<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
Strategic Income Fund
[graphic omitted]
Where
The Best
Minds
Meet(R)
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DECEMBER 31, 1998
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<PAGE>
FEBRUARY 1999
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[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.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
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/ Brice R/ Speca
Bruce R. Speca
President and CEO
Progress on the Y2K Front
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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 STRATEGIC INCOME 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.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Strategic Income Fund's Class A shares since
inception on 5/1/95 compared to the Lehman Aggregate Bond Index(4). The data
points are as follows:]
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MAY 1995 (FUND'S INCEPTION) THROUGH DECEMBER 1998
With Lehman
Net Maximum Aggregate
Asset Sales Bond
Value(1) Charge(2) Index(4)
- --------------------------------------------------------------------------------
5/1/95 $10,000 $9,550 $10,000
6/95 $10,015 $9,564 $10,463
12/95 $11,027 $10,530 $11,123
6/96 $11,380 $10,868 $10,989
12/96 $12,628 $12,060 $11,527
6/97 $13,385 $12,783 $11,883
12/97 $13,806 $13,184 $12,639
6/98 $14,141 $13,505 $13,136
12/98 $13,567 $12,957 $13,737
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 when shares are sold. Class B and C share
performance will vary based on differences in fees and sales charges. All Index
and Fund performance assumes reinvestment of distributions.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
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CLASS A (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) -1.7% 8.7%
With Max. Sales Charge(2) -6.1 7.3
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Class B (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) -2.5% 7.9%
With CDSC(3) -6.7 7.3
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Class C (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) -2.5% 7.8%
With CDSC(3) -3.3 7.8
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SINCE FUND'S
COMPARATIVE PERFORMANCE 1 YEAR INCEPTION
Lehman Aggregate Bond Index(4) 8.7% 9.0%
Lipper Multi-Sector Income Average(5) 1.3 8.5
Morningstar Multisector Bond Average(6) 1.2 8.4
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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. All performance assumes reinvestment of distributions. The Fund
waived certain fees and expenses during the period indicated and, therefore, its
average total return would have been lower had these fees and expenses not been
waived.
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 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) Lehman Aggregate Bond Index is a market-weighted, aggregate index that
includes nearly all debt issued by the U.S. Treasury, U.S. Government
agencies and U.S. corporations rated investment-grade, and U.S. agency debt
backed by mortgage pools. Since inception returns are calculated from
4/30/95.
(5) Lipper Multi-Sector Income Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Inc., an independent
mutual fund ranking service. Since inception returns are calculated from
4/30/95.
(6) Morningstar Multisector Bond 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. Since inception returns are
calculated from 4/30/95.
<PAGE>
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NEW ENGLAND STRATEGIC INCOME FUND
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[Photo of Dan Fuss]
{Photo of Kathleen Gaffney]
Dan Fuss,
Kathleen Gaffney
Loomis, Sayles & Company, L.P.
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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Q. How did New England Strategic Income Fund perform during the 12-month period
that ended December 31, 1998?
The Fund saw its share of ups and downs during 1998 as bond investors in general
contended with unusually turbulent conditions. The Fund's 1998 performance
reflected the tough conditions in bond markets around the world. For the year,
the total return for the Fund's Class A shares at net asset value was -1.7%,
which included the reinvestment of distributions totaling $1.80 per share and a
change in net asset value from $13.42 on December 31, 1997 to $11.37 on December
31, 1998. In comparison, the Lehman Aggregate Bond Index produced a total return
of 8.7% and the Lipper Multi-Sector Income Average generated a 1.3% total
return. Market turbulence aside, our opportunistic approach toward searching for
long-term value tends to place the Fund's performance towards either the top or
bottom of its class of comparable funds, as was the case in 1998. Though the
Fund's total return for 1998 lagged that of its peers, the Fund performed
remarkably well in the last quarter of the year.
Q. What was the investment environment like in 1998?
Investment conditions in 1998 were exciting for bond investors. After the year's
positive start characterized by relatively strong U.S. economic growth and low
inflation, the investment environment became increasingly volatile. In August,
Russia devalued its currency, exacerbating the existing economic and financial
problems in emerging markets. A domino effect spread throughout world financial
markets, as investors sought liquidity and high quality above all else. As a
result, investors sold assets that carried even the lowest levels of risk --
blue chip, high-quality bonds, for example. As is often the case during periods
of uncer- tainty, corporate bonds and emerging market debt -- all of which the
Fund was invested in -- were particularly hard-hit. Treasury securities, favored
for their relative safety, were the only fixed-income assets that fared well
during this period of uncertainty.
Q. How did you manage the Fund in the face of these challenges?
Market turbulence translated into falling bond prices, regardless of the
fundamental investment characteristics of the underlying security -- but we
viewed that situation as an opportunity. We jumped at the chance to identify
hidden value, purchasing issues of quality companies at depressed prices and
attractive yields -- these are the building blocks for future performance. In
our estimation, it was a case of: same bonds, new prices. We carefully invested
in what we viewed as bargain-priced bonds that offered investors twin
opportunities: appetizing current yields now and good prospects for price gains
down the road. We invested in some new issues and added to existing portfolio
holdings.
Q. How do changes in interest rates affect the Fund?
Generally speaking, bond prices and interest rates move in opposite directions.
The longer a bond's duration -- a measure of interest rate sensitivity -- the
more pronounced the effect of fluctuating interest rates on bond prices.
Nevertheless, the movement of interest rates plays only an incidental role in
the way we manage the Fund. We focus on selecting bonds that can overcome
short-term volatility caused by shifting rates. Because we emphasize value, the
Fund's bond selections tend to have longer durations and maturities. These
undervalued longer-term bonds typically provide higher yields than their
shorter-term counterparts and offer better opportunities for price appreciation
over time. At the end of the period, the Fund's duration was 9.7 years and its
average maturity was 16 years.
PORTFOLIO COMPOSITION -- 12/31/98
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% OF
NET ASSETS
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1. YANKEES* 35.6
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2. FOREIGN BONDS 30.6
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3. CORPORATE BONDS 24.2
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4. COMMON STOCKS/PREFERRED STOCKS 8.3
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5. CASH & CASH EQUIVALENTS 0.8
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6. GOVERNMENT BONDS 0.5
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AVERAGE PORTFOLIO MATURITY = 16.2 YEARS
* Yankees are U.S. dollar-denominated foreign bonds.
Portfolio composition is subject to change.
Q. Where did you find the most opportunity?
We found attractive investments in several geographic areas and among different
types of bonds. During the second half of the year, we slightly increased
holdings of emerging market debt to more than half of the portfolio (by the end
of the period). We focused on Asia and Latin America, where we invested in the
corporate debt of what we consider to be foreign blue chip companies. Rating
agencies, however, place a ceiling on corporate debt, so that no corporate
issues can be rated higher than the country itself. As a result, many of the
bonds in which we invested had relatively low quality ratings. Yet, viewed in
the absence of a given country's macroeconomic outlook, these bonds could be
considered investment-grade quality. In Asia, we emphasized bonds in the
telecommunications and utilities sectors -- areas that we believe should benefit
from economic recovery and infrastructure spending. In Latin America, we found
value in sovereign debt, which are government bonds.
On the domestic side, we invested in selected high-yield and investment-grade
bonds. The abundance of new high-yield issues in 1998 drove down prices. We
found some of the best values in telecommunications and health care securities.
Convertible bonds were also attractive as market volatility drove up the yields
on these instruments to levels comparable to those on straight high-yield bonds.
Among investment-grade bonds, the energy sector was especially attractive. By
and large, investors avoided this sector given the relatively low levels of
inflation and declining oil prices. However, we took advantage of what we
considered attractive prices on quality energy companies that we believe are
positioned to prosper when energy prices rebound from current lows.
Q. How do you handle the currency risk associated with foreign securities?
About two-thirds of the foreign bonds in the Fund carry virtually no currency
risk at all because they are denominated in U.S. dollars. These bonds, while
issued by foreign entities, pay principal and interest in U.S. dollars. The
majority of the Fund's currency exposure was to the Canadian dollar and the New
Zealand dollar, both of which we viewed as undervalued and therefore potentially
beneficial to the Fund.
Q. Roughly half of the portfolio was invested in high-yield, lower-grade bonds.
Why were these bonds attractive?
High-yield bonds generally were yielding much more than Treasury bonds. We found
that hefty yields on select high-yield bonds more than compensated investors for
their credit risk. We took advantage of the disparity in yields, which had
widened to levels not seen in more than ten years. At the end of the period, the
portfolio had an average credit quality of BBB, reflecting its recent emphasis
on lower-quality investments.
Q. What is your outlook?
When the Federal Reserve Board lowered interest rates three times in the last
quarter of 1998, it sent a message to world markets that it would act decisively
to avoid a recession. As a result, confidence was restored, especially in the
United States. We believe our opportunistic and patient style of investing is
positioning the Fund to benefit from a turnaround in Asia and Latin America.
Asia has made strides toward righting itself, while Korea and Thailand have
started to show very positive signs in their financial markets. Confidence and
recovery may be themes in the bond market during 1999. Because we took advantage
of what we viewed as appealing investment opportunities during the most volatile
periods, we think the portfolio is well positioned to benefit in a recovery, as
we started to see in the final month of 1998. At the end of 1998, the demand for
fixed-income securities rose, and we began to see an increased demand in the
global bond markets. Looking ahead, we may increase the portfolio's exposure to
investments and markets that tend to thrive as economic growth increases, such
as corporate bonds and the bonds of developing nations. We think that buying
these securities at low prices is the foundation of future performance.
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. The Fund may invest in foreign
and emerging market securities, which can involve special risks. Investments in
lower-rated, higher-yielding bonds may involve greater credit risk. See the
Fund's prospectus for details.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1998
BONDS AND NOTES--89.9% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (A)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE BONDS--12.5%
AUTO PARTS--0.2%
$ 1,150,000 Exide Corp., 144A, 2.900%, 12/15/2005 ................. $ 674,188
------------
BIOTECHNOLOGY--0.1%
350,000 Thermo Electroncorp, 144A, 4.250%, 1/01/2003 .......... 311,500
------------
CANADIAN ISSUER--0.1%
500,000 Rogers Communications, Inc., 2.000%, 11/26/2005 ....... 322,500
------------
COMPUTERS--0.8%
827,000 Cray Research, Inc., 6.125%, 2/01/2011 ................ 545,820
100,000 Data General Corp., 6.000%, 5/15/2004 ................. 96,500
407,000 LTX Corp., 7.250%, 4/15/2011 .......................... 183,150
883,000 Maxtor Corp., 5.750%, 3/01/2012 ....................... 485,650
1,000,000 Read Rite Corp., 6.500%, 9/01/2004 .................... 728,750
450,000 S3 Inc., 5.750%, 10/01/2003 ........................... 316,688
100,000 Telxon Corp., 5.750%, 1/01/2003 ....................... 77,750
------------
2,434,308
------------
ELECTRONICS--0.8%
300,000 Edo Corp., 7.000%, 12/15/2011 ......................... 224,625
250,000 Integrated Device Technology, 5.500%, 6/01/2002 ....... 175,000
1,375,000 Kent Electronics Corp., 4.500%, 9/01/2004 ............. 1,041,562
750,000 Park Electrochemical Corp., 5.500%, 3/01/2006 ......... 676,875
155,000 Richardson Electronics, Ltd., 7.250%, 12/15/2006 ...... 126,325
150,000 Thermedics, Inc., Zero Coupon, 6/01/2003 .............. 100,500
1,448,000 Zenith Electric, 6.250%, 4/01/2011 .................... 217,200
------------
2,562,087
------------
ENERGY--0.0%
125,000 NorAm Energy Corp., 6.000%, 3/15/2012 ................. 120,000
------------
ENVIRONMENTAL--0.2%
760,000 Air & Water Technologies Corp., 8.000%, 5/15/2015 ..... 577,600
------------
FOREIGN ISSUES--5.7%
1,750,000 Advanced Agro Public Co., 3.500%, 6/17/2001 ........... 1,487,500
2,950,000 App Finance VII Mauritius, 3.500%, 4/30/2003 .......... 1,659,375
4,075,000 Bangkok Bank Public, 3.250%, 3/03/2004 ................ 1,609,625
2,130,000 Banpu Public, 2.750%, 4/10/2003 ....................... 1,544,250
1,000,000 Burns Philp Treasury, 5.500%, 4/30/2004 ............... 430,000
2,575,000 Empresas ICA Sociedad, 5.000%, 3/15/2004 .............. 1,596,500
250,000 Inti Indorayon Utama, 7.000%, 5/02/2006 ............... 53,750
2,250,000 Loxley, 2.500%, 4/04/2001 ............................. 405,000
250,000 Piltel, 1.750%, 7/17/2006 ............................. 129,168
975,000 Samsung Co., 0.250%, 6/26/2006 ........................ 899,437
250,000 Samsung Display Devices, 0.250%, 3/12/2006 ............ 230,625
2,575,000 Samsung Electronics Company, Ltd., Zero Coupon,
12/31/2007 .......................................... 2,304,625
3,700,000 Sappi Bvi Finance, 7.500%, 8/01/2002 .................. 3,320,750
1,130,000 Siam Commercial Bank, 3.250%, 1/24/2004 ............... 429,400
1,000,000 Ssangyong Oil Refining Co, Ltd., 3.000%, 12/31/2004 ... 575,000
650,000 Telekom Malaysia B, 4.000%, 10/03/2004 ................ 481,000
350,000 Total Access Communications, Public Ltd., 2.000%,
5/31/2006 ............................................ 262,500
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17,418,505
------------
HOME BUILDERS--0.1%
500,000 Schuler Homes, Inc., 6.500%, 1/15/2003 ................ 420,000
------------
INDUSTRIALS--0.1%
525,000 Intevac, Inc., 6.500%, 3/01/2004 ...................... 317,625
------------
INSURANCE--0.2%
750,000 Loews Corp., 3.125%, 9/15/2007 ........................ 596,250
------------
OIL & GAS--0.1%
500,000 Baker Hughes, Inc., Zero Coupon, 5/05/2008 ............ 325,000
------------
PHARMACEUTICAL--0.7%
400,000 Centocor, Inc., 4.750%, 2/15/2005 ..................... 421,500
600,000 Dura Pharmaceuticals, Inc., 3.500%, 7/15/2002 ......... 423,000
575,000 Glycomed, Inc., 7.500%, 1/01/2003 ..................... 460,000
1,098,000 Nabi, 6.500%, 2/01/2003 ............................... 713,700
------------
2,018,200
------------
REAL ESTATE--0.2%
250,000 Federal Realty Investor Trust, 5.250%, 10/28/2003 ..... 233,125
500,000 Sizeler Property Investments, Inc., 8.000%, 7/15/2003 . 470,000
------------
703,125
------------
RESTAURANTS--0.7%
2,550,000 Boston Chicken, Inc., 4.500%, 2/01/2004 (d) ........... 89,250
1,000,000 Boston Chicken, Inc., Zero Coupon, 6/01/2015 (d) ...... 7,500
1,000,000 Einstein/Noah Bagel Corp., 7.250%, 6/01/2004 .......... 550,000
4,445,000 Shoneys, Inc., Zero Coupon, 4/11/2004 ................. 1,111,250
750,000 TPI Enterprises, Inc., 8.250%, 7/15/2002 .............. 465,000
------------
2,223,000
------------
RETAIL -- SPECIALTY--0.0%
96,000 Bell Sports Corp., 4.250%, 11/15/2000 ................. 72,960
275,000 CML Group, Inc., 5.500%, 1/15/2003 (d) ................ 13,750
------------
86,710
------------
SEMI-CONDUCTORS--0.5%
325,000 Cirrus Logic, Inc., 6.000%, 12/15/2003 ................ 237,656
250,000 Cypress Semiconductor Corp., 6.000%, 10/01/2002 ....... 215,625
1,150,000 Lam Research Corp., 5.000%, 9/01/2002 ................. 902,750
------------
1,356,031
------------
TELECOMMUNICATION--1.7%
3,910,000 Broadband Technologies, Inc., 5.000%, 5/15/2001 ....... 1,485,800
2,500,000 Intermedia Communications, Inc., 8.600%, 6/01/2008 .... 2,387,500
500,000 Phycor, Inc., 4.500%, 2/15/2003 ....................... 279,375
3,000,000 Western Digital Corp., Zero Coupon, 2/18/2018 ......... 907,500
------------
5,060,175
------------
TEXTILE--0.1%
306,000 Dixie Group, Inc., 7.000%, 5/15/2012 .................. 226,440
------------
TRUCKING & FREIGHT FORWARDING--0.2%
1,000,000 Builders Transport, Inc., 8.000%, 8/15/2005 (d) ....... 1,250
200,000 Builders Transport, Inc., 6.500%, 5/01/2011 (d) ....... 250
500,000 Preston Corp., 7.000%, 5/01/2011 ...................... 381,250
424,000 Worldway Corp., 6.250%, 4/15/2011 ..................... 339,200
------------
721,950
------------
Total Convertible Bonds (Identified Cost $52,852,308) . 38,475,194
------------
NON-CONVERTIBLE BONDS--77.4%
BROADCASTING--0.8%
250,000 CBS, Inc., 7.125%, 11/01/2023 ......................... 253,323
3,500,000 Fox Family Worldwide, Inc., 0/10.250%, 11/01/2007 (c) . 2,205,000
------------
2,458,323
------------
CANADIAN--22.4%
2,868,000 Alberta Province Canada, 5.930%, 9/16/2016, (CAD) ..... 1,990,626
11,250,000 British Columbia, Zero Coupon, 11/19/2027, (CAD) ...... 1,425,137
9,775,000 British Columbia Province, Zero Coupon, 8/19/2022,
(CAD) ............................................... 1,668,353
12,525,000 Canada Government, Zero Coupon, 6/01/2021, (CAD) ...... 2,543,455
84,475,000 Canada Government, Zero Coupon, 6/01/2025, (CAD) ...... 14,020,488
4,500,000 Clearnet Communications, Inc, 0/11.750%, 8/13/2007,
(CAD) (c) ........................................... 1,800,529
5,000,000 Hydro Quebec, Zero Coupon, 8/15/2020, (CAD) ........... 897,407
9,950,000 International Semi-Tech, 11.500%, 8/15/2003, (CAD) .... 820,875
2,345,000 Microcell Telecommunications, 0/11.125%, 10/15/2007,
(CAD) (c) ........................................... 842,533
2,500,000 New Brunswick F M Project, Inc, 0/6.470%, 11/30/2027,
(CAD) (c) ........................................... 1,339,414
15,300,000 Ontario Hydro, Zero Coupon, 10/15/2021, (CAD) ......... 2,749,362
750,000 Ontario Province, Zero Coupon, 7/13/2022, (CAD) ....... 129,800
12,600,000 Ontario Province, Zero Coupon, 6/02/2027, (CAD) ....... 1,659,697
8,800,000 Ontario Province, Zero Coupon, 3/08/2029, (CAD) ....... 1,041,364
5,000,000 Province of British Columbia, Zero Coupon, 8/23/2013,
(CAD) ............................................... 1,433,009
18,505,000 Province of British Columbia, Zero Coupon, 9/05/2020,
(CAD) ............................................... 3,529,344
17,900,000 Province of British Columbia, Zero Coupon, 6/09/2022,
(CAD) ............................................... 3,089,001
35,000,000 Province of British Columbia, Zero Coupon, 8/23/2024,
(CAD) ............................................... 5,328,880
7,950,000 Province of Manitoba, 6.500%, 9/22/2017, (CAD) ........ 5,790,600
11,649,000 Province of Manitoba, 7.750%, 12/22/2025, (CAD) ....... 9,810,561
17,135,000 Province of Manitoba, Zero Coupon, 3/05/2031, (CAD) ... 1,845,919
3,500,000 Saskatchewan Province, Zero Coupon, 4/10/2014, (CAD) .. 975,144
9,605,000 Saskatchewan Province, Zero Coupon, 5/30/2025, (CAD) .. 1,428,954
3,750,000 Saskatchewan Province, 5.75%, 3/05/2029 (CAD) ......... 2,472,972
------------
68,633,424
------------
ELECTRIC UTILITIES--0.4%
1,450,000 National Power Corp., 9.625%, 5/15/2028 ............... 1,189,000
------------
ELECTRONICS--1.1%
775,000 Pioneer Standard Electronics, Inc., 8.500%, 8/01/2006 . 758,396
2,250,000 Westinghouse Electric Corp., 7.875%, 9/01/2023 ........ 2,495,835
------------
3,254,231
------------
ENERGY--0.5%
2,175,000 Chesapeake Energy Corp., 7.875%, 3/15/2004 ............ 1,566,000
------------
ENTERTAINMENT--1.8%
5,400,000 Time Warner, Inc., 6.875%, 6/15/2018 .................. 5,656,824
------------
FINANCE & BANKING--1.4%
3,850,000 Keycorp Institutional Capital, 7.826%, 12/01/2026 ..... 4,216,058
------------
FOOD & BEVERAGES--3.5%
2,000,000 Borden, Inc., 7.875%, 2/15/2023 ....................... 1,772,180
3,000,000 RJR Nabisco, Inc., 8.750%, 8/15/2005 .................. 3,027,210
5,665,000 RJR Nabisco, Inc., 9.250%, 8/15/2013 .................. 5,824,526
------------
10,623,916
------------
FOREIGN ISSUES--28.8%
2,000,000 Banco Central Costa, 6.250%, 5/21/2010 ................ 1,700,000
5,150,000 Bangkok Sentral Ng Philipinas, 8.600%, 6/15/2027 ...... 4,332,437
1,500,000 Bangkok Bank Public, Ltd., 144A, 8.250%, 3/15/2016 .... 832,875
6,975,000 Bangkok Bank Public, Ltd., 144A, 8.375%, 1/15/2027 .... 4,045,500
3,000,000 Barak I T C International, 144A, 0/12.500%,
11/15/2007, (c) ..................................... 1,500,000
799,468 Centragas, 144A, 10.650%, 12/01/2010 .................. 679,548
2,365,000 Enersis S.A., 7.400%, 12/01/2016 ...................... 1,962,198
2,500,000 Espirito Santo Centrais Eletri, 10.000%, 7/15/2007 .... 1,531,250
1,250,000 Export Import Bank Korea, 6.375%, 2/15/2006 ........... 1,065,046
3,945,018 Federal Republic of Brazil, 8.000%, 4/15/2014 ......... 2,347,286
15,008,000 Federal Republic of Brazil, 10.125%, 5/15/2027 ........ 10,092,880
2,000,000 Hyundai Motor Co., 144A, 7.600%, 7/15/2007 ............ 1,570,000
500,000 Indah Kiat Finance Mauritius, Ltd., 10.000%, 7/01/2007 270,000
500,000 Industrial Finance Corp Thailand, 144A, 7.375%,
1/142007 ............................................ 413,115
6,500,000 Korea Electric Power Corp, 7.750%, 4/01/2013 .......... 5,443,100
3,662,920 Korea Electric Power Corp, 7.400%, 4/01/2016 .......... 3,017,769
6,800,000 Pan Pacific Industrial Investment plc, 144A, Zero
Coupon, 4/28/2007 ................................... 2,364,972
1,585,000 Perez Companc S.A., 144A, 8.125%, 7/15/2007 ........... 1,390,837
1,000,000 Petroleos Mexicanos, 9.250%, 3/30/2018 ................ 805,000
4,350,000 Petroleos Mexicanos, 9.500%, 9/15/2027 ................ 3,269,025
3,000,000 Petroleos Mexicanos, 144A, 8.625%, 12/01/2023 ......... 2,160,000
1,250,000 Philippine Long Distance Telephone Company, 8.350%,
3/06/2017 ........................................... 940,855
2,700,000 Pindo Deli Finance Mauritius, Ltd., 10.750%, 10/01/2007 1,468,125
2,650,000 Pindo Deli Finance Mauritius, Ltd., 11.750%, 10/01/2017 1,298,500
3,000,000 Pindo Deli Finance Mauritius, Ltd., 10.875%, 10/01/2027 1,440,000
250,000 Pohang Iron & Steel, Ltd., 6.625%, 7/01/2003 .......... 212,500
500,000 Pohang Iron & Steel, Ltd., 7.125%, 11/01/2006 ......... 411,920
3,500,000 Pycsa Panama S.A., 144A, 10.280%, 12/15/2012 .......... 2,730,000
2,750,000 Quezon Power Philippines Co, 8.860%, 6/15/2017 ........ 1,870,000
940,000 Republic of Argentina, 6.188%, 3/31/2005, (e) ......... 799,000
2,263,311 Republic of Ecuador, 6.625%, 2/27/2015 (g) ............ 916,867
600,000 Republic of Peru, 3.250%, 3/07/2017 ................... 339,378
9,000,000 Republic of Venezuela, 9.250%, 9/15/2027 .............. 5,490,000
2,500,000 Samsung Electronics, Ltd. 144A, 7.700%, 10/01/2027 .... 1,687,500
2,850,000 Siam Commercial Bank Public, Ltd. 144A, 7.500%,
3/15/2006 ............................................ 1,396,500
2,500,000 Tata Electric Cos.,144A, 8.500%, 8/19/2017 ............ 1,893,750
1,750,000 Telekom Malaysia B, 7.875%, 8/01/2025 ................. 1,133,388
2,250,000 Tenaga Nasional Berhad, 7.500%, 11/01/2025 ............ 1,189,215
4,500,000 TFM S.A., 0/11.750%, 6/15/2009, (c) ................... 2,475,000
2,175,000 Thai Farmers Bank plc, 8.250%, 8/21/2016 .............. 1,222,829
6,625,000 Tjiwi Kimia Mauritius, Ltd, 10.000%, 8/01/2004 ........ 3,478,125
4,275,000 Total Access Communications Public Ltd., 144A, 8.375%,
11/04/2006 .......................................... 2,907,000
3,000,000 Total Access Communications Public Ltd.144A, 7.625%,
11/04/2001 .......................................... 2,160,000
------------
88,253,290
------------
FOREIGN DENOMINATED--8.7%
34,000,000 Federal National Mortgage Association, Zero Coupon,
10/29/2007, (NZD) ................................... 10,103,031
24,300,000 International Bank of Reconstruction & Development,
Zero Coupon, 8/20/2007, (NZD) ....................... 7,499,448
2,600,000 New Zealand Government, 8.000%, 11/15/2006, (NZD) ..... 1,587,034
825,000 New Zealand Government, 7.000%, 7/15/2009, (NZD) ...... 485,996
23,100,000 Republic of South Africa, 12.500%, 12/21/2006, (ZAR) .. 3,262,856
17,650,000 Republic of South Africa, 13.000%, 8/31/2010, (ZAR) ... 2,539,053
9,500,000 Republic of South Africa, 13.500%, 9/15/2015, (ZAR) ... 1,397,510
------------
26,874,928
------------
U.S. GOVERNMENT--0.5%
5,000,000 United States Treasury Bonds Strip, Principal Only,
9/15/2020 ........................................... 1,507,450
------------
HEALTH CARE -- SERVICES--0.4%
500,000 Columbia/HCA Healthcare Corp., 7.500%, 12/15/2023 ..... 448,890
820,000 Columbia/HCA Healthcare Corp., 7.050%, 12/01/2027 ..... 693,244
------------
1,142,134
------------
INDUSTRIALS--0.8%
2,500,000 Seagate Technology, 7.450%, 3/01/2037 ................. 2,422,125
------------
LIMITED PARTNERSHIP--0.0%
32,000 Boston Celtics Limited Partnership, Ltd., 6.000%,
6/30/2038 ........................................... 19,000
------------
OIL & GAS/EXPLORATION & PRODUCTION--0.1%
250,000 Chesapeake Energy Corp., 9.625%, 5/01/2005 ............ 192,500
------------
RETAIL -- DEPARTMENT STORE--1.8%
1,250,000 Bradlees, Inc., 9.250%, 3/01/2003, (d) (f) ............ 9,375
250,000 Dillon Read Structured Finance Corp., 8.550%, 8/15/2019 242,188
822,396 Dillon Read Structured Finance Corp., 6.660%, 8/15/2010 776,391
3,500,000 Kmart Corp., 7.950%, 2/01/2023 ........................ 3,508,750
250,000 Kmart Funding Corp., 9.440%, 7/01/2018 ................ 266,782
1,000,000 Woolworth Corp., 8.500%, 1/15/2022 .................... 849,380
------------
5,652,866
------------
RETAIL -- GROCERY--0.2%
6,695,000 Penn Traffic Co., 9.625%, 4/15/2005 ................... 535,600
------------
TELECOMMUNICATION--3.9%
7,500,000 Arch Communications Group, Inc., 0/10.875%, 3/15/2008,
(c) ................................................. 4,425,000
1,000,000 Century Communications Corp., 8.375%, 11/15/2017 ...... 1,067,500
2,375,000 Dolphin Telecom Euro, 0/11.625%, 6/01/2008, (XEU) (c) . 890,973
5,375,000 Nextel Communications, Inc., 0/9.750%, 10/31/2007, (c) 3,278,750
2,000,000 RCN Corp., 0/9.800%, 2/15/2008, (c) ................... 1,090,000
2,500,000 Teligent Inc., 144A, 11.500%, 3/01/2008, (c) .......... 1,237,500
------------
11,989,723
------------
TEXTILE--0.1%
250,000 Fruit of the Loom, Inc., 7.375%, 11/15/2023 ........... 222,408
250,000 Phillips Van Heusen Corp., 7.750%, 11/15/2023 ......... 223,930
------------
446,338
------------
TRANSPORTATION--0.2%
800,000 Hvide Marine, Inc., 8.375%, 2/15/2008 ................. 640,000
66,000 Missouri Pacific Railroad Co., 4.250%, 1/01/2005 ...... 59,936
------------
699,936
------------
UTILITIES--0.0%
229,301 Mobile Energy Services Co. LLC, 8.665%, 1/01/2017 ..... 60,765
------------
Total Non-Convertible Bonds (Identified Cost
$260,491,658) ....................................... 237,394,431
------------
COMMON STOCKS--6.0%
SHARES
- ----------------------------------------------------------------------------------------
COMPUTERS--0.0%
150,150 Streamlogic Corp. (d) (f) ............................. 150
693 Streamlogic Corp., Warrants ........................... 0
------------
150
------------
ENERGY--0.1%
192,550 Chesapeake Energy Corp. ............................... 168,481
------------
FOREIGN ISSUES--1.6%
25,300 Philippine Long Distance (GDR) ........................ 1,201,750
80,230 Sappi Ltd. ............................................ 3,149,028
260,000 Total Access Communications Public Ltd. ............... 447,200
------------
4,797,978
------------
FOREIGN DENOMINATED--0.8%
6,786,500 Indah Kiat Paper (IDR) ................................ 1,845,080
1,039,900 Siam Commercial Bank plc (THB) ........................ 622,223
------------
2,467,303
------------
REAL ESTATE--3.0%
162,900 Associated Estates Realty Corp. ....................... 1,924,256
174,050 Berkshire Realty Company, Inc. ........................ 1,653,475
151,600 Developers Diversified Realty ......................... 2,690,900
108,200 Simon Property Group, Inc. ............................ 3,083,700
------------
9,352,331
------------
RESTAURANTS--0.5%
245,173 Advantica Restaurant Group Inc. ....................... 1,517,008
------------
Total Common Stocks (Identified Cost $25,833,787) ..... 18,303,251
------------
PREFERRED STOCKS--2.3%
SHARES DESCRIPTION VALUE(A)
- ----------------------------------------------------------------------------------------
FOREIGN DENOMINATED--0.2%
132,000,000 Sakura Finance (JPY) .................................. $ 581,626
------------
COMPUTERS--0.2%
10,000 Unisys Corp., $3.750, 12/31/2049 ...................... 587,500
------------
CONSTRUCTION MATERIALS--0.2%
10,000 Owens Corning, 6.500%, 5/10/2025 ...................... 498,750
------------
DOMESTIC OIL--0.0%
500 Kelley Oil & Gas Corp., $2.625, 12/31/2049 ............ 4,500
------------
ENERGY--0.2%
25,000 Chesapeake Energy Corp. 144A, 7.000%, 12/31/2049 ...... 267,188
28,850 Chesapeake Energy Corp., 7.000%, 12/31/2049 ........... 308,334
5,000 Western Gas Resources, Inc., $2.625, 12/31/2049 ....... 182,813
------------
758,335
------------
REAL ESTATE--0.5%
6,500 Camden Property Trust, $2.250, 12/31/2049 ............. 153,969
101,500 Meditrust ............................................. 1,535,187
------------
1,689,156
------------
STEEL--0.6%
43,000 Bethleham Steel Corp., $3.500, 12/31/2049 ............. 1,757,625
------------
TRUCKING & FREIGHT FORWARDING--0.4%
38,000 Arkansas Best, $2.875, 12/31/2049 ..................... 1,235,000
------------
Total Preferred Stocks (Identified Cost $8,295,723) ... 7,112,492
------------
SHORT TERM INVESTMENT--0.3%
FACE
AMOUNT
- ----------------------------------------------------------------------------------------
$ 888,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/1998 at 4.000% to be repurchased at
$888,395 on 1/04/1999, collateralized by $665,000
U.S. Treasury Bond, at 8.125%, due 8/15/2019 valued
at $908,826 ......................................... 888,000
------------
Total Short Term Investment (Identified Cost $888,000) 888,000
------------
Total Investments--98.5%
(Identified Cost $348,361,476)(b) ................... 302,173,368
Other assets less liabilities ........................ 4,638,401
------------
Total Net Assets--100% ................................ $306,811,769
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized depreciation on
investments based on cost of $350,450,169 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 ............... $ 19,288,155
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............... (67,564,956)
------------
Net unrealized depreciation ..................................... $(48,276,801)
============
(c) Step Bond: Coupon rate is zero or below market for an initial
period and then increases to a higher coupon rate at a specified
date and rate.
(d) Issuer filed petition under Chapter 11 of the Federal Bankruptcy
Code.
(e) Variable or floating security. Rate disclosed is as of December
31,1998.
(f) Non-income producing security.
(g) Pay in kind securities.
GDR - A Global Depository Receipt (GDR) is a certificate issued by a
custodian bank representing the right to receive securities of the foreign
issuer described. The values of GDRs are significantly influenced by trading
on exchanges not located in the United States or Canada.
Rule 144A - Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At the
period end, the value of these amounted to $30,221,973 or 9.9% of net
assets.
CAD -- Canadian Dollars THB -- Thai Baht
IDR -- Indonesian Rupiah XEU -- European Currency Unit
JPY -- Japanese Yen ZAR -- South African Rand
NZD -- New Zealand Dollars
TEN LARGEST GEOGRAPHIC CONCENTRATIONS OF INVESTMENTS AT DECEMBER 31, 1998
(UNAUDITED)
United States 32.9% Mexico 4.5%
Canada 22.4% Mauritius 3.1%
Thailand 6.7% Philippines 2.8%
Korea 4.8% South Africa 2.4%
Brazil 4.6% British Virgin Islands 2.1%
</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 $348,361,476) ...... $302,173,368
Cash ..................................................... 622,686
Receivable for:
Fund shares sold ....................................... 633,748
Dividends and interest ................................. 5,234,290
Unamortized organization expense ....................... 15,165
------------
308,679,257
LIABILITIES
Payable for:
Fund shares redeemed ................................... $1,149,858
Withholding Taxes ..................................... 3,907
Dividends declared ..................................... 395,863
Accrued expenses:
Management fees ........................................ 167,418
Deferred trustees' fees ................................ 10,082
Accounting and administrative .......................... 6,488
Other ................................................. 133,872
----------
1,867,488
------------
NET ASSETS ................................................. $306,811,769
============
Net Assets consist of:
Capital paid in ........................................ $353,906,898
Undistributed (overdistributed) net investment income .. (530,252)
Accumulated net realized gains (losses) ................ (372,894)
Unrealized appreciation (depreciation) on investments
and foreign currency transactions .................... (46,191,983)
------------
NET ASSETS ................................................. $306,811,769
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($127,306,238 divided by 11,196,187 shares of beneficial
interest) .............................................. $11.37
======
Offering price per share (100/95.50 of $11.37) ............. $11.91*
======
Net asset value and offering price of Class B shares
($134,048,912 divided by 11,790,916 shares of beneficial
interest) .............................................. $11.37**
======
Net asset value and offering price of Class C shares
($45,456,619 divided by 4,001,830 shares of beneficial
interest) .............................................. $11.36**
======
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of: $16,352) ............ $ 2,122,923
Interest ................................................ 30,215,436
------------
32,338,359
Expenses
Management fees ....................................... $ 2,142,686
Service fees - Class A ................................ 354,155
Service and distribution fees - Class B ............... 1,458,912
Service and distribution fees - Class C ............... 528,954
Trustees' fees and expenses ........................... 21,213
Accounting and administrative ......................... 72,358
Custodian ............................................. 200,506
Transfer agent ........................................ 485,024
Audit and tax services ................................ 44,300
Legal ................................................. 15,413
Printing .............................................. 71,945
Registration .......................................... 96,268
Amortization of organization expenses ................. 13,584
Miscellaneous ......................................... 28,783
-----------
Total expenses .......................................... 5,534,101
------------
Net investment income ................................... 26,804,258
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net ..................................... 15,854,818
Foreign currency transactions - net ................... (125,025)
-----------
Total realized gain (loss) on investments and foreign
currency transactions ................................. 15,729,793
-----------
Unrealized appreciation (depreciation) on:
Investments - net ......................................... (51,599,445)
Foreign currency transactions - net ....................... 6,670
-----------
Total unrealized appreciation (depreciation) on
investments and foreign currency transactions ......... (51,592,775)
-----------
Net gain (loss) on investment transactions .............. (35,862,982)
-------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ..... $ (9,058,724)
=============
</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 ................................... $ 20,199,833 $ 26,804,258
Net realized gain (loss) on investments and foreign
currency transactions ................................. 5,990,881 15,729,793
Unrealized appreciation (depreciation) on investments and
foreign currency transactions ......................... (2,630,247) (51,592,775)
------------- -------------
Increase (decrease) in net assets from operations ....... 23,560,467 (9,058,724)
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (9,092,837) (11,535,949)
Class B ............................................... (8,281,842) (10,807,568)
Class C ............................................... (3,004,423) (3,898,903)
Net realized gain on investments
Class A ............................................... (1,533,527) (7,605,426)
Class B ............................................... (1,552,256) (7,994,311)
Class C ............................................... (601,199) (2,721,854)
In excess of net realized gain on investments
Class A ............................................... 0 (535,178)
Class B ............................................... 0 (562,543)
Class C ............................................... 0 (191,532)
------------- -------------
(24,066,084) (45,853,264)
------------- -------------
Increase (decrease) in net assets derived from capital
share transactions .................................... 131,926,275 14,420,035
------------- -------------
Total increase (decrease) in net assets ................. 131,420,658 (40,491,953)
NET ASSETS
Beginning of the year ................................... 215,883,064 347,303,722
------------- -------------
End of the year ......................................... $ 347,303,722 $ 306,811,769
============= =============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
End of the year ......................................... $ (411,696) $ (530,252)
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
MAY 1,(A) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ---------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.36 $13.42
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.74 1.05 1.01 1.05
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.73 0.21 (1.30)
------ ------ ------ ------
Total From Investment Operations ....... 1.23 1.78 1.22 (0.25)
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.73) (1.05) (1.01) (1.05)
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) (0.70)
Distributions in Excess of Net Realized
Capital Gains ........................ 0.00 0.00 0.00 (0.05)
------ ------ ------ ------
Total Distributions .................... (0.74) (1.41) (1.16) (1.80)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.36 $13.42 $11.37
====== ====== ====== ======
Total Return (%)(c) .................... 10.3 14.5 9.3 (1.7)
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 0.93(b) 0.96 1.18 1.19
Ratio of Net Investment Income to
Average
Net Assets (%) ....................... 8.75(b) 8.23 7.36 8.33
Portfolio Turnover Rate (%) ............ 22 52 37 33
Net Assets, End of the Period (000) .... $36,939 $90,729 $144,706 $127,306
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge is not reflected in total return calculations. Periods less than one year are not
computed on an annualized basis.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 1.58(b) 1.31 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------
MAY 1,(A) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ---------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.36 $13.42
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.68 0.95 0.91 0.95
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.73 0.21 (1.30)
------ ------ ------ ------
Total From Investment Operations ....... 1.17 1.68 1.12 (0.35)
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.67) (0.95) (0.91) (0.95)
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) (0.70)
Distributions in Excess of Net Realized
Capital Gains ........................ 0.00 0.00 0.00 (0.05)
------ ------ ------ ------
Total Distributions .................... (0.68) (1.31) (1.06) (1.70)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.36 $13.42 $11.37
====== ====== ====== ======
Total Return (%)(c) .................... 9.7 13.7 8.5 (2.5)
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 1.68(b) 1.71 1.93 1.94
Ratio of Net Investment Income to
Average
Net Assets (%) ....................... 8.00(b) 7.48 6.61 7.58
Portfolio Turnover Rate (%) ............ 22 52 37 33
Net Assets, End of the Period (000) .... $38,767 $93,408 $146,083 $134,049
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year
are not computed on an annualized basis.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 2.33(b) 2.06 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
MAY 1,(A) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ---------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $12.50 $12.99 $13.35 $13.41
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.67 0.95 0.91 0.95
Net Realized and Unrealized Gain (Loss)
on Investments ....................... 0.49 0.72 0.21 (1.30)
------ ------ ------ ------
Total From Investment Operations ....... 1.16 1.67 1.12 (0.35)
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income ... (0.66) (0.95) (0.91) (0.95)
Distributions in Excess of Net
Investment Income .................... (0.01) 0.00 0.00 0.00
Distributions From Net Realized Capital
Gains ................................ 0.00 (0.36) (0.15) (0.70)
Distributions in Excess of Net Realized
Capital Gains ........................ 0.00 0.00 0.00 (0.05)
----- ----- ----- -----
Total Distributions .................... (0.67) (1.31) (1.06) (1.70)
------ ------ ------ ------
Net Asset Value, End of the Period ..... $12.99 $13.35 $13.41 $11.36
====== ====== ====== ======
Total Return (%)(c) .................... 9.7 13.6 8.5 (2.5)
Ratio of Operating Expenses to Average
Net Assets (%)(d) .................... 1.68(b) 1.71 1.93 1.94
Ratio of Net Investment Income to
Average
Net Assets (%) ....................... 8.00(b) 7.48 6.61 7.58
Portfolio Turnover Rate (%) ............ 22 52 37 33
Net Assets, End of the Period (000) .... $12,252 $31,746 $56,515 $45,457
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year
are not annualized.
(d) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations would have been (%) .... 2.33(b) 2.06 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
1. The Fund is a series of New England Funds Trust I, a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company. The
Fund seeks high current income with a secondary objective of capital growth. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each series of shares a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased prior to
May 1, 1997). Class C shares do not pay front end sales charges and do not
convert to any class of shares, but they do pay a higher ongoing distribution
fee than Class A shares and may be subject to a contingent deferred sales charge
if those shares are redeemed within one year. Class Y shares do not pay a front
end sales charge, a contingent deferred sales charge or distribution fees. They
are intended for institutional investors with a minimum of $1,000,000 to invest.
At December 31, 1998, there were no Class Y shares outstanding. Expenses of the
Fund are borne pro-rata by the holders of all classes of shares, except that
each class bears expenses unique to that class (including the Rule 12b-1 service
and distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
service provides the last reported sale price for securities listed on an
applicable securities exchange or on the NASDAQ national market system, or, if
no sale was reported and in the case of over-the-counter securities not so
listed, the last reported bid price. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on the
basis of valuations furnished by a pricing service authorized by the Board of
Trustees, which service determines valuations for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. Short-term obligations with a
remaining maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser and subadviser, under
the supervision of the Fund's trustees.
B. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities resulting from changes in the exchange rate.
C. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion of
discount. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the identified
cost basis.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for mortgage backed securities, foreign currency
transactions and defaulted bond income for book and tax purposes. Permanent book
and tax basis differences will result in reclassifications to capital accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. The Fund's subadviser is responsible
for determining that the value of the collateral is at all times at least equal
to the repurchase price. Repurchase agreements could involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in 1995 in connection with the Fund's
organization and initial registration amounting to $67,920 were paid by the Fund
and are being amortized over 60 months beginning May 1, 1995.
2. PURCHASES AND SALES OF SECURITIES. For the 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
--------------- ------------ --------------- ------------
$1,128,789 $110,362,795 $1,098,367 $122,828,316
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets and 0.60% of such assets in excess of $200 million.
NEFM pays the Fund's investment subadviser, Loomis Sayles & Company, L.P.
("Loomis Sayles") at the rate of 0.35% of the first $200 million of the Fund's
average daily net assets and 0.30% of such assets in excess of $200 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Loomis Sayles are wholly owned subsidiaries of Nvest Companies,
L.P. ("Nvest"), 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
-----------
$1,021,343 NEFM
1,121,343 Loomis Sayles
The effective management fee for the year ended December 31, 1998 was 0.63%.
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 $72,358 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. The Fund paid NEFSCO
$347,007 as compensation for its services in that capacity. For the year ended
December 31, 1998, the Fund received $7,078 in transfer agent credits. The
transfer agent expense in the Statement of Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class A shares, as reimbursement for expenses (including certain payments
to securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in providing personal services to investors in Class A shares
and/or the maintenance of shareholder accounts. For the year ended December 31,
1998, the Fund paid New England Funds $354,155 in fees under the Class A Plan.
If the expenses of New England Funds that are otherwise reimbursable under the
Class A Plan incurred in any year exceed the amounts payable by the Fund under
the Class A Plan, the unreimbursed amount (together with unreimbursed amounts
from prior years) may be carried forward for reimbursement in future years in
which the Class A Plan remains in effect.
Under the Class B and Class C Plans, the Fund pays New England Funds a
monthlyservice fee at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the year ended December 31,
1998 the Fund paid New England Funds $364,728 and $132,238 in service fees under
the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of 0.75% of the average daily net
assets attributable to the Fund's Class B shares and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and Class
C shares. For the year ended December 31, 1998, the Fund paid New England Funds
$1,094,184 and $396,716 in distribution fees under the Class B and Class C
Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors of shares of the Fund during the year ended
December 31, 1998 amounted to $1,180,687.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of NEFM,
New England Funds, Nvest, NEFSCO or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $1,833
Meeting Fee 152/meeting
Annual Committee Member Retainer 275
Annual Committee Chairman Retainer 183
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 C 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 ................................................ 5,039,803 $68,493,945 2,527,016 $33,012,617
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 517,494 7,047,095 703,147 8,857,133
Distributions from net realized gain ..................... 97,740 1,309,719 612,878 6,901,830
----------- ----------- ----------- -----------
5,655,037 76,850,759 3,843,041 48,771,580
Shares repurchased ......................................... (1,666,237) (22,751,600) (3,427,400) (43,428,129)
----------- ----------- ----------- -----------
Net increase (decrease) .................................... 3,988,800 $54,099,159 415,641 $ 5,343,451
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 4,854,294 $65,930,219 2,527,458 $33,025,825
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 377,086 5,134,666 548,291 6,885,038
Distributions from net realized gain ..................... 85,267 1,142,583 559,975 6,306,064
----------- ----------- ----------- -----------
5,316,647 72,207,468 3,635,724 46,216,927
Shares repurchased ......................................... (1,425,292) (19,424,611) (2,729,921) (34,472,473)
----------- ----------- ----------- -----------
Net increase (decrease) .................................... 3,891,355 $52,782,857 905,803 $11,744,454
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 2,819,189 $38,469,852 923,901 $12,215,377
Shares issued in connection with the reinvestment of:
Dividends from net investment income ..................... 169,498 2,307,708 239,281 3,016,047
Distributions from net realized gain ..................... 38,142 510,720 214,637 2,414,955
----------- ----------- ----------- -----------
3,026,829 41,288,280 1,377,819 17,646,379
Shares repurchased ......................................... (1,190,946) (16,244,021) (1,589,737) (20,314,249)
----------- ----------- ----------- -----------
Net increase (decrease) .................................... 1,835,883 $25,044,259 (211,918) $(2,667,870)
----------- ----------- ----------- -----------
Increase (decrease) derived from capital
shares transactions ...................................... 9,716,038 $131,926,275 1,109,526 $14,420,035
=========== =========== =========== ===========
</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 STRATEGIC INCOME 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 Strategic
Income 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
- -------------------------------------------------------------------------------
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 STRATEGIC INCOME FUND
NEW ENGLAND STRATEGIC INCOME FUND
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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