<PAGE>
- -------------------------------------------------------------------------------
SEMIANNUAL REPORT
- -------------------------------------------------------------------------------
(Logo)(R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
New England
Strategic Income Fund
[graphic omitted]
- ------------------
June 30, 1997
- ------------------
<PAGE>
August 1997
Dear New England Funds Shareholder,
[Photo of Henry L.P. Schmelzer]
Spurred by bright economic prospects, the broader U.S. stock market continued
its record run during the first half of the year, experiencing only short-lived
setbacks along the way. These fresh gains come on top of significant increases
in 1995 and 1996, leaving many investors wary of what might come next. Bond
markets, meanwhile, contended with some volatility in interest rates, but have
been relatively stable this year.
Building a portfolio for variable markets
Investors should not abandon well-conceived financial programs for fear of a
down market. Whether today's market levels are excessive -- only hindsight will
tell. So you should remain patient and realistic, alert to the possibility of
periodic market declines. Consultation with your financial representative should
be a regular part of your planning. Your representative can help you take
prudent steps to adjust your portfolio, whatever the next trend may bring.
Strategic initiatives deliver shareholder benefits
Four years ago New England Funds embarked on a new strategic direction.
Expressed in our corporate slogan Where The Best Minds Meet(R), this new thrust
has meant improved performance for many of our funds, award-winning service and
a host of behind-the-scenes enhancements designed to help our shareholders and
their financial representatives.
Our sights, like yours, are focused on the long term. At the same time, we work
to enhance service every day. We also keep a disciplined eye on the performance
that each fund manager achieves. Through these persistent efforts we're
convinced we'll merit your continued commitment and loyalty. Thank you for your
confidence in New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
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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.
INVESTMENT RESULTS THROUGH JUNE 30, 1997
- -------------------------------------------------------------------------------
Putting Performance into Perspective
The charts comparing your Fund's performance to a benchmark index provide 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.
See next page o
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
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[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Strategic Income Fund's Class A, B and C
shares since inception on 5/1/95 compared to the Lehman Aggregate Bond
Index(4). The data points are as follows:]
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -------------------------------------------------------------------------------
MAY 1995 (INCEPTION) THROUGH JUNE 1997
COMPARED TO LEHMAN AGGREGATE BOND INDEX(4)
CLASS A SHARES, INCEPTION 5/1/95 - 6/97
NET ASSET WITH MAXIMUM
VALUE SALES CHARGE LEHMAN(4)
--------- ------------ ---------
1-May-95 $10,000 $ 9,550 $10,000
2Q95 $10,015 $ 9,564 $10,463
3Q95 $10,409 $ 9,940 $10,668
4Q95 $11,027 $10,531 $11,123
1Q96 $11,071 $10,573 $10,925
2Q96 $11,380 $10,868 $10,987
3Q96 $11,970 $11,432 $11,189
4Q96 $12,626 $12,058 $11,525
1Q97 $12,731 $12,158 $11,460
2Q97 $13,384 $12,782 $11,882
CLASS B SHARES, INCEPTION 5/1/95 - 6/97
NET ASSET
VALUE CDSC(3) LEHMAN(4)
--------- ------------ ---------
1-May-95 $10,000 $10,000 $10,000
2Q95 $10,003 $10,003 $10,463
3Q95 $10,376 $10,376 $10,668
4Q95 $10,973 $10,973 $11,123
1Q96 $10,997 $10,997 $10,925
2Q96 $11,274 $10,774 $10,987
3Q96 $11,838 $11,313 $11,189
4Q96 $12,473 $11,920 $11,525
1Q97 $12,553 $11,996 $11,460
2Q97 $13,163 $12,580 $11,882
CLASS C SHARES, INCEPTION 5/1/95 - 6/97
NET ASSET
VALUE LEHMAN(4)
--------- ------------
1-May-95 $10,000 $10,000
2Q95 $ 9,996 $10,463
3Q95 $10,369 $10,668
4Q95 $10,965 $11,123
1Q96 $10,989 $10,925
2Q96 $11,267 $10,987
3Q96 $11,831 $11,189
4Q96 $12,456 $11,525
1Q97 $12,536 $11,460
2Q97 $13,155 $11,882
These illustrations represent past performance and cannot predict future
results. Investment return and principal value may vary, resulting in a gain or
loss when shares are sold. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/97
- -------------------------------------------------------------------------------
CLASS A (Inception 5/1/95) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 6.00% 17.61% 14.38%
With Max. Sales Charge(2) 1.23 12.29 11.98
- -------------------------------------------------------------------------------
CLASS B (Inception 5/1/95) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 5.53% 16.76% 13.50%
With CDSC(3) 0.53 11.76 12.30
- -------------------------------------------------------------------------------
CLASS C (Inception 5/1/95) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 5.61% 16.76% 13.47%
- -------------------------------------------------------------------------------
COMPARATIVE PERFORMANCE YTD 1 YEAR SINCE 5/1/95
Lehman Aggregate(4) 3.11% 8.16% 8.29%
Lipper Multi-Sector
Income Average(5) 4.28 12.85 11.09
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS
(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 (MSC) performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Aggregate Bond Index is a market-weighted, aggregate index which
includes nearly all debt issued by the U.S. Treasury, U.S. Government
agencies and U.S. corporations rated investment-grade, and U.S. agency debt
backed by mortgage pools.
(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>
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NEW ENGLAND STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
Q. How did New England Strategic Income Fund perform during the first half
of 1997?
[Photo of Dan Fuss]
[Photo of Kathleen Gaffney]
Dan Fuss and
Kathleen Gaffney
Loomis, Sayles &
Company, L.P.
Very well. For the six months ending June 30, 1997, the Fund produced a total
return of 6.00% (Class A shares at net asset value), reflecting the reinvestment
of dividend distributions totaling $0.504 per share and a change in share price
to $13.64 on June 30, from $13.36 six months ago. The Fund's performance was
markedly better than the average 4.28% return for the 81 Multi-Sector Income
funds measured by Lipper Analytical Services, an independent mutual fund ranking
service.
During the period, a favorable economic background characterized by solid
economic growth and low inflation levels in the United States was good news for
bond investors. High-yield bonds were the strongest fixed income sector during
the first half of 1997, with the exception of emerging market debt. Demand for
higher-income-producing investments remained strong as investors continued to
search for attractive yields. In the United States, the narrowing gap between
yields of corporate bonds and Treasury securities helped push up bond prices,
benefiting the Fund's corporate holdings. As yields declined, we found better
opportunities to earn attractive income in foreign bond markets, such as those
in Latin America.
- -------------------------------------------------------------------------------
Q. What were some of your key strategies during the period?
We took advantage of strong Latin American economies by investing in corporate
and government bonds issued in Argentina, Brazil and Mexico -- all of which
contributed to the Fund's performance. Holdings in telecommunications companies
also worked to the Fund's advantage. While concerns over competing technologies
dampened bond prices in the telecommunications sector at the start of the
period, prices subsequently recovered as developments within the sector boosted
investor confidence.
Meanwhile, in the United States, strong economic growth meant vigorous business
for retailers, and increased the value of your Fund's position in K-Mart bonds.
The gravity-defying U.S. stock market also contributed to Fund performance by
way of the Fund's investments in "busted" convertible bonds, which are bonds
whose prices have dropped after significant declines in the stocks to which they
can be converted at a certain price. During the period, the appreciating value
of the underlying stocks translated into price gains for the Fund's busted
convertible bond holdings.
Throughout the period, the average duration of the portfolio was somewhat longer
than its benchmark, the Lehman Aggregate Bond Index -- 9.45 years versus 5.38
years on June 30. Duration measures, in years, a bond's sensitivity to interest
rates. Essentially, the longer a bond's duration, the more its price reacts to
changes in interest rates. The Fund's longer duration hindered its performance
earlier in the period when interest rates rose. But, higher interest rates
provided opportunities to purchase fundamentally sound bonds at even better
prices and higher yields. In particular, we favored issues whose performance
tends to be linked more to the credit conditions of the underlying issuer than
to broader market influences, such as interest rates.
- -------------------------------------------------------------------------------
Q. What's your outlook for the coming months?
We see few clouds ahead for investors. Generally peaceful world conditions are
good for financial markets, while economic globalization continues to create
investment opportunities in the world's developing regions. Latin America
continues to benefit from sound economic policies and markets that today are
more accessible to foreign investors, while Asian economies seem likely to
overcome their current growing pains. Meanwhile, the United States and other
developed nations are working to keep costs competitive. The deflationary effect
of their efforts is likely to translate into a stable interest rate environment
that is favorable to bonds.
Looking ahead, our strategy will remain largely the same: We emphasize neither
sectors nor countries. Instead, we rely on intensive research, scouring the
world's markets for select investments that have potential for attractive yields
and price appreciation for high total return.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY COMPOSITION -- JUNE 30, 1997
- --------------------------------------------------------------------------------
AAA 5.4%
AA 9.8%
A 13.5%
BBB 26.2%
BB 24.8%
B 15.6%
CCC 3.3%
Other 1.4%
AVERAGE PORTFOLIO QUALITY = BBB
Quality based on ratings by Standard & Poor's.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION -- JUNE 30, 1997
- --------------------------------------------------------------------------------
PERCENTAGE OF ASSETS
- --------------------------------------------------------------------------------
Corporate Bonds 41.0%
- --------------------------------------------------------------------------------
Foreign Bonds 24.3%
- --------------------------------------------------------------------------------
Yankees* 20.5%
- --------------------------------------------------------------------------------
Common Stocks/Preferred Stocks 11.1%
- --------------------------------------------------------------------------------
Government Bonds/Cash and Equivalents 3.1%
AVERAGE PORTFOLIO MATURITY = 18.77 YEARS
* Yankees are dollar-denominated foreign bonds.
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
<PAGE>
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PORTFOLIO OMPOSITION
- -------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
BONDS AND NOTES--86.1% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE BONDS--15.5%
AEROSPACE--0.2%
$ 665,000 Rohr Industries, Inc., 7.000%, 10/01/12 .................. $ 611,800
------------
AUTO PARTS--0.2%
1,150,000 Exide Corp., 144A, 2.900%, 12/15/05, (i) ................. 708,688
------------
BROADCASTING--0.7%
3,250,000 Comcast Corp., 1.125%, 4/15/07 ........................... 1,885,000
175,000 Fuqua Industries, 6.500%, 8/04/02 ........................ 149,625
------------
2,034,625
------------
CANADIAN ISSUER--0.1%
500,000 Rogers Communications, Inc., 2.000%, 11/26/05 ............ 282,500
------------
COMPUTER SOFTWARE & SERVICES--0.7%
2,585,000 Softkey International, Inc., 144A, 5.500%, 11/01/00, (i) . 2,113,237
------------
COMPUTERS--1.1%
1,955,000 Apple Computer, Inc., 6.000%, 6/01/01 .................... 1,651,975
827,000 Cray Research, Inc., 6.125%, 2/01/11 ..................... 638,857
407,000 LTX Corp., 7.250%, 4/15/11 ............................... 239,113
883,000 Maxtor Corp., 5.750%, 3/01/12 ............................ 609,270
250,000 Telxon Corp., 5.750%, 1/01/03 ............................ 225,000
------------
3,364,215
------------
ELECTRONICS--0.9%
700,000 Cyrix Corp., 5.500%, 6/01/01 ............................. 574,000
300,000 Edo Corp., 7.000%, 12/15/11 .............................. 249,000
750,000 Park Electrochemical Corp., 5.500%, 3/01/06 .............. 682,500
155,000 Richardson Electronics, Ltd., 7.250%, 12/15/06 ........... 120,512
1,098,000 Zenith Electric, 6.250%, 4/01/11 ......................... 916,830
------------
2,542,842
------------
ENTERTAINMENT--0.6%
4,680,000 Time Warner, Inc., Zero Coupon, 12/17/12 ................. 1,836,900
------------
ENVIRONMENTAL--0.8%
760,000 Air & Water Technologies Corp., 8.000%, 5/15/15 .......... 623,200
2,000,000 Molten Metal Technology, Inc., 5.500%, 5/01/06 ........... 740,000
2,000,000 Molten Metal Technology, Inc., 144A, 5.500%, 5/01/06, (d)(i) 740,000
------------
2,103,200
------------
FOREIGN ISSUES--5.5%
1,250,000 Advanced Agro Public Co., 3.500%, 6/17/01 ................ 1,243,750
2,500,000 Bangkok Bank Public, Ltd., 3.250%, 3/03/04 ............... 1,931,250
2,130,000 Banpu Public, 2.750%, 4/10/03 ............................ 1,986,225
1,000,000 Burns Philp Treasury, 5.500%, 4/30/04 .................... 860,000
2,425,000 Empresas ICA Sociedad, 5.000%, 3/15/04 ................... 1,915,750
3,250,000 Finance One, 2.000%, 8/31/01 ............................. 1,560,000
250,000 Inti Indorayon Uta, 7.000%, 5/02/06, (d) ................. 201,250
350,000 Kia Motors Corp, 0.250%, 12/31/06 ........................ 332,500
2,000,000 Loxley, 2.500%, 4/04/01 .................................. 1,740,000
125,000 NorAm Energy Corp., 6.000%, 3/15/12 ...................... 110,000
975,000 Samsung Co., 0.250%, 6/26/06 ............................. 979,875
250,000 Samsung Display Devices, 0.250%, 3/12/06 ................. 242,500
2,750,000 Sappi Bvi Finance, 7.500%, 8/01/02 ....................... 2,609,062
600,000 Ssangyong Oil Refining Co., Ltd., 3.000%, 12/31/04 ....... 408,750
105,000 Yasuda Trust & Banking, 2.875%, 9/30/03 .................. 84,919
------------
16,205,831
------------
FOREIGN DENOMINATED--0.6%
880,000 Siam Commercial Bank, 3.250%, 1/24/04, (k) ............... 558,800
1,500,000 Skf, Zero Coupon, 7/26/02, (l) ........................... 1,104,576
------------
1,663,376
------------
HOME BUILDERS--0.1%
500,000 Schuler Homes, Inc., 6.500%, 1/15/03 ..................... 393,750
------------
INDUSTRIALS--0.1%
200,000 Cirrus Logic, Inc., 6.000%, 12/15/03 ..................... 144,750
------------
MISCELLANEOUS--0.1%
500,000 Veterinary Centers America, Inc., 5.250%, 5/01/06 ........ 355,000
------------
PHARMACEUTICAL--0.2%
325,000 Glycomed, Inc., 7.500%, 1/01/03 .......................... 279,500
400,000 Nabi, 6.500%, 2/01/03 .................................... 326,500
------------
606,000
------------
REAL ESTATE--0.1%
250,000 Federal Realty Investor Trust, 5.250%, 10/28/03 .......... 223,125
125,000 Rockefeller Properties, Zero Coupon, 12/31/00 ............ 85,313
------------
308,438
------------
RESTAURANTS--0.8%
4,195,000 Shoneys, Inc., Zero Coupon, 4/11/04 ...................... 1,803,850
600,000 TPI Enterprises, Inc., 8.250%, 7/15/02 ................... 521,250
------------
2,325,100
------------
RETAIL-SPECIALTY--0.8%
500,000 Bell Sports Corp., 4.250%, 11/15/00 ...................... 426,250
275,000 CML Group, Inc., 5.500%, 1/15/03 ......................... 195,938
850,000 General Host Corp., 8.000%, 2/15/02 ...................... 692,750
1,625,000 Sunglass Hut International, Inc., 144A, 5.250%, 6/15/03, (i) 1,139,531
------------
2,454,469
------------
TELECOMMUNICATION--1.2%
2,000,000 Broadband Technologies, Inc., 5.000%, 5/15/01 ............ 1,440,000
2,000,000 Comcast Cable Communications, 8.875%, 5/01/17 ............ 2,180,020
------------
3,620,020
------------
TEXTILE--0.3%
325,000 Dixie Yarns, Inc., 7.000%, 5/15/12 ....................... 269,750
650,000 Fieldcrest Cannon, Inc., 6.000%, 3/15/12 ................. 516,750
------------
786,500
------------
TRUCKING & FREIGHT FORWARDING--0.4%
1,000,000 Builders Transport, Inc., 8.000%, 8/15/05 ................ 510,000
200,000 Builders Transport, Inc., 6.500%, 5/01/11 ................ 70,000
500,000 Preston Corp., 7.000%, 5/01/11 ........................... 350,000
424,000 Worldway Corp., 6.250%, 4/15/11 .......................... 254,400
------------
1,184,400
------------
Total Convertible Bonds (Identified Cost $48,739,327) .... 45,645,641
------------
NON-CONVERTIBLE BONDS--70.6%
AEROSPACE--0.2%
500,000 Rohr Industries, Inc., 9.250%, 3/01/17 ................... 483,750
------------
AIRLINES--0.0%
65,000 United Air Lines, 7.870%, 1/30/19 ........................ 63,693
------------
BROADCASTING--0.1%
250,000 CBS, Inc., 7.125%, 11/01/23 .............................. 215,655
------------
CANADIAN--16.4%
9,775,000 British Columbia Province, Zero Coupon, 8/19/22, (e) ..... 1,189,975
30,925,000 Government of Canada, Zero Coupon, 6/01/21, (e) .......... 4,286,523
11,910,000 Government of Canada, 8.000%, 6/01/23, (e) ............... 9,789,514
5,560,000 Ontario Hydro, 8.900%, 8/18/22, (e) ...................... 4,886,966
750,000 Ontario Province, Zero Coupon, 7/13/22, (e) .............. 91,737
5,000,000 Province of British Columbia, Zero Coupon, 8/23/13, (e) .. 1,152,189
18,505,000 Province of British Columbia, Zero Coupon, 9/05/20, (e) .. 2,564,983
17,900,000 Province of British Columbia, Zero Coupon, 6/09/22, (e) .. 2,201,122
2,900,000 Province of British Columbia, 8.000%, 9/08/23, (e) ....... 2,335,037
35,000,000 Province of British Columbia, Zero Coupon, 8/23/24, (e) .. 3,695,550
10,649,000 Province of Manitoba, 7.750%, 12/22/25, (e) .............. 8,422,716
17,135,000 Province of Manitoba, Zero Coupon, 3/05/31, (e) .......... 1,150,192
4,375,000 Rogers Cablesystems, Ltd., 9.650%, 1/15/14, (e) .......... 3,200,022
5,400,000 Saskatchewan Province, Zero Coupon, 5/30/25, (e) ......... 540,841
3,205,000 Saskatchewan Province, 8.750%, 5/30/25, (e) .............. 2,794,523
------------
48,301,890
------------
COMPUTERS--3.5%
5,500,000 Apple Computer, Inc., 6.500%, 2/15/04 .................... 4,620,000
4,000,000 Digital Equipment Corp., 7.750%, 4/01/23 ................. 3,607,840
78,538 Streamlogic Corp., 14.000%, 10/07/98 ..................... 78,538
2,000,000 Unisys Corp., 9.750%, 9/15/16 ............................ 1,970,000
------------
10,276,378
------------
ELECTRIC UTILITIES--0.7%
500,000 Niagara Mohawk Power Corp., 5.875%, 9/01/02 .............. 463,675
250,000 Niagara Mohawk Power Corp., 6.625%, 7/01/05 .............. 231,247
1,500,000 Niagara Mohawk Power Corp., 7.875%, 4/01/24 .............. 1,427,175
------------
2,122,097
------------
ELECTRONICS--1.2%
1,000,000 International Semi Tech, 11.500%, 8/15/03 ................ 595,000
775,000 Pioneer Standard Electronics, Inc., 8.500%, 8/01/06 ...... 803,094
2,250,000 Westinghouse Electric Corp., 7.875%, 9/01/23 ............. 2,085,210
------------
3,483,304
------------
ENTERTAINMENT--1.8%
4,850,000 Time Warner, Inc., 8.050%, 1/15/16 ....................... 4,915,135
250,000 Time Warner, Inc., 9.150%, 2/01/23 ....................... 276,123
------------
5,191,258
------------
ENVIRONMENTAL CONTROL--1.3%
1,750,000 Envirotest Systems Corp., 9.125%, 3/15/01 ................ 1,664,687
2,500,000 Envirotest Systems Corp., 144A, 9.625%, 4/01/03, (i) ..... 2,200,000
------------
3,864,687
------------
FINANCE & BANKING--2.4%
2,500,000 First Union Institutional Capital, 8.040%, 12/01/26 ...... 2,485,755
1,000,000 First Union Institutional Capital, 7.850%, 1/01/27 ....... 977,270
3,850,000 Keycorp Institutional Capital A, 7.826%, 12/01/26 ........ 3,739,158
------------
7,202,183
------------
FOOD & BEVERAGES--4.7%
2,000,000 Borden, Inc., 7.875%, 2/15/23 ............................ 1,816,580
3,400,000 RJR Nabisco, Inc., 7.625%, 9/15/03 ....................... 3,348,864
3,000,000 RJR Nabisco, Inc., 8.750%, 8/15/05 ....................... 3,044,850
5,665,000 RJR Nabisco, Inc., 9.250%, 8/15/13 ....................... 5,817,219
------------
14,027,513
------------
FOREIGN ISSUES--15.5%
250,000 Acindar Industria Arg de Acero, 11.250%, 2/15/04 ......... 263,750
350,000 Argentina Republic, 11.375%, 1/30/17 ..................... 393,050
2,600,000 Banco Central Costa, 6.250%, 5/21/10 ..................... 2,210,000
4,975,000 Bangkok Bank Public, Ltd., 8.375%, 1/15/27 ............... 4,756,995
250,000 Compania de Infraes & Services S.A., 11.625%, 6/01/04 .... 262,188
12,158,000 Federal Republic of Brazil, 10.125%, 5/15/27 ............. 11,702,075
1,200,000 Geberit Int S.A., 10.125%, 4/16/07, (m) .................. 743,226
5,000,000 Groupo Televisa S.A. de CV, Zero Coupon, 5/15/08, (c) .... 3,450,000
880,000 MBI Finance, Zero Coupon, 12/18/01 ....................... 630,300
5,550,000 Pan Pacific Industrial Investment Plc,
Zero Coupon, 4/28/07 ..................................... 2,513,595
2,750,000 Petroleos Mexicanos, 144A, 8.625%, 12/01/23, (i) ......... 2,406,250
1,250,000 Ptc International Finance Bv, Zero Coupon, 7/01/07 ....... 759,375
970,200 Republic of Argentina, 6.750%, 3/31/05, (d) .............. 911,386
10,900,000 Republic of Argentina, 5.500%, 3/31/23, (c) .............. 7,548,250
3,050,000 Republic of Poland, 4.000%, 10/27/14, (c) ................ 2,603,938
3,500,000 TFM S.A. de CV, 144A, Zero Coupon, 6/15/09, (i) .......... 2,012,500
1,250,000 Total Access Communication Public, 8.375%, 11/04/06 ...... 1,227,375
1,150,000 Transportacion Maritima Mexica, 10.000%, 11/15/06 ........ 1,164,375
------------
45,558,628
------------
FOREIGN DENOMINATED--7.5%
15,940,000 New Zealand, 8.000%, 11/15/06, (f) ....................... 11,612,747
2,100,000 Republic of Ireland, 8.250%, 8/18/15, (o) ................ 3,646,033
17,750,000 Republic of South Africa, 12.000%, 2/28/05, (g) .......... 3,489,736
7,500,000 Republic of South Africa, 12.500%, 12/21/06, (g) ......... 1,487,626
9,500,000 Republic of South Africa, 13.500%, 9/15/15, (g) .......... 1,964,621
------------
22,200,763
------------
FOREST PRODUCTS--0.1%
250,000 Georgia Pacific Corp., 7.375%, 12/01/25 .................. 237,283
------------
GOVERNMENT TREASURIES--0.3%
5,000,000 United States Treasury Bond Strip, Zero Coupon, 8/15/20 .. 1,011,800
------------
HOME BUILDERS--0.5%
1,500,000 Hovnanian K Enterprises, Inc., 9.750%, 6/01/05 ........... 1,470,000
------------
METAL--0.1%
289,000 Midland Ross Corp., 6.000%, 2/15/07 ...................... 208,080
------------
REAL ESTATE--0.2%
500,000 Sizeler Property Investments, Inc., 8.000%, 7/15/03 ...... 481,250
------------
RESTAURANTS--0.8%
5,450,000 Flagstar Corp., 11.250%, 11/01/04, (n) ................... 2,234,500
------------
RETAIL-DEPARTMENT STORE--3.8%
1,250,000 Bradlees, Inc., 9.250%, 3/01/03, (h) ..................... 75,000
850,000 Dillion Read Structured Finance Corp., 8.375%, 8/15/15 ... 786,250
250,000 Dillion Read Structured Finance Corp., 8.550%, 8/15/19 ... 231,250
886,365 Dillon Read Structured Finance Corp., 6.660%, 8/15/10 .... 780,001
3,500,000 Kmart Corp., 7.950%, 2/01/23 ............................. 3,167,500
2,709,782 Kmart Corp. Pass Through Trust, 8.540%, 1/02/15 .......... 2,547,195
1,250,000 Kmart Corp. Pass Through Trust, 9.350%, 1/02/20 .......... 1,187,500
500,000 Kmart Corp. Pass Through Trust, 9.780%, 1/05/20 .......... 500,000
250,000 Kmart Funding Corp., 9.440%, 7/01/18 ..................... 235,625
715,000 Kmart Funding Corp., Series F, 8.800%, 7/01/10 ........... 686,400
1,000,000 Woolworth Corp., 8.500%, 1/15/22 ......................... 1,049,690
------------
11,246,411
------------
RETAIL-GROCERY--1.1%
5,945,000 Penn Traffic Co., 9.625%, 4/15/05 ........................ 3,150,850
------------
STEEL--1.0%
1,000,000 Geneva Steel Co., 11.125%, 3/15/01 ....................... 900,000
2,750,000 Geneva Steel Co., 9.500%, 1/15/04 ........................ 2,200,000
------------
3,100,000
------------
TELECOMMUNICATION--6.8%
4,650,000 Arch Communications Group, Inc., Zero Coupon, 3/15/08, (c) 2,464,500
500,000 Century Communications Corp., Zero Coupon, 3/15/03, (c) .. 297,500
500,000 Intercel, Inc., Zero Coupon, 2/01/06 ..................... 320,625
1,000,000 Intercel, Inc., Zero Coupon, 5/01/06 ..................... 627,500
2,350,000 Nextel Communications, Inc., Zero Coupon, 8/15/04, (c) ... 1,797,750
250,000 Sprint Spectrum L.P., Zero Coupon, 8/15/06, (c) .......... 182,500
12,940,000 TCI Communications, Inc., 7.875%, 2/15/26 ................ 12,435,340
1,850,000 Tele Communications, Inc., 7.875%, 8/01/13 ............... 1,806,247
------------
19,931,962
------------
TEXTILE--0.1%
250,000 Fruit of the Loom, Inc., 7.375%, 11/15/23 ................ 230,850
250,000 Phillips Van Heusen Corp., 7.750%, 11/15/23 .............. 227,068
------------
457,918
------------
UTILITIES--0.5%
1,500,000 Comed Financing, 8.500%, 1/15/27 ......................... 1,494,660
------------
Total Non-Convertible Bonds (Identified Cost $194,737,073) 208,016,513
------------
COMMON STOCK--8.2%
SHARES
- ------------------------------------------------------------------------------------------
COMPUTERS--0.0%
150,150 Streamlogic Corp. (n) .................................... $ 4,692
693 Streamlogic Corp., Warrants ............................. 5,960
------------
10,652
------------
REAL ESTATE--2.2%
75,800 Developers Diversified Realty ........................... 3,032,000
108,200 Simon de Bartolo Group, Inc. ............................ 3,462,400
------------
6,494,400
------------
FOREIGN ISSUES--1.5%
1,039,900 Siam Commercial Bank PLC ................................ 4,255,140
22,000 Transportacion Maritima Mexica (ADR) (j) ................. 136,125
------------
4,391,265
------------
CABLE & MEDIA--0.6%
15,703 Cablevision Systems Corp. ............................... 1,582,073
------------
ELECTRIC UTILITIES--3.9%
232,700 Eastern Utilities Associates ............................ 4,246,775
300,000 PG&E Corp. .............................................. 7,275,000
------------
11,521,775
------------
Total Common Stock (Identified Cost $22,191,017) ......... 24,000,165
------------
PREFERRED STOCK--2.9%
- ------------------------------------------------------------------------------------------
PAPER--0.0%
3,000 Stone Container Corp. ................................... 51,375
------------
ENTERTAINMENT--0.1%
283 Time Warner, Inc. ....................................... 312,008
------------
RETAIL-DEPARTMENT STORE--0.2%
10,000 Kmart Financing ......................................... 548,750
------------
RETAIL-GROCERY--0.0%
98,000 Flagstar Cos. (n) ....................................... 91,875
------------
PETROLEUM SERVICES--0.1%
10,000 Mcdermott, Inc. ......................................... 316,250
------------
FOREIGN DENOMINATED--0.4%
132,000,000 Sakura Finance .......................................... 1,164,163
------------
COMPUTERS--0.1%
10,000 Unisys Corp. ............................................ 388,750
------------
DOMESTIC OIL--0.0%
500 Kelley Oil & Gas Corp. .................................. 12,125
------------
ELECTRIC UTILITIES--0.8%
10,000 Long Island Lighting Co. ................................ 245,625
150 New York State Electric & Gas Corp. ..................... 8,475
150 Niagara Mohawk Power Corp., 3.6% ........................ 6,164
4,000 Niagara Mohawk Power Corp., 4.1% ........................ 188,000
10,000 Niagara Mohawk Power Corp., 7.85% ....................... 252,500
5,500 Niagara Mohawk Power Corp., Series A Adj. Rate .......... 108,625
55,900 Niagara Mohawk Power Corp., Series B Adj. Rate .......... 1,233,294
10,000 Niagara Mohawk Power Corp., Series C Adj. Rate .......... 223,750
------------
2,266,433
------------
GAS & PIPELINE UTILITIES--0.1%
5,000 Western Gas Resources, Inc. ............................. 198,125
------------
OIL--0.0%
500 Kaneb Services, Inc. .................................... 5,062
------------
STEEL--0.6%
43,000 Bethlehem Steel Corp., 144A (i) .......................... 1,741,500
------------
TRUCKING & FREIGHT FORWARDING--0.5%
44,000 Arkansas Best ........................................... 1,452,000
------------
Total Preferred Stock (Identified Cost $7,459,036) ....... 8,548,416
------------
SHORT-TERM INVESTMENT--1.5%
FACE
AMOUNT
- ------------------------------------------------------------------------------------------
$ 4,404,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 6/30/97 at 5.000% to be repurchased at $4,404,612
on 7/01/97, collateralized by U.S. Treasury Bond,
7.250%, due 5/15/16, valued at $4,492,348 ............. 4,404,000
------------
Total Short Term Investment (Identified Cost $4,404,000) . 4,404,000
------------
Total Investments--98.7% (Identified Cost $277,530,453)
(b) ...................................................... 290,614,735
Other assets less liabilities .......................... 3,944,300
------------
Total Net Assets--100% ................................... $294,559,035
============
(a) See Note 1a.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments
based on cost of $277,530,453 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 ................ $ 20,950,367
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ................ (7,866,085)
------------
Net unrealized appreciation ..................................... $ 13,084,282
============
(c) Step Bond: Coupon rate is zero or below market for an initial
period and then increases to a higher coupon rate at a specified
date and rate.
(d) Variable or floating rate security. Rate disclosed is as of June
30, 1997.
(e) Denominated in Canadian Dollars.
(f) Denominated in New Zealand Dollars.
(g) Denominated in South African Rand.
(h) Non-income producing security.
(i) 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.
(j) 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.
(k) Denominated in Thai Baht.
(l) Denominated in European Currency Units.
(m) Denominated in German Deutsche Mark.
(n) Non-income producing; issuer filed petition under Chapter 11 of
the Federal Bankruptcy Code.
(o) Denominated in Irish Punts.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ..................................... $290,614,735
Cash ..................................................... 462
Receivable for:
Fund shares sold ....................................... 1,494,990
Securities sold ........................................ 330,940
Dividends and interest ................................. 5,038,989
Unamortized organization expense ......................... 35,715
Prepaid registration expense ............................. 10,000
------------
297,525,831
LIABILITIES
Payable for:
Securities purchased ................................... $1,916,208
Fund shares redeemed ................................... 349,070
Dividends declared ..................................... 481,481
Accrued expenses:
Management fees ........................................ 150,016
Deferred trustees' fees ................................ 5,803
Accounting and administrative .......................... 4,285
Other expenses ......................................... 59,933
----------
2,966,796
------------
NET ASSETS ................................................. $294,559,035
============
Net Assets consist of:
Capital paid in ........................................ $280,624,328
Undistributed net investment income .................... 58,142
Accumulated net realized gains ......................... 795,452
Unrealized appreciation on investments and foreign
currency ............................................. 13,081,113
------------
NET ASSETS ................................................. $294,559,035
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($124,552,842 divided by 9,134,402 shares of beneficial
interest) .............................................. $13.64
======
Offering price per share (100/95.50 of $13.64) ............. $14.28*
======
Net asset value and offering price of Class B shares
($125,952,297 divided by 9,239,107 shares of beneficial
interest) .............................................. $13.63**
======
Net asset value and offering price of Class C shares
($44,053,896 divided by 3,233,213 shares of beneficial
interest) .............................................. $13.63
======
Identified cost of investments ............................. $277,530,453
============
*Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ................................................ $ 931,494(a)
Interest ................................................. 10,042,010
-----------
10,973,504
Expenses
Management fees ........................................ $ 809,562
Service fees - Class A ................................. 132,657
Service and distribution fees - Class B ................ 539,087
Service and distribution fees - Class C ................ 186,767
Trustees' fees and expenses ............................ 10,843
Accounting and administrative .......................... 25,346
Custodian .............................................. 84,825
Transfer agent ......................................... 166,197
Audit and tax services ................................. 22,000
Legal .................................................. 10,036
Printing ............................................... 23,793
Registration ........................................... 54,729
Amortization of organization expenses .................. 6,853
Miscellaneous .......................................... 4,176
----------
Total expenses ........................................... 2,076,871
-----------
Net investment income .................................... 8,896,633
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net ...................................... 837,515
Foreign currency transactions - net .................... (34,392)
----------
Total realized gain on investment and foreign currency
transactions ......................................... 803,123
----------
Unrealized appreciation on:
Investments - net ...................................... 5,048,053
Foreign currency transactions - net .................... 2,019
----------
Total unrealized appreciation on investments and foreign
currency transactions ................................ 5,050,072
----------
Net gain on investment transactions ...................... 5,853,195
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................. $14,749,828
===========
(a) Net of foreign taxes of: $8,031
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 10,544,203 $ 8,896,633
Net realized gain on investments and foreign currency
transactions .......................................... 4,553,282 803,123
Unrealized appreciation on investments, and foreign
currency
transactions .......................................... 4,457,434 5,050,072
------------- ------------
Increase in net assets from operations .................. 19,554,919 14,749,828
------------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (4,670,671) (3,978,346)
Class B ............................................... (4,337,318) (3,631,806)
Class C ............................................... (1,344,469) (1,256,144)
Net realized gain on investments
Class A ............................................... (2,056,746) 0
Class B ............................................... (2,084,672) 0
Class C ............................................... (672,804) 0
------------- ------------
(15,166,680) (8,866,296)
------------- ------------
Increase in net assets derived from capital share
transactions .......................................... 123,537,492 72,792,439
------------- ------------
Total increase in net assets ............................ 127,925,731 78,675,971
NET ASSETS
Beginning of the period ................................. 87,957,333 215,883,064
------------- ------------
End of the period ....................................... $ 215,883,064 $ 294,559,035
============== ==============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................................. $ 28,563 $ 27,805
============== ==============
End of the period ....................................... $ 27,805 $ 58,142
============== ==============
</TABLE>
See accompanying notes to finanial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------ ------------------------------------------------
MAY 1,(a) YEAR SIX MONTHS MAY 1,(a) YEAR SIX MONTHS
THROUGH ENDED ENDED THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period ......... $12.50 $12.99 $13.36 $12.50 $12.99 $13.36
------ ------ ------ ------ ------ ------
Income From
Investment
Operations
Net Investment
Income ......... 0.74 1.05 0.51 0.68 0.95 0.45
Net Realized and
Unrealized
Gain on
Investments .. 0.49 0.73 0.27 0.49 0.73 0.27
------ ------ ------ ------ ------ ------
Total From
Investment
Operations ..... 1.23 1.78 0.78 1.17 1.68 0.72
------ ------ ------ ------ ------ ------
Less Distributions
Dividends From
Net Investment
Income ......... (0.73) (1.05) (0.50) (0.67) (0.95) (0.45)
Distributions
From Net Realized
Capital Gains 0.00 (0.36) 0.00 0.00 (0.36) 0.00
Distributions in
Excess of Net
Investment
Income ....... (0.01) 0.00 0.00 (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------
Total
Distributions .. (0.74) (1.41) (0.50) (0.68) (1.31) (0.45)
------ ------ ------ ------ ------ ------
Net Asset Value,
End of Period .. $12.99 $13.36 $13.64 $12.99 $13.36 $13.63
====== ====== ====== ====== ====== ======
Total Return (%)(c) 10.3 14.5 6.0 9.7 13.7 5.5
Ratio of
Operating
Expenses to
Average Net
Assets (%) (d) 0.93(b) 0.96 1.22(b) 1.68(b) 1.71 1.97(b)
Ratio of Net
Investment
Income to
Average Net
Assets (%) ... 8.75(b) 8.23 7.53(b) 8.00(b) 7.48 6.78(b)
Portfolio
Turnover Rate(%) 22 52 28(b) 22 52 28(b)
Net Assets, End
of Period (000) $36,939 $90,729 $124,553 $38,767 $93,408 $125,952
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of Class B shares are not
reflected in total return calculations. Periods less than one year are not computed on an annualized basis.
(d) 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 (%) ... 1.58(b) 1.31 -- 2.33(b) 2.06 --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
MAY 1, (a) YEAR SIX MONTHS
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $12.50 $12.99 $13.35
------ ------ ------
Income From Investment Operations
Net Investment Income ............................... 0.67 0.95 0.45
Net Realized and Unrealized Gain on Investments ..... 0.49 0.72 0.28
------ ------ ------
Total From Investment Operations .................... 1.16 1.67 0.73
------ ------ ------
Less Distributions
Dividends From Net Investment Income ................ (0.66) (0.95) (0.45)
Distributions From Net Realized Capital Gains ....... 0.00 (0.36) 0.00
Distributions in Excess of Net Investment Income .... (0.01) 0.00 0.00
------ ------ ------
Total Distributions ................................. (0.67) (1.31) (0.45)
----- ----- -----
Net Asset Value, End of Period ...................... $12.99 $13.35 $13.63
====== ====== ======
Total Return (%) (c) ................................ 9.7 13.6 5.6
Ratio of Operating Expenses to Average Net Assets (%)
(d) ............................................... 1.68(b) 1.71 1.97(b)
Ratio of Net Investment Income to Average Net Assets
(%) ............................................... 8.00(b) 7.48 6.78(b)
Portfolio Turnover Rate (%) ......................... 22 52 28(b)
Net Assets, End of Period (000) ..................... $12,252 $31,746 $44,054
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
(d) 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 (%) ........ 2.33(b) 2.06 --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
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 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 A, Class B and Class C shares on May 1, 1995. Class
A shares are sold with a maximum front end sales charge of 4.50%. Class B shares
do not pay a front end sales charge, but pay a higher ongoing distribution fee
than Class A shares for eight years (at which point they automatically convert
to Class A shares), and are subject to a contingent deferred sales charge if
those shares are redeemed within six years of purchase (or five years if
purchased prior to May 1, 1997). 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. At June 30, 1997, there were no Class Y shares
outstanding. Expenses of the Fund are borne pro-rata by the holders of all
classes of shares, except that each class bears expenses unique to that class
(including the Rule 12b-1 service and distribution fees applicable to such
class), and votes as a class only with respect to its own Rule 12b-1 plan.
Shares of each class would receive their pro-rata share of the net assets of the
Fund, if the Fund were liquidated. In addition, the Trustees approve separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Loomis Sayles &
Company, L.P. ("Loomis Sayles") under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Loomis Sayles and other information
with respect to transactions in securities, including quotations from securities
dealers. Valuations of securities and other assets owned by the Fund for which
market quotations are readily available are based on those quotations.
Short-term obligations that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Loomis Sayles
under the supervision of the Fund's trustees.
B. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on 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.
C. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion of
discount. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the identified
cost basis.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for mortgage backed securities and foreign currency
transactions for book and tax purposes. Permanent book and tax basis differences
will result in reclassifications to capital accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Loomis Sayles 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.
G. ORGANIZATION EXPENSE. Costs incurred in 1995 in connection with the Fund's
organization and initial registration amounting to $67,920 were paid by the Fund
and are being amortized over 60 months beginning May 1, 1995.
2. Purchases and Sales of Securities (excluding short-term investments) for the
six months ended June 30, 1997 were as follows:
PURCHASES SALES
----------------------------------- ---------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ------------ --------------- -----------
$0 $104,134,857 $1,562,641 $33,405,439
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 0.65% of the first $200 million of the Fund's
average daily net assets and 0.60% of such assets in excess of $200 million.
NEFM pays the Fund's investment subadviser, Loomis Sayles at the rate of 0.35%
of the first $200 million of the Fund's average daily net assets and 0.30% of
such assets in excess of $200 million. Certain officers and directors of NEFM
are also officers or trustees of the Fund. NEFM and Loomis Sayles 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 under the management agreement in effect during the six
months ended June 30, 1997 are as follows:
FEES EARNED
- ----------
$383,029 New England Funds Management, L.P.
$426,533 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 six months
ended June 30, 1997, these expenses amounted to $25,346 and are shown separately
in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1997, the Fund
paid New England Funds $113,867 as compensation for its services in that
capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1997, the Fund paid New England Funds $132,657 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.
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 six months ended June
30, 1997 the Fund paid New England Funds $134,772 and $46,692 in service fees
under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of up to 0.75% of the average daily
net assets attributable to the Fund's Class B shares and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and Class
C shares. For the six months ended June 30, 1997, the Fund paid New England
Funds $404,315 and $140,075 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 six months ended
June 30, 1997 amounted to $740,919.
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 Loomis
Sayles, 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 $2,117
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $91
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. Loomis Sayles voluntarily agreed, until December 31,
1996, to waive its entire subadvisory fee (which is paid by NEFM), and NEFM
agreed to reduce its management fee (which is paid by the Fund) by an equal
amount.
In addition, under an expense deferral arrangement, which NEFM terminated
December 31, 1996, NEFM agreed to defer its management fees (to the extent not
waived as provided in the preceding sentences) for the Fund, to the extent
necessary to limit the Fund's expenses to the annual rate of 1.40% for Class A
shares, 2.15% for Class B shares and 2.15% for Class C shares, subject to the
obligation of the Fund to pay NEFM such deferred fees in later periods to the
extent that the Fund's expenses fall below the annual rate of 1.40% for Class A
shares, 2.15% for Class B shares and 2.15% for Class C shares; provided,
however, that the Fund is not obligated to pay any such deferred fees more than
two years after such fee was deferred. No such expenses were deferred in 1996.
5. CAPITAL SHARES. At June 30, 1997 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B and
Class C capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 4,585,249 $ 60,194,763 2,841,881 $37,976,193
Shares issued in connection with
the reinvestment of:
Dividends from net investment income 267,132 3,495,181 236,585 3,169,191
Distributions from net realized gain 137,305 1,816,726 0 0
--------- ------------- --------- -----------
4,989,686 65,506,670 3,078,466 41,145,384
Shares repurchased ................... (1,041,025) (13,631,309) (735,810) (9,821,644)
--------- ------------- --------- -----------
Net increase ......................... 3,948,661 $ 51,875,361 2,342,656 $31,323,740
--------- ------------- --------- -----------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 4,289,664 $ 56,370,586 2,698,565 $36,047,097
Shares issued in connection with
the reinvestment of:
Dividends from net investment income 187,069 2,445,242 169,557 2,271,052
Distributions from net realized gain 113,978 1,508,713 0 0
--------- ------------- --------- -----------
4,590,711 60,324,541 2,868,122 38,318,149
Shares repurchased ................... (580,814) (7,610,958) (622,773) (8,301,765)
--------- ------------- --------- -----------
Net increase ......................... 4,009,897 $ 52,713,583 2,245,349 $30,016,384
--------- ------------- --------- -----------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- --------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,840,696 $ 24,218,950 1,341,977 $17,982,176
Shares issued in connection with
the reinvestment of:
Dividends from net investment income 70,055 917,823 72,263 967,282
Distributions from net realized gain 41,207 546,262 0 0
--------- ------------- --------- -----------
1,951,958 25,683,035 1,414,240 18,949,458
Shares repurchased ................... (517,103) (6,734,487) (558,892) (7,497,143)
--------- ------------- --------- -----------
Net increase ......................... 1,434,855 $ 18,948,548 855,348 $11,452,315
--------- ------------- --------- -----------
Increase derived from capital shares
transactions ....................... 9,393,413 $123,537,492 5,443,353 $72,792,439
========= ============ ========= ===========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
SUPPLEMENT DATED JULY 28, 1997
TO NEW ENGLAND BOND FUNDS CLASSES A, B AND C PROSPECTUS
DATED MAY 1, 1997 (AS SUPPLEMENTED MAY 28, 1997)
ON PAGE 17 UNDER THE SECTION ENTITLED "HIGH INCOME FUND", THE FIRST SENTENCE OF
THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
The High Income Fund under normal market conditions will invest at least 65% of
its total assets in fixed-income securities which are rated BBB or lower by S&P
or Baa or lower by Moody's or unrated but are of comparable quality to
securities that are so rated.
IN THIS SAME SECTION, THE FOURTH PARAGRAPH IS REVISED TO READ AS FOLLOWS:
High Income Fund expects that under normal market conditions at least 80% of the
value of its total assets will be invested in fixed-income securities of U.S.
corporations, including preferred stock and convertible securities, and U.S.
dollar-denominated fixed-income securities issued by foreign governments or by
companies organized in foreign countries. To achieve its basic investment
objective, the Fund from time to time also may invest up to 20% of the value of
its total assets in common stocks and up to 20% of the value of its total assets
in non-U.S. dollar-denominated fixed-income securities issued by foreign
governments or by companies organized in foreign countries. However, investments
in both of these types of securities on a combined basis generally will not
exceed 20% of the value of the Fund's assets. See "Investment Risks -- Foreign
Securities" below.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
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 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>
--------------
(Logo)(R) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
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[Logo] [Logo]
QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
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DALBAR DALBAR
HONORS COMMITMENT TO: HONORS COMMITMENT TO:
INVESTORS INVESTORS
- --------------------- ---------------------
ST58-0797
[recycle symbol] Printed On Recycled Paper
