<PAGE>
- -------------------------------------------------------------------------------
SEMIANNUAL REPORT
- -------------------------------------------------------------------------------
(Logo)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- -------------------------------------------------------------------------------
New England
Government Securities 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>
- -------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
Investment Results Through June 30, 1997
- --------------------------------------------------------------------------------
Putting Performance in 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.
[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
6/30/87 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
- -------------------------------------------------------------------------------
JUNE 1987 THROUGH JUNE 1997
COMPARED TO THE LEHMAN GOVERNMENT BOND INDEX(4) AND THE COST OF LIVING(5)
Net With Lehman Gov't. Cost
Asset Maximum Bond of
Value(1) Sales Charge(2) Index(4) Living(5)
-------- --------------- ------------- ---------
6/30/87 $10,000 $ 9,550 $10,000 $10,000
6/88 $10,735 $10,252 $10,719 $10,396
6/89 $11,813 $11,281 $12,014 $10,933
6/90 $12,290 $11,737 $12,847 $11,444
6/91 $12,945 $12,363 $14,150 $11,982
6/92 $15,297 $14,609 $16,098 $12,352
6/93 $16,991 $16,226 $18,173 $12,722
6/94 $16,523 $15,780 $17,929 $13,039
6/95 $18,452 $17,621 $20,092 $13,435
6/96 $19,075 $18,217 $20,996 $13,804
6/97 $20,369 $19,452 $22,550 $14,104
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.
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/97
- -------------------------------------------------------------------------------
CLASS A (Inception 9/16/85) YTD 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 2.35% 6.78% 5.89% 7.37%
With Max. Sales Charge(2) -2.23 1.94 4.92 6.88
Lehman Gov't. Bond Index(4) 2.62 7.40 6.98 8.47
Lipper General Gov't. Average(6) 2.47 7.01 5.98 7.41
- -------------------------------------------------------------------------------
CLASS B (Inception 9/23/93) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.97% 5.79% 3.20%
With CDSC(3) -3.00 0.79 2.54
Lehman Gov't. Bond Index(4) 2.62 7.40 5.02
Lipper General Gov't. Average(6) 2.47 7.01 4.13
- -------------------------------------------------------------------------------
CLASS Y (Inception 3/31/94) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.39% 6.96% 6.31%
Lehman Gov't. Bond Index(4) 2.62 7.40 6.93
Lipper General Gov't. Average(6) 2.47 7.01 5.96
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
(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
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 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.
<PAGE>
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NEW ENGLAND GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- -------------------------------------------------------------------------------
[Photo of Joel Damiani]
Joel Damiani
Back Bay Advisors, L.P.
Joel Damiani became the Fund's portfolio manager in May 1997. He holds B.S. and
M.S. degrees from the University of Wisconsin and has ten years of investment
experience. Mr. Damiani is a member of the Boston Security Analysts Society and
the Association for Investment Management and Research.
Q. How did New England Government Securities Fund perform over the past
six months?
For the six months ended June 30, 1997, New England Government Securities Fund
generated a total return of 2.35% (Class A shares at net asset value). This
return reflects the reinvestment of $0.315 per share in dividend distributions
and the change in share price to $11.02 on June 30, from $11.08 six months ago.
Q. What was the environment like for government securities?
The environment was dominated by investor concerns about strong economic growth
and its effect on inflation. Echoing these concerns, the Federal Reserve Board
raised the benchmark federal funds rate -- the rate at which banks lend to each
other overnight -- by one-quarter percentage point in March 1997. Interest rates
ended the period relatively unchanged, although they experienced both a
substantial increase and a substantial decline in between.
Meanwhile, positive forces also influenced government securities prices over the
past six months. Despite concerns that it would rise, inflation remained at
historically low levels. The U.S. government deficit continued to decline, as
economic strength fostered higher tax receipts. As the deficit declined, the
government issued fewer bonds. This dwindling supply, combined with steady
demand from foreign investors, helped support the prices of government
securities.
Q. What strategies did you employ to take advantage of these conditions?
For most of the period, the Fund was invested in U.S. Treasury and GNMA
(Government National Mortgage Association) securities, which are among the most
credit-worthy securities around. We increased the Fund's holdings in
mortgage-backed securities to 50% on June 30, from 35% six months ago.
Mortgage-backed securities tend to hold their value better than U.S. Treasuries
during periods when interest rates rise and bond prices decline.
As of May 1, 1997, a change in the Fund's prospectus broadened its investment
parameters to invest in different types of government securities. We believe the
flexibility to invest in a variety of government issues will help the Fund
produce more attractive long-term returns. Toward the end of the period, we
emphasized investments issued by the Federal National Mortgage Association and
Federal Home Loan Mortgage Association. These securities were selected to
maximize income and, in our opinion, offered better value and potential for
appreciation than other investment alternatives.
We've also begun to focus on bonds with durations of between seven and eight
years. (Stated in years, duration measures a bond's sensitivity to changes in
interest rates -- essentially, the longer a bond's duration, the more sensitive
it is to interest rate changes.) Historically, bonds in this duration range have
provided investors with attractive risk-adjusted returns. At the end of the
period, the most recently issued 10-year U.S. Treasury note provided 96% of the
yield of the current 30-year U.S. bond, while incurring only 57% of its
sensitivity to interest rate changes.
Q. What is your outlook for the next six months?
We expect many of the trends that influenced the market over the past six months
to continue. We think that bond prices could fluctuate as investors monitor
short-term economic data. Also, with the unemployment rate near a 25-year low,
investors are watchful for signs of inflation. Continued strong employment data
could put upward pressure on interest rates.
We believe positive trends are also in place. Technological advances and greater
market efficiencies could allow the economy to grow at a moderate pace while
keeping price pressures low. Further, we anticipate that the declining federal
deficit and steady foreign demand will create a favorable supply/demand
relationship. These factors should benefit the government securities market over
the longer term.
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
BONDS AND NOTES--98.5% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--3.2%
<C> <S> <C>
$ 3,984,450 Prudential Home Mortgage Securities Co., 6.800%, 4/25/09 $ 3,841,249
-------------
GOVERNMENT AGENCIES--46.7%
5,000,000 Federal Home Loan Mortgage Corp., 7.500%, 1/1/12 ..... 5,075,000
10,000,000 Federal National Mortgage Association, 7.500%, 2/1/27 10,021,800
28,900,000 Government National Mortgage Association, 7.000%,
12/15/27 ............................................ 28,367,084
10,310,001 Government National Mortgage Association, 8.500%, with
various maturities to 2027 (c) ...................... 10,715,949
759,329 Government National Mortgage Association, 9.000%, with
various maturities to 2016 (c) ...................... 809,721
229,277 Government National Mortgage Association, 9.500%, with
various maturities to 2009 (c) ...................... 246,249
341,571 Government National Mortgage Association, 10.000%, with
various maturities to 2016 (c) ...................... 368,305
45,495 Government National Mortgage Association, 12.500%, with
various maturities to 2014 (c) ...................... 53,214
-------------
55,657,322
-------------
U.S. GOVERNMENT--48.6%
25,000,000 United States Treasury Bonds, 6.000%, 2/15/26 ........ 22,375,000
18,250,000 United States Treasury Bonds, 6.750%, 8/15/26 ........ 18,061,842
3,400,000 United States Treasury Notes, 5.625%, 2/15/06 ........ 3,193,348
2,000,000 United States Treasury Notes, 5.875%, 4/30/98 ........ 2,002,180
8,500,000 United States Treasury Notes, 6.625%, 6/30/01 ........ 8,579,645
7,000,000 United States Treasury Strip, Zero coupon, 2/15/07 .... 3,713,990
-------------
57,926,005
-------------
Total Bonds and Notes (Identified Cost $116,675,354) .. 117,424,576
-------------
SHORT TERM INVESTMENT--37.0%
- -------------------------------------------------------------------------------------------------
44,142,000 Household Finance Corp. 6.080%, 7/01/97 .............. 44,142,000
-------------
Total Short Term Investment (Identified Cost
$44,142,000) ......................................... 44,142,000
-------------
Total Investments--135.5% (Identified Cost
$160,817,354)(b) ..................................... 161,566,576
Other assets less liabilities ......................... (42,346,664)
-------------
Total Net Assets--100% ................................. $ 119,219,912
=============
(a) See Note 1a.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $160,817,354 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. $ 869,837
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value. (120,615)
-------------
Net unrealized appreciation. $ 749,222
=============
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 Government National Mortgage Association bonds
which have the same coupon rate, have been aggregated for the purposes of
presentation in the schedule of investments.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ................................. $161,566,576
Cash ................................................. 7,502
Receivable for:
Fund shares sold ................................... 282,853
Accrued interest .................................. 1,225,990
Prepaid registration expense ......................... 7,000
------------
163,089,921
LIABILITIES
Payable for:
Securities purchased ............................... $ 43,485,844
Fund shares redeemed ............................... 138,729
Dividends declared ................................. 77,484
Accrued expenses:
Management fees .................................... 64,732
Deferred trustees' fees ............................ 48,014
Accounting and administrative ...................... 2,765
Other expenses ..................................... 52,441
-------------
43,870,009
------------
NET ASSETS ............................................... $119,219,912
============
Net Assets consist of:
Capital paid in .................................... $131,828,921
Undistributed net investment income ................ 65,457
Accumulated net realized losses .................... (13,423,688)
Unrealized appreciation on investments ............. 749,222
------------
NET ASSETS ............................................... $119,219,912
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($107,721,315 divided by 9,778,257 shares of
beneficial interest) ................................. $11.02
======
Offering price per share ( 100/95.50 of $11.02) ........ $11.54*
======
Net asset value and offering price of Class B shares
($5,164,599 divided by 468,811 shares of beneficial
interest) ............................................ $11.02**
======
Net asset value and offering price of Class Y shares
($6,333,998 divided by 575,835 shares of beneficial
interest) ............................................ $11.00
======
Identified cost of investments ........................... $160,817,354
============
*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
Interest ................................................. $4,470,135
Expenses
Management fees ........................................ $ 402,601
Service fees - Class A ................................. 140,658
Service and distribution fees - Class B ................ 25,985
Trustees' fees and expenses ............................ 10,845
Accounting and administrative .......................... 16,637
Custodian .............................................. 40,809
Transfer agent ......................................... 151,335
Audit and tax services ................................. 20,000
Legal .................................................. 9,956
Printing ............................................... 20,637
Registration ........................................... 17,055
Miscellaneous .......................................... 4,647
----------
Total expenses ............................................. 861,165
----------
Net investment income ...................................... 3,608,970
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized loss on:
Investments - net ........................................ (2,026,594)
Options - net ............................................ (27,459)
Futures contracts - net .................................. (10,149)
----------
Total realized loss on investments, options and futures
contracts .............................................. (2,064,202)
----------
Unrealized appreciation on:
Investments - net ........................................ 1,118,322
----------
Net loss on investment transactions ...................... (945,880)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................... $2,663,090
==========
</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 .................................. $ 9,237,304 $ 3,608,970
Net realized loss on investment transactions ........... (4,157,037) (2,064,202)
Unrealized appreciation (depreciation) on investments .. (4,432,622) 1,118,322
------------ ------------
Increase in net assets from operations ................. 647,645 2,663,090
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .............................................. (8,484,171) (3,192,165)
Class B .............................................. (305,730) (128,123)
Class Y .............................................. (497,152) (182,694)
------------ ------------
(9,287,053) (3,502,982)
------------ ------------
Decrease in net assets derived from capital share
transactions ......................................... (18,708,581) (12,316,803)
------------ ------------
Total decrease in net assets ........................... (27,347,989) (13,156,695)
NET ASSETS
Beginning of the period ................................ 159,724,596 132,376,607
------------ ------------
End of the period ...................................... $132,376,607 $119,219,912
============ ============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the period ................................ $ 110,228 $ (40,531)
============ ============
End of the period ...................................... $ (40,531) $ 65,457
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ... $11.92 $11.73 $11.75 $10.43 $11.73 $11.08
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ... 0.70 0.72 0.69 0.74 0.71 0.32
Net Realized and
Unrealized Gain (Loss)
on Investments ........ 0.07 0.32 (1.32) 1.29 (0.64) (0.06)
------ ------ ------ ------ ------ ------
Total From Investment
Operations ............ 0.77 1.04 (0.63) 2.03 0.07 0.26
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income (0.68) (0.72) (0.69) (0.73) (0.72) (0.32)
Distributions From Net
Realized Capital
Gains ................. (0.28) (0.30) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ..... (0.96) (1.02) (0.69) (0.73) (0.72) (0.32)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period ................ $11.73 $11.75 $10.43 $11.73 $11.08 $11.02
====== ====== ====== ====== ====== ======
Total Return (%) (a) .... 6.8 9.0 (5.5) 20.0 0.8 2.4
Ratio of Operating
Expenses to
Average Net Assets (%) 1.23 1.22 1.29 1.35 1.32 1.37(b)
Ratio of Net Investment
Income to Average Net
Assets (%) ............ 5.92 5.70 6.66 6.69 6.45 5.84(b)
Portfolio Turnover Rate(%) 730 276 809 559 462 508(b)
Net Assets, End of Period
(000) ................. $178,030 $182,436 $147,986 $147,503 $120,607 $107,721
(a) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
(b) Computed on an annualized basis.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------
SEPTEMBER 23(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ------------------------------------- JUNE 30,
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ....................... $12.26 $11.75 $10.43 $11.74 $11.08
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income .......... 0.16 0.60 0.65 0.63 0.28
Net Realized and Unrealized Gain
(Loss) on Investments ........ (0.30) (1.32) 1.30 (0.65) (0.07)
------ ------ ------ ------ ------
Total From Investment Operations (0.14) (0.72) 1.95 (0.02) 0.21
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income ....................... (0.16) (0.60) (0.64) (0.64) (0.27)
Distributions From Net Realized
Capital Gains ................ (0.21) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ............ (0.37) (0.60) (0.64) (0.64) (0.27)
------ ------ ------ ------ ------
Net Asset Value, End of Period . $11.75 $10.43 $11.74 $11.08 $11.02
====== ====== ====== ====== ======
Total Return (%) (c) ........... (1.2) (6.2) 19.2 (0.1) 2.0
Ratio of Operating Expenses to
Average Net Assets (%) ....... 1.97(b) 2.04 2.10 2.07 2.12(b)
Ratio of Net Investment Income
to Average Net Assets (%) .... 5.03(b) 5.91 5.94 5.70 5.09(b)
Portfolio Turnover Rate (%) .... 276 809 559 462 508(b)
Net Assets, End of Period (000) $1,255 $2,760 $4,858 $5,385 $5,165
<CAPTION>
CLASS Y
----------------------------------------------------------
MARCH 31(a) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1994 1995 1996 JUNE 30, 1997
------ ------ ------ -------------
Net Asset Value, Beginning of
Period .................... $11.20 $10.44 $11.71 $11.07
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ....... 0.54 0.80 0.74 0.34
Net Realized and Unrealized
Gain (Loss)
on Investments ............ (0.77) 1.26 (0.63) (0.08)
------ ------ ------ ------
Total From Investment
Operations ................ (0.23) 2.06 0.11 0.26
------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income .................... (0.53) (0.79) (0.75) (0.33)
------ ------ ------ ------
Total Distributions ......... (0.53) (0.79) (0.75) (0.33)
------ ------ ------ ------
Net Asset Value, End of
Period .................... $10.44 $11.71 $11.07 $11.00
====== ====== ====== ======
Total Return (%) (c) ........ (2.0) 20.3 1.1 2.4
Ratio of Operating Expenses
to Average Net Assets (%) . 0.93(b) 1.10 1.07 1.12(b)
Ratio of Net Investment
Income to Average
Net Assets (%) ............ 7.25(b) 6.94 6.70 6.09(b)
Portfolio Turnover Rate (%) . 809 559 462 5.08(b)
Net Assets, End of Period (000) $4,104 $7,364 $6,384 $6,334
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year
are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers Class A, Class B 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 six years of purchase
(or five years if purchased before May 1, 1997). 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
six months ended June 30, 1997 were as follows:
PURCHASES SALES
---------------------------------- ---------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ----------- --------------- -----------
$218,405,838 $92,835,323 $244,397,218 $79,983,955
Investments in written options and futures contracts for the Fund for the six
months ended June 30, 1997 are summarized as follows:
WRITTEN OPTIONS
----------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Contracts opened ........... 750 $ 247,231
Contracts closed ........... (750) (247,231)
--- -----------
Open at June 30, 1997 ...... 0 $ 0
=== ===========
SALES OF FUTURES CONTRACTS
----------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Contracts opened ........... 300 $32,485,550
Contracts closed ........... (300) (32,485,550)
--- -----------
Open at June 30, 1997 ...... 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
six months ended June 30, 1997 are as follows:
FEES EARNED
- -----------
$ 201,300 New England Funds Management, L.P.
$ 201,301 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 six months
ended June 30, 1997 these expenses amounted to $16,637 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 $109,202 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 six
months ended June 30, 1997, the Fund paid New England Funds $140,658 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 six months ended June 30, 1997, the Fund paid New England Funds $6,496
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 six months
ended June 30, 1997, the Fund paid New England Funds $19,489 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 six months ended
June 30, 1997 amounted to $75,487.
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 $2,117
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. 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 Y 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 ........................ 667,001 $7,438,079 252,595 $2,764,420
Shares issued in connection with
the reinvestment of:
Dividends from net investment
income .......................... 669,183 7,433,978 260,267 2,850,219
---------- ------------ ---------- ------------
1,336,184 14,872,057 512,862 5,614,639
Shares repurchased ................. (3,030,347) (33,864,530) (1,615,460) (17,729,117)
---------- ------------ ---------- ------------
Net decrease ....................... (1,694,163) ($18,992,473) (1,102,598) ($12,114,478)
---------- ------------ ---------- ------------
<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 ........................ 160,882 $1,801,812 48,303 $525,820
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income ........................... 20,633 229,288 8,420 92,219
------ -------- ------- ---------
181,515 2,031,100 56,723 618,039
Shares repurchased ................. (109,378) (1,213,282) (73,729) (807,095)
------ -------- ------- ---------
Net increase (decrease) ............ 72,137 $817,818 (17,006) ($189,056)
------ -------- ------- ---------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- ----------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 128,428 $1,446,253 20,130 $220,029
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income .......................... 45,009 498,786 17,058 186,521
---------- ------------ ---------- ------------
173,437 1,945,039 37,188 406,550
Shares repurchased ................. (225,328) (2,478,965) (38,264) (419,819)
---------- ------------ ---------- ------------
Net decrease ....................... (51,891) ($533,926) (1,076) ($13,269)
---------- ------------ ---------- ------------
Decrease derived from capital shares
transactions ..................... (1,673,917) ($18,708,581) (1,120,680) ($12,316,803)
========== ============ ========== ============
</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 GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
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) BULK RATE
NEW ENGLAND FUNDS U.S. POSTAGE
Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- --------------------- ---------------------
[Logo] [Logo]
QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
- --------------------- ---------------------
DALBAR DALBAR
HONORS COMMITMENT TO: HONORS COMMITMENT TO:
INVESTORS INVESTORS
- --------------------- ---------------------
GV58-0697
[recycle symbol] Printed On Recycled Paper
