<PAGE>
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England Bullseye Fund
[graphic omitted]
WHERE
THE BEST
MINDS
MEET(R)
- -----------------
JUNE 30, 1999
- -----------------
<PAGE>
AUGUST 1999
- --------------------------------------------------------------------------------
[Photo of Bruce R Speca]
"Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing."
Dear Shareholder,
Performance results for the New England Family of Funds were driven mainly by
two important changes that took place in our financial markets during the first
half of 1999. First, the long, upward climb of large-capitalization stocks
slowed dramatically as attention turned to stocks with more reasonable
valuations. Then, bond investors grew fearful that our persistently strong
economy would lead the Federal Reserve Board to impose higher interest rates.
Your manager's commentary on the following pages details how these trends
affected your fund's strategy and performance.
As I watch investments come in and out of favor, I'm reminded of the importance
of asset allocation - the practice of dividing your portfolio among different
kinds of stocks and bonds. The idea is to own more or less of each investment
type according to your feelings about risk and your investment time horizon.
Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing. In addition to broadening diversification,
it seeks to avoid exposure to narrow market segments and can help reduce
volatility.
While a diversified portfolio may have given solid returns during the past year,
many investors were disappointed when they compared those returns to the
performance of large-company growth stocks or to the soaring returns of Internet
stocks. Suddenly, investors were asking: Is asset allocation dead?
Certainly not! Like so much in life, market cycles are inevitable. Different
categories of investments will be popular at different times, and a sensible
asset allocation program can help you as market trends change.
I know it can be tempting to jump on a bandwagon and go after "easy money." But
I encourage you, instead, to maintain a rational, long-term perspective and to
consult your financial representative regularly to review and fine-tune your
investments, including a well-diversified asset allocation program.
Thank you for your continued interest. We look forward to helping you achieve
your long-term financial objectives.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
<PAGE>
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NEW ENGLAND BULLSEYE FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1999
- --------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown below appears with and
without sales charges and includes Fund expenses and management fees. A
securities index measures the performance of a theoretical portfolio. Unlike a
fund, the index is unmanaged and does not have expenses that affect the results.
It is not possible to invest directly in an index. In addition, few investors
could purchase all of the securities necessary to match the index, and would
incur transaction costs and other expenses even if they could.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
[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 Bullseye Fund's
inception 3/31/98, compared to the S&P 500 Index. The data points from the graph
are as follows:]
- --------------------------------------------------------------------------------
MARCH 1998 (INCEPTION) THROUGH JUNE 1999
Net Maximum
Asset Sales S&P
Value(1) Charge(2) 500(5)
- --------------------------------------------------------------------------------
3/98 $10,000 $ 9,425 $10,000
6/98 $ 9,672 $ 9,116 $11,394
9/98 $ 8,464 $ 7,977 $11,770
12/98 $10,120 $ 9,538 $10,601
3/99 $ 9,752 $ 9,191 $11,128
6/99 $10,840 $10,217 $11,912
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 C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvestment of
distributions.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
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NEW ENGLAND BULLSEYE FUND
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/99
- --------------------------------------------------------------------------------------------------
CLASS A (Inception 3/31/98) 6 MONTHS 1 YEAR SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1), (4) 7.1% 12.1% 6.7%
With Maximum Sales Charge(2), (4) 1.0 5.6 1.8
- --------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B (Inception 3/31/98) 6 MONTHS 1 YEAR SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1), (4) 6.8% 11.4% 6.0%
With CDSC(3), (4) 1.8 6.4 2.9
- --------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C (Inception 3/31/98) 6 MONTHS 1 YEAR SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1), (4) 6.8% 11.4% 6.0%
With CDSC(3), (4) 5.8 10.4 6.0
- --------------------------------------------------------------------------------------------------
<CAPTION>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS A CLASS B CLASS C
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR INCEPTION INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C>
S&P 500 Index(5) 12.4% 22.7% 20.9% 20.9% 20.9%
Lipper Growth Average(6) 11.7 18.9 16.5 16.5 16.5
Morningstar Mid Cap Value Average(7) 11.2 5.9 1.8 1.8 1.8
- --------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO CHARTS
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.
(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.
Returns would have been lower had sales charges been reflected.
(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
reinvestment of all distributions and, for Class B shares, assumes that a
maximum 5.00% sales charge is applied to redemptions. The sales charge will
decrease over time, declining to zero six years after the purchase of
shares. With CDSC performance for Class C shares assumes a maximum 1.00%
sales charge on redemptions within the first year of purchase.
(4) This Fund waived certain fees and expenses during the period indicated and
its average total return would have been lower had these fees not been
waived.
(5) The Standard & Poor's Composite Index of 500 Stocks (S&P 500(R)) is a market
value-weighted unmanaged index of common stock prices. It is a common
measure of stock total return performance. The performance of the S&P 500
has not been adjusted for ongoing management, distribution and operating
expenses and sales charges applicable to mutual fund investments. It is not
possible to invest directly in an index.
(6) Lipper Growth Average is an average (calculated on the basis of net asset
value) of funds with similar investment objectives as calculated by Lipper
Inc., an independent mutual fund ranking service.
(7) Morningstar Mid Cap Value Average is an average (calculated on the basis of
net asset value) of funds with similar investment objectives as calculated
by Morningstar, Inc., an independent mutual fund ranking service.
<PAGE>
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NEW ENGLAND BULLSEYE FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
[photo of William K. Jurika]
[photo of Guy Elliffe]
WILLIAM K. JURIKA,
GUY ELLIFFE
JURIKA & VOYLES, L.P.
Q. How did New England Bullseye Fund perform during the past six months?
For the six months ending June 30, 1999, the Fund had a return of 7.1% on Class
A shares calculated at net asset value, reflecting a $0.90 per share gain to
$13.55. This lagged the 12.4% performance of the Standard & Poor's Composite
Index of 500 Stocks (S&P 500). It is important to remember that while the S&P
500 -- made up of 500 of the largest-capitalization stocks in the U.S. market
- -- can offer a helpful long-term comparison to the Fund's performance, the Fund
invests in a highly concentrated portfolio of fifteen to twenty companies, with
a strong emphasis on mid-cap stocks.
Q. What was the market environment like during the first half of 1999?
The first two quarters of 1999 were very different from each other. During the
first quarter, we witnessed a continuation of the trends that characterized the
market over the past few years. Namely, investors favored large-capitalization
growth stocks, especially those in the technology, consumer goods and financial
services sectors.
In the second quarter, however, market sentiment changed somewhat and we saw
small- and mid-capitalization companies start to perform better than they had
been. Value stocks -- those perceived to be attractively priced relative to the
companies' underlying assets -- started to outperform growth stocks. This shift
resulted from a broadening of global economic growth in Japan and Asia. This
increasingly positive economic outlook translated into improved valuations for a
wide variety of underpriced companies. Some commodities, particularly those
related to energy, also showed signs of a rebound.
This trend toward value proved to be very fruitful for the Fund, which was
focused on mid-capitalization companies with solid business models selling at
attractive prices. There has been a large disparity between the valuations of
large-cap growth stocks and the rest of the market. But the improving global
economy gave investors more confidence in looking beyond the narrow group of
stocks that has led the market for some time.
Interest rates also played a part in this transition. The sustained strong
growth of the U.S. economy, coupled with the improved global outlook, caused
interest rates to rise. Signs of increasing inflation pressures and anticipation
that the Federal Reserve Board would hike short-term interest rates (as it did,
ultimately, in June), also contributed to the improved outlook for mid-cap value
stocks. Higher interest rates made investors less willing to pay the extended
valuations that many large-cap growth stocks have enjoyed over the past few
years.
- ------------------------------------------
YOUR FUND'S INVESTMENTS -- 6/30/99
% of
Security Net Assets
- ------------------------------------------
1. Santa Fe International Corp. 10.0
- ------------------------------------------
2. AES Corp. (c) 8.3
- ------------------------------------------
3. Republic Services, Inc. (c) 7.9
- ------------------------------------------
4. Baxter International, Inc. 6.6
- ------------------------------------------
5. Newell Rubbermaid, Inc. 6.4
- ------------------------------------------
6. Galileo International, Inc. 4.8
- ------------------------------------------
7. Enron Corp. 4.8
- ------------------------------------------
8. First Data Corp. 4.8
- ------------------------------------------
9. ReliaStar Financial Corp. 4.6
- ------------------------------------------
10. Parker Hannifin Corp. 4.5
- ------------------------------------------
Portfolio holdings and asset allocations
will vary.
- ------------------------------------------
Q. Where did you find investment opportunities?
One fertile source of investment opportunity was the energy sector. In this
sector, the Fund was helped by investments in inexpensive stocks that were
closely linked to a rebound in energy prices from very depressed levels.
Companies that helped the Fund's performance included Vastar Resources, a
natural gas company and Santa Fe International, an offshore drilling firm. In
addition, the Fund targeted some companies standing to benefit from deregulation
in the sector. AES, the largest independent power producer in the world, and
Enron, the leading trader of energy contracts, were two investments that worked
out well.
Technology also proved to be an attractive sector. We very firmly believe in the
long-term trend of businesses employing technology to remain competitive.
Synopsys, a semiconductor-design software company and Seagate Technologies, a
leading manufacturer of disc drives, both positively influenced performance.
Other stocks that proved to be strong performers for the Fund were Federal
Express, a beneficiary of improved supply-chain management; First Data Corp., a
leading processor of financial transactions; and Republic Industries, a waste
management company.
In addition, demographic trends inspired our investment in the health care
sector, including Baxter International, a company with strong market share in
kidney dialysis and blood products; and Cigna, a leading managed care company.
Q. Were there any disappointments for the Fund?
Even though the Fund performed well in the first six months of the year, each
period brings its share of disappointments. On the down side, Washington Mutual,
a savings and loan, suffered from the rising interest-rate environment. Also,
CIT Group's stock underperformed as problems emerged in a potential merger with
Newcourt Credit.
Q. What's your outlook?
We are optimistic that market trends will continue to favor the investment style
of the Fund. We believe the market will become increasingly focused on stock
valuations, looking for companies that offer sustainable earnings growth, strong
cash-flow generation and low valuations. To the extent that rising interest
rates continue to hurt stocks with higher price/earnings ratios, the Fund should
be positioned for the revaluation of the market that tends to occur when
interest rates rise.
In addition, the portfolio should be well positioned to benefit from broad
earnings growth and healthy domestic and global economies. Companies with
international businesses should do well, if international economies sustain
growth even if the domestic economy is somewhat constrained by Federal Reserve
Board monetary policy. The Fund should benefit from such a scenario because most
of the companies in the Fund have strong international operations.
Note to Shareholders: As of May 3, 1999, Guy Elliffe replaced Peter Goetz as the
Fund's portfolio co-manager.
The portfolio managers' commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes. The Fund invests in foreign
securities. Investing in foreign securities involves special risks. Investing in
small-cap companies involves greater risk than is customarily associated with
more established companies. The Fund invests in REITS which are subject to
changes in underlying real estate values, rising interest rates, limited
diversification of holdings, higher costs and prepayment risk associated with
related mortgages. Compared with other funds, the Fund may invest a greater
percentage of its assets in a particular company. Therefore, the Fund's return
could be significantly affected by the performance of any one of the small
number of stocks in its portfolio. These risks may increase share price
volatility. See the Fund's prospectus for details.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of June 30, 1999
(unaudited)
COMMON STOCK -- 98.6% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (A)
BUSINESS SERVICES -- 4.8%
17,600 Galileo International, Inc. .................. $ 940,500
--------------
CHEMICALS -- 3.8%
21,500 OM Group, Inc. ............................... 741,750
--------------
COMPUTERS & BUSINESS EQUIPMENT-- 8.2%
28,900 Seagate Technology (c) ....................... 740,563
14,600 Xerox Corp. .................................. 862,312
--------------
1,602,875
--------------
CONSTRUCTION MATERIALS -- 4.5%
19,100 Parker-Hannifin .............................. 873,825
--------------
DRUGS & HEALTH CARE -- 9.8%
21,200 Baxter International, Inc. ................... 1,285,250
22,200 Elan Corp. plc (ADR) (c) ..................... 616,050
--------------
1,901,300
--------------
ENERGY -- 8.3%
27,800 AES Corp. (c) ................................ 1,615,875
--------------
FINANCE -- 3.9%
26,400 CIT Group, Inc. .............................. 762,300
--------------
GAS & PIPELINE UTILITIES -- 4.8%
11,400 Enron Corp. .................................. 931,950
--------------
HOUSEHOLD PRODUCTS -- 6.4%
26,800 Newell Rubbermaid, Inc. ...................... 1,246,200
--------------
INSURANCE -- 8.7%
9,000 CIGNA Corp. .................................. 801,000
20,475 ReliaStar Financial Corp. .................... 895,781
--------------
1,696,781
--------------
INTERNATIONAL OIL -- 10.0%
84,850 Santa Fe International Corp. ................. 1,951,550
--------------
OIL & GAS -- 4.2%
15,700 Vastar Resources, Inc. ....................... 823,269
--------------
RETAIL - GROCERY -- 4.3%
16,243 Albertson's, Inc. ............................ 837,529
--------------
SERVICES -- 4.8%
18,900 First Data Corp. ............................. 924,919
--------------
TRUCKING & FREIGHT FORWARDING -- 4.2%
15,000 FDX Corp. (c) ................................ 813,750
--------------
WASTE MANAGEMENT -- 7.9%
61,800 Republic Services, Inc. (c) .................. 1,529,550
--------------
Total Common Stock
(Identified Cost $16,732,686) .............. 19,193,923
--------------
Total Investments-- 98.6%
(Identified Cost $16,732,686) (b) .......... $ 19,193,923
Other assets less liabilities ................ 265,595
--------------
Total Net Assets-- 100% $ 19,459,518
==============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 1999 the net
unrealized appreciation on investments based on cost of
$16,732,686 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 .............................................. $ 2,898,280
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value............................................. (437,043)
--------------
Net unrealized appreciation $ 2,461,237
==============
(c) Non-income producing security.
ADR An American Depository Receipt (ADR) is a certificate issued by a U.S. Bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1999
(unaudited)
ASSETS
Investments at value
(Identified Cost $16,732,686) ........ $ 19,193,923
Receivable for:
Fund shares sold .................. 155,769
Securities sold ................... 295,340
Dividends and interest ............ 15,409
Prepaid organization costs ........ 15,684
------------
19,676,125
LIABILITIES
Payable for:
Due to custodial bank ............. $139,790
Fund shares redeemed .............. 38,164
Accrued expenses:
Deferred trustees' fees ........... 820
Accounting and administrative ..... 3,274
Other expenses .................... 34,559
--------
216,607
------------
NET ASSETS ............................. $ 19,459,518
============
Net Assets consist of:
Capital paid in ................... $ 17,538,571
Undistributed net investment income (loss) (96,059)
Accumulated net realized losses ... (444,231)
Unrealized appreciation on investments - net 2,461,237
------------
NET ASSETS ............................. $ 19,459,518
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($9,060,293 / 668,591 shares of beneficial interest) $ 13.55
============
Offering price per share (100 / 94.25 of $13.55) $ 14.38*
============
Net asset value and offering price of Class B shares
($8,176,167 / 607,868 shares of beneficial interest) $ 13.45**
============
Net asset value and offering price of Class C shares
($2,223,058 / 165,345 shares of beneficial interest) $ 13.44**
============
* 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
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1999
(unaudited)
INVESTMENT INCOME
Dividends ............................. $ 101,026
Interest .............................. 15,199
------------
116,225
Expenses
Management fees ...................... $ 93,596
Service fees - Class A ............... 11,292
Service and distribution fees -
Class B ......................... 40,383
Service and distribution fees -
Class C ......................... 12,973
Trustees' fees and expenses ...... 3,351
Accounting and administrative .... 9,858
Custodian ........................ 28,758
Transfer agent ................... 56,614
Audit and tax services ........... 6,900
Legal ............................ 1,110
Printing ......................... 6,595
Registration ..................... 28,135
Amortization of organization
expense ......................... 2,071
Insurance ........................ 168
Miscellaneous .................... 3,556
--------
Total expenses ........................ 305,360
Less expense waived by the investment
adviser and subadviser .............. (93,473) 211,887
-------- ------------
Net investment loss ................... (95,662)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized loss on investments-- net .... 212,209
Unrealized appreciation on investments-- net 1,123,584
------------
Net gain on investment transactions .... 1,335,793
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 1,240,131
============
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
FOR THE PERIOD SIX MONTHS
MARCH 31,1998(a) ENDED
THROUGH DECEMBER 31, JUNE 30,
1998 1999
-------- ------------
FROM OPERATIONS
Net investment loss ................. $(81,543) $ (95,662)
Net realized gain (loss) on investments (656,441) 212,209
Net unrealized appreciation on
investments ........................ 1,337,654 1,123,584
----------- ------------
Increase in net assets from operations 599,670 1,240,131
----------- ------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS 20,658,273 (3,038,556)
----------- ------------
Total increase (decrease) in net assets 21,257,943 (1,798,425)
NET ASSETS
Beginning of the period ............. 0 21,257,943
----------- ------------
End of the period ................... $21,257,943 $ 19,459,518
=========== ============
UNDISTRIBUTED NET INVESTMENT LOSS
End of the period ................... $ (397) $ (96,059)
=========== ============
(a) Commencement of operations.
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Class C
-------------------------- ------------------------- ---------------------------
MARCH 31, MARCH 31, MARCH 31,
1998(A) SIX MONTHS 1998(A) SIX MONTHS 1998(A) SIX MONTHS
THROUGH ENDED THROUGH ENDED THROUGH ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1998 1999 1998 1999 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 12.50 $ 12.65 $ 12.50 $ 12.60 $ 12.50 $ 12.59
--------- --------- --------- --------- --------- ---------
Income (Loss) from
investment operations
Net investment
income (loss) (b) .... (0.02) (0.04) (0.08) (0.09) (0.08) (0.10)
Net realized and
unrealized gain
(loss) on Investments 0.17 0.94 0.18 0.94 0.17 0.95
--------- --------- --------- --------- --------- ---------
Total from investment
operations ........... 0.15 0.90 0.10 0.85 0.09 0.85
--------- --------- --------- --------- --------- ---------
Net asset value,
end of period ........ $ 12.65 $ 13.55 $ 12.60 $ 13.45 $ 12.59 $ 13.44
========= ========= ========= ========= ========= =========
Total return (%) (c) .. 1.2 7.1 0.8 6.8 0.7 6.8
Ratio of operating
expenses to average
net assets (%) (d) (e) 1.75 1.75 2.50 2.50 2.50 2.50
Ratio of net investment
income (loss) to
average net
assets (%) (e) ....... (0.28) (0.57) (1.03) (1.32) (1.03) (1.32)
Portfolio turnover
rate (%) ............. 68 113 68 113 68 113
Net assets,
end of period (000) .. $ 9,653 $ 9,060 $ 8,618 $ 8,176 $ 2,987 $ 2,223
(a) Commencement of operations.
(b) Per share net investment loss has been calculated using the average shares outstanding during the period.
(c) A sales charge in the case of Class A Shares and a contingent deferred sales charge in the case of Class B
and Class C Shares is not reflected in total return calculations.
(d) The ratio of operating expenses to average net assets without giving effect to the voluntary expense limitation
described in Note 4 to the Financial Statements, would have been (%)(e):
3.14 2.70 3.89 3.45 3.89 3.45
(e) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the Period Ended June 30, 1999
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. 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 long-term 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 is 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 other class of shares, but they do pay a
higher ongoing distribution fee than Class A shares and may be subject to a
contingent deferred sales charge if those shares are redeemed within one year.
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 market 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. 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.
These differences are primarily due to differing treatments for non-deductible
expenses and net operating losses for book and tax purposes. 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 1998 in connection with the
Fund's organization, amounting to $21,223 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, 1999
purchases and sales of securities (excluding short-term investments) were
$10,804,519 and $13,381,498, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.95% of the first $200 million of the Fund's
average daily net assets, 0.90% of the next $300 million and 0.85% of such
assets in excess of $500 million reduced by payments to the Fund's investment
subadviser, Jurika & Voyles L.P. ("Jurika & Voyles"), at the rate of 0.57% of
the first $200 million of the average daily net assets of the Fund, 0.50% of the
next $300 million of such assets and 0.43% of such assets in excess of $500
million. Certain officers and directors of NEFM are also officers or Trustees of
the Fund. NEFM and Jurika & Voyles 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 Jurika & Voyles under the management and subadvisory
agreements in effect during the six months ended June 30, 1999 are as follows:
Fees Earned (a)
---------------
NEFM $ 37,438
Jurika & Voyles 56,158
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
The annualized effective management fee for the six months ended June 30, 1999
was 0.95%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund reimburses NSC for all or part of
NSC's 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, 1999 these
expenses amounted to $9,858 and are shown separately in the financial statements
as accounting and administrative.
C. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent for
the Fund and Boston Financial Data Services serves as the sub-transfer agent for
the Fund. For the six months ended June 30, 1999, the Fund paid NSC $11,292 as
compensation for its services in that capacity.
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, L.P. ("New England
Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest), 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, 1999, the Fund paid New England
Funds $11,292 in fees under the Class A Plan.
Under the Class B and Class C Plans, 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, 1999, the Fund paid New England Funds $10,096 and $3,243 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, 1999, the Fund paid New England Funds $30,287
and $9,730 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, 1999 amounted to $65,845.
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, NSC or their affiliates. Each other Trustee receives a
retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500
for each meeting of the Board of Trustees attended. Each committee member
receives an additional retainer fee at the annual rate of $6,000 while each
committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual
rate of $4,000. These fees are allocated to the various New England Funds based
on a formula that takes into account, among other factors, the relative net
assets of each fund.
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. Deferred amounts remain in the Fund until distributed in
accordance with the Plan.
4. EXPENSE LIMITATIONS. Under a fee deferral arrangement and expense
reimbursement arrangement, NEFM and Jurika & Voyles have agreed, until further
notice to defer their respective management and sub-advisory fees for the Fund
and, if necessary, NEFM has agreed to bear certain expenses associated with the
Fund, to the extent necessary to limit the Fund's expenses to an annual rate of
1.75% of the Fund's Class A shares, 2.50% of the Fund's Class B and Class C
shares, subject to the obligation of the Fund to pay NEFM and/or Jurika & Voyles
such deferred fees (but not expenses borne) in later periods to the extent that
the Fund's expenses fall below the annual rate of 1.75% of the Fund's Class A
shares, 2.50% of the Fund's Class B and Class C shares provided, however, that
the Fund is not obligated to pay any such deferred fees more than two years
after the end of the fiscal year in which the fee was deferred. As a result of
the Fund's expenses exceeding the expense limitation during the six months ended
June 30, 1999, Jurika & Voyles deferred their entire management fee of $56,158
and NEFM deferred its advisory fees of $93,596 by $93,473.
Expenses deferred in 1998 (subject to repayment until December 31, 2000): NEFM
and Jurika & Voyles deferred their entire management fee of $115,268 and NEFM
assumed additional expenses of $53,944.
5. CAPITAL SHARES. At June 30, 1999 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B,
Class C capital shares. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 31, 1998(A)
THROUGH SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ............................ 977,480 $ 11,869,164 101,186 $ 1,246,301
Shares repurchased ..................... (214,356) (2,450,111) (195,666) (2,423,190)
------------ ------------ ------------ ------------
Net increase (decrease) ................ 763,124 $ 9,419,053 (94,480) $ (1,176,889)
------------ ------------ ------------ ------------
<CAPTION>
FOR THE PERIOD
MARCH 31, 1998(A)
THROUGH SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ............................ 777,580 $ 9,366,653 112,202 $ 1,392,539
Shares repurchased ..................... (93,769) (1,075,313) (188,145) (2,346,586)
------------ ------------ ------------ ------------
Net increase (decrease) ................ 683,811 $ 8,291,340 (75,943) $ (954,047)
------------ ------------ ------------ ------------
<CAPTION>
FOR THE PERIOD
MARCH 31, 1998(A)
THROUGH SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ----------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ............................ 277,249 $ 3,391,994 13,775 $ 174,933
Shares repurchased ..................... (40,069) (444,114) (85,599) (1,082,553)
------------ ------------ ------------ ------------
Net increase (decrease) ................ 237,180 $ 2,947,880 (71,824) $ (907,620)
------------ ------------ ------------ ------------
Increase (decrease) derived from capital
shares transactions .................. 1,684,115 $ 20,658,273 (242,247) $ (3,038,556)
============ ============ ============ ============
</TABLE>
(a) Commencement of operations.
6. NON-DIVERSIFIED STATUS. Compared with other mutual funds, the Fund may invest
a greater percentage of its assets in a particular company. Therefore, the
Fund's return could be significantly affected by the performance of any one of
the small number of stocks in its portfolio.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth and Income Fund
(formerly Growth Opportunities Fund)
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust,
Money Market Series
Tax Exempt Money Market Trust
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
To learn more, and for a free prospectus, contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it is
preceded or accompanied by the Fund's current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of New England Funds are
members of the National Association of Securities Dealers, Inc. (NASD). As a
service to investors, the NASD has asked that we inform you of the availability
of a brochure on its Public Disclosure Program. The program provides access to
information about securities firms and their representatives. Investors may
obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web
site at www.NASDR.com.
- --------------------------------------------------------------------------------
Y2K Readiness Report: New England Funds has kept pace with the Y2K challenge.
Mission critical systems have been tested and non-mission critical systems are
scheduled for completion by September 30, 1999. Y2K is a top priority at New
England Funds. For more information on our Y2K readiness, please visit our Web
site at www.mutualfunds.com.
This material represents Year 2000 Readiness Disclosure pursuant to the Year
2000 Information and Readiness Disclosure Act.
- --------------------------------------------------------------------------------
<PAGE>
------------------
[LOGO](R) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
------------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
BE58-0699
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