<PAGE>
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SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England Government Securities Fund
[graphic omitted]
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JUNE 30, 1998
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<PAGE>
August 1998
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
Investors had reason for comfort during the first half of 1998.
After stunning gains in each of the last three years, the stock market behaved
more like its customary self: Major market indicators moved up for a time, slid
back and were once again in recovery mode at the end of the period. This pattern
largely reflected investors' responses to fast-changing events in Asia.
Unpredictable markets call to mind the long-term experience of millions of
mutual fund investors; those of us who held firm to our plans as markets entered
difficult periods were often rewarded as markets recovered. The longer you stay
invested the less interim ups and downs - here or overseas - should concern you.
News from the Far East drove bond market sentiment as well. In the United
States, faltering Asian economies meant lower prices on many imported goods,
putting pressure on prices and corporate earnings. With slower growth now a real
possibility and with little immediate evidence of inflation, the Federal Reserve
Board left short-term interest rates unchanged, while long-term rates fell to
record lows in mid-June.
In the pages that follow, you can read about how your Fund's management dealt
with the disruptions in the Pacific region and their impact on our domestic
economy. But beyond Asia's present problems, and notwithstanding the inevitable
ebb and flow of our own business cycle, there are reasons to be optimistic about
investment prospects over the next several years. For example, vast,
under-served populations in China and elsewhere represent huge potential demand
for consumer goods. Here in the United States, there is the prospect of a
demography-driven spending wave, as millions of baby-boomers enter their peak
consumption years. Events may turn out differently - volatility will always be
part of investing - but as much as the markets may waver, the watchwords for
many long-term investors are constant: diversify and persist.
While you are thinking about your investments, take a few minutes to review your
portfolio. It's possible that three years of strong market gains have tilted
your holdings disproportionately toward aggressive stock funds. If so, you and
your financial representative can adjust the balance easily using some of New
England Funds' more conservative equity or bond funds to reallocate your assets
in line with your long-term goals and comfort level. Once you are satisfied with
your portfolio's balance, be sure to stay in touch with your financial
professional, invest regularly and don't try to guess what the market will do
next.
Thank you for your continued support of New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
PREPARING FOR THE YEAR 2000
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NEW ENGLAND FUNDS CONTINUES TO WORK TO PROVIDE HIGH QUALITY SERVICE AS WE MOVE
INTO THE NEW CENTURY. SINCE LAST YEAR WE HAVE DEVOTED SIGNIFICANT RESOURCES TO
IDENTIFYING, ANALYZING AND RESOLVING COMPUTER ISSUES RELATED TO YEAR 2000. AS A
FURTHER MEASURE, WE HAVE FOCUSED ON YEAR-END 1998 AS A TARGET FOR PREPAREDNESS
BY VENDOR AND SERVICE AGENCY SYSTEMS THAT WE RELY ON FOR SUPPORT. WE EXPECT
MAJOR SYSTEMS TO BE READY BEFORE THE END OF THE YEAR, WITH A YEAR OF QUALITY
ASSURANCE TO FOLLOW.
<PAGE>
NEW ENGLAND GOVERNMENT SECURITIES FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1998
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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.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in the Government Securities Fund's Class A Shares since
6/30/88 compared to the Lehman Government Bond Index and Cost of Living over
the same period. The data points in this chart are as follows:]
NET WITH LEHMAN COST
ASSET MAXIMUM GOV'T BOND OF
VALUE(1) SALES CHARGE(3) INDEX(4) LIVING(5)
- --------------------------------------------------------------------------------
6/30/88 $10,000 $ 9,550 $10,000 $10,000
6/89 $11,004 $10,509 $11,208 $10,517
6/90 $11,449 $10,933 $11,985 $11,008
6/91 $12,059 $11,516 $13,200 $11,525
6/92 $14,250 $13,609 $15,017 $11,881
6/93 $15,827 $15,115 $16,954 $12,237
6/94 $15,392 $14,699 $16,726 $12,542
6/95 $17,188 $16,415 $18,743 $12,923
6/96 $17,769 $16,970 $19,587 $13,279
6/97 $18,974 $18,120 $21,036 $13,584
6/98 $21,279 $20,322 $23,403 $13,796
JUNE 1988 THROUGH JUNE 1998
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and Class Y share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvested
distributions.
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
- --------------------------------------------------------------------------------
CLASS A (Inception 9/16/85) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 4.06% 12.15% 6.10% 7.84%
With Max. Sales Charge(2) -0.58 7.09 5.12 7.35
Lehman Gov't. Bond Index(4) 4.18 11.25 6.66 8.87
Lipper General Gov't. Average(6) 3.62 10.17 5.72 7.88
- --------------------------------------------------------------------------------
CLASS B (Inception 9/23/93) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.68% 11.32% 4.85%
With CDSC(3) -1.32 6.32 4.52
Lehman Gov't. Bond Index(4) 4.18 11.25 6.31
(calculated from 9/30/93)
Lipper General Gov't. Average(6) 3.62 10.17 5.42
(calculated from 9/30/93)
- --------------------------------------------------------------------------------
CLASS Y (Inception 3/31/94) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 4.20% 12.44% 7.72%
Lehman Gov't. Bond Index(4) 4.18 11.25 7.93
Lipper General Gov't. Average(6) 3.62 10.17 7.03
- --------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
their original cost. Class Y shares are available only to certain institutional
investors.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Government Bond Index is an unmanaged index of bonds that are issued
by the U.S. government and its agencies and have maturities between one and
ten years. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper General Government Funds 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>
NEW ENGLAND GOVERNMENT SECURITIES FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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[Photo of Joel Damiani]
Joel Damiani
Back Bay Advisors, L.P.
Q. How did New England Government Securities Fund perform over the past six
months?
The Fund performed well. For the six months ended June 30, 1998, the Fund's
Class A shares generated a total return of 4.06%, reflecting a $0.14 per share
gain in net asset value to $11.70 and the reinvestment of $0.32 per share in
dividend distributions. By comparison, your Fund's peer group of General
Government funds, as measured by Lipper Analytical Services, Inc., lagged with
an average return of 3.62% for the same period.
Q. What was the investment environment like for government securities?
The environment was positive, with the decline in interest rates benefiting
investors by driving up U.S. government bond prices. Interest rates were
relatively stable through most of the period, declining in the final weeks of
the second quarter. The yield of the benchmark 30-year U.S. Treasury bond ended
1997 at 5.92%, peaked at 6.08% in April and then fell to 5.62% on June 30, 1998.
During the period, favorable economic conditions in the United States and
uncertainty surrounding the Asian economic crisis worked to the advantage of
U.S. government securities. Early in 1998, the domestic economy grew at an
annualized rate of 5.4%, unemployment reached a 28-year low and inflation
remained minimal. Many investors became concerned that economic strength would
stimulate future inflation. At the same time, investors also expected the Asian
situation to dampen economic growth and keep a lid on inflationary pressures.
Demand for government securities rose as international investors sought them for
their safety and high inflation-adjusted returns, increasing the value of these
securities.
Q. What strategies did you use in managing the Fund?
We emphasized total return by balancing opportunities for income and price
performance. As of June 30, 1998, the Fund's average duration was 7.65 years and
its average maturity was 11.9 years. Expressed in years, duration is a more
precise measure than maturity of a bond's sensitivity to changes in interest
rates. The longer the duration, the more sensitive is a bond's price to movement
in interest rates; the reverse is also true. To help increase the Fund's
potential for price gains in anticipation of declining interest rates, we took
steps to extend the portfolio's overall duration.
PORTFOLIO MIX -- 6/30/98
-------------------------------------
U.S. TREASURY BONDS 67%
MORTGAGE-BACKED SECURITIES 24%
U.S. AGENCY SECURITIES 9%
Over the past six months, we reduced the Fund's holdings in mortgage-backed
securities and raised its position in U.S. Treasuries. During the period, the
yield advantage provided by mortgage-backed securities (compared to U.S.
Treasuries) declined, making U.S. Treasuries a better relative value. Further,
the prices of U.S. Treasuries tend to rise more than mortgage securities when
interest rates decline. In particular, we selected Treasuries with high coupons
(stated fixed rates of interest) to improve the Fund's level of income earnings.
We also invested in U.S. Treasury zero coupon bonds to maximize price
appreciation in the event of falling interest rates. Approximately 14% of the
portfolio was invested in U.S. Treasury zero coupon bonds at the end of the
period. Zero coupon bonds, which can be purchased for well below their face
value, do not produce income and are more sensitive to price fluctuations than
bonds that do generate income. These bonds maximize the potential for price
appreciation when interest rates fall and are subject to greater price declines
than income-producing bonds when interest rates rise. We concentrated on
investing in shorter-term U.S. Treasuries with three- to five-year maturities
and longer-term instruments maturing in 15 to 20 years, rather than spreading
investments across the entire maturity spectrum.
Q. What is your outlook for U.S. government securities over the next six months?
Many of the trends that have been positive for interest rates may remain in
place and push interest rates lower. We think economic strength in the United
States accompanied by low inflation will continue to attract foreign investors,
due to the dearth of good economic news coming from Asia. Further, we believe
the downturn in the Asian economies may keep inflationary pressures in the
United States under control. Longer term, however, we anticipate interest rates
moving up if domestic economic growth remains strong and the Asian economies
begin to recover.
Portfolio commentary reflects the conditions and actions taken during the
reporting period, which are subject to change.
A shift in opinion may result in strategic and other portfolio changes.
<PAGE>
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of June 30, 1998
(unaudited)
BONDS AND NOTES--98.7% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------
GOVERNMENT AGENCIES--9.1%
$ 7,300,000 Federal National Mortgage Association, 6.590%,
9/17/07 ........................................ $ 7,685,513
2,000,000 Federal National Mortgage Association, 6.800%,
8/27/12 ........................................ 2,104,060
------------
9,789,573
------------
MORTGAGE BACKED--23.4%
3,970,664 Federal Home Loan Mortgage Corp., 7.500%, 4/1/12 . 4,089,783
2,273,503 Federal National Mortgage Association, 5.937%,
10/25/08 ....................................... 2,222,417
1,142,000 Federal National Mortgage Association, 5.000%,
8/25/22 ........................................ 1,034,218
2,379,962 Federal National Mortgage Association, 6.500%,
11/1/27 ........................................ 2,370,276
1,971,946 Government National Mortgage Association, 6.500%,
2/15/28 ........................................ 1,967,627
8,998,203 Government National Mortgage Association, 7.000%,
with various maturities to 2026 (c) ............ 9,141,544
2,701,158 Government National Mortgage Association, 7.500%,
4/15/27 ........................................ 2,776,277
337,111 Government National Mortgage Association, 8.500%,
2/15/06 ........................................ 353,289
526,734 Government National Mortgage Association, 9.000%,
with various maturities to 2016 (c) ............ 563,304
188,523 Government National Mortgage Association, 9.500%,
with various maturities to 2009 (c) ............ 202,521
284,600 Government National Mortgage Association, 10.000%,
with various maturities to 2016 (c) ............ 306,232
44,424 Government National Mortgage Association, 12.500%,
with various maturities to 2014 (c) ............ 51,666
------------
25,079,154
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U.S. GOVERNMENT--66.2%
11,400,000 United States Treasury Bonds, 11.750%, 2/15/01 ... 13,111,824
6,300,000 United States Treasury Bonds, 12.375%, 5/15/04 ... 8,427,258
9,000,000 United States Treasury Bonds, 13.250%, 5/15/14 ... 14,477,310
14,500,000 United States Treasury Bonds, 9.125%, 5/15/18 .... 20,297,680
48,000,000 United States Treasury Stripped Bonds, Zero
Coupon, with various maturities to 2020 ........ 14,746,360
------------
71,060,432
------------
Total Bonds and Notes (Identified
Cost $104,085,432) ............................. 105,929,159
------------
SHORT TERM INVESTMENT--0.5%
- ------------------------------------------------------------------------------
$ 572,000 Repurchase Agreement with State Street Corp.
dated 6/30/98 at 5% to be repurchased at
$572,080 on 7/01/98 collateralized by
$445,000 U.S. Treasury Bond 8.125%
due 8/15/19 valued at $584,544 ................. 572,000
------------
Total Short Term Investment (Identified
Cost $572,000) ................................. 572,000
------------
Total Investments--99.2% (Identified
Cost $104,657,432) (b) ........................ 106,501,159
Other assets less liabilities .................... 862,217
------------
Total Net Assets--100% ........................... $107,363,376
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 1998 the net unrealized
appreciation on investments based on cost of $104,657,432
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 ......... $ 2,133,081
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... (289,354)
------------
Net unrealized appreciation .......................... $ 1,843,727
============
At December 31, 1997 the Fund had a capital loss carryover of
approximately $10,052,919 of which $3,530,050 expires on
December 31, 2004 and $6,522,869 expires on December 31, 2002.
This may be available to offset future realized capital gains
if any, to the extent provided by regulations.
(c) The Fund's investment in mortgage backed securities of the
Government National Mortgage Association are interests in
separate pools of mortgages. All separate investments in
securities of this issuer which have the same coupon rate
have been aggregated for the purpose of presentation in
the schedule of investments.
See accompanyng notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1998
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $104,657,432) ........ $106,501,159
Cash ....................................................... 253
Receivable for:
Fund shares sold ......................................... 49,184
Interest ................................................. 1,245,515
Prepaid registration expense ............................... 7,000
------------
107,803,111
LIABILITIES
Payable for:
Fund shares redeemed ..................................... $224,488
Dividends declared ....................................... 66,775
Accrued expenses:
Management fees .......................................... 56,095
Deferred trustees' fees .................................. 44,687
Accounting and administrative ............................ 2,739
Other .................................................... 44,951
--------
439,735
------------
NET ASSETS ................................................... $107,363,376
============
Net Assets consist of:
Capital paid in .......................................... $113,021,171
Undistributed net investment income ...................... 225,397
Accumulated net realized losses .......................... (7,726,919)
Unrealized appreciation on investments ................... 1,843,727
------------
NET ASSETS ................................................... $107,363,376
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($97,985,103 divided by 8,374,275 shares of beneficial
interest) ................................................ $11.70
======
Offering price per share (100/95.50 of $11.70) ........... $12.25*
======
Net asset value and offering price of Class B shares ($6,153,574
divided by 525,977 shares of beneficial interest) .......... $11.70**
======
Net asset value, offering and redemption price of Class Y shares
($3,224,699 divided by 276,047 shares of beneficial
interest) .................................................. $11.68
======
* 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 accompanyng notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................... $4,024,700
Expenses
Management fees .......................................... $ 358,016
Service fees - Class A ................................... 124,352
Service and distribution fees - Class B .................. 30,233
Trustees' fees and expenses .............................. 5,118
Accounting and administrative ............................ 15,136
Custodian ................................................ 41,780
Transfer agent ........................................... 132,002
Audit and tax services ................................... 17,000
Legal .................................................... 965
Printing ................................................. 20,924
Registration ............................................. 17,533
Miscellaneous ............................................ 4,736
-----------
Total expenses ............................................. 767,795
----------
Net investment income ...................................... 3,256,905
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain on Investments - net ......................... 2,326,000
Unrealized depreciation on Investments - net ............... (1,263,144)
----------
Net gain on investment transactions ........................ 1,062,856
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................... $4,319,761
==========
</TABLE>
See accompanyng notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 6,783,700 $ 3,256,905
Net realized gain on investment transactions ............ 1,274,411 2,326,000
Unrealized appreciation (depreciation) on investment
transactions .......................................... 3,475,971 (1,263,144)
------------ ------------
Increase in net assets from operations .................. 11,534,082 4,319,761
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (6,106,574) (2,727,211)
Class B ............................................... (253,171) (144,299)
Class Y ............................................... (371,662) (139,604)
------------ ------------
(6,731,407) (3,011,114)
------------ ------------
DECREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ............................................ (21,284,627) (9,839,926)
------------ ------------
Total decrease in net assets ............................ (16,481,952) (8,531,279)
NET ASSETS
Beginning of the period ................................. 132,376,607 115,894,655
------------ ------------
End of the period ....................................... $115,894,655 $107,363,376
============ ============
UNDISTRIBUTED (OVER DISTRIBUTED) NET INVESTMENT INCOME
End of the period ....................................... $ (20,394) $ 225,397
============ ============
</TABLE>
See accompanyng notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------------ JUNE 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period ................. $11.73 $11.75 $10.43 $11.73 $11.08 $11.56
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........... 0.72 0.69 0.74 0.71 0.62 0.35
Net Realized and Unrealized
Gain (Loss) on Investments .... 0.32 (1.32) 1.29 (0.64) 0.48 0.11
------ ------ ------ ------ ------ ------
Total From Investment Operations 1.04 (0.63) 2.03 0.07 1.10 0.46
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ............. (0.72) (0.69) (0.73) (0.72) (0.62) (0.32)
Distributions From Net
Realized Capital Gains ........ (0.30) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ............. (1.02) (0.69) (0.73) (0.72) (0.62) (0.32)
------ ------ ------ ------ ------ ------
Net Asset Value, End of the Period $11.75 $10.43 $11.73 $11.08 $11.56 $11.70
====== ====== ====== ====== ====== ======
Total Return (%) (a) ............ 9.0 (5.5) 20.0 0.8 10.3 4.1
Ratio of Operating Expenses
to Average Net Assets (%) ..... 1.22 1.29 1.35 1.32 1.36 1.36(b)
Ratio of Net Investment
Income to Average Net Assets (%) 5.70 6.66 6.69 6.45 5.63 5.93(b)
Portfolio Turnover Rate (%)...... 276 809 559 462 391 183(b)
Net Assets, End of the
Period (000) .................. $182,436 $147,986 $147,503 $120,607 $103,583 $97,985
(a) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
(b) Computed on an annualized basis.
</TABLE>
See accompanyng notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------
SEPTEMBER 23(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ------------------------------------------------ JUNE 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period ........... $12.26 $11.75 $10.43 $11.74 $11.08 $11.56
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ..... 0.16 0.60 0.65 0.63 0.54 0.30
Net Realized and Unrealized
Gain (Loss) on Investments (0.30) (1.32) 1.30 (0.65) 0.48 0.12
------ ------ ------ ------ ------ ------
Total From Investment
Operations .............. (0.14) (0.72) 1.95 (0.02) 1.02 0.42
------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income ....... (0.16) (0.60) (0.64) (0.64) (0.54) (0.28)
Distributions From Net
Realized Capital Gains .. (0.21) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ....... (0.37) (0.60) (0.64) (0.64) (0.54) (0.28)
------ ------ ------ ------ ------ ------
Net Asset Value, End of the
Period .................. $11.75 $10.43 $11.74 $11.08 $11.56 $11.70
====== ====== ====== ====== ====== ======
Total Return (%) (c) ...... (1.2) (6.2) 19.2 (0.1) 9.5 3.7
Ratio of Operating Expenses
to Average Net Assets (%) 1.97(b) 2.04 2.10 2.07 2.11 2.11(b)
Ratio of Net Investment
Income to Average Net
Assets (%) .............. 5.03(b) 5.91 5.94 5.70 4.88 5.18(b)
Portfolio Turnover Rate (%) 276 809 559 462 391 183(b)
Net Assets, End of the
Period (000) ............ $1,255 $2,760 $4,858 $5,385 $5,654 $6,154
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanyng notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS Y
---------------------------------------------------------------------
MARCH 31(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ---------------------------------- JUNE 30,
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period ............................ $11.20 $10.44 $11.71 $11.07 $11.54
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............... 0.54 0.80 0.74 0.65 0.36
Net Realized and Unrealized Gain
(Loss) on Investments ............. (0.77) 1.26 (0.63) 0.47 0.12
------ ------ ------ ------ ------
Total From Investment Operations .... (0.23) 2.06 0.11 1.12 0.48
------ ------ ------ ------ ------
Less Distributions
Distributions from Net Investment
Income ............................ (0.53) (0.79) (0.75) (0.65) (0.34)
------ ------ ------ ------ ------
Total Distributions ................. (0.53) (0.79) (0.75) (0.65) (0.34)
------ ------ ------ ------ ------
Net Asset Value, End of the Period .. $10.44 $11.71 $11.07 $11.54 $11.68
====== ====== ====== ====== ======
Total Return (%) (c) ................ (2.0) 20.3 1.1 10.5 4.2
Ratio of Operating Expenses to
Average Net Assets (%) ............ 0.93(b) 1.10 1.07 1.11 1.11(b)
Ratio of Net Investment Income to
Average Net Assets (%) ............ 7.25(b) 6.94 6.70 5.88 6.18(b)
Portfolio Turnover Rate (%) ......... 809 559 462 391 183(b)
Net Assets, End of the Period (000) . $4,104 $7,364 $6,384 $6,658 $3,225
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
</TABLE>
See accompanyng notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998
(unaudited)
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Fund seeks a high level of current income consistent with safety of
principal by investing in U.S. Government securities. The Declaration of Trust
permits the Trustees to issue an unlimited number of shares of the Trust in
multiple series (each such series of shares a "Fund").
The Fund offers Class A, Class B and Class Y shares. Class A shares are sold
with a maximum front end sales charge of 4.50%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before May
1, 1997). Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or service and distribution fees. They are intended for
institutional investors with a minimum of $1,000,000 to invest. Expenses of the
Fund are borne pro-rata by the holders of all classes of shares, except that
each class bears expenses unique to that class (including the Rule 12b-1 service
and distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. 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 and the subadviser,
under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Interest income is recorded on the accrual basis. Interest income is increased
by the accretion of discount. Interest income is decreased by the amortization
of acquisition premium on original issue discount securities. In determining net
gain or loss on securities sold, the cost of securities has been determined on
the identified cost basis.
C. OPTIONS. The Fund may use options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to the
Fund is that the change in value of options contracts may not correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty is unable to perform.
The maximum loss for purchased options is limited to premium initially paid for
the option. For options written by the Fund, the maximum loss is not limited to
the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest rate
futures contracts to hedge against changes in the values of securities the Fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price (or to deliver an
amount of cash) on a future date. Upon entering into such a contract, the
purchasing Fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the Fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatment for mortgaged backed securities for book and tax purposes.
Permanent book and tax basis differences will result in reclassification to the
capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. 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.
H. DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a forward
commitment basis. Payment and delivery may take place a month or more after the
date of the transaction. The price of the underlying securities and the date
when the securities will be delivered and paid for are fixed at the time the
transaction is negotiated.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 1998,
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
-------------------------------- -------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ---------- --------------- -----------
$97,832,736 $2,994,998 $85,718,756 $25,424,214
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors, L.P., ("Back Bay") at the rate of 0.325% of the first $200
million of the Fund's average daily net assets, 0.3125% of the next $300 million
and 0.30% of such assets in excess of $500 million. Certain officers and
directors of NEFM are also officers or trustees of the Fund. NEFM and Back Bay
are wholly owned subsidiaries of Nvest Companies, L.P., ("Nvest") which is a
subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by
NEFM and Back Bay under the management agreement in effect during the six months
ended June 30, 1998 are as follows:
FEES EARNED
-----------
$179,008 NEFM
179,008 Back Bay
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest 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 six
months ended June 30, 1998 these expenses amounted to $15,136 and are shown
separately in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is the
transfer and shareholder servicing agent to the Fund. For the six months ended
June 30, 1998, the Fund paid NEFSCO $97,722 as compensation for its services in
that capacity. For the six months ended June 30, 1998, the Fund received $1,131
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 a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class A shares, as reimbursement for expenses (including certain payments
to securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in providing personal services to investors in Class A shares
and/or the maintenance of shareholder accounts. For the six months ended June
30, 1998, the Fund paid New England Funds $124,352 in fees under the Class A
Plan. If the expenses of New England Funds that are otherwise reimbursable under
the Class A Plan incurred in any year exceed the amounts payable by the Fund
under the Class A Plan, the unreimbursed amount (together with unreimbursed
amounts from prior years) may be carried forward for reimbursement in future
years in which the Class A Plan remains in effect. The amount of unreimbursed
expenses carried forward into 1998 is $1,583,658.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class B shares and/or the maintenance of shareholder accounts.
For the six months ended June 30, 1998, the Fund paid New England Funds $7,558
in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who may
be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the six months
ended June 30, 1998, the Fund paid New England Funds $22,675 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1998 amounted to $84,187.
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, NEFSCO, Nvest or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $601
Meeting Fee 159/meeting
Annual Committee Member Retainer 90
Annual Committee Chairman Annual Retainer 60
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund on the
normal payment date.
4. CAPITAL SHARES. At June 30, 1998 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B and
Class Y capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 813,117 $ 9,129,882 508,124 $ 5,874,861
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 479,951 5,348,864 213,515 2,472,730
---------- ------------ ---------- ------------
1,293,068 14,478,746 721,639 8,347,591
Shares repurchased ................. (3,213,030) (35,810,354) (1,308,257) (15,145,816)
---------- ------------ ---------- ------------
Net decrease ....................... (1,919,962) $(21,331,608) (586,618) $ (6,798,225)
---------- ------------ ---------- ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 121,154 $ 1,355,757 127,778 $ 1,483,835
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 15,712 175,195 8,721 101,007
---------- ------------ ---------- ------------
136,866 1,530,952 136,499 1,584,842
Shares repurchased ................. (133,608) (1,485,360) (99,597) (1,150,017)
---------- ------------ ---------- ------------
Net increase ....................... 3,258 $ 45,592 36,902 $ 434,825
---------- ------------ ---------- ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------------------- --------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 35,311 $ 391,173 23,109 $ 267,880
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 33,327 371,325 12,393 143,278
---------- ------------ ---------- ------------
68,638 762,498 35,502 411,158
Shares repurchased ................. (68,695) (761,109) (336,309) (3,887,684)
---------- ------------ ---------- ------------
Net increase (decrease) ............ (57) $ 1,389 (300,807) $ (3,476,526)
---------- ------------ ---------- ------------
Decrease derived from capital shares
transactions ..................... (1,916,761) $(21,284,627) (850,523) $ (9,839,926)
========== ============ ========== =============
</TABLE>
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by
the Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the potfolio.
DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Bullseye Fund
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
Tax Free Income Fund of New York
Intermediate Term Tax Free Fund of California
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 Fund's
current prospectus, which contains information about
distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of New England Funds
are members of the National Association of Securities Dealers, Inc.
(NASD). As a service to investors, the NASD has asked that we inform you
of the availability of a brochure on its Public Disclosure Program.
The program provides access to information about
securities firms and their representatives. Investors may obtain
a copy by contacting the NASD at 1-800-289-9999 or by
visiting their web site at www.NASDR.com.
<PAGE>
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Where The Best Minds Meet(R) Paid
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