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NEW ENGLAND FUNDS
ANNUAL REPORT AND PERFORMANCE UPDATE
NEW ENGLAND
EQUITY INCOME FUND
DECEMBER 31, 1996
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NEW ENGLAND EQUITY INCOME FUND
PORTFOLIO COMPOSITION
Investments as of December 31, 1996
COMMON STOCK--98.3% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (A)
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AEROSPACE--2.8%
900 Northrop Grumman Corp. ............................ $ 74,475
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AUTOMOTIVE & RELATED--6.0%
2,200 Chrysler Corp. .................................... 72,600
1,500 General Motors Corp. .............................. 83,625
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156,225
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BANKS--8.6%
1,200 Bank of Boston Corp. .............................. 77,100
2,400 Bank of New York, Inc. ............................ 81,000
1,800 First Tennessee National Corp. .................... 67,500
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225,600
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CHEMICALS--5.2%
800 Dow Chemical Co. .................................. 62,700
1,300 PPG Industries, Inc. .............................. 72,963
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135,663
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CONGLOMERATES--5.1%
1,200 Tenneco, Inc. ..................................... 54,150
1,200 United Technologies Corp. ......................... 79,200
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133,350
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CONSTRUCTION MATERIALS--5.3%
1,000 Armstrong World Industries, Inc. .................. 69,500
1,900 Masco Corp. ....................................... 68,400
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137,900
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COSMETICS & TOILETRIES--3.5%
1,600 Avon Products, Inc. ............................... 91,400
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DOMESTIC OIL--5.5%
1,700 Phillips Petroleum Co. ............................ 75,225
2,900 USX-Marathon Group ................................ 69,237
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144,462
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ELECTRIC UTILITIES--2.7%
3,600 Edison International .............................. 71,550
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ELECTRICAL EQUIPMENT--3.4%
900 General Electric Co. .............................. 88,988
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FINANCIAL SERVICES--5.3%
1,100 Beneficial Corp. .................................. 69,712
1,400 Fleet Financial Group, Inc. ....................... 69,825
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139,537
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FOOD & BEVERAGES--2.4%
1,000 General Mills, Inc. ............................... 63,375
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FOREST PRODUCTS--2.8%
1,000 Georgia Pacific Corp. ............................. 72,000
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GAS & PIPELINE UTILITIES--6.2%
1,512 El Paso Natural Gas Co. ........................... 76,336
1,900 PanEnergy Corp. ................................... 85,500
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161,836
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INSURANCE--2.4%
1,200 Lincoln National Corp., Inc. ...................... 63,000
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MISCELLANEOUS--2.7%
2,200 Ultramar Diamond Shamrock ......................... 69,575
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PHOTOGRAPHY--2.5%
800 Eastman Kodak Co. ................................. 64,200
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REAL ESTATE--5.1%
2,000 Developers Diversified Realty ..................... 74,250
1,700 Health Care Property Investments, Inc. ............ 59,500
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133,750
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STEEL--2.8%
2,300 USX-U.S. Steel Group .............................. 72,163
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TELECOMMUNICATION--9.9%
1,800 AT&T Corp. ........................................ 78,300
2,100 Bellsouth Corp. ................................... 84,787
2,600 Pacific Telesis Group ............................. 95,550
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258,637
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TOBACCO--5.1%
600 Philip Morris Companies, Inc. ..................... 67,575
1,900 RJR Nabisco Holdings Corp. ........................ 64,600
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132,175
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TRUCKING & FREIGHT FORWARDING--3.0%
2,400 Teekay Shipping Corp. ............................. 78,600
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Total Common Stock (Identified Cost $2,164,132) ... 2,568,461
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SHORT TERM INVESTMENTS--1.4%
FACE
AMOUNT
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$36,302 Seven Seas Money Market Fund, 5.160%, 1/01/97 ..... 36,302
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Total Short Term Investments
(Identified Cost $36,302) ....................... 36,302
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Total Investments--99.7% (Identified Cost
$2,200,434)(b) .................................. 2,604,763
Other assets less liabilities ..................... 8,483
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Total Net Assets--100% ............................ $2,613,246
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(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on
investments based on cost of $2,200,434 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 ........ $ 406,609
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (2,280)
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Net unrealized appreciation ................................. $ 404,329
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See accompanying notes to financial statements.
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NEW ENGLAND EQUITY INCOME FUND
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value ........................................ $2,604,763
Receivable for:
Securities sold ........................................... 76,576
Dividends and interest .................................... 8,454
Due from investment advisor ............................... 41,481
Unamortized organization expenses ........................... 11,609
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2,742,883
LIABILITIES
Payable for:
Securities purchased .......................... $ 72,310
Organization expenses ......................... 15,000
Accrued expenses:
Management fees ............................... 16,022
Distribution fees ............................. 5,722
Custody ....................................... 7,000
Audit ......................................... 7,500
Legal ......................................... 5,500
Misc .......................................... 583
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129,637
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NET ASSETS ....................................................... $2,613,246
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Net Assets consist of:
Capital paid in ............................................. $2,184,076
Undistributed net investment income ......................... 2,276
Accumulated net realized gains .............................. 22,565
Unrealized appreciation on investments ...................... 404,329
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$2,613,246
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NET ASSETS
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($2,613,246 divided by 172,505 shares of beneficial interest) .. $15.15
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Offering price per share (100/94.25 of $15.15) ................... $16.07*
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Identified cost of investments ................................... $2,200,434
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* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of these amounts.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
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NEW ENGLAND EQUITY INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Dividends $ 77,261(a)
Interest 4,150
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81,411
EXPENSES
Management fees $ 16,022
Service fees - A 5,722
Custodian 28,075
Transfer agent 3,029
Audit and tax services 16,100
Legal 10,334
Printing 227
Registration 655
Amortization of organization expenses 3,012
Miscellaneous 842
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Total expenses 84,018
Less expenses waived by the investment advisor
and distributor (49,684) 34,334
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Net investment income 47,077
REALIZED and UNREALIZED GAIN (LOSS) on INVESTMENTS,
Realized gain (loss) on:
Investments - net 155,307
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Total realized gain (loss) on investments 155,307
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Unrealized appreciation (depreciation) on:
Investments - net 346,416
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Total unrealized appreciation (depreciation)
on investments 346,416
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Net gain (loss) on investment transactions 501,723
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NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $548,800
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(a) Net of foreign taxes of $56.
See accompanying notes to financial statements.
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NEW ENGLAND EQUITY INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 1996
THE PERIOD
NOVEMBER 15, 1995(*) YEAR
THROUGH ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
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FROM OPERATIONS
Net investment income .................. $ 6,533 $ 47,077
Net realized gain (loss) on investments
and foreign currency transactions .... 0 155,307
Unrealized appreciation (depreciation)
on investments, and foreign currency
transactions ......................... 57,913 346,416
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Increase (decrease) in net assets from
operations ........................... 64,446 548,800
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FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .................. (6,560) (48,153)
Net realized gain on investments ....... 0 (132,742)
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(6,560) (180,895)
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Proceeds from sale of shares ........... 1,900,000 0
Net asset value of shares issued in
connection with the reinvestment of:
Dividends from net investment income . 6,560 48,153
Distributions from net realized gain . 0 132,742
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1,906,560 180,895
Cost of shares redeemed ................ 0 0
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Increase (decrease) in net assets derived
from capital share transactions ...... 1,906,560 180,895
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Total increase (decrease) in net assets 1,964,446 548,800
NET ASSETS
Beginning of the period ................ 100,000 2,064,446
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End of the period ...................... $2,064,446 $2,613,246
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UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................ $0 $(27)
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End of the period ...................... $(27) $2,276
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NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares ......... 152,000 0
Issued in connection with the
reinvestment of:
Dividends from net investment income . 510 3,193
Distributions from net realized gain . 0 8,802
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152,510 11,995
Redeemed ............................... 0 0
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Net change ............................. 152,510 11,995
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(*) Commencement of Operations
See accompanying notes to financial statements.
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NEW ENGLAND EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
CLASS A
THE PERIOD
NOVEMBER 15, 1995(A) YEAR
THROUGH ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
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Net Asset Value, Beginning of Period $12.50 $12.86
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Income From Investment Operations -
Net Investment Income ............. 0.04 0.31
Net Realized and Unrealized Gain
(Loss) on Investments ............. 0.36 3.11
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Total From Investment Operations 0.40 3.42
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Less Distributions -
Dividends From Net Investment Income (0.04) (0.30)
Distributions From Net Realized
Capital Gains ................... 0.00 (0.83)
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Total Distributions ............. (0.04) (1.13)
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Net Asset Value, End of Period ...... $12.86 $15.15
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Total Return (%) .................... 3.2(c) 26.6
Ratio of Operating Expenses to
Average Net Assets (%) ............ 1.50(b) (d) 1.50
Ratio of Net Investment Income to
Average Net Assets (%) ............ 3.58(b) 2.06
Portfolio Turnover Rate (%) ......... 0 45
Average Commission Rate (e) ......... -- $0.0608
Net Assets, End of Period (000) ..... $2,064 $2,613
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) The ratio of operating expenses to average net assets without giving effect
to this expense limitation would have been 5.97% (annualized) and 3.67% for
the periods ended December 31, 1995 and December 31, 1996, respectively.
(e) For the Fiscal years beginning on or after September 1, 1995, a fund is
required to disclosed its average commissions are charged . This rate
generally does not reflect mark-ups, mark-downs, or spreads on shares traded
on a principal basis.
See accompanying notes to financial statements.
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NEW ENGLAND EQUITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. The Fund is a Series of New England Funds Trust III, 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 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 commenced operations on November 15, 1995. Previously, the Fund had
no transactions other than those relating to organizational matters and the
sale of 8,000 shares of the Fund for $100,000.
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. Short-term obligations with a
remaining maturity of less than sixty days are stated at amortized cost,
which approximates market value.
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 basis differences will result
in reclassification to the capital accounts.
e. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. The Fund's sub-adviser 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.
f. ORGANIZATION EXPENSE. Costs incurred in fiscal 1995 in connection with the
Fund's organization and registration, amounting to approximately $15,000 in
the aggregate, will be paid by the Fund and are being amortized by the Fund
over 60 months.
In the event that at any time during the five-year period beginning with the
date of the commencement of operations, the initial shares acquired by the
Advisor prior to such date are redeemed by any holder thereof, the
redemption proceeds payable in respect of such shares will be reduced by the
prorata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the then unamortized deferred organizational expenses as of
the date of such redemption.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the period ended December 31, 1996, were $995,652 and $986,638
respectively.
3a. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its adviser, New England Funds Management, L.P. ("NEFM")
at the annual rate of 0.70% of the first $200 million of the Fund's average
daily net assets, 0.65% of the next $300 million of such assets and 0.60% of
such assets in excess of $500 million. NEFM pays Loomis Sayles for providing
sub-advisory services to the Fund at the annual rate of 0.40% of the first
$200 million of the average daily net assets of the Fund, 0.325% of the next
$300 million of such assets and 0.275% 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 New England Investment Companies, L.P., which is a subsidiary of
Metropolitan Mutual Life Insurance Company.
Fees earned by NEFM and Loomis Sayles under the management agreement in
effect during the period December 31, 1995 through December 31, 1996, are as
follows:
FEES EARNED (A)
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$6,867 New England Funds Management, L.P.
9,155 Loomis, Sayles & Company, L.P.
(a) Before reduction pursuant to voluntary expense limitation. See Note 4.
b. SERVICE FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has
adopted a Service Plan relating to the Fund (the "Plan"). Under the Plan,
the Fund pays New England Funds a monthly service fee at the annual rate of
up to 0.25% of the average daily net assets of the Fund, 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 the Fund and/or the maintenance
of shareholder accounts. For the year ended December 31, 1996, New England
Funds waived its entire fee of $5,722 under the Plan.
4. EXPENSE LIMITATIONS. Effective November 15, 1995, Loomis Sayles and New
England Funds have voluntarily agreed to reduce their fees and, if
necessary, to assume expenses of the Fund in order to limit the Fund's
expenses to an annual rate of 1.50% of the Fund's average daily net assets.
As a result of the Fund's expenses exceeding the voluntary expense
limitation during the year ended December 31, 1996, NEFM and Loomis Sayles
waived their entire management fee of $16,022 and New England Funds waived
its entire service fee of $5,722 and assumed additional expenses of $27,940.
5. BENEFICIAL INTEREST. At December 31, 1996 all outstanding shares of the Fund
were held by the Loomis Sayles Funded Pension Plan.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of New England Equity Fund:
In our opinion, the accompanying statement of assets & 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 New England Equity Income Fund
("the Fund") at December 31, 1996, the results of its operations for the year
then ended, 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 the 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 owned at
December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 21, 1997
