<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
Municipal Income Fund
[graphic omitted]
June 30, 1998
<PAGE>
AUGUST 1998
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[Photo]
Henry L.P. Schmelzer
President
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>
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NEW ENGLAND MUNICIPAL INCOME 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 Municipal Income Fund's Class A shares since 6/30/88,
compared to the Lehman Municipal Index and the Cost of Living. The plot points
from this chart are as follows:]
JUNE 1988 THROUGH JUNE 1998
Compared to Lehman Municipal Index(4) and the Cost of Living(5)
WITH
MAXIMUM LEHMAN
NET ASSET SALES MUNICIPAL COST OF
VALUE(1) CHARGE(2) INDEX(4) LIVING(5)
6/30/88 $10,000 $ 9,550 $10,000 $10,000
6/89 $11,224 $10,719 $11,139 $10,517
6/90 $11,793 $11,262 $11,898 $11,008
6/91 $12,655 $12,086 $12,970 $11,525
6/92 $14,283 $13,640 $14,496 $11,881
6/93 $15,988 $15,268 $16,230 $12,237
6/94 $15,772 $15,062 $16,262 $12,542
6/95 $17,002 $16,237 $17,692 $12,923
6/96 $18,053 $17,241 $18,866 $13,279
6/97 $19,476 $18,599 $20,564 $13,584
6/98 $21,069 $20,121 $22,345 $13,796
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 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 5/9/77) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 2.80% 8.32% 5.70% 7.75%
With Max. Sales Charge(2) -1.89 3.40 4.73 7.25
Lehman Municipal Index(4) 2.69 8.66 6.46 8.30
Lipper General Muni Average(6) 2.26 8.39 5.77 7.95
- --------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.28% 7.38% 4.37%
With CDSC(3) -2.72 2.38 4.03
Lehman Municipal Index(4) 2.69 8.66 6.06
(calculated from 9/30/93)
Lipper General Muni Average(6) 2.26 8.39 5.33
(calculated from 9/30/93)
- --------------------------------------------------------------------------------
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.
YIELDS AS OF 6/30/98
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC Yield(7) 4.74% 4.21%
Taxable Equivalent Yield(8) 7.84 6.97
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 4.50% 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 Municipal Index is an unmanaged index of bonds issued by states,
municipalities and other governmental entities having maturities of more than
one year. 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 Municipal 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.
(7)SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines.
(8)Taxable equivalent yield is based on the maximum federal income tax bracket
of 39.6%. The alternative minimum tax may apply. Some federal and state taxes
may apply.
<PAGE>
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NEW ENGLAND MUNICIPAL INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
[Photo of Nathan Wentworth]
Nathan Wentworth
Back Bay Advisors, L.P.
Q. How did New England Municipal Income Fund perform over the past six months?
The Fund performed in line with other federally tax-free investments. For the
six months ending June 30, 1998, the Fund's Class A shares posted a total return
of 2.80%, including a $0.02 per share gain in net asset value to $7.77 and the
reinvestment of $0.20 per share in dividend distributions.
Q. What was the environment like for municipal bonds?
Interest rates remained relatively stable -- a positive for bond investors -- as
investors monitored whether the unfolding economic problems in Asia would slow
the U.S. economy and relieve inflationary pressures. In the United States,
strong economic growth and low inflation continued to improve the
creditworthiness of municipal securities. The economy's strength helped generate
higher tax revenues. Many state and local governments replaced higher cost bonds
with cheaper debt, while others were able to finance new projects at lower
interest rates. As a result, municipal bond issuance increased dramatically in
the first half of 1998. During that time, issuers competed for investors'
dollars, driving tax-exempt yields to approximately 90% of those of their
taxable counterparts. Heavy supply of new municipal bonds, however, limited
appreciation potential in the municipal marketplace.
Q. What strategies did you use in managing the Fund?
We emphasized income by maintaining a substantial position in bonds at the lower
end of the investment-grade range of the credit quality spectrum. Typically,
these bonds perform well in a strong economy when interest rates are steady. As
of June 30, 1998, the Fund's average credit quality was A-, its average maturity
was 18 years and its average duration stood at six years. Maturity and duration
are two measures of interest rate sensitivity. In general, the longer a maturity
and duration, the greater the tendency that a bond would increase in value as
interest rates decline. During the six-month period, the maturity and duration
of the Fund were in the moderate-to-long vicinity for a long-term municipal bond
fund.
The Fund's position in bonds rated BBB and lower -- comprising more than half of
the Fund's assets as of the end of the period -- contributed significantly to
income and total return. Bonds with lower ratings, which can involve greater
credit risk, outperformed their higher-rated counterparts over the past six
months. As with all the Fund's investments, we approached this sector of the
market conservatively, researching each prospective bond investment thoroughly
and monitoring holdings continuously.
CREDIT QUALITY COMPOSITION -- 6/30/98
AAA 28.6%
AA 1.6%
A 14.5%
BBB 50.2%
OTHER 5.1%
Demand was exceptionally strong for lower-rated bonds, as investors sought
higher yields in the low interest rate environment. Consequently, prices rose
and yields fell, so that lower-rated bonds provided increasingly less of a yield
advantage to higher-rated bonds. The Fund established its position in these
bonds when they provided a considerably greater yield advantage, subsequently
resulting in a strong performance lift for the Fund.
Higher-grade bonds, namely prerefunded bonds, also contributed to performance.
When a bond is prerefunded, it is retired prior to its stated maturity date. New
bonds pledged by high-quality, liquid securities -- typically U.S. Treasuries --
are issued to retire the existing ones. Often, the bonds are upgraded to AAA to
reflect the quality of the pledged securities. The announcement that a bond will
be prerefunded typically causes its price to rise substantially.
Q. What is your outlook for municipal bonds?
Clearly, there are several forces at work influencing bond prices. We expect to
see a continuation of many recent trends, including strength in the U.S.
economy, well contained inflation and concerns about the impact of Asia's
economic troubles. We believe municipal bonds can benefit from several factors
over the next six months. We expect U.S. economic growth to remain strong and
inflation to stay low, helping municipalities continue to improve from a credit
standpoint. Further, we anticipate a reduction in new supply from the unusually
high levels of earlier this year. The combination of dwindling supply and
continued strong demand bodes well for municipal yields. In this environment, we
expect to take advantage of opportunities for the Fund to generate an attractive
stream of income.
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>
<TABLE>
<CAPTION>
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1998
(unaudited)
TAX EXEMPT OBLIGATIONS--98.0% OF TOTAL NET ASSETS
RATINGS (c)
(UNAUDITED)
---------------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
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ALASKA--0.6%
<S> <C> <C> <C> <C>
$ 1,130,000 Alaska State Housing Finance Corp., 6.500%,
6/01/34 ................................ Aaa AAA $ 1,189,291
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ARIZONA--2.8%
2,500,000 Navajo County Pollution Control, 5.875%,
8/15/28 ................................ Baa1 A- 2,581,950
2,300,000 University of Arizona Revenue Bond, 6.350%,
6/01/14 ................................ A1 AA 2,595,895
-----------
5,177,845
-----------
CALIFORNIA--8.2%
430,000 California Housing Finance Agency Revenue
Bond, 8.125%, 8/01/19 .................. Aa2 AA- 439,383
4,300,000 Foothill/Eastern Transportation Corridor,
6.500%, 1/01/32 ........................ Baa BBB- 4,717,960
2,000,000 Los Angeles Convention & Exhibition,
9.000%, 12/01/20 ....................... Aaa AAA 2,602,720
2,000,000 Los Angeles Regional Airport Lease, 6.350%,
11/01/25 ............................... Baa3 BBB- 2,194,260
3,000,000 Sacramento Power Authority, 6.000%,
7/01/22 ................................. -- BBB- 3,167,370
2,000,000 Sacramento, California, 6.500%, 7/01/21 .. -- BBB- 2,190,640
-----------
15,312,333
-----------
COLORADO--7.3%
1,500,000 Denver City & County Airport Revenue Bond,
7.500%,11/15/06 ........................ Baa1 AAA 1,724,445
1,500,000 Denver City & County Airport Revenue Bond,
7.500%,11/15/12 ........................ Baa1 AAA 1,724,445
1,655,000 Denver City & County Airport Revenue Bond,
7.500%,11/15/23 ........................ Baa1 BBB 1,918,774
3,960,000 Denver City & County Airport Revenue Bond,
7.750%,11/15/21 ........................ Baa1 BBB+ 4,402,253
345,000 Denver City & County Airport Revenue Pre-
refunded Bond, 7.500%, 11/15/23 ........ Aaa AAA 411,333
1,040,000 Denver City & County Airport Revenue Pre-
refunded Bond, 7.750%, 11/15/21 ........ Aaa AAA 1,178,164
2,500,000 E470 Public Highway Authority Revenue Bond,
5.000%, 9/01/26, (MBIA) ................ Aaa AAA 2,438,950
-----------
13,798,364
-----------
FLORIDA--2.4%
3,000,000 Escambia County Pollution Control, 6.900%,
8/01/22 ................................ Baa1 BBB 3,341,850
1,000,000 Martin County Industrial Development
Authority, 7.875%, 12/15/25 ............ Baa3 BBB- 1,174,990
-----------
4,516,840
-----------
GEORGIA--1.4%
2,500,000 Atlanta Special Purpose Facilities Revenue
Bond, 7.900%, 12/01/18 ................. Ba2 BBB- 2,656,525
-----------
GUAM--1.6%
3,000,000 Guam Government, 5.400%, 11/15/18 ........ -- BBB 3,015,180
-----------
ILLINOIS--6.4%
6,000,000 Illinois Development Finance Authority
Pollution Control, 7.250%, 6/01/11 ..... Baa2 BBB 6,503,580
2,500,000 Illinois Development Finance Authority
Pollution Control, 7.375%, 7/01/21 ..... Baa1 BBB 2,910,525
2,250,000 O'Hare International Airport, 8.200%,
12/01/24 ............................... Baa2 BBB- 2,695,860
-----------
12,109,965
-----------
INDIANA--4.1%
3,500,000 Indiana Development Finance Authority
Pollution Control, 6.850%, 12/01/12 .... Ba3 BB- 3,833,760
3,500,000 Indianapolis International Airport
Authority Revenue Bond,
7.100%, 1/15/17 ........................ Baa2 BBB 3,946,705
-----------
7,780,465
-----------
KANSAS--1.2%
2,000,000 Kansas City Utility Systems Revenue Bond,
6.375%, 9/01/23 ........................ Aaa AAA 2,233,760
-----------
KENTUCKY--2.0%
1,500,000 Kenton County Airport Board Revenue Bond,
6.125%, 2/01/22 ........................ Baa3 BBB- 1,539,360
2,000,000 Kenton County Airport Board Revenue Bond,
7.500%, 2/01/12 ........................ Baa3 BBB- 2,205,400
-----------
3,744,760
-----------
MASSACHUSETTS--7.5%
3,000,000 Massachusetts Bay Transportation Authority,
6.100%, 3/01/23 ........................ Aa3 A 3,249,900
2,500,000 Massachusetts State Housing Finance Agency,
6.300%, 10/01/13 ....................... A1 A+ 2,647,375
2,315,000 Massachusetts State Housing Finance Agency,
6.375%, 4/01/21 ........................ A1 A+ 2,456,238
2,000,000 Massachusetts State Turnpike Authority,
5.000%, 1/01/37 ........................ Aaa AAA 1,925,700
4,000,000 Massachusetts State Water Resources
Authority, 4.750%, 8/01/37 .... ........ Aaa AAA 3,722,240
-----------
14,001,453
-----------
NEBRASKA--1.7%
3,000,000 Nebraska Investment Finance Authority,
5.850%, 9/01/28 ........................ -- AAA 3,099,150
-----------
NEW YORK--23.5%
4,585,000 New York City, 7.000%, 10/01/13 .......... Aaa AAA 5,155,603
275,000 New York City, 7.000%, 10/01/13 .......... A3 BBB+ 303,493
120,000 New York City, 7.100%, 2/01/10 ........... A3 BBB+ 132,271
2,315,000 New York City, 7.500%, 2/01/05 ........... A3 BBB+ 2,582,151
1,000,000 New York City Industrial Development
Agency, 5.750%, 10/01/36 ............... Baa3 BBB- 1,021,530
880,000 New York City Pre-refunded, 7.100%,
2/01/10 ................................. Aaa AAA 978,833
2,040,000 New York State Dormitory Authority Revenue
Bond, 5.375%, 5/15/16 .................. A3 BBB+ 2,057,932
4,000,000 New York State Dormitory Authority Revenue
Bond, 5.500%, 5/15/13 .................. A3 A- 4,251,160
5,000,000 New York State Dormitory Authority Revenue
Bond, 5.500%, 5/15/23 .................. A3 BBB+ 5,049,500
1,350,000 New York State Dormitory Authority Revenue
Bond, 5.625%, 5/15/13 .................. A3 BBB+ 1,395,319
2,740,000 New York State Dormitory Authority Revenue
Bond, 5.750%, 7/01/13 .................. Baa1 BBB+ 2,965,639
1,880,000 New York State Dormitory Authority Revenue
Bond, 7.500%, 5/15/13 .................. A3 A- 2,395,345
4,150,000 New York State Medical Care Facilities
Finance, 5.250%, 8/15/14 ............... A3 A- 4,156,184
2,500,000 New York State Medical Care Facilities
Finance, 5.375%, 2/15/14 ............... A3 BBB+ 2,539,675
1,955,000 New York State Medical Care Facilities
Finance, 6.500%, 8/15/12 ............... Aaa AAA 2,151,810
205,000 New York State Medical Care Facilities
Finance, 7.300%, 8/15/11 ............... A3 A- 225,682
370,000 New York State Medical Care Facilities
Finance Pre-refunded, 7.300%, 8/15/11 .. Aaa AAA 412,106
1,500,000 New York State Thruway Authority Service
Contract, 5.750%, 4/01/16 .............. Baa1 BBB+ 1,562,940
3,430,000 New York State Urban Development Corp.
Revenue Bond, 5.500%, 1/01/18 .......... Baa1 BBB+ 3,464,506
135,000 New York State, Pre-refunded, 7.500%,
2/01/05 ................................. Aaa AAA 151,945
1,000,000 Port Authority New York & New Jersey,
7.000%, 10/01/07 ....................... -- -- 1,133,520
-----------
44,087,144
-----------
OHIO--1.9%
3,000,000 Cleveland Public Power Systems Revenue
Bond, 7.000%, 11/15/24 ................. Aaa AAA 3,504,930
-----------
OREGON--2.3%
4,000,000 Western Generation Agency, 7.400%,
1/01/16 ................................. -- -- 4,408,800
-----------
PENNSYLVANIA--11.4%
3,000,000 Delaware County Pollution Control, 7.375%,
4/01/21 ................................ Baa1 BBB+ 3,250,950
2,725,000 Pennsylvania Convention Center Revenue
Bond, 6.700%, 9/01/14 .................. Baa BBB 3,044,533
2,000,000 Pennsylvania Convention Center Revenue
Bond, 6.750%, 9/01/19 .................. Baa BBB 2,239,800
3,000,000 Pennsylvania Economic Development
Financing, 6.600%, 1/01/19 ............. -- BBB- 3,217,140
4,000,000 Pennsylvania Economic Development
Financing, 7.150%, 12/01/18 ............ -- BBB- 4,483,080
1,500,000 Pennsylvania Economic Development
Financing, 7.600%, 12/01/20 ............ Baa2 BBB- 1,678,140
3,000,000 Pennsylvania Economic Development
Financing, 7.600%, 12/01/24 ............ Baa3 BBB 3,515,280
-----------
21,428,923
-----------
PUERTO RICO--1.7%
2,845,000 Puerto Rico Commonwealth Highway
Transporation, 6.625%, 7/01/18 ........ Aaa AAA 3,151,236
-----------
TENNESSEE--1.5%
2,500,000 Maury County Industrial Development Board,
6.500%, 9/01/24 ........................ A3 A 2,747,625
-----------
TEXAS--2.8%
2,000,000 Alliance Airport Authority Special
Facilities, 6.375%, 4/01/21 ............ Baa2 BBB 2,168,360
2,825,000 Fort Worth International Airport, 7.250%,
11/01/30 ............................... Baa2 BBB- 3,139,959
-----------
5,308,319
-----------
U.S. VIRGIN ISLANDS--2.7%
4,500,000 U.S. Virgin Islands Public Finance
Authority, 7.250%, 10/01/18 ............ -- -- 5,128,155
-----------
WASHINGTON--3.0%
1,000,000 Washington State Public Power Supply,
6.800%, 7/01/07 ........................ Aa AA 1,094,480
1,270,000 Washington State Public Power Supply,
7.000%, 7/01/11 ........................ Aaa AAA 1,368,273
3,000,000 Washington State Public Power Supply,
7.000%, 7/01/12 ........................ Aaa AA- 3,229,710
-----------
5,692,463
-----------
Total Tax Exempt Obligations
(Identified Cost $164,168,994) ......... 184,093,526
-----------
<CAPTION>
SHORT TERM INVESTMENTS--0.6%
FACE
AMOUNT ISSUER VALUE (a)
- -------------------------------------------------------------------------------------------------
<C> <C> <C>
$ 1,068,000 Household Finance Corp., 6.000%, 7/01/98 . $ 1,068,000
------------
Total Short Term Investments (Identified
Cost $1,068,000) ........................ 1,068,000
------------
Total Investments--98.6% (Identified Cost
$165,236,994) (b) 185,161,526
Other assets less liabilities ............ 2,722,059
------------
Total Net Assets--100% ................... $187,883,585
============
<CAPTION>
(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 $165,236,994 for federal income tax purposes was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is
an excess of value over tax cost ............................................ $ 19,924,532
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value ............................................ 0
------------
Net unrealized appreciation ................................................. $ 19,924,532
============
At December 31, 1997 the Fund had a capital loss carryover of approximately
$4,991,880 of which $4,966,149 expires on December 31, 2002 and $25,731
expires on December 31, 2005. This may be available to offset future realized
capital gains, if any, to the extent provided by regulations.
(c)The ratings shown are believed to be the most recent ratings available at
June 30, 1998. Securities are generally rated at the time of issuance. The
rating agencies may revise their rating from time to time. As a result, there
can be no assurance that the same ratings would be assigned if the securities
were rated at June 30, 1998. The Fund's subadviser independently evaluates
the Fund's portfolio securities and in making investment decisions does not
rely solely on the ratings of agencies.
MBIA - Municipal Bond Investors Assurance Corp.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments at value (Identified cost $165,236,994) ........ $185,161,526
Cash ....................................................... 886
Receivable for:
Fund shares sold ......................................... 45,256
Accrued interest ......................................... 3,134,105
Prepaid registration expense ............................... 4,000
------------
188,345,773
LIABILITIES
Payable for:
Fund shares redeemed ..................................... $ 40,150
Dividends declared ....................................... 256,057
Accrued expenses:
Management fees .......................................... 68,113
Deferred trustees' fees .................................. 46,169
Accounting and administrative ............................ 3,838
Other .................................................... 47,861
---------
462,188
------------
NET ASSETS ................................................... $187,883,585
============
Net Assets consist of:
Capital paid in .......................................... $176,689,675
Undistributed net investment income ...................... 71,970
Accumulated net realized losses .......................... (8,802,592)
Unrealized appreciation on investments ................... 19,924,532
------------
NET ASSETS ................................................... $187,883,585
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($173,670,808 divided by 22,365,651 shares of beneficial
interest) .................................................. $7.77
=====
Offering price per share (100/95.50 of $7.77) ................ $8.14*
=====
Net asset value and offering price of Class B shares
($14,212,777 divided by 1,830,412 shares of beneficial
interest) .................................................. $7.76**
=====
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
INVESTMENT INCOME
<S> <C> <C>
Interest ................................................... $185,675,883
Expenses
Management fees .......................................... $413,867
Service fees - Class A ................................... 217,444
Service and distribution fees - Class B .................. 68,573
Trustees' fees and expenses .............................. 7,230
Accounting and administrative ............................ 20,468
Custodian ................................................ 49,468
Transfer agent ........................................... 84,599
Audit and tax services ................................... 19,330
Legal .................................................... 3,548
Printing ................................................. 15,983
Registration ............................................. 14,211
Miscellaneous ............................................ 4,883
--------
Total expenses ............................................. 919,604
------------
Net investment income ...................................... 4,756,279
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized loss on investments - net ......................... (1,162,596)
Unrealized appreciation on investments - net ............... 1,347,721
------------
Net gain on investment transactions ........................ 185,125
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................... $ 4,941,404
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------
(unaudited)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
FROM OPERATIONS
<S> <C> <C>
Net investment income .................................... $ 9,706,446 $ 4,756,279
Net realized loss on investments ......................... (25,730) (1,162,596)
Unrealized appreciation on investments ................... 5,660,513 1,347,721
------------ ------------
Increase in net assets from operations ................... 15,341,229 4,941,404
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (9,422,946) (4,297,214)
Class B ................................................ (596,073) (288,619)
------------ ------------
(10,019,019) (4,585,833)
------------ ------------
DECREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ............................................. (8,418,397) (2,926,580)
------------ ------------
Total decrease in net assets ............................. (3,096,187) (2,571,009)
NET ASSETS
Beginning of the period .................................. 193,550,781 190,454,594
------------ ------------
End of the period ........................................ $190,454,594 $187,883,585
============ ============
UNDISTRIBUTED (0VERDISTRIBUTED) NET INVESTMENT INCOME
End of the period ........................................ $ (98,476) $ 71,970
============ ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------
(unaudited)
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 ............ $ 7.54 $ 7.87 $ 6.85 $ 7.60 $ 7.53 $ 7.75
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ..... 0.40 0.39 0.42 0.41 0.40 0.20
Net Realized and Unrealized
Gain (Loss) on
Investments ............. 0.53 (1.01) 0.74 (0.07) 0.23 0.02
-------- -------- -------- -------- -------- --------
Total From Investment
Operations .............. 0.93 (0.62) 1.16 0.34 0.63 0.22
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income ....... (0.42) (0.40) (0.41) (0.41) (0.41) (0.20)
Distributions From Net
Realized Capital Gains .... (0.18) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total Distributions ....... (0.60) (0.40) (0.41) (0.41) (0.41) (0.20)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the
Period .................. $ 7.87 $ 6.85 $ 7.60 $ 7.53 $ 7.75 $ 7.77
======== ======== ======== ======== ======== ========
Total Return (%) (a) ...... 12.7 (8.0) 17.2 4.6 8.6 2.8
Ratio of Operating Expenses
to Average Net Assets (%) . 0.91 0.92 0.93 0.92 0.93 0.93(b)
Ratio of Net Investment
Income to Average Net
Assets (%) .............. 5.27 5.44 5.52 5.46 5.19 5.15(b)
Portfolio Turnover Rate (%) 86 88 93 24 14 19(b)
Net Assets, End of the
Period (000) ............ $226,881 $184,202 $195,301 $180,983 $177,099 $173,671
(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 accompanying notes to fiancial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- ------------------------------------------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------
SEPTEMBER 13(a) SIX MONTHS
THROUGH 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 ............ $ 8.03 $ 7.86 $ 6.85 $ 7.60 $ 7.53 $ 7.75
-------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income ..... 0.07 0.34 0.36 0.35 0.34 0.17
Net Realized and
Unrealized Gain
(Loss) on Investments ... 0.01 (1.01) 0.74 (0.07) 0.23 0.01
-------- -------- -------- -------- -------- --------
Total From Investment
Operations .............. 0.08 (0.67) 1.10 0.28 0.57 0.18
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income ....... (0.07) (0.34) (0.35) (0.35) (0.35) (0.17)
Distributions From Net
Realized Capital
Gains ................... (0.18) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total Distributions ....... (0.25) (0.34) (0.35) (0.35) (0.35) (0.17)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
the Period ................ $ 7.86 $ 6.85 $ 7.60 $ 7.53 $ 7.75 $ 7.76
======== ======== ======== ======== ======== ========
Total Return (%)(c) ....... 1.0 (8.6) 16.3 3.9 7.8 2.3
Ratio of Operating
Expenses to
Average Net Assets (%) . 1.65(b) 1.67 1.68 1.67 1.68 1.68(b)
Ratio of Net Investment
Income to Average Net
Assets (%) .............. 3.91(b) 4.69 4.77 4.71 4.44 4.40(b)
Portfolio Turnover Rate
(%) ..................... 86 88 93 24 14 19(b)
Net Assets, End of the
Period (000) ............ $ 3,395 $ 7,997 $ 12,069 $ 12,568 $ 13,356 $ 14,213
(a)Commencement of Operations.
(b)Computed on an annualized basis.
(c)A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1998
(unaudited)
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 Fund seeks as high a level of current income exempt from federal
income taxes as is consistent with reasonable risk and protection of
shareholders' capital. 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 both Class A and Class B 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). Expenses of the Fund are borne pro-rata by the holders of both
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 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 original issue discount. Interest income is reduced by the
amortization of premium. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. WHEN-ISSUED SECURITIES. Delivery and payment for securities purchased on a
when-issued or delayed delivery basis can take place one month or more after
the date of the transaction. The securities so purchased are subject to market
fluctuation during this period. At June 30, 1998 the Fund held no such
securities.
D. 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.
E. INTEREST RATE FUTURES CONTRACTS. The Fund may enter into interest rate
futures contracts to hedge against changes in the values of securities the
Fund owns or expects to purchase. An interest rate futures contract is an
agreement between two parties to buy and sell a 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.
F. 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.
G. 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. Permanent book and tax basis
differences will result in reclassification to the capital accounts.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were
$17,561,966 and $20,533,943 respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.50% of the first $100 million of the Fund's
average daily net assets and 0.375% of such assets in excess of $100 million.
NEFM pays the Fund's investment subadviser, Back Bay Advisors, L.P., ("Back
Bay Advisors") at the rate of 0.25% of the first $100 million of the Fund's
average daily net assets and 0.1875% of such assets in excess of $100 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of Nvest
Companies, L.P., ("Nvest"), which is a subsidiary of Metropolitan Life
Insurance Company ("MetLife"). Fees earned by NEFM and Back Bay Advisors under
the management agreement in effect during the six months ended June 30, 1998
are as follows:
FEES EARNED
-----------
$206,934 NEFM
$206,933 Back Bay Advisors
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a 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 related 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 $20,468 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund. For the six months
ended June 30, 1998, the Fund paid NEFSCO $57,082 as compensation for its
services in that capacity. For the six months ended June 30, 1998, the Fund
received $1,939 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 $217,444 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(together with unreimbursed amounts from prior years) may be carried forward
for reimbursement in future years in which the Class A Plan remains in effect.
The amount of unreimbursed expenses carried forward at June 30, 1998 is
$1,700,600.
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 $17,143 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 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 $51,430 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors of shares of the Fund during the six months
ended June 30, 1998 amounted to $124,339.
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 $1,024
Meeting Fee 159/meeting
Annual Committee Member Retainer 154
Annual Committee Chairman Retainer 102
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. CONCENTRATION OF CREDIT. At June 30, 1998, the Fund had the following
industry concentrations in excess of 10% as a percentage of the Fund's total
net assets: Airport 15% and Pollution Control Revenue 12%. The Fund also had
more than 10% of its total net assets invested in: New York 24% and
Pennsylvania 11% at June 30, 1998. Certain risks arise from concentrating
investments in any state. Certain revenue or tax related events in a state may
impair the ability of issuers of municipal securities to pay principal and
interest on their obligations.
5. CAPITAL SHARES. At June 30, 1998 there was an unlimited number of shares
of beneficial interest authorized, divided into two classes, Class A and Class
B capital stock. Transactions in capital shares were as follows:
<PAGE>
<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 ........................ 1,683,772 $ 12,743,185 651,901 $ 5,081,015
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 862,708 6,544,010 383,600 2,983,011
---------- ------------- ---------- -----------
2,546,480 19,287,195 1,035,501 8,064,026
Shares repurchased ................. (3,717,665) (28,115,220) (1,519,611) (11,827,992)
---------- ------------- ---------- -----------
Net decrease ....................... (1,171,185) $ (8,828,025) (484,110) $(3,763,966)
========== ============= ========== ===========
<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 ........................ 331,564 $ 2,500,094 223,223 $ 1,738,993
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 43,761 331,929 21,211 164,921
---------- ------------- ---------- -----------
375,325 2,832,023 244,434 1,903,914
Shares repurchased ................. (320,322) (2,422,395) (137,148) (1,066,528)
---------- ------------- ---------- -----------
Net increase ...................... 55,003 $409,628 107,286 $837,386
---------- ------------- ---------- -----------
Decrease derived from capital shares
transactions ..................... (1,116,182) $ (8,418,397) (376,824) $(2,926,580)
========== ============= ========== ===========
</TABLE>
<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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NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
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