<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
(Logo)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
New England
Strategic Income 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>
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NEW ENGLAND STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
- ---------------------
[Logo]
QUALITY
TESTED SERVICE
1996
- ---------------------
DALBAR
HONORS COMMITMENT TO:
INVESTORS
- ---------------------
For two years running we're proud to announce that DALBAR, an independent
evaluator of mutual fund service, has awarded New England Funds its Quality
Tested Service Seal for "providing the highest tier of service excellence in the
mutual fund industry." New England Funds is one of just three mutual fund
companies to earn this distinction in each of the last two years -- another
reason why we are becoming known as the mutual fund company Where The Best Minds
Meet(TM).
INVESTMENT RESULTS THROUGH DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Strategic Income Fund's Class A, B and C
shares since inception on 5/1/95 compare to the Lehman Aggregate Bond Index(4).
The data points are as follows:]
A $10,000 INVESTMENT COMPARED TO LEHMAN AGGREGATE BOND INDEX(4)
MAY 1995 THROUGH DECEMBER 1996
[] NET ASSET VALUE(1) [] WITH MAXIMUM SALES CHARGE(2) [] LEHMAN(4) []CDSC(3)
CLASS A INCEPTION 5/1/95
NAV MSC LEHMAN*
--- --- ------
12/31/96 $12,631 $12,060 $11,526
09/30/96 $11,905 $11,370 $11,190
06/30/96 $11,318 $10,809 $10,988
03/31/96 $11,071 $10,573 $10,926
12/31/95 $11,027 $10,531 $11,124
09/30/95 $10,409 $ 9,940 $10,669
06/30/95 $10,015 $ 9,564 $10,463
05/01/95 $10,000 $ 9,550 $10,000
CLASS B INCEPTION 5/1/95
NAV MSC LEHMAN*
--- --- ------
12/31/96 $12,475 $12,175 $11,526
09/30/96 $11,774 $11,354 $11,190
06/30/96 $11,214 $10,814 $10,988
03/31/96 $10,997 $10,997 $10,926
12/31/95 $10,973 $10,973 $11,124
09/30/95 $10,376 $10,376 $10,669
06/30/95 $10,003 $10,003 $10,463
05/01/95 $10,000 $10,000 $10,000
CLASS C INCEPTION 5/1/95
NAV LEHMAN*
--- ------
12/31/96 $12,457 $11,526
09/30/96 $11,766 $11,190
06/30/96 $11,206 $10,988
03/31/96 $10,989 $10,926
12/31/95 $10,965 $11,124
09/30/95 $10,369 $10,669
06/30/95 $ 9,996 $10,463
05/01/95 $10,000 $10,000
These illustrations represent past performance and cannot predict future
results. Investment return and principal value may vary, resulting in a gain or
loss when shares are sold. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 12/31/96
- --------------------------------------------------------------------------------
CLASS A (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 14.52% 15.00%
With Max. Sales Charge(2) 9.38 11.86
Lipper Multi-Sector Income Average(5) 11.74 12.75
- --------------------------------------------------------------------------------
CLASS B (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 13.68% 14.15%
With CDSC(3) 9.68 12.50
Lehman Aggregate(4) 3.61 8.89
Lipper Multi-Sector Income Average(5) 11.74 12.75
- --------------------------------------------------------------------------------
CLASS C (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 13.59% 14.05%
Lehman Aggregate(4) 3.61 8.89
Lipper Multi-Sector Income Average(5) 11.74 12.75
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS 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 (MSC) performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
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 Aggregate Bond Index is a market-weighted, aggregate index which
includes nearly all debt issued by the U.S. Treasury, U.S. Government
agencies and U.S. corporations rated investment-grade, and U.S. agency debt
backed by mortgage pools.
(5) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Q. How did New England Strategic Income Fund perform over the fiscal year?
[Photo of Dan Fuss and Kathleen Gaffney
Loomis, Sayles & Company, L.P.]
Very well. The Fund posted strong performance, generating a total return of
14.52% (Class A shares at net asset value) for the year ended December 31,
1996. This reflects an increase in share price to $13.36 on December 31,
1996, from $12.99 a year ago and includes reinvested income distributions
totaling $1.05 per share. The Fund's performance compares favorably with
its benchmark, the Lehman Aggregate Bond Index, which produced a 3.61%
total return. Further, Lipper Analytical Services ranked New England
Strategic Income Fund #3 out of 51 funds in its competitive Multi-Sector
Income Fund group for the year. On December 31, the Fund's 30-day SEC yield
was 7.61% for Class A shares, compared to 8.32% a year ago.
Q. What is your approach to managing the Fund?
We take full advantage of the Fund's flexible investment charter to shape a
portfolio that strikes an attractive balance between high current income
and price appreciation. The Fund's broad investment latitude allows us to
invest in U.S. and foreign fixed-income securities of varying credit
quality and maturity to maximize opportunities in the global fixed-income
markets.
To assess a security's potential for income and capital appreciation, we
employ a bottom-up approach. Each holding must satisfy a rigorous
evaluation process that focuses on the characteristics of individual bonds
-- including its value relative to other similarly rated bonds -- rather
than macroeconomic factors. Once we select an issue, we monitor it
throughout its life in the portfolio.
While bond prices and interest rates typically move in opposite directions,
our emphasis on total return helped protect the Fund's value as interest
rates rose early in 1996. Many holdings tended to be influenced more by
specific developments related to individual issuers than to changes in the
overall economy and interest rates.
Q. How does the Fund's flexible investment approach benefit shareholders?
Shareholders have access to what we believe are the most attractive
opportunities worldwide through a mix of investments that encompasses the
major sectors of global fixed-income markets: U.S. government securities,
U.S. high-yield corporate bonds and foreign securities. The low correlation
among the different classes can improve the Fund's long-term performance as
we shift to markets that offer more value and higher total returns. When
one market appears to be overvalued, another sector can provide
opportunity.
Q. What accounts for your strong performance over the past year?
In the first half, the key was a strategic focus on high yield bonds. This
emphasis helped the Fund produce share price gains, even as U.S. interest
rates were rising earlier in the period. Throughout the year, the global
market was awash with cash as investors aggressively sought higher returns.
This situation created a lot of demand for high-yield bonds, namely
emerging market debt and lower-quality U.S. corporate bonds. Emerging
market bonds performed better than all other fixed-income sectors in 1996
while lower-quality U.S. corporate bonds were the top-performers in the
U.S. fixed-income market. We favored high yielding U.S. corporate bonds as
well as Brady bonds from select emerging markets, such as Mexico, Argentina
and Brazil. Brady bonds, named for former U.S. Treasury Secretary Nicholas
Brady, are restructured debt of foreign governments that are often backed
by U.S. Treasury securities. Brady bonds offered high yields relative to
comparable investments. Further, strong fiscal policies in many developing
countries created a positive economic outlook and improved the countries'
credit conditions, opening the opportunity for price gains.
As the year progressed, strong demand for high-yield issues drove yields in
this sector lower relative to other fixed-income sectors. Putting our
fundamental research to work, we took advantage of value in different
sectors. Specifically, we reduced the Fund's holdings in Latin American
Brady bonds, investing the proceeds in "busted converts" of several high
technology companies, including National Semiconductor and Applied
Magnetics. Busted converts are bonds that are unlikely to be converted into
equity because the underlying stock prices have fallen. These bonds offered
attractive yields and were selling at well below face value.
Q. What is your outlook for the fixed-income market over the next six months?
We think the current spreads between yields of corporate bonds across the
quality spectrum and those of Treasury securities could widen to more
normal historical relationships. Logic suggests that at some point
investors will require corporate bonds to generate greater incremental
yield than they are currently offering to compensate for the additional
credit risk. But given the abundant investable cash available in the global
marketplace and generally favorable economic conditions, current yield
relationships could persist.
In any event, we believe opportunities will continue to develop in bond
markets around the world. The Fund's investment flexibility combined with
its intensive bond selection process can provide an avenue to capitalize on
those opportunities.
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CREDIT QUALITY COMPOSITION -- DECEMBER 31, 1996
- --------------------------------------------------------------------------------
AAA 12.29%
AA 9.59%
A 12.65%
BAA 26.00%
BA 17.48%
B 18.03%
CAA 3.96%
AVERAGE PORTFOLIO QUALITY = Ba1
Based on ratings by Moody's Investors Service.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION -- DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PERCENTAGE OF ASSETS
- --------------------------------------------------------------------------------
U.S. Corporate/High Yield 47.8%
- --------------------------------------------------------------------------------
Foreign/Canada/Yankee* 40.2%
- --------------------------------------------------------------------------------
Common Stocks/Preferred Stocks 8.9%
- --------------------------------------------------------------------------------
Governments/Cash Equivalents 3.1%
Average Portfolio Maturity = 18 Years
Portfolio composition is subject to change.
* Yankees are dollar-denominated foreign bonds.
<PAGE>
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PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of December 31, 1996
<TABLE>
<CAPTION>
BONDS AND NOTES--88.0% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- ---------------------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE BONDS--14.2%
AEROSPACE--0.3%
$ 665,000 Rohr Industries, Inc., 7.000%, 10/01/12 .................. $ 613,462
------------
AUTO PARTS--0.2%
650,000 Exide Corp., 144A, 2.900%, 12/15/05, (i) ................. 385,125
------------
BROADCASTING--0.1%
250,000 Comcast Corp., 1.125%, 4/15/07 ........................... 127,500
75,000 Fuqua Industries, 6.500%, 8/04/02 ........................ 59,250
------------
186,750
------------
COMPUTER SOFTWARE & SERVICES--1.0%
461,000 BBN Corp., 6.000%, 4/01/12 ............................... 449,475
500,000 Macneal Schwendler Corp., 7.875%, 8/18/04 ................ 452,500
1,635,000 Softkey International, Inc., 144A, 5.500%, 11/01/00, (i) . 1,350,919
------------
2,252,894
------------
COMPUTERS--1.6%
4,800,000 AST Research, Inc., Zero Coupon, 12/14/13 ................ 1,536,000
250,000 Computervision Corp., 8.000%, 12/01/09 ................... 210,000
677,000 Cray Research, Inc., 6.125%, 2/01/11 ..................... 535,676
407,000 LTX Corp., 7.000%, 4/15/11 ............................... 276,760
883,000 Maxtor Corp., 5.750%, 3/01/12 ............................ 600,440
250,000 Telxon Corp., 5.750%, 1/01/03 ............................ 206,250
------------
3,365,126
------------
ELECTRONICS--1.0%
200,000 Cyrix Corp., 144A, 5.500%, 6/01/01, (i) .................. 144,000
300,000 Edo Corp., 7.000%, 12/15/11 .............................. 240,000
500,000 Integrated Device Technology, 5.500%, 6/01/02 ............ 432,500
750,000 Park Electrochemical Corp., 5.500%, 3/01/06 .............. 665,625
1,000,000 Zenith Electric, 6.250%, 4/01/11 ......................... 740,000
------------
2,222,125
------------
ENTERTAINMENT--0.8%
4,680,000 Time Warner, Inc., Zero Coupon, 12/17/12 ................. 1,760,850
------------
ENVIRONMENTAL--0.3%
760,000 Air & Water Technologies Corp., 8.000%, 5/15/15 .......... 661,200
------------
FOREIGN ISSUES--4.6%
1,250,000 Advanced Agro Public Co., 3.500%, 6/17/01 ................ 1,289,062
1,275,000 Banpu Public, 2.750%, 4/10/03 ............................ 1,275,000
1,000,000 Burns Philp Treasury, 5.500%, 4/30/04 .................... 880,000
1,925,000 Empresas ICA Sociedad, 5.000%, 3/15/04 ................... 1,337,875
3,250,000 Finance One, 2.000%, 8/31/01 ............................. 2,949,375
250,000 Inti Indorayon Uta, 7.000%, 5/02/06, (d) ................. 189,375
1,000,000 Loxley, 2.500%, 4/04/01 .................................. 990,000
500,000 Rogers Communications, Inc., 2.000%, 11/26/05 ............ 280,000
750,000 Samsung Co., 0.250%, 6/26/06 ............................. 747,188
------------
9,937,875
------------
HEALTH CARE--0.1%
250,000 Healthsource, Inc., 144A, 5.000%, 3/01/03, (i) ........... 197,500
------------
HOME BUILDERS--0.2%
500,000 Schuler Homes, Inc., 6.500%, 1/15/03 ..................... 381,250
------------
MISCELLANEOUS--0.2%
500,000 Veterinary Centers America, Inc., 5.250%, 5/01/06 ........ 342,500
------------
OIL--0.2%
500,000 Oryx Energy Co., 7.500%, 5/15/14 ......................... 485,000
------------
OIL & GAS--0.0%
125,000 NorAm Energy Corp., 6.000%, 3/15/12 ...................... 107,813
------------
PHARMACEUTICAL--0.1%
325,000 Glycomed, Inc., 7.500%, 1/01/03 .......................... 282,750
------------
REAL ESTATE--0.1%
250,000 Federal Realty Investor Trust, 5.250%, 10/28/03 .......... 228,750
125,000 Rockefeller Properties, Zero Coupon, 12/31/00 ............ 74,687
------------
303,437
------------
RESTAURANTS--0.6%
625,000 Flagstar Corp., 10.000%, 11/01/14 ........................ 137,500
2,250,000 Shoneys, Inc., Zero Coupon, 4/11/04 ...................... 967,500
100,000 TPI Enterprises, Inc., 8.250%, 7/15/02 ................... 89,000
------------
1,194,000
------------
RETAIL--0.3%
500,000 Bell Sports Corp., 4.250%, 11/15/00 ...................... 391,250
275,000 CML Group, Inc., 5.500%, 1/15/03 ......................... 198,000
------------
589,250
------------
RETAIL - SPECIALTY--0.9%
850,000 General Host Corp., 8.000%, 2/15/02 ...................... 620,500
1,725,000 Sunglass Hut International, Inc., 144A, 5.250%, 6/15/03, (i) 1,224,750
------------
1,845,250
------------
TECHNOLOGY--0.6%
2,000,000 Molten Metal Technology, Inc., 144A, 5.500%, 5/01/06, (d)(i) 1,350,000
------------
TEXTILE--0.4%
325,000 Dixie Yarns, Inc., 7.000%, 5/15/12 ....................... 266,500
650,000 Fieldcrest Cannon, Inc., 6.000%, 3/15/12 ................. 492,375
------------
758,875
------------
TRUCKING & FREIGHT FORWARDING--0.6%
1,000,000 Builders Transport, Inc., 8.000%, 8/15/05 ................ 600,000
200,000 Builders Transport, Inc., 6.500%, 5/01/11 ................ 103,000
500,000 Preston Corp., 7.000%, 5/01/11 ........................... 350,000
424,000 Worldway Corp., 6.250%, 4/15/11 .......................... 254,400
------------
1,307,400
------------
Total Convertible Bonds (Identified Cost $30,499,580) .... 30,530,432
------------
NON-CONVERTIBLE BONDS--73.8%
AEROSPACE--0.2%
500,000 Rohr Industries, Inc., 9.250%, 3/01/17 ................... 457,500
------------
AIRLINES--0.0%
65,000 United Air Lines, 7.870%, 1/30/18 ........................ 63,907
------------
APPAREL & TEXTILES--0.1%
250,000 Phillips Van Heusen Corp., 7.750%, 11/15/23 .............. 207,435
------------
BROADCASTING--0.1%
250,000 CBS, Inc., 7.125%, 11/01/23 .............................. 211,718
------------
CANADIAN--15.3%
8,000,000 Government of Canada, Zero Coupon, 6/01/21, (e) .......... 1,004,947
9,810,000 Government of Canada, 8.000%, 6/01/23, (e) ............... 7,956,085
2,885,000 Ontario Hydro, 8.900%, 8/18/22, (e) ...................... 2,479,772
750,000 Ontario Province, Zero Coupon, 7/13/22, (e) .............. 79,788
5,000,000 Province of British Columbia, Zero Coupon, 8/23/13, (e) .. 1,060,197
18,505,000 Province of British Columbia, Zero Coupon, 9/05/20, (e) .. 2,311,606
6,200,000 Province of British Columbia, Zero Coupon, 6/09/22, (e) .. 668,180
2,900,000 Province of British Columbia, 8.000%, 9/08/23, (e) ....... 2,278,992
35,000,000 Province of British Columbia, Zero Coupon, 8/23/24, (e) .. 3,286,757
10,649,000 Province of Manitoba, 7.750%, 12/22/25, (e) .............. 8,241,176
17,135,000 Province of Manitoba, Zero Coupon, 3/05/31, (e) .......... 965,211
3,205,000 Saskatchewan Province, 8.750%, 5/30/25, (e) .............. 2,725,592
------------
33,058,303
------------
COMPUTERS--4.2%
4,250,000 Apple Computer, Inc., 6.500%, 2/15/04 .................... 3,697,500
4,000,000 Digital Equipment Corp., 7.750%, 4/01/23 ................. 3,430,600
78,537 Streamlogic Corp., 14.000%, 10/07/98 ..................... 78,537
2,000,000 Unisys Corp., 9.750%, 9/15/16 ............................ 1,860,000
------------
9,066,637
------------
ELECTRIC UTILITIES--1.4%
750,000 Beaver Valley II Funding Corp., 8.625%, 6/01/07 .......... 729,090
1,000,000 Niagara Mohawk Power Corp., 5.875%, 9/01/02 .............. 884,790
250,000 Niagara Mohawk Power Corp., 6.625%, 7/01/05 .............. 218,065
1,500,000 Niagara Mohawk Power Corp., 7.875%, 4/01/24 .............. 1,309,845
------------
3,141,790
------------
ELECTRONICS--0.6%
775,000 Pioneer Standard Electronics, Inc., 8.500%, 8/01/06 ...... 784,688
500,000 Westinghouse Electric Corp., 7.875%, 9/01/23 ............. 457,725
------------
1,242,413
------------
ENTERTAINMENT--2.4%
4,850,000 Time Warner, Inc., 8.050%, 1/15/16 ....................... 4,834,334
250,000 Time Warner, Inc., 9.150%, 2/01/23 ....................... 270,998
------------
5,105,332
------------
ENVIRONMENTAL CONTROL--1.5%
1,750,000 Envirotest Systems Corp., 9.125%, 3/15/01 ................ 1,610,000
2,000,000 Envirotest Systems Corp., 9.625%, 4/01/03 ................ 1,620,000
------------
3,230,000
------------
FINANCE & BANKING--3.4%
1,000,000 First Union Institutional Capital, 144A, 7.850%, 1/01/27, (i) 991,250
2,500,000 First Union Institutional Trust, 144A, 8.040%, 12/01/26, (i) 2,493,125
3,850,000 Keycorp Institutional Capital, 144A, 7.826%, 12/01/26, (i) 3,776,850
------------
7,261,225
------------
FOOD & BEVERAGES--5.5%
2,000,000 Borden, Inc., 7.875%, 2/15/23 ............................ 1,776,060
2,400,000 RJR Nabisco, Inc., 7.625%, 9/15/03 ....................... 2,300,832
3,000,000 RJR Nabisco, Inc., 8.750%, 8/15/05 ....................... 3,013,500
4,665,000 RJR Nabisco, Inc., 9.250%, 8/15/13 ....................... 4,766,510
------------
11,856,902
------------
FOREIGN ISSUES--12.1%
2,600,000 Banco Central Costa, 6.250%, 5/21/10 ..................... 2,099,500
2,000,000 Colombia Republic, 7.250%, 2/23/04 ....................... 1,955,000
7,325,000 Federal Republic of Brazil, 5.000%, 4/15/24, (d) ......... 4,610,208
5,000,000 Groupo Televisa S.A. de CV, Zero Coupon, 5/15/08, (c) .... 3,312,500
2,250,000 Petroleos Mexicanos, 144A, 8.625%, 12/01/23, (i) ......... 1,822,500
980,000 Republic of Argentina, 6.625%, 3/31/05, (d) .............. 851,992
9,900,000 Republic of Argentina, 5.250%, 3/31/23, (c) .............. 6,243,237
3,250,000 Republic of Ecuador, 3.250%, 2/28/25, (c) ................ 1,501,110
3,050,000 Republic of Poland, 4.000%, 10/27/14, (c) ................ 2,577,250
1,150,000 Transportacion Maritima Mexica, 10.000%, 11/15/06 ........ 1,154,313
------------
26,127,610
------------
FOREIGN DENOMINATED--8.2%
13,590,000 New Zealand, 8.000%, 11/15/06, (f) ....................... 10,107,551
17,750,000 Republic of South Africa, 12.000%, 2/28/05, (g) .......... 3,102,856
7,500,000 Republic of South Africa, 12.500%, 12/21/06, (g) ......... 1,311,407
4,375,000 Rogers Cablesystems, Ltd., 9.650%, 1/15/14, (e) .......... 3,120,440
------------
17,642,254
------------
FOREST PRODUCTS--0.1%
250,000 Georgia Pacific Corp., 7.375%, 12/01/25 .................. 235,853
------------
GOVERNMENT TREASURIES--2.8%
5,000,000 United States Treasury Bond Strip, 8/15/20 ............... 995,750
5,350,000 United States Treasury Bonds, 6.250%, 8/15/23 ............ 5,015,625
------------
6,011,375
------------
HOME BUILDERS--0.6%
1,500,000 Hovnanian K Enterprises, Inc., 9.750%, 6/01/05 ........... 1,350,000
------------
METAL--0.1%
289,000 Midland Ross Corp., 6.000%, 2/15/07 ...................... 177,735
------------
RESTAURANTS--1.0%
5,450,000 Flagstar Corp., 11.250%, 11/01/04 ........................ 2,125,500
------------
RETAIL - DEPARTMENT STORE--5.1%
1,250,000 Bradlees, Inc., 9.250%, 3/01/03, (h) ..................... 118,750
350,000 Dillon Read Structured Finance Corp., 8.375%, 8/15/15 .... 293,720
250,000 Dillon Read Structured Finance Corp., 8.550%, 8/15/19 .... 207,500
906,328 Dillon Read Structured Finance Corp., 6.660%, 8/15/10 .... 743,189
3,500,000 K mart Corp., 7.950%, 2/01/23 ............................ 2,861,250
2,709,782 K mart Corp. Pass Through Trust, 8.540%, 1/02/15 ......... 2,303,315
1,250,000 K mart Corp. Pass Through Trust, 9.350%, 1/02/20 ......... 1,075,000
500,000 K mart Corp. Pass Through Trust, 9.780%, 1/05/20 ......... 442,500
250,000 K mart Funding Corp., 9.440%, 7/01/18 .................... 220,000
1,215,000 K mart Funding Corp., Series F, 8.800%, 7/01/10 .......... 1,075,275
800,000 Service Merchandise, 9.000%, 12/15/04 .................... 674,000
1,000,000 Woolworth Corp., 8.500%, 1/15/22 ......................... 1,054,450
------------
11,068,949
------------
RETAIL - GROCERY--1.4%
5,500,000 Penn Traffic Co., 9.625%, 4/15/05 ........................ 3,080,000
------------
STEEL--1.5%
1,000,000 Geneva Steel Co., 11.125%, 3/15/01 ....................... 920,000
2,750,000 Geneva Steel Co., 9.500%, 1/15/04 ........................ 2,248,125
------------
3,168,125
------------
TELECOMMUNICATION--6.1%
1,000,000 Arch Communications Group, Inc., Zero Coupon, 3/15/08, (c)
........................................................ 570,000
500,000 Century Communications Corp., Zero Coupon, 3/15/03 ....... 282,500
2,350,000 Nextel Communications, Inc., Zero Coupon, 8/15/04, (c) ... 1,603,875
250,000 Sprint Spectrum L.P., Zero Coupon, 8/15/06, (c) .......... 170,625
11,900,000 TCI Communications, Inc., 7.875%, 2/15/26 ................ 10,644,074
------------
13,271,074
------------
TEXTILE--0.1%
250,000 Fruit of the Loom, Inc., 7.375%, 11/15/23 ................ 231,080
------------
Total Non-Convertible Bonds (Identified Cost $152,229,401) 159,392,717
------------
COMMON STOCK--6.7%
SHARES
- -------------------------------------------------------------------------------------------
COMPUTERS--0.0%
150,150 Streamlogic Corp. ....................................... 103,228
693 Streamlogic Corp., Warrants ............................. 153
------------
103,381
------------
ELECTRIC UTILITIES--2.9%
300,000 Pacific Gas & Electric Co. .............................. 6,300,000
------------
FOREIGN ISSUES--0.1%
22,000 Transportacion Maritima Mexica ADR (j) ................... 115,500
------------
REAL ESTATE--3.7%
75,800 Developers Diversified Realty ........................... 2,814,075
45,400 Meditrust ............................................... 1,816,000
108,200 Simon de Bartolo Group, Inc. ............................ 3,354,200
------------
7,984,275
------------
Total Common Stock (Identified Cost $13,623,402) ......... 14,503,156
------------
PREFERRED STOCK--2.2%
- ------------------------------------------------------------------------------------------
ENTERTAINMENT--0.1%
268 Time Warner, Inc. ....................................... 289,105
------------
RETAIL - DEPARTMENT STORE--0.2%
10,000 K mart Financing I ...................................... 487,500
------------
COMPUTERS--0.2%
10,000 Unisys Corp. ............................................ 345,000
------------
DOMESTIC OIL--0.0%
500 Kelley Oil & Gas Corp. .................................. 11,938
------------
ELECTRIC UTILITIES--1.0%
30 Cleveland Electric Illuminating Co. ..................... 28,238
10,000 Long Island Lighting Co. ................................ 216,250
150 New York State Electric & Gas Corp. ..................... 9,300
150 Niagara Mohawk Power Corp. .............................. 5,625
4,000 Niagara Mohawk Power Corp. .............................. 168,000
10,000 Niagara Mohawk Power Corp. .............................. 248,750
55,900 Niagara Mohawk Power Corp. .............................. 1,104,025
5,500 Niagara Mohawk Power Corp., Series A .................... 97,625
10,000 Niagara Mohawk Power Corp., Series C .................... 190,000
1,030 Texas Utilities Electric Co. ............................ 59,997
------------
2,127,810
------------
GAS & PIPELINE UTILITIES--0.1%
5,000 Western Gas Resources, Inc. ............................. 195,000
------------
OIL--0.0%
500 Kaneb Services, Inc. .................................... 4,750
------------
STEEL--0.4%
26,000 Bethlehem Steel Corp., 144A (i) .......................... 981,500
------------
TRUCKING & FREIGHT FORWARDING--0.2%
17,500 Arkansas Best ........................................... 417,812
------------
Total Preferred Stock (Identified Cost $4,898,108) ....... 4,860,415
------------
SHORT TERM INVESTMENT--1.2%
FACE
AMOUNT DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------------------
$ 2,596,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/96 at 4.750% to be repurchased at $2,596,685
on 1/2/97, collateralized by $2,070,000 U.S. Treasury
Bond, 8.875%, due 8/15/17, valued at $2,652,835 ........ $ 2,596,000
-------------
Total Short Term Investment (Identified Cost $2,596,000) . 2,596,000
-------------
Total Investments--98.1% (Identified Cost $203,846,491)(b) 211,882,720
Other assets less liabilities .......................... 4,000,344
-------------
Total Net Assets--100% ................................... $ 215,883,064
=============
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments
based on cost of $203,854,162 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. ............................. $ 13,338,981
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value. ............................. (5,310,423)
-------------
Net unrealized appreciation. .......................................... $ 8,028,558
=============
(c) Step Bond: Coupon rate is zero or below market for an initial period and then
increases to a higher coupon rate at a specified date and rate.
(d) Variable or floating rate security. Rate disclosed is as of December 31, 1996.
(e) Denominated in Canadian Dollars.
(f) Denominated in New Zealand Dollars.
(g) Denominated in South African Rand.
(h) Non-income producing security.
(i) Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
(j) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer described.
The values of ADRs are significantly influenced by trading on exchanges not
located in the United States or Canada.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value .................................... $211,882,720
Cash .................................................... 1,096
Receivable for:
Fund shares sold ...................................... 2,846,236
Securities sold ....................................... 6,228,955
Dividends and interest ................................ 3,888,737
Unamortized organization expense ........................ 42,568
Prepaid expense ......................................... 10,000
------------
224,900,312
LIABILITIES
Payable for:
Securities purchased .................................. $8,281,161
Fund shares redeemed .................................. 271,725
Dividends declared .................................... 312,913
Accrued expenses:
Management fees ....................................... 46,896
Deferred trustees' fees ............................... 4,286
Accounting and administrative ......................... 3,284
Other expenses ........................................ 96,983
----------
9,017,248
------------
NET ASSETS ................................................ $215,883,064
============
Net Assets consist of:
Capital paid in ....................................... $207,831,891
Undistributed net investment income ................... 27,805
Accumulated net realized losses ....................... (7,671)
Unrealized appreciation on investments and foreign
currency transactions ............................... 8,031,039
------------
NET ASSETS ................................................ $215,883,064
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($90,728,554 divided by 6,791,746 shares of beneficial
interest) ............................................... $13.36
======
Offering price per share ( 100/95.50 of $13.36) ........... $13.99*
======
Net asset value and offering price of Class B shares
($93,408,492 divided by 6,993,758 shares of beneficial
interest) ............................................... $13.36**
======
Net asset value and offering price of Class C shares
($31,746,018 divided by 2,377,865 shares of beneficial
interest) ............................................... $13.35
======
Identified cost of investments ............................ $203,846,491
============
* 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
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................................... $ 991,682
Interest ................................................ 11,437,798
-----------
12,429,480
Expenses
Management fees ....................................... $ 902,997
Service fees - Class A ................................ 143,965
Service and distribution fees - Class B ............... 591,801
Service and distribution fees - Class C ............... 184,185
Trustees' fees and expenses ........................... 17,085
Accounting and administrative ......................... 32,819
Custodian ............................................. 123,523
Transfer agent ........................................ 164,057
Audit and tax services ................................ 47,000
Legal ................................................. 22,277
Printing .............................................. 34,765
Registration .......................................... 75,471
Amortization of organization expenses ................. 14,384
Miscellaneous ......................................... 3,737
-----------
Total expenses .......................................... 2,358,066
Less expenses waived by the investment sub adviser ...... (472,789) 1,885,277
----------- -----------
Net investment income ................................... 10,544,203
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net ..................................... 4,554,850
Foreign currency transactions - net ................... (1,568)
-----------
Net realized gain on investments and foreign currency
transactions ........................................ 4,553,282
-----------
Unrealized appreciation (depreciation) on:
Investments - net ..................................... 4,460,870
Foreign currency transactions - net ................... (3,436)
-----------
Net unrealized appreciation on investments and foreign
currency transactions ............................... 4,457,434
-----------
Net gain on investment transactions ..................... 9,010,716
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................ $19,554,919
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 1, (a)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 3,068,538 $ 10,544,203
Net realized gain on investments and foreign currency
transactions ............................................ 227,560 4,553,282
Unrealized appreciation on investments, and foreign
currency transactions 3,573,605 4,457,434
----------- ------------
Increase in net assets from operations .................... 6,869,703 19,554,919
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (1,369,404) (4,670,671)
Class B ............................................... (1,236,649) (4,337,318)
Class C ............................................... (462,485) (1,344,469)
In excess of net investment income
Class A ............................................... (22,615) 0
Class B ............................................... (20,422) 0
Class C ............................................... (7,638) 0
Net realized gain on investments
Class A ............................................... 0 (2,056,746)
Class B ............................................... 0 (2,084,672)
Class C ............................................... 0 (672,804)
----------- ------------
(3,119,213) (15,166,680)
----------- ------------
Increase in net assets derived from capital share
transactions ............................................ 84,206,843 123,537,492
----------- ------------
Total increase (decrease) in net assets ................... 87,957,333 127,925,731
NET ASSETS
Beginning of the period ................................... 0 87,957,333
----------- ------------
End of the period ......................................... $87,957,333 $215,883,064
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................................... $ 0 $ 28,653
=========== ============
End of the period ......................................... $ 28,653 $ 27,805
=========== ============
(a) Commencement of operations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------ ------------------------------
MAY 1,(a) YEAR MAY 1,(a) YEAR
THROUGH ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $12.50 $12.99 $12.50 $12.99
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.74 1.05 0.68 0.95
Net Realized and Unrealized Gain (Loss)
on Investments 0.49 0.73 0.49 0.73
------ ------ ------ ------
Total From Investment Operations ....... 1.23 1.78 1.17 1.68
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.73) (1.05) (0.67) (0.95)
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) 0.00 (0.36)
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 (0.01) 0.00
------ ------ ------ ------
Total Distributions .................... (0.74) (1.41) (0.68) (1.31)
------ ------ ------ ------
Net Asset Value, End of Period ......... $12.99 $13.36 $12.99 $13.36
====== ====== ====== ======
Total Return (%) (c) ................... 10.3 14.5 9.7 13.7
Ratio of Operating Expenses to Average
Net Assets (%) (d) 0.93(b) 0.96 1.68(b) 1.71
Ratio of Net Investment Income to
Average Net Assets (%) 8.75(b) 8.23 8.00(b) 7.48
Portfolio Turnover Rate (%) ............ 22 52 22 52
Net Assets, End of Period (000) ........ $36,939 $90,729 $38,767 $93,408
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the
case of Class B shares are not reflected in total return calculations. Periods less than
one year are not computed on an annualized basis.
(d) The ratio of operating expenses to
average net assets without giving
effect to the voluntary expense
limitations described in Note 4 to
the Financial Statements would have
been (%) ........................... 1.58(b) 1.31 2.33(b) 2.06
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
-----------------------------
MAY 1, (a) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period ........................... $12.50 $12.99
------ ------
Income From Investment Operations
Net Investment Income .......................................... 0.67 0.95
Net Realized and Unrealized Gain (Loss) on Investments ......... 0.49 0.72
------ ------
Total From Investment Operations ............................... 1.16 1.67
------ ------
Less Distributions
Dividends From Net Investment Income ........................... (0.66) (0.95)
Distributions From Net Realized Capital Gains .................. 0.00 (0.36)
Distributions in Excess of Net Investment Income ............... (0.01) 0.00
------ ------
Total Distributions ............................................ (0.67) (1.31)
------ ------
Net Asset Value, End of Period ................................. $12.99 $13.35
====== ======
Total Return (%) (c) ........................................... 9.7 13.6
Ratio of Operating Expenses to Average Net Assets (%) (d) ...... 1.68(b) 1.71
Ratio of Net Investment Income to Average Net Assets (%) ....... 8.00(b) 7.48
Portfolio Turnover Rate (%) .................................... 22 52
Net Assets, End of Period (000) ................................ $12,252 $31,746
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets
without giving effect to the voluntary expense limitations
described in Note 4 to the Financial Statements would have
been (%) ................................................... 2.33(b) 2.06
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1996
1. The Fund is a series of New England Funds Trust I, a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each series of shares a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. The Fund commenced
its public offering of Class A, Class B and Class C shares on May 1, 1995. Class
A shares are sold with a maximum front end sales charge of 4.50%. Class B shares
do not pay a front end sales charge, but pay a higher ongoing distribution fee
than Class A shares for eight years (at which point they automatically convert
to Class A shares), and are subject to a contingent deferred sales charge if
those shares are redeemed within five years of purchase. Class C shares do not
pay front end or contingent deferred sales charges and do not convert to any
class of shares, but they do pay a higher ongoing distribution fee than Class A
shares. Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or distribution fees. They are intended for institutional
investors with a minimum of $1,000,000 to invest. At December 31, 1996, there
were no Class Y shares outstanding. Expenses of the Fund are borne pro-rata by
the holders of all classes of shares, except that each class bears expenses
unique to that class (including the Rule 12b-1 service and distribution fees
applicable to such class), and votes as a class only with respect to its own
Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the
net assets of the Fund, if the Fund were liquidated. In addition, the Trustees
approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Loomis Sayles &
Company, L.P. ("Loomis Sayles") under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Loomis Sayles and other information
with respect to transactions in securities, including quotations from securities
dealers. Valuations of securities and other assets owned by the Fund for which
market quotations are readily available are based on those quotations.
Short-term obligations that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Loomis Sayles
under the supervision of the Fund's trustees.
B. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities resulting from changes in the exchange rate.
C. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion of
discount. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the identified
cost basis.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for mortgage backed securities and foreign currency
transactions for book and tax purposes. Permanent book and tax basis differences
will result in reclassifications to capital accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Loomis Sayles is responsible for determining that the
value of the collateral is at all times at least equal to the repurchase price.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in 1995 in connection with the Fund's
organization and initial registration amounting to $67,920 were paid by the Fund
and are being amortized over 60 months beginning May 1, 1995.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
year ended December 31, 1996 were as follows:
PURCHASES SALES
- ----------------------------------------- -----------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ------------------------ --------------- ------------------ ---------------
$14,976,832 $166,204,688 $8,956,617 $59,361,721
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets and 0.60% of such assets in excess of $200 million.
NEFM pays the Fund's investment subadviser, Loomis Sayles at the rate of 0.35%
of the first $200 million of the Fund's average daily net assets and 0.30% of
such assets in excess of $200 million. Certain officers and directors of NEFM
are also officers or trustees of the Fund. NEFM and Loomis Sayles are wholly
owned subsidiaries of New England Investment Companies, L.P. ("NEIC") which is a
subsidiary of Metropolitan Life Insurance Company ("Met Life"). Fees earned by
NEFM and Loomis Sayles under the management agreement in effect during the year
ended December 31, 1996 are as follows:
FEES EARNED
- -----------
$430,208 New England Funds Management, L.P.
$472,789 (a) Loomis, Sayles & Company, L.P.
(a) Before reduction pursuant to voluntary expense limitations. See Note 4.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P.("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC and
performs certain accounting and administrative services for the Fund. The Fund
reimburses New England Funds for all or part of New England Funds' expenses of
providing these services which include the following: (i) expenses for personnel
performing bookkeeping, accounting, internal auditing and financial reporting
functions and clerical functions relating to the Fund, (ii) expenses for
services required in connection with the preparation of registration statements
and prospectuses, shareholder reports and notices, proxy solicitation material
furnished to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance, and (iii) registration, filing and other fees
in connection with requirements of regulatory authorities. For the year ended
December 31, 1996, these expenses amounted to $32,819 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 $123,236 as compensation for its services in that capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1996, the Fund paid New England Funds $143,965 in fees under
the Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect.
Under the Class B and Class C Plans, the Fund pays New England Funds a monthly
service fee at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the year ended December 30,
1996 the Fund paid New England Funds $147,950 and $46,046 in service fees under
the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of up to 0.75% of the average daily
net assets attributable to the Fund's Class B shares and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and Class
C shares. For the year ended December 31, 1996, the Fund paid New England Funds
$443,851 and $138,139 in distribution fees under the Class B and Class C Plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors of shares of the Fund during the year ended
December 31, 1996 amounted to $1,263,584.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of Loomis
Sayles, NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $1,464
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $41
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund on the
normal payment date.
4. EXPENSE LIMITATIONS. Loomis Sayles voluntarily agreed, until December 31,
1996, to waive its entire subadvisory fee (which is paid by NEFM), and NEFM
agreed to reduce its management fee (which is paid by the Fund) by an equal
amount. For the year ended December 31, 1996, Loomis Sayles waived its entire
subadvisory fee of $472,789.
In addition, under an expense deferral arrangement, which NEFM terminated
December 31, 1996, NEFM agreed to defer its management fees (to the extent not
waived as provided in the preceding sentences) for the Fund, to the extent
necessary to limit the Fund's expenses to the annual rate of 1.40% for Class A
shares, 2.15% for Class B shares and 2.15% for Class C shares, subject to the
obligation of the Fund to pay NEFM such deferred fees in later periods to the
extent that the Fund's expenses fall below the annual rate of 1.40% for Class A
shares, 2.15% for Class B shares and 2.15% for Class C shares; provided,
however, that the Fund is not obligated to pay any such deferred fees more than
two years after such fee was deferred. No such expenses were deferred in 1996.
NEFM collected $30,735 in fees deferred from 1995.
5. 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 C capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
FROM THE PERIOD MAY 1,(a)
THROUGH YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- ---------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ---- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ......................... 2,999,705 $37,336,091 4,585,249 $ 60,194,763
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income .......................... 83,928 1,050,952 267,132 3,495,181
Distributions from net realized
gain ............................ 0 0 137,305 1,816,726
--------- ----------- ---------- ------------
3,083,633 38,387,043 4,989,686 65,506,670
Shares repurchased .................. (240,548) (3,031,993) (1,041,025) (13,631,309)
--------- ----------- ---------- ------------
Net increase ........................ 2,843,085 $35,355,050 3,948,661 $ 51,875,361
--------- ----------- ---------- ------------
FROM THE PERIOD MAY 1,(a)
THROUGH YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- ---------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ---- -------------- --------------- -------------- ----------------
Shares sold ......................... 3,069,532 $38,206,120 4,289,664 $ 56,370,586
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income .......................... 58,814 736,795 187,069 2,445,242
Distributions from net realized
gain ............................ 0 0 113,978 1,508,713
--------- ----------- ---------- ------------
3,128,346 38,942,915 4,590,711 60,324,541
Shares repurchased .................. (144,485) (1,810,786) (580,814) (7,610,958)
--------- ----------- ---------- ------------
Net increase ........................ 2,983,861 $37,132,129 4,009,897 $ 52,713,583
--------- ----------- ---------- ------------
FROM THE PERIOD MAY 1,(a)
THROUGH YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- ---------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ---- -------------- --------------- -------------- ----------------
Shares sold ......................... 1,178,513 $14,661,683 1,840,696 $ 24,218,950
Shares issued in connection with the
reinvestment of:
Dividends from net investment
income .......................... 23,720 296,747 70,055 917,823
Distributions from net realized
gain ............................ 0 0 41,207 546,262
--------- ----------- ---------- ------------
1,202,233 14,958,430 1,951,958 25,683,035
Shares repurchased .................. (259,223) (3,238,766) (517,103) (6,734,487)
--------- ----------- ---------- ------------
Net increase ........................ 943,010 $11,719,664 1,434,855 $ 18,948,548
--------- ----------- ---------- ------------
Increase derived from capital shares
transactions ...................... 6,769,956 $84,206,843 9,393,413 $123,537,492
========= =========== ========== ============
(a) Commencement of operations.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of NEW ENGLAND STRATEGIC INCOME 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 Strategic Income Fund
("the Fund") at December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned at
December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997
<PAGE>
--------------
(Logo) BULK RATE
NEW ENGLAND FUNDS U.S. POSTAGE
Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
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399 Boylston Street
Boston, Massachusetts
02116
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[Logo] [Logo]
QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
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DALBAR DALBAR
HONORS COMMITMENT TO: HONORS COMMITMENT TO:
INVESTORS INVESTORS
- --------------------- ---------------------
MU56-1296
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