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NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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NEW ENGLAND
BOND 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 Bond 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
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Henry L.P. Schmelzer, President
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NEW ENGLAND BOND 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 the growth of a
$10,000 investment in New Bond Income Fund from 6/30/86 compared to the Lehman
Government/Corporate Bond Index(4) and the Cost of Living(5). The data points
from the graph 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 $10,599 $10,122 $10,557 $10,372
1988 $11,357 $10,846 $11,377 $10,780
1989 $12,502 $11,939 $12,540 $11,338
1990 $13,284 $12,686 $13,521 $11,868
1991 $14,615 $13,958 $14,944 $12,425
1992 $16,879 $16,120 $16,912 $12,808
1993 $19,214 $18,349 $18,677 $13,192
1994 $18,785 $17,940 $18,629 $13,476
1995 $21,472 $20,506 $20,561 $13,859
1996 $22,576 $21,560 $21,589 $14,231
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, C and Y share
performance will be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance
assumes reinvested distributions.
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AVERAGE ANNUAL TOTAL RETURNS 6/30/96
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CLASS A (Inception 11/7/73) YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR
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Net Asset Value(1) -1.69% 5.14% 5.53% 9.09% 8.48%
With Max. Sales Charge(2) -6.10 0.44 3.92 8.08 7.99
Lipper Intermediate
Investment Grade Debt
Average(6) -1.40 4.27 4.54 7.72 7.65
CLASS B (Inception 9/13/93) YTD 1 YEAR SINCE INCEPTION
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Net Asset Value(1) -2.06% 4.36% 3.70%
With CDSC(3) -5.86 0.43 2.79
Lehman Intermediate
Govt./Corp.(4) -0.21 5.00 5.22
Lipper Intermediate Investment
Grade Debt Average(6) -1.40 4.27 n/a
CLASS C (Inception 12/31/94) YTD 1 YEAR SINCE INCEPTION
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Net Asset Value(1) -2.07% 4.27% 10.19%
Lehman Intermediate
Govt./Corp.(4) -0.21 5.00 9.81
Lipper Intermediate Investment
Grade Debt Average(6) -1.40 4.27 n/a
CLASS Y (Inception 12/31/94) YTD 1 YEAR SINCE INCEPTION
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Net Asset Value(1) -1.64% 5.52% 12.30%
Lehman Intermediate
Govt./Corp.(4) -0.21 5.00 9.81
Lipper Intermediate Investment
Grade Debt Average6 -1.40 4.27 n/a
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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 4.5% 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 Intermediate Government/Corporate Bond Index is an unmanaged index of
investment-grade bonds with one- to ten-year maturities issued by the U.S.
government and U.S. corporations. 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
Cathy Bunting
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NEW ENGLAND BOND INCOME FUND
Portfolio Manager: Cathy Bunting
Back Bay Advisors, L.P.
After rewarding bond investors with price gains for much of 1995, widespread
declines in interest rates were replaced by an increase during the first six
months of 1996. Unexpected evidence of economic strength fueled this climb
tempering last year's strong performance in the bond markets. Employment data
released in March was key among a host of indicators signaling that the economy
was growing at a surprisingly strong pace. The good news is that inflation
levels remained tame in spite of the economy's vigor.
Though rising interest rates create challenging conditions for fixed income
investments, corporate bonds fared markedly better than government debt in the
first half of the year. The favorable economic landscape helped cushion price
declines of corporate issues in the face of rising interest rates.
How Your Fund Performed
Thanks to an overweighting in corporate issues relative to government debt, New
England Bond Income Fund was able to minimize the negative impact of higher
interest rates during the first half of the year. For the six-month period
ending June 30, 1996, the Fund had a total return on net asset value of -1.69%
for Class A shares, compared to -1.40% for the Lipper Intermediate Investment
Grade Debt Average for the same period. It's important to note that in the past
several years your Fund has posted consistently high rankings compared to its
Lipper peer group.
How We Managed Your Fund
The Fund's focus on corporate bonds worked to its advantage during the past six
months. With 60%-70% of the portfolio devoted to corporate issues, your Fund
managed to evade the steeper declines that beset government issues. The
favorable economic environment along with institutional investors' increased
participation in the corporate bond market benefitted all corporate sectors,
helping to stabilize the prices of corporate debt.
We took advantage of opportunities in select sectors, namely telephone and
utilities. Increasingly competitive conditions in the utility sector prompted
consolidations and restructuring, rendering these bonds more attractive.
Meanwhile, with no new supply to speak of, the balance between supply and demand
shifted in favor of utilities. Supply, in fact, had been shrinking as many
utility companies repurchased their outstanding debt. The lower-quality,
BBB-rated bonds continue to offer good value.
The portfolio's Canadian holdings also worked well for the Fund. Real
(inflation-adjusted) returns on Canadian bonds were attractive as the inflation
rate in Canada remained low. Further, the country's Quebec Separatist referendum
issue -- a major source of volatility in Canada's securities markets in 1995 --
was postponed until at least 1998, improving overall investor sentiment. The
sounder fiscal situation in Canada added to the fundamental merit of Canadian
debt.
Also contributing positively to Fund performance was the average credit quality
of the portfolio -- slightly lower than the average quality of the Lehman
Aggregate Index, the Fund's Performance benchmark. Taking a bit more credit risk
during the six months was amply rewarded, as lower-grade bonds generally
performed better than their higher-grade counterparts.
Positives aside, volatility in the cable sector took a toll on the Fund's
six-month results. Specifically, Moody's -- an independent bond rating agency --
unexpectedly downgraded the credit quality of TCI Communications to below
investment-grade. (Bonds rated BBB and above are considered to be
"investment-grade.") This downgrade had a sobering effect on the entire sector,
hampering the performance of cable/media bonds as a group. We took advantage of
the consequent price weakness in the sector and added to the Fund's TCI
position.
As always, intensive credit-by-credit research precedes all our investment
decisions. One of the largest cable companies in the nation, TCI has
demonstrated its commitment to investment-grade ratings--for example, by
implementing some structural changes to help improve its balance sheet. That
said, we believe the investment viability of TCI issues, as well as other cable
bonds, remains fundamentally intact.
During the period, the 5.8% average duration of the Fund was modestly longer
than the 4.8% average of the Lehman Aggregate Index. (Duration is a more precise
measure than maturity of the sensitivity of bond prices to changes in interest
rates. Essentially, the longer a bond's duration, the more pronounced its
reactions to interest rate movements.) While the Fund's longer duration boosted
its performance last year amidst falling interest rates, it hampered returns
this year as rates rose.
On the other hand, your Fund's duration structure helped augment its current
yield in a rising interest rate environment. During the second half of the year,
we plan to maintain our current duration strategy, anticipating that economic
growth will slow while inflation levels remain subdued.
Investment Outlook
Definite signs as to whether the recent pace of economic growth will translate
into escalating inflation rates -- or whether it is even sustainable -- have yet
to emerge. Job growth, a key indicator of the economy's strength, will bear
watching.
Though the direction of interest rates over the short term is unclear, a
portfolio of quality fixed-income investments can still provide income-oriented
investors with a reliable source of regular income. In the months ahead,
thorough credit research will remain key in helping us position your Fund in the
securities that can best help us deliver an attractive stream of income and a
steady share price.
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PORTFOLIO COMPOSITION 6/30/96*
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AAA 30.4%
AA 18.9
A 13.3
BBB 18.5
BB 18.9
*Portfolio composition will change with market and economic conditions.
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(logo)
NEW ENGLAND FUNDS
Where The Best Minds MeetTM
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Portfolio Composition, Financial Statements and Highlights
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NEW ENGLAND
BOND 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)
BONDS AND NOTES--96.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (A)
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<S> <C> <C>
BROADCASTING--4.1%
$ 5,700,000 Continental Cablevision, Inc., 11.000%, 6/01/07 ........ $ 6,448,125
2,500,000 Continental Cablevision, Inc., 9.500%, 8/01/13 ......... 2,718,750
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9,166,875
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FEDERAL AGENCIES--15.6%
357,400 Federal Home Loan Bank, 9.000%, 5/01/01 ................ 369,463
3,500,000 Federal National Mortgage Association, 6.450%, 6/10/03 . 3,374,910
1,500,000 Federal National Mortgage Association, 7.850%, 9/10/04 . 1,513,560
1,000,000 Federal National Mortgage Association, 7.875%, 2/24/05 . 1,054,580
882,168 Federal National Mortgage Association, 7.500%, 11/01/24 871,140
11,180,559 Government National Mortgage Association, 7.000%,
with various maturities to 2025 (c) .................. 0,729,871
11,724,447 Government National Mortgage Association, 7.500%,
with various maturities to 2025 (c) .................. 1,563,236
4,270,037 Government National Mortgage Association, 8.500%,
with various maturities to 2023 (c) .................. 4,394,124
326,560 Government National Mortgage Association, 9.000%,
with various maturities to 2016 (c) .................. 342,071
482,578 Government National Mortgage Association, 11.500%,
with various maturities to 2016 (c) .................. 546,106
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4,759,061
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FINANCE AND BANKING--7.9%
6,075,000 American General Financial Corp., 8.450%, 10/15/09 ..... 6,732,923
4,750,000 Associates Corp. of North America, 8.550%, 7/15/09 ..... 5,298,958
5,500,000 Toronto Dominion Bank of Ontario, 7.875%, 8/15/04 ...... 5,592,950
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17,624,831
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FOREIGN--6.6%
3,500,000 Government of Canada, 7.500%, 9/01/00 (d) .............. 2,621,270
4,500,000 Government of Canada, 8.000%, 6/01/23 (d) .............. 3,256,427
2,000,000 Government of Canada, 9.000%, 12/01/04 (d) ............. 1,596,426
2,400,000 Ontario Hydro, 8.875%, 10/25/05 (d) .................... 1,864,206
7,000,000 Province of British Columbia, 7.750%, 6/16/03 (d) ...... 5,205,164
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14,543,493
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OIL AND GAS--3.2%
4,400,000 Oryx Energy Co., 10.000%, 4/01/01 ...................... 4,785,792
2,100,000 Mitchell Energy & Development, 9.250%, 1/15/02 ......... 2,231,733
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7,017,525
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PUBLISHING--6.6%
4,000,000 Golden Books Publishing, Inc., 7.650%, 9/15/02 ....... 3,420,000
3,700,000 News America Holdings, 9.500%, 7/15/24 .............. 4,092,829
7,000,000 Time Warner Entertainment Co. LP, 9.150%, 2/01/23 ... 7,293,650
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14,806,479
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RAILROADS--2.8%
6,000,000 Southern Pacific Rail, 9.375%, 8/15/05 .............. 6,300,000
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TELECOMMUNICATION--11.7%
1,800,000 360 Communications, Inc., 7.125%, 3/01/03 ........... 1,729,422
5,500,000 AT&T Corp., 8.350%, 1/15/25 ......................... 5,759,325
4,000,000 Bellsouth Telecommunications, Inc., 5.850%, 11/15/45. 3,900,640
2,500,000 MCI Communications Corp., 7.750%, 3/23/25 ........... 2,451,625
8,080,000 TCI Communications, Inc., 9.250%, 1/15/23 ........... 8,039,842
4,500,000 US West Communication, 7.200%, 11/10/26 ............. 4,162,725
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26,043,579
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U.S. GOVERNMENT--6.4%
1,000,000 U.S. Treasury Notes, 6.875%, 7/31/99 ................ 1,015,530
4,500,000 U.S. Treasury Notes, 8.500%, 11/15/00 ............... 4,849,605
3,000,000 U.S. Treasury Notes, 5.750%, 8/15/03 ................ 2,858,310
5,500,000 U.S. Treasury Notes, 6.500%, 8/15/05 ................ 5,425,255
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14,148,700
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UTILITIES-DIVERSIFIED--8.9%
4,100,000 Long Island Lighting Co., 8.900%, 7/15/19 ........... 3,713,247
3,500,000 Long Island Lighting Co., 8.900%, 11/01/22 .......... 3,211,985
1,249,000 New York State Electric & Gas Corp., 9.875%, 2/01/20. 1,315,734
6,500,000 New York State Electric & Gas Corp., 8.875%, 11/01/21 6,799,390
5,000,000 Tennessee Valley Authority, 6.125%, 7/15/03 ......... 4,784,050
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19,824,406
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UTILITIES - ELECTRIC--8.5%
5,000,000 Alabama Power Co., 8.750%, 12/01/21 ................. 5,150,000
8,000,000 Arizona Public Service Co., 8.000%, 12/30/15 ........ 8,020,640
2,300,000 Texas Utilities Electric Co., 8.875%, 2/01/22 ....... 2,421,440
3,200,000 Texas Utilities Electric Co., 8.500%, 8/01/24 ....... 3,286,560
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18,878,640
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YANKEE--14.3%
2,000,000 Asian Development Bank, 11.125%, 5/01/98 ............ 2,161,620
2,000,000 Argentina Republic, 9.250%, 2/23/01 ................. 1,912,500
1,200,000 British Columbia Hydro & Petroleum, 12.500%, 9/01/13 1,387,740
1,600,000 British Columbia Hydro & Petroleum, 12.500%, 1/15/14 1,877,184
3,500,000 Canadian Pacific Limited, 8.850%, 6/01/22 ........... 3,679,235
2,000,000 Republic of Finland, 6.950%, 2/15/26 ................ 1,883,180
3,000,000 Hydro Quebec, 7.500%, 4/01/16 ....................... 2,915,400
1,000,000 Maxus Energy Corp., 11.500%, 11/15/15 ............... 1,043,750
600,000 Petroleos Mexicanos, 6.315%, 4/07/97 (e) (f) ........ 601,500
9,800,000 Petroleos Mexicanos, 8.625%, 12/01/23 ............... 7,456,134
3,310,000 Province of Ontario, 11.500%, 3/10/13 ............... 3,701,639
3,000,000 Province of Quebec, 8.625%, 12/01/26 ................ 3,241,500
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31,861,382
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Total Bonds and Notes (Identified Cost $218,899,593). 214,974,971
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SHORT-TERM INVESTMENTS--1.5%
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3,225,000 American Express Credit Corp., 5.390%, 7/01/96 ........ 3,225,000
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Total Short-Term Investment
(Identified Cost $3,225,000) ....................... 3,225,000
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Total Investments--98.1%
(Identified Cost $222,124,593) (b) ................. 218,199,971
Other assets less liabilities ....................... 4,187,568
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Total Net Assets--100% .............................. $222,387,539
============
<FN>
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1996 the net unrealized
depreciation on investments based on cost of $222,124,593
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. ......... $ 994,372
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value. ......... (4,918,994)
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Net unrealized depreciation ................................. $ (3,924,622)
============
(c) The Fund's investments in mortgage backed securities of the
Government National Mortgage Association, which have the
same coupon rate, have been aggregated for the purpose of
presentation in the schedule of investments.
(d) Denominated in Canadian dollars.
(e) Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
(f) Variable or floating rate security. Rate disclosed is as of
June 30, 1996.
</FN>
</TABLE>
See accompanying notes to financial statements.
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STATEMENT OF ASSETS & LIABILITIES
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June 30, 1996
(unaudited)
ASSETS
Investments at value .......................... $218,199,971
Cash .......................................... 4,644
Receivable for:
Fund shares sold ............................ 277,700
Securities sold ............................. 2,843,681
Dividends and interest ...................... 4,642,399
Prepaid registration expense .................. 11,000
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225,979,395
LIABILITIES
Payable for:
Securities purchased ........................ $2,812,118
Fund shares redeemed ........................ 413,300
Dividends declared .......................... 154,181
Accrued expenses:
Management fees ............................. 77,685
Deferred trustees' fees ..................... 68,485
Accounting and administrative ............... 3,533
Other expenses .............................. 62,554
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3,591,856
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NET ASSETS ...................................... $222,387,539
============
Net Assets consist of:
Capital paid in ............................. $225,226,736
Undistributed net investment income ......... 129,810
Accumulated net realized gains .............. 955,649
Unrealized depreciation on investments ...... (3,924,656)
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NET ASSETS ...................................... $222,387,539
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($191,063,432 divided by 16,290,211
shares of beneficial interest) ................ $11.73
======
Offering price per share (100/95.50 of $11.73) .. $12.28*
======
Net asset value and offering price of Class B
shares ($27,269,862 divided by 2,325,587 shares
of beneficial interest) ....................... $11.73**
======
Net asset value and offering price of Class C
shares ($1,763,609 divided by 150,325 shares of
beneficial interest) .......................... $11.73
======
Net asset value and offering price of Class Y
shares ($2,290,636 divided by 194,739 shares of
beneficial interest) .......................... $11.76
======
Identified cost of investments .................. $222,124,593
============
* 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>
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STATEMENT OF OPERATIONS
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Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest .................................... $ 8,872,688
Expenses
Management fees ........................... $ 477,714
Service fees--Class A ..................... 241,366
Service and distribution fees--Class B .... 125,945
Service and distribution fees--Class C .... 5,670
Trustees' fees and expenses ............... 10,459
Accounting and administrative ............. 26,426
Custodian ................................. 53,248
Transfer agent ............................ 231,783
Audit and tax services .................... 27,000
Legal ..................................... 11,604
Printing .................................. 29,501
Registration .............................. 39,059
Miscellaneous ............................. 1,282
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Total expenses .............................. 1,281,057
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Net investment income ....................... 7,591,631
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain on:
Investments--net .......................... 812,017
Foreign currency transactions--net ........ 8,099
-----------
Total realized gain on investments and
foreign currency transactions ........... 820,116
-----------
Unrealized appreciation (depreciation) on:
Investments--net .......................... (12,630,805)
Foreign currency transactions--net ........ 745
-----------
Total unrealized depreciation on
investments and foreign currency
transactions ............................ (12,630,060)
-----------
Net loss on investment transactions ......... (11,809,944)
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NET DECREASE IN NET ASSETS FROM OPERATIONS .... $(4,218,313)
===========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
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(unaudited)
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
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FROM OPERATIONS
Net investment income ..................... $ 13,460,532 $ 7,591,631
Net realized gain on investments and
foreign currency transactions ........... 3,375,468 820,116
Unrealized appreciation (depreciation) on
investments, and foreign
currency transactions ................... 21,417,541 (12,630,060)
------------ ------------
Increase (decrease) in net assets from
operations .............................. 38,253,541 (4,218,313)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................. (12,389,368) (6,713,068)
Class B ................................. (971,501) (783,661)
Class C ................................. (15,073) (35,314)
Class Y ................................. (116,130) (79,848)
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(13,492,072) (7,611,891)
------------ ------------
Increase in net assets derived from capital
share transactions ...................... 37,374,309 7,284,922
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Total increase (decrease) in net assets ... 62,135,778 (4,545,282)
NET ASSETS
Beginning of the period ................... 164,797,043 226,932,821
------------ ------------
End of the period ......................... $226,932,821 $222,387,539
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................... $ 43,998 $ 150,070
============ ============
End of the period ......................... $ 150,070 $ 129,810
============ ============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
CLASS A
---------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
Net Asset Value,
Beginning of Period . $11.12 $12.14 $12.12 $12.18 $10.95 $12.36
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income . 0.88 0.85 0.77 0.72 0.81 0.42
Net Realized and
Unrealized Gain (Loss)
on Investments ....... 1.04 0.01 0.66 (1.23) 1.40 (0.63)
------ ------ ------ ------ ------ -----
Total From Investment
Operations .......... 1.92 0.86 1.43 (0.51) 2.21 (0.21)
------ ------ ------ ------ ------ -----
Less Distributions
Distributions From Net
Investment Income ... (0.90) (0.86) (0.78) (0.72) (0.80) (0.42)
Distributions From Net
Realized Capital
Gains ............... 0.00 (0.02) 0.59) 0.00 0.00 0.00
------ ------ ------ ------ ------ -----
Total Distributions ... (0.90) (0.88) (1.37) (0.72) (0.80) (0.42)
------ ------ ------ ------ ------ -----
Net Asset Value, End of
Period .............. $12.14 $12.12 $12.18 $10.95 $12.36 $11.73
====== ====== ====== ====== ====== ======
Total Return (%) (b) .. 18.1 7.5 12.1 (4.2) 20.8 (1.7)
Ratio of Operating
Expenses to Average
Net Assets (%) ...... 1.15 1.08 1.04 1.08 1.14 1.07(a)
Ratio of Net Investment
Income to Average Net
Assets (%) .......... 7.69 7.08 6.10 6.46 6.81 6.89(a)
Portfolio Turnover
Rate (%) ............ 218 89 202 77 81 111(a)
Net Assets, End of
Period (000) ........ $113,759 $145,184 $179,264 $155,362 $200,285 $191,063
(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.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
<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 Asset Value, Beginning
of Period ................ $13.06 $12.18 $10.95 $12.36
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ...... 0.20 0.63 0.72 0.39
Net Realized and Unrealized
Gain (Loss) on Investments (0.30) (1.23) 1.40 (0.64)
------ ------ ------ ------
Total From Investment
Operations ............... (0.10) (0.60) 2.12 (0.25)
------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ........ (0.19) (0.63) (0.71) (0.38)
Distributions From Net
Realized Capital Gains ... (0.59) (0.00) 0.00 0.00
------ ------ ------ ------
Total Distributions ........ (0.78) (0.63) (0.71) (0.38)
------ ------ ------ ------
Net Asset Value, End of
Period ................... $12.18 $10.95 $12.36 $11.73
====== ====== ====== ======
Total Return (%) (c) ....... (0.8) (4.9) 19.9 (2.1)
Ratio of Operating Expenses
to Average Net Assets (%). 1.81 (b) 1.83 1.89 1.82 (b)
Ratio of Net Investment
Income to Average Net
Assets (%) ............... 4.79 (b) 5.71 6.06 6.14 (b)
Portfolio Turnover Rate (%) 202 77 81 111 (b)
Net Assets, End of
Period )000) ............. $2,661 $9,435 $12,398 $27,270
<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.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
CLASS C CLASS Y
------------------------------ ---------------------------
YEAR SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 3 JUNE 30,
1995 1996 1995 1996
------------- ---------- ---------- ----------
Net Asset Value,
Beginning of
Period.......... $10.95 $12.36 $10.95 $12.40
------ ------ ------ ------
Income From
Investment
Operations
Net Investment
Income ......... 0.56 0.39 0.80 0.43
Net Realized and
Unrealized Gain
(Loss) on
Investments 1.40 (0.64) 1.44 (0.64)
------ ------ ------ ------
Total From
Investment
Operations ..... 1.96 (0.25) 2.24 (0.21)
------ ------ ------ ------
Less Distributions
Distributions From
Net Investment
Income ......... (0.55) (0.38) (0.79) (0.43)
------ ------ ------ ------
Total Distributions (0.55) (0.38) (0.79) (0.43)
------ ------ ----- ------
Net Asset Value,
End of Period .. $12.36 $11.73 $12.40 $11.76
====== ====== ====== ======
Total Return (%) (b) 18.1 (2.1) 21.0 (1.6)
Ratio of Operating
Expenses to
Average Net
Assets (%) ..... 1.89 1.82 (a) 0.89 0.82 (a)
Ratio of Net
Investment Income
to Average Net
Assets (%) ..... 6.06 6.14 (a) 7.06 7.14 (a)
Portfolio Turnover
Rate (%) ....... 81 111 (a) 81 111 (a)
Net Assets, End of
Period (000) ... $1,009 $1,764 $2,241 $2,291
(a) Computed on an annualized basis.
(b) Periods less than one year are not computed on an annualized basis.
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 Class A, Class B, Class C and Class Y shares. The Fund
commenced its public offering of Class B shares on September 13, 1993 and
Class C and Class Y shares on December 30, 1994. 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. Class C shares do not pay front
end or contingent deferred sales charges and do not convert to any class of
shares, but they do pay a higher ongoing distribution fee than Class A shares.
Class Y shares do not pay a front end sales charge, a contingent deferred
sales charge or distribution fees. They are intended for institutional
investors with a minimum of $1,000,000 to invest. Expenses of the Fund are
borne pro-rata by the holders of all 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. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other
assets and liabilities denominated in currencies other than U.S. dollars are
translated into U.S. dollars based upon foreign exchange rates prevailing at
the end of the period. Purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign
exchange rates prevailing at the end of the period, it is not practical to
isolate that portion of the results of operations arising from changes in
exchange rates from fluctuations arising from changes in market prices of the
investment securities. Such fluctuations are included with the net realized
and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities, resulting from changes in the exchange
rate.
FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's currency exposure. Contracts to buy generally are used to acquire
exposure to foreign currencies, while contracts to sell are used to hedge the
Fund's investments against currency fluctuations. Also, a contract to buy or
sell can offset a previous contract. These contracts involve market risk in
excess of the unrealized gain or loss reflected in the Fund's Statement of
Assets and Liabilities. The U.S. dollar value of the currencies the Fund has
committed to buy or sell is shown in the schedule of investments under the
caption "Forward Foreign Currency Contracts." This amount represents the
aggregate exposure to each currency the Fund has acquired or hedged through
currency contracts at period end. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contracts terms. The U.S. dollar value of forward foreign currency contracts
is determined using forward currency exchange rates supplied by a quotation
service.
C. 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 is increased by the accretion
of discount. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the
identified cost basis.
D. 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.
E. 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. These differences
are primarily due to differing treatments for mortgage backed securities and
foreign currency transactions for book and tax purposes. Permanent book and
tax basis differences will result in reclassifications to capital accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the six months ended June 30, 1996 were as follows:
PURCHASES SALES
----------------------------------- -------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- -------------- --------------- ------------
$25,788,750 $104,001,212 $36,672,801 $81,666,360
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
- -----------
$238,857 New England Funds Management, L.P.
$238,857 Back Bay Advisor, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned 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 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 $26,426 and are shown separately in the financial statements as
accounting and administrative services.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the six months ended June 30, 1996, the Fund
paid New England Funds $167,541 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 Service and Distribution Plans relating to the Fund's
Class B and Class C shares (the "Class B and Class C Plans").
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 $241,366 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 $1,919,349.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C 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 and Class C
shares and/or the maintenance of shareholder accounts. For the six months
ended June 30, 1996, the Fund paid New England Funds $31,486 and $1,418 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds
monthly distribution fees at the annual rate of up to 0.75% of the average
daily net assets attributable to the Fund's Class B and Class C 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 and
Class C shares. For the six months ended June 30, 1996, the Fund paid New
England Funds $94,459 and $4,252 in distribution fees under the Class B and
Class C Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the six months
ended June 30, 1996 amounted to $297,924.
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 $2,234
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $107
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. CAPITAL SHARES. At June 30, 1996 there was an unlimited number of shares
of beneficial interest authorized, divided into four classes, Class A, Class
B, Class C and Class Y capital stock. Transactions in capital shares were as
follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------- ----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------- -------------- -------- --------------
Shares sold 2,700,665 $ 30,791,035 1,365,770 $ 16,155,070
Shares
issued in
the
merger
with New
England
Global
Government
Fund ...... 1,513,135 17,368,227 0 0
Shares
issued in
connection
with the
reinvestment
of:
Dividends
from net
investment
income .... 937,520 11,088,211 508,923 6,044,962
--------- ------------ ---------- --------------
5,151,320 59,247,473 1,874,693 22,200,032
Shares
repurchased. (3,144,314) (36,944,840) (1,785,441) (21,229,198)
---------- ------------ ---------- --------------
Net increase 2,007,006 22,302,633 89,252 970,834
---------- ------------ ---------- --------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------- ----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------- -------------- -------- --------------
Shares sold.. 973,948 11,423,501 534,218 6,537,473
Shares
issued in
the
merger
with New
England
Global
Government
Fund ....... 132,100 1,516,371 0 0
<PAGE>
Shares
issued in
connection
with the
reinvestment
of:
Dividends from
net
investment
income .... 69,864 830,708 57,210 678,817
---------- ------------ ---------- --------------
1,175,912 13,770,580 591,428 7,216,290
Shares
repurchased (144,789) (1,723,515) (158,848) (1,883,440)
--------- ------------ ---------- -------------
Net increase 1,031,123 12,047,065 432,580 5,332,850
--------- ------------ ---------- -------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- -------- -------------- -------- --------------
Shares sold.. 118,121 1,417,727 87,203 1,035,866
Shares
issued in
connection
with the
reinvestment
of:
Dividends
from net
investment
income ... 1,084 13,111 2,611 30,927
--------- ------------ ---------- --------------
119,205 1,430,838 89,814 1,066,793
Shares
repurchased (37,616) (450,113) (21,078) (254,997)
--------- ------------ ---------- --------------
Net increase 81,589 980,725 68,736 811,796
--------- ------------ ---------- --------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------- ---------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- -------- -------------- -------- --------------
Shares sold. 183,755 $ 2,080,961 41,187 $ 491,931
Shares
issued in
connection
with the
reinvestment
of:
Dividends
from net
investment
income ... 9,639 114,837 6,813 81,149
--------- ------------ ---------- --------------
193,394 2,195,798 48,000 573,080
Shares
repurchased. (12,673) (151,912) (33,982) (403,638)
--------- ------------ ---------- --------------
Net increase 180,721 2,043,886 14,018 169,442
--------- ------------ ---------- --------------
Increase
derived
from
capital
share
transactions 3,300,439 $37,374,309 604,586 $ 7,284,922
========= =========== ========== ==============
<PAGE>
- -----------------------------------------------------------------------------
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.
<PAGE>
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