<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
(Logo)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
New England
International Equity Fund
[graphic omitted]
December 31, 1996
<PAGE>
FEBRUARY 1997
- --------------------------------------------------------------------------------
[Photo of Henry L.P. Schmelzer]
Dear New England Funds Shareholder,
Taken together, 1995 and 1996 constituted the sixth strongest back-to-back years
for the U.S. stock market since 1915, as measured by percentage gain in the Dow
Jones Industrial Average (according to Bloomberg Business News).
Most New England Funds portfolio managers believe that the forces behind this
rally -- low inflation, relatively stable interest rates and strong corporate
profits -- will persist, at least for a time. Nevertheless, bull markets can
suddenly turn quiet; they can decline modestly; or they can reverse course
sharply. No one can predict what is ahead, nor can anyone guarantee whether the
market's strength will extend even further in 1997 and beyond.
Maintain a Long-Term Perspective
Whatever the market's direction, you should be prepared to consider any
short-term trends in the broader context of your long-term personal goals,
including the accumulation of financial assets. One way to manage this important
process is by diversifying your investments. While U.S. stocks have historically
been the strongest performers, you may, depending on your financial goals and
needs, also benefit from investing in various types of bond funds, and by
participating in growing overseas markets.
Remember that each investment has its own unique risks. What's more, no strategy
can assure a profit or protect against a loss. However, one time-tested approach
is to invest regularly and stay invested -- in good times and bad -- to avoid
the pitfall of guessing what the market might do in the short run.
Our Multiple-Adviser Approach Sets Us Apart
Many financial representatives recommend New England Funds to their clients
because of our distinctive multiple-adviser approach. For each fund, we
hand-pick a specific subadviser or subadvisers with significant experience and
demonstrated skill in selecting investments that are in tune with that fund's
stated objective. We call it matching the talent to the task.
Finally, it may interest you to learn that you are part of a major national
trend. In 1996, nearly 37 million U.S. households owned mutual funds, according
to the Investment Company Institute, an industry trade organization. Mutual
funds are now a cornerstone of retirement, college and other investment plans
for millions of Americans.
New England Funds has grown with the industry and is now over $6 billion in
size. We thank you for helping us reach this important milestone, and look
forward to serving your investment needs well into the future.
Sincerely,
/s/ Henry L.P. Schmelzer
- ------------------------
Henry L.P. Schmelzer, President
For more information, including a prospectus for any
New England Fund, please contact your financial representative or call the
Investor Services and Marketing Group at 800-225-5478. Please read the
prospectus carefully, including the information on charges and expenses, before
you invest.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
- --------------------- For two years running we're proud to announce that
[Logo] DALBAR, an independent evaluator of mutual fund
QUALITY service, has awarded New England Funds its Quality
TESTED SERVICE Tested Service Seal for "providing the highest
1996 tier of service excellence in the mutual fund
- --------------------- industry." New England Funds is one of just three
DALBAR mutual fund companies to earn this distinction in
HONORS COMMITMENT TO: each of the last two years -- another reason why
INVESTORS we are becoming known as the mutual fund company
- --------------------- Where The Best Minds Meet(TM).
INVESTMENT RESULTS THROUGH DECEMBER 31, 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.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares since New England International Equity
Fund's inception on 5/21/92 compared to the EAFE Index over the same period. The
data points for this chart are as follows:]
- --------------------------------------------------------------------------------
A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
COMPARED TO MORGAN STANLEY CAPITAL INTERNATIONAL
EUROPE AUSTRALASIA FAR EAST INDEX (MSCI EAFE INDEX)(4)
[] NET ASSET VALUE(1)
[] WITH MAXIMUM SALES CHARGE(2)
[] MSCI EAFE(R) INDEX(4)
DATE NAV(1) POP(2) EAFE(4)
- ---- -------- ------- ----------
5/21/92 $10,000 $ 9,425 $10,000
12/31/92 $ 9,511 $ 8,964 $ 9,317
12/31/93 $12,306 $11,599 $12,386
12/31/94 $13,298 $12,534 $13,384
12/31/95 $14,067 $13,258 $14,930
12/31/96 $14,514 $13,961 $15,880
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, Class C and Class 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.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS 12/31/96
- --------------------------------------------------------------------------------
CLASS A (Inception 5/21/92) 1 YEAR 3 YEAR SINCE INCEPTION
Net Asset Value(1) 3.27% 5.68% 8.41%
With Max. Sales Charge(2) -2.65 3.61 7.02
Lipper International Avg.(5) 10.59 7.10 n/a
- --------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 3 YEAR SINCE INCEPTION
Net Asset Value(1) 2.48% 4.93% 4.57%
With CDSC(3) -1.52 4.01 4.02
MSCI EAFE(4) 6.36 8.64 7.39
Lipper International Avg.(5) 10.59 7.10 n/a
- --------------------------------------------------------------------------------
CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.48% 3.82%
MSCI EAFE(4) 6.36 8.88
Lipper International Avg.(5) 10.59 n/a
- --------------------------------------------------------------------------------
CLASS Y (Inception 9/9/93) 1 YEAR 3 YEAR SINCE INCEPTION
Net Asset Value(1) 3.95% 6.46% 6.07%
MSCI EAFE(4) 6.36 8.64 7.36
Lipper International Avg.(5) 10.59 7.10 n/a
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. Class Y shares are available only to certain institutional
investors. Share price and return may vary.
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 5.75% 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. Class C shares are available only to eligible
institutional investors and are not subject to a sales charge.
(4) Morgan Stanley Capital International (MSCI) Europe Australasia Far East
Index (EAFE) is an arithmetical average (weighted by market value) of the
performance (in U.S. dollars) of 1,036 companies representing stock markets
in Europe, Australia, New Zealand and the Far East. The Index performance
has not been adjusted for ongoing management, distribution and operating
expenses and sales charges applicable to mutual fund investments.
(5) 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.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Q. How did New England International Equity Fund perform in 1996?
[Photos of
Nicholas Carn, Tim Griffen (shown),
Gregory Eckersley, Nigel Hankin
Draycott Partners, Ltd.]
The Fund generated 3.27% total return for the year ended December 31, 1996
(Class A shares at net asset value), underperforming its benchmark, the MSCI
Europe, Australasia, Far East (EAFE) Index, which returned 6.36%.(4)
Q. What factors most influenced the Fund's performance?
The Fund's relatively large exposure to the Japanese stock market was the
single biggest influence on investment performance. The perception that the
Japanese domestic economy was weakening once again, as the fiscal stimulus
of the first quarter subsided, caused the stock market to deteriorate in the
second half. In addition, the Japanese stocks in the Fund's portfolio as a
whole underperformed the Japanese broad market indexes.
Meanwhile, exposure to the UK, Spain and Italy benefited performance as
interest rates fell further. European markets staged a second-half recovery
from a weak showing at the beginning of the year. The world economy
continued to register steady non-inflationary growth, due in part to the
desynchronization of the European and Japanese economies and also the
continued slow, steady growth of the U.S. economy.
Q. How did you manage the Fund in 1996?
Through the first half of the year we maintained a weighting in Japan below
that of the EAFE Index. The Fund was overweighted in the UK and
underweighted in East Asia, while we kept our continental European holdings
broadly in line with the EAFE.
In the fall, in response to lower Japanese stock market prices and signs of
an improvement in the economy, we slightly increased our Japan weighting.
Shortly thereafter, we raised the Japanese domestic exposure within the
portfolio as the fall in the stock market made valuations more attractive.
At the time of writing, these decisions have not proven correct and are the
primary reasons for the Fund's underperformance relative to other
international equity mutual funds for 1996 as a whole.
Q. What is your investment outlook for 1997?
Global monetary policy is currently very accommodative and global interest
rates are at twenty-year lows. Some of the challenges currently facing the
world economy include high labor costs and rigid labor markets, together
with the legacy of exchange rate overvaluation in Europe and the prospect of
tight fiscal policy to remedy the effects of the long recession in Japan.
Despite these challenges, we believe that this policy mix generally favors
world stock markets in coming months. The discount rate applied to future
earnings is likely to remain low, while an environment of low economic
volatility favors companies' restructuring efforts.
IMPORTANT NOTE: EFFECTIVE FEBRUARY 14, 1997, LOOMIS, SAYLES & COMPANY, L.P.
SUCCEEDED DRAYCOTT PARTNERS, LTD. AS INVESTMENT SUBADVISER TO NEW ENGLAND
INTERNATIONAL EQUITY FUND. LOOMIS SAYLES IS AN AFFILIATE OF NEW ENGLAND FUNDS
MANAGEMENT. IF YOU HAVE NOT ALREADY RECEIVED A COPY OF THE PROSPECTUS SUPPLEMENT
OR A SHAREHOLDER PROXY STATEMENT EXPLAINING THE REASONS FOR THIS CHANGE, PLEASE
PHONE NEW ENGLAND FUNDS AT 800-225-5478 TO REQUEST THESE DOCUMENTS.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------
YOUR FUND'S TOP TEN HOLDINGS 12/31/96*
- --------------------------------------------------
PERCENTAGE
COMPANY OF ASSETS
- --------------------------------------------------
1. BARCLAYS 1.68%
- --------------------------------------------------
2. BRITISH AEROSPACE 1.60%
- --------------------------------------------------
3. REED INTERNATIONAL 1.47%
- --------------------------------------------------
4. MATSUSHITA ELECTRIC INDUSTRY 1.45%
- --------------------------------------------------
5. SECOM CO. 1.45%
- --------------------------------------------------
6. FORTIS AMEV NV 1.41%
- --------------------------------------------------
7. DAIWA BANK 1.40%
- --------------------------------------------------
8. MANNESMANN AG 1.38%
- --------------------------------------------------
9. TOMKINS 1.35%
- --------------------------------------------------
10. HOECHST AG 1.33%
- --------------------------------------------------
- ------------------------------------------------------
YOUR FUND'S TOP TEN SECTORS 12/31/96*
- ------------------------------------------------------
PERCENTAGE
SECTOR OF ASSETS
- ------------------------------------------------------
1. BANKS 13.7%
- ------------------------------------------------------
2. CONGLOMERATES 5.8%
- ------------------------------------------------------
3. FOOD & BEVERAGES 5.7%
- ------------------------------------------------------
4. BUSINESS SERVICES 5.7%
- ------------------------------------------------------
5. RETAIL 4.8%
- ------------------------------------------------------
6. INDUSTRIAL MACHINERY 4.0%
- ------------------------------------------------------
7. ELECTRIC UTILITIES 4.0%
- ------------------------------------------------------
8. BROADCASTING 3.9%
- ------------------------------------------------------
9. HOUSEHOLD APPLIANCES & HOME FURNISHINGS 3.2%
- ------------------------------------------------------
10. DRUGS & HEALTH CARE 2.9%
- ------------------------------------------------------
* Portfolio holdings and asset allocations will vary.
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of December 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK--97.5% OF TOTAL INVESTMENTS
SHARES (A) DESCRIPTION VALUE (B)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
AUSTRALIA--4.4%
145,050 Australia & New Zealand Bank Group, 144A (f) .............. $ 914,273
108,857 Boral, Ltd ............................................... 309,759
46,600 Broken Hill Proprietary Co., 144A (f) ..................... 663,756
78,800 Capral Aluminum .......................................... 250,537
188,800 Fairfax John ............................................. 427,693
37,100 Lend Lease Corp., 144A (f) ................................ 719,529
149,400 News Corp. 144A (f) ....................................... 788,503
215,400 Normandy Mining, Ltd., Warrants (e) ....................... 71,908
464,800 Normandy Mining, Ltd. .................................... 642,836
267,100 North, Ltd. .............................................. 781,280
424,050 Oil Search Ltd. .......................................... 825,787
235,446 QNI, Ltd. ................................................ 473,475
140,800 Southcorp Holdings, Ltd. ................................. 447,659
48,100 Wesfarmers ............................................... 336,444
165,000 Westpac Bank Corp., 144A (f) .............................. 939,035
109,150 WMC, Ltd. ................................................ 687,989
----------------
9,280,463
----------------
BELGIUM--1.2%
19,350 Delhaize le Lion, 144A (f) ................................ 1,149,626
6,770 Glaverbel ................................................ 786,304
3,850 Powerfin ................................................. 588,527
----------------
2,524,457
----------------
DENMARK--1.0%
7,900 BG Bank .................................................. 370,137
8,500 Crisplant Industries ..................................... 411,234
46,500 ISS International Service Systems, 144A (f) ............... 1,223,518
----------------
2,004,889
----------------
FINLAND--1.9%
14,010 Huhtamaki OY ............................................. 651,770
40,300 Kesko .................................................... 568,580
4,030 Kone Corp. ............................................... 445,052
9,600 Metra AB ................................................. 540,522
12,100 Raison Tehtaat ........................................... 762,826
51,600 UPM-Kymmene OY ........................................... 1,082,478
----------------
4,051,228
----------------
GERMANY--7.7%
19,630 Adidas AG ................................................ 1,696,640
930 Bayer Motoren Werk ....................................... 648,486
975 Boss Hugo AG ............................................. 1,224,769
20,680 Deutsche Telekom ......................................... 436,097
20,210 Henkel Kgaa .............................................. 1,015,228
58,930 Hoechst AG ............................................... 2,784,125
35,120 Lufthansa AG, 144A (f) .................................... 479,283
6,630 Mannesmann AG, 144A (f) ................................... 2,873,804
2,330 Preussag AG .............................................. 527,687
8,580 SGL Carbon AG, 144A (f) ................................... 1,081,700
33,870 Tarkett AG ............................................... 675,727
44,570 Veba ..................................................... 2,577,808
----------------
16,021,354
----------------
ITALY--3.0%
370,450 BCA Fideuram SPA ......................................... 814,404
157,000 Edison ................................................... 993,540
300,000 Eni Spa .................................................. 1,539,552
271,750 Saipem, 144A (f) .......................................... 1,250,372
483,000 STET ..................................................... 1,631,757
----------------
6,229,625
----------------
JAPAN--37.2%
172,000 Asahi Glass Co. .......................................... 1,618,859
155,000 Dai Nippon Printing ...................................... 2,716,950
558,000 Daiwa Bank ............................................... 2,915,033
73,000 Daiwa Securities, 144A (f) ................................ 649,253
111,000 Denso Corp. .............................................. 2,674,121
478 East Japan Railway, 144A (f) .............................. 2,150,402
186,000 Fuji Bank, 144A (f) ....................................... 2,714,273
1,082,000 Hokkaido Takushoku, 144A (f) .............................. 2,102,150
487,000 Ishikawajima Har ......................................... 2,165,659
126,000 Kirin Brewery Co. ........................................ 1,240,307
186,000 Matsushita Electric Industry, 144A (f) .................... 3,035,489
291,000 Mitsubishi Chemical ...................................... 942,276
149,000 Mitsubishi Corp., 144A (f) ................................ 1,543,908
225,000 Mitsubishi Heavy Industry, Ltd., 144A (f) ................. 1,787,410
152,000 Mitsubishi Logistics ..................................... 1,968,742
172,000 Mitsui & Co. ............................................. 1,396,080
149,000 Mitsui Fudosan Co., 144A (f) .............................. 1,492,445
307,000 Mitsukoshi ............................................... 2,179,035
33,000 Nintendo Co. ............................................. 2,362,231
503,000 Nippon Credit Bank ....................................... 1,324,713
674,000 Nippon Steel Corp. ....................................... 1,990,398
228 Nippon Telegraph & Telephone ............................. 1,728,555
135,000 Nomura Securities ........................................ 2,028,322
315,820 Odakyu Electric Railway .................................. 1,895,302
130,000 Onward Kashiyama ......................................... 1,829,721
706,000 Osaka Gas Co. ............................................ 1,932,493
165,000 Ricoh Co. ................................................ 1,894,914
149,000 Sakura Bank, 144A (f) ..................................... 1,065,297
149,000 Sanwa Bank ............................................... 2,032,812
263,000 Sato Kogyo Co. ........................................... 917,468
50,000 Secom Co. ................................................ 3,026,509
34,000 Sony Corp. ............................................... 2,228,305
84,000 Sumitomo Bank, 144A (f) ................................... 1,211,294
5,000 Sumitomo Marine & Fire Insurance Co., 144A (f) ............ 31,085
274,000 Taisei Corp. ............................................. 1,419,567
120,000 Takashimaya Co. .......................................... 1,440,290
247,000 Tokai Bank ............................................... 2,580,693
107,000 Tokyo Electric Power, 144A (f) ............................ 2,346,775
169,000 Toto ..................................................... 1,926,259
45,000 Toyota Motor Corp. ....................................... 1,293,930
187,000 Yakult Honsha Co. ........................................ 1,937,657
471,000 Yasuda Trust & Banking ................................... 1,996,900
----------------
77,733,882
----------------
KOREA--0.4%
8,100 Daewoo Electronics ....................................... 57,994
7,700 Daewoo Heavy Industry .................................... 47,567
14,500 Korea Electric Power, 144A (f) ............................ 422,130
21,085 Korea First Bank, 144A (f) ................................ 106,797
5,400 L.G. Chemicals ........................................... 52,083
10,800 L.G. Electronics, Inc. ................................... 136,757
6,900 Ssangyong Cement ......................................... 97,172
----------------
920,500
----------------
LUXEMBOURG--0.1%
6,090 Kia Motors Corp., 144A (GDR) (f) (g) ...................... 118,919
----------------
NETHERLANDS--3.1%
3,600 Akzo Nobel NV ............................................ 492,094
9,300 CSM NV ................................................... 517,116
84,050 Fortis Amev NV ........................................... 2,945,279
56,900 Vendex International ..................................... 2,435,511
----------------
6,390,000
----------------
NORWAY--1.4%
9,900 Orkla A/S ................................................ 683,755
54,500 Schibsted ASA ............................................ 993,893
63,100 Smedvig .................................................. 1,282,938
----------------
2,960,586
----------------
SPAIN--3.0%
35,000 Autopistas del Mare ...................................... 549,971
42,600 Banco Santander S.A. ..................................... 2,726,794
450,000 Corp Fin Reunida ......................................... 1,476,603
14,000 Repsol S.A. .............................................. 537,031
11,600 Tabacalera S.A. .......................................... 499,472
37,400 Viscofan Envoltura ....................................... 547,352
----------------
6,337,223
----------------
SWEDEN--0.3%
35,000 Scandic Hotels AB ........................................ 585,052
----------------
SWITZERLAND--5.9%
4,840 Adecco S.A. .............................................. 1,214,972
2,224 Alusuisse Lonza Holding, 144A (f) ......................... 1,772,886
448 Baloise Holdings ......................................... 900,351
467 Danzas Holding ........................................... 518,114
1,303 Nestle S.A., 144A (f) ..................................... 1,398,888
1,170 Novartis AG .............................................. 1,340,015
300 Roche Holdings AG ........................................ 2,334,329
991 Schindler Holding AG ..................................... 1,077,254
1,248 Swissair ................................................. 1,009,775
4,480 Tag Heuer ................................................ 722,959
----------------
12,289,543
----------------
UNITED KINGDOM--26.9%
217,500 BAA ...................................................... 1,803,495
204,800 Barclays ................................................. 3,510,406
128,250 Bass ..................................................... 1,806,090
129,750 BPB ...................................................... 853,589
153,000 British Aerospace ........................................ 3,349,906
150,500 British Petroleum, 144A (f) ............................... 1,804,866
171,000 British Sky Broadcast .................................... 1,529,244
237,350 British Telecom .......................................... 1,606,189
261,400 BTR ...................................................... 1,276,323
203,400 Cadbury Schweppes ........................................ 1,717,941
208,000 Caradon PLC .............................................. 855,234
167,775 Carlton Communications PLC ............................... 1,470,511
57,710 EMI Thorn Group ........................................... 1,364,149
178,850 General Electric ......................................... 1,173,540
155,950 Glaxo Wellcome PLC ....................................... 2,538,162
157,475 Greenalls Group .......................................... 1,586,351
932,500 Hanson ................................................... 1,310,005
184,550 Imi ...................................................... 1,182,486
644,200 Ladbroke Group PLC ....................................... 2,560,466
406,900 National Grid Group ...................................... 1,359,354
117,050 National Westminster ..................................... 1,375,643
572,050 Orange ................................................... 1,852,278
108,200 Pearson 144A (f) .......................................... 1,381,001
240,300 Rank Group ............................................... 1,803,176
162,610 Reed International, 144A (f) .............................. 3,058,862
121,900 Reuters Holdings ......................................... 1,567,345
188,650 J. Sainsbury .............................................. 1,250,772
92,090 Shell Transport & Trading ................................ 1,596,626
96,700 SmithKline Beecham PLC ................................... 1,338,592
555,500 TeleWest Communications .................................. 1,175,334
233,250 TI Group ................................................. 2,313,719
608,800 Tomkins, 144A (f) ......................................... 2,816,104
----------------
56,187,759
----------------
Total Common Stock (Identified Cost $189,859,297) ......... 203,635,480
----------------
See accompanying notes to financial statements.
<PAGE>
SHORT TERM INVESTMENTS--2.8%
FACE
AMOUNT DESCRIPTION VALUE (B)
- ---------------------------------------------------------------------------------------------------
$ 5,798,000 Repurchase Agreement with State Street Bank & Trust dated
12/31/96 at 4.750% to be repurchased at $5,799,530 on 1/
02/97, collateralized by $4,615,000 U.S. Treasury Bonds
8.875%, due 8/15/17, valued at $5,914,413 .............. $ 5,798,000
----------------
Total Short Term Investments (Identified Cost $5,798,000) . 5,798,000
----------------
Total Investments--100.3% (Identified Cost $195,657,297)
(c) ....................................................... 209,433,480
Other assets less liabilities (d) ....................... (675,635)
----------------
Total Net Assets--100% .................................... $ 208,757,845
================
(a) Ordinary shares unless noted otherwise.
(b) See note 1a.
(c) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments
based on cost of $197,421,798 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 ........................ $ 29,663,899
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value ........................ (17,652,217)
----------------
Net unrealized appreciation ........................................ $ 12,011,682
================
(d) Including deposits in foreign denominated currencies with a value of $822,136
and a cost of $815,724.
(e) Non-income producing security.
(f) 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.
(g) Global Depository Receipt.
</TABLE>
TEN LARGEST INDUSTRY HOLDINGS AT DECEMBER 31, 1996 (UNAUDITED)
Bank 13.65% Industrial Machinery 3.97%
Conglomerates 5.79% Electric Utilities 3.94%
Food & Beverages 5.61% Broadcasting 3.91%
Business Services 5.61% Household Appliances 3.15%
Retail Trade 4.82% Drugs & Health Care 2.95%
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ..................................... $209,433,480
Cash ..................................................... 298
Foreign cash at value .................................... 822,136
Receivable for:
Fund shares sold ....................................... 120,788
Securities sold ........................................ 256,263
Dividends and interest ................................. 319,023
Foreign taxes .......................................... 153,837
Prepaid registration expense ............................. 12,000
Unamortized organization expenses ........................ 25,452
------------
211,143,277
LIABILITIES
Payable for:
Securities purchased ................................... $ 206,655
Fund shares redeemed ................................... 1,435,989
Withholding Taxes ...................................... 40,990
Accrued expenses:
Management fees ........................................ 503,080
Deferred trustees' fees ................................ 8,052
Accounting and administrative .......................... 3,577
Other expenses ......................................... 187,089
-----------
2,385,432
------------
NET ASSETS ................................................. $208,757,845
============
Net Assets consist of:
Capital paid in ........................................ $191,571,541
Overdistributed net investment income .................. (162,086)
Accumulated net realized gains ......................... 3,558,374
Unrealized appreciation on investments and foreign
currency transactions 13,790,016
------------
NET ASSETS ................................................. $208,757,845
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($109,772,646 divided by 6,732,408 shares of beneficial
interest) .............................................. $16.31
======
Offering price per share (100/94.25 of $16.31) ............. $17.31*
======
Net asset value and offering price of Class B shares
($45,974,016 divided by 2,874,037 shares of beneficial
interest) ................................................ $16.00**
======
Net asset value and offering price of Class C shares
($850,204 divided by 53,049 shares of beneficial interest) $16.03
======
Net asset value and offering price of Class Y shares
($52,160,979 divided by 3,164,702 shares of beneficial
interest) ................................................ $16.48
======
Identified cost of investments ............................. $195,657,297
============
*Based upon single purchases of less than $50,000.
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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................................... $4,414,463(a)
Interest ................................................ 612,040
----------
5,026,503
Expenses
Management fees ....................................... $ 2,439,442
Service fees - Class A ................................ 316,834
Service and distribution fees - Class B ............... 513,700
Service and distribution fees - Class C ............... 10,445
Trustees' fees and expenses ........................... 22,859
Accounting and administrative ......................... 51,077
Custodian ............................................. 481,356
Transfer agent ........................................ 652,014
Audit and tax services ................................ 50,000
Legal ................................................. 24,357
Printing .............................................. 61,506
Registration .......................................... 49,770
Amortization of organization expenses ................. 60,456
Miscellaneous ......................................... 10,909
-----------
Total Expenses .......................................... 4,744,725
Less expenses waived by the investment adviser and sub-
adviser ............................................... (255,787) 4,488,938
----------- ----------
Net investment income ................................... 537,565
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net ..................................... 15,861,459
Foreign currency transactions - net ................... (392,131)
-----------
Net realized gain on investments and foreign currency
transactions ........................................ 15,469,328
-----------
Unrealized depreciation on:
Investments - net ..................................... (7,285,697)
Foreign currency transactions - net ................... (282)
-----------
Net unrealized depreciation on investments and foreign
currency
transactions ........................................ (7,285,979)
-----------
Net gain on investment transactions ..................... 8,183,349
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................ $8,720,914
==========
(a) Net of foreign taxes of: $688,545.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996
------------- ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income .................................... $ 2,457,266 $ 537,565
Net realized gain (loss) on investments and foreign
currency transactions (4,130,366) 15,469,328
Unrealized appreciation (depreciation) on investments and
foreign currency transactions .......................... 17,055,690 (7,285,979)
------------- ------------
Increase in net assets from operations ................... 15,382,590 8,720,914
------------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (2,225,716) (144,405)
Class B ................................................ (615,923) 0
Class C ................................................ (12,203) 0
Class Y ................................................ (2,045,868) (267,794)
Net realized gain on investments
Class A ................................................ 0 (2,392,039)
Class B ................................................ 0 (1,005,926)
Class C ................................................ 0 (21,073)
Class Y ................................................ 0 (1,938,066)
------------- ------------
(4,899,710) (5,769,303)
------------- ------------
Increase (decrease) in net assets derived from capital
share transactions ..................................... 22,364,784 (68,120,558)
------------- ------------
Total increase (decrease) in net assets .................. 32,847,664 (65,168,947)
NET ASSETS
Beginning of the year .................................... 241,079,128 273,926,792
------------- ------------
End of the year .......................................... $273,926,792 $208,757,845
============ ============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the year .................................... $ 0 $ 20,518
============ ============
End of the year .......................................... $ 20,518 $ (162,086)
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
MAY 21(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------
1992 1993 1994 1995 1996
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ............................ $12.50 $11.80 $14.85 $15.50 $16.13
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............. 0.01 0.11 0.00 0.27 0.02(g)
Net Realized and Unrealized Gain
(Loss) on Investments ........... (0.63) 3.37 1.19 0.63 0.51
------ ------ ------ ------ ------
Total From Investment Operations .. (0.62) 3.48 1.19 0.90 0.53
------ ------ ------ ------ ------
Less Distributions (d)
Dividends From Net Investment
Income .......................... (0.01) (0.11) 0.00 (0.27) (0.02)
Distributions From Net Realized
Capital Gains ................... 0.00 (0.32) (0.53) 0.00 (0.33)
Distributions From Paid-in Capital (0.07) 0.00 (0.01) 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ............... (0.08) (0.43) (0.54) (0.27) (0.35)
------ ------ ------ ------ ------
Net Asset Value, End of Period .... $11.80 $14.85 $15.50 $16.13 $16.31
====== ====== ====== ====== ======
Total Return (%) (c) .............. (5.0) 29.4 8.1 5.8 3.3
Ratio of Operating Expenses to
Average Net Assets(%)(e) ........ 1.50(b) 1.60 1.75 1.75 1.75
Ratio of Net Investment Income to
Average Net Assets(%) ........... 0.10(b) 0.24 0.01 1.24 0.14
Portfolio Turnover Rate (%) ....... 62 101 123 119 59
Average Commission Rate (f) ....... -- -- -- -- $0.0180
Net Assets, End of Period (000) ... $21,731 $80,937 $142,917 $136,848 $109,773
(a) Commencement of Operations.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
(d) See Note 1e.
(e) The ratio of operating expenses
to average net assets without
giving effect to the voluntary
expense limitations described
in Note 4 to the Financial
Statements would have been (%) 2.89(b) 2.16 1.79 1.83 1.79
(f) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
(g) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------------------------- ---------------------------
SEPTEMBER 13(a) YEAR ENDED
THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, ----------------------------------------- ---------------------------
1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.19 $14.81 $15.35 $15.93 $15.35 $15.96
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income
(loss) ............. 0.12 0.00 0.19 (0.10)(g) 0.19 (0.10)(g)
Net Realized and
Unrealized Gain
(Loss) on
Investments ........ (0.06) 1.08 0.58 0.50 0.61 0.50
------ ------ ------ ------ ------ ------
Total From Investment
Operations ......... 0.06 1.08 0.77 0.40 0.80 0.40
------ ------ ------ ------ ------ ------
Less Distributions (d)
Dividends From Net
Investment Income .. (0.12) 0.00 (0.19) 0.00 (0.19) 0.00
Distributions From Net
Realized Capital Gains (0.32) (0.53) 0.00 (0.33) 0.00 (0.33)
Distributions From
Paid-in Capital .... 0.00 (0.01) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions .. (0.44) (0.54) (0.19) (0.33) (0.19) (0.33)
------ ------ ------ ------ ------ ------
Net Asset Value, End
of Period .......... $14.81 $15.35 $15.93 $16.00 $15.96 $16.03
====== ====== ====== ====== ====== ======
Total Return (%) (c) . 0.3 7.3 5.0 2.5 5.2 2.5
Ratio of Operating
Expenses to
Average Net Assets(%)(e) 2.50 (b) 2.50 2.50 2.50 2.50 2.50
Ratio of Net
Investment Income
(loss) to Average
Net Assets (%) ..... (1.69)(b) (0.74) 0.49 (0.61) 0.49 (0.61)
Portfolio Turnover Rate(%) 101 123 119 59 119 59
Average Commission Rate(f) -- -- -- $0.0180 -- $0.0180
Net Assets, End of
Period (000) ....... $9,176 $41,601 $52,895 $45,974 $1,066 $ 850
(a) Commencement of Operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge in the case of Class B shares is not reflected in total return calculations.
Periods less than one year are not annualized.
(d) See Note 1e.
(e) The ratio of
operating expenses
to average net
assets without
giving effect to
the voluntary
expense
limitations
described in Note
4 to the Financial
Statements would
have been (%) 3.36 (b) 2.54 2.58 2.54 2.58 2.54
(f) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
(g) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial highlights.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------------------------
SEPTEMBER 9(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income From Investment Operations
Net Investment Income ...................... 0.13 0.00 0.42 0.11(g)
Net Realized and Unrealized Gain (Loss) on
Investments .............................. (0.01) 1.32 0.60 0.54
------ ------ ------ ------
Total From Investment Operations ........... 0.12 1.32 1.02 0.65
------ ------ ------ ------
Less Distributions (d)
Dividends From Net Investment Income ....... (0.13) 0.00 (0.41) (0.09)
Distributions From Net Realized Capital
Gains ...................................... (0.32) (0.53) 0.00 (0.33)
Distributions From Paid-in Capital ......... 0.00 (0.01) 0.00 0.00
------ ------ ------ ------
Total Distributions ........................ (0.45) (0.54) (0.41) (0.42)
------ ------ ------ ------
Net Asset Value, End of Period ............. $14.86 $15.64 $16.25 $16.48
====== ====== ====== ======
Total Return (%) (c) ....................... 0.7 8.9 6.6 4.0
Ratio of Operating Expenses to Average Net
Assets (%) (e) ........................... 1.00(b) 1.00 1.00 1.00
Ratio of Net Investment Income to Average
Net Assets (%) ........................... 0.33(b) 0.76 1.99 0.89
Portfolio Turnover Rate (%) ................ 101 123 119 59
Average Commission Rate (f) ................ -- -- -- $0.0180
Net Assets, End of Period (000) ............ $7,006 $56,561 $83,119 $52,161
(a) Commencement of Operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
(d) See Note 1e.
(e) The ratio of operating expenses to
average net assets without giving effect
to the voluntary expense limitations
described in Note 4 to the Financial
Statements would have been (%) ......... 1.35(b) 1.04 1.21 1.19
(f) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission
rate per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
(g) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying note to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. The Fund is a series of 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, of Class C shares
on December 30, 1994 and of its Class Y shares on September 9, 1993. Class A
shares are sold with a maximum front end sales charge of 5.75%. 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 each class 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. Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
service provides the last reported sale price for securities listed on an
applicable securities exchange or on the NASDAQ national market system, or, if
no sale was reported and in the case of over-the-counter securities not so
listed, the last reported bid price. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates value.
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 or when the Fund learns of
the dividend, and interest income is recorded on the accrual basis. In
determining net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
C. 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.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. 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 fluctuation. 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 (if any) is shown in the schedule of investments under the caption
"Forward Foreign Currency Contracts." This amount represents the aggregate
exposure to each currency each 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.
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 and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for the
foreign currency component on the sale of securities for book and tax purposes.
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. The subadviser 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
portfolio's ability to dispose of the underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in fiscal 1992 in connection with the
Fund's organization and registration, amounting to approximately $178,500 in the
aggregate, were paid by the Fund and are being amortized by the Fund based on
projected annual average net assets over 60 months.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the year ended December 31, 1996 were $152,478,312 and $223,485,141,
respectively.
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 0.90% of the first $200 million of the Fund's
average daily net assets, 0.85% of the next $300 million and 0.80% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Draycott Partners, Ltd. at the rate of 0.54% of the first $200 million of the
Fund's average daily net assets, 0.49% of the next $300 million and 0.44% of
such assets in excess of $500 million. Certain officers and directors of NEFM
are also officers or trustees of the Fund. NEFM is a wholly owned subsidiary of
New England Investment Companies, L.P. ("NEIC") which is a subsidiary of
Metropolitan Life Insurance Company ("Met Life"). Fees earned by NEFM under the
management agreement in effect during the year ended December 31, 1996 are as
follows:
FEES EARNED
-----------
$ 990,800(a) New England Funds Management, L.P.
$1,448,642(a) Draycott Partners, Ltd.
(a) Before reduction due to voluntary expense limitation. See Note 4.
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 year ended
December 31, 1996, these expenses amounted to $51,077 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 for the Fund. For the year ended December 31, 1996 the Fund paid
New England Funds $495,021 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 the 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, 1996, the Fund paid New England Funds $316,834 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 at December 31, 1996 is
$514,256.
Under the Class B and Class C Plans, 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 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 year ended December 31,
1996, the Fund paid New England Funds $128,425 and $2,611 in service fees under
the Class B and Class C plans, respectively.
Also under the Class B and Class C 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 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 year ended December 31, 1996, the Fund paid New England Funds
$385,275 and $7,834 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 of shares of the Fund during the year ended
December 31, 1996 amounted to $493,414.
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 New
England Funds, NEFM, NEIC or their affiliates, other than registered investment
companies. Each other trustee was compensated by the Fund as follows:
Annual Retainer $2,254
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $129/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 been, had it been invested in the Fund on the
normal payment date.
4. EXPENSE LIMITATIONS. Commencing May 21, 1992, Draycott and New England Funds
had voluntarily agreed to reduce their fees and, if necessary, to assume
expenses of the Fund in order to limit the Fund's expenses to an annual rate of
1.50% of the Fund's average daily net assets. On October 1, 1993, this
limitation was changed to 1.75% of the Fund's Class A average net assets, 2.50%
of Classes B and C average net assets and 1.00% of Class Y average net assets,
until further notice to the Fund. As a result of the Fund's expenses exceeding
the voluntary expense limitation during the year ended December 31, 1996, NEFM
waived $103,892 of its $990,800 management fees and Draycott waived $151,895 of
its $1,448,642 sub-advisory fees.
5. CONCENTRATION OF CREDIT. The Fund had the following geographic concentration
in excess of 10% of its total net assets at December 31, 1996: Japan 37% and the
United Kingdom, 27%. The Fund pursues its objectives by investing in foreign
securities. There are certain risks involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments. These
risks include those resulting from future adverse political or economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions.
6. CAPITAL SHARES. At December 31, 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 2,215,430 $ 34,501,158 1,825,637 $ 29,792,464
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 132,647 2,128,983 8,742 140,746
Distributions from net realized
gain ........................... 0 0 140,697 2,292,111
------------- ---------------- ------------- ----------------
2,348,077 36,630,141 1,975,076 32,225,321
Shares repurchased ................. (3,084,715) (48,156,416) (3,726,604) (61,134,746)
------------- ---------------- ------------- ----------------
Net decrease ....................... (736,638) $ (11,526,275) (1,751,528) $ (28,909,425)
------------- ---------------- ------------- ----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 1,152,458 $ 17,743,605 485,690 $ 7,864,591
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 35,549 563,445 0 0
Distributions from net realized
gain ........................... 0 0 57,043 912,182
------------- ---------------- ------------- ----------------
1,188,007 18,307,050 542,733 8,776,773
Shares repurchased ................. (577,306) (8,944,580) (988,934) (16,015,194)
------------- ---------------- ------------- ----------------
Net increase (decrease) ............ 610,701 $ 9,362,470 (446,201) $ (7,238,421)
------------- ---------------- ------------- ----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- --------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 74,361 $ 1,142,301 26,580 $ 431,991
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 730 11,593 0 0
Distributions from net realized
gain ........................... 0 0 1,291 20,709
------------- ---------------- ------------- ----------------
75,091 1,153,894 27,871 452,700
Shares repurchased ................. (8,331) (130,582) (41,582) (671,566)
------------- ---------------- ------------- ----------------
Net increase (decrease) ............ 66,760 $ 1,023,312 (13,711) $ (218,866)
------------- ---------------- ------------- ----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- --------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 2,118,793 $ 33,408,749 1,802,534 $ 30,088,855
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 126,522 2,045,868 16,496 268,390
Distributions from net realized
gain ........................... 0 0 117,430 1,938,067
------------- ---------------- ------------- ----------------
2,245,315 35,454,617 1,936,460 32,295,312
Shares repurchased ................. (748,198) (11,949,340) (3,885,695) (64,049,158)
------------- ---------------- ------------- ----------------
Net increase (decrease) ............ 1,497,117 23,505,277 (1,949,235) (31,753,846)
------------- ---------------- ------------- ----------------
Increase (decrease) derived from
capital shares transactions ...... 1,437,940 $ 22,364,784 (4,160,675) $(68,120,558)
============= ============== ============= ================
</TABLE>
7. SUBSEQUENT EVENT. On January 31, 1997, the Board of Trustees of New England
Funds Trust I (the "Trust") approved a Subadvisory Agreement (the "Agreement")
relating to New England International Equity Fund (the "Fund") between New
England Funds Management, L.P. ("NEFM"), the Fund's adviser, and Loomis, Sayles
& Company, L.P. ("Loomis Sayles"). Under the Agreement, Loomis Sayles will be
the Fund's subadviser, succeeding Draycott Partners, Ltd., and will be
responsible for day-to-day management of the Fund's investment operations under
the oversight of NEFM. The Agreement is subject to the approval of the Fund's
shareholders. Pursuant to a rule of the Securities and Exchange Commission,
which under certain circumstances allows such agreements to take effect, and to
remain in effect for up to 120 days, without receiving prior shareholder
approval, the Agreement will be effective at the close of business on February
14, 1997. A special shareholder meeting will be held in early April to vote upon
the approval of the Agreement, and a notice of such meeting and a proxy
statement will be sent to shareholders in mid-February. In the event that the
Fund's shareholders do not approve the Agreement at the special shareholder
meeting, then the Trust's Board of Trustees will convene a special meeting of
trustees to consider alternative arrangements for the management of the Fund's
investment portfolio.
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of NEW ENGLAND INTERNATIONAL EQUITY
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 International Equity
Fund ("the Fund") at December 31, 1996, 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 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, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
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INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities 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., Distributor
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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