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ANNUAL REPORT
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[LOGO]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Capital Growth Fund
[Graphic Omitted]
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DECEMBER 31, 1997
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FEBRUARY 1997
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
In 1997, many investors once again had reason to be pleased with the performance
of their mutual fund holdings. However, in times such as these, expectations
tend to grow along with prices. It pays to remind ourselves that no trend is
permanent, and we should keep our goals realistic and long-term needs in focus.
In the third straight year of outstanding returns, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index -- two widely followed
indicators of the performance of large-company stocks -- gained 24.9% and 33.3%
respectively. At the same time, smaller-company stocks, as measured by the
Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded
as declining interest rates and rising prices meant solid gains. The Lehman Long
Treasury Index, for example, posted a 15.1% return for the year. Results were
less favorable for international investors, especially those exposed to emerging
markets or the financial turmoil in Asia.
Gratifying though it has been, the markets' surge of the past few years obscures
the historic norm: Downturns and volatility also are regular features of
investing. Even in 1997, notwithstanding the impressive overall results,
investors saw some sharp, short-term drops, whether they were invested in the
United States or overseas, in bonds or stocks. Market fluctuations remind us of
some valuable lessons.
First, volatility is inevitable, and should not disrupt long-term programs
without sufficient evaluation. Those who sold in response to downturns --
October 1987 is an obvious example -- may have missed out on the subsequent
uptrend. Second, sound diversification can reduce risk. A useful exercise is to
review your asset allocation regularly with your financial representative.
Starting in 1998, you have one more reason to consult with your representative:
Newly expanded retirement options, including the new Roth IRA, could play an
important role in your retirement and tax planning for years to come. With this
in mind, New England Funds has introduced programs specially designed to help
you make the most of the newest retirement vehicles.
[Dalbar logo]
1995 o 1996 o 1997
In addition to offering quality mutual fund choices and tax-advantaged plans, we
focus on providing the highest quality customer service. This is why I am
pleased to report that we have received DALBAR's Mutual Fund Service Award 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 receive this
award for the third consecutive year from DALBAR, an independent evaluator of
mutual fund service. We are continuing to work to provide even more effective
services. Two examples are: the Personal Access Line(TM) -- our enhanced
automated telephone account service (800-346-5984) -- and the account
information section of the New England Funds web site (www.mutualfunds.com).
Each provides convenient, 24-hour access to current information about your New
England Funds accounts.
All of us at New England Funds thank you for your continued support and look
forward to serving you in the years ahead.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
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NEW ENGLAND CAPITAL GROWTH FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 1997
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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 illustratng a $10,000
investment in the Fund since inception 8/3/92, compared to the S&P Index over
the same period. The data for this chart are as follows:]
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GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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AUGUST 1992 (INCEPTION) THROUGH DECEMBER 1997
Net Asset With Maximum S&P 500
Value(1) Sales Charge(2) Index(4)
8/3/92 $10,000 $ 9,425 $10,000
1992 $11,491 $10,830 $10,422
1993 $12,398 $11,685 $11,470
1994 $12,194 $11,493 $11,626
1995 $15,937 $15,020 $15,979
1996 $18,654 $17,581 $19,639
1997 $21,868 $20,611 $26,180
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 C share
performance will be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance assumes
reinvested distributions.
<PAGE>
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NEW ENGLAND CAPITAL GROWTH FUND
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AVERAGE ANNUAL TOTAL RETURNS 12/31/97
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SINCE
CLASS A (Inception 8/3/92) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 17.23% 13.75% 15.57%
With Max. Sales Charge(2) 10.47 12.41 14.32
Standard & Poor's 500(4) 33.31 20.22 19.42
Lipper Growth Fund Average(5) 25.18 16.44 16.96
CLASS B (Inception 9/13/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 15.89% 14.17%
With CDSC(3) 10.89 13.87
Standard & Poor's 500(4) 33.31 21.81
Lipper Growth Fund Average(5) 25.18 17.27
(calculated from 9/30/93)
CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 15.94% 20.45%
Standard & Poor's 500(4) 33.31 31.08
Lipper Growth Fund Average(5) 25.18 24.99
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) Maximum Sales Charge performance assumes reinvestment of all distributions
and reflects the maximum sales charge of 5.75% at the time of purchase of
Class A shares.
(3) 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) Standard & Poor's 500(R) Index (S&P 500) is an unmanaged index representing
the performance of 500 major companies, most of which are listed on the New
York Stock Exchange. The S&P 500 performance has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(5) Lipper Growth Fund 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.
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NEW ENGLAND CAPITAL GROWTH FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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Q. Please tell us about New England Capital Growth Fund's 1997 performance.
[Scott Pape and Bruce Ebel Loomis, Sayles & Company, L.P.]
We were somewhat disappointed in the Fund's one-year results through December
31, 1997. Capital Growth Fund's total return for Class A shares based on net
asset value was 17.23%, compared to 33.31% for the Standard & Poor's 500
Stock Index. The Fund's return reflects an $0.68 per share gain in net asset
value to $19.95 per share and the reinvestment of $2.57 per share in capital
gains distributions.
While major market indicators like the S&P 500 and the Dow Jones Industrial
Average surged ahead again this year, the bulk of their gains came from a
limited number of large-capitalization companies. The broader market,
including smaller- and mid-cap companies, to which we have committed a
portion of the Fund's portfolio, produced more modest gains. For example, the
Russell 2000, a small-cap index, rose 22.36%, while the NASDAQ Industrial
Index, which represents the non-financial stocks in the broad-based NASDAQ
Index, added only 10.04%.
The Fund's Class B and C shares had total returns (based on net asset value)
in 1997 of 15.89% and 15.94%, respectively.
Q. How would you describe the investment environment?
America's "Goldilocks" economy -- neither too hot nor too cold -- has
inspired continued investor confidence for several years. Inflation figures
have repeatedly come in below many forecasts, fueling rises in both
fixed-income and equity markets. Adding to investor comfort, the Federal
Reserve Board was disinclined to rock the economic boat by raising interest
rates. And corporate profits exceeded expectations in every quarter of the
year. The effect on investors was clear, as the flow of cash into financial
assets continued at a vigorous pace.
Market activity went through three distinct phases in 1997. During the first
quarter, investors favored large-capitalization companies, just as they had
in 1996, both because of greater earnings visibility and for defensive
reasons. From April through October, a wider range of stocks attracted
attention, and many averages overtook the blue-chip indicators temporarily.
Then, as the looming currency crisis in Southeast Asia spread to the region's
equity markets, investors once again fled to the relative safety of the very
largest companies, reinstating the performance advantage of large companies
over the rest of the market.
We were encouraged through the middle part of the year by the strong rally in
the broader market, a trend that we believe would have persisted but for the
instability in Asia.
Q. Given this environment, what was your strategy during the course of the year?
Throughout 1997, we pursued the strategy that we have followed for the last
18 months, slightly over-weighting smaller- and mid-sized companies. We
believe that these companies have both the greatest earnings growth potential
and attractive valuations. Recent turbulence in international markets
reinforces our conviction, as these small- and mid-cap firms are generally
focused on growing their businesses in markets here in the United States.
While America's economic fundamentals remain strong, inflated prices of
multi-national enterprises represent the primary threat to the market, in our
opinion.
Therefore, during the second half of the year, we increased exposure to
companies that focus on the United States and moved away from those that
focus on overseas economies. In that context, nearly all of the Fund's
holdings are based in the United States.
Q. What were some of the factors that affected performance, both positively and
negatively?
Stock performance depended principally on company size. The Fund's holdings
that fit the market's demand for large, defensive companies with strong
earnings did well. Among these were General Electric, Microsoft, Disney,
Johnson & Johnson and Schlumberger, a major provider of oil drilling
services.
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YOUR FUND'S 10 LARGEST INVESTMENTS -- 12/31/97
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% OF
COMPANY NET ASSETS
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1. GENERAL ELECTRIC CO. 2.74
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2. GILLETTE CO. 2.55
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3. STARBUCKS CORP. 2.32
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4. HBO & CO. 2.28
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5. FISERV, INC. 2.16
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6. CENDANT CORP. 2.12
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7. CISCO SYSTEMS, INC. 2.10
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8. PARAMETRIC TECHNOLOGY CORP. 2.02
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9. MGIC INVESTMENT CORP. 2.00
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10. HEALTHSOUTH CORP. 1.97
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Portfolio holdings and asset allocations will vary.
A second group of companies also turned in strong earnings, but because they
fell outside the big-cap pattern, share prices did not always keep up. Some
examples: consumer-focused Starbucks, Cendant Corp. (a marketing services
company), Healthsouth (a manager of rehabilitation hospitals) and Fiserv,
which provides data processing services.
Two notable disappointments were PETsMART, a chain of pet supply superstores,
and Ascend Communications, a developer and marketer of network communications
products. Ascend experienced difficulties digesting its acquisition of
Cascade Communications, while PETsMART's management scaled back expansion
plans, having previously overextended the company's infrastructure and
systems capabilities.
Q. What is your outlook for the market and its implications for the Fund?
We think the array of good economic news -- low inflation, moderate growth,
low interest rates -- will continue. However, the current recovery is now
seven years old, and a moderate slowdown in 1998 would not surprise us.
Contributing to this view are persistently high consumer debt levels and some
indications of weakness in the closely watched automobile sector. Also,
constrained Asian economies could weaken U.S.-based companies' exports into
the region. A slump might also result from any Federal Reserve Board action
or from simple exhaustion; either way, profits would come under pressure. In
this scenario, the market would assess earnings prospects more closely,
focusing on companies with the potential to produce consistent, predictable
financial results.
The search for these opportunities is the foundation of our
research-intensive management process. We seek to build a portfolio of
America's premier companies, those that operate in dynamic growth markets,
are dominant in their industries and have the potential to deliver real
(inflation-adjusted) earnings growth over time.
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1997
COMMON STOCK--100.0% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
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AEROSPACE--1.3%
51,600 Boeing Co. ............................................ $ 2,525,175
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AIRLINES--1.5%
119,700 Southwest Airlines .................................... 2,947,613
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BANKS--2.1%
10,000 Star Banc Corp. ....................................... 573,750
31,000 U.S. Bancorp .......................................... 3,470,062
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4,043,812
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BEVERAGES--1.0%
30,200 Coca-Cola Co. ......................................... 2,012,075
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BUSINESS SERVICES--16.6%
100,000 ABR Information Services, Inc. (c) .................... 2,387,500
27,200 America Online, Inc. .................................. 2,425,900
59,000 Automatic Data Processing, Inc. ....................... 3,621,125
22,000 Cambridge Technology Partners (c) ..................... 915,750
77,000 Checkfree Corp. (c) ................................... 2,079,000
92,000 Cintas Corp. .......................................... 3,588,000
42,900 Corrections Corporation America ....................... 1,589,981
23,000 Danka Business Systems (ADR) (d) ...................... 366,563
83,000 First Data Corp. ...................................... 2,427,750
86,250 Fiserv, Inc. (c) ...................................... 4,237,031
68,250 Paychex, Inc. ......................................... 3,455,156
20,000 Stewart Enterprises, Inc. ............................. 932,500
112,000 Sun Guard Data Systems ................................ 3,472,000
52,625 Sykes Enterprises, Inc. (c) ........................... 1,026,188
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32,524,444
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CHEMICALS--1.6%
7,800 El duPont deNemours & Co. ............................. 468,488
61,600 Monsanto Co. .......................................... 2,587,200
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3,055,688
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COMMUNICATION SERVICES--0.4%
17,700 Cox Communications Incorporated New ................... 709,106
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COMPUTER SOFTWARE & SERVICES--10.1%
26,550 Computer Associates International, Inc. ............... 1,403,831
49,100 Compuware Corp. (c) ................................... 1,571,200
93,400 HBO & Co. ............................................. 4,483,200
51,400 HNC Software, Inc. (c) ................................ 2,210,200
26,000 Microsoft Corp. (c) ................................... 3,360,500
42,000 Networks Associates Inc. .............................. 2,220,750
83,500 Parametric Technology Corp. (c) ....................... 3,955,813
17,000 Security Dynamics Technologies ........................ 607,750
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19,813,244
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COMPUTERS & BUSINESS EQUIPMENT--3.7%
20,300 3Com Corp. (c) ........................................ 709,231
73,950 Cisco Systems, Inc. (c) ............................... 4,122,713
19,600 Diebold, Inc. ......................................... 992,250
54,000 EMC Corp. (c) ......................................... 1,481,625
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7,305,819
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CONGLOMERATES--1.2%
52,100 Thermo Electron Corp. (c) ............................. 2,318,450
------------
CONSTRUCTION MATERIALS--0.8%
43,000 Fastenal Co. .......................................... 1,644,750
------------
ELECTRICAL EQUIPMENT--2.7%
73,200 General Electric Co. .................................. 5,371,050
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ELECTRONIC COMPONENTS--5.3%
48,000 Altera Corp. (c) ...................................... 1,590,000
36,000 Intel Corp. ........................................... 2,529,000
8,437 Molex, Inc. ........................................... 271,038
102,281 Molex, Inc., Class A .................................. 2,940,579
74,400 Solectron Corp. (c) ................................... 3,092,250
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10,422,867
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ELECTRONICS--1.2%
87,100 Cymer, Inc. (c) ....................................... 1,306,500
25,200 Texas Instruments, Inc. ............................... 1,134,000
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2,440,500
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FINANCIAL SERVICES--3.8%
54,150 Charles Schwab Corp. .................................. 2,270,915
21,900 Federal National Mortgage Association ................. 1,249,669
58,900 MGIC Investment Corp. ................................. 3,916,850
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7,437,434
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FOOD & BEVERAGES--0.5%
15,000 Hershey Foods ......................................... 929,063
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HEALTH CARE--DRUGS--8.1%
35,000 Abbott Laboratories ................................... 2,294,687
49,100 Amgen, Inc. ........................................... 2,657,537
13,100 Eli Lilly ............................................. 912,088
26,000 Johnson & Johnson ..................................... 1,712,750
23,700 Merck & Co. ........................................... 2,518,125
230,000 Oncor, Inc. (c) ....................................... 1,063,750
27,500 Pfizer, Inc. .......................................... 2,050,469
65,000 Somatogen, Inc. (c) ................................... 288,438
18,800 Warner-Lambert Co. .................................... 2,331,200
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15,829,044
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HEALTH CARE--MEDICAL TECHNOLOGY--3.7%
22,000 Arterial Vascular Engineering, Inc. (c) ............... 1,430,000
28,300 Boston Scientific Corp. (c) ........................... 1,298,262
64,700 CardioThoracic Systems, Inc. .......................... 355,850
70,000 Idexx Laboratories, Inc. (c) .......................... 1,115,625
48,400 Medtronic, Inc. ....................................... 2,531,925
30,000 Perclose, Inc. (c) .................................... 577,500
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7,309,162
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HEALTH CARE--SERVICES--3.6%
60,000 American Physician Partners, Inc. ..................... 637,500
139,400 HEALTHSOUTH Corp. (c) ................................. 3,868,350
37,900 Omnicare, Inc. ........................................ 1,174,900
50,000 Phycor, Inc. (c) ...................................... 1,350,000
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7,030,750
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HOTELS & RESTAURANTS--2.5%
66,000 Einstein Noah Bagel Corp. (c) ......................... 367,125
118,400 Starbucks Corp. (c) ................................... 4,543,600
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4,910,725
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HOUSEHOLD PRODUCTS--3.8%
10,000 Corning, Inc. ......................................... 371,250
49,760 Gillette Co. .......................................... 4,997,770
50,000 Newell Co. ............................................ 2,125,000
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7,494,020
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INSURANCE--2.4%
32,550 American International Group, Inc. .................... 3,539,812
5,600 General Re Corp. ...................................... 1,187,200
------------
4,727,012
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MACHINERY--1.7%
56,600 Illinois Tool Works, Inc. ............................. 3,403,075
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MEDIA & ENTERTAINMENT--1.3%
25,200 Walt Disney Co. ....................................... 2,496,375
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OIL--0.2%
35,000 Unit Corp. ............................................ 336,875
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OIL--INDEPENDANT PRODUCERS--1.1%
30,600 Anadarko Petroleum Corp. .............................. $ 1,857,038
7,600 Ocean Energy, Inc. .................................... 374,775
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2,231,813
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OIL--MAJOR INTEGRATED--0.4%
9,600 Amoco Corp. ........................................... 817,200
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OIL SERVICES--2.1%
15,800 Baker Hughes, Inc. .................................... 689,275
13,600 Nabors Industries, Inc. ............................... 427,550
17,800 Rowan Companies, Inc. (c) ............................. 542,900
31,200 Schlumberger, Ltd. .................................... 2,511,600
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4,171,325
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RETAIL--2.5%
10,000 Kohls Corp. ........................................... 681,250
11,500 Nordstrom, Inc. ....................................... 694,313
29,600 Wal-Mart Stores, Inc. ................................. 1,167,350
76,300 Walgreen Co. .......................................... 2,393,912
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4,936,825
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RETAIL--SPECIALTY--4.8%
121,000 Cendant Corp. (c) ..................................... 4,159,375
56,500 Home Depot, Inc. ...................................... 3,326,437
251,700 Petsmart, Inc. (c) .................................... 1,824,825
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9,310,637
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TELECOMMUNICATION--0.5%
12,300 Ameritech Corp. ....................................... 990,150
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TELECOMMUNICATION EQUIPMENT--6.2%
55,000 Andrew Corp. (c) ...................................... 1,320,000
47,220 Ascend Communications, Inc. (c) ....................... 1,156,890
39,300 Ciena Corp. ........................................... 2,402,212
5,600 Lucent Technologies, Inc. ............................. 447,300
82,900 PairGain Technologies, Inc. (c) ....................... 1,606,188
30,000 QUALCOMM, Inc. (c) .................................... 1,515,000
69,200 Tellabs, Inc. (c) ..................................... 3,658,950
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12,106,540
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TOBACCO--1.3%
57,500 Philip Morris Companies ............................... 2,605,469
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Total Common Stock (Identified Cost $154,155,270) ..... 196,208,087
------------
SHORT TERM INVESTMENT--0.2%
FACE
AMOUNT DESCRIPTION VALUE(a)
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$489,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/97 at 5.000% to be repurchased at $489,136
on 01/02/98 collateralized by $485,000 U.S. Treasury
Note 6.125% due 7/31/2000 with a value of $501,670 .. $ 489,000
------------
Total Short Term Investment (Identified Cost $489,000) 489,000
------------
Total Investments--100.2% (Identified Cost $154,644,270)
(b) ................................................. 196,697,087
Other assets less liabilities ......................... (437,810)
------------
Total Net Assets--100% ................................ $196,259,277
============
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on
investments based on cost of $155,021,662 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 ....... $ 53,800,304
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (12,124,879)
------------
Net unrealized appreciation ................................ $ 41,675,425
============
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued
by a U.S. bank representing the right to receive securities
of the foreign issuer described. The value of ADRs are
significantly influenced by trading on exchanges not located
in the United States.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
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December 31, 1997
ASSETS
Investments at value ............................ $196,697,087
Cash ............................................ 225,858
Receivable for:
Fund shares sold .............................. 75,409
Securities sold ............................... 3,077,470
Dividends and interest ........................ 105,006
Foreign taxes ................................. 141
Miscellaneous ................................. 3,581
Prepaid registration expense .................... 8,000
------------
200,192,552
LIABILITIES
Payable for:
Securities purchased .......................... $3,452,253
Fund shares redeemed .......................... 258,440
Withholding taxes ............................ 850
Accrued expenses:
Management fees ............................... 123,029
Deferred trustees' fees ....................... 12,939
Accounting and administrative ................. 3,169
Other ......................................... 82,595
----------
3,933,275
------------
NET ASSETS ........................................ $196,259,277
============
Net Assets consist of:
Capital paid in ............................... $149,044,832
Accumulated net investment loss ............... (11,514)
Accumulated net realized gains ................ 5,173,142
Unrealized appreciation on investments ........ 42,052,817
------------
NET ASSETS ........................................ $196,259,277
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($149,734,401 divided by 7,504,148 shares
of beneficial interest) ........................ $19.95
======
Offering price per share (100/94.25 of $19.95) .... $21.17*
======
Net asset value and offering price of Class B
shares ($45,545,871 divided by 2,385,218 shares
of beneficial interest) ........................ $19.10**
======
Net Asset value and offering price of Class C
shares($979,005 divided by 51,242 shares of
beneficial interest)............................ $19.11
======
Identified cost of investments .................... $154,644,270
============
*Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
INVESTMENT INCOME
Dividends ..................................... $1,027,440(a)
----------
Interest ...................................... 82,606
----------
1,110,046
Expenses
Management fees ............................. $1,436,893
Service fees - Class A ...................... 370,087
Service and distribution fees - Class B ..... 426,954
Service and distribution fees - Class C ..... 9,279
Trustees' fees and expenses ................. 21,117
Accounting and administrative ............... 39,071
Custodian ................................... 91,311
Transfer agent .............................. 540,255
Audit and tax services ...................... 31,490
Legal ....................................... 10,778
Printing .................................... 45,442
Registration ................................ 41,729
Amortization of organization expenses ....... 13,860
Miscellaneous ............................... 20,982
----------
Total expenses ................................ 3,099,248
----------
Net investment loss ........................... (1,989,202)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on Investments - net .......... 25,264,485
Unrealized appreciation on Investments - net 6,522,743
----------
Net gain on investment transactions ......... 31,787,228
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...... $29,798,026
===========
(a) Net of foreign taxes of: $1,635
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
FROM OPERATIONS
Net investment loss ........................ $ (1,428,178) $ (1,989,202)
Net realized gain on investments ........... 18,744,410 25,264,485
Unrealized appreciation on investments ..... 8,386,925 6,522,743
------------ ------------
Increase in net assets from operations ..... 25,703,157 29,798,026
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain on investments
Class A .................................. (14,938,405) (17,900,884)
Class B .................................. (3,853,333) (5,549,923)
Class C .................................. (66,669) (113,371)
------------ ------------
(18,858,407) (23,564,178)
------------ ------------
Increase in net assets derived from
capital share transactions ............... 22,332,195 10,756,577
------------ ------------
Total increase in net assets ............... 29,176,945 16,990,425
NET ASSETS
Beginning of the year ...................... 150,091,907 179,268,852
------------ ------------
End of the year ............................ $179,268,852 $196,259,277
============ ============
ACCUMULATED NET INVESTMENT LOSS
Beginning of the year ...................... $ 0 $ (7,492)
============ ============
End of the year ........................... $ (7,492) $ (11,514)
============ ============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ........ $14.23 $15.27 $15.02 $18.41 $19.27
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) .............. 0.00 (0.08) (0.11)(b) (0.14)(e) (0.18)(e)
Net Realized and Unrealized Gain (Loss) on
Investments ............................. 1.12 (0.17) 4.74 3.22 3.43
------ ------ ------ ------ ------
Total From Investment Operations .......... 1.12 (0.25) 4.63 3.08 3.25
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Realized Capital
Gains ................................... (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------
Total Distributions ....................... (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------
Net Asset Value, End of Year .............. $15.27 $15.02 $18.41 $19.27 $19.95
====== ====== ====== ====== ======
Total Return (%) (c) ...................... 7.9 (1.6) 30.7 17.1 17.2
Ratio of Operating Expenses to Average Net
Assets (%) (a) .......................... 1.23 1.63 1.61 1.50 1.45
Ratio of Net Investment Income (loss) to
Average Net Assets (%) .................. (0.03) (0.45) (0.67) (0.71) (0.87)
Portfolio Turnover Rate (%) ............... 77 82 69 74 48
Average Commission Rate (d) ............... -- -- -- $0.0509 $0.0506
Net Assets, End of Year (000) ............. $98,735 $95,803 $123,504 $141,326 $149,734
(a) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense limitations
would have been (%) ................... 1.58 -- -- -- --
(b) Per share net investment income (loss) does not reflect the period's reclassification of permanent differences between book
and tax basis net investment income (loss). See Note 1d.
(c) A sales charge is not reflected in total return calculations.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share
for trades upon which commissions are charged. This rate generally does not reflect mark-ups, mark-downs, or spreads on
shares traded on a principal basis.
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
SEPTEMBER 13(c)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------------
1993 1994 1995 1996 1997
------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . $14.79 $15.24 $14.89 $18.09 $18.74
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) ......... 0.00 (0.08) (0.16)(b) (0.28)(g) (0.32)(g)
Net Realized and Unrealized Gain
(Loss) on Investments .............. 0.53 (0.27) 4.60 3.15 3.25
------ ------ ------ ------ ------
Total From Investment Operations ..... 0.53 (0.35) 4.44 2.87 2.93
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Realized
Capital Gains ...................... (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------
Total Distributions .................. (0.08) 0.00 (1.24) (2.22) (2.57)
------ ------ ------ ------ ------
Net Asset Value, End of Period ....... $15.24 $14.89 $18.09 $18.74 $19.10
====== ====== ====== ====== ======
Total Return (%)(e) .................. 3.6 (2.3) 29.7 16.2 15.9
Ratio of Operating Expenses to Average
Net Assets (%)(a) .................. 2.29(d) 2.38 2.36 2.25 2.20
Ratio of Net Investment Income (loss)
to Average Net Assets (%) .......... (1.15)(d) (1.20) (1.42) (1.46) (1.62)
Portfolio Turnover Rate (%) .......... 77 82 69 74 48
Net Assets, End of Period (000) ...... $6,748 $15,390 $26,234 $37,439 $45,546
(a) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .. 2.29(d) -- -- -- --
(b) Per share net investment income (loss) does not reflect the period's reclassification of permanent differences between
book and tax basis net investment income (loss). See Note 1d.
(c) Commencement of Operations.
(d) Computed on an annualized basis.
(e) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not
annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per
share for trades upon which commissions are charged. This rate generally does not reflect mark-ups, mark-downs, or spreads on
shares traded on a principal basis.
(g) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ............................ $14.89 $18.08 $18.74
------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) .................................. (0.09)(a) (0.28)(c) (0.34)(c)
Net Realized and Unrealized Gain (Loss) on Investments ........ 4.52 3.16 3.28
------ ------ ------
Total From Investment Operations .............................. 4.43 2.88 2.94
------ ------ ------
Less Distributions
Distributions From Net Realized Capital Gains ................. (1.24) (2.22) (2.57)
------ ------ ------
Total Distributions ........................................... (1.24) (2.22) (2.57)
------ ------ ------
Net Asset Value, End of Year .................................. $18.08 $18.74 $19.11
====== ====== ======
Total Return (%) .............................................. 29.7 16.2 15.9
Ratio of Operating Expenses to Average Net Assets (%) ......... 2.36 2.25 2.20
Ratio of Net Investment Income (loss) to Average
Net Assets (%)............................................... (1.42) (1.46) (1.62)
Portfolio Turnover Rate (%) ................................... 69 74 48
Average Commission Rate (b) ................................... -- $0.0509 $0.0506
Net Assets, End of Year (000) ................................. $354 $504 $979
(a) Per share net investment income (loss) does not reflect the period's reclassification of permanent differences
between book and tax basis net investment income (loss). See Note 1d.
(b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate
per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups, mark-downs,
or spreads on shares traded on a principal basis.
(c) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
1. The Fund is a Series of New England Funds Trust I, a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series of shares a "Fund").
The Fund offers Class A, Class B and Class C shares. The Fund commenced its
public offering of Class B shares on September 13, 1993 and of Class C shares on
December 30, 1994. Class A shares are sold with a maximum front end sales charge
of 5.75%. 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 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.
Expenses of the Fund are borne pro-rata by the holders of each class of shares,
except that each class bears expenses unique to that class (including the Rule
12b-1 service and distribution fees applicable to such class), and votes as a
class only with respect to its own Rule 12b-1 plan. Shares of each class would
receive their pro-rata share of the net assets of the Fund, if the Fund were
liquidated. In addition, the Trustees approve separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
service provides the last reported sale price for securities listed on an
applicable securities exchange or on the NASDAQ national market system, or, if
no sale was reported and in the case of over-the-counter securities not so
listed, the last reported bid price. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser, New England Funds
Management L.P., and the subadviser, under the supervision of the Fund's
trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted
for on the trade date (the date the buy or sell is executed). Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Interest income for the Funds is increased by the accretion of discount.
In determining net gain or loss on securities sold, the cost of securities has
been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to the capital accounts.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. The Fund's subadviser is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
F. ORGANIZATION EXPENSE. Costs incurred in fiscal 1992 in connection with the
Fund's organization and registration, amounting to approximately $75,980 in the
aggregate, were paid by the Fund and were amortized by the Fund based on
projected annual average net assets over 60 months.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the year ended December 31, 1997 were $90,443,696 and $104,480,194,
respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management L.P.
("NEFM") at the annual rate of 0.75% of the first $200 million of the Fund's
average daily net assets, 0.70% of the next $300 million and 0.65% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Loomis Sayles & Company, L.P. at the rate of 0.60% of the first $25 million of
the Fund's average daily net assets, 0.55% of the next $75 million and 0.50% of
the next $100 million, 0.35% 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 Loomis Sayles & Company, L.P. are
wholly owned subsidiaries of New England Investment Companies, L.P. ("NEIC")
which is a subsidiary of Metropolitan Life Insurance Company ("Met Life"). Fees
earned by NEFM and Loomis Sayles & Company, L.P. under the management agreement
in effect during the year ended December 31, 1997 are as follows:
FEES EARNED
- -----------
$ 416,862 New England Funds Management, L.P.
$1,020,031 Loomis Sayles & Company, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC and
performs certain accounting and administrative services for the Fund. The Fund
reimburses New England Funds for all or part of New England Funds' expenses of
providing these services which include the following: (i) expenses for personnel
performing bookkeeping, accounting and financial reporting functions and
clerical functions relating to the Fund and (ii) expenses for services required
in connection with the preparation of registration statements and prospectuses,
registration of shares in various states, shareholder reports and notices, proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities and reports and questionnaires for SEC compliance. For the year
ended December 31, 1997 these expenses amounted to $39,071 and are shown
separately in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $382,977 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $3,751 in
transfer agent credits. The transfer agent expense in the Statement of
Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1997, the Fund paid New England Funds $370,087 in fees under
the Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect. The
amount of unreimbursed expenses carried forward at December 31, 1997 is
$563,284.
Under the Class B and Class C 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 and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the year ended December 31,
1997, the Fund paid New England Funds $106,738 and $2,320 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
monthly distribution fees at the annual rate of up to 0.75% of the average daily
net assets attributable to the Fund's Class B and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and Class
C shares. For the year ended December 31, 1997, the Fund paid New England Funds
$320,216 and $6,959 in distribution fees under the Class B and Class C plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the year ended
December 31, 1997 amounted to $357,074.
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 $2,100
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
Committee Chairman Retainer $75/year
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund on the
normal payment date.
4. CAPITAL SHARES. At December 31, 1997 there was an unlimited number of shares
of beneficial interest authorized, divided into three classes, Class A, Class B
and Class C capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------ -----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,203,520 $23,479,369 858,626 $17,173,248
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain 756,936 14,477,042 884,046 17,485,625
--------- ----------- --------- -----------
1,960,456 37,956,411 1,742,672 34,658,873
Shares repurchased ................... (1,337,035) (26,121,440) (1,571,461) (31,813,412)
--------- ----------- --------- -----------
Net increase ........................ 623,421 $11,834,971 171,211 $ 2,845,461
--------- ----------- --------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------ -----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 567,615 $10,820,271 472,600 $ 9,252,929
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain 198,737 3,703,740 282,724 5,380,519
--------- ----------- --------- -----------
766,352 14,524,011 755,324 14,633,448
Shares repurchased ................... (218,153) (4,167,995) (368,337) (7,211,093)
--------- ----------- --------- -----------
Net increase ........................ 548,199 $10,356,016 386,987 $ 7,422,355
--------- ----------- --------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------ -----------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 21,535 $ 414,964 138,714 $ 2,806,680
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain 3,454 64,268 5,797 110,303
--------- ----------- --------- -----------
24,989 479,232 144,511 2,916,983
Shares repurchased ................... (17,682) (338,024) (120,139) (2,428,222)
--------- ----------- --------- -----------
Net increase ........................ 7,307 $ 141,208 24,372 $ 488,761
--------- ----------- --------- -----------
Increase derived from capital shares
transactions ....................... 1,178,927 $22,332,195 582,570 $10,756,577
========= =========== ========= ===========
</TABLE>
5. SUBSEQUENT EVENT. On January 30, 1998 the Board of Trustees of New England
Funds Trust I (the "Trust") approved a Subadvisory Agreement (the "Agreement")
relating to New England Capital Growth Fund (the "Fund") between New England
Funds Management, L.P. ("NEFM"), the Fund's adviser, and Westpeak Investment
Advisers, L.P ("Westpeak"). Under the Agreement, Westpeak will be the Fund's
subadviser, succeeding Loomis Sayles & Company, L.P., and will be responsible
for day-to-day management of the Fund's investment operations under the
oversight of NEFM. The Agreement is subject to the approval of the Fund's
shareholders. Pursuant to a rule of the Securities and Exchange Commission,
which under certain circumstances allows such agreements to take effect, and to
remain in effect for up to 120 days, without receiving prior shareholder
approval, the Agreement will be effective at the close of business on February
13, 1998. A special shareholder meeting will be held in early April to vote upon
the approval of the Agreement and a notice of such meeting and a proxy statement
will be sent to shareholders in mid-February. In the event that the Fund's
shareholders do not approve the Agreement at the special shareholder meeting,
then the Trust's Board of Trustees will convene a special meeting of trustees to
consider alternative arrangements for the managment of the Fund's investment
portfolio.
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust I and Shareholders of
NEW ENGLAND CAPITAL GROWTH 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 Capital Growth Fund
("the Fund"), a series of New England Funds Trust I, at December 31, 1997 and
the results of its operations, 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, 1997 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 12, 1998
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for
Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997,
November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus
for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997,
July 28, 1997, November 17, 1997 and January 1, 1998); and the New England
Equity Income Fund Prospectus for Class A, B and C shares dated September 1,
1997 (as supplemented November 17, 1997 and January 1, 1998).
THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES:
The cover page of each Prospectus is revised to reflect:
o While no initial sales charge applies to Class B or Class C share purchases,
a contingent deferred sales charge (a "CDSC") is imposed upon certain
redemptions of Class B and Class C shares.
o New England Funds Trust I, New England Funds Trust II and New England Funds
Trust III are referred to in the Prospectus as the "Trusts."
THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE
"SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ AS
FOLLOWS:
CLASS C
---------
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(2) ..................... None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable)(2) ............................................. 1.00%
(2) Does not apply to reinvested distributions.
In the tables that appear under "Example" in the "Schedule of Fees" section, the
expense amounts in the Prospectus for Class C shares for the 1 Year period
assume no redemption. If shares are redeemed at period end, expense amounts for
each Fund would be as follows: New England Capital Growth Fund, $33; New England
Balanced Fund, $31; New England International Equity Fund, $35; New England
Value Fund, $31; New England Growth Opportunities Fund, $31; New England Star
Advisers Fund, $35; New England Star Worldwide Fund, $44; New England Star Small
Cap Fund, $38; New England Equity Income Fund, $33.
THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS
REVISED TO READ AS FOLLOWS:
Class C shares are offered at net asset value, without an initial sales charge,
are subject to a 0.25% annual service fee and a 0.75% annual distribution fee,
are subject to a CDSC of 1.00% on redemptions made within one year from the date
of purchase and do not convert into another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such investment
dealer. The Distributor will retain the service and distribution fees assessed
against Class C shares in the first year of investment, and the entire amount of
the CDSC paid by Class C shareholders upon redemption in the first year, in
order to compensate the Distributor for providing distribution- related services
to the Fund in connection with the sale of Class C shares, and to reimburse the
Distributor, in whole or in part, for the commissions paid (and related
financing costs) to investment dealers at the time of a sale of Class C shares.
Unlike Class B shares, there are no conversion features associated with Class C
shares; therefore, if Class C shares are held for more than eight years Class C
shareholders will thereafter be subject to higher distribution fees than
shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of another series of the Trusts. If an exchange is
made to Class C shares of a Money Market Fund, then the one-year holding period
for purposes of determining the expiration of the CDSC will stop and resumes
only when an exchange is made back into Class C shares of a series of the
Trusts. If the Money Market Fund shares are redeemed rather than exchanged back
into a series of the Trusts, then the CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held longest are the first
to be redeemed.
The CDSC on Class C shares is not imposed on shares purchased prior to March 1,
1998.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gain distributions. The
first year of purchase ends one year after the day on which the purchase was
accepted.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested. The CDSC may be eliminated
for certain persons and organizations. See "Sales Charges--General" below.
THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS--
CLASS C SHARES" IS REVISED TO READ AS FOLLOWS:
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust - Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD SENTENCE
IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
Total return is measured by comparing the value of a hypothetical $1,000
investment in a class at the beginning of the relevant period to the value of
the investment at the end of the period (assuming deduction of the current
maximum sales charge on Class A shares, automatic reinvestment of all dividends
and capital gains distributions and, in the case of Class B and C shares,
imposition of the CDSC relevant to the period quoted).
<PAGE>
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NEW ENGLAND FUNDS
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STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Equity Income 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
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 Funds current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
<PAGE>
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U.S. Postage
PAID
Brockton, MA
Permit No. 770
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NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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399 Boylston Street
Boston, Massachusetts
02116
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MUTUAL FUND
SERVICE AWARD
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DALBAR
HONORS COMMITMENT TO:
INVESTORS
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1995 o 1996 o 1997
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