<PAGE>
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ANNUAL REPORT
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[LOGO]
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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DECEMBER 31, 1997
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<PAGE>
FEBRUARY 1998
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Dear Shareholder:
"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
In 1997, many investors once again had reason to be pleased with the performance
of their mutual fund holdings. However, in times such as these, expectations
tend to grow along with prices. It pays to remind ourselves that no trend is
permanent, and we should keep our goals realistic and long-term needs in focus.
In the third straight year of outstanding returns, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index -- two widely followed
indicators of the performance of large-company stocks -- gained 24.9% and 33.3%
respectively. At the same time, smaller-company stocks, as measured by the
Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded
as declining interest rates and rising prices meant solid gains. The Lehman Long
Treasury Index, for example, posted a 15.1% return for the year. Results were
less favorable for international investors, especially those exposed to emerging
markets or the financial turmoil in Asia.
Gratifying though it has been, the markets' surge of the past few years obscures
the historic norm: Downturns and volatility also are regular features of
investing. Even in 1997, notwithstanding the impressive overall results,
investors saw some sharp, short-term drops, whether they were invested in the
United States or overseas, in bonds or stocks. Market fluctuations remind us of
some valuable lessons.
First, volatility is inevitable, and should not disrupt long-term programs
without sufficient evaluation. Those who sold in response to downturns --
October 1987 is an obvious example -- may have missed out on the subsequent
uptrend. Second, sound diversification can reduce risk. A useful exercise is to
review your asset allocation regularly with your financial representative.
Starting in 1998, you have one more reason to consult with your representative:
Newly expanded retirement options, including the new Roth IRA, could play an
important role in your retirement and tax planning for years to come. With this
in mind, New England Funds has introduced programs specially designed to help
you make the most of the newest retirement vehicles.
[Dalbar logo]
1995 o 1996 o 1997
In addition to offering quality mutual fund choices and tax-advantaged plans, we
focus on providing the highest quality customer service. This is why I am
pleased to report that we have received DALBAR's Mutual Fund Service Award for
"providing the highest tier of service excellence in the mutual fund industry."
New England Funds is one of just three mutual fund companies to receive this
award for the third consecutive year from DALBAR, an independent evaluator of
mutual fund service. We are continuing to work to provide even more effective
services. Two examples are: the Personal Access Line(TM) -- our enhanced
automated telephone account service (800-346-5984) -- and the account
information section of the New England Funds web site (www.mutualfunds.com).
Each provides convenient, 24-hour access to current information about your New
England Funds accounts.
All of us at New England Funds thank you for your continued support and look
forward to serving you in the years ahead.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
<PAGE>
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NEW ENGLAND EQUITY INCOME FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 1997
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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 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.
[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:
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GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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NOVEMBER 1995 (INCEPTION) THROUGH DECEMBER 1997
Net With Maximum S&P
Asset Value(1) Sales Charge(2) 500(4)
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11/28/95 $10,000 $ 9,425 $10,000
12/95 $10,321 $ 9,728 $10,215
3/96 $10,875 $10,250 $10,763
6/96 $11,357 $10,704 $11,245
9/96 $11,702 $11,029 $11,590
12/96 $13,069 $12,318 $12,555
3/97 $13,095 $12,342 $12,894
6/97 $14,631 $13,790 $15,141
9/97 $15,711 $14,808 $16,273
12/97 $16,028 $15,107 $16,738
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 be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance assumes
reinvested distributions.
<PAGE>
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NEW ENGLAND EQUITY INCOME FUND
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Note: While the Fund's Class A shares were established just over two years ago,
they weren't offered to the public until September 15, 1997. On that same date,
Class B and C shares were introduced for the first time.
TOTAL RETURNS -- 12/31/97
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CLASS A* (Inception 11/28/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 22.64% 25.32%
With Max. Sales Charge(2) 15.62 21.83
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CLASS B (Inception 9/15/97) SINCE INCEPTION
Net Asset Value(1) 3.72%
With CDSC(3) -1.28
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CLASS C (Inception 9/15/97) SINCE INCEPTION
Net Asset Value(1) 3.72%
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SINCE SINCE
CLASS A CLASS B & C**
COMPARATIVE PERFORMANCE 1 YEAR* INCEPTION INCEPTION
S&P 500 Index(4) 33.31% 27.94% 6.39%
Lipper Equity Income Average(5) 27.44 23.52 2.37
*Reflects average annual total returns.
**Calculated from 9/30/93
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.
(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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Q. How did New England Equity Income Fund perform in 1997?
[Photo of Mauricio F. Cevallos]
[Photo of Tom Kolefas]
[Photo of Peter Ramsden]
Mauricio F. Cevallos, Tom Kolefas and Peter Ramsden
Loomis, Sayles & Company, L.P.
The Fund, which first became open to the investing public on September 15,
1997, delivered satisfactory returns as it maintained its discipline of
seeking undervalued stocks that pay better-than-average dividends when
compared to the S&P 500. For the year ending December 31, 1997, Class A
Shares had a total return of 22.64%, reflecting a $2.44 per share gain in net
asset value to $17.59 and the reinvestment of $0.958 per share in
distributions. Class B and C Shares, which were introduced for the first time
on September 15, 1997, each had total returns of 3.72% for the final three
and one-half months of 1997. During the year, the S&P 500 Index had a total
return of 33.31% and the average return of the 183 funds in the Equity Income
Class was 27.44%, according to Lipper Analytical Services.
These returns were achieved during a period when the stock market strongly
favored the stocks of large, multinational companies, rather than the
undervalued stocks that your Fund emphasizes.
Q. Please describe the investment environment.
Stable economic growth and low inflation have been the economy's hallmarks
for some time and have enabled companies to enjoy steady earnings growth.
During the first half of 1997, the market exhibited a clear preference for
very large, multinational growth stocks -- the ones that are well represented
in the 100 or so largest stocks of the S&P 500. These "nifty one-hundred" are
the same stocks that have led the market since 1994, though your Fund
currently favors mid- and smaller-sized companies, believing that their
valuations are more reasonable.
Q. What were some of the key factors that affected performance?
The relative strength of large, multinational growth stocks worked against
the Fund. In the second quarter of 1997, the S&P 500 was up 17.5%, while your
Fund had a 12% return (based on net asset value) for the same period. Coming
into 1997, we believed the market's largest companies were too expensive and
therefore represented too large a risk. Your Fund opted to hunt for value in
some relatively smaller companies, some of which also are included in the S&P
500. As we now know, the demand for very large stocks continued throughout
1997.
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YOUR FUND'S 10 LARGEST HOLDINGS -- 12/31/97
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% OF
COMPANY NET ASSETS
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1. BENEFICIAL CORP. 3.05
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2. LINCOLN NATIONAL CORP., INC. 3.05
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3. FLEET FINANCIAL GROUP, INC. 3.04
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4. WILLAMETTE INDUSTRIES, INC. 3.04
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5. GTE CORP. 3.03
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6. SEARS, ROEBUCK 3.03
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7. GENUINE PARTS CO. 3.03
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8. USX-MARATHON GROUP 3.03
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9. TEMPLE-INLAND, INC. 3.02
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10. EDISON INTERNATIONAL 3.01
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Portfolio holdings and asset allocations will vary.
Q. What was your investment strategy in view of these conditions?
We take a conservative, value-oriented approach to stock selection.
Specifically, we're looking for 30 to 40 stocks that pay dividends, sell at a
discount to the S&P 500's price-to-earnings ratio -- that is, have a lower
price-to-earnings ratio than the S&P 500 -- and produce cash flow (a sign
that the firm has the resources to invest in future development).
During the second half of 1997, the Fund sought out stocks trading at 14 to
15 times next year's expected earnings. In contrast, the S&P 500 is selling
at about 20 times projected 1998 earnings -- an unusually high level
reflecting the market's high confidence. We don't want shareholders caught
off guard if actual earnings fall short of those expectations.
We emphasized financial stocks, which accounted for about 21% of the
portfolio as of year-end 1997. Holdings in this area included Bank of New
York and BankBoston. As interest rates declined, bank profits rose as the
margin increased between the cost of money and income from money. The strong
economy also has kept other types of expenses -- such as default charges --
manageable for these institutions. On top of these factors, greater use of
technology and better management practices have improved the efficiency of
operations.
Another focal area for the portfolio has been the paper industry, which
accounted for about 7% of the Fund at year-end. Low inventories at a time in
the economy when demand is likely to rise could lead to appreciation in the
prices of companies such as Georgia Pacific, Willamette and Temple Inland
during the next 18 months.
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YOUR FUND'S FIVE LARGEST INDUSTRIES -- 12/31/97
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% OF
INDUSTRY NET ASSETS
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1. TELECOMMUNICATION 8.9
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2. BANKS 8.5
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3. FINANCIAL SERVICES 6.1
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4. INSURANCE 6.0
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5. ELECTRIC UTILITIES 6.0
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Portfolio holdings and asset allocations will vary.
Q. What is your outlook for the Fund?
Going back to 1994, the stocks included in the S&P 500 have outperformed the
rest of the stock market by a substantial margin. We believe the gap suggests
that investors have overpaid for the perceived comfort of owning large
multinational companies. Weak foreign economies and a strong dollar have
strained these large firms and their ability to meet investors' expectations. As
a result, we believe better values exist in other types of stocks, including the
dividend-paying, attractively priced stocks that are your Fund's chief focus.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1997
COMMON STOCK--95.8% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
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AEROSPACE--3.0%
14,600 Rockwell International Corp. .................... $ 762,850
-----------
AUTO PARTS--3.0%
22,900 Genuine Parts Co. ............................... 777,169
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AUTOMOTIVE--3.0%
12,500 General Motors Corp. ............................ 757,813
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BANKS--8.5%
13,300 Bank of New York ................................ 768,906
8,200 BankBoston Corp. ................................ 770,288
10,105 Charter One Financial, Inc. ..................... 637,878
-----------
2,177,072
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CHEMICALS--3.0%
13,400 PPG Industries, Inc. ............................ 765,475
-----------
COMPUTERS & BUSINESS EQUIPMENT--3.0%
10,400 Xerox Corp. ..................................... 767,650
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CONGLOMERATES--3.0%
19,500 Tenneco, Inc. New ............................... 770,250
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CONSTRUCTION MATERIALS--3.0%
15,100 Masco Corp. ..................................... 768,213
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CONTAINERS & GLASS--3.0%
14,800 Temple-Inland, Inc. ............................. 774,225
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DOMESTIC OIL--6.0%
24,000 Ultramar Diamond Shamrock ....................... 765,000
23,000 USX-Marathon Group .............................. 776,250
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1,541,250
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ELECTRIC UTILITIES--6.0%
13,900 Duke Power Co. .................................. 769,712
28,400 Edison International ............................ 772,125
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1,541,837
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FINANCIAL SERVICES--6.1%
9,400 Beneficial Corp. ................................ 781,375
10,400 Fleet Financial Group, Inc. ..................... 779,350
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1,560,725
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FOREST PRODUCTS--4.1%
12,700 Georgia Pacific Corp. ........................... 771,525
12,600 Georgia Pacific Corp. Timber Group .............. 285,863
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1,057,388
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GAS & PIPELINE UTILITIES--3.0%
11,600 El Paso Natural Gas Co. ......................... 771,400
-----------
INSURANCE--6.0%
8,200 Hartford Financial Services Group ............... 767,212
10,000 Lincoln National Corp., Inc. .................... 781,250
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1,548,462
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MISCELLANEOUS--0.4%
1,000 Hvide Capital Trust ............................. 57,500
624 Raytheon Co. .................................... 30,771
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88,271
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PAPER--3.0%
24,200 Willamette Industries, Inc. ..................... 778,937
-----------
REAL ESTATE--4.8%
20,000 Developers Diversified Realty ................... 765,000
12,300 Health Care Property Investments, Inc. .......... 465,094
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1,230,094
-----------
RETAIL--3.0%
17,200 Sears, Roebuck .................................. 778,300
-----------
STEEL--3.0%
29,500 Allegheny Teldyne, Inc. ......................... 763,313
-----------
TELECOMMUNICATION--8.9%
13,400 BellSouth Corp. ................................. 754,587
14,900 GTE Corp. ....................................... 778,525
10,400 SBC Communications, Inc. ........................ 761,800
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2,294,912
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TOBACCO--6.0%
16,900 Philip Morris Companies ......................... 765,781
20,400 RJR Nabisco Holdings Corp. ...................... 765,000
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1,530,781
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TRUCKING & FREIGHT FORWARDING--3.0%
22,900 Teekay Shipping Corp. ........................... 768,581
-----------
Total Common Stock (Identified Cost $23,431,574) 24,574,968
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SHORT TERM INVESTMENTS--9.5%
FACE
AMOUNT DESCRIPTION VALUE (a)
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$2,441,000 Repurchase Agreement with State Street Bank &
Trust Co. dated 12/31/97 at 5.000% to be
repurchased at $2,441,678 on 1/02/98,
collateralized by $2,430,000 U.S. Treasury
Note due 1/31/99 valued at $2,493,532 ......... $ 2,441,000
-----------
Total Short Term Investments (Identified
Cost $2,441,000).............................. 2,441,000
-----------
Total Investments--105.3% (Identified Cost
$25,872,574) (b) .............................. 27,015,968
Other assets less liabilities ................... (1,363,830)
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Total Net Assets--100% .......................... $25,652,138
===========
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on
investments based on cost of $25,872,574 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 ....... $ 1,450,397
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (307,003)
-----------
Net unrealized appreciation ................................. $ 1,143,394
===========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
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December 31, 1997
ASSETS
Investments at value ............................ $27,015,968
Cash ............................................ 3,651
Fund shares sold .............................. 940,929
Dividends and interest ........................ 36,280
Miscellaneous ................................. 7,227
Due from investment advisor ................... 30,957
Prepaid registration expense .................... 25,883
Unamortized organization expenses ............... 13,006
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28,073,901
LIABILITIES
Payable for:
Securities purchased .......................... $2,379,082
Fund shares redeemed .......................... 2,067
Accrued expenses:
Deferred trustees' fees ....................... 352
Accounting and administrative ................. 1,398
Other expenses ................................ 38,864
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2,421,763
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NET ASSETS ........................................ $25,652,138
===========
Net assets consist of:
Capital paid in ............................... $24,352,765
Undistributed net investment income ........... 1,207
Accumulated net realized gains ................ 154,772
Unrealized appreciation on investments ....... 1,143,394
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NET ASSETS ........................................ $25,652,138
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($14,681,247 divided by 834,784 shares of
beneficial interest) ........................... $17.59
======
Offering price per share (100/94.25 of $17.59) .... $18.66*
======
Net asset value and redemption price of Class B
shares ($9,374,851 divided by 532,836 shares of
beneficial interest) ........................... $17.59**
======
Net asset value and redemption price of Class C
shares ($1,596,040 divided by 90,724 shares of
beneficial interest) ........................... $17.59
======
Identified cost of investments .................... $25,872,574
===========
* 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.
<PAGE>
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STATEMENT OF OPERATIONS
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Year Ended December 31, 1997
INVESTMENT INCOME
Dividends .......................................... $ 158,004
Interest ........................................... 36,451
-----------
194,455
Management fees .................................. 41,756
Service fees - A ................................. 11,355
Service and distribution fees - Class B .......... 12,154
Service and distribution fees - Class C .......... 2,076
Trustees' fees and expenses ...................... 2,656
Accounting and administrative .................... 3,496
Custodian ........................................ 37,744
Transfer agent ................................... 25,975
Audit and tax services ........................... 19,910
Legal ............................................ 3,855
Printing ......................................... 11,918
Registration ..................................... 20,837
Amortization of organization expenses ............ 1,209
Miscellaneous .................................... 886
--------
Total expenses ..................................... 195,827
Less expenses waived by the investment adviser
and distributor.................................... (95,677) 100,150
-------- -----------
Net investment income .............................. 94,305
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REALIZED and UNREALIZED GAIN on INVESTMENTS,
Realized gain on:
Investments - net ................................ 326,007
Unrealized appreciation on:
Investments - net ................................ 739,065
--------
Net gain on investment transactions ................ 1,065,072
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NET INCREASE IN NET ASSETS FROM OPERATIONS ........... $ 1,159,377
===========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
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YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
---------- -----------
FROM OPERATIONS
Net investment income .................... $ 47,077 $ 94,305
Net realized gain on investments ......... 155,307 326,007
Unrealized appreciation on investments ... 346,416 739,065
---------- -----------
Increase in net assets from operations ... 548,800 1,159,377
---------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................ (48,153) (75,660)
Class B ................................ 0 (19,575)
Class C ................................ 0 (3,144)
Net realized gain on investments
Class A ................................ (132,742) (157,550)
Class B ................................ 0 (31,171)
Class C ................................ 0 (5,079)
---------- -----------
(180,895) (292,179)
---------- -----------
Increase in net assets derived from
capital share transactions ............. 180,895 22,171,694
---------- -----------
Total increase in net assets ............. 548,800 23,038,892
NET ASSETS
Beginning of the year .................... 2,064,446 2,613,246
---------- -----------
End of the year .......................... $2,613,246 $25,652,138
========== ===========
UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME
Beginning of the year .................... $ (27) $ 2,276
---------- -----------
End of the year .......................... $ 2,276 $ 1,207
========== ===========
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------- --------------- ---------------
THE PERIOD THE PERIOD THE PERIOD
NOVEMBER 15, SEPTEMBER 15, SEPTEMBER 15,
1995(a) YEAR ENDED 1997(a) 1997(a)
THROUGH DECEMBER 31, THROUGH THROUGH
DECEMBER 31, ----------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.50 $12.86 $15.15 $17.06 $17.06
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................. 0.04 0.31 0.25 0.03 0.03
Net Realized and Unrealized Gain (Loss)
on Investments ...................... 0.36 3.11 3.15 0.60 0.60
------ ------ ------ ------ ------
Total From Investment Operations ...... 0.40 3.42 3.40 0.63 0.63
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment
Income .............................. (0.04) (0.30) (0.26) (0.04) (0.04)
Distributions From Net Realized Capital
Gains ............................... 0.00 (0.83) (0.70) (0.06) (0.06)
------ ------ ------ ------ ------
Total Distributions ................... (0.04) (1.13) (0.96) (0.10) (0.10)
------ ------ ------ ------ ------
Net Asset Value, End of Period ........ $12.86 $15.15 $17.59 $17.59 $17.59
====== ====== ====== ====== ======
Total Return (%) (c) .................. 3.2 26.6 22.6 3.7 3.7
Ratio of Operating Expenses to Average
Net Assets (%) (d) .................. 1.50(b) 1.50 1.50 2.25(b) 2.25(b)
Ratio of Net Investment Income to
Average Net Assets (%) .............. 3.58(b) 2.06 1.76 1.01(b) 1.01(b)
Portfolio Turnover Rate (%) ........... 0 45 33 33 33
Average Commission Rate (e) ........... -- $0.0608 $ 0.0600 $0.0600 $0.0600
Net Assets, End of Period (000) ....... $2,064 $ 2,613 $14,681 $9,375 $1,596
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A sales charge in the case of Class A shares and a contingent deferred
sales charge in the case of Class B shares are 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
described in effect to the expense
limitation described in note 4
would have been (%) ............... 5.97 (b) 3.67 3.10 3.85(b) 3.85(b)
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades upon
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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December 31, 1997
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 offers Class A, Class B and Class C shares. The Fund commenced its
public offering of Class A shares on November 28, 1995 and Class B and C shares
on September 15 1997. 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 or contingent deferred sales
charges and do not convert to any class of shares, but they do pay a higher
ongoing distribution fee than Class A shares. 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.
ctual 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, New England Funds
Management L.P., and the 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 for the Funds 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. 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 (excluding short-term investments) for the
Fund for the year ended December 31, 1997 were $22,904,716 and $1,963,279,
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 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., ("NEIC") 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, 1997 are as follows:
FEES EARNED (a)
- ---------------
$17,895 New England Funds Management, L.P.
$23,861 Loomis, Sayles & Company, L.P.
(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 NEIC 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, 1997 these expenses amounted to $3,496 and are shown
separately in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $18,000 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $77 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 up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1997, the Fund paid New England Funds $11,355 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 up to 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 period ended December
31, 1997, the Fund paid New England Funds $3,039 and $519 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 up to 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 period ended December 31, 1997, the Fund paid New England
Funds $9,115 and $1,557 in distribution fees under the Class B and Class C
plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the year ended
December 31, 1997 amounted to $264,263.
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, NEIC or their affiliates, other than registered investment
companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $714
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
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. Effective November 28, 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 Class A average daily net assets and effective
September 15, 1997, 2.25% of the Fund's Class B and Class C average net assets.
As a result of the Fund's expenses exceeding the voluntary expense limitation
during the period ended December 31, 1997, NEFM and Loomis Sayles waived their
entire management fee of $41,756 and New England Funds waived $4,979 of its
service fee and assumed additional expenses of $48,942.
5. CAPITAL SHARES. At December 31, 1997 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, 1996 DECEMBER 31, 1997
----------------- ------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................. 0 $ 0 656,587 $11,309,160
Shares issued in connection with the
reinvestment of:
Dividends from net investment income ...... 3,193 48,153 4,302 73,745
Dividends from net realized gain .......... 8,802 132,742 9,084 155,582
------ -------- ---------- -----------
11,995 180,895 669,973 11,538,487
Shares repurchased .......................... 0 0 (7,694) (132,782)
------ -------- ---------- -----------
Net increase ................................ 11,995 $180,895 662,279 $11,405,705
------ -------- ---------- -----------
<CAPTION>
FOR THE PERIOD
SEPTEMBER 15, 1997(a)
THROUGH
DECEMBER 31, 1997
------------------------
CLASS B SHARES AMOUNT
- ------- ---------- -----------
<S> <C> <C>
Shares sold ..................................................... 536,588 $ 9,256,725
Shares issued in connection with the
reinvestment of:
Dividends from net investment income .......................... 991 17,025
Dividends from net realized gain .............................. 1,617 27,782
---------- -----------
539,196 9,301,532
Shares repurchased .............................................. (6,360) (107,487)
---------- -----------
Net increase .................................................... 532,836 $ 9,194,045
---------- -----------
<CAPTION>
FOR THE PERIOD
SEPTEMBER 15, 1997(a)
THROUGH
DECEMBER 31, 1997
------------------------
CLASS C SHARES AMOUNT
- ------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold ..................................................... 95,043 $ 1,644,267
Shares issued in connection with the
reinvestment of:
Dividends from net investment income .......................... 156 2,679
Dividends from net realized gain .............................. 284 4,871
---------- -----------
95,483 1,651,817
Shares repurchased .............................................. (4,759) (79,873)
---------- -----------
Net increase .................................................... 90,724 1,571,944
---------- -----------
Increase derived from capital shares
transactions .............................. 11,995 $180,895 1,285,839 $22,171,694
====== ======== ========= ===========
(a) Commencement of Operations.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust III and Shareholders of
NEW ENGLAND EQUITY INCOME 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") a series of New England Funds Trust III at December 31, 1997, 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 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, 1997 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 12, 1998
<PAGE>
NEW ENGLAND FUNDS
Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for
Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997,
November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus
for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997,
July 28, 1997, November 17, 1997 and January 1, 1998); and the New England
Equity Income Fund Prospectus for Class A, B and C shares dated September 1,
1997 (as supplemented November 17, 1997 and January 1, 1998).
THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES:
The cover page of each Prospectus is revised to reflect:
o While no initial sales charge applies to Class B or Class C share purchases,
a contingent deferred sales charge (a "CDSC") is imposed upon certain
redemptions of Class B and Class C shares.
o New England Funds Trust I, New England Funds Trust II and New England Funds
Trust III are referred to in the Prospectus as the "Trusts."
THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE
"SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ
AS FOLLOWS:
CLASS C
------------
Maximum Initial Sales Charge Imposed on a Purchase
(as a percentage of offering price)(2) .................... None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable)(2) ............................................ 1.00%
(2) Does not apply to reinvested distributions.
In the tables that appear under "Example" in the "Schedule of Fees" section, the
expense amounts in the Prospectus for Class C shares for the 1 Year period
assume no redemption. If shares are redeemed at period end, expense amounts for
each Fund would be as follows: New England Capital Growth Fund, $33; New England
Balanced Fund, $31; New England International Equity Fund, $35; New England
Value Fund, $31; New England Growth Opportunities Fund, $31; New England Star
Advisers Fund, $35; New England Star Worldwide Fund, $44; New England Star Small
Cap Fund, $38; New England Equity Income Fund, $33.
THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS
REVISED TO READ AS FOLLOWS:
Class C shares are offered at net asset value, without an initial sales charge,
are subject to a 0.25% annual service fee and a 0.75% annual distribution fee,
are subject to a CDSC of 1.00% on redemptions made within one year from the date
of purchase and do not convert into another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such investment
dealer. The Distributor will retain the service and distribution fees assessed
against Class C shares in the first year of investment, and the entire amount of
the CDSC paid by Class C shareholders upon redemption in the first year, in
order to compensate the Distributor for providing distribution- related services
to the Fund in connection with the sale of Class C shares, and to reimburse the
Distributor, in whole or in part, for the commissions paid (and related
financing costs) to investment dealers at the time of a sale of Class C shares.
Unlike Class B shares, there are no conversion features associated with Class C
shares; therefore, if Class C shares are held for more than eight years Class C
shareholders will thereafter be subject to higher distribution fees than
shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of another series of the Trusts. If an exchange is
made to Class C shares of a Money Market Fund, then the one-year holding period
for purposes of determining the expiration of the CDSC will stop and resumes
only when an exchange is made back into Class C shares of a series of the
Trusts. If the Money Market Fund shares are redeemed rather than exchanged back
into a series of the Trusts, then the CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held longest are the first
to be redeemed.
The CDSC on Class C shares is not imposed on shares purchased prior to March 1,
1998.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gain distributions. The
first year of purchase ends one year after the day on which the purchase was
accepted.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested. The CDSC may be
eliminated for certain persons and organizations. See "Sales Charges--General"
below.
THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS--
CLASS C SHARES" IS REVISED TO READ AS FOLLOWS:
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust - Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD SENTENCE
IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
Total return is measured by comparing the value of a hypothetical $1,000
investment in a class at the beginning of the relevant period to the value of
the investment at the end of the period (assuming deduction of the current
maximum sales charge on Class A shares, automatic reinvestment of all dividends
and capital gains distributions and, in the case of Class B and C shares,
imposition of the CDSC relevant to the period quoted).
<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.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its
earnings per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more
aggressive than "value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
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
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
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 Funds current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
<PAGE>
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- ----------------------
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02116
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- ---------------------
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HONORS COMMITMENT TO:
INVESTORS
- ---------------------
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EI56-1297
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