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[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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NEW ENGLAND
MUNICIPAL
INCOME FUND
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JUNE 30, 1996
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<PAGE>
July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Municipal Income Fund, containing your
portfolio manager commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first half
of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic growth,
remained strong at 2.3% through June, just shy of what most economists consider
optimal growth. As a result, the Federal Reserve Board opted not to tinker with
interest rates through the first half of the year, save for a quarter-point ease
in short-term rates in late January. The relatively calm economic waters had a
stimulating effect on the domestic equity market, boosting stocks 537 points to
5,654 at the end of June, as measured by the Dow Jones Industrial Average. Bond
yields did not fare as well, rising to 7.00% at the end of June from 6.65%
earlier in the year. Money market yields remained stable, falling back only
slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of the
Dow Jones Industrial Average's first-half gains. Again, we are reminded that no
bull market lasts forever. Long-term financial goals are key in times like these
and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A financial
representative can guide you through volatile markets and help you meet your
long-term financial goals. A recent study by Dalbar, Inc., a mutual fund
monitoring and analytical service, shows that, on average, mutual fund investors
who bought and held shares, with the assistance of a financial representative,
enjoyed the benefits of a long-term commitment. Consequently, they benefitted
from higher returns than direct investors and others who bought and sold,
although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our most
popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds marked their first and second birthdays, respectively. We're proud of all
of our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow moderately
and that inflationary pressures will not be excessive. While we estimate the GDP
may rise somewhat from its current level of 2.3%, the Federal Reserve should be
reluctant to tighten the money supply by raising short-term interest rates. We
also believe that the equity markets will continue to be volatile through the
rest of the year.
We believe that you will find your portfolio manager commentary informative. If
you have any questions or comments, please contact your financial representative
or New England Funds directly at 800-225-5478.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
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NEW ENGLAND MUNICIPAL INCOME FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1996
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.
[A chart in the form of a line graph appears here illustrating a $10,000
investment in New England Municipal Income Fund's Class A Shares since 6/30/86
compared to the Lehman Municipal Index(4) and the Cost of Living(5). The data
points for this chart are as follows:
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A $10,000 Investment in Class A Shares
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Cost of
Date Range NAV POP Lehman* Living
6/30/86 $10,000 $ 9,550 $10,000 $10,000
1987 $10,490 $10,018 $10,862 $10,372
1988 $11,257 $10,750 $11,668 $10,780
1989 $12,635 $12,066 $12,997 $11,338
1990 $13,275 $12,687 $13,882 $11,868
1991 $14,246 $13,605 $15,133 $12,425
1992 $16,078 $15,354 $16,914 $12,808
1993 $17,997 $17,187 $18,937 $13,192
1994 $17,754 $16,955 $18,975 $13,476
1995 $19,142 $18,280 $20,643 $13,859
1996 $20,325 $19,410 $22,013 $14,231
*Lehman Aggregate Index
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.
Average Annual Total Returns as of 6/30/96*
Class A YTD 1 Year 3 Years 5 Years 10 Years
Net Asset Value(1) -0.07% 6.18% 4.13% 7.36% 7.35%
With Max. Sales Charge(2) -4.59 1.36 2.54 6.38 6.86
Lipper General Muni. Average(6) -1.38 5.67 4.13 7.34 7.61
Class B (Inception 9/13/93) YTD 1 Year Since Inception
Net Asset Value(1) -0.45% 5.50% 2.38%
With CDSC(3) -4.34 1.50 1.42
Lehman Municipal(4) 6.64 4.08
Lipper General Muni. Average(6) -1.38 5.67 n/a
Yields as of 6/30/96*
Class A Class B
SEC Yield 5.37% 4.88%
Taxable Equivalent Yield 8.89 8.08
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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Photo of
Nathan Wentworth
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NEW ENGLAND MUNICIPAL INCOME FUND
(FORMERLY NEW ENGLAND TAX EXEMPT INCOME FUND)
Portfolio Manager: Nathan Wentworth
Back Bay Advisors, L.P.(R)
The Market
The first six months of 1996 were challenging for fixed-income investments, and
municipal bonds were no exception. The strong bond market rally of 1995 quickly
lost steam early this year as unexpectedly strong economic activity caused
interest rates to reverse direction and move sharply higher. From the beginning
to the end of the period, long-term interest rates, as measured by the yield on
the 30-year U.S. Treasury bond, climbed almost a full percentage point, from
5.95% to 6.89%.
The good news for the municipal bond market was the easing of fears generated by
tax reform proposals, particularly those promoting a flat tax. Triple-A rated,
30-year municipal bonds had yields close to 90% of comparable Treasury bonds at
the end of 1995. This ratio declined during the first half of 1996 to about 85%,
indicating that municipal bonds had appreciated relative to Treasury bonds,
losing less value than Treasury bonds during the market sell-off.
How Your Fund Performed
The New England Municipal Income Fund had excellent performance on a relative
basis. For the six month period, the Fund had a total return of -0.07% for Class
A shares, based on net asset value. This performance is better than the average
return of -1.38% for the 225 municipal bond funds tracked by Lipper.
As of June 28, 1996, the Fund's SEC yield was 5.37% and 4.88% for Class A and
Class B shares respectively, which translates into taxable equivalent yields of
8.89% and 8.08% for a fully taxable investment, assuming the maximum federal tax
rate of 39.6%.*
How We Managed Your Fund
The Fund had been positioned defensively since late 1995, reflecting our belief
that weakening demand for municipal bonds and a potentially volatile interest
rate environment would depress values and erase much of the gain generated
during the market rally of 1995. We lowered the Fund's duration to about 6 years
in order to reduce the Fund's sensitivity to interest rate changes. This
defensive restructuring proved very successful when the market sold off sharply
early in the period.
The Fund is currently positioned to be market neutral. Near the end of the
period, we extended the Fund's duration to about 7 3/4 years based, in part, on
the substantial ground that the bond market gave up over a short period. In
addition, as more economic data became available, we did not see any significant
wage and price or commodity price increases, which should calm the market's
fears of inflation. The Fund's holdings of high-coupon bonds and selected
investments in lower-quality credits will continue to support shareholder value
in a rising interest rate environment.
We also pursued strategies designed to enhance the Fund's yield. About 11% of
the Fund is invested in bonds that are considered below investment grade and
another 54% is invested in BBB-rated bonds, the lowest investment grade rating
category. Our internal credit research team permits us to add significant value
in this area through ongoing analysis. We have been very successful selecting
investments of this kind, particularly in the airport and independent power
production (IPP) sectors. We had a significant holding in Delta Airlines-backed
airport bonds that were rated below investment grade at the time of purchase.
These bonds performed very well when Delta received an investment grade rating
during the period. In the IPP arena, we used a careful selection process to
identify the strongest situations in this sector. Because this sector was
relatively new to the tax exempt universe, and many investors were unfamiliar
with these types of projects, we were able to purchase bonds at very attractive
levels. Several of these investments, including two cogeneration plants in
Pennsylvania and one in Florida, have provided exceptional performance.
Our Investment Outlook
We see nothing in the economy over the next six months that should fundamentally
change our investment strategy. While benign inflation should be a positive for
the market, the stronger-than-expected growth continues to alarm investors. As a
result, we expect to see continued volatility as the market seesaws between each
economic release. We expect to maintain the Fund's market neutral position and
to look for value on a case-by-case basis.
Supply and demand dynamics in the municipal market will also be important to
watch. Current low levels of supply and fairly limited demand have made
selecting attractive bonds more difficult. Likewise, the increase in the
percentage of new bonds that are issued with bond insurance limits the number of
appealing yield-oriented opportunities as these issues carry low yielding,
triple-A ratings.
While tax reform is currently not a material factor in the market, that could
all change based on the presidential election in November. Should the
Republicans win and retain control of the House of Representatives, tax reform
proposals may reappear. Until such time, however, municipal bonds provide
attractive opportunities for individuals subject to high federal tax rates.
* The alternative minimum tax may apply. Some federal and state taxes may apply.
Yield is calculated using a standard formula established by the Securities and
Exchange Commission, and is an annualized percentage rate based on the yield
earned by each of the Fund's share classes during the 30 days ended June 28,
1996.
Portfolio Quality as of 6/30/96
AAA 14.30%
AA 8.10%
A 13.06%
BBB 53.13%
Other 11.41%
Average Portfolio Quality = A Average Portfolio Maturity = 21.5 years
Quality ratings provided by Standard & Poor's Corporation.
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(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
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NEW ENGLAND
MUNICIPAL INCOME
FUND
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JUNE 30, 1996
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1996
(unaudited)
<TABLE>
TAX EXEMPT BONDS--98.9% OF TOTAL NET ASSETS
<CAPTION>
RATINGS (c)
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FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
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<S> <C> <C> <C> <C>
ALABAMA--0.8%
$1,500,000 Mobile Solid Waste Disposal Revenue Bond,
6.950%, 1/01/20 ..................................... Baa3 BBB- $ 1,546,155
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ALASKA--0.8%
1,535,000 Alaska State Housing Finance Corp., 6.500%, 6/01/34 ... Aaa AAA 1,556,459
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ARIZONA--2.5%
2,500,000 Navajo County Pollution Control, 5.875%, 8/15/28 ...... Baa1 BBB 2,387,175
2,300,000 University of Arizona, 6.350%, 6/01/14 ................ A1 AA 2,387,170
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4,774,345
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CALIFORNIA--8.1%
1,500,000 California Housing Finance Agency Revenue Bond,
8.100%, 8/01/07 ..................................... Aa AA- 1,557,075
465,000 California Housing Finance Agency Revenue Bond,
8.125%, 8/01/19 .................................... Aa AA- 483,939
4,300,000 Foothills/Eastern Transportation Corridor, 6.500%,
1/01/32 ............................................. Baa BBB- 4,299,957
2,000,000 Los Angeles Convention & Exhibition Authority,
9.000%, 12/01/20 ................................... AAA AAA 2,577,120
2,000,000 Los Angeles Regional Airports Revenue Bond,
6.350%, 11/01/25 ................................... Baa3 BB+ 2,008,020
2,000,000 Sacramento California Cogeneration Authority,
6.500%, 7/01/21 ..................................... -- BBB- 2,017,160
3,000,000 Sacramento California Power Authority, 6.000%, 7/01/22 -- BBB- 2,852,550
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15,795,821
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COLORADO--5.7%
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/06 .................................... Baa AAA 1,724,100
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/12 ................................... Baa AAA 1,724,100
5,000,000 Denver City & County Airport Revenue Bond,
7.750%, 11/15/21 ................................... Baa BBB 5,526,950
2,000,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/23 ................................... Baa BBB 2,180,540
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11,155,690
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CONNECTICUT--1.0%
2,000,000 Connecticut State Housing Finance Authority,
6.125%, 5/15/18 ..................................... Aa AA 2,011,640
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FLORIDA--7.4%
3,000,000 Escambia County Pollution Control, 6.900%, 8/01/22 ... Baa1 BBB 3,160,020
1,430,000 Florida State, Jacksonville Transportation,
6.400%, 7/01/22 .................................... Aa AA 1,520,319
1,000,000 Martin County Industrial Development Authority,
7.875%, 12/15/25 ................................... Baa3 BBB- 1,119,370
1,500,000 Palm Beach County Solid Waste Revenue,
8.750%, 7/01/10 .................................... A A 1,617,450
2,000,000 Palm Beach County Solid Waste Revenue,
6.850%, 1/01/14 .................................... -- -- 1,921,380
2,500,000 Palm Beach County Solid Waste Revenue,
6.950%, 1/01/22 .................................... -- -- 2,371,775
2,500,000 Pasco County, Pollution Control Revenue,
6.350%, 2/01/22 ..................................... Aaa AAA 2,610,450
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14,320,764
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GEORGIA--1.4%
2,500,000 Atlanta Special Purpose Facilities Revenue,
7.900%, 12/01/18 ................................... Ba2 BB+ 2,654,175
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GUAM--1.4%
3,000,000 Guam Government, Series A, 5.400%, 11/15/18 ........... -- BBB 2,623,020
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ILLINOIS--6.0%
2,250,000 Chicago O'Hare International Airport Special
Facilities, 8.200%, 12/01/24 ........................ Baa2 BB+ 2,585,858
6,000,000 Illinois Development Financial Authority Pollution
Control, 7.250%, 6/01/11 ............................ Baa2 BBB 6,375,240
2,500,000 Illinois Development Financial Authority Pollution
Control, 7.375%, 7/01/21 ............................ Baa1 BBB 2,761,325
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11,722,423
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INDIANA--3.3%
3,500,000 Indiana State Development Financial Authority
Pollution, 6.850%, 12/01/12 ......................... Ba3 BB- 3,556,105
2,800,000 Indianapolis Airport Authority, 7.100%, 1/15/17 ...... Baa2 BBB 2,949,716
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6,505,821
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KENTUCKY--1.8%
2,000,000 Kenton County Airport Board Revenue, 7.500%, 2/01/12 . Baa3 BB+ 2,129,840
1,500,000 Kenton County Airport Board Revenue, 6.125%, 2/01/22 . Baa3 BB+ 1,415,970
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3,545,810
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MASSACHUSETTS--5.9%
3,000,000 Massachusetts Bay Transportation Authority,
6.100%, 3/01/23 .................................... A1 A+ 3,039,930
2,605,000 Massachusetts State Health & Educational Facilities,
5.750%, 7/01/24 .................................... Aa AA- 2,530,914
2,500,000 Massachusetts State Housing Finance Agency,
6.300%, 10/01/13 ................................... A1 A+ 2,516,375
3,315,000 Massachusetts State Housing Finance Agency,
6.375%, 4/01/21 .................................... A1 A+ 3,320,072
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11,407,291
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MICHIGAN--1.4%
2,765,000 Dickinson County Economic Development,
5.850%, 10/01/18 .................................... Baa1 BBB 2,658,382
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NEW YORK--19.2%
2,000,000 Metropolitan Transportation Authority Service Center,
5.750%, 7/01/15 .................................... Baa1 BBB 1,891,820
2,450,000 New York City General Obligation, 7.500%, 2/01/05 .... Baa1 BBB+ 2,639,826
1,000,000 New York City General Obligation, 7.100%, 2/01/10. .... Baa1 BBB+ 1,043,270
4,860,000 New York City General Obligation, 7.000%, 10/01/13 .... Baa1 BBB+ 5,037,584
4,000,000 New York State Dormitory Authority, 5.500%, 5/15/13 .. Baa1 BBB+ 3,749,000
1,350,000 New York State Dormitory Authority, 5.625%, 5/15/13 .. Baa1 BBB+ 1,261,359
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 .. Baa1 BBB 2,639,387
2,040,000 New York State Dormitory Authority, 5.375%, 5/15/16 .. Baa1 BBB+ 1,836,184
2,500,000 New York State Dormitory Authority, 5.500%, 5/15/23 ... Baa1 BBB+ 2,239,325
575,000 New York State Medical Care Facilities, 7.300%, 8/15/11 Baa1 BBB+ 631,166
1,955,000 New York State Medical Care Facilities, 6.500%, 8/15/12 Aaa AAA 2,045,008
2,500,000 New York State Medical Care Facilities, 5.375%, 2/15/14 Baa1 BBB+ 2,275,625
4,150,000 New York State Medical Care Facilities. 5.250%, 8/15/14 Baa1 BBB+ 3,711,719
3,430,000 New York State Urban Development Corp.,
5.500%, 1/01/18 .................................... Baa1 BBB 3,120,477
1,000,000 Port Authority of New York & New Jersey,
7.000%, 10/1/07 ..................................... -- -- 1,054,830
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37,326,924
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NORTH CAROLINA--2.1%
2,545,000 North Carolina Eastern Municipal Power,
6.125%, 1/01/09 ..................................... A BBB+ 2,572,664
1,500,000 North Carolina Eastern Municipal Power,
6.000%, 1/01/22 ..................................... A BBB+ 1,465,560
------------
4,038,224
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OHIO--1.7%
3,000,000 Cleveland Public Power Systems Revenue,
7.000%, 11/15/24 ................................... Aaa AAA 3,334,230
------------
OREGON--0.5%
1,000,000 Western Generation Agency, 7.400%, 1/01/16 ............ -- -- 1,054,860
------------
PENNSYLVANIA--10.3%
3,000,000 Delaware County Pollution Control, 7.375%, 4/01/21 ... Baa1 BBB+ 3,198,960
2,725,000 Pennsylvania Convention Center, 6.700%, 9/01/14 ....... Baa BBB- 2,842,965
2,000,000 Pennsylvania Convention Center, 6.750%, 9/01/19 ....... Baa BBB- 2,086,380
4,000,000 Pennsylvania Economic Development Financing Authority,
7.150%, 12/01/18 ................................... -- BBB- 4,087,920
3,000,000 Pennsylvania Economic Development Financing Authority,
6.600%, 1/01/19 .................................... -- -- 2,823,090
1,500,000 Pennsylvania Economic Development Financing Authority,
7.600%, 12/01/20 ................................... Baa2 BBB 1,646,715
3,000,000 Pennsylvania Economic Development Financing Authority,
7.600%, 12/01/24 ................................... Baa1 BBB+ 3,313,980
------------
20,000,010
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PUERTO RICO--5.4%
2,845,000 Puerto Rico Commonwealth Highway & Trans. Authority,
6.625%, 7/01/18 ..................................... Baa1 A 3,136,954
3,750,000 Puerto Rico Electric Power Authority, 6.000%, 7/01/14 Baa1 A- 3,777,975
1,250,000 Puerto Rico Public Building Authority, 5.750%, 7/01/16 Baa1 A 1,213,875
2,500,000 Puerto Rico Public Building Authority, 5.500%, 7/01/21 Baa1 A 2,323,950
------------
10,452,754
------------
SOUTH DAKOTA--0.5%
1,000,000 South Dakota Student Loan Financing, 7.700%, 8/01/07 .. -- A+ 1,061,550
------------
TENNESSEE--1.3%
2,500,000 Maury County, Induustrial Development Board,
6.500%, 9/01/24 ..................................... A3 A- 2,576,550
------------
TEXAS--4.0%
2,000,000 Alliance Airport Authority, 6.375%, 4/01/21 ........... Baa2 BBB 1,976,440
2,825,000 Dallas Fort Worth International Airport, 7.250%,
11/01/30 ............................................ Baa2 BB+ 2,964,781
3,000,000 Texas State Turnpike Authority, 5.250%, 01/01/23 ...... Aaa AAA 2,751,540
------------
7,692,761
------------
UTAH--1.1%
2,000,000 Intermountain Power Agency, 8.625%, 7/01/21 .......... Aa AA 2,127,740
------------
VIRGIN ISLANDS--2.4%
4,500,000 Virgin Islands Public Finance Authority, 7.250%,
10/01/18 ............................................ -- -- 4,753,260
------------
WASHINGTON--2.9%
1,000,000 Washington Public Power Supply, 6.800%, 7/01/07 ...... Aa AA- 1,074,530
1,270,000 Washington Public Power Supply, 7.000%, 7/01/11 ...... Aa AA- 1,332,496
3,000,000 Washington Public Power Supply, 7.000%, 7/01/12 ...... Aa AA- 3,214,410
------------
5,621,436
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Total Tax Exempt Bonds (Identified Cost $182,946,439) ........................... 192,318,095
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<CAPTION>
SHORT-TERM INVESTMENT -- 0.7%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1,400,000 American Express Credit Corp., 5.390%, 7/01/96 .................................. 1,400,000
------------
Total Short-Term Investment (Identified Cost $1,400,000) ........................ 1,400,000
------------
Total Investments -- 99.6% (Identified Cost $184,346,439) (b) ................... 193,718,095
Other assets less liabilities ................................................... 608,704
------------
Total Net Assets - 100% ......................................................... $194,326,799
============
<FN>
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1996 the net unrealized appreciation on investments
based on cost of $184,346,439 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 .................................................................... $9,942,300
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value .................................................................... (570,644)
----------
Net unrealized appreciation ............................................................... $9,371,656
==========
(c) The ratings shown are believed to be the most recent ratings available at June 30, 1996.
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, 1996. 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.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
ASSETS
Investments at value ....................... $193,718,095
Cash ....................................... 4,554
Receivable for:
Fund shares sold ......................... 103,651
Accrued interest ......................... 3,787,079
Prepaid registration expense ............... 4,000
------------
197,617,379
LIABILITIES
Payable for:
Securities purchased ..................... $2,500,800
Fund shares redeemed ..................... 367,927
Dividends declared ....................... 267,512
Accrued expenses:
Management fees .......................... 69,596
Deferred trustees' fees .................. 43,231
Accounting and administrative ............ 3,533
Other expenses ........................... 37,981
----------
3,290,580
------------
NET ASSETS ................................... $194,326,799
============
Net Assets consist of:
Capital paid in .......................... $192,631,389
Undistributed net investment income ...... 298,401
Accumulated net realized losses .......... (7,974,647)
Unrealized appreciation on investments ... 9,371,656
------------
NET ASSETS ................................... $194,326,799
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class
A shares ($182,211,891 divided by 24,666,498
shares of beneficial interest) ............. $7.39
=====
Offering price per share (100/95.50 of $7.39) $7.74*
=====
Net asset value and offering price of Class B
shares ($12,114,908 divided by 1,640,133
shares of beneficial interest) ............. $7.39**
=====
Identified cost of investments ............... $184,346,439
============
* Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest ................................... $6,371,979
Expenses
Management fees .......................... $ 434,697
Service fees--Class A .................... 233,195
Service and distribution fees--Class B ... 60,733
Trustees' fees and expenses .............. 10,428
Accounting and administrative ............ 26,484
Custodian ................................ 42,834
Transfer agent ........................... 88,823
Audit and tax services ................... 24,000
Legal .................................... 10,499
Printing ................................. 17,824
Registration ............................. 14,884
Miscellaneous ............................ 4,306
-----------
Total expenses ............................. 968,707
----------
Net investment income ...................... 5,403,272
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net ......................... 722,924
Options--net ............................. (245,975)
Futures contracts--net ................... (99,412)
-----------
Total realized gain on investments,
options and futures contracts .......... 377,537
-----------
Unrealized appreciation (depreciation) on:
Investments--net ......................... (6,834,780)
Options--net ............................. 251,100
Futures contracts--net ................... 258,712
-----------
Total unrealized depreciation on
investments, options and
futures contracts ...................... (6,324,968)
-----------
Net loss on investment transactions ........ (5,947,431)
----------
NET DECREASE IN NET ASSETS FROM OPERATIONS ... $ (544,159)
==========
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
------------ -------------
FROM OPERATIONS
Net investment income ...................... $ 11,178,967 $ 5,403,272
Net realized gain (loss) on investment
transactions ............................. (1,398,807) 377,537
Unrealized appreciation (depreciation) on
investment transactions .................. 22,279,474 (6,324,968)
------------ ------------
Increase (decrease) in net assets from
operations ............................... 32,059,634 (544,159)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .................................. (10,706,960) (5,037,253)
Class B .................................. (506,948) (282,374)
------------ ------------
(11,213,908) (5,319,627)
------------ ------------
Decrease in net assets derived from capital
share transactions ....................... (5,674,559) (7,179,261)
------------ ------------
Total increase (decrease) in net assets .... 15,171,167 (13,043,047)
NET ASSETS
Beginning of the period .................... 192,198,679 207,369,846
------------ ------------
End of the period .......................... $207,369,846 $194,326,799
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period .................... $ 46,584 $ 214,756
============ ============
End of the period .......................... $ 214,756 $ 298,401
============ ============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
---------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $7.21 $7.53 $7.54 $7.87 $6.85 $7.60
----- ----- ----- ----- ----- -----
Income From Investment Operations
Net Investment Income ............................ 0.45 0.44 0.40 0.39 0.42 0.21
Net Realized and Unrealized Gain (loss)
on Investments ................................. 0.35 0.21 0.53 (1.01) 0.74 (0.22)
----- ----- ----- ----- ----- -----
Total From Investment Operations ................. 0.80 0.65 0.93 (0.62) 1.16 (0.01)
----- ----- ----- ----- ----- -----
Less Distributions
Dividends From Net Investment Income ............. (0.43) (0.46) (0.42) (0.40) (0.41) (0.20)
Distributions From Net Realized
Capital Gains .................................. (0.01) (0.18) (0.18) 0.00 0.00 0.00
Distributions From Paid-in Capital ............... (0.04) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Total Distributions .............................. (0.48) (0.64) (0.60) (0.40) (0.41) (0.20)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period ................... $7.53 $7.54 $7.87 $6.85 $7.60 $7.39
===== ===== ===== ===== ===== =====
Total Return (%) (b) ............................. 11.6 8.9 12.7 (8.0) 17.2 (0.1)
Ratio of Operating Expenses to
Average Net Assets (%) ......................... 0.95 0.95 0.91 0.92 0.93 0.93(a)
Ratio of Net Investment Income to
Average Net Assets (%) ......................... 6.18 5.80 5.27 5.44 5.52 5.44(a)
Portfolio Turnover Rate (%) ...................... 126 85 86 88 93 31(a)
Net Assets, End of Period (000) .................. $162,991 $183,276 $226,881 $184,202 $195,301 $182,212
<FN>
(a) Computed on an annualized basis.
(b) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------
SEPTEMBER 13(a) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
--------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Assset Value, Beginning of Period ............ $8.03 $7.86 $6.85 $7.60
----- ----- ----- -----
Income From Investment Operations
Net Investment Income ............................ 0.07 0.34 0.36 0.18
Net Realized and Unrealized Gain (loss)
on Investments ................................. 0.01 (1.01) 0.74 (0.21)
----- ----- ----- -----
Total From Investment Operations ................. 0.08 (0.67) 1.10 (0.03)
----- ----- ----- -----
Less Distributions
Dividends From Net Investment Income ............. (0.07) (0.34) (0.35) (0.18)
Distributions From Net Realized Capital Gains .... (0.18) 0.00 0.00 0.00
----- ----- ----- -----
Total Distributions .............................. (0.25) (0.34) (0.35) (0.18)
----- ----- ----- -----
Net Asset Value, End of Period ................... $7.86 $6.85 $7.60 $7.39
===== ===== ===== =====
Total Return(%) (c) .............................. 1.0 (8.6) 16.3 (0.5)
Ratio of Operating Expenses to
Average Net Assets (%) ......................... 1.65(b) 1.67 1.68 1.68(b)
Ratio of Net Investment Income to
Average Net Assets (%) ......................... 3.91(b) 4.69 4.77 4.69(b)
Portfolio Turnover Rate (%) ...................... 86 88 93 31(b)
Net Assets, End of Period (000) .................. $3,395 $7,997 $12,069 $12,115
<FN>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
(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 for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within 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 of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, 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 delivery basis can take place one month or more after
the date of the transaction. The securities so purchased are subject to market
fluctuation during this period. At June 30, 1996 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 from 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.
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.
E. 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.
Risks of entering into futures contracts include the possibility that there
may be an illiquid market and that changes in the value of the contract may
not correlate with changes in the value of the underlying securities.
F. 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.
G. 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, 1996 were $30,752,008 and
$34,157,375 respectively.
Transactions in written options and futures contracts for the Fund for the six
months ended June 30, 1996 are summarized as follows:
SALES OF FUTURES CONTRACTS
----------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Open at December 31, 1995 ...................... 100 $ 11,844,413
Contracts opened ............................... 100 12,012,475
Contracts closed ............................... (200) (23,856,888)
--- --------------
Open at June 30, 1996 .......................... 0 $ 0
=== ==============
WRITTEN OPTIONS
----------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1995 ...................... 200 $ 258,275
Contracts opened ............................... 300 174,131
Contracts closed ............................... (500) (432,406)
--- --------------
Open at June 30, 1996 .......................... 0 $ 0
=== ==============
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays management fees to its investment adviser, New England Funds
Management L.P. ("NEFM") at the annual rate of 0.50% of the first $100 million
of the Fund's average daily net assets and 0.375% of such assets in excess of
$100 million. NEFM pays the Fund's investment subadviser, Back Bay Advisors,
at the rate of 0.25% of the first $100 million of the Fund's average daily net
assets and 0.1875% of such assets in excess of $100 million. Certain officers
and directors of NEFM and Back Bay Advisors are also officers or trustees of
the Fund. NEFM and Back Bay Advisors, are wholly owned subsidiaries of New
England Investment Companies, L.P., ("NEIC") which is a subsidiary of New
England Mutual Life Insurance Company. Fees earned by NEFM and Back Bay
Advisors under the management agreement in effect during the six months ended
June 30, 1996 are as follows:
FEES EARNED
- -----------
$217,349 New England Funds Management, L.P.
$217,348 Back Bay Advisors, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a subsidiary of NEIC and performs
certain accounting and administrative services for the Fund. The Fund
reimburses New England Funds for all or part of New England Funds' expenses of
providing these services which include the following: (i) expenses for
personnel performing bookkeeping, accounting, internal auditing and financial
reporting functions and 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 ended June 30, 1996 these expenses
amounted to $26,484 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, 1996, the Fund
paid New England Funds $63,797 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, 1996, the Fund paid New England Funds $233,195 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 1996 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, 1996, the Fund paid
New England Funds $15,183 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, 1996, the Fund paid New England Funds $45,550 in distribution
fees under the Class B Plan.
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, 1996 amounted to $135,858.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, 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:
Annual Retainer $2,227
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $98/year
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, 1996 as a percentage of the Fund's
total net assets: Airports 12.3%. The Fund also had more than 10% of its total
net assets invested in: Pennsylvania 10.3% and New York 19.2% at June 30,
1996. 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, 1996 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, 1995 JUNE 30, 1996
--------------------------- ----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 1,603,141 $ 11,755,869 639,118 $ 4,823,879
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............. 1,035,922 7,650,069 486,170 3,622,825
--------- ------------ --------- ------------
2,639,063 19,405,938 1,125,288 8,446,704
Shares repurchased ................................. (3,825,037) (28,129,585) (2,149,436) (16,011,383)
--------- ------------ --------- ------------
Net decrease ....................................... (1,185,974) (8,723,647) (1,024,148) (7,564,679)
--------- ------------ --------- ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
--------------------------- ----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 594,737 4,335,541 236,465 1,753,579
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............. 46,353 342,707 25,818 192,337
--------- ------------ --------- ------------
641,090 4,678,248 262,283 1,945,916
Shares repurchased ................................. (220,882) (1,629,160) (209,759) (1,560,498)
--------- ------------ --------- ------------
Net increase ....................................... 420,208 3,049,088 52,524 385,418
--------- ------------ --------- ------------
Decrease derived from capital share transactions ... (765,766) $ (5,674,559) (971,624) $ (7,179,261)
========= ============ ========= ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
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
retirememt 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:]
Monthly investments of $50
Years Growth of Monthly Investments
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
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.
<PAGE>
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SAVING FOR RETIREMENT
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AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. While it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of investor B's commitment -- and
for less than half the time. Yet investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
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INFORMATION ON CALL
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YOU CAN CALL NEW ENGLAND FUNDS DAY OR NIGHT
Do you like to keep on top of your New England Funds but can't always
call us during regular business hours? With Tele#Facts, New England Funds'
24-hours a day automated telephone system, you can call us any time that's
convenient for you -- day or night!
By calling 1-800-346-5984 from any Touch-Tone(R) telephone, you can:
o Check the current value of your New England Fund account
o Find out the current yield and total return on any New England Fund
o Buy, sell or exchange fund shares
Just remember to have these four items with you before calling:
1. YOUR PERSONAL IDENTIFICATION NUMBER which is the last four digits of your
Social Security number
2. THE FUND NUMBER -- two- or three-digit number listed on the Tele#Facts
wallet card
3. FUNCTION NUMBER -- listed on the Tele#Facts wallet card
4. ACCOUNT NUMBER -- listed on all your statements
You can get the information you need to use Tele#Facts from the back of your
statement. If you need another Tele#Facts wallet card or have questions about
getting started, please call us at 1-800-225-5478.
So go ahead and give Tele#Facts a try. We think you'll enjoy this easy-to-use
and convenient service from New England Funds!
<PAGE>
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NEW ENGLAND FUNDS
- -----------------------------------------------------------------------------
STOCK FUNDS
Growth Fund
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
Growth Fund of Israel
International Equity Fund
Star Worldwide 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
Municipal 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.
VISIT OUR WORLD WIDE WEB SITE AT HTTP://WWW.MUTUALFUNDS.COM
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.
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