<PAGE>
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ANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Balanced Fund
Where
The Best Minds
Meet(R)
December 31, 1998
<PAGE>
February 1999
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[Photo of Bruce R. Speca]
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.
"Research indicates that saving for retirement is the number one goal for
invesors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
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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,
/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>
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NEW ENGLAND BALANCED FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 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 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 does not have 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. Your Fund's
benchmark has changed from 65% S&P 500 Index/35% Lehman Intermediate Gov't/Corp.
Index to 65% S&P 500 Index/35% Lehman Gov't/Corp. Index to more accurately
reflect the Fund's holdings.(4), (6)
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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December 1998 through December 1998
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Balanced Fund Class A Shares since 12/31/88,
compared to a blend of the S&P 500 and Lehman Intermediate Government/Corporate
Indices. The data points to this chart are as follows:]
Net Asset With Maximum S&P/Lehman S&P/Lehman
Value(1) Sales Charge(2) Gov't/Corp.(6) Interm. Gov't/Corp(4)
--------- -------------- -------------- ------------------
12/31/88 $10,000 $ 9,425 $10,000 $10,000
1989 $11,037 $10,402 $12,551 $12,500
1990 $ 9,867 $ 9,300 $12,660 $12,648
1991 $12,749 $12,016 $15,872 $15,789
1992 $14,525 $13,690 $17,078 $16,967
1993 $16,585 $15,631 $18,855 $18,599
1994 $16,142 $15,214 $18,790 $18,638
1995 $20,389 $19,217 $24,629 $24,174
1996 $23,880 $22,507 $28,545 $28,114
1997 $28,066 $26,452 $35,701 $34,977
1998 $30,362 $28,616 $43,501 $42,493
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. Classes B, C and 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>
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NEW ENGLAND BALANCED FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
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CLASS A (Inception 11/27/68) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 8.2% 12.9% 11.8%
With Max. Sales Charge(2) 2.0 11.5 11.1
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CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 7.3% 12.0% 12.0%
With CDSC(3) 2.6 11.8 11.9
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CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 7.3% 16.1%
With CDSC(3) 6.4 16.1
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CLASS Y (Inception 3/8/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 8.6% 13.8%
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<TABLE>
<CAPTION>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS B CLASS C CLASS Y
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C> <C>
S&P/Lehman Gov't/Corp Blend(6) 21.9% 18.2% 15.7% 17.6% 23.4% 20.1%
S&P/Lehman Int Gov't/Corp Blend(4) 21.5 17.9 15.4 17.4 22.9 19.7
Lipper Balanced Average(5) 13.5 13.8 12.9 13.4 18.2 15.3
Morningstar Domestic Hybrid Average(7) 12.1 13.3 12.5 12.3 16.8 14.1
</TABLE>
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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. The Fund was changed from an equity income fund to a balanced
fund on March 1, 1990. Results for periods prior to that date reflect former
investment policies and are not necessarily representative of results that would
have been achieved had the Fund's current investment policies then been in
effect. Class Y shares are available 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 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sale Charge (CDSC) performance for Class B shares
assumes that a maximum 5% sales charge is applied to redemptions. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares. With CDSC performance for Class C shares assumes a
maximum 1% sales charge on redemptions within the first year of purchase.
(4) Represented by a 65% weighting in the Standard & Poor's Composite Index of
500 Stocks (the "S&P 500") and a 35% weighting in the Lehman Intermediate
Government/Corporate Bond Index. Indices are rebalanced to 65%/35% at the
end of each year. Standard & Poor's 500 Stock Index is an unmanaged index
representing the performance of 500 major companies, most of which are
listed on the New York Stock Exchange. Lehman Intermediate
Government/Corporate Bond Index is an unmanaged index of investment grade
bonds, issued by the U.S. government and U.S. corporations, having
maturities between one and ten years. The indices' performance have 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. Class Y since inception return
is calculated from 3/31/94.
(5) Lipper Balanced 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. Class Y since inception return is calculated from 3/31/94.
(6) Represented by a 65% weighting in the S&P 500 and a 35% weighting in the
Lehman Government/Corporate Bond Index. Indices are rebalanced to 65%/35%
at end of each year. Lehman Government/Corporate Bond Index is an unmanaged
index that includes the Lehman Government and Corporate Bond Indices,
including U.S. government Treasury and agency securities, corporate and
yankee bonds. The indices' 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. Class Y since inception return is calculated from
3/31/94.
(7) Morningstar Domestic Hybrid 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. Class Y since inception return is calculated from
3/31/94.
<PAGE>
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NEW ENGLAND BALANCED FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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[Photo of Meri Anne Beck]
[Photo of John Hyll]
[Photo of Barr Segal]
[Photo of Jeff Wardlow]
[Photo of Gregg Watkins]
Meri Anne Beck, John Hyll, Barr Segal, Jeff Wardlow, Gregg Watkin
Loomis, Sayles & Company, L.P.
Q. Please tell us about New England Balanced Fund's performance during 1998.
For the 12 months ending December 31, 1998, New England Balanced Fund's Class A
shares at net asset value had a total return of 8.2%, which included a $0.73 per
share loss and the reinvestment of $1.80 per share in distributions.
Q. What was the investment environment in 1998?
Large-capitalization growth stocks drove the popular market averages to
double-digit returns again in 1998. Repeating a four-year pattern, returns on
most individual stocks failed to reflect the strong gains in the averages. As an
example of the very narrow range of stocks that defined the strong performance,
just ten stocks out of 500 -- the ten largest in the Standard & Poor's Composite
Index of 500 Stocks (the "S&P 500") -- accounted for nearly half of the S&P
500's return last year. In addition, sharp drops and rapid recoveries were more
frequent than we have seen in several years, as the investment mood swung from
near euphoria to uneasiness. Behind this volatility was the question that caused
so much uncertainty in 1997: Would upheavals in Asia and elsewhere take a severe
toll on corporate earnings in the United States? That concern applied not only
to exporters whose sales are directly affected by weak economies and falling
currency values overseas, but also to manufacturers and others whose pricing
might be undercut by low-cost, competitive imports.
Several companies alerted analysts that their optimistic earnings forecasts
might need to be revised. But a decline in interest rates gave the market a
solid underpinning and investors planned on continued economic expansion.
Q. Given this environment, what was your equity strategy during the period?
Early in 1998 we positioned the Fund to emphasize cyclical sectors, including
basic industries like chemicals, industrial companies and consumer cyclicals,
because of their attractive valuations. Cyclical companies are those whose
fortunes rise and fall with the nation's economy.
As the year progressed and the corporate earnings outlook began to deteriorate,
we cut back exposure to cyclical industries and built up the Fund's holdings in
consumer staples as well as financial and energy stocks. Staple industries
supply services or products that are in relatively constant demand regardless of
economic ups and downs, such as food and health care. In chemicals, we reduced
positions in W.R. Grace and Solutia.
YOUR FUND'S ASSET MIX - 12/31/98
- ------------------------------------
COMMON STOCKS 61.8%
BONDS 36.6%
CASH & CASH EQUIVALENTS 1.6%
Portfolio holdings and asset allocation will vary.
In view of the uncertain climate overseas, we added Federated Department Stores
to the portfolio. Retailers are generally well insulated from foreign economic
problems because nearly all their revenues originate domestically. Moreover,
retailing is a natural beneficiary of the nation's sustained low unemployment
rate and high levels of consumer confidence.
We also added Tenet Healthcare, an owner and manager of for-profit hospitals. We
saw good value and a positive earnings outlook in the company. Plus, there is no
foreign risk in the health care sector, and its prospects are not tied to the
economy.
For most of the year, the Fund's asset allocation -- the way it is divided
between stocks and bonds -- remained fairly stable at 60% stocks with 40% bonds.
In the third quarter, when the stock allocation declined along with the market,
we added to existing holdings to restore the 60/40 balance.
Q. What were the principal factors affecting equity performance?
It was a difficult year for our value-focused investment style. With investors
focused on a few large-cap growth stocks, other sectors were largely neglected.
Nevertheless, the Fund benefited from its commitment to the Regional Bell
companies, Ameritech, Bell Atlantic and BellSouth, all of which scored
impressive gains during the year. About 7% of the Fund was invested in
technology stocks, another sector that produced solid gains for the Fund.
Individual technology companies that helped performance include IBM and Sun
Microsystems.
Performance suffered principally because our investment style excludes very
high-priced stocks like those that dominated market activity in 1998.
Investments in energy and oil-related sectors also disappointed, due in large
part to falling oil prices.
Q. What was the bond environment, and how did you respond?
Most bond markets were extremely volatile last year, as shifting economic news
had investors rushing from one sector to another with unaccustomed haste. The
year began relatively quietly, with fairly narrow differences between the yields
- -- known as spreads -- on quality corporate bonds and those on U.S. government
issues. Narrow spreads generally signal confidence in the outlook for corporate
bonds. But when confidence evaporated in the second and third quarters of 1998,
investors sold corporate bonds and fled to the relative stability of Treasury
securities. The event that triggered this flight to the highest perceived
quality was the default by Russia on its sovereign (government) debt. All debt
tied to emerging markets quickly became suspect, so there were essentially no
buyers in the sector. Investors moved out of U.S. corporate issues for fear that
deflation -- falling prices and sinking profits -- and possible recession would
invade our economy from overseas.
YOUR FUND'S FIVE LARGEST INDUSTRIES -- 12/31/98
% OF
NET ASSETS
- ---------------------------------------------------
1. GOV'T/AGENCY 10.8
- ---------------------------------------------------
2. TELEPHONE 6.5
- ---------------------------------------------------
3. BANKS 5.8
- ---------------------------------------------------
4. CONSUMER 5.4
- ---------------------------------------------------
5. MANUFACTURING 4.7
Portfolio holdings and asset allocations will vary.
After the Federal Reserve Board's three cuts in short-term interest rates last
Fall, investors began returning to corporate bonds; spreads narrowed and
performance improved in many sectors. At year-end, bond markets fell back
slightly, as low unemployment and other indicators suggested that economic
growth would persist, at least for a time. Strong growth tends to raise concerns
over rekindled inflation, a development that could undermine the value of
fixed-income assets.
The bond portion of New England Balanced Fund benefited from our decision to
avoid all emerging market debt and to concentrate on Treasury securities and
high-quality U.S. corporate bonds. Early in 1998 we reduced exposure to
corporate issues because they were expensive compared to Treasury securities. To
add potential impetus to our Treasury purchases, we extended the duration of
that part of the portfolio. (Duration is a measure of a portfolio's sensitivity
to changes in interest rates. Funds with longer durations tend to do well when
interest rates fall, as they did in 1998.) By year-end we had changed emphasis,
taking advantage of attractive prices among quality corporate bonds. These
purchases built the Fund's corporate position to 60% of the fixed-income
portfolio, well above the sector's 25% representation in the Lehman Brothers
Government Corporate Bond Index and indicative of the positive prospects we
foresee for corporate bonds.
Q. What is your current outlook for 1999?
Although we do not anticipate a recession, we believe a restrained economic
environment will make it difficult for companies to raise prices, allowing only
modest profit growth. Furthermore, the impact of uncertainties abroad has yet to
be fully felt here, in our opinion. As a result, more companies may experience
difficulties living up to analysts' expectations.
On the equity side, we believe our value approach is appropriate to the economic
landscape we expect to see in 1999. We may have seen the peak of the
outperformance of growth stocks over value stocks for this market cycle, as we
believe economics will inevitably dictate more rational pricing. If we are
correct, the Fund is positioned to benefit from its basic orientation as
investors turn their attention to value stocks.
A non-recessionary economic outlook is also good for bonds. Corporate balance
sheets are generally healthy. We think consumer spending must slow soon, as
individual expenditures are too high for available income. A drop in
manufacturing employment because of price competition from Asia should be offset
by an upswing in service sector jobs, including technology, keeping unemployment
low.
Stock and bond selection for the Fund will continue to rely on Loomis Sayles'
proprietary research. Based on the ideas supplied by our analysts, we will seek
renewed opportunities in the equity and fixed income markets. Industry
diversification and other portfolio characteristics will be a result of our
analytical work.
The portfolio managers' 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.
Foreign securities may be affected by currency fluctuations, higher volatility
than the U.S. securities and limited liquidity. Investing in lower-rated
higher-yielding bonds may involve greater risk. Unanticipated prepayments may
occur, reducing the value of mortgage or asset-backed securities. See the Fund's
prospectus for details.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--61.8% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
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AEROSPACE & DEFENSE--1.8%
<C> <S> <C>
57,000 Northrop Grumman Corp. ................................. $ 4,168,125
50,000 Sundstrand Corp. ....................................... 2,593,750
------------
6,761,875
------------
AUTO & RELATED--1.6%
57,000 General Motors Corp. ................................... 4,079,062
33,500 Magna International, Inc. .............................. 2,077,000
------------
6,156,062
------------
BANKS--4.8%
59,974 BankAmerica Corp. ...................................... 3,605,937
137,000 Fleet Financial Group, Inc. ............................ 6,122,187
50,000 National City Corp. .................................... 3,625,000
35,000 PNC Bank Corp. ......................................... 1,894,375
80,000 Wells Fargo & Co. ...................................... 3,195,000
------------
18,442,499
------------
BANKS & THRIFTS--0.9%
64,696 Banc One Corp. ......................................... 3,303,540
------------
BEVERAGES--1.3%
75,000 Anheuser-Busch Cos. .................................... 4,921,875
------------
BUILDING & RELATED--2.2%
42,000 Armstrong World Industries, Inc. ....................... 2,533,125
45,000 Black & Decker Corp. ................................... 2,522,813
53,000 Philips Electronics NV, New York shares ................ 3,587,437
------------
8,643,375
------------
BUSINESS SERVICES--1.0%
85,000 Dun & Bradstreet Corp. ................................. 2,682,813
40,000 Viad Corp. ............................................. 1,215,000
------------
3,897,813
------------
BUSINESS SERVICES - COMPUTER DATA PRODUCTS--1.2%
145,000 First Data Corp. ....................................... 4,594,688
------------
CHEMICALS - MAJOR--0.6%
120,000 Crompton & Knowles Corp. ............................... 2,482,500
------------
CHEMICALS-SPECIALTY--1.0%
82,000 Solutia, Inc. .......................................... 1,834,750
135,000 W.R. Grace & Co. (c) ................................... 2,117,813
------------
3,952,563
------------
COMPUTERS & BUSINESS EQUIPMENT--1.5%
31,000 International Business Machines Corp. .................. 5,727,250
------------
COMPUTER EQUIPMENT--0.8%
80,000 Harris Corp. ........................................... 2,930,000
------------
COMPUTER HARDWARE--1.5%
82,000 Hewlett-Packard Co. .................................... 5,601,625
------------
CONSUMER--1.3%
105,000 Abbott Laboratories .................................... 5,145,000
------------
DRUGS & HEALTH CARE--1.2%
85,000 American Home Products Corp. ........................... 4,786,562
------------
ELECTRIC COMPANIES--2.3%
95,000 CMS Energy Corp. ....................................... 4,601,562
33,400 Energy East Corp. ...................................... 1,887,100
53,000 Pinnacle West Capital Corp. ............................ 2,245,875
------------
8,734,537
------------
ELECTRONICS--2.0%
48,000 Litton Industries, Inc. (c) ............................ 3,132,000
88,700 Raytheon Co., Class B .................................. 4,723,275
------------
7,855,275
------------
FINANCIAL - CONSUMER/DIVERSIFIED--2.4%
80,000 Corrections Corporation America ........................ 1,410,000
89,000 Federal Home Loan Mortgage Corp. ....................... 5,734,937
40,000 The FINOVA Group, Inc. ................................. 2,157,500
------------
9,302,437
------------
FOODS--2.0%
130,000 ConAgra, Inc. .......................................... 4,095,000
130,000 Sara Lee Corp. ......................................... 3,664,375
------------
7,759,375
------------
FREIGHT TRANSPORTATION--0.3%
45,000 Ryder Systems, Inc. .................................... 1,170,000
------------
HEALTH CARE - SERVICES--2.0%
190,000 Tenet Healthcare Corp. (c) ............................. 4,987,500
30,000 Wellpoint Health Networks, Inc. ........................ 2,610,000
------------
7,597,500
------------
HOUSEHOLD PRODUCTS--1.2%
85,000 Kimberly-Clark Corp. ................................... 4,632,500
------------
INSURANCE--3.1%
160,200 ACE, Ltd. .............................................. 5,516,888
103,200 Allstate Corp. ......................................... 3,986,100
63,100 Everest Reinsurance Holdings ........................... 2,456,956
------------
11,959,944
------------
INVESTMENT BANKING/BROKER/MANAGEMENT--0.4%
45,000 Bear Stearns Cos., Inc. ................................ 1,681,875
------------
INVESTMENT COMPANIES--0.8%
45,000 Morgan Stanley Dean Witter ............................. 3,195,000
------------
LEISURE--0.9%
95,000 Hasbro, Inc. ........................................... 3,431,875
------------
MACHINERY--0.5%
58,800 Deere & Co. ............................................ 1,947,750
------------
MANUFACTURING - DIVERSIFIED--2.1%
45,000 Eaton Corp. ............................................ 3,180,937
70,000 Premark International, Inc. ............................ 2,423,750
75,000 Tenneco, Inc. .......................................... 2,554,688
------------
8,159,375
------------
NATURAL GAS--0.7%
50,000 Columbia Gas Systems, Inc. ............................. 2,887,500
------------
OIL & GAS/DRILLING EQUIPMENT--0.6%
70,000 BJ Services ............................................ 1,093,750
50,000 Cooper Cameron Corp. ................................... 1,225,000
------------
2,318,750
------------
OIL & GAS/MAJOR INTEGRATED--2.9%
25,000 Amoco Corp. ............................................ 1,475,000
31,271 British Petroleum plc (ADR) ............................ 2,970,745
50,000 Exxon Corp. ............................................ 3,656,250
35,000 Mobil Corp. ............................................ 3,049,375
------------
11,151,370
------------
OIL & GAS/REFINING/MARKETING--0.7%
100,000 Tosco Corp. ............................................ 2,587,500
------------
PAPER & FOREST PRODUCTS--0.9%
40,000 Georgia Pacific Corp. .................................. 2,342,500
50,000 Georgia Pacific Corp. Timber Group ..................... 1,190,625
------------
3,533,125
------------
PETROLEUM SERVICES--0.6%
112,700 Conoco, Inc. ........................................... 2,352,613
------------
PHOTOGRAPHY-IMAGING--1.4%
45,000 Xerox Corp. ............................................ 5,310,000
------------
RETAIL - FOOD & DRUG--0.9%
60,000 Kroger Co. (c) ......................................... 3,630,000
------------
RETAIL - GENERAL MERCHANDISE--2.3%
110,000 Federated Department Stores, Inc.(c) ................... 4,791,875
93,100 Kmart (c) .............................................. 1,425,594
60,000 Sears, Roebuck & Co. ................................... 2,550,000
------------
8,767,469
------------
TELEPHONE--5.4%
123,200 Ameritech Corp. ........................................ 7,807,800
108,800 Bell Atlantic Corp. .................................... 5,766,400
120,000 BellSouth Corp. ........................................ 5,985,000
34,200 Cincinnati Bell, Inc. .................................. 1,293,187
------------
20,852,387
------------
TELECOMMUNICATION - LONG DISTANCE--1.5%
41,000 AT&T Corp. ............................................. 3,085,250
31,000 Sprint Corp. (c) ....................................... 2,607,875
------------
5,693,125
------------
TOBACCO--1.2%
130,000 UST, Inc. .............................................. 4,533,750
------------
Total Common Stocks (Identified Cost $194,238,808) ..... 238,392,259
------------
<PAGE>
BONDS AND NOTES--36.6%
FACE
AMOUNT
- -----------------------------------------------------------------------------------------
BANKS--1.0%
$ 3,430,000 Mellon Bank, 7.000%, 3/15/2006 ......................... 3,684,129
------------
CONSUMER--4.1%
2,505,000 AMERCO, 7.850%, 5/15/2003 .............................. 2,479,023
4,790,000 Coca Cola Enterprises, Inc., 6.750%, 1/15/2038 ......... 4,933,892
2,500,000 Dillards, Inc., 6.430%, 8/01/2004 ...................... 2,545,400
2,975,000 FMC Corp., 7.125%, 11/25/2002 .......................... 2,990,143
3,000,000 Northwest Airlines Corp., 8.375%, 3/15/2004 ............ 2,937,030
------------
15,885,488
------------
CYCLICAL--0.7%
2,125,000 Carnival Corp., 7.050%, 5/15/2005 ...................... 2,235,160
500,000 Westvaco Corp., 9.650%, 3/01/2002 ...................... 556,820
------------
2,791,980
------------
ENERGY--2.0%
4,190,000 Kerr-Mcgee Corp., 6.625%, 10/15/2007 ................... 4,451,246
2,960,000 Tosco Corp., 7.625%, 5/15/2006 ......................... 3,158,705
------------
7,609,951
------------
EQUIPMENT TRUST--0.2%
600,000 Delta Air Lines, Inc., 9.200%, 9/23/2014 ............... 720,156
------------
GAS UTILITIES--1.4%
4,445,000 KN Energy, Inc., 6.650%, 3/01/2005 ..................... 4,417,974
1,200,000 Williams Holdings Co., 6.250%, 2/01/2006 ............... 1,188,036
------------
5,606,010
------------
GOVERNMENT--10.8%
965,000 United States Treasury Bonds, 6.500%, 11/15/2026 ....... 1,122,111
10,100,000 United States Treasury Notes, 7.000%, 7/15/2006 ........ 11,499,759
2,200,000 United States Treasury Notes, 6.625%, 5/15/2007 ........ 2,473,966
10,070,000 United States Treasury Notes, 6.125%, 8/15/2007 ........ 11,024,032
26,000,000 United States Treasury Strip, 2/15/2009 ................ 15,676,960
------------
41,796,828
------------
MANUFACTURING--2.6%
3,660,000 Nabisco Inc., 7.050%, 7/15/2007 ........................ 3,689,354
1,790,000 Philips Electronics NV, 7.250%, 8/15/2013 .............. 1,863,730
1,780,000 Raytheon Co., 6.300%, 3/15/2005 ........................ 1,824,482
2,500,000 Textron, Inc., 6.625%, 11/15/2007 ...................... 2,632,300
------------
10,009,866
------------
MORTGAGE--3.1%
3,868,058 Federal Home Loan Mortgage Association, 6.000%, 8/15/
2022 ................................................. 3,810,037
3,000,000 Federal National Mortgage Association, 6.000%, 2/25/2024 2,980,410
5,258,381 Federal National Mortgage Association, 6.000%, 4/01/2028 5,189,338
------------
11,979,785
------------
OTHER FINANCE--3.3%
3,050,000 Bear Stearns Cos., Inc., 6.750%, 12/15/2007 ............ 3,168,889
1,500,000 Donaldson Lufkin & Jenrette, Inc., 6.875%, 11/01/2005 .. 1,565,865
1,775,000 National Health Investors, Inc., 7.300%, 7/16/2007 ..... 1,955,855
1,990,000 Prologis Trust, 7.050%, 7/15/2006 ...................... 1,941,743
4,025,000 Salomon, Inc., 7.000%, 3/15/2004 ....................... 4,204,877
------------
12,837,229
------------
SERVICE--3.5%
3,000,000 La Quinta Inns, Inc., 7.400%, 9/15/2005 ................ 2,970,000
3,390,000 Loewen Group International, Inc., 7.750%, 10/15/2001 ... 2,905,976
3,295,000 MGM Grand, Inc., 6.875%, 2/06/2008 ..................... 3,018,912
2,425,000 Secured Finance, 9.050%, 12/15/2004 .................... 2,773,472
1,660,000 U.S. West Capital Funding Inc., 6.250%, 7/15/2005 ...... 1,716,888
------------
13,385,248
------------
TELEPHONE--1.1%
4,600,000 Sprint Spectrum, L.P., Zero Coupon, 8/15/2006 (d) ...... 4,186,000
------------
TRANSPORTATION--2.8%
3,300,000 Federal Express Equipment Test, 7.020%, 1/15/2016 ...... 3,385,285
2,350,000 Norfolk Southern Corp., 7.050%, 5/01/2037 .............. 2,563,216
2,000,000 Royal Caribbean Cruises Line, 8.125%, 7/28/2004 ........ 2,118,420
2,570,000 Royal Caribbean Cruises Line, 7.000%, 10/15/2007 ....... 2,573,572
------------
10,640,493
------------
Total Bonds and Notes (Identified Cost $136,498,774) ... 141,133,163
------------
SHORT TERM INVESTMENT--1.3%
- -----------------------------------------------------------------------------------------
5,072,650 Associates First Capital, 5.000%, 1/04/1999 ............ 5,072,650
------------
Total Short Term Investment (Identified Cost $5,072,650) 5,072,650
------------
Total Investments--99.7% (Identified Cost
$335,810,232) (b) ................................... 384,598,072
Other assets less liabilities .......................... 1,213,902
------------
Total Net Assets--100% ................................. $385,811,974
============
(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 $335,811,278 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 ............ $ 53,720,434
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............ (4,933,640)
------------
Net unrealized appreciation .................................. $ 48,786,794
============
(c) Non-income producing security.
(d) 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.
ADR/GDR -An American Depository Receipt or Global Depository Receipt 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $335,810,232) ...... $384,598,072
Receivable for:
Fund shares sold ....................................... 248,820
Securities sold ........................................ 673,331
Dividends and interest ................................. 2,615,307
------------
388,135,530
LIABILITIES
Payable for:
Securities purchased ................................... $ 651,108
Fund shares redeemed ................................... 1,225,726
Withholding taxes ...................................... 4,561
Accrued expenses:
Management fees ........................................ 234,530
Deferred trustees' fees ................................ 66,680
Accounting and administrative .......................... 7,678
Other .................................................. 133,273
----------
2,323,556
------------
NET ASSETS ................................................. $385,811,974
============
Net Assets consist of:
Capital paid in ........................................ $334,798,524
Undistributed net investment income .................... 103,509
Accumulated net realized gains (losses) ................ 2,122,009
Unrealized appreciation (depreciation) on investments
and foreign currency transactions .................... 48,787,932
------------
NET ASSETS ................................................. $385,811,974
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($222,865,516 divided by 16,487,154 shares of beneficial
interest) .............................................. $13.52
======
Offering price per share (100/94.25 of $13.52) ............. $14.34*
======
Net asset value and offering price of Class B shares
($84,254,644 divided by 6,285,880 shares of beneficial
interest) .............................................. $13.40**
======
Net asset value and offering price of Class C shares
($5,479,924 divided by 410,505 shares of beneficial
interest) .............................................. $13.35**
======
Net asset value, offering and redemption price of Class Y shares
($73,211,890 divided by 5,408,596 shares of beneficial
interest) .............................................. $13.54
======
* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of: $36,799) ........... $ 3,465,726
Interest ............................................... 10,556,444
-----------
14,022,170
Expenses
Management fees ...................................... $ 2,876,837
Service fees - Class A ............................... 574,918
Service and distribution fees - Class B .............. 810,836
Service and distribution fees - Class C .............. 54,042
Trustees' fees and expenses .......................... 23,816
Accounting and administrative ........................ 82,246
Custodian ............................................ 120,378
Transfer agent ....................................... 692,526
Audit and tax services ............................... 35,500
Legal ................................................ 21,999
Printing ............................................. 62,597
Registration ......................................... 75,464
Miscellaneous ........................................ 34,148
------------
Total expenses ......................................... 5,465,307
-----------
Net investment income .................................. 8,556,863
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on Investments - net .............. 36,886,910
------------
Unrealized appreciation (depreciation) on:
Investments - net .................................... (15,316,886)
Foreign currency transactions - net .................. 47
------------
Unrealized appreciation (depreciation) on investments
and foreign currency transactions .................. (15,316,839)
------------
Net gain (loss) on investment transactions ............. 21,570,071
-----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $30,126,934
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 8,610,744 $ 8,556,863
Net realized gain (loss) on investments ................. 44,522,520 36,886,910
Unrealized appreciation (depreciation) on investments
and foreign currency transactions ..................... 9,443,755 (15,316,839)
---------------- ----------------
Increase (decrease) in net assets from operations ....... 62,577,019 30,126,934
---------------- ----------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (5,058,699) (5,071,303)
Class B ............................................... (1,076,687) (1,228,192)
Class C ............................................... (59,400) (84,069)
Class Y ............................................... (2,402,391) (2,049,589)
Net realized gain on investments
Class A ............................................... (26,172,311) (22,927,357)
Class B ............................................... (8,351,315) (8,531,184)
Class C ............................................... (483,496) (560,266)
Class Y ............................................... (11,201,373) (7,647,240)
---------------- ----------------
(54,805,672) (48,099,200)
---------------- ----------------
Increase (decrease) in net assets derived from capital
share transactions 34,227,005 3,590,030
---------------- ----------------
Total increase (decrease) in net assets ................. 41,998,352 (14,382,236)
NET ASSETS
Beginning of the year ................................... 358,195,858 400,194,210
---------------- ----------------
End of the year ......................................... $ 400,194,210 $ 385,811,974
================ ================
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the year ......................................... $ (38,382) $ 103,509
================ ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Year $12.13 $11.27 $13.14 $13.94 $14.25
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.33 0.42 0.38 0.33 0.33
Net Realized and Unrealized Gain (Loss)
on Investments ...................... (0.65) 2.49 1.76 2.05 0.74
------ ------ ------ ------ ------
Total From Investment Operations ...... (0.32) 2.91 2.14 2.38 1.07
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income .. (0.33) (0.40) (0.39) (0.33) (0.32)
Distributions From Net Realized Capital
Gains ............................... (0.21) (0.64) (0.95) (1.74) (1.48)
------ ------ ------ ------ ------
Total Distributions ................... (0.54) (1.04) (1.34) (2.07) (1.80)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ...... $11.27 $13.14 $13.94 $14.25 $13.52
====== ====== ====== ====== ======
Total Return (%) (a) .................. (2.7) 26.3 17.1 17.5 8.2
Ratio of Operating Expenses to Average
Net Assets (%) ...................... 1.40 1.36 1.33 1.29 1.30
Ratio of Net Investment Income to
Average Net Assets (%) 2.91 3.37 2.79 2.25 2.25
Portfolio Turnover Rate (%) ........... 36 54 70 69 81
Net Assets, End of the Year (000) ..... $158,332 $196,514 $219,626 $233,421 $222,866
(a) A sales charge is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Year ..... $12.11 $11.24 $13.08 $13.86 $14.15
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ...................... 0.26 0.34 0.29 0.23 0.21
Net Realized and Unrealized Gain (Loss) on
Investments .............................. (0.66) 2.46 1.74 2.03 0.74
------ ------ ------ ------ ------
Total From Investment Operations ........... (0.40) 2.80 2.03 2.26 0.95
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ....... (0.26) (0.32) (0.30) (0.23) (0.22)
Distributions From Net Realized Capital
Gains .................................... (0.21) (0.64) (0.95) (1.74) (1.48)
------ ------ ------ ------ ------
Total Distributions ........................ (0.47) (0.96) (1.25) (1.97) (1.70)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ........... $11.24 $13.08 $13.86 $14.15 $13.40
====== ====== ====== ====== ======
Total Return (%) (a) ....................... (3.4) 25.3 16.3 16.7 7.3
Ratio of Operating Expenses to Average Net
Assets (%) ............................... 2.15 2.11 2.08 2.04 2.05
Ratio of Net Investment Income to Average
Net Assets (%) ........................... 2.16 2.62 2.04 1.50 1.50
Portfolio Turnover Rate (%) ................ 36 54 70 69 81
Net Assets, End of the Year (000) .......... $21,607 $40,361 $58,367 $76,558 $84,255
(a) A contingent deferred sales charge in the case of Class B shares is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Year .......... $11.24 $13.05 $13.82 $14.10
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........................... 0.35 0.29 0.23 0.21
Net Realized and Unrealized Gain on Investments . 2.44 1.73 2.02 0.74
------ ------ ------ ------
Total From Investment Operations ................ 2.79 2.02 2.25 0.95
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ............ (0.34) (0.30) (0.23) (0.22)
Distributions From Net Realized Capital Gains ... (0.64) (0.95) (1.74) (1.48)
------ ------ ------ ------
Total Distributions ............................. (0.98) (1.25) (1.97) (1.70)
------ ------ ------ ------
Net Asset Value, End of the Year ................ $13.05 $13.82 $14.10 $13.35
====== ====== ====== ======
Total Return (%) (a) ............................ 25.2 16.2 16.6 7.3
Ratio of Operating Expenses to Average Net Assets
(%) ........................................... 2.11 2.08 2.04 2.05
Ratio of Net Investment Income to Average Net
Assets (%) 2.62 2.04 1.50 1.50
Portfolio Turnover Rate (%) ..................... 54 70 69 81
Net Assets, End of the Year (000) ............... $718 $2,538 $4,596 $5,480
(a) A contingent deferred sales charge is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------------------------------------
MARCH 8(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period .............................. $12.20 $11.27 $13.15 $13.95 $14.27
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.38 0.46 0.44 0.40 0.39
Net Realized and Unrealized Gain (Loss)
on Investments ...................... (0.72) 2.51 1.76 2.06 0.74
------ ------ ------ ------ ------
Total From Investment Operations ...... (0.34) 2.97 2.20 2.46 1.13
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income .. (0.38) (0.45) (0.45) (0.40) (0.38)
Distributions From Net Realized Capital
Gains (0.21) (0.64) (0.95) (1.74) (1.48)
------ ------ ------ ------ ------
Total Distributions ................... (0.59) (1.09) (1.40) (2.14) (1.86)
------ ------ ------ ------ ------
Net Asset Value, End of the Period .... $11.27 $13.15 $13.95 $14.27 $13.54
====== ====== ====== ====== ======
Total Return (%) (c) .................. (2.8) 26.8 17.6 18.1 8.6
Ratio of Operating Expenses to Average
Net Assets (%) ...................... 0.99(b) 1.11 0.88 0.88 0.90
Ratio of Net Investment Income to
Average Net Assets (%) 3.69(b) 3.62 3.24 2.66 2.65
Portfolio Turnover Rate (%) ........... 36 54 70 69 81
Net Assets, End of the Period (000) ... $39,183 $59,411 $77,665 $85,620 $73,212
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 a reasonable long-term investment return from a
combination of long-term capital appreciation and moderate current income. 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, Class C and Class Y shares. Class A shares are
sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased prior to
May 1, 1997). Class C shares do not pay a front end sales charge and do not
convert to any other 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. Expenses of the Fund are borne pro rata by the holders of each class
of shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees and transfer agent 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 as authorized by the Board of
Trustees, which service determines valuations for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. Short-term obligations with a
remaining maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser and subadviser, under
the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income for the Fund is increased by the
accretion of discount. In determining net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from generally accepted accounting principles.
Permanent book and tax differences are primarily due to differing treatments for
mortgage backed securities, and market discount transactions.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements including
interest. 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.
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
- --------------------- ------------------ ------------------ -----------------
$75,727,906 $237,753,553 $73,572,906 $278,124,399
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 0.75% of the first $200 million of the Fund's
average daily net assets, 0.70% of the next $300 million and 0.65% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Loomis Sayles & Company, L.P. ("Loomis Sayles") at the rate of 0.535% of the
first $200 million of the Fund's average daily net assets, 0.350% of the next
$300 million and 0.300% of such assets in excess of $500 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"), formerly known as New England Investment Companies, L.P., 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 year
ended December 31, 1998 are as follows:
FEES EARNED
-----------
$1,216,764 NEFM
1,660,073 Loomis Sayles
The effective management fee for the year ended December 31, 1998 was 0.73%.
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 year
ended December 31, 1998 these expenses amounted to $82,246 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 $501,714 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $8,379 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
the 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 $574,918 in fees under the
Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect. The
amount of unreimbursed expenses carried forward at December 31, 1998 is
$2,041,399.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees 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 year ended December 31,
1998, the Fund paid New England Funds $202,709 and $13,513 in service fees under
the Class B and Class C plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds a
monthly distribution fee at the annual rate of 0.75% of the average daily net
assets attributable to the Fund's Class B and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in connection with the marketing or sale of Class B and Class C shares.
For the year ended December 31, 1998, the Fund paid New England Funds $608,127
and $40,529 in distribution fees under the Class B and Class C plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the year ended
December 31, 1998 amounted to $795,501.
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:
Meeting Fee 152/meeting
Annual Committee Member Retainer 335
Annual Committee Chairman Retainer 223
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 four classes, Class A, Class B,
Class C 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 ................................................. 2,817,913 $40,996,836 4,184,781 $60,620,980
Shares issued in connection with the reinvestment of:
Dividends from net investment income ...................... 334,010 4,805,523 343,283 4,825,054
Distributions from net realized gain ...................... 1,767,242 25,250,301 1,673,947 22,101,687
----------- ----------- ----------- -----------
4,919,165 71,052,660 6,202,011 87,547,721
Shares repurchased .......................................... (4,301,205) (62,553,540) (6,091,042) (87,727,573)
----------- ----------- ----------- -----------
Net increase (decrease) ..................................... 617,960 $ 8,499,120 110,969 $ (179,852)
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................................. 1,277,539 $18,483,400 1,248,516 $17,867,284
Shares issued in connection with the reinvestment of:
Dividends from net investment income ...................... 71,225 1,016,924 83,821 1,166,098
Distributions from net realized gain ...................... 566,453 8,034,641 627,610 8,221,630
----------- ----------- ----------- -----------
1,915,217 27,534,965 1,959,947 27,255,012
Shares repurchased .......................................... (716,112) (10,405,386) (1,084,622) (15,449,632)
----------- ----------- ----------- -----------
Net increase (decrease) ..................................... 1,199,105 $17,129,579 875,325 $11,805,380
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- -------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................................. 155,255 $ 2,254,801 227,595 $ 3,252,356
Shares issued in connection with the reinvestment of:
Dividends from net investment income ...................... 3,834 54,473 5,863 81,509
Distributions from net realized gain ...................... 32,135 454,275 42,147 550,039
----------- ----------- ----------- -----------
191,224 2,763,549 275,605 3,883,904
Shares repurchased .......................................... (48,951) (713,283) (190,985) (2,763,416)
----------- ----------- ----------- -----------
Net increase (decrease) ..................................... 142,273 $ 2,050,266 84,620 $ 1,120,488
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- -------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................................. 2,379,842 $35,365,862 408,384 $ 5,832,877
Shares issued in connection with the reinvestment of:
Dividends from net investment income ...................... 166,670 2,402,299 145,334 2,049,589
Distributions from net realized gain ...................... 782,566 11,201,375 578,415 7,647,241
----------- ----------- ----------- -----------
3,329,078 48,969,536 1,132,133 15,529,707
Shares repurchased .......................................... (2,895,751) (42,421,496) (1,724,451) (24,685,693)
----------- ----------- ----------- -----------
Net increase (decrease) ..................................... 433,327 $ 6,548,040 (592,318) $(9,155,986)
----------- ----------- ----------- -----------
Increase (decrease) derived from capital shares transactions 2,392,665 $34,227,005 478,596 $ 3,590,030
=========== =========== =========== ===========
</TABLE>
5. LINE OF CREDIT. The Fund along with the other portfolios that comprise the
New England Funds (the "Funds") participate in a $100,000,000 committed line of
credit provided by Citibank, N.A. under a credit agreement (the "Agreement")
dated March 5, 1998. Advances under the Agreement are taken primarily for
temporary or emergency purposes. Borrowings under the Agreement bear interest at
a rate tied to one of several short-term rates that may be selected from time to
time. In addition, the Funds are charged a facility fee equal to 0.07% per annum
on the unused portion of the line of credit. The annual cost of maintaining the
line of credit and the facility fee is apportioned pro rata among the
participating Funds. There were no borrowings as of or during the period ended
December 31, 1998.
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust I and the Shareholders of
NEW ENGLAND BALANCED 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 Balanced 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 and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND EQUITY INCOME FUND
SUPPLEMENT DATED FEBRUARY 12, 1999
TO THE NEW ENGLAND STOCK FUNDS CLASS A, B AND C AND
CLASS Y PROSPECTUSES EACH DATED MAY 1, 1998
The following information supplements the second paragraph in the "Fund
Management" section of each Prospectus:
Effective immediately, Peter Ramsden and Tom Kolefas act as portfolio managers
of the Equity Income Fund.
<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>
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------------------
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