<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[LOGO]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England
Star Small Cap Fund
[Graphic Omitted]
- ------------------
DECEMBER 31, 1997
- ------------------
<PAGE>
FEBRUARY 1998
- -------------------------------------------------------------------------------
Dear Shareholder:
[Photo of Henry L.P. Schmelzer]
"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
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
TOTAL RETURNS -- 12/31/97
- -------------------------------------------------------------------------------
CLASS A (Inception 12/31/96) 1 YEAR/SINCE INCEPTION
Net Asset Value(1) 26.97%
With Max. Sales Charge(2) 19.69
CLASS B (Inception 12/31/96) 1 YEAR/SINCE INCEPTION
Net Asset Value(1) 26.09%
With CDSC(3) 21.09
CLASS C (Inception 12/31/96) 1 YEAR/SINCE INCEPTION
Net Asset Value(1) 26.09%
COMPARATIVE PERFORMANCE 1 YEAR/SINCE FUND INCEPTION
Russell 2000(4) 22.36%
Lipper Small Cap Fund Avg.(5) 20.63
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge 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) 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) Russell 2000 Small Stock Index is a popular measure of the stock price
performance of small companies. The Index performance has not been adjusted
for ongoing management, distribution and operating expenses and sales
charges applicable to mutual fund investments.
(5) Lipper Small Cap 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.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT COMPARED TO RUSSELL 2000
- -------------------------------------------------------------------------------
DECEMBER 1996 THROUGH DECEMBER 1997
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the Star Small Cap Fund's Class A shares compared to
Russell 2000. The data points to this chart are as follows:]
Net With Maximum Russell
Class A Asset Value(1) Sales Charge(2) 2000(4)
- -------------------------------------------------------------------------------
12/31/96 $10,000 $ 9,425 $10,000
Jan-97 $10,192 $ 9,606 $10,200
Feb-97 $ 9,920 $ 9,349 $ 9,953
Mar-97 $ 9,351 $ 8,814 $ 9,483
Apr-97 $ 9,264 $ 8,731 $ 9,510
May-97 $10,447 $ 9,847 $10,567
Jun-97 $11,040 $10,405 $11,021
Jul-97 $11,784 $11,106 $11,533
Aug-97 $12,104 $11,408 $11,797
Sep-97 $13,160 $12,403 $12,661
Oct-97 $12,673 $11,944 $12,105
Nov-97 $12,376 $11,665 $12,026
Dec-97 $12,697 $11,967 $12,237
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the Star Small Cap Fund's Class B shares compared to
Russell 2000. The data points to this chart are as follows:]
Net Russell
Class B Asset Value(1) CDSC(3) 2000(4)
- -------------------------------------------------------------------------------
12/31/96 $10,000 $10,000 $10,000
Jan-97 $10,184 $10,184 $10,200
Feb-97 $ 9,912 $ 9,912 $ 9,953
Mar-97 $ 9,336 $ 9,336 $ 9,483
Apr-97 $ 9,248 $ 9,248 $ 9,510
May-97 $10,425 $10,425 $10,567
Jun-97 $11,001 $11,001 $11,021
Jul-97 $11,745 $11,745 $11,533
Aug-97 $12,057 $12,057 $11,797
Sep-97 $13,098 $13,098 $12,661
Oct-97 $12,602 $12,602 $12,105
Nov-97 $12,298 $12,298 $12,026
Dec-97 $12,609 $12,109 $12,237
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the Star Small Cap Fund's Class C shares compared to
Russell 2000. The data points to this chart are as follows:]
Net Russell
Class C Asset Value(1) 2000(4)
- ----------------------------------------------------------------
12/31/96 $10,000 $10,000
Jan-97 $10,192 $10,200
Feb-97 $ 9,912 $ 9,953
Mar-97 $ 9,336 $ 9,483
Apr-97 $ 9,248 $ 9,510
May-97 $10,424 $10,567
Jun-97 $11,001 $11,021
Jul-97 $11,745 $11,533
Aug-97 $12,057 $11,797
Sep-97 $13,098 $12,661
Oct-97 $12,609 $12,105
Nov-97 $12,298 $12,026
Dec-97 $12,609 $12,237
These illustrations represent past performance and cannot predict future
results. Investment return and principal value may vary, resulting in a gain or
loss on the sale of shares. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
OVERVIEW: HOW YOUR FUND PERFORMED
- -------------------------------------------------------------------------------
New England Star Small Cap Fund finished its first full year in operation with
strong results. For the year ending December 31, 1997, the Fund's Class A shares
produced a total return of 26.97%, reflecting a $2.87 per share gain in net
asset asset value to $15.37 per share and the reinvestment of $0.475 per share
in capital gains distributions. For both Class B and C shares, the Fund
generated a total return of 26.09%, also based on net asset value. In
comparison, the Russell 2000 Small Stock Index returned 22.36%, falling well
short of your Fund's 1997 performance.
The 12-month period was generally positive for domestic stocks. U.S. economic
growth was strong, interest rates were relatively low, and inflation remained at
a modest level of 2%. For the first four months of the year, however, returns
from stocks of small companies generally lagged those of large companies, which
had been market leaders for more than two years. Investor sentiment began to
cool toward large-company stocks during the second quarter of the year, when a
strong U.S. dollar and high stock prices raised questions about whether or not
large-company stocks could continue their climb. As investors sought other
opportunities, small-company stocks rallied for several months, outperforming
large-company stocks. During the last three months of 1997, problems in certain
Asian economies and financial markets reverberated throughout the world's stock
markets. U.S. stocks, in fact, declined across the board, especially
small-company stocks.
New England Star Small Cap Fund is composed of four separate portfolio segments,
each managed by a different leading investment management firm. Your Fund's
multiple-adviser approach -- the essence of the Star concept -- provides a means
to diversify among not just individual securities, but among investment styles
and strategies as well.
Though the four portfolio segments of New England Star Small Cap Fund are
managed autonomously, the following chart gives you a general sector profile of
the Fund as a whole.
- -------------------------------------------------------------------------------
YOUR FUND'S 10 LARGEST SECTORS -- 12/31/97
- -------------------------------------------------------------------------------
% OF
SECTOR NET ASSETS
- -------------------------------------------------------------------------------
1. BUSINESS SERVICES 6.8
- -------------------------------------------------------------------------------
2. SOFTWARE 6.8
- -------------------------------------------------------------------------------
3. INSURANCE 4.8
- -------------------------------------------------------------------------------
4. CONSUMER GOODS & SERVICES 4.4
- -------------------------------------------------------------------------------
5. RETAIL 4.2
- -------------------------------------------------------------------------------
6. BANKS 4.1
- -------------------------------------------------------------------------------
7. INDUSTRIAL GOODS & SERVICES 3.4
- -------------------------------------------------------------------------------
8. HEALTH CARE -D MEDICAL TECHNOLOGY 3.4
- -------------------------------------------------------------------------------
9. SAVINGS & LOAN 3.1
- -------------------------------------------------------------------------------
10. BROADCASTING & PUBLISHING 2.9
- -------------------------------------------------------------------------------
Portfolio holdings and asset allocations will vary.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
OAKMARK/HARRIS ASSOCIATES L.P.
- -------------------------------------------------------------------------------
Q. How do you manage the Oakmark/ Harris portion of the portfolio?
Photo of Steven Reid]
Steven Reid
Oakmark/Harris Associates L.P.
I select stocks on a case-by-case basis, though my segment's holdings during
the year tended to cluster around a few themes and industry sectors. I found
opportunity in a number of areas, especially financial companies and small
industrial businesses, which were among the strongest contributors to
performance.
Q. In what types of financial companies did you invest?
I emphasized companies that were leaders in specific market niches, such as
reinsurance companies. Reinsurers allow individual companies to take on
clients whose coverage would be too great a burden for one insurer alone to
carry. A reinsurer assumes some of the risk in return for part of the premium
fee paid by the insured. RenaissanceRe Holdings and PXRE Corp. are two
reinsurers that contributed to the portfolio's return.
The largest bank investment at year-end was People's Bank. Large banks have
been acquiring small, independent Connecticut banks, and People's is one of
the last remaining. The bank is well run, with some appealing
characteristics: very high market share of deposits, strong credit card
operation, and a unique corporate structure.
Q. Industrial companies were a large part of your portion of the portfolio.
What types of companies did you find attractive?
Primarily two types of companies -- those that were spin-offs from larger
businesses and those that had implemented restructuring programs. An example
is Magnatech, which produces motors and control devices. Among its
significant products are lighting ballasts, which are essential for
fluorescent lighting.
Q. What explains the absence of technology stocks in your portion of the
portfolio?
My long investment time frame exceeds the life cycles of the products of many
technology companies. In many cases, today's technology is tomorrow's
obsolescence. I find it is more productive to look for the companies that are
the beneficiaries of new technology.
LARGEST HOLDINGS IN OAKMARK/HARRIS SEGMENT
- -------------------------------------------------------------------------------
% OF SEGMENT ASSETS % OF FUND ASSETS
- -------------------------------------------------------------------------------
People's Bank 6.11 1.60
Catellus Development Corp. 5.15 1.35
U.S. Industries, Inc. 4.85 1.27
RenaissanceRe Holdings 4.26 1.12
Cablevision Systems Corp. 3.70 0.97
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
LOOMIS, SAYLES & COMPANY, L.P.
- -------------------------------------------------------------------------------
Q. The Loomis, Sayles & Company portion of the portfolio emphasizes small,
growth stocks. How did they perform?
[Photo of David Smith, Philip Fine and Christopher Ely] David Smith, Philip Fine
and Christopher Ely Loomis, Sayles & Co., L.P.
Small growth stocks generally underperformed both large-cap stocks and
small-cap value stocks, revealing the challenging conditions for small-cap
growth managers during 1997. In particular, a heavy concentration in
technology stocks hampered the Loomis Sayles portion of the portfolio during
the year.
Q. What changes did you make to your technology holdings during the period?
We reduced our technology investments, ending the year with 24% of the Loomis
Sayles segment in technology, down from a high of about 42% in the third
quarter. Beginning in September, we took profits in many of our electronics
holdings and redeployed the proceeds into software and services. We believe
these investments are less vulnerable to problems in Asia. Among the
electronics companies we continued to favor were SIPEX (a producer of a
proprietary chip that illuminates displays on devices such as pagers, cell
phones, and watches) and ATMI (a supplier of specialized materials to
semiconductor manufacturers).
LARGEST HOLDINGS IN LOOMIS SEGMENT
- -------------------------------------------------------------------------------
% OF SEGMENT ASSETS % OF FUND ASSETS
- -------------------------------------------------------------------------------
Sipex Corp. 3.08 0.74
Network Appliance, Inc. 2.98 0.72
Sunrise Assisted Living, Inc. 2.84 0.68
FirstFed Financial 2.79 0.67
Whole Foods Market, Inc. 2.75 0.66
Q. What types of stocks helped performance?
Financial stocks were very strong performers in 1997, benefiting from
declining interest rates and a consolidation within the banking industry. We
ended the year with 13% of our segment invested in small banks, savings and
loans, and insurance companies.
Q. At 16% of your segment, health care stocks were a large position. Where
did you find opportunity?
We focused on three areas: biotechnology, medical devices, and services. In
biotechnology, we emphasized companies with drugs in late-stage clinical
trials or already approved by the Food and Drug Administration. Sepracor, a
company that develops improved versions of existing drugs, was one such
company. In the medical device area, we were particularly excited about
Novoste, which is developing a device that uses radiation to open re-narrowed
arteries following coronary angioplasty. In the services area, we invested in
Sunrise Assisted Living, a pioneer in building facilities for the elderly.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
MONTGOMERY ASSET MANAGEMENT
- -------------------------------------------------------------------------------
Q. How do you select stocks for the Montgomery portion of the portfolio?
[Photo of Andrew Pratt]
Andrew Pratt Montgomery Asset Management
I take a three-step approach. First, I screen individual companies, looking
for positive changes and potential for strong earnings growth. If the signs
are positive, I then proceed to the second step: fundamental analysis. I talk
with company managers, analyze corporate balance sheets, product lines, and
market share, then apply Montgomery's own valuation criteria. Finally, to be
added to the portfolio, a company must have the potential to appreciate 20%
over the next 12 months. With this strategy, I built a mix of technology,
finance, health care, and industrial stocks.
Q. In selecting investments, did any themes surface?
Yes, although my approach is to select companies on an individual basis.
Across virtually all sectors of the economy, there's evidence that companies
are focusing on their core businesses and outsourcing work that can be
handled by specialists. I found a number of outsourcing companies attractive.
For example, we invested in Caribiner, a company that helps businesses with
new product launches and other public relations events. Caribiner is active
in the hotel industry, where it supplies audio-visual services for special
events.
LARGEST HOLDINGS IN MONTGOMERY SEGMENT
- --------------------------------------------------------------------------------
% OF SEGMENT ASSETS % OF FUND ASSETS
- -------------------------------------------------------------------------------
Cooper Companies, Inc. 3.20 0.77
ESC Medical Systems, Ltd. 2.17 0.52
Acxiom Corp. 2.11 0.51
Jones Medical Industries, Inc. 2.01 0.48
Carpenter Technology Corp. 1.90 0.46
Information technology is another area in which outsourcing is common.
Services, such as implementing applications, establishing computer networks,
and solving the year 2000 problem are in demand. Rather than maintain large
technical staffs, many companies keep small information technology businesses
under contract. Two information technology companies that I added were
Computer Task Group and Analysts International.
Q. What other types of companies were attractive?
Selected health care companies that we believe can be long-term contributors
to the portfolio's returns constituted about 15% of the Montgomery portion of
the portfolio at year-end. One example is ESC Medical Systems, Ltd., a
company that makes laser equipment used by dermatologists for cosmetic skin
care applications. Not only is ESC a well run business, but I believe it
stands to benefit from increasing demand for skin care procedures as the
population ages.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND STAR SMALL CAP FUND
- -------------------------------------------------------------------------------
ROBERTSON STEPHENS INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
Q. How did you structure the Robertson Stephens portion of the portfolio?
[Photo of John Wallace]
[Photo of John Seabern]
John Wallace and John Seabern
Robertson Stephens Investment Management
One stock at a time -- which was a successful approach during 1997's volatile
investment environ-ment for small-company stocks. During the past year, the
segment's sector allocations were in line with that of the Fund's benchmark,
the Russell 2000 Index. No individual stock position exceeded 3% of the
segment.
Q. Which investments contributed most to performance?
A varied blend of stocks in a number of industries and economic sectors
performed well. Vans, a sportswear and sports equipment retailer for
so-called Generation X adults, was a solid performer throughout the year. The
company continues to post revenue and earnings growth above 20%, yet its
stock price is relatively inexpensive compared to its earnings growth.
Energy service stocks helped boost performance in 1997, despite poor returns
in the fourth quarter. Even though oil prices declined, major integrated oil
companies continued to increase exploration and development spending. This
trend was positive for oil service companies and may continue through 1998 as
well. Camco International, OYO Geospace Corp., and Key Energy are some of the
oil service stocks that delivered strong results.
Q. What is your outlook for 1998?
We're cautious about 1998, believing it's late in both the economic growth
and bull market cycles. While Asian financial turmoil dominated market news
in the latter part of 1997, it's impossible to predict the eventual impact of
Asia's problems on the economy and financial markets in the United States.
We believe the cable TV industry is an area to watch. Many cable system
operators have invested heavily in technology and equipment, as they seek to
expand into more households. In many cases, these investment programs are
winding down and freeing up cash flow. Simultaneously, many cable operators
are expanding services and raising cable fees to subscribers. We believe
these trends could lead to better cash flow and potentially better stock
performance.
LARGEST HOLDINGS IN ROBERTSON STEPHENS SEGMENT
- -------------------------------------------------------------------------------
% OF SEGMENT ASSETS % OF FUND ASSETS
- -------------------------------------------------------------------------------
AgriBioTech, Inc. 2.38 0.61
EVI, Inc. 2.04 0.52
Walter Industries, Inc. 1.86 0.48
Cooper Cameron Corp. 1.80 0.46
Herman Miller 1.79 0.46
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of December 31, 1997
COMMON STOCK -- 92.6% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE(A)
- -------------------------------------------------------------------------------
AEROSPACE--0.9%
5,000 Alliant Techsystems, Inc. ................... $ 278,750
25,000 Tracor, Inc. ................................ 759,375
------------
1,038,125
------------
AIRLINES--0.3%
7,500 Continental Airlines, Inc. .................. 360,938
------------
APPAREL & TEXTILES--0.9%
7,000 Jones Apparel Group, Inc. (c) ............... 301,000
10,800 St. John Knits, Inc. ........................ 432,000
10,300 The Men's Wearhouse, Inc. (c) ............... 357,925
------------
1,090,925
------------
AUTOMOTIVE--0.4%
30,000 Stoneridge, Inc. ............................ 480,000
------------
BANKS--4.1%
25,000 BankAtlantic Bancorp, Inc. .................. 407,812
10,650 Commercial Federal Corp. .................... 378,741
6,000 Compass Bancshares, Inc. .................... 262,500
9,000 First Union Corp. ........................... 461,250
6,000 Long Island Bancorp, Inc. ................... 297,750
30,000 Northwest Savings Bank ...................... 423,750
50,000 People's Bank ............................... 1,900,000
10,000 TCF Financial Corp. ......................... 339,375
5,000 Union Planters Corp. ........................ 339,688
------------
4,810,866
------------
BIOTECHNOLOGY--1.1%
42,500 AgriBioTech, Inc. (c) ....................... 725,156
8,200 Intercardia, Inc. (c) ....................... 146,575
21,500 Millennium Pharmaceuticals (c) .............. 408,500
------------
1,280,231
------------
BROADCASTING--1.2%
8,600 Heftel Broadcasting Corp. (c) ............... 402,050
15,000 U.S. West Media Group (c) ................... 433,125
16,300 Westwood One, Inc. (c) ...................... 605,138
------------
1,440,313
------------
BROADCASTING &
PUBLISHING--2.9%
40,000 Ascent Entertainment Group, Inc. (c) ........ 415,000
12,000 Cablevision Systems Corp. (c) ............... 1,149,000
9,000 Catalina Marketing Corp. (c) ................ 416,250
20,000 Granite Broadcasting Corp. (c) .............. 181,250
15,800 HA-LO Industries, Inc. (c) .................. 410,800
10,000 Lee Enterprises, Inc. ....................... 295,625
18,000 Metro Networks, Inc. (c) .................... 589,500
------------
3,457,425
------------
BUILDING MATERIAL &
CONSTRUCTION--0.3%
15,000 Kaufman & Broad Home Corp. .................. 336,563
------------
BUSINESS SERVICES--6.8%
11,100 Abacus Direct Corp. (c) ..................... 455,100
18,700 Alternative Resources (c) ................... 431,269
20,000 Applied Graphics Technologies, Inc. (c)...... 1,065,000
9,400 Caribiner International, Inc. (c) ........... 418,300
22,300 Checkfree Corp. (c) ......................... 602,100
9,400 Computer Learning Centers, Inc. (c) ......... 575,750
12,500 Computer Task Group, Inc. ................... 444,531
12,800 CSG Systems International, Inc. (c).......... 512,000
4,800 Fair Issac & Company, Inc. (c) .............. 159,900
21,000 Inspire Insurance Solutions, Inc. ........... 438,375
12,400 Interim Services (c) ........................ 320,850
19,700 Lamar Advertising Co. (c) ................... 783,075
31,900 PMT Services, Inc. (c) ...................... 442,612
17,100 Saville Systems PLC (c) ..................... 709,650
81,157 U-Ship, Inc. ................................ 15,217
12,800 Universal Outdoor Holdings, Inc. (c) ........ 665,600
------------
8,039,329
------------
COMMERCIAL SERVICES--0.4%
12,000 Childrens Comprehensive Services ............ 222,000
7,000 Primark Corp. ............................... 284,813
------------
506,813
------------
COMMUNICATION SERVICES--1.5%
17,500 Clearnet Communications, Inc. 199,062
15,400 Metromedia Fiber Network, Inc. (c) .......... 256,025
12,000 Mobile Telecommunication .................... 264,000
13,000 NEXTEL Communications, Inc................... 338,000
8,500 Startec Global Communications ............... 190,188
10,300 Winstar Communications, Inc. (c) ............ 256,856
8,500 WorldCom, Inc. (c) .......................... 257,125
------------
1,761,256
------------
COMPUTER SOFTWARE &
SERVICES--1.1%
6,000 Compuware Corp. (c) ......................... 192,000
14,600 Concord Communications, Inc. (c) ............ 302,950
12,800 Ontrack Data International, Inc. (c) ........ 319,200
12,000 Peritus Software Services, Inc. (c) ......... 244,500
12,800 Smallworldwide PLC (c) ...................... 280,000
------------
1,338,650
------------
COMPUTERS & BUSINESS
EQUIPMENT--1.6%
15,000 Imation Corp. (c) ........................... 240,000
9,400 Natural Microsystems Corp. (c) .............. 437,100
24,000 Network Appliance, Inc. (c) ................. 852,000
18,850 United States Office Products Co. (c) ....... 369,931
------------
1,899,031
------------
CONSTRUCTION
MATERIALS--0.2%
12,500 Giant Cement Holding, Inc. .................. 289,063
------------
CONSUMER GOODS &
SERVICES--4.4%
12,600 Budget Group, Inc. (c) ...................... 435,488
12,000 Education Management Corp. (c) .............. 372,000
36,500 Ferro Corp. ................................. 887,406
15,000 First Brands Corp. .......................... 404,063
10,500 GC Companies, Inc. (c) ...................... 497,437
23,500 Libbey, Inc. ................................ 890,062
20,000 R.G. Barry Corp. ............................ 232,500
20,000 Scotsman Industries, Inc. ................... 488,750
12,800 Standard Motor Products, Inc. ............... 288,800
25,000 Triarc Companies, Inc. (c) .................. 681,250
------------
5,177,756
------------
DIVERSIFIED CONGLOMERATES--1.3%
50,000 U.S. Industries, Inc. (c) ................... 1,506,250
------------
DRUGS & HEALTH CARE--2.1%
7,700 Gilead Sciences, Inc. (c) ................... 294,525
15,200 INCYTE Pharmacuticals, Inc. (c) ............. 684,000
12,800 Medimmune, Inc. (c) ......................... 548,800
11,100 Pharmacyclics, Inc. (c) ..................... 284,438
8,600 Sepracor, Inc. (c) .......................... 344,537
9,400 Vertex Pharmaceuticals, Inc. (c) ............ 310,200
------------
2,466,500
------------
ELECTRIC UTILITIES--0.2%
10,000 Houston Industries, Inc. .................... 266,875
------------
ELECTRICAL EQUIPMENT--0.4%
17,600 MRV Communications, Inc. (c) ................ 420,200
------------
ELECTRONIC COMPONENTS--1.2%
24,800 ATMI, Inc. (c) .............................. 601,400
29,100 Sipex Corp. (c) ............................. 880,275
------------
1,481,675
------------
ELECTRONICS--1.3%
15,100 Genrad, Inc. (c) ............................ 455,831
18,900 SBS Technologies, Inc. (c) .................. 512,663
14,600 Uniphase Corp. (c) .......................... 604,075
------------
1,572,569
------------
ENERGY--2.4%
7,000 Burlington Resources, Inc. .................. 313,688
5,500 Camco International, Inc. ................... 350,281
10,600 CE Franklin, Ltd. ........................... 98,050
9,000 Cooper Cameron Corp. (c) .................... 549,000
12,000 EVI, Inc. ................................... 621,000
17,000 Mitcham Industries, Inc. .................... 310,250
20,000 OYO Geospace Corp. .......................... 377,500
25,000 Virginia Gas Co. ............................ 212,500
------------
2,832,269
------------
ENTERTAINMENT--1.0%
60,000 Alliance Gaming Corp. ....................... 292,500
23,100 Grand Casinos, Inc. ......................... 314,738
19,700 Regal Cinemas, Inc. (c)...................... 549,137
------------
1,156,375
------------
FINANCIAL SERVICES--1.1%
26,700 BA Merchant Services (c) .................... 473,925
12,000 Duff & Phelps Credit Rating Co. ............. 487,500
15,300 Imperial Credit Industries (c) .............. 313,650
750 Resource Bancshares Mortgage Group .......... 12,234
------------
1,287,309
------------
FOOD -- AGRIBUSINESS--0.5%
17,877 Delta and Pine Land. ........................ 545,249
------------
FOOD & BEVERAGES--2.3%
35,000 Authentic Specialty Foods, Inc. ............. 476,875
13,600 Broughton Foods Co. (c) ..................... 227,800
28,500 International Multifoods Corp. .............. 806,906
40,000 M & F Worldwide Corp. ....................... 392,500
50,000 Ralcorp Holdings, Inc. (c) .................. 846,875
------------
2,750,956
------------
FOOD -- RETAILERS/
WHOLESALERS--0.3%
18,750 Tasty Baking Corp. .......................... 362,109
------------
HEALTH CARE--1.8%
17,500 Ballard Medical Products (c) ................ 424,375
16,100 FPA Medical Management, Inc. (c) ............ 299,863
15,000 Jones Medical Industries, Inc. (c) .......... 573,750
25,100 Orthodontic Centers of America, Inc. (c) .... 417,287
11,400 Sierra Health Services, Inc. (c) ............ 383,325
------------
2,098,600
------------
HEALTH CARE -- MEDICAL
TECHNOLOGY--3.4%
22,300 Cooper Companies, Inc. (c) .................. 911,512
11,100 Cytyc Corp. (c) ............................. 276,113
16,000 ESC Medical Systems, Ltd. (c) ............... 620,000
15,000 Matritech, Inc. ............................. 73,125
14,600 Novoste Corp. (c) ........................... 328,500
18,500 Perclose, Inc. (c) .......................... 356,125
13,800 Sola International, Inc. (c) ................ 448,500
10,000 Spine-Tech, Inc. ............................ 514,375
12,700 Waters Corp. (c) ............................ 477,837
------------
4,006,087
------------
HEALTH CARE -- SERVICES--1.5%
50,000 Medaphis Corp. (c) .......................... 325,000
17,100 Medquist, Inc. (c) .......................... 594,225
18,800 Sunrise Assisted Living, Inc. (c) ........... 810,750
------------
1,729,975
------------
HOME BUILDERS--2.0%
13,000 Crossmann Communities, Inc. ................. 359,125
22,300 D.R.Horton .................................. 387,462
24,800 Lennar Corp. ................................ 534,750
10,000 Oakwood Homes Corp. ......................... 331,875
6,000 Pulte Corp. ................................. 250,875
20,000 Toll Brothers, Inc. ......................... 535,000
------------
2,399,087
------------
HOTELS & RESTAURANTS--0.5%
18,800 CapStar Hotel Co. (c) ....................... 645,075
------------
INDUSTRIAL GOODS &
SERVICES--3.4%
15,000 Binks Manufacturing Co. ..................... 633,750
13,000 Columbus McKinnon ........................... 315,250
30,000 Gardner Denver Machinery, Inc. (c) .......... 759,375
45,000 MagneTek, Inc. (c) .......................... 877,500
15,000 SPX Corp. ................................... 1,035,000
13,500 Zurn Industries, Inc. ....................... 424,406
------------
4,045,281
------------
INDUSTRIAL MACHINERY--0.2%
13,700 IRI International Corp. (c) ................. 191,800
------------
INSURANCE--4.8%
13,000 Chartwell Re Corp. .......................... 438,750
15,000 Financial Security Assured Holdings, Ltd. ... 723,750
7,500 Hartford Life, Inc. (c) ..................... 339,844
25,000 Highlands Insurance Group, Inc. (c) ......... 709,375
13,700 Penn Treaty American Corp. (c) .............. 434,975
7,000 Piper Jaffray Companies, Inc. ............... 255,062
7,000 Provident Companies, Inc. ................... 270,375
25,000 PXRE Corp. .................................. 829,687
30,000 RenaissanceRe Holdings....................... 1,323,750
8,250 W. R. Berkley Corp. ......................... 361,969
------------
5,687,537
------------
LEISURE & LODGING--0.7%
9,400 Interstate Hotels Co. (c) ................... 329,588
22,900 Prime Hospitality Corp. (c) ................. 466,587
------------
796,175
------------
MACHINERY--1.6%
20,000 D T Industries .............................. 680,000
10,300 Manitowoc Co. ............................... 334,750
11,500 Mathews International Corp. ................. 506,000
18,000 Northwest Pipe Co. (c) ...................... 432,000
------------
1,952,750
------------
MANUFACTURING--1.2%
10,000 Herman Miller ............................... 545,625
7,600 Simpson Manufacturing Co. ................... 253,175
27,500 Walter Industries, Inc. ..................... 567,188
------------
1,365,988
------------
MEDIA & ENTERTAINMENT--1.0%
13,500 Comcast Corp. ............................... 426,094
14,002 Tele-Communications TCI Ventures Group ...... 396,432
15,000 Tele-Communications, Inc. (c) ............... 419,062
------------
1,241,588
------------
METAL--1.2%
20,000 Atchison Casting ............................ 325,000
25,000 The Carbide/Graphite Group, Inc. (c) ........ 843,750
10,500 Titanium Metals Corp. (c) ................... 303,187
------------
1,471,937
------------
NETWORK SYSTEMS--1.3%
25,000 Aware, Inc. ................................. 256,250
32,000 Concentric Network Corp. .................... 284,000
22,500 Digi International, Inc. (c) ................ 382,500
20,000 Nextlevel Systems, Inc. (c) ................. 357,500
70,000 Tidel Technologies, Inc. (c) ................ 275,625
------------
1,555,875
------------
OIL--1.0%
16,500 Hvide Marine, Inc. (c) ...................... 424,875
21,000 Marine Drilling Companies, Inc. (c) ......... 435,750
11,500 Pride International, Inc. (c) ............... 290,375
------------
1,151,000
------------
OIL & GAS--1.7%
93,200 Bonus Resource Services Corp. ............... 384,786
20,000 Comstock Resources, Inc. .................... 238,750
15,000 Nabors Industries, Inc. ..................... 471,562
6,500 Patterson Energy, Inc. (c) .................. 251,469
70,000 Titan Exploration, Inc. (c) ................. 665,000
------------
2,011,567
------------
OIL -- INDEPENDANT
PRODUCERS--0.4%
14,600 St. Mary Land & Exploration Co. ............. 511,000
------------
PACKAGING--0.3%
16,900 Ivex Packaging Corp. (c) .................... 405,600
------------
PAPER--0.3%
10,000 Caraustar Industries, Inc. .................. 342,500
------------
PETROLEUM SERVICES--0.3%
8,600 Atwood Oceanics, Inc. (c) ................... 407,425
------------
PHARMACEUTICAL--0.3%
18,800 DUSA Pharmaceuticals, Inc ................... 216,200
10,000 Neurex Corp. ................................ 138,750
------------
354,950
------------
PHOTOGRAPHY--0.2%
14,900 X-Rite, Inc. ................................ 271,925
------------
PUBLISHING--0.5%
11,900 Big Flower Holdings, Inc. (c) ............... 287,088
11,200 World Color Press, Inc. (c) ................. 297,500
------------
584,588
------------
REAL ESTATE--1.8%
22,000 Canadian Hotel (Warrants) ................... 147,792
25,000 Castle & Cooke, Inc. (c) .................... 421,875
80,000 Catellus Development Corp. (c) .............. 1,600,000
------------
2,169,667
------------
REAL ESTATE INVESTMENT TRUSTS--0.4%
19,000 CRIIMI MAE, Inc. ............................ 285,000
7,500 Walden Residential Properties, Inc. ......... 191,250
------------
476,250
------------
RESTAURANTS--0.2%
22,200 Apple South, Inc. ........................... 291,375
------------
RETAIL--4.2%
12,700 Borders Group, Inc. (c) ..................... 397,669
15,000 Cole National Corp. (c) ..................... 449,062
19,800 Eagle Hardware & Garden (c) ................. 383,625
15,000 Gadzooks, Inc. (c) .......................... 315,000
13,000 ONSALE, Inc. ................................ 234,000
13,800 Proffitts (c) ............................... 392,438
2,800 Rock of Ages Corp. .......................... 43,400
13,000 The Dress Barn .............................. 368,875
75,000 Ugly Duckling Corp. ......................... 637,500
35,000 Vans, Inc. .................................. 529,375
24,500 Whole Foods Market, Inc. (c) ................ 1,252,562
------------
5,003,506
------------
RETAIL -- SPECIALTY--0.3%
22,000 N2K, Inc. ................................... 321,750
------------
SAVINGS & LOAN--3.1%
13,700 Astoria Financial Corp. ..................... 763,775
15,400 Bay View Capital Corp........................ 558,250
20,600 FirstFed Financial (c) ...................... 798,250
13,700 Peoples Heritage Financial Group ............ 630,200
17,100 Reliance Bancorp, Inc. ...................... 626,287
14,600 Roslyn Bancorp .............................. 339,450
------------
3,716,212
------------
SEMICONDUCTOR &
EQUIPMENT--0.2%
18,000 International Rectifier Corp. (c) ........... 212,625
------------
SOFTWARE--6.8%
31,300 Acxiom Corp. (c) ............................ 602,525
9,000 Analysts International ...................... 310,500
15,100 Boole & Babbage, Inc. (c) ................... 451,112
9,400 Daou Systems, Inc. (c)....................... 293,750
65,000 Egghead, Inc. (c) ........................... 422,500
10,000 Filenet Corp. (c) ........................... 301,250
16,400 Henry Jack & Associates, Inc. ............... 446,900
19,700 Industri Matematik International Corp. (c)... 581,150
23,000 INTERSOLV, Inc. (c) ......................... 465,750
8,900 Kronos, Inc. (c) ............................ 274,231
12,000 Lycos, Inc. (c) ............................. 496,500
10,200 National Instruments Corp. (c) .............. 295,800
4,100 Netscape Communications Corp. (c) ........... 99,938
13,000 PLATINUM Technology, Inc. ................... 367,250
27,500 Secure Computing Corp. ...................... 324,844
22,000 Structural Dynamics (c) ..................... 495,000
8,300 Synopsys, Inc. (c) .......................... 296,725
30,000 System Software Associates, Inc. ............ 262,500
12,850 Veritas Software Co. (c) .................... 655,350
15,000 Wind River Systems (c) ...................... 595,312
------------
8,038,887
------------
STEEL--0.5%
11,300 Carpenter Technology Corp. .................. 543,106
------------
TELECOMMUNICATION
EQUIPMENT--1.5%
20,000 ANTEC Corp. ................................. 312,500
11,000 Comverse Technology, Inc. (c) ............... 429,000
37,600 IWL Communications, Inc. .................... 488,800
33,000 P-COMM, Inc. (c) ............................ 569,250
------------
1,799,550
------------
TOBACCO--0.5%
10,900 Consolidated Cigar Holdings, Inc. (c) ....... 300,432
12,100 General Cigar Holdings, Inc. (c) ............ 257,881
------------
558,313
------------
TOYS & AMUSEMENTS--0.4%
13,000 Action Performance Companies, Inc. (c) ...... 492,375
------------
TRANSPORTATION--0.2%
10,000 Skywest, Inc. ............................... 296,250
------------
TRUCKING & FREIGHT
FORWARDING--0.7%
12,900 Halter Marine Group, Inc. (c) ............... 372,488
12,500 USFreightways Corp. ......................... 406,250
------------
778,738
------------
Total Common Stock
(Identified Cost $94,357,733) ............. 109,882,534
------------
OPTIONS - 0.0%
CONTRACTS
- -----------------------------------------------------------------------------
125 Polaris Industries, 30 Put, 3/22/98 ......... 22,656
------------
Total Options (Identified Cost $23,031) ..... 22,656
------------
SHORT TERM INVESTMENTS--11.6%
FACE
AMOUNT DESCRIPTION VALUE(a)
- -----------------------------------------------------------------------------
$8,404,000 Repurchase Agreement with State Street Bank & Trust
Co. dated 12/31/97 at 5.000% to be repurchased at
$8,406,334 on 1/02/98, collateralized by
$3,350,000 U.S. Treasury Note, 5.750% due
12/31/98 valued at $3,353,142 and $5,095,000 U.S.
Treasury Notes 5.875% due 1/31/99 valued at
$5,228,209 (d).................................. $ 8,404,000
5,369,000 Repurchase Agreement with State Street Bank & Trust
Co. dated 12/31/97 at 6.000% to be repurchased at
$5,370,790 on 1/02/98 collateralized by
$5,340,000 U.S. Treasury Note 5.875% due 1/31/99
valued at $5,479,614 .......................... 5,369,000
------------
Total Short Term Investments (Identified
Cost $13,773,000) .............................. 13,773,000
------------
Total Investments -- 104.2% (Identified Cost
$108,153,764)(b) ............................... 123,678,190
Other assets less liabilities ..................... (5,025,570)
------------
Total Net Assets -- 100% .......................... $118,652,620
============
SECURITIES SOLD SHORT
SHARES
- -----------------------------------------------------------------------------
5,000 American Power Conversion Corp. ................... $ 118,125
5,000 Arterial Vascular Engineering, Inc. ............... 325,000
8,000 Hologic, Inc. ..................................... 165,500
------------
Total Securities Sold Short
(Total Proceeds $655,339) ........................ $ 608,625
============
WRITTEN OPTION CONTRACTS
NET UNREALIZED
CONTRACTS DESCRIPTION DEPRECIATION
- ------------------------------------------------------------------------------
125 Polaris Industries, 30 Call, 3/22/98 .............. $ (379)
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1997 the net
unrealized appreciation on investments based on cost of
$108,760,253 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 ............................................... $ 18,143,989
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. (3,226,052)
------------
Net unrealized appreciation .......................... $ 14,917,937
============
(c) Non-income producing security.
(d) A portion of this security has been segregated as collateral for options
and short sales.
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1997
ASSETS
Investments at value ............................ $109,905,190
Repurchase agreements ........................... 13,773,000
Cash ............................................ 71,156
Cash - Restricted ............................... 1,103,551
Receivable for:
Fund shares sold .............................. 663,392
Securities sold ............................... 118,453
Dividends and interest ........................ 27,222
Prepaid registration expense .................... 12,500
Unamortized organization expense ................ 34,919
------------
125,709,383
LIABILITIES
Payable for:
Securities purchased .......................... $5,658,970
Open short sales - (proceeds of $655,339) ..... 608,625
Open written options - (proceeds of $30,871) .. 31,250
Fund shares redeemed .......................... 536,643
Accrued expenses:
Management fees ............................... 98,207
Deferred trustees' fees ....................... 1,357
Accounting and administrative ................. 2,313
Other ......................................... 119,398
----------
7,056,763
------------
NET ASSETS ........................................ $118,652,620
============
Net Assets consist of:
Capital paid in ............................... $104,274,459
Accumulated net investment loss ............... (1,357)
Accumulated net realized loss ................. (1,191,243)
Unrealized appreciation on investments,
securites sold short and written option
transactions ................................ 15,570,761
------------
NET ASSETS ........................................ $118,652,620
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($52,066,394 divided by 3,387,431 shares
of beneficial interest) ........................ $15.37
======
Offering price per share (100/94.25 of $15.37) .. $16.31*
======
Net asset value and offering price of Class B
shares ($52,616,150 divided by 3,447,823 shares
of beneficial interest) ........................ $15.26**
======
Net Asset value and offering price of Class C
shares ($13,970,076 divided by 915,421 shares
of beneficial interest) ........................ $15.26
======
Identified cost of investments .................. $108,153,764
============
*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>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1997
INVESTMENT INCOME
Dividends ...................................... $ 271,259(a)
Interest ....................................... 265,405
-----------
536,664
Expenses
Management fees .............................. $ 745,638
Service fees - Class A ....................... 79,699
Service and distribution fees - Class B ...... 304,812
Service and distribution fees - Class C ...... 86,522
Trustees' fees and expenses .................. 11,158
Accounting and administrative ................ 23,420
Custodian .................................... 199,348
Transfer agent ............................... 226,514
Audit and tax services ....................... 44,300
Legal ........................................ 24,475
Printing ..................................... 26,675
Registration ................................. 69,053
Amortization of organization expenses ........ 6,755
Miscellaneous ................................ 5,408
----------
Total expenses ................................. 1,853,777
-----------
Net investment loss ............................ (1,317,113)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, SECURITIES SOLD SHORT AND WRITTEN
OPTIONS
Realized gain on:
Investments - net ............................ 3,518,165
Securities sold short - net .................. 34,514
----------
Net realized gain .............................. 3,552,679
----------
Unrealized appreciation (depreciation):
Investments - net ............................ 15,524,426
Securities sold short - net .................. 46,714
Written options .............................. (379)
----------
Net unrealized appreciation .................... 15,570,761
----------
Net gain on investment transactions ............ 19,123,440
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ....... $17,806,327
===========
(a) Net of foreign taxes of: $295.
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1997
------------
FROM OPERATIONS
Net investment loss .......................................... $ (1,317,113)
Net realized gain on investments and securities sold short ... 3,552,679
Unrealized appreciation on investments, securites sold
short and written options .................................. 15,570,761
------------
Increase in net assets from operations ....................... 17,806,327
------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain on investments
Class A .................................................... (1,512,427)
Class B .................................................... (1,578,060)
Class C .................................................... (386,249)
------------
(3,476,736)
------------
Increase in net assets derived from capital share transactions . 104,322,991
------------
Total increase in net assets ................................... 118,652,582
NET ASSETS
Beginning of the year ........................................ 38
------------
End of the year .............................................. $118,652,620
============
ACCUMULATED NET INVESTMENT LOSS
Beginning of the year ........................................ $ 0
============
End of the year .............................................. $ (1,357)
============
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------- ------------ ------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net asset value, beginning of year ............ $12.50 $12.50 $12.50
------ ------ ------
Income from investment operations
Net investment loss (a) ....................... (0.20) (0.30) (0.30)
Net realized and unrealized gain on investments 3.55 3.54 3.54
------ ------ ------
Total from investment operations .............. 3.35 3.24 3.24
------ ------ ------
Less distributions
Distributions from net realized capital gains . (0.48) (0.48) (0.48)
------ ------ ------
Total distributions ........................... (0.48) (0.48) (0.48)
------ ------ ------
Net asset value, end of year .................. $15.37 $15.26 $15.26
====== ====== ======
Total return (%) (b) .......................... 27.0 26.1 26.1
Ratio of operating expenses to average net
assets (%) .................................. 2.20 2.95 2.95
Ratio of net investment loss to average net
assets (%) .................................. (1.44) (2.19) (2.19)
Portfolio turnover rate (%) ................... 140 140 140
Average commission rate ....................... $0.0551 $0.0551 $0.0551
Net assets, end of year (000) ................. $52,066 $52,616 $13,970
(a) Per share net investment loss has been calculated using the average shares outstanding during the year.
(b) A sales charge in the case of Class A Shares and a contingent deferred sales charge in the case of Class B Shares
is not reflected in total return calculations.
</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 A, Class B and Class C shares on December 31, 1996.
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 other 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 market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser and the appropriate
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).
Dividend income is recorded on the ex-dividend date or when the Fund learns of
the dividend, and interest income is recorded on the accrual basis. 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. These differences are primarily due to differing
treatments for organization costs, wash sales, post October losses and net
investment loss. Permanent book and tax basis differences will result in
reclassification to 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. Each sub-adviser 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 portfolio's ability to dispose of the underlying securities.
F. SHORT SALES. A short sale is a transaction in which the Fund sells securities
it does not own (but has borrowed) in anticipation of a decline in the market
price of the securities. When the Fund makes a short sale, the proceeds it
receives from the sale will be held on behalf of the broker effecting the sale
until the Fund replaces the borrowed securities. To deliver the securities to
the buyer, the Fund arranges through the broker to borrow the securities and, in
doing so, the Fund becomes obligated to replace the securities borrowed at their
market value at the time of replacement, whatever that price may be. The Fund
may have to pay a premium to borrow the securities and must pay any dividends or
interest payable on the borrowed securities until the securities are replaced.
At December 31, 1997, the market value of securities and cash segregated to
cover short positions was $1,510,851. Securities sold short at December 31, 1997
and their related market values are set forth in the schedule of investments.
G. SHORT SALES AGAINST THE BOX. In a short sale against the box, the Fund sells
a borrowed security, while at the same time owning an identical security in the
portfolio. While the short sale is outstanding, the Fund will not dispose of the
security hedged by the short sale.
When the Fund sells short against the box, it will establish a margin account
with the broker lending the security sold short. While the short sale is
outstanding, the broker retains the proceeds of the short sale, and the Fund
pledges securities or cash as additional collateral. The Fund earns interest
from the broker on the proceeds of the short sale and accrues such interest on a
daily basis.
H. OPTIONS. The Fund may use options to enhance investment return, or 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 the 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.
I. ORGANIZATION EXPENSE. Costs incurred in connection with the Fund's
organization and initial registration, amounting to approximately $41,674 in the
aggregate, were paid by the Fund and are being amortized by the Fund over 60
months.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the year ended December 31, 1997 were $187,476,223 and $97,330,013
respectively.
Transactions in written options for the Fund for the year ended December 31,
1997 are summarized as follows:
WRITTEN OPTIONS
------------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
----------------- -----------------
Open at December 31, 1996 0 $ 0
Contracts opened 125 30,871
Contracts closed 0 0
--- ------
Open at December 31, 1997 125 $30,871
=== =======
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 1.05% of the Fund's average daily net assets.
NEFM pays the Fund's four investment sub-advisers, Harris Associates, L.P.,
Loomis, Sayles & Company, L.P., Montgomery Asset Management, L.P. and Robertson,
Stephens & Company Investment Management, L.P. a sub-advisory fee as follows:
Harris Associates, L.P., at the annual rate of 0.70% of the average daily net
assets of its segment of the Fund, Loomis, Sayles & Company, L.P. and Robertson,
Stephens & Company Investment Management, L.P. at the annual rate of 0.55% of
the first $50 million of the average daily net assets of the segment of the Fund
which that sub-adviser manages, and 0.50% of such assets in excess of $50
million, and Montgomery Asset Management, L.P. at the annual rate of 0.65% of
the first $50 million of the average daily net assets of the segment of the Fund
which that sub-adviser manages, and 0.50% of such assets in excess of $50
million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM, Harris Associates, L.P. and Loomis, Sayles & Company, L.P. are
wholly owned subsidiaries of New England Investment Companies, L.P. which is a
subsidiary of Metropolitan Life Insurance Company. Fees earned by NEFM and the
sub-advisers under the management agreement in effect during the year ended
December 31, 1997, are as follows:
FEES EARNED
- -----------
$309,875 New England Funds Management, L.P.
130,052 Harris Associates, L.P.
92,832 Loomis, Sayles & Company, L.P.
112,593 Montgomery Asset Management, L.P.
Robertson, Stephens & Company Investment
100,286 Management, L.P.
- -------
$745,638
========
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of New England
Investment Companies, L.P. 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,
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 $23,420 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 $162,177 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $1,408 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 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 $79,699 in fees under
the Class A Plan.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees 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 $76,203 and $21,630 in service fees under
the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plan, 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 $228,609
and $64,892 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 $1,251,332.
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, New England Investment Companies, L.P. or their affiliates,
other than registered investment companies. Each other trustee is compensated by
the Fund as follows:
Annual Retainer $714
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
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:
YEAR ENDED
DECEMBER 31, 1997
-------------------------
CLASS A SHARES AMOUNT
---------- ------------
Shares sold ..................................... 7,382,397 $102,447,455
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain .......... 99,843 1,454,709
---------- ------------
7,482,240 103,902,164
Shares repurchased .............................. (4,094,809) (58,848,512)
---------- ------------
Net increase .................................... 3,387,431 $ 45,053,652
---------- ------------
YEAR ENDED
DECEMBER 31, 1997
-------------------------
CLASS B SHARES AMOUNT
---------- ------------
Shares sold ..................................... 3,659,528 $ 49,771,350
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain .......... 98,691 1,428,060
---------- ------------
3,758,219 51,199,410
Shares repurchased .............................. (310,396) (4,301,792)
---------- ------------
Net increase .................................... 3,447,823 $ 46,897,618
---------- ------------
YEAR ENDED
DECEMBER 31, 1997
-------------------------
CLASS C SHARES AMOUNT
---------- ------------
Shares sold ..................................... 1,397,972 $ 19,301,406
Shares issued in connection with the
reinvestment of:
Distributions from net realized gain .......... 25,323 366,428
---------- ------------
1,423,295 19,667,834
Shares repurchased .............................. (507,874) (7,296,113)
---------- ------------
Net increase .................................... 915,421 $ 12,371,721
---------- ------------
Increase derived from capital share transactions 7,750,675 $104,322,991
========== ============
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust I and the Shareholders of the
NEW ENGLAND STAR SMALL CAP 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 Star Small Cap 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 year then ended 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 audit. We conducted our audit 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 audit, 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, provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 12, 1998
<PAGE>
SHAREHOLDER MEETING (UNAUDITED)
At a special shareholders' meeting held July 16, 1997, shareholders of the
Star Small Cap Fund voted for the following proposals:
1. Subadvisory agreement relating to the Fund between NEFM and CAM
Acquisition, LLC ("New Montgomery"). (New Montgomery formed due to
Montgomery's acquisition by Commerzbank.)
<TABLE>
<CAPTION>
VOTED VOTED ABSTAINED BROKER TOTAL
FOR AGAINST VOTES NON-VOTES VOTES
------------- ---------- ----------- ----- -------------
<S> <C> <C> <C> <C>
2,077,964.309 87,172.759 128,711.173 0.000 2,293,848.241
</TABLE>
2. To the extent permitted by exemptions granted by the SEC, to permit NEFM to
enter into new and amended agreements with sub-advisers with respect to the
Fund without obtaining shareholder approval of such agreements, and to
permit such sub-advisers to manage assets of the Fund (or a segment
thereof) pursuant to such sub-advisory agreements.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAINED BROKER TOTAL
FOR AGAINST VOTES NON-VOTES VOTES
------------- ---------- ----------- ----- -------------
<S> <C> <C> <C> <C>
1,879,473.589 150,653.656 129,014.996 134,706.000 2,293,848.241
</TABLE>
<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>
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.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its
earnings per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more
aggressive than "value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- -------------------------------------------------------------------------------
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 Fund's
current prospectus, which contains information about
distribution charges, management and other items of interest.
Investors are advised to read the prospectus
carefully before investing.
<PAGE>
--------------
BULK RATE
U.S. POSTAGE
PAID
BROCKTON, MA
(Logo) PERMIT NO. 770
NEW ENGLAND FUNDS --------------
Where The Best Minds Meet(TM)
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- ---------------------
[Logo]
MUTUAL FUND
SERVICE AWARD
- ---------------------
DALBAR
HONORS COMMITMENT TO:
INVESTORS
- ---------------------
1995 o 1996 o 1997
SC56-1297
[Recycle Logo] Printed On Recycled Paper
