<PAGE>
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SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Equity Income Fund
[graphic omitted]
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JUNE 30, 1998
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<PAGE>
August 1998
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
Investors had reason for comfort during the first half of 1998.
After stunning gains in each of the last three years, the stock market behaved
more like its customary self: Major market indicators moved up for a time, slid
back and were once again in recovery mode at the end of the period. This pattern
largely reflected investors' responses to fast-changing events in Asia.
Unpredictable markets call to mind the long-term experience of millions of
mutual fund investors; those of us who held firm to our plans as markets entered
difficult periods were often rewarded as markets recovered. The longer you stay
invested the less interim ups and downs -- here or overseas -- should concern
you.
News from the Far East drove bond market sentiment as well. In the United
States, faltering Asian economies meant lower prices on many imported goods,
putting pressure on prices and corporate earnings. With slower growth now a real
possibility and with little immediate evidence of inflation, the Federal Reserve
Board left short-term interest rates unchanged, while long-term rates fell to
record lows in mid-June.
In the pages that follow, you can read about how your Fund's management dealt
with the disruptions in the Pacific region and their impact on our domestic
economy. But beyond Asia's present problems, and notwithstanding the inevitable
ebb and flow of our own business cycle, there are reasons to be optimistic about
investment prospects over the next several years. For example, vast,
under-served populations in China and elsewhere represent huge potential demand
for consumer goods. Here in the United States, there is the prospect of a
demography-driven spending wave, as millions of baby-boomers enter their peak
consumption years. Events may turn out differently -- volatility will always be
part of investing -- but as much as the markets may waver, the watchwords for
many long-term investors are constant: diversify and persist.
While you are thinking about your investments, take a few minutes to review your
portfolio. It's possible that three years of strong market gains have tilted
your holdings disproportionately toward aggressive stock funds. If so, you and
your financial representative can adjust the balance easily using some of New
England Funds' more conservative equity or bond funds to reallocate your assets
in line with your long-term goals and comfort level. Once you are satisfied with
your portfolio's balance, be sure to stay in touch with your financial
professional, invest regularly and don't try to guess what the market will do
next.
Thank you for your continued support of New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
PREPARING FOR THE YEAR 2000
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New England Funds continues to work to provide high quality service as we move
into the new century. Since last year we have devoted significant resources to
identifying, analyzing and resolving computer issues related to Year 2000. As a
further measure, we have focused on year-end 1998 as a target for preparedness
by vendor and service agency systems that we rely on for support. We expect
major systems to be ready before the end of the year, with a year of quality
assurance to follow.
<PAGE>
NEW ENGLAND EQUITY INCOME FUND
INVESTMENT RESULTS THROUGH JUNE 30, 1998
- --------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares, since New England Equity Income Fund's
inception 11/28/95, compared to the S&P 500 Index. The data points from the
graph are as follows:
NOVEMBER 1995 (INCEPTION) THROUGH JUNE 1998
Net With Maximum
Asset Sales S&P
Value(1) Charge(2) 500(4)
11/28/1995 $10,000 $ 9,425 $10,000
12/1995 $10,321 $ 9,728 $10,215
03/1996 $10,875 $10,250 $10,763
06/1996 $11,357 $10,704 $11,245
09/1996 $11,702 $11,029 $11,590
12/1996 $13,069 $12,318 $12,555
03/1997 $13,095 $12,342 $12,894
06/1997 $14,631 $13,790 $15,141
09/1997 $15,711 $14,808 $16,273
12/1997 $16,028 $15,107 $16,738
03/1998 $17,849 $16,823 $19,068
06/1998 $17,003 $16,026 $19,696
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and Class C share
performance will vary based on differences in inception date, fees and sales
charges. All Index and Fund performance assumes reinvested distributions.
<PAGE>
<TABLE>
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NEW ENGLAND EQUITY INCOME FUND
- ----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A (Inception 11/28/95) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 6.09% 16.22% 22.74%
With Max. Sales Charge(2) 0.00 9.57 19.98
- ----------------------------------------------------------------------------------------------
CLASS B (Inception 9/15/97) 6 MONTHS SINCE INCEPTION
Net Asset Value(1) 5.74% 9.67%
With CDSC(3) 0.74 4.67
- ----------------------------------------------------------------------------------------------
CLASS C (Inception 9/15/97) 6 MONTHS SINCE INCEPTION
Net Asset Value(1) 5.74% 9.67%
With CDSC(3) 4.74 8.67
- ----------------------------------------------------------------------------------------------
SINCE SINCE
CLASS A CLASS B&C*
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR INCEPTION INCEPTION
S&P 500 Index(4) 17.67% 30.09% 29.91% 25.19%
Lipper Equity Income Average(5) 9.13 20.94 22.33 11.74
- ----------------------------------------------------------------------------------------------
</TABLE>
*Lipper Average calculated from 9/30/97
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares. CDSC for Class C shares assumes a maximum 1% sales
charge on redemptions within the first year of purchase.
(4) Standard & Poor's 500 Index (S&P 500) is an unmanaged index representing the
performance of 500 major companies, most of which are listed on the New York
Stock Exchange. The S&P 500 is not available for direct investment and its
performance has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund investments.
(5) Lipper Equity Income Average is an average of the total return performance
(based on NAV) of funds with similar objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
<PAGE>
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NEW ENGLAND EQUITY INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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- -------------------------------
[Photo of Mauricio F. Cevallos]
- -------------------------------
- -------------------------------
[Photo of Tom Kolefas]
- -------------------------------
- -------------------------------
[Photo of Peter Ramsden]
- -------------------------------
Mauricio F. Cevallos,
Tom Kolefas,
Peter Ramsden
Loomis, Sayles & Company, L.P.
Q. Please tell us about New England Equity Income Fund's performance during the
first half of 1998.
For the six months ending June 30, 1998, New England Equity Income Fund's (Class
A shares) total return of 6.09% lagged the 17.67% return of its benchmark, the
Standard & Poor's 500 Stock Index. The Fund's return included a $0.94 per share
gain in net asset value to $18.53 and the reinvestment of $0.13 per share in
dividend distributions.
Q. What was the investment environment?
During the past six months, several crosscurrents in the markets posed difficult
challenges for a portfolio as disciplined and structured as New England Equity
Income Fund.
First, a stronger than expected domestic economy and lower interest rates
focused investor attention on stocks that are sensitive to consumer confidence
and the general level of business activity, such as retailers, housing-related
companies and wireless telecommunications stocks -- groups that offer little in
the way of yield support and were generally too richly priced to be considered
for the Fund. Second, by late April, renewed concern over the Asian economic
crisis caused investors to seek earnings potential in the consumer staple and
pharmaceutical stocks. Once again, extreme valuations and low yields eliminated
these stocks as candidates for the portfolio.
Panic surrounding the Asian crisis and its potential impact on global commodity
prices led many investors to abandon basic industries and other cyclical
sectors. Furthermore, with weakened economies, Asian nations needed less oil,
reducing demand at a time when the growing supply had forced crude oil prices
down sharply.
Q. Given this environment, what was your investment strategy during the period?
Based on past experience, value-based investment disciplines have the most
difficulty during the initial stages of an economic slowdown. However, in the
current, less secure environment, we expect investors to rethink their current
assumptions about how stocks ought to be valued and begin to invest more
conservatively.
True to our discipline, we focused on getting the most value, whether by way of
earnings, cash flow or assets, for each invested dollar. In addition, our
strategy requires that the dividend yield on each holding be greater than the
market's average, as measured by the S&P 500. This approach is designed to
preserve capital -- historically, dividend yield has acted to cushion price
declines, allowing portfolios with higher yields to perform well in down
markets.
The Fund does not employ "top down" strategies for selecting stocks; we avoid
investment decisions based on forecasts of the Gross Domestic Product, the
exchange rate of the Japanese yen, the price of oil or any other macro-economic
factors.
YOUR FUND'S 10 LARGEST INVESTMENTS -- 6/30/98
- ---------------------------------------------------
% of
Company Net Assets
- ---------------------------------------------------
1. Charter One Financial, Inc. 4.13
- ---------------------------------------------------
2. Duke Power Co. 3.11
- ---------------------------------------------------
3. Philip Morris Cos. 3.11
- ---------------------------------------------------
4. Masco Corp. 3.10
- ---------------------------------------------------
5. American General 3.09
- ---------------------------------------------------
6. Edison International 3.06
- ---------------------------------------------------
7. Eastman Kodak Co. 3.06
- ---------------------------------------------------
8. SBC Communications, Inc. 3.05
- ---------------------------------------------------
9. Hartford Financial Services Group 3.02
- ---------------------------------------------------
10. Sears, Roebuck & Co. 3.00
- ---------------------------------------------------
Portfolio holdings and asset allocation will vary.
- ---------------------------------------------------
Q. What were the principal factors affecting performance, either positively or
negatively?
Heavy concentrations (relative to the S&P 500 Index) in the basic industry and
energy sectors, in the face of the Asian economic crisis and declining oil
prices, were the two most significant reasons for our underperformance. Our
relatively lighter positions in consumer staple and pharmaceutical stocks also
held back performance when investors drove prices on these stocks higher for the
perceived safety of their relatively predictable earnings.
Our buy discipline, which requires a below market price-to-earnings ratio, kept
these sectors from consideration. (A price/earnings ratio is a rule-of-thumb
that investors use to help gauge whether a stock's price is high or low in terms
of the company's earning power -- the higher the ratio the more expensive the
stock.)
Concerns over global economic growth left many of the Fund's cyclical holdings
selling at recession-like prices. Finally, falling oil prices dragged down the
energy-related holdings in the portfolio.
Q. What is your current outlook?
With a recovery in Asia highly unlikely in the near future, we believe the
picture for U.S. corporate earnings has become somewhat cloudy. A prolonged
Asian recession could slow the growth of large U.S. multinational corporations
and put pressure on companies that derive substantial revenues from exports into
the region. The stronger U.S. dollar alone can work to make U.S. products and
services more costly and, therefore, less competitive around the globe.
As investors seek to preserve capital in this more challenging environment,
earnings, cash flow and assets -- the measures that we use in our stock
selection -- will replace growth momentum and brand recognition as primary
valuation yardsticks. We believe that New England Equity Income Fund is ideally
positioned for this anticipated change in investor sentiment.
At the end of the period, the Fund's portfolio valuations were very conservative
by several measures. First, the average price/earnings ratio was 30% below the
S&P 500's average. Second, the portfolio's dividend yield was 65% higher than
the yield on the Index. In addition, many portfolio stocks were selling at 25%
to 50% less than their theoretical break-up value.
Thus, we have positioned the Fund as a possible refuge from the speculative
excesses that have dominated the markets for some time, and to be a rewarding
vehicle for protecting and growing capital in the months and years to come.
Reviewing the portfolio at the end of the period, we feel our holdings offer
some resiliency in weak markets and the potential for strong gains when global
economic news turns more positive.
Portfolio commentary reflects the conditions and actions taken during the
reporting period, which are subject to change. A shift in opinion may result in
strategic and other portfolio charges.
<PAGE>
<TABLE>
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1998
(unaudited)
COMMON STOCK--97.2% OF TOTAL NET ASSETS
<CAPTION>
SHARES DESCRIPTION VALUE (a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE--2.5%
20,400 Rockwell International Corp. ............................... $ 980,475
-----------
AGRICULTURAL MACHINERY--2.9%
21,900 Deere & Co. ................................................ 1,157,963
-----------
AUTO PARTS--2.8%
32,400 Genuine Parts Co. .......................................... 1,119,825
-----------
AUTOMOTIVE--2.6%
15,500 General Motors Corp. ....................................... 1,035,594
-----------
BANKS--10.0%
18,900 Bank of New York ........................................... 1,146,994
20,800 BankBoston Corp. ........................................... 1,157,000
48,310 Charter One Financial, Inc. ................................ 1,627,443
-----------
3,931,437
-----------
CONGLOMERATES--2.4%
24,900 Tenneco, Inc. New .......................................... 947,756
-----------
CONSTRUCTION MATERIALS--3.1%
20,200 Masco Corp. ................................................ 1,222,100
-----------
CONTAINERS & GLASS--2.3%
17,100 Temple-Inland, Inc. ........................................ 921,263
-----------
DOMESTIC OIL--5.9%
36,300 Ultramar Diamond Shamrock .................................. 1,145,719
34,000 USX-Marathon Group ......................................... 1,166,625
-----------
2,312,344
-----------
ELECTRIC UTILITIES--6.2%
20,700 Duke Power Co. ............................................. 1,226,475
40,800 Edison International ....................................... 1,206,150
-----------
2,432,625
-----------
FINANCIAL SERVICES--3.0%
14,000 Fleet Financial Group, Inc. ................................ 1,169,000
-----------
GAS & PIPELINE UTILITIES--2.9%
30,400 El Paso Natural Gas Co. .................................... 1,162,800
-----------
INSURANCE--9.1%
17,100 American General ........................................... 1,217,306
10,400 Hartford Financial Services Group .......................... 1,189,500
12,800 Lincoln National Corp., Inc. ............................... 1,169,600
-----------
3,576,406
-----------
INTERNATIONAL OIL--2.8%
12,700 British Petroleum PLC (ADR) ................................ 1,120,775
-----------
MISCELLANEOUS--0.1%
1,000 Hvide Capital Trust ........................................ $ 42,375
-----------
OIL SERVICES--1.9%
31,500 Wallace Computer Service ................................... 748,125
-----------
PAPER--2.3%
28,000 Willamette Industries, Inc. ................................ 896,000
-----------
PAPER & FOREST PRODUCTS--3.2%
16,400 Georgia Pacific Corp. ...................................... 966,575
12,600 Georgia Pacific Corp. Timber Group ......................... 290,587
-----------
1,257,162
-----------
PHOTOGRAPHY--3.1%
16,500 Eastman Kodak Co. .......................................... 1,205,531
-----------
REAL ESTATE--4.0%
29,300 Developers Diversified Realty .............................. 1,148,193
12,300 Health Care Property Investments, Inc. ..................... 443,569
-----------
1,591,762
-----------
RETAIL--3.0%
19,400 Sears, Roebuck & Co. ....................................... 1,184,613
-----------
STEEL--2.7%
46,000 Allegheny Teledyne, Inc. ................................... 1,052,250
-----------
TELECOMMUNICATION--10.2%
19,400 GTE Corp. .................................................. 1,079,125
30,100 SBC Communications, Inc. ................................... 1,204,000
10,600 Telebras (ADR) ............................................. 1,157,387
12,400 Telefonos de Mexico S.A. de C.V. (ADR) 144A ................ 595,975
-----------
4,036,487
-----------
TOBACCO--5.6%
31,100 Philip Morris Cos .......................................... 1,224,562
41,000 RJR Nabisco Holdings Corp. ................................. 973,750
-----------
2,198,312
-----------
TRUCKING & FREIGHT FORWARDING--2.6%
41,000 Teekay Shipping Corp. ...................................... 1,027,563
-----------
Total Common Stock (Identified Cost $36,753,012) ........... 38,330,543
-----------
SHORT TERM INVESTMENT--2.5%
FACE
AMOUNT DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------------------------------
$997,000 Repurchase Agreement with State Street Corp. dated 6/30/98
at 5.000% to be repurchased at $997,138 on 7/01/98,
collateralized by $775,000 U.S. Treasury Bond, at 8.125%,
due 8/15/19 valued at $1,018,026 ......................... $ 997,000
-----------
Total Short Term Investment (Identified Cost $997,000) ..... 997,000
-----------
Total Investments--99.7% (Identified Cost $37,750,012) (b) . 39,327,543
Other assets less liabilities .............................. 103,073
-----------
Total Net Assets--100% ..................................... $39,430,616
===========
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information:
At June 30, 1998 the net unrealized appreciation on investments
based on cost of $37,750,012 for federal income tax purposes was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ........................ $ 3,337,440
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ........................ (1,759,909)
-----------
Net unrealized appreciation ............................................ $ 1,577,531
===========
ADR/GDR -- An American Depository Receipt (ADR) or Global Depository
Receipt (GDR) is a certificate issued by a Custodian Bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs and GDRs are significantly influenced
by trading on exchanges not located in the United States or Canada.
144A -- Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these
amounted to $595,975 or 1.5% of net assets.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ----------------------------------------------------------------------------------------------------
June 30, 1998
(unaudited)
<S> <C> <C>
ASSETS
Investments at value (Identified cost $37,750,012) ........... $39,327,543
Cash ......................................................... 418
Receivable for:
Fund shares sold ........................................... 43,539
Dividends and interest ..................................... 108,202
Prepaid registration expense ................................. 36,582
Unamortized organization expenses ............................ 8,414
-----------
39,524,698
LIABILITIES
Payable for:
Fund shares redeemed ....................................... $27,460
Withholding taxes .......................................... 1,327
Accrued expenses:
Management fees ............................................ 37,801
Deferred trustees' fees .................................... 773
Accounting and administrative .............................. 1,792
Other expenses ............................................. 24,929
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94,082
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NET ASSETS ..................................................... $39,430,616
===========
Net Assets consist of:
Capital paid in ............................................ $36,708,504
Undistributed net investment income ........................ 997
Accumulated net realized gains ............................. 1,143,584
Unrealized appreciation on investments ..................... 1,577,531
-----------
NET ASSETS ..................................................... $39,430,616
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($20,488,389 divided by 1,105,734 shares of beneficial
interest) .................................................... $18.53
======
Offering price per share (100/94.25 of $18.53) ................. $19.66*
======
Net asset value and offering price of Class B shares
($16,778,653 divided by 905,476 shares of beneficial
interest) .................................................... $18.53**
======
Net asset value and offering price of Class C shares
($2,163,574 divided by 116,790 shares of beneficial interest) $18.53**
======
*Based upon single purchases of less than $50,000. Reduced sales charges apply
for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
INVESTMENT INCOME
<S> <C> <C>
Dividends ..................................................... $ 472,968
Interest ...................................................... 54,210
----------
527,178
Expenses
Management fees ............................................. $120,795
Service fees - A ............................................ 23,329
Service and distribution fees - Class B ..................... 69,159
Service and distribution fees - Class C ..................... 10,089
Trustees' fees and expenses ................................. 3,279
Accounting and administrative ............................... 9,996
Custodian ................................................... 28,485
Transfer agent .............................................. 53,337
Audit and tax services ...................................... 10,455
Legal ....................................................... 7,374
Printing .................................................... 14,446
Registration ................................................ 39,726
Amortization of organization expenses ....................... 2,308
Miscellaneous ............................................... 6,114
Total expenses ................................................ 398,892
Less expenses waived by the investment adviser and subadviser . (78,090) 320,802
-------- ------------
Net investment income ......................................... 206,376
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments - net ........................................... 988,812
Unrealized appreciation on:
Investments - net ........................................... 434,137
Net gain on investment transactions ........................... -------- 1,422,949
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................... $1,629,325
==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 94,305 $ 206,376
Net realized gain on investments .......................... 326,007 988,812
Unrealized appreciation on investments .................... 739,065 434,137
----------- -----------
Increase in net assets from operations .................... 1,159,377 1,629,325
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (75,660) (140,506)
Class B ................................................. (19,575) (58,182)
Class C ................................................. (3,144) (7,898)
Net realized gain on investments
Class A ................................................. (157,550) 0
Class B ................................................. (31,171) 0
Class C ................................................. (5,079) 0
----------- -----------
(292,179) (206,586)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ............................................ 22,171,694 12,355,739
----------- -----------
Total increase in net assets .............................. 23,038,892 13,778,478
NET ASSETS
Beginning of the period ................................... 2,613,246 25,652,138
----------- -----------
End of the period ......................................... $25,652,138 $39,430,616
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ......................................... $ 1,207 $ 997
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
-------------------------------------------------------------------
THE PERIOD
NOVEMBER 15,
1995(a) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED
DECEMBER 31, ------------------------- JUNE 30,
1995 1996 1997 1998
------------ ------ ------ ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period ................ $12.50 $12.86 $15.15 $17.59
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................................... 0.04 0.31 0.25 0.14
Net Realized and Unrealized Gain on Investments ......... 0.36 3.11 3.15 0.93
------ ------ ------ ------
Total From Investment Operations ........................ 0.40 3.42 3.40 1.07
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ................ (0.04) (0.30) (0.26) (0.13)
Distributions From Net Realized Capital Gains ........... 0.00 (0.83) (0.70) 0.00
------ ------ ------ ------
Total Distributions ..................................... (0.04) (1.13) (0.96) (0.13)
------ ------ ------ ------
Net Asset Value, End of the Period ...................... $12.86 $15.15 $17.59 $18.53
====== ====== ====== ======
Total Return (%) (c) .................................... 3.2 26.6 22.6 6.1
Ratio of Operating Expenses to Average Net Assets (%)(d). 1.50(b) 1.50 1.50 1.50(b)
Ratio of Net Investment Income to Average Net Assets(%) . 3.58(b) 2.06 1.76 1.52(b)
Portfolio Turnover Rate (%) ............................. 0 45 33 27(b)
Net Assets, End of the Period (000) ..................... $2,064 $2,613 $14,681 $20,488
(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
annualized.
(d) The ratio of operating expenses to average net
assets without giving effect to the expense
limitation described in note 4 would have been(%) ... 5.97(b) 3.67 3.10 1.95(b)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS B CLASS C
----------------------------------------- -------------------------
THE PERIOD THE PERIOD
SEPTEMBER 15, SEPTEMBER 15,
1997(a) SIX MONTHS 1997(a) SIX MONTHS
THROUGH ENDED THROUGH ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1997 1998 1997 1998
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period ................ $17.06 $17.59 $17.06 $17.59
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................................... 0.03 0.06 0.03 0.07
Net Realized and Unrealized Gain on Investments ......... 0.60 0.95 0.60 0.94
------ ------ ------ ------
Total From Investment Operations ........................ 0.63 1.01 0.63 1.01
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ................ (0.04) (0.07) (0.04) (0.07)
Distributions From Net Realized Capital Gains ........... (0.06) 0.00 (0.06) 0.00
------ ------ ------ ------
Total Distributions ..................................... (0.10) (0.07) (0.10) (0.07)
------ ------ ------ ------
Net Asset Value, End of the Period ...................... $17.59 $18.53 $17.59 $18.53
====== ====== ====== ======
Total Return (%) (c) .................................... 3.7 5.7 3.7 5.7
Ratio of Operating Expenses to Average
Net Assets (%) (d) .................................... 2.25(b) 2.25(b) 2.25(b) 2.25(b)
Ratio of Net Investment Income to Average
Net Assets (%) ........................................ 1.01(b) 0.77(b) 1.01(b) 0.77(b)
Portfolio Turnover Rate (%) ............................. 33 27(b) 33 27(b)
Net Assets, End of the Period (000) ..................... $9,375 $16,779 $1,596 $2,164
(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 the expense
limitation described in note 4 would have been(%) ... 3.85(b) 2.70(b) 3.85(b) 2.70(b)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1998
(unaudited)
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
Fund seeks current income and capital growth. The Declaration of Trust permits
the trustees to issue an unlimited number of shares of the Trust in multiple
series (each such series of shares a "Fund").
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase. 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.
Expenses of the Fund are borne pro-rata by the holders of each class of shares,
except that each class bears expenses unique to that class (including the Rule
12b-1 service and distribution fees 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. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser and subadviser, under
the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED 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. 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 relating to shareholder distributions
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 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.
F. ORGANIZATION EXPENSE. Costs incurred in fiscal 1995 in connection with the
Fund's organization and registration, amounting to approximately $19,700 in the
aggregate, were paid by the Fund and are being amortized by the Fund over 60
months.
2. PURCHASES AND SALES OF SECURITIES For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were
$16,661,094 and $4,328,469, respectively.
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 0.70% of the first $200 million of the Fund's
average daily net assets, 0.65% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadvisor,
Loomis Sayles & Company, L.P. ("Loomis Sayles") for providing subadvisory
services to the Fund at the 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 Nvest Companies, L.P. ("Nvest") which is
a subsidiary of Metropolitan Life Insurance Company ("MetLife").
Fees earned by NEFM and Loomis Sayles under the management agreement in effect
during the six months ended June 30, 1998 are as follows:
FEES EARNED (a)
- ---------------
$51,772 NEFM
$69,023 Loomis Sayles
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest and
performs certain accounting and administrative services for the Fund. The Fund
reimburses New England Funds for all or part of New England Funds' expenses of
providing these services which include the following: (i) expenses for personnel
performing bookkeeping, accounting, and financial reporting functions and
clerical functions relating to the Fund and (ii) expenses for services required
in connection with the preparation of registration statements and prospectuses,
registration of shares in various states, shareholder reports and notices, proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities and reports and questionnaires for SEC compliance. For the six
months ended June 30, 1998 these expenses amounted to $9,996 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 for the Fund. For the six months ended
June 30, 1998, the Fund paid NEFSCO $32,948 as compensation for its services in
that capacity. For the six months ended June 30 1998, the Fund received $379 in
transfer agent credits. The transfer agent expense in the Statement of
Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class A shares, as reimbursement for expenses (including certain payments
to securities dealers, who may be affiliated with New England Funds) incurred by
the New England Funds in providing personal services to investors in Class A
shares and/or the maintenance of shareholder accounts. For the six months ended
June 30, 1998, the Fund paid New England Funds $23,329 in fees under the Class A
Plan.
Under the Class B and Class C Plan, the Fund pays New England Funds a monthly
service fee at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the six months ended June
30, 1998, the Fund paid New England Funds $17,290 and $2,522 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
monthly distribution fees at the annual rate of 0.75% of the average daily net
assets attributable to the Fund's Class B and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in connection with the marketing or sale of Class B and Class C shares.
For the six months ended June 30, 1998, the Fund paid New England Funds $51,869
and $7,567 in distribution fees under the Class B and Class C plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1998 amounted to $187,729.
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 $202
Meeting Fee 159/meeting
Annual Committee Member Retainer 30
Annual Committee Chairman Retainer 20
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. EXPENSE LIMITATIONS. Loomis Sayles has voluntarily agreed, until further
notice to NEFM, to waive its entire subadvisory fee with respect to the Equity
Income Fund. This waiver by Loomis Sayles does not reduce the Fund's expenses.
This agreement may be terminated by Loomis Sayles at any time. In addition,
under an expense deferral arrangement, which NEFM may terminate at any time,
NEFM has agreed to defer its management fee for the Fund and, if necessary, to
bear certain expenses associated with the Fund to the extent necessary to limit
the Fund's expenses to the annual rate of 1.50% for Class A shares, 2.25% for
Class B shares and 2.25% for Class C shares, subject to the obligation of the
Fund to pay NEFM such deferred fees and expenses in later periods to the extent
that the Fund's expenses fall below the annual rate of 1.50% for Class A shares,
2.25% for Class B shares and 2.25% for Class C shares; provided, however, that
the Fund is not obligated to pay any such deferred fees or expenses more than
two years after the end of the fiscal year in which the fee or expense was
deferred. As a result of the Fund's expenses exceeding the voluntary expense
limitation during the period ended June 30, 1998, NEFM deferred $9,067 of its
$51,772 management fees and Loomis Sayles waived their entire management fee of
$69,023.
5. CAPITAL SHARES. At June 30, 1998 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B and
Class C capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
--------------------------- -------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................. 656,587 $11,309,160 430,810 $ 7,971,004
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................. 4,302 73,745 7,139 133,565
Distributions from net realized gain .................. 9,084 155,582 0 0
--------- ----------- -------- -----------
669,973 11,538,487 437,949 8,104,569
Shares repurchased ...................................... (7,694) (132,782) (166,999) (3,121,924)
--------- ----------- -------- -----------
Net increase ............................................ 662,279 $11,405,705 270,950 $ 4,982,645
--------- ----------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 15, 1997(a) SIX MONTHS ENDED
THROUGH DECEMBER 31, 1997 JUNE 30, 1998
--------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................. 536,588 $ 9,256,725 403,710 $ 7,487,968
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................. 991 17,025 2,824 52,620
Distributions from net realized gain .................. 1,617 27,782 0 0
--------- ----------- -------- -----------
539,196 9,301,532 406,534 7,540,588
Shares repurchased ...................................... (6,360) (107,487) (33,894) (645,058)
--------- ----------- -------- -----------
Net increase ............................................ 532,836 $ 9,194,045 372,640 $ 6,895,530
--------- ----------- -------- -----------
</TABLE>
<TABLE>
FOR THE PERIOD
SEPTEMBER 15, 1997(a) SIX MONTHS ENDED
THROUGH DECEMBER 31, 1997 JUNE 30, 1998
--------------------------- -------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................. 95,043 $ 1,644,267 40,257 $ 744,198
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................. 156 2,679 371 6,933
Distributions from net realized gain .................. 284 4,871 0 0
--------- ----------- -------- -----------
95,483 1,651,817 40,628 751,131
Shares repurchased ...................................... (4,759) (79,873) (14,562) (273,567)
--------- ----------- -------- -----------
Net increase ............................................ 90,724 $ 1,571,944 26,066 $ 477,564
--------- ----------- -------- -----------
Increase derived from capital shares
transactions .......................................... 1,285,839 $22,171,694 669,656 $12,355,739
========= =========== ======= ===========
(a) Commencement of operations.
</TABLE>
<PAGE>
SUPPLEMENT DATED AUGUST 17, 1998 TO THE NEW ENGLAND STOCK FUNDS CLASS A, B AND
C SHARES AND CLASS Y SHARES PROSPECTUSES DATED MAY 1, 1998
FOR NEW ENGLAND VALUE FUND AND NEW ENGLAND BALANCED FUND
The following supplements the "Fund Management" section of each Prospectus:
Effective August 1998, Jeffrey Wardlow and Lauriann Kloppenberg have assumed
responsibility for the day-to-day management of the Value Fund. Also effective
August 1998, Jeffrey Wardlow and Gregg Watkins have assumed responsibility for
the day-to-day management of the equity portion of the Balanced Fund and the
responsibility for allocating the assets of the Balanced Fund between equity
and fixed-income securities. The day-to-day management of the fixed-income
portion of the Balanced Fund remains the same. Mr. Wardlow, Vice President of
Loomis Sayles, has managed the Loomis Sayles Core Value Fund since its
inception in May 1991. Ms. Kloppenberg, Vice President and Director of Equity
Research of Loomis Sayles, has been employed by Loomis Sayles for more than
five years. Mr. Watkins, Vice President of Loomis Sayles, is also a portfolio
manager of the Loomis Sayles Mid-Cap Value Fund and has been employed by
Loomis Sayles for more than five years.
FOR NEW ENGLAND GROWTH FUND
Effective September 1, 1998, New England Growth Fund offers Class C shares to
the general public in addition to Class A and Class B shares. Therefore, the
following tables supplement "Annual fund operating expenses" and "Example" in
the "Schedule of Fees" section:
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
NEW ENGLAND
GROWTH FUND
-----------
CLASS C
-----------
Management Fees ................................................ 0.67%
12b-1 Fees ..................................................... 1.00%*
Other Expenses ................................................. 0.20%
Total Fund Operating Expenses .................................. 1.87%
- ------------
*Because of the higher 12b-1 fees, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of
actual or expected Fund performance or expenses, both of which may be more or
less than those shown.
NEW ENGLAND GROWTH FUND
-----------------------
CLASS C
-----------------------
(1) (2)
1 year ........................................... $ 29 $ 19
3 years .......................................... $ 59 $ 59
5 years .......................................... $101 $101
10 years ......................................... $219 $219
- ------------
(1) Assumes redemption at end of period.
(2) Assumes no redemption at end of period.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Bullseye Fund
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Equity Income Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Municipal Income Fund
Massachusetts Tax Free Income Fund
Tax Free Income Fund of New York
Intermediate Term Tax Free Fund of California
MONEY MARKET FUNDS
Cash Management Trust, Money Market Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
VISIT OUR WORLD WIDE WEB SITE AT WWW.MUTUALFUNDS.COM
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective
investors when it is preceded or accompanied by the Fund's
current prospectus, which contains information about
distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of New England Funds
are members of the National Association of Securities Dealers, Inc.
(NASD). As a service to investors, the NASD has asked that we inform you
of the availability of a brochure on its Public Disclosure Program.
The program provides access to information about
securities firms and their representatives. Investors may obtain
a copy by contacting the NASD at 1-800-289-9999 or by
visiting their web site at www.NASDR.com.
<PAGE>
------------------
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NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
---------------------
399 Boylston Street
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