<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England
Government Securities Fund
[graphic omitted]
Where
The Best Minds
Meet(R)
- -----------------
December 31, 1998
- -----------------
<PAGE>
FEBRUARY 1999
- --------------------------------------------------------------------------------
[Photo of Bruce R. Speca]
- --------------------------------------------------------------------------------
"Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
- --------------------------------------------------------------------------------
In September 1998, I became President of New England Funds. As an 18-year
veteran of the mutual fund industry, I was pleased and honored to accept this
important post. In my first message to you, I hope to present what I believe
you, our valued shareholders, really want to know and to offer it in a
straightforward manner.
How did my fund perform?
There's no question that long-term performance is the bottom line of your
investment program. With that in mind, please review the other sections of this
report. You'll see your fund's performance and commentary from your fund manager
that summarizes the fund's successes and shortcomings and the outlook for the
year ahead.
Our assessment of New England Funds' overall performance in 1998 is that we had
a solid, but not spectacular, year. While extremely pleased with both absolute
and relative returns in many of our stock and bond portfolios, we were
disappointed by the results of those equity funds that pursue a "value" rather
than a "growth" strategy. Value stocks were largely ignored in 1998, as
investors focused on very large, high visibility growth stocks (indeed, 45% of
the gain in the Standard & Poor's 500 Stock Index -- a market value-weighted,
unmanaged index of common stock prices for 500 selected stocks -- came from just
10 stocks!) and select technology companies.
Much of the underperformance in value-oriented funds can be attributed to market
cycles, but we continue to pursue strategies to increase returns in these funds.
Can the stock market keep going up?
Like any winning streak, sooner or later the market will experience setbacks.
Does that mean 1999 will see the last burst of energy from the bull market? It's
easy to argue both sides of this question. Employment is high, inflation is low
and economic growth is continuing. But corporate profits may start to lag and
commodity prices, notably oil, are depressed around the world. The conclusion?
Economists, like weathermen and other forecasters, can only hope to be right
more often than they are wrong.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
My Own Two Cents
All too often investors lament, "What I could have made if only . . ." instead
of "What I actually made." But experience has taught me that the more important
question is, "Did I stick with my investment program and make progress toward my
financial goals?"
Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score.
The mutual fund industry has become extremely complex, with more funds, new
strategies and approaches to analyzing performance. What hasn't changed is your
financial representative's primary objective: to help you sort it all out and
increase your returns in line with your goals.
Your financial adviser can help you avoid being distracted by the daily noise
and avoid what I view as the most important risk that investors face. It's the
risk of not staying invested and possibly falling short of your long-term goals.
Your adviser will help you stick with your investment program during periods of
uncertainty.
One last thought: All of us at New England Funds appreciate the trust that you
and your representative have placed in us. We look forward to serving you in the
years ahead. Sincerely,
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
PROGRESS ON THE Y2K FRONT
- --------------------------------------------------------------------------------
New England Funds has been and continues to engage in initiatives aimed at
having our computer systems tested and ready to function capably for the Year
2000. We are insisting on the same standard from vendors whose systems must
interact reliably with ours as well as from the subadvisers to our funds. We are
monitoring their progress and pursuing assurances of their readiness. Our
systems are being tested on a four-digit format (2000, not 00) and updated as
needed to perform competently. Additionally, we are developing contingency plans
to diminish the possibility of inconvenience related to Year 2000. Stay informed
on our Year 2000 readiness by visiting our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness disclosure pursuant to the Year
2000 Information and Readiness Act.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 below 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 and has no expenses that affect the results. It is
not possible to invest directly in an index. In addition, few investors could
purchase all of the securities necessary to match the index and would incur
transaction costs and other expenses even if they could.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the Government Securities Fund's Class A Shares since
12/31/88 compared to the Lehman Government Bond Index over the same period. The
data points from the graph are as follows:]
LEHMAN GOV'T
NAV MSC BOND INDEX
- --------------------------------------------------------------------------------
12/31/88 $10,000 $ 9,550 $10,000
89 $11,259 $10,752 $11,423
90 $11,894 $11,359 $12,419
91 $13,661 $13,047 $14,323
92 $14,590 $13,934 $15,358
93 $15,904 $15,188 $16,996
94 $15,029 $14,353 $16,423
95 $18,039 $17,227 $19,433
96 $18,182 $17,363 $19,972
97 $20,056 $19,154 $21,887
98 $21,859 $20,876 $24,043
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and Class Y share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvestment of
distributions.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CLASS A (Inception 9/16/85) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 9.0% 6.6% 8.1%
With Max. Sales Charge(2) 4.1 5.6 7.6
- -------------------------------------------------------------------------------
CLASS B (Inception 9/23/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 8.2% 5.8% 5.2%
With CDSC(3) 3.2 5.5 5.1
- --------------------------------------------------------------------------------
CLASS Y (Inception 3/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 9.3% 7.9%
- --------------------------------------------------------------------------------
SINCE SINCE
FUND'S FUND'S
CLASS B CLASS Y
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION
Lehman Gov't. Bond Index(4) 9.9% 7.2% 9.2% 6.8% 8.3%
Lipper General Gov't. Average(5) 8.1 6.2 8.2 5.8 7.3
Morningstar Long Gov't Average(6) 11.4 7.8 9.6 7.1 9.5
- --------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
their original cost. Class Y shares are available only to certain institutional
investors.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Government Bond Index is an unmanaged index of bonds that are issued
by the U.S. government and its agencies and have maturities between one and
ten years. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments. Class B since inception return is calculated
from 9/30/93.
(5) Lipper General Government Funds Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper, Inc., an independent
mutual fund ranking service. Class B since inception return is calculated
from 9/30/93.
(6) Morningstar Long Government 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 Morningstar Inc., an
independent mutual fund ranking service. Class B since inception return is
calculated from 9/30/93.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
[Photo of Joel Damiani]
Joel Damiani
Back Bay Advisors, L.P.
Q. How did New England Government Securities Fund perform over the past year?
The Fund performed very well. For the 12 months ending December 31, 1998, the
Fund's Class A shares (calculated at NAV) generated a total return of 9.0%,
reflecting a $0.34 per share gain in net asset value to $11.90 and the
reinvestment of $0.67 per share in dividend distributions. By comparison, your
Fund's peer group of general government funds, as measured by Lipper, Inc., had
an average return of 8.1% for the same period.
Q. What was the investment environment like for government securities?
The environment was positive for all of 1998, and exceptional for the last half
of the year. U.S. Treasury securities thrived amid an extremely volatile
backdrop that included such events as continued uncertainty over the Asian
financial crisis, Russia's default on some of its outstanding debt in August and
concurrent currency devaluation, and the widely publicized meltdown of highly
leveraged hedge funds late in September 1998. Leveraged hedge funds use borrowed
money to invest, and their performance can be significantly influenced -- either
positively or negatively -- by small changes in prices. As these events
unfolded, investors sought the security offered by U.S. Treasury securities in a
flight to quality. Prices for these securities were bid up dramatically, while,
as is the case with bonds, their yields fell. The yield of the benchmark U.S.
Treasury bond dropped from 5.62% on June 30, 1998, to 5.09% at the end of the
year.
Furthermore, the economic environment in the United States was positive for
government securities. Projections show that economic growth slowed from an
annualized pace of around 3.6% in the third quarter of 1998 to about 3% in the
fourth quarter, with inflation remaining subdued. Increases in the annual rate
of inflation, as measured by the Consumer Price Index, ranged from about 1.5% to
1.7%.
Finally, U.S. government bonds benefited, along with other fixed-income
instruments, from a declining interest rate environment. The Federal Reserve
Board -- responding to concerns that a worldwide recession would stifle economic
growth in the United States -- lowered key short-term interest rates three
times, on September 29, October 15 and November 17, as a response to a shrinking
of the availability of loans for some corporate borrowers.
Q. What strategies did you pursue amid this backdrop?
In general, there weren't many changes in the portfolio, as it already was well
positioned to take advantage of this environment. We continued to emphasize
total return by balancing opportunities for income and price performance. As of
December 31, 1998, the Fund's duration was 7.9 years and its average maturity
11.4 years. Expressed in years, duration is a more precise measure than maturity
of a bond's sensitivity to changes in interest rates. The longer the duration,
the more sensitive a bond's price is to movements in interest rates; the reverse
is also true. The principal reason the Fund was able to beat the average
performance of its peers was precisely because it is structured as a long
duration government securities fund. In the declining interest rate environment
of the past year, the Fund's duration structure helped it to achieve strong
returns, as the prices of longer-duration bonds tended to rise.
PORTFOLIO MIX -- 12/31/98
U.S. Treasury Bonds 69%
Mortgage-Backed Securities 22%
U.S. Agency Securities 9%
This breakdown does not include short-term securities.
In terms of asset allocation among different sectors of the government bond
market, the Fund's holdings remained fairly stable. One slight change was a
decrease in mortgage-backed securities, and a corresponding increase in Treasury
securities. As interest rates dropped, it became more advantageous for mortgage
holders to prepay their mortgages and refinance at lower rates. In response, I
took the principal and interest from prepaid mortgages and reinvested them in
Treasuries. However, for a short period, mortgage-backed securities became
extremely cheap, hitting five- to ten-year lows in valuation relative to
comparable Treasuries. I took advantage of that situation to purchase some
Ginnie Mae securities that have since contributed to the Fund's positive
performance. Overall, however, mortgage-backed securities -- as well as all
other non-Treasury sectors -- markedly underperformed comparable investments in
Treasury securities.
Q. What is your outlook for U.S. government securities this year?
Our outlook remains pretty much the same as it was for 1998. Many of the trends
that were positive for the U.S. government security market remain in place and
could push interest rates lower. These trends include moderate growth in the
U.S. economy and low inflation. Foreign investors should continue to gravitate
toward the U.S. bond market because of continued uncertainty in Asia. In
addition, we believe that stagnant economic growth in that part of the world
could help to control inflationary pressures in the United States. However,
while we do anticipate further drops in interest rates, we don't expect to see
them fall as dramatically as they did over the latter half of 1998. The market
also anticipates lower interest rates -- the consensus appears to be that the
Federal Reserve Board may lower rates, but not to the extent it did in the
fourth quarter of 1998. U.S. government securities have begun to stabilize in
price and yield, and we wouldn't be surprised to see that trend continue in the
early part of 1999.
The portfolio manager's 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. The Fund may invest in
mortgage-backed securities, which are subject to the risk that unanticipated
prepayments may occur, reducing the value of the securities. Government
guarantees apply to individual securities only and not to prices and yields of
shares in a managed portfolio. See the Fund's prospectus for details.
- --------------------------------------------------------------------------------
Note to shareholers: Scott A. Millimet recently became co-manager of New England
Government Securities Fund. Joel A. Damiani remains lead portfolio manager. See
prospectus supplement on page 21 for more information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
BONDS AND NOTES--98.2% OF TOTAL NET ASSETS
<TABLE>
FACE
AMOUNT DESCRIPTION VALUE (a)
- -----------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES--8.7%
<C> <S> <C>
$ 7,300,000 Federal National Mortgage Association, 6.590%, 9/17/2007 . $ 7,889,694
2,000,000 Federal National Mortgage Association, 6.800%, 8/27/2012 . 2,181,560
------------
10,071,254
------------
MORTGAGE BACKED--21.2%
3,202,613 Federal Home Loan Mortgage Corp., 7.500%, 4/1/2012 ....... 3,292,671
1,142,000 Federal National Mortgage Association, 5.000%, 8/25/2022 . 1,087,036
1,750,260 Federal National Mortgage Association, 5.937%, 10/25/2008 1,742,351
2,362,896 Federal National Mortgage Association, 6.500%, 11/1/2027 . 2,378,397
1,950,743 Government National Mortgage Association, 6.500%, 2/15/
2028 ................................................... 1,970,251
10,315,422 Government National Mortgage Association, 7.000%, with
various maturities to 2027 (c) ......................... 10,553,914
2,242,896 Government National Mortgage Association, 7.500%, 4/15/
2027 ................................................... 2,312,268
301,809 Government National Mortgage Association, 8.500%, 2/15/
2006 ................................................... 316,972
451,012 Government National Mortgage Association, 9.000%, with
various maturities
to 2016 (c) ............................................ 481,227
168,659 Government National Mortgage Association, 9.500%, with
various maturities
to 2009 (c) ............................................ 179,713
244,663 Government National Mortgage Association, 10.000%, with
various maturities
to 2016 (c) ............................................ 261,309
43,835 Government National Mortgage Association, 12.500%, with
various maturities
to 2014 (c) ............................................ 49,792
------------
24,625,901
------------
U.S. GOVERNMENT--68.3%
13,800,000 United States Treasury Bonds, 9.125%, 5/15/2018 (d) ...... 19,962,528
11,000,000 United States Treasury Bonds, 11.750%, 2/15/2001 ......... 12,555,510
6,300,000 United States Treasury Bonds, 12.375%, 5/15/2004 ......... 8,552,250
11,800,000 United States Treasury Bonds, 13.250%, 5/15/2014 ......... 19,532,658
2,800,000 United States Treasury Notes, 6.125%, 8/15/2007 .......... 3,058,132
22,000,000 United States Treasury Stripped Bonds, Zero Coupon, 8/15/
2017 ................................................... 7,855,100
26,000,000 United States Treasury Stripped Bonds, Zero Coupon, 8/15/
2020 ................................................... 7,838,740
------------
79,354,918
------------
Total Bonds and Notes (Identified Cost $110,220,361) ..... 114,052,073
------------
<CAPTION>
SHORT TERM INVESTMENT--0.8%
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
896,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/1998 at 4% to be repurchased at $896,398 on
1/04/1999 collateralized by 675,000 U.S. Treasury Bond
8.125% due 8/15/2019 valued at $922,493 ............... 896,000
------------
Total Short Term Investment (Identified Cost $896,000) .. 896,000
------------
Total Investments--99.0% (Identified Cost $111,116,361)
(b) .................................................... 114,948,073
Other assets less liabilities ........................... 1,144,747
------------
Total Net Assets--100% .................................. $116,092,820
============
<CAPTION>
FUTURES CONTRACTS
NET
UNREALIZED
CONTRACTS DESCRIPTION DEPRECIATION
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
35 U.S. Treasury Bonds, March 1999 (long) ................. $ (67,406)
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on
investments based on cost of $111,280,043 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 ......................................................... $ 3,961,726
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ....................................................... (293,696)
-----------
Net unrealized appreciation ............................................ $ 3,668,030
==========
</TABLE>
At December 31, 1998 the Fund had a capital loss carryover of
approximately $7,570,110 of which $3,530,050 expires on December 31, 2004
and $4,040,060 expires on December 31, 2002. This may be available to
offset future realized capital gains, if any, to the extent provided by
regulations.
(c) The Fund's investment in mortgage backed securities of the Government
National Mortgage Association are interests in separate pools of mortgages.
All separate investments in securities of this issuer which have the same
coupon rate have been aggregated for the purpose of presentation in the
schedule of investments.
(d) A portion of this security has been segregated as collateral in connection
with the Fund's outstanding futures contracts at December 31, 1998.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments at value (Identified cost $111,116,361) ........ $114,948,073
Cash ....................................................... 436
Receivable for:
Fund shares sold ......................................... 317,857
Accrued interest ......................................... 1,338,421
------------
116,604,787
LIABILITIES
Payable for:
Fund shares redeemed ..................................... $195,696
Variation margin payable ................................. 4,375
Dividends declared ....................................... 110,554
Accrued expenses:
Management fees .......................................... 64,131
Deferred trustees' fees .................................. 48,841
Accounting and administrative ............................ 3,364
Other .................................................... 85,006
--------
511,967
------------
NET ASSETS ................................................... $116,092,820
============
Net Assets consist of:
Capital paid in .......................................... $119,989,810
Undistributed net investment income ...................... 66,275
Accumulated net realized gains (losses) .................. (7,727,571)
Unrealized appreciation (depreciation) on investments and
futures contracts 3,764,306
------------
NET ASSETS ................................................... $116,092,820
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($103,032,010 divided by 8,659,410 shares of beneficial
interest) .................................................. $11.90
======
Offering price per share (100/95.50 of $11.90) ............... $12.46*
======
Net asset value and offering price of Class B shares
($9,656,521 divided by 811,511 shares of beneficial
interest) .................................................. $11.90**
======
Net asset value, offering and redemption price of Class Y shares
($3,404,289 divided by 286,644 shares of beneficial
interest) .................................................. $11.88
======
</TABLE>
* 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.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Interest ................................................... $ 8,059,997
Expenses
Management fees .......................................... $ 728,262
Service fees - Class A ................................... 251,899
Service and distribution fees - Class B .................. 70,781
Trustees' fees and expenses .............................. 10,357
Accounting and administrative ............................ 34,398
Custodian ................................................ 81,648
Transfer agent ........................................... 261,001
Audit and tax services ................................... 38,000
Legal .................................................... 5,028
Printing ................................................. 40,136
Registration ............................................. 50,401
Miscellaneous ............................................ 19,715
-----------
Total expenses ............................................. 1,591,626
------------
Net investment income ...................................... 6,468,371
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ........................................ 2,318,396
Futures contracts - net .................................. 33,642
----------
Total realized gain (loss) on investments and futures
contracts .................................................. 2,352,038
----------
Unrealized appreciation (depreciation) on:
Investments - net ........................................ 724,841
Futures contracts - net .................................. (67,406)
----------
Total unrealized appreciation (depreciation) on investments
and futures contracts .................................... 657,435
----------
Net gain (loss) on investment transactions ................. 3,009,473
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........ $ 9,477,844
============
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998
------------ -------------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 6,783,700 $ 6,468,371
Net realized gain (loss) on investments and futures
contracts ............................................. 1,274,411 2,352,038
Unrealized appreciation (depreciation) on investments and
futures contracts ..................................... 3,475,971 657,435
------------ -------------
Increase (decrease) in net assets from operations ....... 11,534,082 9,477,844
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (6,106,574) (5,800,979)
Class B ............................................... (253,171) (359,173)
Class Y ............................................... (371,662) (248,237)
----------- -------------
(6,731,407) (6,408,389)
----------- -------------
Increase (decrease) in net assets derived from capital
share transactions ...................................... (21,284,627) (2,871,290)
------------ -------------
Total increase (decrease) in net assets ................... (16,481,952) 198,165
NET ASSETS
Beginning of the year ................................... 132,376,607 115,894,655
------------ -------------
End of the year ......................................... $115,894,655 $ 116,092,820
============ =============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the year ......................................... $ (20,394) $ 66,275
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of the Year ............... $11.75 $10.43 $11.73 $11.08 $11.56
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................ 0.69 0.74 0.71 0.62 0.68
Net Realized and Unrealized Gain
(Loss) on Investments .............. (1.32) 1.29 (0.64) 0.48 0.33
------ ------ ------ ------ ------
Total From Investment Operations ..... (0.63) 2.03 0.07 1.10 1.01
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment
Income ............................. (0.69) (0.73) (0.72) (0.62) (0.67)
------ ------ ------ ------ ------
Total Distributions .................. (0.69) (0.73) (0.72) (0.62) (0.67)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ..... $10.43 $11.73 $11.08 $11.56 $11.90
====== ====== ====== ====== ======
Total Return (%) (a) ................. (5.5) 20.0 0.8 10.3 9.0
Ratio of Operating Expenses to Average
Net Assets (%) ..................... 1.29 1.35 1.32 1.36 1.38
Ratio of Net Investment Income to
Average Net Assets (%) ............. 6.66 6.69 6.45 5.63 5.80
Portfolio Turnover Rate (%) .......... 809 559 462 391 106
Net Assets, End of the Year (000) .... $147,986 $147,503 $120,607 $103,583 $103,032
</TABLE>
(a) A sales charge is not reflected in total return calculations.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Net Asset Value, Beginning
<S> <C> <C> <C> <C> <C>
of the Year ......................... $11.75 $10.43 $11.74 $11.08 $11.56
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................ 0.60 0.65 0.63 0.54 0.58
Net Realized and Unrealized Gain
(Loss) on Investments .............. (1.32) 1.30 (0.65) 0.48 0.34
------ ------ ------ ------ ------
Total From Investment Operations ..... (0.72) 1.95 (0.02) 1.02 0.92
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income . (0.60) (0.64) (0.64) (0.54) (0.58)
------ ------ ------ ------ ------
Total Distributions .................. (0.60) (0.64) (0.64) (0.54) (0.58)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ..... $10.43 $11.74 $11.08 $11.56 $11.90
====== ====== ====== ====== ======
Total Return (%) (a) ................. (6.2) 19.2 (0.1) 9.5 8.2
Ratio of Operating Expenses to Average
Net Assets (%) ..................... 2.04 2.10 2.07 2.11 2.13
Ratio of Net Investment Income to
Average Net Assets (%) ............. 5.91 5.94 5.70 4.88 5.05
Portfolio Turnover Rate (%) .......... 809 559 462 391 106
Net Assets, End of the Year (000) .... $2,760 $4,858 $5,385 $5,654 $9,657
</TABLE>
(a) A contingent deferred sales charge is not reflected in total return
calculations.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------------------------------
MARCH 31(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------------
1994 1995 1996 1997 1998
----------- ---- ---- ---- ----
Net Asset Value, Beginning of the
<S> <C> <C> <C> <C> <C>
Period ......................... $11.20 $10.44 $11.71 $11.07 $11.54
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............ 0.54 0.80 0.74 0.65 0.72
Net Realized and Unrealized Gain
(Loss) on Investments .......... (0.77) 1.26 (0.63) 0.47 0.32
------ ------ ------ ------ ------
Total From Investment Operations . (0.23) 2.06 0.11 1.12 1.04
------ ------ ------ ------ ------
Less Distributions
Distributions from Net Investment
Income ......................... (0.53) (0.79) (0.75) (0.65) (0.70)
------ ------ ------ ------ ------
Total Distributions .............. (0.53) (0.79) (0.75) (0.65) (0.70)
------ ------ ------ ------ ------
Net Asset Value, End of the Period $10.44 $11.71 $11.07 $11.54 $11.88
====== ====== ====== ====== ======
Total Return (%) (c) ............. (2.0) 20.3 1.1 10.5 9.3
Ratio of Operating Expenses to
Average Net Assets (%) ......... 0.93(b) 1.10 1.07 1.11 1.13
Ratio of Net Investment Income to
Average Net Assets (%) ......... 7.25(b) 6.94 6.70 5.88 6.05
Portfolio Turnover Rate (%) ...... 809 559 462 391 106
Net Assets, End of the Period
(000) .......................... $4,104 $7,364 $6,384 $6,658 $3,404
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Fund seeks a high level of current income consistent with safety
of principal by investing in U.S. Government securities. The Declaration of
Trust permits the Trustees to issue an unlimited number of shares of the Trust
in multiple series (each such series of shares a "Fund").
The Fund offers Class A, Class B and Class Y shares. Class A shares are sold
with a maximum front end sales charge of 4.50%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before
May 1, 1997). Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or service and distribution fees. They are intended for
institutional investors with a minimum of $1,000,000 to invest. Expenses of
the Fund are borne pro-rata by the holders of all classes of shares, except
that each class bears expenses unique to that class (including the Rule 12b-1
service and distribution fees applicable to such class), and votes as a class
only with respect to its own Rule 12b-1 plan. Shares of each class would
receive their pro rata share of the net assets of the Fund, if the Fund were
liquidated. In addition, the Trustees approve separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Debt securities (other than short-term obligations
with a remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which service determines valuations for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. Short-term obligations with a
remaining maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser and the subadviser,
under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Interest income is recorded on the accrual basis. Interest income is increased
by the accretion of discount. Interest income is decreased by the amortization
of acquisition premium on original issue discount securities. In determining
net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
C. OPTIONS. The Fund may use options to hedge against changes in the values
of securities the Fund owns or expects to purchase. Writing puts and buying
calls tends to increase the Fund's exposure to the underlying instrument and
writing calls or buying puts tends to decrease the Fund's exposure to the
underlying instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to
the Fund is that the change in value of options contracts may not correspond
to the change in value of the hedged instruments. In addition, losses may
arise from changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty is unable
to perform. The maximum loss for purchased options is limited to premium
initially paid for the option. For options written by the Fund, the maximum
loss is not limited to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest
rate futures contracts to hedge against changes in the values of securities
the Fund owns or expects to purchase. An interest rate futures contract is an
agreement between two parties to buy and sell a security for a set price (or
to deliver an amount of cash) on a future date. Upon entering into such a
contract, the purchasing Fund is required to pledge to the broker an amount of
cash, U.S. Government securities or other high quality debt securities equal
to the minimum "initial margin" requirements of the exchange. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it was
closed.
The potential risk to the Fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the Fund may not be able to close out its
futures positions due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatment for mortgaged backed securities for book and tax
purposes. Permanent book and tax basis differences will result in
reclassification to the capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. The Fund's subadviser is responsible for
determining that the value of the collateral is at all times at least equal to
the repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
H. DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a
forward commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated.
2. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 1998,
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
-------------------------------- -------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ---------- --------------- ----------
$111,815,595 $5,537,116 $93,391,074 $28,564,630
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors, L.P., ("Back Bay") at the rate of 0.325% of the first $200
million of the Fund's average daily net assets, 0.3125% of the next $300
million and 0.30% of such assets in excess of $500 million. Certain officers
and directors of NEFM are also officers or trustees of the Fund. NEFM and Back
Bay are wholly owned subsidiaries of Nvest Companies, L.P., ("Nvest"),
formerly known as New England Investment Companies, L.P., which is a
subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by
NEFM and Back Bay under the management agreement in effect during the year
ended December 31, 1998 are as follows:
FEES EARNED
-----------
$364,131 NEFM
364,131 Back Bay
The effective management fee for the year ended December 31, 1998 was 0.65%.
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 year ended December 31, 1998 these
expenses amounted to $34,398 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund and Boston Financial
Data Services serves as the sub-transfer agent for the Fund. For the year
ended December 31, 1998, the Fund paid NEFSCO $186,211 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $2,406 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 year
ended December 31, 1998, the Fund paid New England Funds $251,899 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(together with unreimbursed amounts from prior years) may be carried forward
for reimbursement in future years in which the Class A Plan remains in effect.
The amount of unreimbursed expenses carried forward into 1999 is $1,583,658.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal
services to investors in Class B shares and/or the maintenance of shareholder
accounts. For the year ended December 31, 1998, the Fund paid New England
Funds $17,695 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 year ended
December 31, 1998, the Fund paid New England Funds $53,086 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1998 amounted to $277,732.
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 $699
Meeting Fee 152/meeting
Annual Committee Member Retainer 105
Annual Committee Chairman Retainer 70
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have been, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At December 31, 1998 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class Y capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold ......................... 813,117 $ 9,129,882 1,656,981 $19,549,659
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ............................ 479,951 5,348,864 436,981 5,132,956
---------- ------------ ---------- -----------
1,293,068 14,478,746 2,093,962 24,682,615
Shares repurchased .................. (3,213,030) (35,810,354) (2,395,445) (28,036,795)
---------- ------------ ---------- -----------
Net increase (decrease) ............. (1,919,962) $(21,331,608) (301,483) $(3,354,180)
---------- ------------ ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold ......................... 121,154 $ 1,355,757 525,057 $ 6,224,313
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ............................ 15,712 175,195 20,660 243,213
---------- ------------ ---------- -----------
136,866 1,530,952 545,717 6,467,526
Shares repurchased .................. (133,608) (1,485,360) (223,281) (2,616,439)
---------- ------------ ---------- -----------
Net increase (decrease) ............. 3,258 $ 45,592 322,436 $ 3,851,087
---------- ------------ ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold ......................... 35,311 $ 391,173 122,605 $ 1,438,718
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ............................ 33,327 371,325 20,559 240,336
---------- ------------ ---------- -----------
68,638 762,498 143,164 1,679,054
Shares repurchased .................. (68,695) (761,109) (433,374) (5,047,251)
---------- ------------ ---------- -----------
Net increase (decrease) ............. (57) $ 1,389 (290,210) $(3,368,197)
---------- ------------ ---------- -----------
Increase (decrease) derived from
capital shares transactions ....... (1,916,761) $(21,284,627) (269,257) $(2,871,290)
========== ============ ======== ===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of New England Funds Trust I and the Shareholders of
NEW ENGLAND GOVERNMENT SECURITIES FUND
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio composition, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the New England Government
Securities Fund (the "Fund"), a series of New England Funds Trust I, at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW ENGLAND MUNICIPAL INCOME FUND
SUPPLEMENT DATED JANUARY 18, 1999
TO NEW ENGLAND BOND FUNDS CLASS A, B AND C PROSPECTUS DATED MAY 1, 1998
Effective January 1999, James S. Welch has replaced Nathan R. Wentworth as
portfolio manager of New England Municipal Income Fund. Mr. Welch is a Senior
Vice President of Back Bay Advisors and has been employed by the firm for over
five years. He also serves as the portfolio manager of New England
Intermediate Term Tax Free Fund of California, New England Massachusetts Tax
Free Income Fund and New England Tax Free Income Fund of New York and as co-
portfolio manager of New England Limited Term U.S. Government Fund.
NEW ENGLAND GOVERNMENT SECURITIES FUND
AND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
SUPPLEMENT DATED FEBRUARY 12, 1999 TO
NEW ENGLAND BOND FUNDS CLASS A, B AND C SHARES AND CLASS Y SHARES
PROSPECTUSES DATED MAY 1, 1998
The following supplements the third paragraph in the "Fund Management" section
of each Prospectus:
Effective immediately, Joel A. Damiani acts as lead portfolio manager and
Scott A. Millimet acts as co-portfolio manager of the Government Securities
Fund, and Mr. Millimet acts as lead portfolio manager and Mr. Damiani acts as
co-portfolio manager of the Limited Term U.S. Government Fund.
<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
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth Opportunities Fund
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free Fund of California
Tax Free Income Fund of New York
(formerly Intermediate Term Tax Free Fund of NY)
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust
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
800-289-9999 or by visiting their Web site at
www.NASDR.com.
<PAGE>
------------------
[LOGO](R) Bulk Rate
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
---------------------
GV56-1298
