== ========= ===========
</TABLE>
18
<PAGE> 29
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-------------------------------------------------------------------------------
June 30, 1995
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------------- -----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold....................... 913,518 $ 6,744,228 420,460 $ 3,044,059
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income............. 31,151 222,402 21,150 154,309
--------- ----------- --------- -----------
944,669 6,966,630 441,610 3,198,368
Shares redeemed................... (209,246) (1,489,425) (90,236) (657,074)
--------- ----------- --------- -----------
Net increase...................... 735,423 $ 5,477,205 351,374 $ 2,541,294
========= =========== ========= ===========
Total decrease from capital share
transactions.................... (1,231,856) $ (7,986,345) (216,373) $ (1,616,748)
========= ============ ========= ===========
</TABLE>
19
<PAGE> 30
------------------------------------------------------------------------------
REGULAR INVESTING PAYS
------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets
2. It's convenient and effortless
3. It requires a low minimum to get started
4. It can help you reach important long-term goals like retirement or
college funding
5. It can help you benefit from the ups and downs of the market
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $50 a month in your New England Fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
----------------------------------------------------------------------------
THE POWER OF MONTHLY INVESTING
----------------------------------------------------------------------------
A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:
<TABLE>
<CAPTION>
Monthly investments of $50:
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
<CAPTION>
Monthly investments of $100
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
<CAPTION>
Monthly investments of $200:
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
<CAPTION>
Monthly investments of $500:
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
</TABLE>
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high.
You can start an Investment Builder program with your current New England Fund
account, or with any of our other funds. To open an Investment Builder account
today, call your financial representative or New England Funds at
1-800-225-5478.
20
<PAGE> 31
------------------------------------------------------------------------------
NEW ENGLAND FUNDS
------------------------------------------------------------------------------
STOCK FUNDS
International Equity Fund
Growth Funds
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Tax Exempt Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
MONEY MARKET FUNDS
Cash Management Trust
-- Money Market Series
-- U.S. Government Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
New England Funds, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors
when it is preceded or accompanied by the Fund's current
prospectus, which contains information about distribution charges,
management and other items of interest. Investors are advised
to read the prospectus carefully before investing.
<PAGE> 32
[LOGO]
NEW ENGLAND FUNDS
Where the Best Minds Meets
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
95-0765 [TX5B]
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