[LOGO]
NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET
ANNUAL REPORT AND PERFORMANCE UPDATE
NEW ENGLAND
MUNICIPAL
INCOME FUND
[ARTWORK APPEARS HERE]
DECEMBER 31, 1995
<PAGE>
January 31, 1996
DEAR SHAREHOLDER,
ItOs a real pleasure to present to you the 1995 Annual Report for New
England Municipal Income Fund, containing your portfolio managerOs
commentary and complete financial information.
FAVORABLE ECONOMIC CONDITIONS IN 1995
In 1995 subdued economic growth with little or no inflation created a
very favorable backdrop for the bond and stock markets. Long term
interest rates dipped on the positive inflation news, with the yield
on the 30-year Treasury bond falling to a low of 5.95% at year end.
The stock market, fueled by lower interest rates and solid corporate
earnings growth, advanced 37.6%, as measured by the Standard & PoorOs
500 Index,* for its best showing since 1958. In July and in
December, the Federal Reserve Board lowered short term rates,
signaling its belief that the economy was indeed on a path towards
slow, non-inflationary growth.
NEW ENGLAND FUNDS - WHERE THE BEST MINDS MEET
Over this past year we launched our new corporate identity - Where the
Best Minds Meet -which we believe reflects the essence of New England
Funds. Our unique multiple adviser structure brings together some of
the best investment minds in the business. As recent examples,
consider New England Star Advisers Fund, managed by four prominent
equity advisers, and New England Star Worldwide Fund, a global fund
introduced this January which builds off the Star Advisers concept.
In addition, last May we launched New England Strategic Income Fund,
under the management of Dan Fuss of Loomis Sayles. One of the
industryOs most respected managers, Dan Fuss was named 1995Os OBond
Fund Manager of the YearO by Morningstar for his past record of
accomplishment in fund management at Loomis Sayles.**
* Standard & PoorOs 500 is an unmanaged index representing 500
major companies, the majority of which are listed on the New York
Stock Exchange.
** Morningstar is a third party, independent mutual fund rating
service.
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
1995 DALBAR AWARD FOR SERVICE EXCELLENCE
Where the Best Minds Meet also refers to your financial adviser and
all the people at New England Funds who provide you with quality
service. We are proud to report that in recognition of our ongoing
quality initiatives, New England Funds has been named a 1995 Quality
Tested Service Seal Winner by DALBAR, an independent mutual fund
service rating company. The coveted DALBAR award was given to only
seven companies for Oproviding the highest tier of service excellence
in the mutual fund industry.O
OUTLOOK FOR 1996
Looking ahead, we believe interest rates are likely to remain flat as
the economy continues on its slow, steady, non-inflationary growth
path. While this scenario is extremely positive for the long term, it
is unlikely that 1996 will see a repeat of last yearOs stellar
performance. At this time itOs worth reiterating that long-term
investors should not focus on one yearOs performance. Instead, we
recommend that you review your asset allocation program with your
financial adviser, then remain committed to that program to carry out
its objectives.
We believe you will find your portfolio managerOs commentary
informative. If you have any questions or comments, please contact
your financial representative or New England Funds directly at 800-225-
5478. Also, please contact New England Funds for a prospectus on any
of the funds mentioned above. The prospectus details investment
objectives and risks, as well as management fees and expenses. You
should read it carefully before investing or sending money.
Sincerely,
/s/PETER S. VOSS /s/HENRY L.P. SCHMELZER
Peter S. Voss Henry L.P. Schmelzer
Chairman President
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
INVESTMENT RESULTS THROUGH DECEMBER 31, 1995
Putting Performance into Perspective
The graph comparing your FundOs 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 FundOs 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 $10,000 INVESTMENT IN CLASS A SHARES
[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 Municipal Income Fund - Net Asset Value(1)
Year Amount
- ----- ------
1995 $22,422
1994 $19,126
1993 $20,803
1992 $18,467
1991 $16,952
1990 $15,191
1989 $14,398
1988 $13,119
1987 $11,770
1986 $12,125
12/31/84 $10,000
New England Municipal Income Fund - With Maximum Sales Charge(2)
Year Amount
- ----- ------
1995 $21,413
1994 $18,266
1993 $19,867
1992 $17,636
1991 $16,189
1990 $14,507
1989 $13,750
1988 $12,528
1987 $11,240
1986 $11,579
12/31/84 $9,550
Lehman Municipal Index(4)
Year Amount
- ----- ------
1995 $24,203
1994 $20,606
1993 $21,729
1992 $19,352
1991 $17,786
1990 $15,860
1989 $14,782
1988 $13,343
1987 $12,112
1986 $11,932
12/31/84 $10,000
Cost of Living(5)
Year Amount
- ----- ------
1995 $14,055
1994 $13,697
1993 $13,340
1992 $12,983
1991 $12,617
1990 $12,242
1989 $11,537
1988 $11,025
1987 $10,558
1986 $10,110
12/31/84 $10,000
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.
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/95*
<TABLE><CAPTION>
<S> <C> <C> <C>
CLASS A 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 17.23% 8.09% 8.41%
With Max. Sales Charge(2) 12.00 7.10 7.92
Lipper General Muni. Average(6)16.84 8.48 8.62
CLASS B (INCEPTION 9/21/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 16.31% 3.10%
With CDSC(3) 12.31 1.91
Lehman Municipal Index(4) 17.46 5.63
Lipper General Muni. Average(6)16.84 4.53
YIELDS AS OF 12/31/95*
CLASS A CLASS B
SEC YIELD 5.11% 4.60%
TAXABLE EQUIVALENT YIELD 8.46 7.62
<FN>
SEC Yield is based on the FundOs 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.
</TABLE>
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
[PHOTO]
(FORMERLY NEW ENGLAND TAX EXEMPT INCOME FUND)
Portfolio Manager: Nathan Wentworth
Back Bay Advisors, L.P."
Slow economic growth. Benign inflation. Falling interest rates. All in
all, a very positive climate for municipal-bond investors. General
municipal-bond funds produced an average total return of 16.8% in 1995
- - a sharp contrast to their 6.5% decline in 1994, and the highest
return since 1986, according to Lipper Analytical Services.1 But for
concern over tax reform - in particular, the various flat tax
proposals - returns might have been higher still.
In early March, triple-A rated municipals due in 30 years yielded only
about 79% of comparable Treasury bonds. By late in the year, that
ratio had soared to about 90%, the higher relative yield reflecting
faster price gains by Treasuries.
How Your Fund Performed
New England Municipal Income Fund produced excellent returns on a
relative basis. For the fiscal year ended December 31, 1995, your
FundOs total return was 17.23% at net asset value for Class A shares
placing the Fund ahead of the average return for 225 municipal bond
funds tracked by Lipper.1 At that date, the FundOs yield was 5.11% and
4.6% for Class A and Class B shares respectively, which translates
into taxable equivalent yields of 8.46% and 7.62% for a fully taxable
investment, assuming the maximum federal tax rate of 39.6%.2
1 Lipper Analytical Services is an independent research
organization; rankings vary over time and do not reflect the
effects of sales charges. The Lipper Average is an average of the
total return performance (calculated on the basis of net asset
value) of funds with similar objectives, as calculated by Lipper
Analytical Services.
2 The alternative minimum tax (AMT) 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 based on the yield earned for the
FundOs Class A and Class B shares during the 30 days ending
December 31, 1995.
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
How We Managed Your Fund
Over the course of the year, we actively managed your Fund, shifting
strategies to reflect current market conditions. At the outset, we
were positioned aggressively in anticipation of the marketOs rebound.
The Fund was fully invested and owned a fair number of bonds priced at
a discount, as well as long-term bonds, which typically can provide
significant appreciation potential if long-term rates begin to
decline. This aggressive stance proved extremely successful as
interest rates dropped and the bonds in the portfolio gained in price.
Later in the year, we grew more cautious, as we saw growing signs of
investor apathy due to tax reform fears. We believed that the reduced
demand for municipal bonds would ultimately lead to lower bond values.
To introduce a measure of protection for the Fund, we shortened
portfolio duration from more than nine years to about six years. By
reducing the duration, we made the portfolio less sensitive to
interest-rate moves. We sold many of the discount bonds in favor of
higher-coupon holdings.
To help maintain a stable dividend stream for our shareholders, we
have been pursuing strategies designed to increase the FundOs yield.
To that end, we have increased our holdings in bonds that are below
investment-grade. At year-end, the Fund had roughly 13% of assets
invested in carefully selected bonds of this kind, helping to produce
a 12-month yield that is ranked in the top third of its Lipper peer
group. Careful, thorough, ongoing credit analysis enables us to move
along the quality spectrum and seek bonds that we can be comfortable
with, including those that are not investment grade.
The Fund continues to own New York bonds secured by a pledge of state
appropriations; this very liquid sector and has been a source of
attractive yields. We also own New
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
York City General Obligation bonds. Denver Airport 5% bonds also
delivered attractive returns for us this year.
When interest rates decline, bond issuers often refinance their debt
to reduce costs. In an effort to shield the portfolio from early bond
redemptions, call protection is always built into your Fund. Depending
on market conditions, our strategies may include buying non-callable
bonds and bonds selling at a discount to their par value.
Our Outlook
In our view, current indications lead us to an optimistic - but
cautious - outlook. The Federal Reserve Board has succeeded in keeping
inflation at bay while maintaining sustainable economic growth. This
has enabled the Fed to reduce short-term interest rates. We think that
the sluggish growth in the fourth quarter of 1995, combined with the
recent slowing of consumer spending and continued low inflation, make
it more likely that the Fed will continue on an easing path, albeit
slowly. A lowering of interest rates, however modest, implies
continued growth, and we do not think that a recession is likely in
1996. Similarly, we do not believe that our economy, now entering its
sixth year of expansion, is immune to inflation. In other words,
accelerating inflation or faster growth could introduce some
turbulence into the smooth ride that fixed-income investors enjoyed in
1995. For this reason, we have positioned the Fund more conservatively
going into 1996.
What About Tax Reform?
Although there is no way to predict changes in the nationOs tax code,
we believe that the Flat Tax concept will be a very difficult one to
sell. Certainly, few observers anticipate passage of any significant
tax reform proposals before 1997. Until then, we have a tax structure
with the highest federal rate at 39.6%, making the taxable-equivalent
yields on long-term municipals extremely attractive, especially for
investors burdened by high federal income taxes.
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
We believe that municipal bonds like those that the Fund holds will
stand up well to the uncertainty of pending tax reform legislation,
and will continue to benefit from favorable economic fundamentals.
Because of the relatively high current yields, municipal bonds are
particularly well positioned to produce attractive returns for
investors.
A Special Note
Shareholders of your Fund recently approved a proposal to eliminate
the investment restriction that limited the FundOs investments in
securities that could generate interest subject to the Federal
Alternative Minimum Tax (AMT). We believe that this change will
enhance the FundOs ability to achieve a higher yield. The change could
also increase the amount of the FundOs income distributions subject to
AMT. Shareholders who are subject to AMT may potentially pay
additional income taxes, but most shareholders are not affected. In
connection with the new policy, the FundOs name has changed to New
England Municipal Income Fund.
PORTFOLIO QUALITY AS OF 12/31/95
[A pie chart appears here, illustrating the portfolio quality of New
England Municipal Income Fund at December 31, 1995. The pie chart is
broken in pieces representing credit ratings in the following
percentages:]
CREDIT RATINGS PERCENTAGE
- ---------------------------------
CASH 2.9%
A 9.8%
AA 9.8%
AAA 13.1%
BBB 50.6%
BELOW BBB 13.7
- ----------------------------------
AVERAGE PORTFOLIO QUALITY = A-
AVERAGE PORTFOLIO MATURITY = 21.5 YEARS
Quality ratings provided by Standard & PoorOs Corporation.
<PAGE>
NEW ENGLAND MUNICIPAL INCOME FUND
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 fundOs portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits
earned from selling securities in a fundOs 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 fundOs Oaverage maturityO 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 fundOs
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.
[LOGO]
NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET
PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
NEW ENGLAND
MUNICIPAL
INCOME FUND
DECEMBER 31, 1995
<PAGE>
PORTFOLIO COMPOSITION
Investments as of December 31, 1995
TAX EXEMPT BONDS--97.3% OF TOTAL NET ASSETS
<TABLE><CAPTION>
<C> <S> <C> <C> <C>
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
- --
ALABAMA--0.8%
$1,500,000 Mobile Solid Waste Disposal,
6.950%, 1/01/20 BAA3 BBB- $1,601,010
------------
ARIZONA--1.2%
2,300,000 University of Arizona,
6.350%, 6/01/14 (d) A1 AA 2,506,379
------------
CALIFORNIA--7.1%
1,500,000 California Housing Finance Agency
Revenue Bond, 8.100%, 8/01/07 AA A+ 1,577,130
485,000 California Housing Finance
Agency Revenue Bond, 8.125%,
8/01/19 AA A+ 509,197
4,300,000 Foothills/Eastern Transportation
Corridor, 6.500%, 1/01/32 -- BBB- 4,408,532
3,500,000 Foothills/Eastern Transportation
Corridor, 6.000%, 1/01/34 -- BBB- 3,489,535
2,000,000 Los Angeles Convention &
Exhibition Authority, 9.000%,
12/01/20 (d) AAA AAA 2,665,440
2,000,000 Sacramento, California,
6.500%, 7/01/21 -- BBB- 2,092,300
------------
14,742,134
------------
COLORADO--5.4%
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/06 BAA BBB 1,694,715
1,500,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/12 BAA BBB 1,666,410
5,000,000 Denver City & County Airport Revenue Bond,
7.750%, 11/15/21 BAA BBB 5,600,200
2,000,000 Denver City & County Airport Revenue Bond,
7.500%, 11/15/23 BAA BBB 2,225,920
------------
11,187,245
------------
CONNECTICUT--1.0%
2,000,000 Connecticut State Housing Finance Authority,
6.125%, 5/15/18 AA AA 2,070,200
------------
<PAGE>
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--continued
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
FLORIDA--12.0%
$3,000,000 Dade County Seaport,
6.250%, 10/01/21 (AMBAC) AAA AAA $3,199,740
3,000,000 Escambia County Pollution
Control, 6.900%, 8/01/22 BAA1 BBB 3,218,670
1,430,000 Florida State,
6.400%, 7/01/22 AA AA 1,537,879
2,000,000 Florida State Board of Ed.
Cap. Outlay 6.625%, 6/01/22 AA AA 2,180,520
1,890,000 Gainesville Utilities System
Revenue Bond, 6.500%, 10/01/22 AA AA 2,079,756
1,000,000 Martin County Industrial
Development Authority,
7.875%, 12/15/25 BAA3 BBB- 1,151,390
2,500,000 Palm Beach County,
6.950%, 1/01/22 -- -- 2,577,450
1,500,000 Palm Beach County Solid Waste
Revenue, 8.750%, 7/01/10 A A- 1,634,445
2,000,000 Palm Beach County Solid Wast
Revenue, 6.850%, 1/01/14 -- -- 2,070,240
2,500,000 Pasco County, Pollution Control,
Revenue 6.350%, 2/01/22 (MBIA) AAA AAA 2,699,725
2,350,000 Seminole County Gas, Tax Revenue,
6.375%, 10/01/18 (FGIC). AAA AAA 2,559,385
------------
24,909,200
------------
GEORGIA--1.3%
2,500,000 Atlanta Special Purpose Facilities
Revenue, 7.900%, 12/01/18 BA3 BB 2,700,950
------------
Guam--2.2%
5,000,000 Guam Government,
5.400%, 11/15/18 -- BBB 4,575,000
------------
Illinois--5.8%
2,250,000 Chicago O'Hare International Airport
Special Facilities Revenue
8.200%, 12/01/24 BAA2 BB+ 2,685,015
6,000,000 Illinois Development Financial
Authority Pollution,
7.250%, 6/01/11 BAA2 BBB 6,536,220
2,500,000 Illinois Development Financial
Authority Pollution,
7.375%, 7/01/21 BAA2 BBB 2,874,325
------------
12,095,560
------------
<PAGE>
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--continued
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
INDIANA--3.3%
$3,500,000 Indiana State Developement
Financial Authority Pollution,
6.850%, 12/01/12 BA3 BB $3,692,605
2,800,000 Indianapolis International
Airport Authority, 7.100%,
1/15/17 BAA2 BBB 3,070,564
------------
6,763,169
------------
KENTUCKY--1.5%
2,000,000 Kenton County Airport Board
Revenue Bond, 7.500%, 2/01/12 BA1 BB 2,170,120
815,000 Kentucky Housing Corp.
Housing Revenue Bond,7.450%,
1/01/23 AA1 AAA 848,105
------------
3,018,225
------------
MASSACHUSETTS--3.9%
2,000,000 Massachusetts Bay Transportation
Authority, 6.100%, 3/01/23 A1 A+ 2,068,560
2,500,000 Massachusetts State Housing
Finance Agency, 6.300%, 10/01/13 A1 A+ 2,580,950
3,315,000 Massachusetts State Housing
Finance Agency, 6.375%, 4/01/21 A1 A+ 3,404,174
------------
8,053,684
------------
MICHIGAN--1.3%
2,765,000 Dickinson County Economic
Development, 5.850%, 10/01/18 BAA1 BBB 2,757,811
------------
NEVADA--3.2%
6,500,000 Clark County, Passenger Facilities,
6.000%, 7/01/22 (AMBAC). AAA AAA 6,664,905
------------
NEW JERSEY--1.1%
2,250,000 New Jersey State Housing Management,
6.050%, 11/01/20 (AMBAC) AAA AAA 2,331,945
------------
<PAGE>
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--continued
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
NEW YORK--18.0%
$2,000,000 Metro Transit Authority Service
Center, 5.750%, 7/01/15 BAA1 BBB $1,995,340
2,450,000 New York City Revenue Bonds,
7.500%, 2/01/05 BAA1 BBB+ 2,701,052
1,000,000 New York City Revenue Bonds,
7.100%, 2/01/10 BAA1 BBB+ 1,077,900
4,860,000 New York City Revenue Bonds,
7.000%, 10/01/13 BAA1 BBB+ 5,239,031
1,500,000 New York State Dormitory
Authority, 6.000%, 5/15/11 BAA1 BBB+ 1,544,805
4,000,000 New York State Dormitory
Authority, 5.500%, 5/15/13 BAA1 BBB+ 3,955,640
1,350,000 New York State Dormitory
Authority, 5.625%, 5/15/13 BAA1 BBB+ 1,340,293
1,880,000 New York State Dormitory
Authority, 7.500%, 5/15/13 BAA1 BBB+ 2,263,764
2,740,000 New York State Dormitory
Authority, 5.750%, 7/01/13 BAA1 BBB+ 2,773,209
2,040,000 New York State Dormitory
Authority, 5.375%, 5/15/16 BAA1 BBB+ 1,948,730
575,000 New York State Medical
Care Facilities, 7.300%, 8/15/11BAA1 BBB+ 651,647
1,955,000 New York State Medical Care
Facilities, 6.500%, 8/15/12 (FGIC)AAA AAA 2,105,144
2,500,000 New York State Medical Care
Facilities, 5.375%, 2/15/14 BAA1 BBB+ 2,408,775
4,150,000 New York State Medical Care
Facilities, 5.250%, 8/15/14 BAA1 BBB+ 3,946,318
3,430,000 New York State Urban Development
Corp., 5.500%, 1/01/18 BAA1 BBB 3,307,137
------------
37,258,785
------------
NORTH CAROLINA--2.0%
2,545,000 North Carolina Eastern Municipal
Power, 6.125%, 1/01/09 A BBB+ 2,645,680
1,500,000 North Carolina Eastern Municipal
Power, 6.000%, 1/01/22 A BBB+ 1,550,250
------------
4,195,930
------------
OHIO--1.7%
3,000,000 Cleveland Public Power Systems Revenue,
7.000%, 11/15/24 (MBIA). AAA AAA 3,461,250
------------
<PAGE>
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--continued
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
OREGON--0.5%
$1,000,000 Western Generation Agency
7.400%, 1/01/16 -- -- $1,081,910
------------
PENNSYLVANIA--10.0%
3,000,000 Delaware County Pollution Control,
7.375%, 4/01/21 BAA1 BBB+ 3,282,120
2,725,000 Pennsylvania Convention Center,
6.700%, 9/01/14 BAA BBB- 2,917,658
2,000,000 Pennsylvania Convention Center,
6.750%, 9/01/19 BAA BBB- 2,132,880
4,000,000 Pennsylvania Economic Development
Financing Authority, 7.150%,
12/01/18 -- BBB- 4,304,280
3,000,000 Pennsylvania Economic Development
Financing Authority, 6.600%,
1/01/19 -- -- 2,989,410
1,500,000 Pennsylvania Economic Development
Financing Authority, 7.600%,
12/01/20 BAA2 BBB- 1,702,365
3,000,000 Pennsylvania Economic Development
Financing Authority, 7.600%,
12/01/24 BAA1 BBB+ 3,382,710
------------
20,711,423
------------
PUERTO RICO--2.6%
2,845,000 Puerto Rico Commonwealth Highway,
6.625%, 7/01/18 BAA1 A 3,054,193
2,500,000 Puerto Rico Public Building
Authority, 5.500%, 7/01/21 BAA1 A 2,433,200
------------
5,487,393
------------
SOUTH DAKOTA--0.5%
1,000,000 South Dakota, Student Loan
Financing, 7.700%, 8/01/07 -- A+ 1,082,470
------------
TENNESSEE--1.3%
2,500,000 Muary County, Individual Development
Board, 6.500%, 9/01/24 -- BBB+ 2,645,575
------------
TEXAS--3.0%
3,205,000 Dallas Fort Worth International
Airport, 6.250%, 11/01/13 BA1 BB 3,246,857
2,825,000 Dallas Fort Worth International
Airport, 7.250%, 11/01/30 BAA2 BB+ 3,033,090
------------
6,279,947
------------
<PAGE>
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--continued
RATINGS (C)
(UNAUDITED)
------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (A)
- ----------------------------------------------------------------------
UTAH--1.5%
$2,000,000 Intermountain Power Agency,
8.625%, 7/01/21 AA AA $2,186,600
750,000 Utah State Board of Regents
Student Loan Revenue,
7.450%, 11/01/08 (AMBAC) AAA AAA 814,380
------------
3,000,980
------------
VIRGIN ISLANDS--2.3%
4,500,000 Virgin Islands Public Finance
Authority, 7.250%, 10/01/18 -- -- 4,839,390
------------
WASHINGTON--2.8%
1,000,000 Washington Public Power Supply,
6.800%, 7/01/07 AA AA 1,106,350
1,270,000 Washington Public Power Supply,
7.000%, 7/01/11 AA AA 1,398,588
3,000,000 Washington Public Power Supply,
7.000%, 7/01/12 AA AA 3,303,750
------------
5,808,688
------------
Total Tax Exempt Bonds
(Identified Cost $185,624,721) 201,831,158
------------
SHORT-TERM INVESTMENT--0.3%
600,000 Household Finance Corp., 5.650%, 1/02/96. 599,906
------------
Total Short-Term Investment
(Identified Cost $599,906). 599,906
------------
Total Investments--97.6%
(Identified Cost $186,224,627)(b) 202,431,064
Cash, Receivables and other assets. 6,116,255
Liabilities (1,177,473)
------------
Total Net Assets--100%. $207,369,846
===========
WRITTEN CALL OPTION -- U.S. TREASURE BOND FUTURE
CONTRACTS EXPIRATION STRIKE PRICE VALUE
- ----------------------------------------------------------------------
- --
200 February 17, 1996 $120.00 $E(509,375)
MUNICIPAL BOND FUTURES CONTRACT -- SOLD
AGGREGATE MARKET NET UNREALIZED
CONTRACTS EXPIRATION FACE VALUE VALUE DEPRECIATION
- ----------------------------------------------------------------------
- --
100 March 1996 $11,844,413 $12,103,126 $E(258,713)
PORTFOLIO COMPOSITION--continued
Investments as of December 31, 1995
TAX EXEMPT BONDS--CONTINUED
<FN>
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1995 the net unrealized
appreciation on investments based on cost of $186,314,408 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. $ 16,116,656
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value 0
-----------
Net unrealized appreciation $ 16,116,656
-----------
-----------
(c) The ratings shown are believed to be the most recent ratings
available at December 31, 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 December 31, 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.
(d) These securities, or a portion thereof, are being used to
collateralize the options and futures contracts open at December
31, 1995.
</TABLE>
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value $202,431,064
Cash. 1,555
Receivable for:
Fund shares sold 58,775
Securities sold 2,191,267
Accrued interest 3,860,658
Prepaid registration expense 4,000
-----------
208,547,319
LIABILITIES
Payable for:
Fund shares redeemed. $ 226,398
Futures variation margin 31,250
Written options outstanding, at market
(premiums received $258,275) 509,375
Dividends declared 233,559
Accrued expenses:
Management fees 76,506
Deferred trustees' fees. 41,739
Accounting and administrative. 3,737
Other expenses. 54,909
-------
1,177,473
-----------
NET ASSETS $207,369,846
============
Net Assets consist of:
Capital paid in $199,810,650
Undistributed net investment income. 214,756
Accumulated net realized losses (8,352,184)
Unrealized appreciation on investments,
options and futures contracts. 15,696,624
-----------
NET ASSETS $207,369,846
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($195,300,988 divided by 25,690,646 shares of beneficial
interest) $7.60
============
Offering price per share (100/95.50 of $7.60). $7.96*
============
Net asset value and offering price of Class B shares
($12,068,858 divided by 1,587,609 shares of beneficial
interest) $7.60**
==========
Identified cost of investments. $186,224,627
============
<FN>
* 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.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $13,165,711
Expenses
Management fees $890,150
Service fees -- Class A 483,317
Service and distribution fees -- Class B. 107,048
Trustees' fees and expenses 23,415
Accounting and administrative 49,539
Custodian 114,280
Transfer agent 185,587
Audit and tax services 46,000
Legal 20,148
Printing 30,434
Registration 21,290
Miscellaneous 15,536 1,986,744
----------- -----------
Net investment income. 11,178,967
REALIZED and UNREALIZED GAIN (LOSS)
on INVESTMENTS,
OPTIONS and FUTURES CONTRACTS
Realized gain (loss) on:
Investments -- net 2,948,977
Options -- net 231,122
Futures contracts -- net (4,578,906)
----------
Total realized loss on investments,
options and futures
contracts (1,398,807)
-----------
Unrealized appreciation
(depreciation) on:
Investments -- net 22,789,287
Options -- net (251,100)
Futures contracts -- net (258,713)
-----------
Total unrealized appreciation on
investments, options and
futures contracts 22,279,474
-----------
Net gain on investment transactions 20,880,667
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $32,059,634
===========
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
FROM OPERATIONS
Net investment income. $ 11,571,475 $ 11,178,967
Net realized loss on investment
transactions (6,747,827) (1,398,807)
Unrealized appreciation (depreciation)
on investments (23,242,432) 22,279,474
----------- -----------
Increase (decrease) in net assets from
operations (18,418,784) 32,059,634
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A. (11,356,838) (10,706,960)
Class B. (315,692) (506,948)
----------- -----------
(11,672,530) (11,213,908)
----------- -----------
Decrease in net assets derived from
capital share
transactions (7,986,345) (5,674,559)
----------- -----------
Total increase (decrease) in net assets.(38,077,659) 15,171,167
NET ASSETS
Beginning of the year. 230,276,338 192,198,679
----------- -----------
End of the year. $192,198,679 $207,369,846
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year. $0 $46,584
============ ============
End of the year. $ 46,584 $214,756
============ ============
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A
------------------------------------------------
YEAR ENDED DECEMBER 31,
1991 1992 1993 1994 1995
------- ------- ------- ------- -----
Net Asset Value,
Beginning of Period. $7.21 $7.53 $7.54 $7.87 $6.85
------- ------- ------- ------- -----
Income From Investment
Operations
Net Investment
Income. 0.45 0.44 0.40 0.39 0.42
Net Realized and
Unrealized Gain
(Loss) on
Investments 0.35 0.21 0.53 (1.01) 0.74
------- ------- ------- ------- -----
Total From Investment
Operations 0.80 0.65 0.93 (0.62) 1.16
------- ------- ------- ------- -----
Less Distributions
Distributions From Net
Investment Income (0.43) (0.46) (0.42) (0.40) (0.41)
Distributions From Net
Realized Capital
Gains (0.01) (0.18) (0.18) 0.00 0.00
Distributions from
Paid-in Capital (0.04) 0.00 0.00 0.00 0.00
------- ------- ------- ------- -----
Total Distributions (0.48) (0.64) (0.60) (0.40) (0.41)
------- ------- ------- ------- -----
Net Asset Value,
End of Period. $7.53 $7.54 $7.87 $6.85 $7.60
======== ====== ====== ====== ======
Total Return (%). 11.6 8.9 12.7 (8.0) 17.2
Ratio of Operating
Expenses to Average Net
Assets (%). 0.95 0.95 0.91 0.92 0.93
Ratio of Net Investment
Income to Average
Net Assets (%). 6.18 5.80 5.27 5.44 5.52
Portfolio Turnover
Rate (%). 126 85 86 88 93
Net Assets,
End of Period
(000) $162,991 $183,276 $226,881 184,202 $195,301
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS--continued
<TABLE><CAPTION>
<S> <C> <C> <C>
CLASS B
-------------------------------------------------
SEPTEMBER 13,(A) YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------- ------- -------
Net Asset Value,
Beginning of Period $ 8.03 $ 7.86 $6.85
------- ------- -------
Income From Investment Operations
Net Investment Income 0.07 0.34 0.36
Net Realized and Unrealized
Gain (Loss) on
Investments 0.01 (1.01) 0.74
------- ------- -------
Total From Investment Operations. 0.08 (0.67) 1.10
------- ------- -------
Less Distributions
Distributions From Net Investment
Income. (0.07) (0.34) (0.35)
Distributions From Net
Realized Capital
Gains (0.18) 0.00 0.00
------- ------- -------
Total Distributions (0.25) (0.34) (0.35)
------- ------- -------
Net Asset Value, End of Period $ 7.86 $ 6.85 $7.60
======= ======= =======
Total Return (%) 1.0(c) (8.6) 16.3
Ratio of Operating Expenses
to Average Net
Assets (%) 1.65(b) 1.67 1.68
Ratio of Net Investment Income
to Average
Net Assets (%) 3.91(b) 4.69 4.77
Portfolio Turnover Rate (%) 86 88 93
Net Assets, End of Period (000) $3,395 $7,997 $12,069
<FN>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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 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
<PAGE>
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
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 transaction. The securities so purchased
are subject to market fluctuation during this period. At December 31,
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 from such sale will be
decreased by the premium originally paid. If the fund exercises a
purchased call
<PAGE>
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
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.
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.
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 year ended December 31, 1995 were $184,544,744
and $195,973,085 respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
Transactions in written options and futures contracts for the Fund for
the year ended December 31, 1995 are summarized as follows:
<TABLE><CAPTION>
<S> <C> <C>
SALES OF FUTURES
CONTRACTS
-----------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS CONTRACTS
---------- ------------
Contracts opened. 3,912 $427,366,133
Contracts closed. (3,812) (415,521,720)
------ ------------
Open at December 31, 1995. 100 $ 11,844,413
====== ===========
WRITTEN OPTIONS
------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------ -----------
Contracts opened 4,351 $ 2,084,837
Contracts closed (4,151) (1,826,562)
------ -----------
Open at December 31, 1995 200 $258,275
====== ==========
</TABLE>
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.During the
year ended December 31, 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 year ended
December 31, 1995 provided for fees as set forth below:
<TABLE><CAPTION>
<C> <C> <C>
FEES EARNED ANNUAL PERCENTAGE RATE ANNUAL NET ASSET VALUE LEVELS
- ---------- ----------------------- ------------------------------
$890,150 0.500% the first $100 million
0.375% the excess over $100 million
</TABLE>
Effective January 1, 1996, New England Funds Management, L.P. became
the adviser for the Fund with the aforementioned adviser being
retained as the Fund's sub-adviser.
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
fees in connection with requirements of regulatory authorities. For
the year ended December 31, 1995 these expenses amounted to $49,539
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 year ended December
31, 1995, the Fund paid New England Funds $132,906 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 year ended December 31,
1995, the Fund paid New England Funds $483,317 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 year ended December 31, 1995, the Fund paid New
England Funds $26,762 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 year ended December 31, 1995, the
Fund paid New England Funds $80,286 in distribution fees under the
Class B Plan.
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
Commissions (including contingent deferred sales charges) on Fund
shares paid to New England Funds by investors of shares of the Fund
during the year ended December 31, 1995 amounted to $307,028.
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:
Annual Retainer $2,400
Meeting Fee $125/meeting
Committee Meeting Fee $75/meeting
Committee Chairman Retainer $125/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 December 31, 1995 as a percentage
of the Fund's total net assets: Airports 16.7%. The Fund also had more
than 10% of its total net assets invested in: Pennsylvania 10.0%,
Florida 12.0% and New York 18.0% at December 31, 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 December 31, 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>
<S> <C> <C> <C> <C>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------------- -----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- --------- --------- ----------- --------- -----------
Shares sold 3,542,005 $ 26,128,781 1,603,141 $ 11,755,869
Shares issued in
connection with
the reinvestment of:
Dividends from net
investment income 1,101,789 7,965,454 1,035,922 7,650,069
--------- ----------- --------- -----------
4,643,794 34,094,235 2,639,063 19,405,938
Shares repurchased. (6,611,073) (47,557,785)(3,825,037) (28,129,585)
--------- ----------- --------- -----------
Net decrease. (1,967,279) $(13,463,550)(1,185,974) $ (8,723,647)
----------- ------------- ---------- ------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS--continued
December 31, 1995
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------------- -----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------ --------- ----------- --------- -----------
Shares sold 913,518 $6,744,228 594,737 $4,335,541
Shares issued in
connection with
the reinvestment of:
Distributions from net
investment income. 31,151 222,402 46,353 342,707
--------- ----------- --------- -----------
944,669 6,966,630 641,090 4,678,248
Shares repurchased. (209,246) (1,489,425) (220,882) (1,629,160)
--------- ----------- --------- -----------
Net increase. 735,423 5,477,205 420,208 3,049,088
--------- ----------- --------- -----------
Increase (decrease)
derived from
capital shares
transactions (1,231,856) $ (7,986,345) (765,766) $ (5,674,559)
=========== ============ ========== ============
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of NEW ENGLAND MUNICIPAL
INCOME FUND (FORMERLY NEW ENGLAND TAX EXEMPT INCOME FUND)
In our opinion, the accompanying statement of assets & liabilities,
including the portfolio composition, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
New England Municipal Income Fund ("the Fund") at December 31, 1995,
the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and the financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities owned at December 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1996
<PAGE>
SHAREHOLDER MEETING
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
At a special shareholders' meeting held on December 28, 1995, shareholders of
the New England Municipal Income Fund voted for the following proposals:
VOTED VOTED ABSTAINED BROKER TOTAL
FOR AGAINST VOTES NON-VOTES VOTES
------ -------- --------- --------- ------
1. To approve new
investment advisory
arrangements to be
effective upon the
merger of New
England Mutual Life
Insurance Company
into Metropolitan
Life Insurance
Company, such
arrangements to be
substantially
identical to the
investment advisory
arrangements in
effect for the Fund
immediately prior to
such merger 15,422,206.252 615,903.917 682,471.170 16,720,581.339
============= ============ ==========
2. To approve a new
Advisory Agreement
between the Fund and
New England Funds
Management, L.P.
("NEFM") 15,191,489.090 759,928.196 747,163.053 22,001.000 16,720,581.339
============= ============ ========== ============
3. To approve a related
Sub-Advisory
Agreement between
NEFM and such Fund's
current investment
adviser. 14,977,944.684 905,727.031 814,908.624 22,001.000 16,720,581.339
============= ============ ========== ============
4. To approve the
elimination of the
Fund's fundamental
investment policy
that requires that
it normally invest
at least 80% of its
net assets in tax
exempt bonds the
income from which is
not subject to the
federal alternative
minimum tax 12,641,546.241 2,045,203.710 626,883.388 1,406,948.000 16,720,581.339
============= ============ ========== ============
</TABLE>
<PAGE>
REGULAR INVESTING PAYS
FIVE GOOD REASONS TO INVEST REGULARLY
1. ItOs an easy way to build assets
2. ItOs 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 FundsO 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>
SAVING FOR RETIREMENT
AN EARLY START CAN MAKE A BIG DIFFERENCE
With todayOs lengthening life spans, you may be retired for 20 years
or more after you complete your working career. Living these
retirement years the way youOve dreamed of will require considerable
financial resources. While itOs never too late to start a retirement
savings program, itOs 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.
AN EARLY START CAN MAKE A BIG DIFFERENCE
[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 BOs commitment
- - and for less than half the time. Yet investor A wound up with a much
greater retirement nest egg. The reason? ItOs 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>
NEW ENGLAND FUNDS
STOCK FUNDS
Growth Fund of Israel
International Equity Fund
Star Worldwide Fund
Growth Fund
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
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.
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 FundOs 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>
Bulk Rate
U.S. Postage
Paid
Brockton, MA
Permit No. 770
[LOGO]
NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET
399 Boylston Street
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02116
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QUALITY
TESTED SERVICE
1996
DALBAR
HONORS COMMITMENT TO:
INVESTORS
TX56
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Italic typefaces is displayed in normal type.
(3) Boldface type is displayed in capital letters.
(4) Headers (e.g. the names of the fund) and footers (e.g. page
numbers and OSee accompanying notes to financial statementsO) are
omitted.
(5) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(6) Bullet points, leaders and similar graphic symbols are omitted.
(7) Page numbering is different.
