<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England
Equity Income Fund
[graphic omitted]
Where
The Best
Minds
Meet(R)
- -----------------
December 31, 1998
- -----------------
<PAGE>
FEBRUARY 1999
- --------------------------------------------------------------------------------
[Photo of Bruce R. Speca]
- --------------------------------------------------------------------------------
"Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
- --------------------------------------------------------------------------------
In September 1998, I became President of New England Funds. As an 18-year
veteran of the mutual fund industry, I was pleased and honored to accept this
important post. In my first message to you, I hope to present what I believe
you, our valued shareholders, really want to know and to offer it in a
straightforward manner.
How did my fund perform?
There's no question that long-term performance is the bottom line of your
investment program. With that in mind, please review the other sections of this
report. You'll see your fund's performance and commentary from your fund manager
that summarizes the fund's successes and shortcomings and the outlook for the
year ahead.
Our assessment of New England Funds' overall performance in 1998 is that we had
a solid, but not spectacular, year. While extremely pleased with both absolute
and relative returns in many of our stock and bond portfolios, we were
disappointed by the results of those equity funds that pursue a 'value' rather
than a 'growth' strategy. Value stocks were largely ignored in 1998, as
investors focused on very large, high visibility growth stocks (indeed, 45% of
the gain in the Standard & Poor's 500 Stock Index --a market value-weighted,
unmanaged index of common stock prices for 500 selected stocks -- came from just
10 stocks!) and select technology companies.
Much of the underperformance in value-oriented funds can be attributed to market
cycles, but we continue to pursue strategies to increase returns in these funds.
Can the stock market keep going up?
Like any winning streak, sooner or later the market will
experience setbacks. Does that mean 1999 will see the last
burst of energy from the bull market? It's easy to argue both sides of this
question. Employment is high, inflation is low and economic growth is
continuing. But corporate profits may start to lag and commodity prices, notably
oil, are depressed around the world. The conclusion? Economists, like weathermen
and other forecasters, can only hope to be right more often than they are wrong.
- --------------------------------------------------------------------------------
Not FDIC insured May lose value No bank guarantee
- --------------------------------------------------------------------------------
<PAGE>
My Own Two Cents
All too often investors lament, "What I could have made if only . . ." instead
of "What I actually made." But experience has taught me that the more important
question is, "Did I stick with my investment program and make progress toward my
financial goals?"
Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score.
The mutual fund industry has become extremely complex, with more funds, new
strategies and approaches to analyzing performance. What hasn't changed is your
financial representative's primary objective: to help you sort it all out and
increase your returns in line with your goals.
Your financial adviser can help you avoid being distracted by the daily noise
and avoid what I view as the most important risk that investors face. It's the
risk of not staying invested and possibly falling short of your long-term goals.
Your adviser will help you stick with your investment program during periods of
uncertainty.
One last thought: All of us at New England Funds appreciate the trust that you
and your representative have placed in us. We look forward to serving you in the
years ahead.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
Progress on the Y2K Front
- --------------------------------------------------------------------------------
New England Funds has been and continues to engage in initiatives aimed at
having our computer systems tested and ready to function capably for the Year
2000. We are insisting on the same standard from vendors whose systems must
interact reliably with ours as well as from the subadvisers to our funds. We are
monitoring their progress and pursuing assurances of their readiness. Our
systems are being tested on a four-digit format (2000, not 00) and updated as
needed to perform competently. Additionally, we are developing contingency plans
to diminish the possibility of inconvenience related to Year 2000. Stay informed
on our Year 2000 readiness by visiting our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness disclosure pursuant to the Year
2000 Information and Readiness Act.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND EQUITY INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
PUTTING PERFORMANCE IN PERSPECTIVE
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown 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 Eqity Income Fund's
inception on 11/28/95, compared to the S&P 500 Index. The data points from the
graph are as follows:]
NOVEMBER 1995 (INCEPTION) THROUGH DECEMBER 1998
Net With Maximum S&P
Asset Value(1) Sales Charge(2) 500(4)
-------------- --------------- ------
11/28/95 $10,000 $ 9,425 $10,000
12/95 $10,321 $ 9,728 $10,215
6/96 $11,356 $10,703 $11,245
12/96 $13,068 $12,316 $12,555
6/97 $14,629 $13,788 $15,140
12/97 $16,026 $15,105 $16,737
6/98 $17,002 $16,025 $19,694
12/98 $16,455 $15,509 $21,510
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and Class C share
performance will vary based on differences in inception date, fees and sales
charges. All Index and Fund performance assumes reinvestment of distributions.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND EQUITY INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
- --------------------------------------------------------------------------------
CLASS A (Inception 11/28/95) 1 YEAR SINCE INCEPTION
Net Asset Value1 2.7% 17.5%
With Max. Sales Charge(2) -3.2% 15.3
- --------------------------------------------------------------------------------
CLASS B (Inception 9/15/97) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.0% 4.4%
With CDSC3 -3.0 1.3
- --------------------------------------------------------------------------------
CLASS C (Inception 9/15/97) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.0% 4.5%
With CDSC(3) 1.0 4.5
- --------------------------------------------------------------------------------
SINCE SINCE
CLASS A CLASS B & C
COMPARATIVE PERFORMANCE 1 YEAR INCEPTION INCEPTION
S&P 500 Stock Index(4) 28.5% 28.1% 27.2%
Lipper Equity Income Average(5) 10.9 18.9 10.6
Morningstar Large Value Avg.(6) 12.3 19.9 10.3
- --------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. All Index and Fund performance assumes reinvestment of
distributions.
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 Sale Charge (CDSC) performance for Class B shares
assumes that a maximum 5% sales charge is applied to redemptions. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares. With CDSC performance for Class C shares assumes a
maximum 1% sales charge on redemptions within the first year of purchase.
(4) Standard & Poor's Composite Index of 500 Stocks (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
Inc., an independent mutual fund ranking service. Class A since inception
return is calculated from 11/30/95. Class B and C since inception returns
are calculated from 9/30/97.
(6) Morningstar Large Value Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Morningstar Inc., an
independent mutual fund ranking service. Class A since inception return is
calculated from 11/30/95. Class B and Class C since inception returns are
calculated from 9/30/97.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND EQUITY INCOME FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
[Photo of Mauricio F. Cevallos]
[Photo of Tom Kolefas]
[Photo of Peter Ramsden]
Mauricio F. Cevallos,
Tom Kolefas,
Peter Ramsden
Loomis, Sayles & Company, L.P.
Q. Please tell us about New England Equity Income Fund's performance during
1998.
For the 12 months ending December 31, 1998, New England Equity Income Fund's
Class A shares had a total return of 2.7% based on net asset value. This return
includes a $0.03 per share gain and distributions of $0.43 per share. This
performance significantly lagged the 28.5% return of the Standard & Poor's 500
Composite Index of Stocks (the "S&P 500"), whose performance was largely driven
by a few large-company growth stocks. The Fund, however, tends to emphasize a
value-based approach. During 1998, the performance of value stocks generally
lagged that of growth stocks.
Q. What was the investment environment in 1998?
Despite more ups and downs than in the previous several years, by year-end 1998
a fourth year of remarkable increases had been recorded. However, a majority of
the market's gains were once again concentrated in relatively few
large-capitalization growth stocks.
After peaking in mid July, the market stumbled on renewed Asian jitters and
their expected impact on the earnings of U.S. firms. The market had lost nearly
10%, when, in early August, Russia defaulted on a portion of its debt and
investors sought to limit their emerging market exposure. Many investors feared
a broader global economic meltdown and rushed to increase their cash allocation.
This panic reached its extreme point on August 31 when the market lost 6.8% in
just one day. The market rebounded, rising 6.4% in September. But the recovery
was cut short by the failure of Long-Term Capital Management, a large, highly
leveraged hedge fund, whose $3.6 billion bailout orchestrated by a consortium of
15 or more investment banks raised serious concerns over the matter of credit
risk in both the equity and bond markets. By October 8 the market had erased
September's gains and seemed about to head lower. As 1998 drew to a close, the
uncertainty in the markets caused by the Clinton scandal and the threat of a war
in Iraq kept investors away from value stocks and further focused demand for
stocks with steady growth prospects.
Meanwhile, two powerful forces were at work in the background that combined to
support high equity valuations -- lower interest rates and lower oil prices. The
Federal Reserve Board cut short-term interest rates three times between
September 29 and November 17. This rapid series of cuts reassured investors that
the Fed was determined not to let our economy suffer because of events overseas,
and that inflation presented no near-term threat. The response, beginning in
early October was euphoric; the S&P 500 rebounded a stunning 24% in just two
months.
YOUR FUND'S 10 LARGEST INVESTMENTS -- 12/31/98
% of
Company Net Assets
- --------------------------------------------------------------------------------
1. Warnaco Group 4.1
- --------------------------------------------------------------------------------
2. Philip Morris Cos. 3.8
- --------------------------------------------------------------------------------
3. American General 3.7
- --------------------------------------------------------------------------------
4. Bank of New York 3.6
- --------------------------------------------------------------------------------
5. GTE Corp. 3.5
- --------------------------------------------------------------------------------
6. Fleet Financial Group, Inc. 3.4
- --------------------------------------------------------------------------------
7. RJR Nabisco Holdings Corp. 3.3
- --------------------------------------------------------------------------------
8. Masco Corp. 3.2
- --------------------------------------------------------------------------------
9. Hartford Financial Services Group 3.1
- --------------------------------------------------------------------------------
10. Edison International 3.1
Portfolio holdings and asset allocation will vary.
Given this environment, what was your investment strategy during the period?
As always, the Fund concentrated on a research-intensive approach to individual
stock selection, focusing on getting the most value (either in earnings, cash
flow or assets) for each investment dollar. We also insist on a second
discipline; every stock in the portfolio must seek to provide a dividend yield
greater than the yield on the S&P 500. This discipline is designed to preserve
capital, because portfolios with superior dividend yields have historically
performed well in protracted down markets.
Q. What were the principal factors affecting performance?
The investment environment of the past twelve months was particularly
challenging for the Fund.
By sticking with its strict value-style investment discipline, the Fund was
operating in an asset class that has been decidedly out of favor. Investors have
been paying higher and higher prices for stocks that they hope will deliver more
predictable growth. Thus growth stocks, despite their high valuations, were the
market's darlings in 1998. We underweighted technology and health care stocks,
due to their overall inflated price-to-earnings ratios, which hindered fund
performance. Our buy discipline, which requires a below market price-to-earnings
ratio and a greater yield than the market as a whole, largely eliminated these
sectors from consideration. Investments in the basic industries and energy
sectors were also a major drag on Fund performance in the face of the Asian
economic crisis and declining oil prices. The Fund benefited from its
investments in the domestic telecommunications industry, especially GTE and
Ameritech.
Q. What is your current outlook for the stock market and the Fund?
With near term recovery in Asia unlikely and wage inflation still strong in the
United States, we believe corporate America could suffer an earnings slowdown in
1999. We think depressed consumer markets abroad will slow the growth of large
U.S. multinationals and put pressure on companies that have high export sales.
The strong dollar will likely continue to impede trade as U.S. products and
services remain expensive for buyers overseas. This environment could cause
investors to become more conservative. As preservation of capital becomes a
priority, earnings, cash flow and assets will return as the standards by which
investments are valued.
We have constructed the portfolio from the speculative excesses in today's
marketplace, with an estimated average 1999 price/earnings ratio 30% below that
of the S&P 500, a dividend yield 65% higher than the Index, and many stocks
selling at 25% to 50% below their break-up value, which is the aggregate market
value of a company if each of its parts operated independently and had its own
stock price. Going forward, we believe the Fund will be an effective vehicle for
protecting and growing capital.
The portfolio managers' commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes. The Fund may invest in foreign
securities, which can involve special risks. Investments in small-cap
investments carry special risks, including trading in narrower markets, limited
financial and management resources, less liquidity and greater volatility than
large-cap stocks. See the Fund's prospectus for details.
- --------------------------------------------------------------------------------
Note to shareholders: While we were producing this report, portfolio manager
Mauricio F. Cevallos left the Fund to take another position at Loomis, Sayles &
Company, L.P. Remaining managers Tom Kolefas and Peter Ramsden will act as
portfolio managers of the Fund.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1998
COMMON STOCK--98.0% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE--2.9%
12,600 Lockheed Martin Corp. ........................ $ 1,067,850
-----------
APPAREL & TEXTILES--4.1%
60,000 Warnaco Group ................................ 1,515,000
-----------
AUTOMOTIVE--3.0%
15,500 General Motors Corp. ......................... 1,109,219
-----------
BANKS--5.3%
20,800 BankBoston Corp. ............................. 809,900
28,200 Wells Fargo & Co. ............................ 1,126,237
-----------
1,936,137
-----------
BANKS & THRIFTS--3.6%
32,800 Bank of New York Company, Inc. ............... 1,320,200
-----------
COMPUTERS & BUSINESS EQUIPMENT--3.0%
9,300 Xerox Corp. .................................. 1,097,400
-----------
CONSTRUCTION MATERIALS--3.2%
40,400 Masco Corp. .................................. 1,161,500
-----------
DOMESTIC OIL--4.8%
30,400 El Paso Energy Corp. ......................... 1,058,300
23,400 USX-Marathon Group ........................... 704,925
-----------
1,763,225
-----------
ELECTRIC UTILITIES--3.1%
40,800 Edison International ......................... 1,137,300
-----------
ENERGY--2.2%
38,400 Conoco, Inc. ................................. 801,600
-----------
FINANCIAL SERVICES--6.0%
28,000 Fleet Financial Group, Inc. .................. 1,251,250
1,000 Hvide Capital Trust 144A ..................... 16,000
19,800 ReliaStar Financial Corp. .................... 913,275
-----------
2,180,525
-----------
FOOD & BEVERAGES--6.7%
26,100 Philip Morris Cos. ........................... 1,396,350
37,900 Supervalu, Inc. .............................. 1,061,200
-----------
2,457,550
-----------
INDUSTRIAL MACHINERY--2.0%
11,500 Magna International, Inc. .................... 713,000
-----------
INSURANCE--11.4%
17,100 American General ............................. $ 1,333,800
27,600 Conseco, Inc. ................................ 843,525
20,800 Hartford Financial Services Group ............ 1,141,400
10,300 Lincoln National Corp., Inc. ................. 842,669
-----------
4,161,394
-----------
PAPER--4.5%
12,300 Bowater, Inc. ................................ 509,681
20,700 Kimberly-Clark Corp. ......................... 1,128,150
-----------
1,637,831
-----------
PAPER & FOREST PRODUCTS--2.1%
8,200 Georgia Pacific Corp. ........................ 480,212
12,600 Georgia Pacific Corp. Timber Group ........... 300,038
-----------
780,250
-----------
PHOTOGRAPHY--2.0%
10,200 Eastman Kodak Co. ............................ 734,400
-----------
REAL ESTATE--3.9%
58,600 Developers Diversified Realty ................ 1,040,150
12,300 Health Care Property Investments, Inc. ....... 378,225
-----------
1,418,375
-----------
RETAIL--2.3%
19,400 Sears, Roebuck & Co. ......................... 824,500
-----------
STEEL--1.0%
18,300 Allegheny Teledyne, Inc. ..................... 374,006
-----------
TELECOMMUNICATION--10.0%
16,300 Ameritech Corp. .............................. 1,033,012
19,400 GTE Corp. .................................... 1,261,000
10,600 Telecomunicacoes Brasileiras (ADR) ........... 770,488
12,400 Telefonos de Mexico S.A. de C.V. (ADR) ....... 603,725
-----------
3,668,225
-----------
TOBACCO--3.3%
41,000 RJR Nabisco Holdings Corp. ................... 1,217,188
-----------
TRUCKING & FREIGHT FORWARDING--5.1%
41,800 Ryder Systems, Inc. .......................... 1,086,800
41,000 Teekay Shipping Corp. ........................ 771,313
-----------
1,858,113
-----------
UTILITIES--2.5%
21,400 Pinnacle West Capital Corp. .................. 906,825
-----------
Total Common Stock (Identified
Cost $34,302,421) .......................... 35,841,613
-----------
SHORT TERM INVESTMENT--2.8%
FACE
AMOUNT DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------
$1,011,000 Repurchase Agreement with State Street Bank
and Trust Co. dated 12/31/1998 at 4.000% to
be repurchased at $1,011,449 on 1/04/1999,
collateralized by $760,000 U.S. Treasury
Bond at 8.125%, due 8/15/2019 valued at
$1,038,630 ................................. $ 1,011,000
-----------
Total Short Term Investment (Identified
Cost $1,011,000) ........................... 1,011,000
-----------
Total Investments--100.8% (Identified
Cost $35,313,421) (b) ...................... 36,852,613
Other assets less liabilities ................ (289,464)
-----------
Total Net Assets--100% ....................... $36,563,149
===========
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1998 the net
unrealized appreciation on investments based on cost
of $35,313,421 for federal income tax purposes was
as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ..... $ 3,687,949
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. (2,148,757)
-----------
Net unrealized appreciation .............................. $ 1,539,192
===========
ADR An American Depositary Receipt (ADR) is a certificate issued by a
custodian 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 or Canada.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these amounted to $16,000 or 0.04% of net assets.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1998
ASSETS
Investments at value (Identified cost $35,313,421) $36,852,613
Cash .............................................. 539
Receivable for:
Fund shares sold ................................ 149,172
Dividends and interest .......................... 150,548
Tax reclaims .................................... 1,180
Unamortized organization expenses ................. 9,066
-----------
37,163,118
LIABILITIES
Payable for:
Securities purchased ............................ $449,379
Fund shares redeemed ............................ 93,370
Withholding Taxes ............................... 1,797
Accrued expenses:
Management fees ................................. 6,679
Deferred trustees' fees ......................... 1,229
Accounting and administrative ................... 1,971
Other expenses .................................. 45,544
599,969
-----------
NET ASSETS .......................................... $36,563,149
===========
Net Assets consist of:
Capital paid in ................................. $35,728,810
Undistributed net investment income ............. 4,105
Accumulated net realized gains (losses) ......... (708,989)
Unrealized appreciation (depreciation) on
investments and foreign currency transactions . 1,539,223
-----------
NET ASSETS .......................................... $36,563,149
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($17,838,893 divided by 1,012,303 shares
of beneficial interest) ........................... $17.62
======
Offering price per share (100/94.25 of $17.62) ...... $18.69*
======
Net asset value and offering price of Class B shares
($16,623,036 divided by 943,205 shares of
beneficial interest) .............................. $17.62**
======
Net asset value and offering price of Class C shares
($2,101,220 divided by 119,174 shares of beneficial
interest) ......................................... $17.63**
======
* Based upon single purchases of less than $50,000. Reduced sales charges apply
for purchases in excess of these amounts.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
INVESTMENT INCOME
Dividends (net of foreign taxes of $5,712) ........ $ 968,014
Interest .......................................... 88,954
----------
1,056,968
Expenses
Management fees ................................. $ 248,935
Service fees - A ................................ 46,490
Service and distribution fees - Class B ......... 149,078
Service and distribution fees - Class C ......... 20,584
Trustees' fees and expenses ..................... 6,678
Accounting and administrative ................... 21,298
Custodian ....................................... 52,712
Transfer agent .................................. 123,563
Audit and tax services .......................... 20,900
Legal ........................................... 8,596
Printing ........................................ 27,854
Registration .................................... 92,275
Amortization of organization expenses ........... 3,940
Insurance ....................................... 1,000
Miscellaneous ................................... 8,778
Total expenses .................................... 832,681
Less expenses waived by the investment adviser and
distributor ..................................... (172,002) 660,679
---------- ----------
Net investment income ............................. 396,289
REALIZED and UNREALIZED GAIN (LOSS) on INVESTMENTS
and FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on investments - net ......... (495,667)
Unrealized appreciation (depreciation) on:
Investments - net ............................... 395,798
Foreign currency transactions - net ............. 31
Total unrealized appreciation (depreciation) on
investments and foreign currency transactions ... 395,829
Net gain (loss) on investment transactions ........ (99,838)
----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ....... $ 296,451
==========
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998
----------- -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 94,305 $ 396,289
Net realized gain (loss) on investments ................... 326,007 (495,667)
Unrealized appreciation (depreciation) on investments and
foreign currency transactions ........................... 739,065 395,829
----------- -----------
Increase (decrease) in net assets from operations ......... 1,159,377 296,451
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (75,660) (268,096)
Class B ................................................. (19,575) (115,988)
Class C ................................................. (3,144) (15,562)
Net realized gain on investments
Class A ................................................. (157,550) (179,152)
Class B ................................................. (31,171) (162,228)
Class C ................................................. (5,079) (21,050)
----------- -----------
(292,179) (762,076)
----------- -----------
Increase (decrease) in net assets derived from capital
share transactions ...................................... 22,171,694 11,376,636
----------- -----------
Total increase (decrease) in net assets ................... 23,038,892 10,911,011
NET ASSETS
Beginning of the year ..................................... 2,613,246 25,652,138
----------- -----------
End of the year ........................................... $25,652,138 $36,563,149
----------- -----------
UNDISTRIBUTED NET INVESTMENT INCOME
End of the year ........................................... $ 1,207 $ 4,105
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
THE PERIOD
NOVEMBER 15,
1995(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $12.50 $12.86 $15.15 $17.59
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............................... 0.04 0.31 0.25 0.26(b)
Net Realized and Unrealized Gain (Loss) on
Investments ....................................... 0.36 3.11 3.15 0.20(c)
----- ----- ----- -----
Total From Investment Operations .................... 0.40 3.42 3.40 0.46
----- ----- ----- -----
Less Distributions
Distributions From Net Investment Income ............ (0.04) (0.30) (0.26) (0.26)
Distributions From Net Realized Capital Gains ....... 0.00 (0.83) (0.70) (0.17)
----- ----- ----- -----
Total Distributions ................................. (0.04) (1.13) (0.96) (0.43)
----- ----- ----- -----
Net Asset Value, End of Period ...................... $12.86 $15.15 $17.59 $17.62
====== ====== ====== ======
Total Return (%) (d) ................................ 3.2 26.6 22.6 2.7
Ratio of Operating Expenses to Average Net
Assets (%) (e) .................................... 1.50(f) 1.50 1.50 1.50
Ratio of Net Investment Income to Average Net
Assets (%) ........................................ 3.58(f) 2.06 1.76 1.48
Portfolio Turnover Rate (%) ......................... 0 45 33 61
Net Assets, End of Period (000) ..................... $2,064 $2,613 $14,681 $17,839
(a) Commencement of operations.
(b) Per share net investment income has been
calculated using the average shares outstanding
during the year.
(c) The amount shown for a share outstanding does not
correspond with the aggregate net gain/(loss) on
investments for the period ended December 31,
1998, due to the timing of purchases and
redemptions of fund shares in relation to
fluctuating market values of the investments of
the Fund.
(d) A sales charge is not reflected in total return
calculations. The period less than one year is
not annualized.
(e) The ratio of operating expenses to average net
assets without giving effect to this expense
limitation described in Note 4 to the Financial
Statements would have been (%) .................. 5.97(f) 3.67 3.10 1.92
(f) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------- -------------------------------------
THE PERIOD THE PERIOD
SEPTEMBER 15, SEPTEMBER 15,
1997(a) 1997(a)
THROUGH YEAR ENDED THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .............. $17.06 $17.59 $17.06 $17.59
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............................. 0.03 0.13(b) 0.03 0.13(b)
Net Realized and Unrealized Gain (Loss)
on Investments .................................. 0.60 0.20(c) 0.60 0.21(c)
------ ------ ------ ------
Total From Investment Operations .................. 0.63 0.33 0.63 0.34
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income .......... (0.04) (0.13) (0.04) (0.13)
Distributions From Net Realized Capital Gains ..... (0.06) (0.17) (0.06) (0.17)
------ ------ ------ ------
Total Distributions ............................... (0.10) (0.30) (0.10) (0.30)
------ ------ ------ ------
Net Asset Value, End of Period .................... $17.59 $17.62 $17.59 $17.63
====== ====== ====== ======
Total Return (%) (d) .............................. 3.7 2.0 3.7 2.0
Ratio of Operating Expenses to Average
Net Assets (%) (e) .............................. 2.25(f) 2.25 2.25(f) 2.25
Ratio of Net Investment Income to Average
Net Assets (%) .................................. 1.01(f) 0.73 1.01(f) 0.73
Portfolio Turnover Rate (%) ....................... 33 61 33 61
Net Assets, End of Period (000) ................... $9,375 $16,623 $1,596 $2,101
(a) Commencement of operations.
(b) Per share net investment income has been
calculated using the average shares outstanding
during the year.
(c) The amount shown for a share outstanding does
not correspond with the aggregate net gain/
(loss) on investments for the period ended
December 31, 1998, due to the timing of
purchases and redemptions of fund shares in
relation to fluctuating market values of the
investments of the Fund.
(d) A contingent deferred sales charge is not
reflected in total return calculations. Periods
less than one year are not annualized.
(e) The ratio of operating expenses to average net
assets without giving effect to this expense
limitation described in Note 4 to the Financial
Statements would have been (%) ................ 3.85(f) 2.67 3.85(f) 2.67
(f) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
1. The Fund is a Series of New England Funds Trust III, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Fund seeks current income and capital growth. The Declaration of
Trust permits the trustees to issue an unlimited number of shares of the Trust
in multiple series (each such series of shares 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 class of shares, but they do pay a
higher ongoing distribution fee than Class A shares and may be subject to a
contingent deferred sales charge if those shares are redeemed within one year.
Expenses of the Fund are borne pro rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund were liquidated. In addition, the Trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which service provides the last reported sale price for securities
listed on an applicable securities exchange or on the NASDAQ national market
system, or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price. Short-term obligations
with a remaining maturity of less than sixty days are stated at amortized
cost, which approximates value. All other securities and assets are valued at
their fair value as determined in good faith by the Fund's adviser and
subadviser, under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are
accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion
of discount. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The timing and characterization of
certain income and capital gains distributions are determined in accordance
with federal tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for organization costs and distributions from Real Estate
Investment Trusts 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 1995 in connection with
the Fund's organization and registration, amounting to approximately $19,700
in the aggregate, were paid by the Fund and are being amortized by the Fund
over 60 months.
2. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were
$31,625,023 and $20,258,511, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.70% of the first $200 million of the Fund's
average daily net assets, 0.65% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadvisor,
Loomis Sayles & Company, L.P. ("Loomis Sayles") for providing subadvisory
services to the Fund at the rate of 0.40% of the first $200 million of the
average daily net assets of the Fund, 0.325% of the next $300 million of such
assets and 0.275% of such assets in excess of $500 million. Certain officers
and directors of NEFM are also officers or trustees of the Fund. NEFM and
Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P.
("Nvest"), formally known as New England Investment Companies, L.P., which is
a subsidiary of Metropolitan Life Insurance Company ("MetLife").
Fees earned by NEFM and Loomis Sayles under the management agreement in effect
during the year ended December 31, 1998 are as follows:
FEES EARNED (a)
- ---------------
$142,249 Loomis Sayles
106,686 NEFM
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
The effective management fee for the year ended December 31, 1998 was 0.70%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, and financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1998 these
expenses amounted to $21,298 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") 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 year
ended December 31, 1998, the Fund paid NEFSCO $75,312 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $769 in transfer agent credits. The transfer agent expense in the
Statement of Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940
Act, the Trust has adopted a Service Plan relating to the Fund's Class A
shares (the "Class A Plan") and Service and Distribution Plans relating to the
Fund's Class B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1998, the Fund paid New England Funds $46,490 in fees under
the Class A Plan.
Under the Class B and Class C Plan, the Fund pays New England Funds a monthly
service fee at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1998, the Fund paid New England Funds $37,270 and $5,146 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 year ended December 31, 1998, the Fund paid New England Funds $111,808
and $15,438 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, 1998 amounted to $265,746.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, Nvest, NEFSCO or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $205
Meeting Fee 152/meeting
Annual Committee Meeting Retainer 31
Annual Committee Chairman Retainer 21
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have been, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Loomis Sayles has voluntarily agreed, until further
notice to NEFM, to waive its entire subadvisory fee with respect to the Equity
Income Fund. This agreement may be terminated by Loomis Sayles at any time. In
addition, under an expense deferral arrangement, which NEFM may terminate at
any time, NEFM has agreed to defer its management fee for the Fund and, if
necessary, to bear certain expenses associated with the Fund to the extent
necessary to limit the Fund's expenses to the annual rate of 1.50% for Class A
shares, 2.25% for Class B shares and 2.25% for Class C shares, subject to the
obligation of the Fund to pay NEFM such deferred fees and expenses in later
periods to the extent that the Fund's expenses fall below the annual rate of
1.50% for Class A shares, 2.25% for Class B shares and 2.25% for Class C
shares; provided, however, that the Fund is not obligated to pay any such
deferred fees or expenses more than two years after the end of the fiscal year
in which the fee or expense was deferred. As a result of the Fund's expenses
exceeding the voluntary expense limitation during the period ended December
31, 1998, NEFM deferred $29,753 of its $106,686 management fees and Loomis
Sayles waived their entire management fee of $142,249.
5. CAPITAL SHARES. At December 31, 1998 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class C capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- --------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................ 656,587 $11,309,160 605,911 $11,038,787
Shares issued in connection with the
reinvestment of:
Dividends from net investment income . 4,302 73,745 14,398 255,693
Distributions from net realized gain . 9,084 155,582 10,133 171,218
--------- ----------- ------- -----------
669,973 11,538,487 630,442 11,465,698
Shares repurchased ..................... (7,694) (132,782) (452,923) (8,091,937)
--------- ----------- ------- -----------
Net increase (decrease) ................ 662,279 $11,405,705 177,519 $ 3,373,761
--------- ----------- ------- -----------
<CAPTION>
FOR THE PERIOD
SEPTEMBER 15, 1997(a) YEAR ENDED
THROUGH DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................ 536,588 $ 9,256,725 547,429 $ 9,914,032
Shares issued in connection with the
reinvestment of:
Dividends from net investment income . 991 17,025 5,903 104,500
Distributions from net realized gain . 1,617 27,782 8,752 147,992
--------- ----------- ------- -----------
539,196 9,301,532 562,084 10,166,524
Shares repurchased ..................... (6,360) (107,487) (151,715) (2,689,057)
--------- ----------- ------- -----------
Net increase (decrease) ................ 532,836 $ 9,194,045 410,369 $ 7,477,467
--------- ----------- ------- -----------
<CAPTION>
FOR THE PERIOD
SEPTEMBER 15, 1997(a) YEAR ENDED
THROUGH DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- -------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- -------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................ 95,043 $ 1,644,267 64,147 $ 1,161,625
Shares issued in connection with the
reinvestment of:
Dividends from net investment income . 156 2,679 776 13,773
Distributions from net realized gain . 284 4,871 1,200 20,278
--------- ----------- ------- -----------
95,483 1,651,817 66,123 1,195,676
Shares repurchased ..................... (4,759) (79,873) (37,673) (670,268)
--------- ----------- ------- -----------
Net increase (decrease) ................ 90,724 $ 1,571,944 28,450 $ 525,408
--------- ----------- ------- -----------
Increase (decrease) derived from capital
shares transactions .................. 1,285,839 $22,171,694 616,338 $11,376,636
========= =========== ======= ===========
</TABLE>
(a) Commencement of operations.
6. LINE OF CREDIT. The Fund along with the other portfolios that comprise the
New England Funds (the "Funds") participate in a $100,000,000 committed line
of credit provided by Citibank, N.A. under a credit agreement (the
"Agreement") dated March 5, 1998. Advances under the Agreement are taken
primarily for temporary or emergency purposes. Borrowings under the Agreement
bear interest at a rate tied to one of several short-term rates that may be
selected from time to time. In addition, the Funds are charged a facility fee
equal to 0.07% per annum on the unused portion of the line of credit. The
annual cost of maintaining the line of credit and the facility fee is
apportioned pro rata among the participating Funds. There were no borrowings
as of or during the period ended December 31, 1998.
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of New England Funds Trust III and Shareholders of
NEW ENGLAND EQUITY INCOME FUND
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio composition, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the New England Equity Income
Fund (the "Fund"), a series of New England Funds Trust III, at December 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
NEW ENGLAND EQUITY INCOME FUND
SUPPLEMENT DATED FEBRUARY 12, 1999
TO THE NEW ENGLAND STOCK FUNDS CLASS A, B AND C AND
CLASS Y PROSPECTUSES EACH DATED MAY 1, 1998
The following information supplements the second paragraph in the "Fund
Management" section of each Prospectus:
Effective immediately, Peter Ramsden and Tom Kolefas act as portfolio managers
of the Equity Income Fund.
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
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>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth Opportunities Fund
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free Fund of California
Tax Free Income Fund of New York
(formerly Intermediate Term Tax Free Fund of NY)
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective
investors when it is preceded or accompanied by the Fund's
current prospectus, which contains
information about distribution charges, management and other
items of interest. Investors are advised to read the
prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of
New England Funds are members of the National Association of Securities
Dealers, Inc. (NASD). As a service to investors, the NASD has asked that
we inform you of the availability of a brochure on its Public Disclosure
Program. The program provides access to information about securities firms
and their representatives. Investors may obtain a copy by contacting the
NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com.
<PAGE>
------------------
[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
---------------------
EI56-1298
[Recycle Logo] Printed on Recycled Paper
