<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 Strategic Income Fund
[graphic omitted]
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JUNE 30, 1998
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<PAGE>
August 1998
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
Investors had reason for comfort during the first half of 1998.
After stunning gains in each of the last three years, the stock market behaved
more like its customary self: Major market indicators moved up for a time, slid
back and were once again in recovery mode at the end of the period. This pattern
largely reflected investors' responses to fast-changing events in Asia.
Unpredictable markets call to mind the long-term experience of millions of
mutual fund investors; those of us who held firm to our plans as markets entered
difficult periods were often rewarded as markets recovered. The longer you stay
invested the less interim ups and downs -- here or overseas -- should concern
you.
News from the Far East drove bond market sentiment as well. In the United
States, faltering Asian economies meant lower prices on many imported goods,
putting pressure on prices and corporate earnings. With slower growth now a real
possibility and with little immediate evidence of inflation, the Federal Reserve
Board left short-term interest rates unchanged, while long-term rates fell to
record lows in mid-June.
In the pages that follow, you can read about how your Fund's management dealt
with the disruptions in the Pacific region and their impact on our domestic
economy. But beyond Asia's present problems, and notwithstanding the inevitable
ebb and flow of our own business cycle, there are reasons to be optimistic about
investment prospects over the next several years. For example, vast,
under-served populations in China and elsewhere represent huge potential demand
for consumer goods. Here in the United States, there is the prospect of a
demography-driven spending wave, as millions of baby-boomers enter their peak
consumption years. Events may turn out differently -- volatility will always be
part of investing -- but as much as the markets may waver, the watchwords for
many long-term investors are constant: diversify and persist.
While you are thinking about your investments, take a few minutes to review your
portfolio. It's possible that three years of strong market gains have tilted
your holdings disproportionately toward aggressive stock funds. If so, you and
your financial representative can adjust the balance easily using some of New
England Funds' more conservative equity or bond funds to reallocate your assets
in line with your long-term goals and comfort level. Once you are satisfied with
your portfolio's balance, be sure to stay in touch with your financial
professional, invest regularly and don't try to guess what the market will do
next.
Thank you for your continued support of New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
PREPARING FOR THE YEAR 2000
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New England Funds continues to work to provide high quality service as we move
into the new century. Since last year we have devoted significant resources to
identifying, analyzing and resolving computer issues related to Year 2000. As a
further measure, we have focused on year-end 1998 as a target for preparedness
by vendor and service agency systems that we rely on for support. We expect
major systems to be ready before the end of the year, with a year of quality
assurance to follow.
<PAGE>
NEW ENGLAND STRATEGIC 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
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Strategic Income Fund's Class A, B and C
shares since inception on 5/1/95 compared to the Lehman Aggregate Bond Index(4).
The data points are as follows:]
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MAY 1995 (INCEPTION) THROUGH DECEMBER 1997
(COMPARED TO LEHMAN AGGREGATE BOND INDEX(4)
CLASS A SHARES
NET ASSET WITH MAXIMUM
VALUE(1) SALES CHARGE(2) LEHMAN(4)
--------- ------------ -------
1-May-95 $10,000 $ 9,550 $10,000
6/95 $10,015 $ 9,564 $10,463
12/95 $11,027 $10,530 $11,122
6/96 $11,380 $10,868 $10,986
12/96 $12,628 $12,060 $11,525
6/97 $13,385 $12,783 $11,883
12/97 $13,806 $13,184 $12,641
6/98 $14,239 $13,598 $13,138
CLASS B SHARES
NET ASSET
VALUE(1) CDSC(3) LEHMAN(4)
--------- ------------ -------
1-May-95 $10,000 $10,000 $10,000
6/95 $10,003 $10,003 $10,463
12/95 $10,973 $10,973 $11,122
6/96 $11,274 $11,274 $10,986
12/96 $12,474 $12,474 $11,525
6/97 $13,163 $13,163 $11,883
12/97 $13,536 $13,536 $12,641
6/98 $13,804 $13,504 $13,138
CLASS C SHARES
NET ASSET
VALUE(1) LEHMAN(4)
--------- -------
1-May-95 $10,000 $10,000
6/95 $ 9,996 $10,463
12/95 $10,966 $11,122
6/96 $11,267 $10,986
12/96 $12,457 $11,525
6/97 $13,156 $11,883
12/97 $13,518 $12,641
6/98 $13,785 $13,138
These illustrations represent past performance and cannot predict future
results. Investment return and principal value may vary, resulting in a gain or
loss when shares are sold. All Index and Fund performance assumes reinvested
distributions.
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
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CLASS A (Inception 5/1/95) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.44% 5.65% 11.55%
With Max. Sales Charge(2) -2.16 0.91 9.94
- --------------------------------------------------------------------------------
CLASS B (Inception 5/1/95) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.98% 4.86% 10.70
With CDSC(3) -2.95 0.01 9.94
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CLASS C (Inception 5/1/95) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.98% 4.79% 10.66%
With CDSC(3) 0.99 3.82 10.66
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COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR SINCE 5/1/95
Lehman Aggregate Bond Index(4) 3.93% 10.54% 9.00%
Lipper Multi-Sector Income Average(5) 2.71 7.05 10.49
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These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS
(1) Net Asset Value (NAV) -- 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 -- assumes reinvestment of all distributions and
reflects the maximum sales charge of 4.5% at the time of purchase of Class
A shares.
(3) With Contingent Deferred Sales Charge (CDSC) -- 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. CDSC for Class C shares assumes a maximum 1% sales charge on
redemptions within the first year of purchase.
(4) Lehman Aggregate Bond Index is a market-weighted, aggregate index that
includes nearly all debt issued by the U.S. Treasury, U.S. Government
agencies and U.S. corporations rated investment-grade, and U.S. agency debt
backed by mortgage pools.
(5) Lipper Multi-Sector Income 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>
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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- ---------------------------
[Photo of Dan Fuss]
- ---------------------------
[Photo of Kathleen Gaffney]
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Dan Fuss
Kathleen Gaffney
Loomis, Sayles & Company, L.P.
Q. How did New England Strategic Income Fund perform over the past six months?
For the six months ending June 30, 1998, the Fund's Class A shares generated a
total return of 2.44%, including a $0.17 per share drop in net asset value to
$13.25 per share and the reinvestment of $0.504 per share in dividend
distributions. A number of the Fund's holdings did not escape the ill effects of
Asia's economic turmoil, and the setback is reflected in the Fund's six-month
results. But we continue to hold many of these underperforming securities,
believing they have the capacity to reward patient investors with satisfying
results over time.
Q. What was the Fund's investment environment like during that time?
In the United States, investment conditions for bond investors were favorable
and, in fact, benefited from the economic turmoil that dominated the financial
markets of Asia and the Pacific Rim. Despite robust economic growth and a strong
U.S. dollar, inflation levels in the United States remained negligible.
Meanwhile, the flight-to-quality mentality triggered by Asia's problems boosted
investor demand for high-quality, U.S. dollar-denominated securities, favored
for their perceived safety. Given these influences, long-term interest rates
were generally stable throughout most of the period, declining somewhat late in
the second quarter. During the six months, renewed turmoil followed the initial
signs suggesting that stability was returning to Asian economies. Hopes for a
quick recovery vanished, placing many economies on the brink of collapse. The
deterioration of Japan's economy pushed that country's unemployment levels
higher and further weakened the Japanese yen. Elsewhere in the Pacific Rim,
riots, political upheaval and the resignation of Indonesian President Suharto
after 31 years in office disrupted the process of rebuilding Indonesia's
economy. In the wake of these events, bonds from Southeast Asia and other
emerging markets such as those in Latin America suffered particularly severe
price declines.
Q. How did you manage the Fund in this environment?
With careful deliberation, we retained our investments in emerging bond markets
- -- Latin America's as well as Asia's -- despite the unsettled investment
conditions. We believe the Fund's 18% exposure to these markets, much of which
is in Latin American bonds, can eventually produce satisfying results -- as long
as the changes necessary for restoring economic health remain in progress.
Clearly though, portfolio holdings in those regions worked against Fund
performance during the six months.
In other foreign markets, we continued to favor Canadian-issued and -denominated
bonds, which were relatively stable. We also maintained a focus on Yankee bonds,
which are foreign bonds denominated in U.S. dollars. These bonds enabled your
Fund to continue to earn attractive levels of income without being hindered by
the volatility associated with currency fluctuations.
PORTFOLIO COMPOSITION -- 6/30/98
% of
NET ASSETS
----------------------------------------------
1. CORPORATE BONDS 29.0
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2. YANKEE BONDS* 32.1
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3. FOREIGN BONDS 26.1
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4. COMMON/PREFERRED STOCKS 9.3
----------------------------------------------
5. GOVERNMENT BONDS 0.4
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6. CASH AND EQUIVALENTS 3.1
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AVERAGE PORTFOLIO MATURITY = 16.63 YEARS
* YANKEES ARE U.S. DOLLAR-DENOMINATED FOREIGN BONDS.
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
As always, we manage the Fund opportunistically -- looking to generate ample
income and take advantage of ways to enhance the Fund's price performance. We
are exceedingly selective in our investment process; each individual investment
is backed by a great deal of in-house credit research. We also analyze the yield
relationships between different kinds of bond issues and monitor both sovereign
(country) and credit risk to select those bonds we believe to represent the best
comparative value. Given this approach, we favor undervalued corporate bonds
with strong or improving credit profiles because they can provide a significant
edge in yield over those of U.S. Treasuries with comparable maturities.
Typically, these corporate bonds are available at prices below their face value.
As the issuer's financial situation improves, so does the likelihood that rating
agencies will upgrade its debt issues. In that event, the market value of the
bonds tends to rise, benefiting investors.
Throughout the six months, we maintained a customarily high level of
diversification, which acts as a form of risk management. On June 30, the Fund's
portfolio was invested in 197 government and corporate bonds of varying credit
qualities and from 25 different markets around the world.
The average credit quality of the portfolio was BBB. As usual, we kept the
portfolio's average duration (a more precise measure than maturity of a bond's
price sensitivity to interest rate changes) relatively long to get the most out
of the Fund's participation in any potential price gains in a declining interest
rate environment. (The longer the duration, the greater a bond's price
sensitivity to changes in interest rates. Conversely, shorter durations indicate
less price sensitivity to interest rate moves.) On June 30, the Fund's average
duration was 9.6 years.
Q. What is your outlook over the next six months?
Our outlook is cautious yet optimistic. We believe the Asian crisis could foster
slower U.S economic growth and enable inflation to remain at historically low
levels. In this environment, we would favor the bonds of companies in
faster-growing sectors, such as telecommunications and cable, as well as in
Canadian government and provincial debt. In our opinion, these sectors offer
values that stand out within the global bond universe.
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 charges.
<PAGE>
PORTFOLIO COMPOSITION
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Investments as of June 30, 1998
(unaudited)
BONDS AND NOTES--87.6% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------
CONVERTIBLE BONDS--12.3%
AUTO PARTS--0.2%
$ 1,150,000 Exide Corp., 144A, 2.900%, 12/15/05 ............... $ 710,125
-------------
CANADIAN ISSUER--0.1%
500,000 Rogers Communications, Inc., 2.000%, 11/26/05 ..... 310,000
-------------
COMPUTER SOFTWARE & SERVICES--0.7%
2,585,000 Softkey International, Inc., 144A, 5.500%,
11/01/00 ........................................ 2,471,906
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COMPUTERS--1.1%
1,500,000 Apple Computer, Inc., 6.000%, 6/01/01 ............. 1,697,804
827,000 Cray Research, Inc., 6.125%, 2/01/11 .............. 674,005
100,000 Data General Corp., 6.000%, 5/15/04 ............... 90,500
407,000 LTX Corp., 7.250%, 4/15/11 ........................ 243,182
883,000 Maxtor Corp., 5.750%, 3/01/12 ..................... 618,100
550,000 Read Rite Corp., 6.500%, 9/01/04 .................. 346,500
250,000 S3, Inc., 5.750%, 10/01/03 ........................ 180,313
100,000 Telxon Corp., 5.750%, 1/01/03 ..................... 118,625
-------------
3,969,029
-------------
CONSUMER PRODUCTS--0.1%
250,000 Cypress Semiconductor Corp., 6.000%, 10/01/02 ..... 218,750
-------------
ELECTRIC UTILITIES--0.4%
1,450,000 National Power Corp., 9.625%, 5/15/28 ............. 1,334,000
-------------
ELECTRONICS--0.8%
300,000 Edo Corp., 7.000%, 12/15/11 ....................... 240,000
250,000 Integrated Device Technology, 5.500%, 6/01/02 ..... 201,250
1,375,000 Kent Electronics Corp., 4.500%, 9/01/04 ........... 1,124,062
750,000 Park Electrochemical Corp., 5.500%, 3/01/06 ....... 651,563
155,000 Richardson Electronics, Ltd., 7.250%, 12/15/06 .... 148,800
150,000 Thermedics Inc., Zero Coupon, 6/01/03 ............. 112,500
1,448,000 Zenith Electric, 6.250%, 4/01/11 .................. 367,430
-------------
2,845,605
-------------
ENERGY--0.0%
125,000 NorAm Energy Corp., 6.000%, 3/15/12 ............... 118,750
-------------
ENVIRONMENTAL--0.2%
760,000 Air & Water Technologies Corp., 8.000%, 5/15/15 ... 630,800
-------------
FOREIGN ISSUES--4.6%
1,750,000 Advanced Agro Public Co., 3.500%, 6/17/01 ......... 1,575,000
1,350,000 App Finance Vii Mauritius Ltd., 3.500%, 4/30/03 ... 1,069,875
750,000 App Finance Vii Mauritius Ltd., 3.500%, 4/30/03 ... 594,375
4,075,000 Bangkok Bank Public, 3.250%, 3/03/04 .............. 1,324,375
2,130,000 Banpu Public, 2.750%, 4/10/03 ..................... 1,459,050
1,000,000 Burns Philp Treasury, 5.500%, 4/30/04 ............. 570,000
250,000 Danka Business Systems Plc, 6.750%, 4/01/02 ....... 218,750
2,575,000 Empresas ICA Sociedad, 5.000%, 3/15/04 ............ 1,837,906
250,000 Inti Indorayon Uta, 7.000%, 5/02/06, (d) .......... 75,000
250,000 Piltel, 1.750%, 7/17/06 ........................... 194,375
975,000 Samsung Co., 0.250%, 6/26/06 ...................... 897,000
250,000 Samsung Display Devices, 0.250%, 3/12/06 .......... 236,250
2,250,000 Samsung Electronics Company Ltd., Zero Coupon,
12/31/07 ........................................ 1,755,000
3,400,000 Sappi Bvi Finance, 7.500%, 8/01/02 ................ 3,170,500
1,130,000 Siam Commercial Bank, 3.250%, 1/24/04 ............. 384,200
1,000,000 Ssangyong Oil Refining Co., Ltd., 3.000%,
12/31/04 ........................................ 470,000
650,000 Telekom Malaysia B, 4.000%, 10/03/04 .............. 474,500
350,000 Total Access Communications, 2.000%, 5/31/06 ...... 266,000
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16,572,156
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HOME BUILDERS--0.1%
500,000 Schuler Homes, Inc., 6.500%, 1/15/03 .............. 450,000
-------------
INDUSTRIALS--0.1%
525,000 Intevac Inc., 6.500%, 3/01/04 ..................... 450,188
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PHARMACEUTICAL--0.5%
600,000 Dura Pharmaceuticals Inc., 3.500%, 7/15/02 ........ 531,750
575,000 Glycomed, Inc., 7.500%, 1/01/03 ................... 540,500
1,098,000 Nabi, 6.500%, 2/01/03 ............................. 723,308
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1,795,558
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REAL ESTATE--0.2%
250,000 Federal Realty Investor Trust, 5.250%, 10/28/03 ... 233,750
500,000 Sizeler Property Investments, Inc., 8.000%,
7/15/03 ......................................... 497,500
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731,250
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RESTAURANTS--1.0%
2,550,000 Boston Chicken, Inc., 4.500%, 2/01/04 ............. 395,250
1,000,000 Boston Chicken, Inc., Zero Coupon, 6/01/15 ........ 50,000
1,000,000 Einstein/Noah Bagel Corp., 7.250%, 6/01/04 ........ 650,000
4,445,000 Shoneys, Inc., Zero Coupon, 4/11/04 ............... 1,866,900
750,000 TPI Enterprises, Inc., 8.250%, 7/15/02 ............ 622,500
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3,584,650
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RETAIL -- SPECIALTY--0.2%
500,000 Bell Sports Corp., 4.250%, 11/15/00 ............... 431,250
275,000 CML Group, Inc., 5.500%, 1/15/03 .................. 170,500
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601,750
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SEMI-CONDUCTORS--0.3%
325,000 Cirrus Logic, Inc., 6.000%, 2/15/08 ............... 257,156
1,000,000 Lam Research Corp., 5.000%, 9/01/02 ............... 820,000
-------------
1,077,156
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TECHNOLOGY--0.0%
2,000,000 Molten Metal Technology, Inc., 5.500%,
5/01/06, (e) .................................... 80,000
2,000,000 Molten Metal Technology, Inc., 144A, 5.500%,
5/01/06, (d) (e) ................................ 80,000
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160,000
-------------
TELECOMMUNICATION--1.4%
3,910,000 Broadband Technologies, Inc., 5.000%, 5/15/01 ..... 2,580,600
2,500,000 Intermedia Communications, Inc., 8.600%, 6/01/08 .. 2,518,750
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5,099,350
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TEXTILE--0.1%
306,000 Dixie Group, Inc., 7.000%, 5/15/12 ................ 266,220
-------------
TRUCKING & FREIGHT FORWARDING--0.2%
1,000,000 Builders Transport, Inc., 8.000%, 8/15/05 ......... 100,000
200,000 Builders Transport, Inc., 6.500%, 5/01/11 ......... 20,000
500,000 Preston Corp., 7.000%, 5/01/11 .................... 407,500
424,000 Worldway Corp., 6.250%, 4/15/11 ................... 351,920
-------------
879,420
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Total Convertible Bonds
(Identified Cost $54,031,607) ................... 44,276,663
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NON-CONVERTIBLE BONDS--75.3%
BROADCASTING--0.7%
250,000 CBS, Inc., 7.125%, 11/01/23 ....................... 238,753
3,500,000 Fox Family Worldwide, Inc., Zero Coupon, 11/01/07 . 2,275,000
-------------
2,513,753
-------------
CANADIAN--20.5%
2,913,497 Alberta Province Canada, 5.930%, 9/16/16, (CAD) ... 2,044,176
11,250,000 British Columbia, Zero Coupon, 11/19/27, (CAD) .... 1,334,428
9,775,000 British Columbia Province, Zero Coupon,
8/19/22, (CAD) .................................. 1,602,503
30,925,000 Canada Government, Zero Coupon, 6/01/21, (CAD) .... 5,936,245
94,475,000 Canada Government, Zero Coupon, 6/01/25, (CAD) .... 14,819,481
4,500,000 Clearnet Communications, Inc, 0/11.750%,
8/13/07, (CAD) (c) .............................. 2,021,164
5,000,000 Hydro Quebec, Zero Coupon, 8/15/20, (CAD) ......... 894,893
5,200,000 International Semi-Tech, 11.500%, 8/15/03 (CAD) ... 1,560,000
2,345,000 Microcell Telecommunications, 0/11.125%,
10/15/07, (CAD) (c) ............................. 1,005,376
2,500,000 New Brunswick F M Proje (d) ....................... 1,315,815
750,000 Ontario Province, Zero Coupon, 7/13/22, (CAD) ..... 125,047
5,000,000 Province of British Columbia, Zero Coupon,
8/23/13, (CAD) .................................. 1,420,940
18,505,000 Province of British Columbia, Zero Coupon,
9/05/20, (CAD) ................................. 3,403,928
17,900,000 Province of British Columbia, Zero Coupon,
6/09/22, (CAD) .................................. 2,968,614
2,900,000 Province of British Columbia, 8.000%,
9/08/23, (CAD) .................................. 2,531,029
35,000,000 Province of British Columbia, Zero Coupon,
8/23/24, (CAD) .................................. 5,097,145
7,950,000 Province of Manitoba, 6.500%, 9/22/17, (CAD) ...... 5,913,335
11,649,000 Province of Manitoba, 7.750%, 12/22/25, (CAD) ..... 10,103,780
17,135,000 Province of Manitoba, Zero Coupon, 3/05/31, (CAD) . 1,730,467
2,695,000 Rogers Cablesystems, Ltd., 9.650%, 1/15/14, (CAD) . 2,115,193
3,500,000 Saskatchewan Province, Zero Coupon, 4/10/14, (CAD) 957,025
5,400,000 Saskatchewan Province, Zero Coupon, 5/30/25, (CAD) 763,633
4,205,000 Saskatchewan Province, 8.750%, 5/30/25, (CAD) ..... 3,994,814
-------------
73,659,031
-------------
COMPUTERS--1.6%
6,175,000 Apple Computer, Inc., 6.500%, 2/15/04 ............. 5,681,000
78,538 Streamlogic Corp., 14.000%, 10/07/98 .............. 3,927
-------------
5,684,927
-------------
ELECTRONICS--0.9%
775,000 Pioneer Standard Electronics, Inc., 8.500%,
8/01/06 ......................................... 833,587
2,250,000 Westinghouse Electric Corp., 7.875%, 9/01/23 ...... 2,312,482
-------------
3,146,069
-------------
ENERGY--0.5%
1,675,000 Chesapeake Energy Corp., 7.875%, 3/15/04 .......... 1,570,313
250,000 Chesapeake Energy Corp., 9.625%, 5/01/05 .......... 250,625
-------------
1,820,938
-------------
ENTERTAINMENT--1.6%
5,400,000 Time Warner Inc., 6.875%, 6/15/18 ................. 5,421,060
295,000 Time Warner, Inc., 7.570%, 2/01/24 ................ 317,308
-------------
5,738,368
-------------
FINANCE & BANKING--2.2%
2,500,000 First Union Institutional Capital, 8.040%,
12/01/26 ........................................ 2,713,707
1,000,000 First Union Institutional Capital, 7.850%,
1/01/27 ......................................... 1,062,180
3,850,000 Keycorp Institutional Capital, 7.826%, 12/01/26 ... 4,077,843
-------------
7,853,730
-------------
FOOD & BEVERAGES--3.6%
2,000,000 Borden, Inc., 7.875%, 2/15/23 ..................... 1,967,560
1,800,000 RJR Nabisco, Inc., 7.625%, 9/15/03 ................ 1,789,650
3,000,000 RJR Nabisco, Inc., 8.750%, 8/15/05 ................ 3,128,610
5,665,000 RJR Nabisco, Inc., 9.250%, 8/15/13 ................ 6,110,609
-------------
12,996,429
-------------
FOREIGN ISSUES--27.5%
2,600,000 Banco Central Costa, 6.250%, 5/21/10 .............. 2,314,000
5,150,000 Bangko Sentral Ng Philipinas, 8.600%,
6/15/27 ......................................... 4,429,000
1,500,000 Bangkok Bank Public, Ltd., 144A, 8.250%, 3/15/16 .. 1,122,915
6,975,000 Bangkok Bank Public, Ltd., 144A, 8.375%, 1/15/27 .. 5,101,445
3,000,000 Barak I T C International, 144A, 12.500%,
11/15/07,(c)..................................... 1,800,000
900,000 Espirito Santo Centrais Eletri, 144A, 10.000%,
7/15/07 ......................................... 756,000
1,250,000 Export Import Bank Korea, 6.375%, 2/15/06 ......... 939,502
3,886,718 Federal Republic of Brazil, 8.000%, 4/15/14 ....... 2,866,455
15,008,000 Federal Republic of Brazil, 10.125%, 5/15/27 ...... 12,921,888
2,000,000 Hyundai Motor Co., 144A, 7.600%, 7/15/07 .......... 1,556,240
500,000 Industrial Finance Corp Thailand, 144A, 7.375%,
1/14/07 ......................................... 437,625
6,500,000 Korea Electric Power Corp, 7.750%, 4/01/13 ........ 4,805,580
3,713,854 Korea Electric Power Corp, 7.400%, 4/01/16 ........ 2,977,731
2,250,000 Loxley, 2.500%, 4/04/01 ........................... 720,000
6,550,000 Pan Pacific Industrial Investment Plc, 144A, Zero
Coupon, 4/28/07 ................................. 2,520,047
1,585,000 Perez Companc S.A., 144A, 8.125%, 7/15/07 ......... 1,446,312
4,350,000 Petroleos Mexicanos, 9.500%, 9/15/27 .............. 4,095,525
3,000,000 Petroleos Mexicanos, 144A, 8.625%, 12/01/23 ....... 2,583,750
1,250,000 Philippine Long Distance Telephone Company Maine,
8.350%, 3/06/17 ................................. 1,065,710
2,250,000 Pindo Deli Finance Mauritius Ltd., 10.750%,
10/01/07 ......................................... 1,575,000
3,000,000 Pindo Deli Finance Mauritius Ltd., 10.875%,
10/01/27 ........................................ 1,770,000
2,650,000 Pindo Deli Finance Mauritus Ltd., 11.750%,
10/01/17 ........................................ 1,772,187
250,000 Pohang Iron & Steel Ltd., 6.625%, 7/01/03 ......... 202,378
3,500,000 Pycsa Panama S.A. 144A, 10.280%, 12/15/12 ......... 3,303,125
2,750,000 Quezon Power Philippines Co, 8.860%, 6/15/17 ...... 2,365,550
950,000 Republic of Argentina, 6.625%, 3/31/05, (d) ....... 838,375
2,225,331 Republic of Ecuador, 6.625%, 2/27/15 .............. 1,330,970
600,000 Republic of Peru, 3.250%, 3/07/17 ................. 355,500
23,100,000 Republic of South Africa, 12.500%, 12/21/06,
(ZAR) ........................................... 3,343,270
7,000,000 Republic of Venezuela, 9.250%, 9/15/27 ............ 5,407,500
500,000 Samsung Electronics Ltd., 144A, 7.450%, 10/01/02 .. 404,305
1,000,000 Samsung Electronics Ltd., 144A, 8.500%, 11/01/02 .. 906,820
2,500,000 Samsung Electronics, Ltd. 144A, 7.700%, 10/01/27 .. 1,625,000
2,850,000 Siam Commercial Bank Public Ltd. 144A, 7.500%,
3/15/06 ......................................... 2,340,933
2,500,000 Tata Electric Cos.,144A, 8.500%, 8/19/17 .......... 2,100,000
2,000,000 Tenaga Nasional Berhad, 7.500%, 11/01/25 .......... 1,494,120
4,500,000 TFM S.A., Zero Coupon, 6/15/09 .................... 2,812,500
1,175,000 Thai Fmrs Bk Pub Ltd, 8.250%, 8/21/16 ............. 827,506
6,125,000 Tjiwi Kimia Mauritius Ltd, 10.000%, 8/01/04 ....... 4,348,750
3,000,000 Total Access Communications Public Ltd., 144A,
7.625%, 11/04/01 ................................ 2,280,000
4,275,000 Total Access Communications Public Ltd., 144A,
8.375%, 11/04/06 ................................ 3,078,000
-------------
98,941,514
-------------
FOREIGN DENOMINATED--6.2%
34,000,000 Federal National Mortgage Association, Zero
Coupon, 10/29/07, (NZD) ......................... 9,558,296
24,300,000 International Bank of Reconstruction &
Development, Zero Coupon, 8/20/07, (NZD) ........ 6,778,355
2,600,000 New Zealand Government, 8.000%, 11/15/06, (NZD) ... 1,484,276
825,000 New Zealand Government, 7.000%, 7/15/09, (NZD) .... 449,331
17,750,000 Republic of South Africa, 12.000%, 2/28/05, (ZAR) . 2,567,846
9,500,000 Republic of South Africa, 13.500%, 9/15/15, (ZAR) . 1,419,876
-------------
22,257,980
-------------
GOVERNMENT TREASURIES--0.4%
5,000,000 United States Treasury Stripped Bonds,
Zero Coupon, 8/15/20 ............................ 1,414,300
-------------
HEALTH CARE -- SERVICES--0.2%
820,000 Columbia/HCA Healthcare Corp., 7.050%, 12/01/27 ... 734,531
-------------
INDUSTRIALS--0.8%
500,000 Pohang Iron & Steel, Ltd., 7.125%, 11/01/06 ....... 385,945
2,500,000 Seagate Technology, 7.450%, 3/01/37 ............... 2,455,775
-------------
2,841,720
-------------
RETAIL -- DEPARTMENT STORE--1.9%
1,250,000 Bradlees, Inc., 9.250%, 3/01/03, (e) .............. 9,375
850,000 Dillon Read Structured Finance Corp.,
8.375%, 8/15/15 ................................. 848,937
250,000 Dillon Read Structured Finance Corp.,
8.550%, 8/15/19 ................................. 250,313
844,421 Dillon Read Structured Finance Corp.,
6.660%, 8/15/10 ................................. 783,235
3,500,000 Kmart Corp., 7.950%, 2/01/23 ...................... 3,526,250
250,000 Kmart Funding Corp., 9.440%, 7/01/18 .............. 273,812
1,000,000 Woolworth Corp., 8.500%, 1/15/22 .................. 1,102,970
-------------
6,794,892
-------------
RETAIL -- GROCERY--0.7%
6,695,000 Penn Traffic Co., 9.625%, 4/15/05 ................. 2,594,313
-------------
TELECOMMUNICATION--5.2%
7,500,000 Arch Communications Group, Inc., (0/10.875),
3/15/08,(c) ..................................... 4,275,000
1,000,000 Century Communications Corp., 8.375%, 11/15/17 .... 957,500
5,375,000 Nextel Communications, Inc., (0/9.750),
10/31/07, (c) ................................... 3,507,187
7,113,000 TCI Communications, Inc., 7.875%, 2/15/26 ......... 8,085,774
575,000 TCI Communications, Inc., 7.125%, 2/15/28 ......... 600,300
2,500,000 Teligent, Inc., 144A, 11.500%, 3/01/08 ............ 1,381,250
-------------
18,807,011
-------------
TEXTILE--0.1%
250,000 Fruit of the Loom, Inc., 7.375%, 11/15/23 ......... 226,280
250,000 Phillips Van Heusen Corp., 7.750%, 11/15/23 ....... 232,143
-------------
458,423
-------------
TRANSPORTATION--0.2%
800,000 Hvide Marine, Inc., 8.375%, 2/15/08 ............... 764,000
66,000 Missouri Pacific Railroad Co., 4.250%, 1/01/05 .... 57,557
-------------
821,557
-------------
UTILITIES--0.5%
1,500,000 Comed Financing, 8.500%, 1/15/27 .................. 1,605,870
233,269 Mobile Energy Services Co. LLC, 8.665%, 1/01/17 ... 118,967
-------------
1,724,837
-------------
Total Non-Convertible Bonds (Identified Cost
$270,681,233) ................................... 270,804,323
-------------
COMMON STOCK--7.2%
SHARES
- ------------------------------------------------------------------------------
COMPUTERS--0.0%
150,150 Streamlogic Corp. ................................. 150
693 Streamlogic Corp., Warrants ....................... 0
-------------
150
-------------
ELECTRIC UTILITIES--1.7%
232,700 Eastern Utilities Associates ...................... 6,108,375
-------------
ENERGY--0.2%
192,550 Chesapeake Energy Corp. ........................... 770,200
-------------
FOREIGN ISSUES--1.6%
6,786,500 Indah Kiat Paper .................................. 1,308,659
25,300 Philippine Long Distance (GDR) .................... 1,163,800
751,800 Sappi, Ltd ........................................ 2,804,214
1,039,900 Siam Commercial Bank PLC .......................... 333,064
260,000 Total Access Communications ....................... 278,200
-------------
5,887,937
-------------
MISCELLANEOUS--0.7%
245,173 Advantica Restaurant Group, Inc. .................. 2,390,437
-------------
REAL ESTATE--3.0%
142,900 Associated Estates Reality Corp. .................. 2,670,444
148,350 Berkshire Realty Company, Inc. .................... 1,733,841
75,800 Developers Diversified Realty ..................... 2,970,412
108,200 Simon de Bartolo Group, Inc. ...................... 3,516,500
-------------
10,891,197
-------------
Total Common Stock (Identified Cost $29,387,627) .. 26,048,296
-------------
PREFERRED STOCK--2.1%
SHARES DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------
COMPUTERS--0.1%
10,000 Unisys Corp. ...................................... 522,500
-------------
CONSTRUCTION MATERIALS--0.2%
10,000 Owens Corning ..................................... 533,750
-------------
DOMESTIC OIL--0.0%
500 Kelley Oil & Gas Corp. ............................ 11,687
-------------
ELECTRIC UTILITIES--0.1%
150 New York State Electric & Gas Corp. ............... 10,800
250 Niagara Mohawk Power Corp., 3.600% ................ 14,656
7,330 Niagara Mohawk Power Corp., 4.100% ................ 489,278
-------------
514,734
-------------
ENERGY--0.3%
25,000 Chesapeak Energy Corp. ............................ 1,068,750
-------------
ENTERTAINMENT--0.1%
297 Time Warner, Inc. ................................. 329,670
-------------
GAS & PIPELINE UTILITIES--0.1%
5,000 Western Gas Resources, Inc. ....................... 193,750
-------------
REAL ESTATE--0.1%
6,500 Camden Property Trust ............................. 172,250
8,000 Meditrust ......................................... 223,500
-------------
395,750
-------------
RETAIL -- DEPARTMENT STORE--0.2%
10,000 Kmart Financing ................................... 700,000
-------------
STEEL--0.5%
43,000 Bethlehem Steel Corp., 144A ....................... 1,961,875
-------------
TRUCKING & FREIGHT FORWARDING--0.4%
38,000 Arkansas Best ..................................... 1,429,750
-------------
Total Preferred Stock
(Identified Cost $6,429,724) .................... 7,662,216
-------------
SHORT TERM INVESTMENT--1.8%
FACE
AMOUNT VALUE (a)
- ------------------------------------------------------------------------------
$ 6,329,000 Repurchase Agreement with State Street Corp.
dated 6/30/98 at 5.000% to be repurchased at
$6,329,879 on 7/01/98 collateralized by
$4,915,000 U.S. Treasury Bond, 8.125% due
8/15/19 valued at $6,456,250 .................... $ 6,329,000
-------------
Total Short Term Investment
(Identified Cost $6,329,000)..................... 6,329,000
-------------
Total Investments--98.7%
(Identified Cost $366,859,191)(b) ............... 355,120,498
Other assets less liabilities .................... 4,522,699
-------------
Total Net Assets--100% ............................ $ 359,643,197
=============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information:
At June 30, 1998 the net unrealized depreciation on
investments based on cost of $366,859,191 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 ............................................ $ 28,368,046
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................... (40,106,739)
-------------
Net unrealized depreciation ........................ $ (11,738,693)
=============
(c) Step Bond: Coupon rate is zero or below market for an initial
period and then increases to a higher coupon rate at a
specified date and rate.
(d) Variable or floating rate security. Rate disclosed is as of
June 30, 1998.
(e) Non-income producing security.
ADR/GDR - An American Depository Receipt (ADR) or Global
Depository Receipt (GDR) is a certificate issued by a
Custodian Bank representing the right to receive
securities of the foreign issuer described. The values
of ADRs and GDRs are significantly influenced by
trading on exchanges not located in the United States
or Canada.
144A - Securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be
resold in transactions exempt from registration,
normally to qualified institutional buyers. At the
period end, the value of these amounted to $39,967,673
or 11.1% of net assets.
CAD-Canadian Dollars
NZD-New Zealand Dollars
ZAR-South African Rand
TEN LARGEST GEOGRAPHIC CONCENTRATIONS OF INVESTMENTS AT JUNE 30, 1998
(UNAUDITED)
United States 42.7% Mexico 3.6%
Canada 20.6 Mauritius 3.1
Thailand 6.7 Philippines 2.6
Brazil 5.2 South Africa 2.0
Korea 4.0 British V.I. 1.7
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $366,859,191) ........ $355,120,498
Cash ....................................................... 474
Foreign cash at value (Identified cost $57) ................ 57
Receivable for:
Fund shares sold ......................................... 801,818
Securities sold .......................................... 60,943
Dividends and interest ................................... 5,257,724
Unamortized organization expense ........................... 25,288
Prepaid expense ............................................ 10,000
------------
361,276,802
LIABILITIES
Payable for:
Securities purchased ..................................... $173,300
Fund shares redeemed ..................................... 574,951
Withholding taxes ........................................ 3,906
Dividends declared ....................................... 606,747
Accrued expenses:
Management fees .......................................... 186,737
Deferred trustees' fees .................................. 9,016
Accounting and administrative ............................ 6,353
Other .................................................... 72,595
--------
1,633,605
------------
NET ASSETS ................................................... $359,643,197
============
Net Assets consist of:
Capital paid in .......................................... $357,187,948
Undistributed net investment income ...................... 434,722
Accumulated net realized gains ........................... 13,798,422
Unrealized depreciation on investments and foreign
currency ............................................... (11,777,895)
------------
NET ASSETS ................................................... $359,643,197
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($150,001,778 divided by 11,324,420 shares of beneficial
interest) ................................................ $13.25
======
Offering price per share (100/95.50 of $13.25) ............... $13.87*
======
Net asset value and offering price of Class B shares
($153,727,201 divided by 11,608,939 shares of beneficial
interest) ................................................ $13.24**
======
Net asset value and offering price of Class C shares
($55,914,218 divided by 4,224,956 shares of beneficial
interest) ................................................ $13.23**
======
*Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends .............................................. $ 930,534(a)
Interest ............................................... 15,137,418
-----------
16,067,952
Expenses
Management fees ...................................... $ 1,128,511
Service fees - Class A ............................... 187,325
Service and distribution fees - Class B .............. 763,981
Service and distribution fees - Class C .............. 284,986
Trustees' fees and expenses .......................... 10,437
Accounting and administrative ........................ 32,551
Custodian ............................................ 100,197
Transfer agent ....................................... 240,434
Audit and tax services ............................... 22,095
Legal ................................................ 6,218
Printing ............................................. 36,307
Registration ......................................... 63,310
Amortization of organization expenses ................ 6,853
Miscellaneous ........................................ 7,930
------------
Total expenses ......................................... 2,891,135
-----------
Net investment income .................................. 13,176,817
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net .................................... 11,360,002
Foreign currency transactions - net .................. (149,007)
------------
Total realized gain on investments and foreign currency
transactions ......................................... 11,210,995
------------
Unrealized depreciation on:
Investments - net ...................................... (17,150,029)
Foreign currency transactions - net .................... (28,658)
------------
Total unrealized depreciation on investments and foreign
currency transactions ................................ (17,178,687)
------------
Net loss on investment transactions .................... (5,967,692)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............... $ 7,209,125
===========
(a) Net of foreign taxes of: $7,813.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 20,199,833 $ 13,176,817
------------- -------------
Net realized gain on investments and foreign currency
transactions .......................................... 5,990,881 11,210,995
Unrealized depreciation on investments and foreign
currency
transactions .......................................... (2,630,247) (17,178,687)
------------- -------------
Increase in net assets from operations .................. 23,560,467 7,209,125
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (9,092,837) (5,461,986)
Class B ............................................... (8,281,842) (5,001,907)
Class C ............................................... (3,004,423) (1,866,506)
Net realized gain on investments
Class A ............................................... (1,533,527) 0
Class B ............................................... (1,552,256) 0
Class C ............................................... (601,199) 0
------------- -------------
(24,066,084) (12,330,399)
------------- -------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ............................................ 131,926,275 17,460,749
------------- -------------
Total increase in net assets ............................ 131,420,658 12,339,475
NET ASSETS
Beginning of the period ................................. 215,883,064 347,303,722
------------- -------------
End of the period ....................................... $ 347,303,722 $ 359,643,197
============= =============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the period ....................................... $ (411,696) $ 434,722
============= =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
MAY 1,(a) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED
DECEMBER 31, --------------------- JUNE 30,
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.36 $13.42
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.74 1.05 1.01 0.54
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.73 0.21 (0.21)
------ ------ ------ ------
Total From Investment Operations ....... 1.23 1.78 1.22 0.33
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.73) (1.05) (1.01) (0.50)
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) 0.00
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions .................... (0.74) (1.41) (1.16) (0.50)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.36 $13.42 $13.25
====== ====== ====== ======
Total Return (%)(c) .................... 10.3 14.5 9.3 2.5
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 0.93(b) 0.96 1.18 1.17(b)
Ratio of Net Investment Income to
Average Net Assets (%) ............... 8.75(b) 8.23 7.36 7.77(b)
Portfolio Turnover Rate (%) ............ 22 52 37 50(b)
Net Assets, End of the Period (000) .... $36,939 $90,729 $144,706 $150,002
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods less than one year are not computed on
an annualized basis.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 1.58(b) 1.31 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
MAY 1,(a) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED
DECEMBER 31, --------------------- JUNE 30,
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.36 $13.42
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.68 0.95 0.91 0.48
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.73 0.21 (0.21)
------ ------ ------ ------
Total From Investment Operations ....... 1.17 1.68 1.12 0.27
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.67) (0.95) (0.91) (0.45)
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) 0.00
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions .................... (0.68) (1.31) (1.06) (0.45)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.36 $13.42 $13.24
====== ====== ====== ======
Total Return (%)(c) .................... 9.7 13.7 8.5 2.0
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 1.68(b) 1.71 1.93 1.92(b)
Ratio of Net Investment Income to
Average Net Assets (%) ............... 8.00(b) 7.48 6.61 7.02(b)
Portfolio Turnover Rate (%) ............ 22 52 37 50(b)
Net Assets, End of the Period (000) .... $38,767 $93,408 $146,083 $153,727
(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 computed on an annualized basis.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 2.33(b) 2.06 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
MAY 1,(a) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED
DECEMBER 31, --------------------- JUNE 30,
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.35 $13.41
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.67 0.95 0.91 0.48
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.72 0.21 (0.21)
------ ------ ------ ------
Total From Investment Operations ....... 1.16 1.67 1.12 0.27
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.66) (0.95) (0.91) (0.45)
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) 0.00
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions .................... (0.67) (1.31) (1.06) (0.45)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.35 $13.41 $13.23
====== ====== ====== ======
Total Return (%)(c) .................... 9.7 13.6 8.5 2.0
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 1.68(b) 1.71 1.93 1.92(b)
Ratio of Net Investment Income to
Average Net Assets (%) ............... 8.00(b) 7.48 6.61 7.02(b)
Portfolio Turnover Rate (%) ............ 22 52 37 50(b)
Net Assets, End of the Period (000) .... $12,252 $31,746 $56,515 $55,914
(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.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 2.33(b) 2.06 -- --
</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 high current income with a secondary objective of
capital growth. The Declaration of Trust permits the Trustees to issue an
unlimited number of shares of the Trust in multiple series (each series of
shares a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. 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 prior to May 1, 1997). Class C shares do not pay front end sales
charges and do not convert to any class of shares, but they do pay a higher
ongoing distribution fee than Class A shares and may be subject to a
contingent deferred sales charge if those shares are redeemed within one year.
Class Y shares do not pay a front end sales charge, a contingent deferred
sales charge or distribution fees. They are intended for institutional
investors with a minimum of $1,000,000 to invest. At June 30, 1998, there were
no Class Y shares outstanding. Expenses of the Fund are borne pro-rata by the
holders of all classes of shares, except that each class bears expenses unique
to that class (including the Rule 12b-1 service and distribution fees
applicable to such class), and votes as a class only with respect to its own
Rule 12b-1 plan. Shares of each class would receive their pro-rata share of
the net assets of the Fund, if the Fund were liquidated. In addition, the
Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. 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. 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. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other
assets and liabilities denominated in currencies other than U.S. dollars are
translated into U.S. dollars based upon foreign exchange rates prevailing at
the end of the period. Purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign
exchange rates prevailing at the end of the period, it is not practical to
isolate that portion of the results of operations arising from changes in
exchange rates from fluctuations arising from changes in market prices of the
investment securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities resulting from changes in the exchange
rate.
C. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion
of discount. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the
identified cost basis.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for mortgage backed securities, foreign currency
transactions and defaulted bond income for book and tax purposes. Permanent
book and tax basis differences will result in reclassifications to capital
accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price including interest. The Fund's subadviser is
responsible for determining that the value of the collateral is at all times
at least equal to the repurchase price. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party
including possible delays or restrictions upon the Fund's ability to dispose
of the underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in 1995 in connection with the Fund's
organization and initial registration amounting to $67,920 were paid by the
Fund and are being amortized over 60 months beginning May 1, 1995.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
- ---------------------------------- -----------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ----------------- -------------- ----------------- -------------
$1,128,789 $97,037,469 $1,098,367 $87,014,949
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets and 0.60% of such assets in excess of $200 million.
NEFM pays the Fund's investment subadviser, Loomis Sayles & Company, L.P.
("Loomis Sayles") at the rate of 0.35% of the first $200 million of the Fund's
average daily net assets and 0.30% of such assets in excess of $200 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Loomis Sayles are wholly owned subsidiaries of Nvest Companies,
L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance Company
("MetLife"). Fees earned by NEFM and Loomis Sayles under the management
agreement in effect during the six months ended June 30, 1998 are as follows:
FEES EARNED
-----------
$539,444 NEFM
589,067 Loomis Sayles
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting and financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the six months ended June 30, 1998,
these expenses amounted to $32,551 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. The Fund paid NEFSCO
$170,371 as compensation for its services in that capacity. For the six months
ended June 30, 1998, the Fund received $3,766 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 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 $187,325 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(together with unreimbursed amounts from prior years) may be carried forward
for reimbursement in future years in which the Class A Plan remains in effect.
Under the Class B and Class C Plans, the Fund pays New England Funds a monthly
service fee at the annual rate of 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 six months
ended June 30, 1998 the Fund paid New England Funds $190,995 and $71,247 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of 0.75% of the average daily net
assets attributable to the Fund's Class B shares and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the six months ended June 30, 1998, the Fund paid New
England Funds $572,986 and $213,739 in distribution fees under the Class B and
Class C Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors of shares of the Fund during the six months
ended June 30, 1998 amounted to $717,316.
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, Nvest, NEFSCO or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $2,012
Meeting Fee 159/meeting
Annual Committee Member Retainer 302
Annual Committee Chairman Retainer 201
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have been, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At June 30, 1998 there was an unlimited number of shares
of beneficial interest authorized, divided into three classes, Class A, Class
B and Class C capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
---------------------------------- ----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 5,039,803 $ 68,493,945 1,646,228 $ 22,449,654
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 517,494 7,047,095 315,400 4,305,762
Distributions from net realized
gain ........................... 97,740 1,309,719 0 0
----------- ------------- ------------ -------------
5,655,037 76,850,759 1,961,628 26,755,416
Shares repurchased ................. (1,666,237) (22,751,600) (1,417,754) (19,361,766)
----------- ------------- ------------ -------------
Net increase ...................... 3,988,800 $ 54,099,159 543,874 $ 7,393,650
----------- ------------- ------------ -------------
<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 ........................ 4,854,294 $ 65,930,219 1,574,263 $ 21,494,832
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 377,086 5,134,666 237,662 3,242,434
Distributions from net realized
gain ........................... 85,267 1,142,583 0 0
----------- ------------- ------------ -------------
5,316,647 72,207,468 1,811,925 24,737,266
Shares repurchased ................. (1,425,292) (19,424,611) (1,088,099) (14,834,062)
----------- ------------- ------------ -------------
Net increase ...................... 3,891,355 $ 52,782,857 723,826 $ 9,903,204
----------- ------------- ------------ -------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
---------------------------------- ----------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold ........................ 2,819,189 $ 38,469,852 674,741 $ 9,196,706
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ......................... 169,498 2,307,708 109,481 1,493,507
Distributions from net realized
gain ........................... 38,142 510,720 0 0
----------- ------------- ------------ -------------
3,026,829 41,288,280 784,222 10,690,213
Shares repurchased ................. (1,190,946) (16,244,021) (773,014) (10,526,318)
----------- ------------- ------------ -------------
Net increase ...................... 1,835,883 $ 25,044,259 11,208 $ 163,895
----------- ------------- ------------ -------------
Increase derived from capital shares
transactions ..................... 9,716,038 $ 131,926,275 1,278,908 $ 17,460,749
=========== ============= ============ =============
</TABLE>
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by
the Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the potfolio.
DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Bullseye Fund
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Equity Income Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Municipal Income Fund
Massachusetts Tax Free Income Fund
Tax Free Income Fund of New York
Intermediate Term Tax Free Fund of California
MONEY MARKET FUNDS
Cash Management Trust, Money Market Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
VISIT OUR WORLD WIDE WEB SITE AT WWW.MUTUALFUNDS.COM
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective
investors when it is preceded or accompanied by the Fund's
current prospectus, which contains information about
distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of New England Funds
are members of the National Association of Securities Dealers, Inc.
(NASD). As a service to investors, the NASD has asked that we inform you
of the availability of a brochure on its Public Disclosure Program.
The program provides access to information about
securities firms and their representatives. Investors may obtain
a copy by contacting the NASD at 1-800-289-9999 or by
visiting their web site at www.NASDR.com.
<PAGE>
------------------
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Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
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