<PAGE>
- -------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
(Logo)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- -------------------------------------------------------------------------------
New England
Government Securities Fund
[graphic omitted]
December 31, 1996
<PAGE>
February 1997
- -------------------------------------------------------------------------------
[Photo of Henry L.P. Schmelzer]
Dear New England Funds Shareholder,
Taken together, 1995 and 1996 constituted the sixth strongest back-to-back years
for the U.S. stock market since 1915, as measured by percentage gain in the Dow
Jones Industrial Average (according to Bloomberg Business News).
Most New England Funds portfolio managers believe that the forces behind this
rally -- low inflation, relatively stable interest rates and strong corporate
profits -- will persist, at least for a time. Nevertheless, bull markets can
suddenly turn quiet; they can decline modestly; or they can reverse course
sharply. No one can predict what is ahead, nor can anyone guarantee whether the
market's strength will extend even further in 1997 and beyond.
Maintain a Long-Term Perspective
Whatever the market's direction, you should be prepared to consider any
short-term trends in the broader context of your long-term personal goals,
including the accumulation of financial assets. One way to manage this important
process is by diversifying your investments. While U.S. stocks have historically
been the strongest performers, you may, depending on your financial goals and
needs, also benefit from investing in various types of bond funds, and by
participating in growing overseas markets.
Remember that each investment has its own unique risks. What's more, no strategy
can assure a profit or protect against a loss. However, one time-tested approach
is to invest regularly and stay invested -- in good times and bad -- to avoid
the pitfall of guessing what the market might do in the short run.
Our Multiple-Adviser Approach Sets Us Apart
Many financial representatives recommend New England Funds to their clients
because of our distinctive multiple-adviser approach. For each fund, we
hand-pick a specific subadviser or subadvisers with significant experience and
demonstrated skill in selecting investments that are in tune with that fund's
stated objective. We call it matching the talent to the task.
Finally, it may interest you to learn that you are part of a major national
trend. In 1996, nearly 37 million U.S. households owned mutual funds, according
to the Investment Company Institute, an industry trade organization. Mutual
funds are now a cornerstone of retirement, college and other investment plans
for millions of Americans.
New England Funds has grown with the industry and is now over $6 billion in
size. We thank you for helping us reach this important milestone, and look
forward to serving your investment needs well into the future.
Sincerely,
/s/ Henry L.P. Schmelzer
- ------------------------
Henry L.P. Schmelzer, President
For more information, including a prospectus for any New England Fund, please
contact your financial representative or call the Investor Services and
Marketing Group at 800-225-5478. Please read the prospectus carefully, including
the information on charges and expenses, before you invest.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
- --------------------- For two years running we're proud to announce that
[Logo] DALBAR, an independent evaluator of mutual fund
QUALITY service, has awarded New England Funds its Quality
TESTED SERVICE Tested Service Seal for "providing the highest
1996 tier of service excellence in the mutual fund
- --------------------- industry." New England Funds is one of just three
DALBAR mutual fund companies to earn this distinction in
HONORS COMMITMENT TO: each of the last two years -- another reason why
INVESTORS we are becoming known as the mutual fund company
- --------------------- Where The Best Minds Meet(TM).
INVESTMENT RESULTS THROUGH DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in the Government Securities Fund's Class A Shares since
12/31/86 compared to the Lehman Government Bond Index and Cost of Living over
the same period. The data points in this chart are as follows:]
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- -------------------------------------------------------------------------------
DECEMBER 1985 THROUGH DECEMBER 1996
COMPARED TO THE LEHMAN GOVERNMENT BOND INDEX(4) AND THE COST OF LIVING(5)
[] NET ASSET VALUE(1)
[] WITH MAXIMUM SALES CHARGE(2)
[] LEHMAN GOV'T. BOND INDEX(4)
[] COST OF LIVING(5)
DATE NAV POP LEHMAN COST OF LIVING
- ---- ---------- --------- ---------- ------------------
12/31/86 $10,000 $ 9,550 $10,000 $10,000
12/31/87 $10,020 $ 9,569 $10,219 $10,443
12/31/88 $10,664 $10,184 $10,938 $10,905
12/31/89 $12,007 $11,467 $12,495 $11,412
12/31/90 $12,684 $12,113 $13,585 $12,109
12/31/91 $14,569 $13,913 $15,667 $12,479
12/31/92 $15,560 $14,859 $16,800 $12,841
12/31/93 $16,960 $16,197 $18,591 $13,194
12/31/94 $16,027 $15,306 $17,964 $13,548
12/31/95 $19,237 $18,372 $21,257 $13,902
12/31/96 $19,389 $18,517 $21,846 $14,363
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 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 GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/96
- -------------------------------------------------------------------------------
CLASS A (INCEPTION 9/16/85) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
NET ASSET VALUE(1) 0.79% 4.56% 5.88% 6.85%
WITH MAX. SALES CHARGE(2) -3.73 2.98 4.92 6.35
LIPPER GENERAL GOV'T. AVERAGE(6) 1.72 4.51 5.90 6.95
CLASS B (INCEPTION 9/23/93) 1 YEAR 3 YEARS SINCE INCEPTION
NET ASSET VALUE(1) -0.05% 3.78% 3.08%
WITH CDSC(3) -4.05 2.90 2.57
LEHMAN GOV'T. BOND INDEX(4) 2.77 5.53 4.98
LIPPER GENERAL GOV'T. AVERAGE(6) 1.72 4.51 N/A
CLASS Y (INCEPTION 3/31/94) 1 YEAR SINCE INCEPTION
NET ASSET VALUE(1) 1.13% 6.56%
LEHMAN GOV'T. BOND INDEX(4) 2.77 7.23
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. Class Y shares are available only to certain institutional
investors.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) Lehman Government Bond Index is an unmanaged index of bonds issued by the
U.S. government and its agencies having maturities between one and ten
years. The Index performance has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to mutual
fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
- -------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- -------------------------------------------------------------------------------
Q. How did New England Government Securities Fund perform during 1996?
[Photo of Eric Gutterson
Back Bay Advisors, L.P.]
After a challenging start in 1996, New England Government Securities Fund
finished the year more or less where it began. For the year ended December
31, 1996, the Fund generated a total return of 0.79% for Class A shares,
based on net asset value. An increase in the Fund's income stream during the
year helped to offset a decline in share price. The Fund's Class A 30-day
net annualized SEC yield at the end of December was 5.06% - up from its
4.41% yield a year ago.
Rising long-term interest rates and weak bond market returns early in 1996
stood in vivid contrast to the remarkable strength of bonds in 1995.
Concerned that robust economic growth might cause inflationary pressures to
escalate, bond investors pushed down fixed-income prices and drove up
yields. By the second half of the year, steady (if slower) economic growth,
continued low inflation and strong foreign demand for U.S. government bonds
fostered better performance.
During the period, your Fund trailed its benchmark, the unmanaged Lehman
Brothers Government Bond Index, which posted a one-year total return of
2.77%. The lag was largely the result of strategic decisions related to the
Fund's duration, which were not precisely synchronized with changes in
market direction. 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 - rising when interest rates fall
and declining when interest rates rise. The Fund's average duration at the
beginning of the period was longer than that of the index, causing larger
relative price declines when interest rates rose. But as market conditions
improved, the Fund's longer duration helped to offset losses sustained
during the first six months of 1996.
Q. How did you manage the Fund in the face of these challenging investment
conditions?
We adjusted the Fund's strategy midway through the year, reflecting two
distinct periods that characterized bond markets in 1996: rising interest
rates during the first half, and steadier interest rates later in the year.
As always, the Fund's credit quality remained high, as U.S. government
securities are among the most creditworthy securities available. As interest
rates rose early in 1996, we worked to position the Fund even more
conservatively by shortening the portfolio's average duration from six years
to four. We strategically purchased bonds with shorter maturities to balance
our holdings of longer-maturity bonds. We also increased investments in
mortgage-backed securities, which tend to perform better than Treasury
securities during periods of rising interest rates, when mortgage holders
are less likely to refinance and prepay their mortgages.
As bond market conditions improved later in the year, we extended the Fund's
duration back to the five- to six-year range by refocusing on bonds with
longer maturities. We also sold mortgage bonds selling at a premium to face
value while maintaining investments in those selling at a discount. Because
the underlying mortgage rates on discount bonds tend to be lower, they
typically hold up better than premium bonds when interest rates decline. To
mitigate prepayment risk, we replaced some of the portfolio's higher-coupon
mortgage-backed securities - bonds paying higher stated rates of interest -
with lower-coupon bonds. Despite their lower relative coupons, these bonds
still produced income above most other high-quality fixed-income
investments. In addition, lower-coupon bonds enjoyed better price
performance - precisely because they were less susceptible to prepayment.
These adjustments helped your Fund perform better than the Lehman Brothers
Government Bond Index during the year's second half.
Q. What is your investment outlook for the months ahead?
Demand is low for U.S. fixed income securities among domestic investors;
however, foreign interest remains strong. While this divergence means
current supply/demand relationships, on balance, could remain unchanged, it
may translate into continued short-term volatility for bonds as interest
rates move within a relatively narrow range. In this environment, we
currently expect to keep the Fund's average duration in line with that of
the Lehman Index, its benchmark.
Meanwhile, we believe the ingredients that foster better bond market
performance - slow economic growth, low inflation and gradually falling
interest rates over time could lie ahead. As we monitor market conditions,
we'll continue to seek a mix of government securities that can afford
shareholders attractive opportunities for price appreciation, a competitive
stream of income and ample protection from prepayments.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
TREASURY YIELD CURVE
- -------------------------------------------------------------------------------
The "yield curve" illustrates the yields available on U.S. Treasury securities
of varying maturities, ranging from three-month Treasury bills to 30-year
Treasury bonds. Under normal conditions, a security with a longer maturity will
offer a higher yield than a shorter term security, to compensate the bond holder
for tying up money for longer periods of time. The chart below illustrates the
yield curve at the beginning and at the end of 1996. As you can see, long-term
rates rose, with the 30-year bond's yield rising to 6.64% from 5.95%.
- -------------------------------------------------------------------------------
THE YIELD CURVE: JANUARY - DECEMBER 1996
- -------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the drop in the
yield curve of 3-month Treasury bills to 30-year Treasury bonds. The data from
the graph is as follows:]
1/01/96 12/31/96 CHANGE
------- -------- ------
3 MONTH 5.071 5.186 0.1151
6 MONTH 5.147 5.297 0.1504
1 YEAR 5.131 5.488 0.3566
2 YEAR 5.150 5.868 0.7177
3 YEAR 5.207 6.010 0.8028
5 YEAR 5.374 6.206 0.8323
10 YEAR 5.570 6.418 0.8475
30 YEAR 5.949 6.641 0.6916
Source: Bloomberg
What caused this rise? Over the year it became apparent that the economy was
growing at a faster pace than expected, though inflation remained under control.
(Inflation is the bond market's primary foe because it eats away at the value of
fixed-income investments). Wary of escalating inflation (which failed to
materialize), the markets drove up long term rates. Bond prices, which move in
the opposite direction from interest rates, declined after posting impressive
gains in 1995.
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of December 31, 1996
<TABLE>
<CAPTION>
BONDS AND NOTES--99.1% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (A)
- ---------------------------------------------------------------------------------------------
<C> <S> <C>
GOVERNMENT AGENCIES--35.0% (C)
$ 29,667,996 Government National Mortgage Association, 7.000%, with
various maturities to 2026 .......................... $ 29,035,390
15,149,999 Government National Mortgage Association, 7.500%, with
various maturities to 2026 .......................... 15,154,695
446,229 Government National Mortgage Association, 8.500%,
2/15/06 .............................................. 467,590
831,613 Government National Mortgage Association, 9.000%, with
various maturities to 2016 .......................... 888,305
240,789 Government National Mortgage Association, 9.500%, with
various maturities to 2009 .......................... 261,555
429,989 Government National Mortgage Association, 10.000%, with
various maturities to 2016 .......................... 466,631
53,608 Government National Mortgage Association, 12.500%, with
various maturities to 2014 .......................... 63,124
-------------
46,337,290
-------------
U.S. GOVERNMENT--64.1%
20,000,000 United States Treasury Bonds 7.125%, 2/15/23 ......... 20,881,200
15,000,000 United States Treasury Bonds 10.750%, 2/15/03 ........ 18,365,550
11,500,000 United States Treasury Bonds 10.750%, 8/15/05 ........ 14,754,155
19,000,000 United States Treasury Notes 9.125%, 5/15/99 ......... 20,303,210
10,000,000 United States Treasury Notes 9.250%, 8/15/98 ......... 10,520,300
-------------
84,824,415
-------------
Total Bonds and Notes (Identified Cost $131,530,805) .. 131,161,705
-------------
Total Investments--99.1% (Identified Cost $131,530,805)(b) 131,161,705
Other assets less liabilities ......................... 1,214,902
-------------
Total Net Assets--100% ................................. $ 132,376,607
=============
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized depreciation on investments
based on cost of $131,990,801 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. ......................... $ 403,968
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value. ......................... (1,233,064)
-------------
Net unrealized depreciation. ....................................... $ (829,096)
=============
At December 31, 1996 the Fund had a capital loss carryover of approximately $10,899,000 of
which $3,597,000 expires on December 31, 2004 and $7,302,000 expires on December 31, 2002.
This may be available to offset future realized capital gains, if any, to the extent provided
by regulations.
(c) The Fund's investment in mortgage backed securities of the Government National Mortgage
Association which have the same coupon rate, have been aggregated for the purpose of
presentation in the schedule of investments.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value .................................... $131,161,705
Cash .................................................... 64,711
Receivable for:
Fund shares sold ...................................... 65,318
Accrued interest ...................................... 2,471,955
Prepaid registration expense ............................ 7,000
------------
133,770,689
LIABILITIES
Payable for:
Fund shares redeemed .................................. $1,073,458
Dividends declared .................................... 125,737
Accrued expenses:
Management fees ....................................... 74,523
Deferred trustees' fees ............................... 46,313
Accounting and administrative ......................... 2,570
Other expenses ........................................ 71,481
----------
1,394,082
------------
NET ASSETS ................................................ $132,376,607
============
Net Assets consist of:
Capital paid in ......................................... $144,145,724
Undistributed net investment income ................... (40,531)
Accumulated net realized losses ....................... (11,359,486)
Unrealized depreciation on investments ............... (369,100)
------------
NET ASSETS ................................................ $132,376,607
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($120,606,962 divided by 10,880,855 shares of beneficial
interest) ............................................... $11.08
======
Offering price per share (100/95.50 of $11.08) ............ $11.60*
======
Net asset value and offering price of Class B shares
($5,385,185 divided by 485,817 shares of beneficial
interest) ............................................... $11.08**
======
Net asset value and offering price of Class Y shares
($6,384,460 divided by 576,911 shares of beneficial
interest) ............................................... $11.07
=====
Identified cost of investments ............................ $131,530,805
============
* 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
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................. $11,150,319
Expenses
Management fees ........................................ $ 933,063
Service fees - Class A ................................. 327,097
Service and distribution fees - Class B ................ 53,314
Trustees' fees and expenses ............................ 22,355
Accounting and administrative .......................... 34,007
Custodian .............................................. 94,425
Transfer agent ......................................... 311,319
Audit and tax services ................................. 43,600
Legal .................................................. 24,357
Printing ............................................... 41,236
Registration ........................................... 22,597
Miscellaneous .......................................... 5,645
-----------
Total expenses ........................................... 1,913,015
-----------
Net investment income .................................... 9,237,304
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized loss on:
Investments - net ...................................... (3,745,280)
Options - net .......................................... (218,902)
Futures contracts - net ................................ (192,855)
-----------
Net realized loss on investments, options and futures
contracts ............................................ (4,157,037)
-----------
Unrealized depreciation on:
Investments - net ...................................... (4,432,622)
-----------
Net unrealized depreciation on investments ............. (4,432,622)
-----------
Net loss on investment transactions ...................... (8,589,659)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................. $ 647,645
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income .................................... $ 10,367,613 $ 9,237,304
Net realized gain (loss) on investment transactions ...... 11,531,660 (4,157,037)
Unrealized appreciation (depreciation) on investments .... 6,486,892 (4,432,622)
-------------- -------------
Increase in net assets from operations ................... 28,386,165 647,645
-------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (9,617,397) (8,484,171)
Class B ................................................ (214,648) (305,730)
Class Y ................................................ (347,523) (497,152)
-------------- -------------
(10,179,568) (9,287,053)
-------------- -------------
Decrease in net assets derived from capital share
transactions ........................................... (13,330,766) (18,708,581)
-------------- -------------
Total increase (decrease) in net assets .................. 4,875,831 (27,347,989)
NET ASSETS
Beginning of the year .................................... 154,848,765 159,724,596
-------------- -------------
End of the year .......................................... $ 159,724,596 $ 132,376,607
============== =============
UNDISTRIBUTED/(OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the year .................................... $ 35,432 $ 110,228
============== =============
End of the year .......................................... $ 110,228 $ (40,531)
============== =============
</TABLE>
See accompanying notes to financial statements.
<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 Period .. $11.92 $11.73 $11.75 $10.43 $11.73
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.70 0.72 0.69 0.74 0.71
Net Realized and Unrealized Gain (Loss)
on Investments ...................... 0.07 0.32 (1.32) 1.29 (0.64)
------ ------ ------ ------ ------
Total From Investment Operations ...... 0.77 1.04 (0.63) 2.03 0.07
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income .. (0.68) (0.72) (0.69) (0.73) (0.72)
Distributions From Net Realized Capital
Gains ............................... (0.28) (0.30) 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ................... (0.96) (1.02) (0.69) (0.73) (0.72)
------ ------ ------ ------ ------
Net Asset Value, End of Period ........ $11.73 $11.75 $10.43 $11.73 $11.08
====== ====== ====== ====== ======
Total Return (%) (a) .................. 6.8 9.0 (5.5) 20.0 0.8
Ratio of Operating Expenses to
Average Net Assets (%) .............. 1.23 1.22 1.29 1.35 1.32
Ratio of Net Investment Income to
Average Net Assets (%) .............. 5.92 5.70 6.66 6.69 6.45
Portfolio Turnover Rate (%) ........... 730 276 809 559 462
Net Assets, End of Period (000) ....... $178,030 $182,436 $147,986 $147,503 $120,607
(a) A sales charge is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------
SEPTEMBER 23(A)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------
1993 1994 1995 1996
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $12.26 $11.75 $10.43 $11.74
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ....................... 0.16 0.60 0.65 0.63
Net Realized and Unrealized Gain (Loss) on
Investments ............................... (0.30) (1.32) 1.30 (0.65)
------ ------ ------ ------
Total From Investment Operations ............ (0.14) (0.72) 1.95 (0.02)
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ........ (0.16) (0.60) (0.64) (0.64)
Distributions From Net Realized Capital Gains (0.21) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions ......................... (0.37) (0.60) (0.64) (0.64)
------ ------ ------ ------
Net Asset Value, End of Period .............. $11.75 $10.43 $11.74 $11.08
====== ====== ====== ======
Total Return (%) (c) ........................ (1.2) (6.2) 19.2 (0.1)
Ratio of Operating Expenses to Average Net
Assets (%) ................................ 1.97 (b) 2.04 2.10 2.07
Ratio of Net Investment Income to Average Net
Assets (%) 5.03 (b) 5.91 5.94 5.70
Portfolio Turnover Rate (%) ................. 276 809 559 462
Net Assets, End of Period (000) ............. $1,255 $2,760 $4,858 $5,385
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are
not computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
CLASS Y
----------------------------------------------
MARCH 31(A) YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------ ------------ ------------
Net Asset Value, Beginning of
Period ..................... $11.20 $10.44 $11.71
------ ------ ------
Income From Investment
Operations
Net Investment Income ........ 0.54 0.80 0.74
Net Realized and Unrealized
Gain (Loss) on Investments . (0.77) 1.26 (0.63)
------ ------ ------
Total From Investment
Operations ................. (0.23) 2.06 0.11
------ ------ ------
Less Distributions
Dividends From Net Investment
Income ..................... (0.53) (0.79) (0.75)
------ ------ ------
Total Distributions .......... (0.53) (0.79) (0.75)
------ ------ ------
Net Asset Value, End of Period $10.44 $11.71 $11.07
====== ====== ======
Total Return (%) (c) ......... (2.0) 20.3 1.1
Ratio of Operating Expenses to
Average Net Assets (%) ..... 0.93(b) 1.10 1.07
Ratio of Net Investment Income
to Average Net Assets (%) . 7.25(b) 6.94 6.70
Portfolio Turnover Rate (%) .. 809 559 462
Net Assets, End of Period
(000) ...................... $4,104 $7,364 $6,384
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1996
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers Class A, Class B and Class Y shares. The Fund commenced its
public offering of Class B shares on September 23, 1993, and of Class Y shares
on March 31, 1994. Class A shares are sold with a maximum front end sales charge
of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher
ongoing distribution fee than Class A shares for eight years (at which point
they automatically convert to Class A shares), and are subject to a contingent
deferred sales charge if those shares are redeemed within five years of
purchase. Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or distribution fees. They are intended for institutional
investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne
pro-rata by the holders of all classes of shares, except that each class bears
expenses unique to that class (including the Rule 12b-1 service and distribution
fees applicable to such class), and votes as a class only with respect to its
own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of
the net assets of the Fund, if the Fund were liquidated. In addition, the
Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors, L.P.
("Back Bay Advisors"), under the supervision of the Fund's trustees, determines
the value of the Fund's portfolio of securities, using valuations provided by a
pricing service selected by Back Bay Advisors and other information with respect
to transactions in securities, including quotations from securities dealers.
Valuations of securities and other assets owned by the Fund for which market
quotations are readily available are based on those quotations. Short-term
obligations that will mature in 60 days or less are stated at amortized cost,
which approximates market value. All other securities and assets are valued at
their fair value as determined in good faith by Back Bay Advisors under the
supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
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.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and put
options on securities to manage its exposure to interest rates and the bond
market. Buying futures, writing puts, and buying calls tend to increase the
Fund's exposure to the underlying instrument. Selling futures, buying puts, and
writing calls tend to decrease the Fund's exposure to the underlying instrument,
or hedge other Fund investments. When a Fund writes a call or put option, an
amount equal to the premium received by the Fund is included in the Fund's
statement of assets and liabilities as an asset and as an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. The current value of a written
option is the closing price on the principal exchange on which such option is
traded. If an option which the Fund has written expires on its stipulated
expiration date, or if the Fund enters into a closing purchase transaction, the
Fund realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is extinguished. If a call option which the Fund has written is
exercised, the Fund realizes a capital gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a put option which the Fund has written is exercised,
the amount of the premium originally received will reduce the cost of the
security which the Fund purchases upon exercise of the option.
The premium paid by the Fund for the purchase of a call or a put option is
included in the asset section of the Fund's statement of assets and liabilities
as an investment and subsequently adjusted to the current market value of the
option. The current value of a purchased option is the closing price on the
principal exchange on which such option is traded. If an option which the Fund
has purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount of the cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gain or loss, depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. If the Fund exercises a purchased put option, it will
realize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. If the Fund
exercises a purchased call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
The risk in writing a call option is that the Fund gives up the opportunity of
profit if the market price of the underlying security increases above the strike
price. The risk in writing a put option is that the Fund may incur a loss if the
market price of the security decreases and the option is exercised. The Fund
also has the additional risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist. The Fund also may write
over-the-counter options where the completion of the obligation is dependent
upon the credit standing of the other party.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may enter into interest rate
futures contracts to hedge against changes in the values of securities the Fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a debt security for a set price (or to
deliver an amount of cash) on a future date. Upon entering into such a contract,
the purchasing Fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange on which the contract is traded,
currently up to $3,000 per contract. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker involved in the transaction an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as "variation margin," and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and that changes in the value of the contract may not correlate
with changes in the value of the underlying securities.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatment for mortgaged backed securities for book and tax purposes.
Permanent book and tax basis differences will result in reclassification to the
capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Back Bay Advisors is responsible for determining that
the value of the collateral is at all times at least equal to the repurchase
price. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
H. DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a forward
commitment basis. Payment and delivery may take place a month or more after the
date of the transaction. The price of the underlying securities and the date
when the securities will be delivered and paid for are fixed at the time the
transaction is negotiated.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
year ended December 31, 1996 were as follows:
PURCHASES SALES
U.S. GOVERNMENT U.S. GOVERMNMENT
----------------- ------------------
$651,472,025 $668,096,190
Investments in written options and futures contracts for the Fund for the year
ended December 31, 1996 are summarized as follows:
WRITTEN OPTIONS
------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
Contracts opened ................................... 4,660 $ 1,811,213
Contracts closed ................................... (4,660) (1,811,213)
----- ------------
Open at December 31, 1996 .......................... 0 $ 0
===== ============
SALES OF FUTURES CONTRACTS
--------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Contracts opened ................................... 2,205 $244,120,543
Contracts closed ................................... (2,205) (244,120,543)
----- ------------
Open at December 31, 1996 .......................... 0 $ 0
===== ============
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, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors, at the rate of 0.325% of the first $200 million of the Fund's
average daily net assets, 0.3125% of the next $300 million and 0.30% of such
assets in excess of $500 million. Certain officers and directors of NEFM are
also officers or trustees of the Fund. NEFM and Back Bay Advisors are wholly
owned subsidiaries of New England Investment
Companies, L.P., ("NEIC") which is a subsidiary of Metropolitan Life Insurance
Company ("Met Life"). Fees earned by NEFM and Back Bay Advisors under the
management agreement in effect during the year ended December 31, 1996 are as
follows:
FEES EARNED
- -----------
$466,532 New England Funds Management, L.P.
$466,531 Back Bay Advisors, 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 $34,007 and are shown separately in
the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1996, the Fund paid
New England Funds $228,064 as compensation for its services in that capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A Shares (the
"Class A Plan") and a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1996, the Fund paid New England Funds $327,097 in fees under
the Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect. The
amount of unreimbursed expenses carried forward into 1997 is $1,583,658.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class B shares and/or the maintenance of shareholder accounts.
For the year ended December 31, 1996, the Fund paid New England Funds $13,329 in
service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who may
be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the year ended
December 31, 1996, the Fund paid New England Funds $39,985 in distribution fees
under the Class B Plan.
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 $186,262.
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 $2,207
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $75
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 three classes, Class A, Class B
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 ........................ 1,068,035 $11,814,179 667,001 $ 7,438,079
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 750,226 8,348,543 669,183 7,433,978
---------- ------------ ---------- ------------
1,818,261 20,162,722 1,336,184 14,872,057
Shares repurchased ................. (3,428,266) (37,859,136) (3,030,347) (33,864,530)
---------- ------------ ---------- ------------
Net decrease ....................... (1,610,005) ($17,696,414) (1,694,163) ($18,992,473)
---------- ------------ ---------- ------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- ---------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
Shares sold ........................ 177,242 $1,973,019 160,882 $1,801,812
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 14,498 162,005 20,633 229,288
---------- ------------ ---------- ------------
191,740 2,135,024 181,515 2,031,100
Shares repurchased ................. (42,705) (477,235) (109,378) (1,213,282)
---------- ------------ ---------- ------------
Net increase ....................... 149,035 $1,657,789 72,137 $ 817,818
---------- ------------ ---------- ------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- ---------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ---- -------------- ---------------- -------------- ----------------
Shares sold ........................ 319,873 $ 3,655,072 128,428 $ 1,446,253
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ......................... 30,819 344,793 45,009 498,786
---------- ------------ ---------- ------------
350,692 3,999,865 173,437 1,945,039
Shares repurchased ................. (114,950) (1,292,006) (225,328) (2,478,965)
---------- ------------ ---------- ------------
Net increase (decrease) ............ 235,742 $ 2,707,859 (51,891) ($ 533,926)
---------- ------------ ---------- ------------
Decrease derived from capital shares
transactions ..................... (1,225,228) ($13,330,766) (1,673,917) ($18,708,581)
========== ============ ========== ============
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of NEW ENGLAND GOVERNMENT SECURITIES
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 Government Securities
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, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- -------------------------------------------------------------------------------
STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
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.
<PAGE>
--------------
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NEW ENGLAND FUNDS U.S. POSTAGE
Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- --------------------- ---------------------
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TESTED SERVICE TESTED SERVICE
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- --------------------- ---------------------
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- --------------------- ---------------------
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