<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
(Logo)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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NEW ENGLAND BALANCED 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, President
------------------------------------
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>
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NEW ENGLAND BALANCED FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
[graphic omitted - DALBAR
QUALITY TESTED SERVICE - 1996
HONORS COMMITMENT TO: INVESTORS]
For two years running we're proud to announce that DALBAR, an independent
evaluator of mutual fund service, has awarded New England Funds its Quality
Tested Service Seal for "providing the highest tier of service excellence in the
mutual fund industry." New England Funds is one of just three mutual fund
companies to earn this distinction in each of the last two years -- another
reason why 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>
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NEW ENGLAND BALANCED FUND
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Balanced Fund Class A Shares since 12/31/86,
compared to the S&P 500 and a blend of the S&P 500 and Lehman Intermediate
Government/Corporate Indices. The data points to this chart are as follows:]
A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
COMPARED TO STANDARD & POOR'S 500 INDEX(R)4 AND A BLEND OF STANDARD & POOR'S 500
AND LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE BOND INDICES (5)
DECEMBER 1986 - DECEMBER 1996
WITH S&P/LEHMAN
NET MAXIMUM INTERM.
ASSET SALES GOV'T/
VALUE(1) CHARGE(2) S&P 500(4) CORP.(5)
----- --------- ---------- --------
12/31/86 $10,000 $9,425 $10,000 $10,000
1987 $10,077 $9,498 $10,521 $11,080
1988 $11,087 $10,449 $12,257 $11,965
1989 $12,236 $11,533 $16,129 $15,100
1990 $10,939 $10,310 $15,626 $15,162
1991 $14,135 $13,322 $20,367 $19,024
1992 $16,104 $15,178 $21,916 $21,678
1993 $18,387 $17,330 $24,121 $22,606
1994 $17,896 $16,867 $24,449 $26,650
1995 $22,607 $21,307 $33,603 $34,375
1996 $26,477 $24,954 $41,298 $39,981
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 BALANCED FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS* AS OF 12/31/96
- --------------------------------------------------------------------------------
CLASS A (Inception 11/27/68) 1 YEAR 3 YEAR 5 YEAR 10 YEAR
Net Asset Value(1) 17.12% 12.92% 13.37% 10.23%
With Max. Sales Charge(2) 10.40 10.71 12.04 9.57
Lipper Balanced Average(6) 13.73 11.68 10.76 11.18
- --------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 3 YEAR SINCE INCEPTION
Net Asset Value(1) 16.26% 12.08% 12.02%
With CDSC(3) 12.26 11.28 11.55
Standard & Poor's 500(4) 22.90 19.63 18.40
Lipper Balanced Average(6) 13.73 11.68 n/a
- --------------------------------------------------------------------------------
CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 16.21% 20.62%
Standard & Poor's 500(4) 22.90 30.27
- --------------------------------------------------------------------------------
CLASS Y (Inception 3/8/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 17.63% 14.10%
Standard & Poor's 500(4) 22.90 20.94
*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. The Fund was changed from an equity income fund to a balanced
fund on March 1, 1990. Results for periods prior to that date reflect former
investment policies and are not necessarily representative of results that would
have been achieved had the Fund's current investment policies then been in
effect.
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.
(4)Standard & Poor's Composite Index of 500 Stocks(R) (S&P 500) is an unmanaged
index representing the performance of 500 major companies, most of which are
listed on the New York Stock Exchange. The S&P 500 performance has not been
adjusted for ongoing management, distribution and operating expenses and
sales charges applicable to mutual fund investments.
(5)Represented by a 65% weighting in the S&P 500 and a 35% weighting in the
Lehman Intermediate Government/Corporate Bond Index. Indices are rebalanced
to 65%/35% at the end of each year. Lehman Intermediate Government/Corporate
Bond Index is an unmanaged index of investment grade bonds, issued by the
U.S. government and U.S. corporations, having maturities between one and ten
years. The indices' performance have not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(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.
<PAGE>
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NEW ENGLAND BALANCED FUND
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QUESTIONS & ANSWERS WITH PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Q. How did New England Balanced Fund perform in 1996?
[Photo of Doug Ramos,
Loomis, Sayles &
Co., L.P.]
Your Fund generated 17.12% total return through December 31, 1996 (Class A
shares at net asset value), thanks primarily to strong performance in the equity
portion of the Fund during the second half of the year. The Fund outperformed
its benchmark, the Lipper Balanced Average, which finished the year with a
13.73% total return.(6)
Q. How did you manage the Fund in 1996?
[Photo of Meri Anne Beck
Loomis, Sayles &
Co., L.P.]
For the equity portion of the Fund's portfolio, the key to performance in 1996
was stock selection. In the technology area, strong demand for personal
computers and computer networks resulted in outstanding performance from
companies such as EMC Corp. and Intel Corp.
Solid business fundamentals and higher energy prices powered investments in
Tosco and PanEnergy. In the financial sector, where the portfolio had a large
weighting, ongoing consolidation in the banking industry benefited our holdings
in NationsBank and Chase Manhattan. Attractive business fundamentals also helped
produce strong performance in other financial services holdings such as ACE
Ltd., a liability insurer; Federal Home Loan Mortgage Corp. (Freddie Mac); and
Green Tree, a financial services company.
In the capital goods sector, McDonnell-Douglas and Northrop Grumman were solid
performers that benefited from the ongoing consolidation in the defense
industry. Specific company events also contributed to performance in the case of
Eckerd, a drugstore chain, that was bought out by JCPenny. Allied Signal, a
large multinational conglomerate in the businesses of aerospace, automotive and
engineered materials, and Carnival Corp., the popular cruise line operator,
performed well as they continued to execute their business strategies.*
Higher interest rates and new telecommunications legislation contributed to weak
performance in the Fund's utilities and communications holdings. It should be
noted, however, that the Fund was significantly underweighted in this area.
On the fixed-income side, our overweighting in corporate bonds had a positive
impact on the Fund for most of the year. Profits were taken in Hospital Corp. of
America, International Lease Finance, Lockheed Martin and Smith Barney corporate
bonds.* Coastal Corp. and Tektronix also performed well as a result of improving
fundamentals, and Carnival Corp. was upgraded in quality. On the other hand, TCI
Communications performed poorly as the company recorded losses. Toward the end
of the year we increased our allocation to U.S. Treasury and U.S. Government
Agency mortgage bonds, as the risk/reward trade-off now favors these issues. Our
continuing focus is on credit and sector selection to provide the best total
return potential.
Q. What is your outlook for 1997?
We continue to expect moderate economic growth, low inflation and a stable
interest rate environment in 1997. Overall, these conditions should not produce
any major dislocations in the financial markets. However, we believe that equity
markets will experience increased volatility in 1997. An increase in the
possibility of earnings disappointments and investor concerns over lower
corporate earnings growth than last year should contribute to this volatility.
We believe these concerns will make stock selection an important factor in the
Fund's performance in 1997.
* As of December 31, 1996, McDonnell-Douglas and Eckerd were no longer held by
the Fund. As of November 18, Smith Barney was no longer held by the fund.
<PAGE>
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NEW ENGLAND BALANCED FUND
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YOUR FUND'S ASSET DIVERSIFICATION 12/31/96*
CASH & CASH
STOCKS BONDS EQUIVALENTS
65.6% 32.7% 1.7%
*Portfolio holdings and asset allocations will vary.
YOUR FUND'S FIVE LARGEST SECTORS 12/31/96*
- --------------------------------------------------------------------------------
PERCENTAGE OF
INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
1. U.S. GOVERNMENT 8.3%
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2. BANKS 6.7%
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3. INSURANCE 5.6%
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4. HEALTH CARE SERVICES 4.7%
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5. HOUSING & BUILDING MATERIALS 4.6%
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*Portfolio holdings and asset allocations will vary.
<PAGE>
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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1996
COMMON STOCK--65.6% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------
AEROSPACE--3.4%
30,300 Lockheed Martin Corp. .............................. $ 2,772,450
60,000 Northrop Grumman Corp. ............................. 4,965,000
94,300 Raytheon Co. ....................................... 4,538,187
------------
12,275,637
------------
APPAREL & TEXTILES--1.3%
111,700 Reebok International, Ltd. ......................... 4,691,400
------------
AUTOMOTIVE & RELATED--1.0%
67,000 General Motors Corp. ............................... 3,735,250
------------
BANKS--5.1%
47,300 BankAmerica Corp. .................................. 4,718,175
51,600 Chase Manhattan Corp. ............................... 4,605,300
46,200 NationsBank Corp. .................................. 4,516,050
98,500 Norwest Corp. ...................................... 4,284,750
------------
18,124,275
------------
BEVERAGES--1.2%
187,000 Whitman Corp. ...................................... 4,277,625
------------
CHEMICALS--3.8%
199,600 Crompton & Knowles Corp. ........................... 3,842,300
53,000 El du Pont de Nemours & Co. ........................ 5,001,875
87,500 PPG Industries, Inc. ............................... 4,910,937
------------
13,755,112
------------
COMPUTERS & BUSINESS EQUIPMENT--1.3%
137,500 EMC Corp. (c) ...................................... 4,554,688
------------
CONGLOMERATES--3.7%
67,200 Allied Signal, Inc. ............................... 4,502,400
95,200 Dover Corp. ....................................... 4,783,800
100,000 Philips Electronics NV (ADR) (d) .................. 4,000,000
------------
13,286,200
------------
ELECTRIC UTILITIES--1.1%
200,100 Edison International .............................. 3,976,988
------------
ELECTRICAL EQUIPMENT--1.4%
86,100 York International Corp. .......................... 4,810,838
------------
ELECTRONIC COMPONENTS--1.2%
31,400 Intel Corp. ....................................... 4,111,438
------------
FINANCIAL SERVICES--3.7%
41,900 Federal Home Loan Mortgage Corp. .................. 4,614,237
113,500 Federal National Mortgage Association ............. 4,227,875
111,100 Green Tree Financial Corp. ........................ 4,291,238
------------
13,133,350
------------
FOOD-AGRIBUSINESS--0.9%
138,300 IBP, Inc. ......................................... 3,353,775
------------
FREIGHT TRANSPORTATION--3.9%
50,600 Burlington Northern Santa Fe ...................... 4,370,575
181,100 Canadian Pacific, Ltd. ............................ 4,799,150
110,400 Federal Express Corp. (c) ......................... 4,912,800
------------
14,082,525
------------
GAS & PIPELINE UTILITIES--2.1%
29,400 Columbia Gas Systems, Inc. ........................ 1,870,575
127,300 Panenergy Corp. ................................... 5,728,500
-------------
7,599,075
-------------
HEALTH CARE-SERVICES--4.2%
67,600 Aetna, Inc. ....................................... 5,408,000
224,500 Beverly Enterprises, Inc. ......................... 2,862,375
124,200 Columbia/HCA Healthcare Corp. ..................... 5,061,150
56,300 Foundation Health Corp. (c) ....................... 1,787,525
-------------
15,119,050
-------------
HOUSEHOLD PRODUCTS--2.8%
34,700 Kimberly-Clark Corp. .............................. 3,305,175
77,400 Premark International, Inc. ....................... 1,722,150
91,300 Tupperware Corp. .................................. 4,895,962
-------------
9,923,287
-------------
HOUSING & BUILDING MATERIALS--4.6%
72,800 Armstrong World Industries, Inc. .................. 5,059,600
53,200 Black & Decker Corp. .............................. 1,602,650
148,800 Leggett & Platt, Inc. ............................. 5,152,200
131,000 Masco Corp. ....................................... 4,716,000
-------------
16,530,450
-------------
INSURANCE--5.0%
82,000 ACE, Ltd. ......................................... 4,930,250
79,500 Allstate Corp. .................................... 4,601,062
69,400 Chubb Corp. ....................................... 3,730,250
163,100 Everest Reinsurance Holdings, Inc. ................ 4,689,125
-------------
17,950,687
-------------
LEISURE TIME--2.6%
152,200 American Greetings Corp. .......................... 4,318,675
155,400 Carnival Corp. .................................... 5,128,200
-------------
9,446,875
-------------
OIL & GAS--3.1%
77,400 Tosco Corp. ....................................... 6,124,275
94,800 United Meridian Corp.(c) .......................... 4,905,900
-------------
11,030,175
-------------
PACKAGING--1.4%
94,500 Crown Cork & Seal Co., Inc. ....................... 5,138,438
-------------
RETAIL-FOOD & DRUG--1.5%
111,600 Kroger Co. (c) .................................... 5,189,400
-------------
TELECOMMUNICATION--2.8%
19,600 Ameritech Corp. ................................... 1,188,250
95,200 GTE Corp. ......................................... 4,331,600
123,000 Pacific Telesis Group ............................. 4,520,250
-------------
10,040,100
-------------
TOBACCO--2.5%
46,200 Loews Corp. ....................................... 4,354,350
136,300 UST, Inc. ......................................... 4,412,712
-------------
8,767,062
-------------
Total Common Stock (Identified Cost $180,597,653) . $ 234,903,700
-------------
BONDS AND NOTES--32.7%
FACE
AMOUNT
- -------------------------------------------------------------------------------
BANKS--1.6%
$ 1,140,000 Chase Manhattan Corp., 10.000%, 6/15/99 .......... 1,232,522
600,000 First Interstate Bancorp, 12.750%, 5/01/97 ....... 612,870
600,000 First National Tennessee Corp., 10.375%, 6/01/99... 651,984
3,430,000 Mellon Bank, 7.000%, 3/15/06 ..................... 3,410,724
-------------
5,908,100
-------------
CABLE & MEDIA--0.9%
3,270,000 TCI Communications, Inc., 7.250%, 6/15/99 ........ 3,279,221
-------------
ENERGY--1.1%
3,700,000 Coastal Corp., 8.125%, 9/15/02 ................... 3,913,416
-------------
FINANCE--3.7%
2,000,000 American General Corp., 9.625%, 7/15/00 .......... 2,190,220
1,000,000 Avalon Properties, Inc., 7.375%, 9/15/02 ......... 1,008,850
1,790,000 Dean Witter, Discover & Co., 6.750%, 1/01/16 ..... 1,647,910
1,000,000 General Motors Acceptance Corp., 5.500%, 12/15/01 946,180
1,700,000 Household International, 5.250%, 10/15/98 ........ 1,667,921
940,000 International Lease Finance Corp., 6.350%, 11/07/01 925,016
2,425,000 Secured Finance, 9.050%, 12/15/04 ................ 2,733,193
2,100,000 World Omni Automobile Lease Finance Corp.,
6.550%, 6/25/02 ................................ 2,109,849
-------------
13,229,139
-------------
GOVERNMENT AGENCIES--1.0%
2,575,000 Federal Home Loan Bank, 4.500%, 11/23/98 (e) ..... 2,435,255
1,000,000 Federal National Mortgage Association,
8.050%, 5/20/04 ................................ 1,005,030
-------------
3,440,285
-------------
U.S. GOVERNMENT--8.3%
6,580,000 United States Treasury Bonds, 7.875%, 2/15/21 .... 7,437,440
450,000 United States Treasury Notes, 5.375%, 5/31/98 .... 447,678
2,000,000 United States Treasury Notes, 6.750%, 6/30/99 .... 2,035,320
2,500,000 United States Treasury Notes, 6.250%, 2/15/03 .... 2,496,875
17,100,000 United States Treasury Notes, 6.500%, 8/15/05 .... 17,209,611
-------------
29,626,924
-------------
HEALTH CARE-SERVICES--0.5%
1,775,000 Columbia/HCA Healthcare Co., 8.020%, 8/05/02 ..... 1,885,174
-------------
INDUSTRIALS--1.4%
1,790,000 Phillips Electronics NV, 7.250%, 8/15/13 ......... 1,745,519
2,000,000 Tektronix, Inc., 7.625%, 8/15/02 ................. 2,056,000
1,200,000 Williams Holdings Co., 6.250%, 2/01/06 ........... 1,128,588
-------------
4,930,107
-------------
INSURANCE--0.6%
1,095,000 Progressive Corp., 10.000%, 12/15/00 ............. 1,222,502
1,000,000 USF&G Corp., 8.375%, 6/15/01 ..................... 1,062,080
-------------
2,284,582
-------------
LEISURE & LODGING--1.9%
1,750,000 Carnival Corp., 7.050%, 5/15/05 .................. 1,741,932
3,000,000 La Quinta Inns, Inc., 7.400%, 9/15/05 ............ 2,947,500
2,000,000 Royal Caribbean Cruises Line, 8.125%, 7/28/04 .... 2,094,180
-------------
6,783,612
-------------
MEDIA & ENTERTAINMENT--0.5%
1,710,000 Time Warner Entertainment Co., 8.875%, 10/01/12 .. 1,869,201
-------------
MORTGAGE--2.0%
4,137,189 Federal National Mortgage Association,
7.000%, 12/01/11 ................................ 4,132,018
314,036 Federal National Mortgage Association,
7.500%, 6/01/15 ................................. 318,071
3,000,000 Federal National Mortgage Association,
6.000%, 2/25/24 ................................ 2,655,060
-------------
7,105,149
-------------
MORTGAGE BACKED--3.5%
3,868,058 Federal Home Loan Mortgage Association,
6.000%, 8/15/22 ................................. 3,458,276
1,000,000 Federal Home Loan Mortgage Association,
6.500%, 3/15/23 ................................. 943,430
518,924 Federal Home Loan Mortgage Corp.,
7.750%, 10/15/98 ................................ 524,762
500,000 Federal Home Loan Mortgage Corp.,
8.000%, 7/15/21 ................................. 515,935
2,065,000 General Electric Capital Mortgage
Services, Inc., 10.000%, 3/25/24 ................ 2,120,487
22,485 Mortgage Securities III Trust, 9.000%, 4/01/10 ... 22,902
575,000 Westam Mortgage Financial Corp., 8.950%, 8/01/18 . 614,347
4,000,000 Westam Mortgage Financial Corp., 9.400%, 12/01/18 . 4,223,720
-------------
12,423,859
-------------
PAPER--0.3%
500,000 Westvaco Corp., 9.650%, 3/01/02 .................. 553,660
500,000 Westvaco Corp., 10.300%, 1/15/19 ................. 531,480
-------------
1,085,140
-------------
RAILROADS & EQUIPMENT--0.3%
1,000,000 CSX, Inc., 6.800%, 6/01/09 ....................... 985,780
-------------
RETAIL--1.1%
3,390,000 Federated Department Stores, Inc., 8.500%, 6/15/03 3,549,872
500,000 Sears, Roebuck & Co., 9.300%, 4/15/98 ............ 520,510
-------------
4,070,382
-------------
SECURITIES--0.8%
1,500,000 Donaldson Lufkin & Jenrette, Inc., 6.875%, 11/01/05 1,461,510
1,500,000 Lehman Brothers Holdings, Inc., 8.875%, 11/01/98 . 1,559,505
-------------
3,021,015
-------------
TECHNOLOGY--0.9%
3,410,000 Digital Equipment Corp., 8.625%, 11/01/12 ........ 3,304,392
-------------
TELECOMMUNICATION--0.4%
1,300,000 Southern Bell Telephone & Telegraph Co.,
7.625%, 3/15/13 ................................. 1,295,229
-------------
TRANSPORTATION--1.4%
2,000,000 American Airlines, 10.180%, 1/02/13 .............. 2,415,700
1,000,000 Delta Air Lines, Inc., 7.790%, 12/01/98 .......... 1,020,710
500,000 Delta Air Lines, Inc., 9.530%, 11/17/99 .......... 530,155
600,000 Delta Air Lines, Inc., 9.200%, 9/23/14 ........... 664,020
350,000 U.S. Air, Inc., 10.700%, 1/15/07 ................. 345,310
-------------
4,975,895
-------------
YANKEE/SUPRANATIONAL--0.5%
1,100,000 Export, Import Bank of Japan, 9.500%, 6/29/00 .... 1,209,313
600,000 Hydro Quebec, 6.520%, 2/23/06 .................... 577,284
-------------
1,786,597
-------------
Total Bonds and Notes (Identified Cost
$116,848,230) .................................. 117,203,199
-------------
SHORT TERM INVESTMENTS--1.5%
- -------------------------------------------------------------------------------
5,330,000 Associates Corp. of North America 6.550%, 1/02/97 ... 5,330,000
-------------
Total Short Term Investments
(Identified Cost $5,330,000) ...................... 5,330,000
-------------
Total Investments--99.8% (Identified
Cost $302,775,883) (b) ............................ 357,436,899
Other assets less liabilities ...................... 758,959
-------------
Total Net Assets--100% .............................. $ 358,195,858
=============
(a) See Note 1a.
(b)Federal Tax Information: At December 31, 1996 the net
unrealized appreciation on investments based on cost
of $302,775,883 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. .................................................... $ 56,986,451
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value. ............ (2,325,435)
-------------
Net unrealized appreciation ......................... $ 54,661,016
=============
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by
a U.S. bank representing the right to receive securities of the
foreign issuer described. The values of ADRs are significantly
influenced by trading on exchanges not located in the United
States or Canada.
(e) Floating rate notes are instruments whose interest rates vary
with changes in a designated base rate on a specific date. This
note resets quarterly based upon a specific index.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value ..................................... $357,436,899
Cash ..................................................... 879
Receivable for:
Fund shares sold ....................................... 636,403
Dividends and interest ................................. 2,338,499
Prepaid registration expense ............................. 9,000
------------
360,421,680
LIABILITIES
Payable for:
Securities purchased ................................... $ 307,755
Fund shares redeemed ................................... 1,538,963
Withholding taxes ...................................... 2,105
Accrued expenses:
Management fees ........................................ 219,559
Deferred trustees' fees ................................ 61,819
Accounting and administrative .......................... 4,723
Other expenses ......................................... 90,898
-----------
2,225,822
------------
NET ASSETS ................................................. $358,195,858
============
Net Assets consist of:
Capital paid in ........................................ $296,981,490
Undistributed net investment income .................... 67,903
Accumulated net realized gains ......................... 6,485,449
Unrealized appreciation on investments ................. 54,661,016
------------
NET ASSETS ........................ ........................ $358,195,858
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($219,625,749 divided by 15,758,225 shares of beneficial
interest) ................................................ $13.94
Offering price per share (100/94.25 of $13.94) ............. $14.79*
======
Net asset value and offering price of Class B shares
($58,367,455 divided by 4,211,450 shares of beneficial
interest) ................................................ $13.86**
======
Net asset value and offering price of Class C shares
($2,537,951 divided by 183,612 shares of beneficial
interest) ................................................ $13.82
======
Net asset value and offering price of Class Y shares
($77,664,703 divided by 5,567,587 shares of beneficial
interest) ................................................ $13.95
======
Identified cost of investments ............................. $302,775,883
============
</TABLE>
* 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.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends ................................................ $ 4,132,269(a)
Interest ................................................. 9,132,336
-----------
13,264,605
Expenses
Management fees ........................................ $2,355,084
Service fees - Class A ................................. 510,800
Service and distribution fees - Class B ................ 486,433
Service and distribution fees - Class C ................ 15,702
Trustees' fees and expenses ............................ 22,946
Accounting and administrative .......................... 56,069
Custodian .............................................. 109,681
Transfer agent ......................................... 606,876
Audit and tax services ................................. 39,000
Legal .................................................. 24,357
Printing ............................................... 50,222
Registration ........................................... 55,360
Miscellaneous .......................................... 15,272
---------
Total Expenses ........................................... 4,347,802
-----------
Net investment income .................................... 8,916,803
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on Investments - net ....................... 23,718,238
Unrealized appreciation on Investments - net ............. 19,414,861
-----------
Net gain on investment transactions ...................... 43,133,099
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................. $52,049,902
===========
(a) Net of foreign taxes of: $70,240
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996
---------------- ----------------
FROM OPERATIONS
<S> <C> <C>
Net investment income .................................... $ 8,602,825 $ 8,916,803
Net realized gain on investments ......................... 19,279,791 23,718,238
Unrealized appreciation on investments ................... 31,334,849 19,414,861
------------- -------------
Increase in net assets from operations ................... 59,217,465 52,049,902
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (5,712,466) (5,852,505)
Class B ................................................ (810,141) (1,086,841)
Class C ................................................ (10,773) (35,007)
Class Y ................................................ (1,783,679) (2,273,570)
In excess of net investment income
Class A ................................................ 0 (86,451)
Class B ................................................ 0 (16,054)
Class C ................................................ 0 (518)
Class Y ................................................ 0 (33,584)
Net realized gain on investments
Class A ................................................ (8,998,651) (14,194,062)
Class B ................................................ (1,694,413) (3,640,173)
Class C ................................................ (23,154) (144,376)
Class Y ................................................ (2,594,417) (4,878,053)
------------- -------------
(21,627,694) (32,241,194)
------------- -------------
Increase in net assets derived from capital share
transactions ............................................. 40,291,424 41,383,400
------------- -------------
Total increase in net assets ............................. 77,881,195 61,192,108
NET ASSETS
Beginning of the year .................................. 219,122,555 297,003,750
------------- -------------
End of the year ........................................ $ 297,003,750 $ 358,195,858
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year .................................. $ 0 $ 297,609
============= =============
End of the year ........................................ $ 297,609 $ 67,903
============= =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $10.15 $11.16 $12.13 $11.27 $13.14
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.30 0.31 0.33 0.42 0.38
Net Realized and Unrealized Gain (Loss)
on Investments ...................... 1.10 1.26 (0.65) 2.49 1.76
------ ------ ------ ------ ------
Total From Investment Operations ...... 1.40 1.57 (0.32) 2.91 2.14
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income .. (0.30) (0.31) (0.33) (0.40) (0.39)
Distributions From Net Realized
Capital Gains (0.09) (0.29) (0.21) (0.64) (0.95)
------ ------ ------ ------ ------
Total Distributions ................... (0.39) (0.60) (0.54) (1.04) (1.34)
------ ------ ------ ------ ------
Net Asset Value, End of Year .......... $11.16 $12.13 $11.27 $13.14 $13.94
====== ====== ====== ====== ======
Total Return (%) (a) .................. 13.9 14.2 (2.7) 26.3 17.1
Ratio of Operating Expenses to
Average Net Assets (%) .............. 1.48 1.40 1.40 1.36 1.33
Ratio of Net Investment Income to
Average Net Assets (%) .............. 2.84 2.66 2.91 3.37 2.79
Portfolio Turnover Rate (%) ........... 38 50 36 54 70
Average Commission rate (b) ........... -- -- -- -- $0.0577
Net Assets, End of Year (000) ......... $90,527 $158,308 $158,332 $196,514 $219,626
</TABLE>
(a) A sales charge is not reflected in total return calculations.
(b) 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.
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 ........................... $12.16 $12.11 $11.24 $13.08 $11.24 $13.05
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income .......................................... 0.16 0.26 0.34 0.29 0.35 0.29
Net Realized and Unrealized Gain (Loss) on Investments ......... 0.24 (0.66) 2.46 1.74 2.44 1.73
------ ------ ------ ------ ------ ------
Total From Investment Operations ............................... 0.40 (0.40) 2.80 2.03 2.79 2.02
------ ------ ------ ------ ------ ------
Less Distributions Dividends From Net Investment Income ........ (0.16) (0.26) (0.32) (0.30) (0.34) (0.30)
Distributions From Net Realized Capital Gains .................. (0.29) (0.21) (0.64) (0.95) (0.64) (0.95)
------ ------ ------ ------ ------ ------
Total Distributions ............................................ (0.45) (0.47) (0.96) (1.25) (0.98) (1.25)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period ................................. $12.11 $11.24 $13.08 $13.86 $13.05 $13.82
====== ====== ====== ====== ====== ======
Total Return (%) (c) ........................................... 3.3 (3.4) 25.3 16.3 25.2 16.2
Ratio of Operating Expenses to Average Net Assets (%) .......... 2.36(b) 2.15 2.11 2.08 2.11 2.08
Ratio of Net Investment Income to Average Net Assets (%) ....... 1.92(b) 2.16 2.62 2.04 2.62 2.04
Portfolio Turnover Rate (%) .................................... 50 36 54 70 54 70
Average Commission Rate (d) .................................... -- -- -- $0.0577 -- $0.0577
Net Assets, End of Period (000) ................................ $4,691 $21,607 $40,361 $58,367 $718 $ 2,538
</TABLE>
(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)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.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
CLASS Y
----------------------------------------------
MARCH 8(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1994 1995 1996
----------------- ---- ----
Net Asset Value, Beginning of
Period ......................... $12.20 $11.27 $13.15
----- ----- -----
Income From Investment
Operations
Net Investment Income ............ 0.38 0.46 0.44
Net Realized and Unrealized
Gain (Loss) on Investments ..... (0.72) 2.51 1.76
----- ----- -----
Total From Investment
Operations ..................... (0.34) 2.97 2.20
----- ----- -----
Less Distributions
Dividends From Net Investment
Income ......................... (0.38) (0.45) (0.45)
Distributions From Net
Realized Capital Gains ......... (0.21) (0.64) (0.95)
----- ----- -----
Total Distributions .............. (0.59) (1.09) (1.40)
----- ----- -----
Net Asset Value,
End of Period .................. $11.27 $13.15 $13.95
====== ====== ======
Total Return (%) (c) ............. (2.8) 26.8 17.6
Ratio of Operating Expenses to
Average Net Assets (%) ......... 0.99(b) 1.11 0.88
Ratio of Net Investment Income
to Average Net Assets (%) ...... 3.69(b) 3.62 3.24
Portfolio Turnover Rate (%) ...... 36 54 70
Average Commission Rate (d) ...... -- -- $0.0577
Net Assets, End of Period
(000) .......................... $39,183 $59,411 $77,665
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
(d) 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.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investments as of December 31, 1996
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 March 8,
1994. Class A shares are sold with a maximum front end sales charge of 5.75%.
Class B shares do not pay 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 a front end or contingent deferred sales
charge and do not convert to any other 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. Debt securities (other
than short-term obligations with a remaining maturity of less than sixty days)
are valued on the basis of valuations furnished by a pricing service, selected
by the Fund's adviser as authorized by the Board of Trustees, which service
determines valuations for normal, institutional-size trading units of such
securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. 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 and interest
income is recorded on the accrual basis. Interest income for the Fund is
increased by the accretion of discount. In determining net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
C. 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.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The timing and characterization of
certain income and capital gains distributions are determined in accordance
with federal tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax differences are primarily due to
differing treatments for mortgage backed securities, real estate limited
partnership investments and market discount transactions.
E. 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 Fund's 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 Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the year ended December 31, 1996 were as follows:
PURCHASES SALES
- ----------------------------------------- -----------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ---------------------- ------------ ----------------- ------------
$60,747,301 $179,013,348 $45,186,860 $174,357,962
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 0.75% of the first $200 million of the Fund's
average daily net assets, 0.70% of the next $300 million and 0.65% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Loomis Sayles & Company, L.P. at the rate of 0.535% of the first $200 million
of the Fund's average daily net assets, 0.350% of the next $300 million and
0.300% of such assets in excess of $500 million. Certain officers and
directors of NEFM are also officers or trustees of the Fund. NEFM and Loomis
Sayles & Company, L.P. are wholly owned subsidiaries of New England Investment
Companies, L.P., ("NEIC") which is a subsidiary of Metropolitan Life Insurance
Company ("Met Life"). Fees earned by NEFM and Loomis Sayles & Company, L.P.
under the management agreement in effect during the year ended December 31,
1996 are as follows:
FEES EARNED
- -----------
$ 857,540 New England Funds Management, L.P.
$1,497,544 Loomis Sayles & Company, 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 year ended December 31, 1996 these expenses
amounted to $56,069 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 $451,235 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 $510,800 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
$2,041,399.
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 year ended
December 31, 1996, the Fund paid New England Funds $121,608 and $3,925 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 $364,825 and $11,777 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 year ended
December 31, 1996 amounted to $748,209.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $2,263
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $140/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. 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 .......................................... 2,351,242 $29,575,711 2,042,042 $27,474,652
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............... 431,380 5,458,656 422,784 5,671,048
Distributions from net realized gain ............... 676,500 8,677,748 1,028,876 13,651,501
--------- ----------- --------- -----------
3,459,122 43,712,115 3,493,702 46,797,201
Shares repurchased ................................... (2,555,776) (31,998,569) (2,688,513) (36,228,573)
---------- ----------- ---------- -----------
Net increase ......................................... 903,346 $11,713,546 805,189 $10,568,628
---------- ----------- ---------- -----------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- -----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- ---------- -----------
Shares sold .......................................... 1,299,583 $16,346,011 1,210,684 $16,217,164
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............... 60,310 762,503 78,261 1,044,705
Distributions from net realized gain ............... 127,576 1,630,289 265,769 3,505,614
---------- ----------- ---------- -----------
1,487,469 18,738,803 1,554,714 20,767,483
Shares repurchased ................................... (325,054) (4,030,921) (428,641) (5,756,244)
---------- ----------- ---------- -----------
Net increase ......................................... 1,162,415 $14,707,882 1,126,073 $15,011,239
---------- ----------- ---------- -----------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- -----------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- ---------- -----------
Shares sold .......................................... 62,310 $ 785,919 139,602 $ 1,870,733
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............... 760 9,669 2,512 33,499
Distributions from net realized gain ............... 1,599 20,420 10,413 137,144
---------- ----------- ---------- -----------
64,669 816,008 152,527 2,041,376
Shares repurchased ................................... (9,679) (122,769) (23,905) (318,332)
---------- ----------- ---------- -----------
Net increase ......................................... 54,990 $ 693,239 128,622 $ 1,723,044
---------- ----------- ---------- -----------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- -----------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- ---------- -----------
Shares sold .......................................... 1,420,697 $17,832,342 1,301,205 $17,576,774
Shares issued in connection with the reinvestment of:
Dividends from net investment income ............... 140,440 1,780,695 171,746 2,306,879
Distributions from net realized gain ............... 202,067 2,594,422 366,945 4,878,050
--------- ----------- --------- -----------
1,763,204 22,207,459 1,839,896 24,761,703
Shares repurchased ................................... (723,075) (9,030,702) (789,611) (10,681,214)
--------- ----------- --------- -----------
Net increase ......................................... 1,040,129 13,176,757 1,050,285 14,080,489
--------- ----------- --------- -----------
Increase derived from capital shares
transactions ..................................... 3,160,880 $40,291,424 3,110,169 $41,383,400
========= =========== ========= ===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of NEW ENGLAND BALANCED 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 Balanced 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 the financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at December 31, 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
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NEW ENGLAND BALANCED FUND
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GLOSSARY FOR MUTUAL FUND INVESTORS
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TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its earnings
per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more aggressive than
"value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
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NEW ENGLAND FUNDS
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STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Balanced Fund
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.
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(Logo) BULK RATE
NEW ENGLAND FUNDS U.S. POSTAGE
Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
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399 Boylston Street
Boston, Massachusetts
02116
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QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
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INVESTORS INVESTORS
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BL56-1296
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