-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q9RsbLd0tOXfjDhH8ay0y1R02I/R/AUlt/v2oodzVkMKIsHFl2dtUphZZxSu3Kod FUdaikxAn9ClA0hIyzfPww== 0000950156-99-000133.txt : 19990301 0000950156-99-000133.hdr.sgml : 19990301 ACCESSION NUMBER: 0000950156-99-000133 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND FUNDS TRUST I CENTRAL INDEX KEY: 0000770540 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04323 FILM NUMBER: 99550989 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND GOVERNMENT SECURITIES FUND DATE OF NAME CHANGE: 19861111 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND LIFE GOVERNMENT SECURITIES TRUST DATE OF NAME CHANGE: 19860930 N-30D 1 NEF TRUST I - STAR ADVISERS FUND - -------------------------------------------------------------------------------- ANNUAL REPORT - -------------------------------------------------------------------------------- [Logo](R) NEW ENGLAND FUNDS(R) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- New England Star Advisers Fund [graphic omitted] Where The Best Minds Meet(R) - ----------------- DECEMBER 31, 1998 - ----------------- 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 Composite Index of 500 Stocks (the "S&P 500") - - 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 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- NEW ENGLAND GROWTH 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 appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged; there are no expenses that affect the results. In addition, few investors could purchase all of the securities necessary to match the index. And, if they could, they would incur transaction costs and other expenses. In the past the Standard & Poor's 500 Stock Index5 served as a benchmark for New England Star Advisers. Going forward the Standard & Poor's 400 Midcap Index7 will be the primary benchmark and the S&P 500 Stock Index will be the secondary benchmark. While no benchmark is a perfect match for a managed fund, the addition of the new Index better reflects the characteristics that may be represented in the Fund. 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 Star Advisers Fund's inception on 7/7/94 compared to Standard & Poor's 500(5). The data points from the graph are as follows:] NAV(1) MSC(2) S&P 500(5) S&P 400(7) - ----------------------------------------------------------- 07-Jul-94 $10,000 $9,425 $10,000 $10,000 12/94 $10,638 $10,026 $10,391 $10,401 6/95 $12,252 $11,547 $12,484 $12,228 12/95 $14,293 $13,471 $14,281 $13,610 12/96 $17,006 $16,028 $17,552 $16,216 6/97 $18,775 $17,695 $21,167 $18,323 6/98 $23,293 $21,954 $27,534 $23,290 12/98 $24,372 $22,970 $30,073 $25,530 These illustrations represent 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. All Index and Fund performance assumes reinvestment of distributions. Class B, C and Y share performance will differ from that shown based on differences in inception date, fees and sales charges. - ------------------------------------------------------------------------------- NEW ENGLAND STAR ADVISERS FUND - ------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - 12/31/98 - ------------------------------------------------------------------------------- CLASS A (Inception 7/7/94) 1 YEAR SINCE INCEPTION Net Asset Value(1) 19.3% 21.9% With Max. Sales Charge(2) 12.4 20.4 - ------------------------------------------------------------------------------- CLASS B (Inception 7/7/94) 1 YEAR SINCE INCEPTION Net Asset Value(1) 18.4% 21.1% With CDSC(3) 13.4 20.8 - ------------------------------------------------------------------------------- CLASS C (Inception 7/7/94) 1 YEAR SINCE INCEPTION Net Asset Value(1) 18.5% 21.1% With CDSC(3) 17.5 21.1 - ------------------------------------------------------------------------------- CLASS Y (Inception 11/15/94)* 1 YEAR SINCE INCEPTION Net Asset Value(1) 19.6% 22.0% - ------------------------------------------------------------------------------- SINCE FUND'S SINCE FUND'S COMPARATIVE PERFORMANCE 1 YEAR CLASS A, B & C CLASS Y INCEPTION INCEPTION S&P 400 Midcap Index(7) 19.1% 23.2% 23.2% S&P 500 Stock Index(5) 28.5 27.8 29.2 Lipper Growth Average(4) 22.9 22.3 24.0 Morningstar Mid Cap Growth Avg(6) 18.0 20.3 20.9 - ------------------------------------------------------------------------------- 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. * Class Y shares are available only to certain institutional investors and are not subject to a sales charge. NOTES TO CHARTS (PAGES 1 & 2) (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 (MSC) 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) 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. CDSC for Class C shares assumes a maximum 1% sales charge on redemptions within the first year of purchase. (4) Lipper Growth 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 Lipper, Inc., an independent mutual fund ranking service. Class Y since inception return is calculated from 11/30/94. (5) 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 performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. Investors cannot purchase an index directly. (6) Morningstar Mid Cap Growth 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, B and C share total returns since inception are calculated from 7/31/94. Class Y since inception return is calculated from 11/30/94. (7) Standard and Poor's Midcap 400 Index (S&P 400) is an unmanaged index representing the performance of the mid-sized company segment of the U.S. market. The S&P 400 performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. Investors cannot purchase an index directly. - ------------------------------------------------------------------------------- NEW ENGLAND STAR ADVISERS FUND - ------------------------------------------------------------------------------- OVERVIEW: HOW THE FUND PERFORMED - ------------------------------------------------------------------------------- Calendar year 1998 was a rewarding but turbulent period for most U.S. stock investors. Despite a healthy economic backdrop, U.S. stocks were affected by the uncertainty that resulted from continuing economic and financial troubles in global markets. While the U.S. market ended the year with strong gains, it did so only after experiencing a steep drop. New England Star Advisers Fund is composed of four separate segments, each managed by a different leading investment management firm. This multiple-adviser approach is the foundation of the Star concept. It provides a means to diversify among not just individual securities but also among investment styles and strategies. For the 12-month period that ended December 31, 1998, New England Star Advisers Fund's Class A shares at net asset value produced a total return of 19.3%, reflecting a $1.85 per share gain to $20.02 and a $1.38 capital gain distribution. Investing in the U.S. stock market in 1998 was similar to riding a roller coaster. The market produced double-digit returns in the first quarter of the year, pulled back slightly in the second quarter, reached a record high in July, experienced a nearly 20% decline in August and September and then rebounded strongly to close the year with significant gains. Ironically, this volatility occurred at a time when economic fundamentals in the United States were nearly ideal. Relatively strong growth, low inflation and interest rates, high levels of consumer confidence and spending and solid corporate profits were positive for stocks. Nevertheless, investors could not ignore the economic events that took place beyond U.S. borders. For the most part, the gyrations in the U.S. market resulted from persistent economic problems in foreign markets. The Federal Reserve Board made three successive interest rates cuts as stocks hit their lowest point of the year. The Fed's action restored confidence in the U.S. economy and in equity securities, and the stock market recovered lost ground. The economic and financial crises that began in the Asian emerging markets in 1997 continued to cast a shadow over the U.S. stock market. Despite government and International Monetary Fund (IMF) bailout packages, several emerging market countries devalued their currencies. In Japan, a new government and a spate of tax and spending initiatives designed to jump-start the economy couldn't budge the country from recession. With the Russian government's default on its debt and devaluation of its currency, the Russian economy nearly collapsed. In Latin America, concerns that individual economies, especially Brazil, would buckle under the weight of high interest rates and fallout from troubles in other emerging markets eroded confidence in the region. The effect of the global economy on U.S. stocks was dramatic. Nevertheless, the U.S. stock market persevered. As in the three previous years, 1998 will go into the financial record books as a "year of the large-caps." Once again large-cap growth stocks maintained their position as market leaders. The uncertainty caused by the "Asian flu," as Asia's economic troubles are sometimes called, prompted investors to seek what they perceived to be safe havens. As a result, investors tended to focus on the familiar - the large, well known companies with consistent growth records. Despite their attractive earnings, low prices and relatively little exposure to the world's financial trouble spots, small-cap and mid-cap stocks barely participated in the stock market's upward trend. Just as the performance of different types of stocks varied during 1998, the performance of various industry groups differed. Technology companies of all types - computer manufacturers, software developers, internet companies - ended 1998 as the clear winners. In addition, pharmaceutical companies and consumer stocks generated strong returns. On the other hand, companies that had virtually anything to do with commodities were stymied by weak worldwide demand for their products. Energy, precious metals and natural resources stocks also lost ground. Volatility is an intrinsic part of the investment process, and our experience in 1998 has shown that events in world markets can have a strong effect on domestic investments. Nevertheless, we believe stocks continue to be good long-term investments. While we will not attempt market predictions or your Fund's performance in the coming months, your investments are in the hands of some of the most experienced and prominent investment managers in the country. The four portfolio segments of New England Star Advisers Fund are managed autonomously. However, the chart below shows the areas of emphasis for the Fund as a whole. In the following pages, your Fund's four subadvisers discuss their investment strategies during 1998. YOUR FUND'S 5 LARGEST SECTORS - 12/31/98 % OF SECTOR NET ASSETS - ------------------------------------------------------------------------------- 1. DRUGS & HEALTH CARE 8.0 - ------------------------------------------------------------------------------- 2. FOOD & BEVERAGES 7.0 - ------------------------------------------------------------------------------- 3. BANKS & THRIFTS 6.3 - ------------------------------------------------------------------------------- 4. BROADCASTING 4.8 - ------------------------------------------------------------------------------- 5. TELECOMMUNICATION 4.0 Portfolio holdings and asset allocations will vary. - ------------------------------------------------------------------------------- NEW ENGLAND STAR ADVISERS FUND - ------------------------------------------------------------------------------- OAKMARK/HARRIS ASSOCIATES L.P. - ROBERT SANBORN - ------------------------------------------------------------------------------- During calendar year 1998, long-term value investors faced a difficult and unusual investment environment. Mega-cap stocks and growth stocks performed very well. However, smaller company stocks and value stocks were relatively poor performers. While the Standard & Poor's Composite Index of 500 Stocks appreciated more than 28%, other indexes lagged. In hindsight, the place to invest in 1998 was clearly large-cap, growth stocks. However, we found such stocks to be overpriced. In our view, over the course of the year these stocks went from being substantially overpriced to being extremely overpriced. In managing the portfolio, we follow a rigorous discipline that refrains from paying more than 60 cents for every $1 of value we see in a stock. We do not try to anticipate the psychology of the market nor do we buy "hot" stocks in the hope that they will continue to rise in price. No matter what the environment, we adhere to our value strategy. Our analysis of the market environment at the end of 1998 indicated that investors were willing to assume large amounts of stock price risk but not willing to take on much business or fundamental risk. In other words, investors seemed to be overpaying for growth. As a result, when a company had any negative news, its investors quickly sold their shares, even if the company's economic fundamentals remained intact. Investors avoided stocks with any fundamental controversies. We have several holdings that reported various business problems in 1998. These include Mattel, Lockheed Martin, Boeing and Nike. We believe prices on these stocks have declined to a point where future appreciation could be significant. Several holdings made strong gains during the period. The segment's largest position, Philip Morris, rose more than 20% as many of the threats to the tobacco industry's prosperity disappeared. We believe Philip Morris continues to be undervalued. Black & Decker recovered from very depressed price levels and rose almost 50%. We continue to hold the stock and believe it has a good possibility for more gains. LARGEST HOLDINGS IN OAKMARK/HARRIS SEGMENT - ------------------------------------------------------------------------------- % OF % OF SEGMENT ASSETS FUND ASSETS - ------------------------------------------------------------------------------- 1. Philip Morris Cos. 10.6 2.1 2. Banc One Corp. 6.2 1.2 3. Dun & Bradstreet Corp. 6.0 1.2 4. First Data Corp. 5.7 1.1 5. H & R Block, Inc. 5.3 1.0 - ------------------------------------------------------------------------------- While we have been surprised at the continued strong performance of mega-cap and growth stocks, we are not tempted to change our successful long term strategies. We are confident that the significant run-up in prices on big company growth stocks has created favorable conditions for value stocks to perform well. FOUNDERS ASSET MANAGEMENT, LLC - PAUL LAROCCO - ------------------------------------------------------------------------------- During the 12-month period that ended December 31, 1998, the Asian economic and financial crises accelerated and spread to emerging markets in Russia and South America. As a result, a number of large companies with multinational operations reported disappointing earnings. This situation, coupled with the fact that prices on domestic stocks were high, led us to believe that a market drop was imminent. Therefore, we made portfolio adjustments during the year. During the first half of 1998, large-cap stocks were popular with investors because of their liquidity and safety. As the year progressed, however, investors began to focus more on earnings growth and began to move down the capitalization spectrum in search of growth. We believe we may see more investor interest in mid-cap and small-cap stocks because such companies are not as exposed to troubled overseas economies. Because of weakness in foreign markets in 1998, we trimmed holdings in several large, multinational consumer products companies. We also reduced our position in Citicorp, which has significant emerging market exposure. In the pharmaceutical area, we reduced Pfizer, the Fund's largest holding. Sales of Pfizer's new drug, Viagra, were strong, but they failed to meet some expectations. While defense spending has been low for several years, recently there have been discussions in Congress about increasing the defense budget because of concern that the economic problems overseas could result in unrest or conflict. To capitalize on this possibility, we added to our holdings of defense contractor Lockheed Martin, which at year-end was 1.8% of the segment. We also added to Northrop Grumman, which was 1.0% of the segment at the end of the year. In addition to winning new defense contracts, these companies have been successful at exploiting commercial opportunities for their products. LARGEST HOLDINGS IN FOUNDERS SEGMENT - ------------------------------------------------------------------------------- % OF % OF SEGMENT ASSETS FUND ASSETS - ------------------------------------------------------------------------------- 1. General Electric Co. 4.3 1.2 2. Microsoft Corp. 4.2 1.2 3. Pfizer, Inc. 3.4 1.0 4. Intel Corp. 3.1 0.9 5. MCI Worldcom, Inc. 2.9 0.8 Major segment positions at the end of the period included Intel, 3.1% of the segment, GE, 4.3% and Pfizer, 3.4%. These high-quality companies are established leaders in their industries and are among the segment's long-term top-ten holdings. Looking ahead, Founders plans to invest in mid-cap and large-cap growth companies with enduring quality. To identify such companies, we use a comprehensive ten-step qualitative checklist we call the "Pyramid of Growth." This checklist helps us uncover companies with strong and growing brand identities that evoke trust and reliability. Many are household names with strong brand franchises. We seek companies that have demonstrated consistent, above-average earnings growth and those with unique or proprietary products that have the ability to capitalize on the inefficiencies in their industry. We look for companies that are leaders in exploiting broad societal trends and that have seasoned and respected management teams, willing to buy back shares for the benefit of the company. Effective January 1999, Scott A. Chapman and Thomas M. Arrington became portfolio managers of the segment. They have been Vice Presidents of Investments at Founders since December 1998. LOOMIS, SAYLES & COMPANY, L.P. - MARY CHAMPAGNE AND JEFF PETHERICK - ------------------------------------------------------------------------------- The past year was difficult for small-cap value investors. Because economic troubles in global markets had a negative effect on U.S. stocks, most investors were risk-averse. As a result, they favored the liquidity and perceived safety of large-cap stocks, even though (in our opinion) small-caps were more attractively valued and had greater potential for earnings growth and price appreciation. Throughout the year, the segment held its value relative to the market as a whole. It weathered the July-August market correction well, and when the market rebounded in the fall, the segment outperformed many of its competitors. In managing the segment, we emphasized high quality securities with attractive valuations and consistent earnings growth. During the first six months, we invested a significant portion of the segment's assets in Real Estate Investment Trusts (REITs). While REITs provided relatively high dividend yields in the 6% to 8% range, they underperformed. Because of their poor performance, we reduced the segment's allocation to REITs, and at the end of the period, they comprised about 5.5% of assets. We believe the remaining REITs have the potential to produce solid gains and should be attractive to investors because of their yields and low prices. During the second half of the year, we emphasized companies that had been out of favor for a significant period. We found the most value in technology and health care stocks. At the end of the period, technology stocks accounted for 13% of segment assets. Many high quality technology companies had been underperformers since 1996 and were selling at very low prices. Two particularly strong performers were Alpha Industries, a semiconductor manufacturer, and Hutchinson Technology, a company that supplies components to the disk-drive industry. Both stocks more than doubled in price in the fourth quarter. At the end of the period, 11% of assets were invested in selected health care stocks. While these stocks got off to a slow start in 1998, by year-end they also generated double-digit returns. In the health care area we invested in Allegiance Corporation, Pathogenesis and Respironics, all of which performed well for the year. Looking ahead, we believe the economic troubles in world markets may result in a slower growing U.S. economy. We anticipate a challenging investment environment, one in which industry groups rotate in and out of favor with investors. We feel strongly, however, that small-cap value stocks are poised for strong performance in 1999. The valuations of these companies are at twenty-year lows relative to large-cap stocks, and most small companies have little exposure to global markets. We believe these companies have the potential for strong earnings growth and price appreciation in the months ahead. LARGEST HOLDINGS IN LOOMIS SAYLES SEGMENT - ------------------------------------------------------------------------------- % OF % OF SEGMENT ASSETS FUND ASSETS - ------------------------------------------------------------------------------- 1. Viad Corp. 2.1 0.5 2. Protective Life Corp. 1.4 0.3 3. Premark International 1.4 0.3 4. Conmed Corp. 1.4 0.3 5. Everest Reinsurance Holdings 1.2 0.3 JANUS CAPITAL CORP. - WARREN LAMMERT - ------------------------------------------------------------------------------- Early in the year, we were uncertain if the worst effects of the "Asian contagion" were over. Consequently, we reduced the number of holdings in the segment and concentrated on companies that we believed had the most resilient earnings. Although we maintained investments in a variety of industries, we focused on selected technology, pharmaceutical and cable companies. These holdings contributed to strong returns in the first half of 1998. In the technology area, Dell and Microsoft were among the best performers. Comcast, a cable company, also logged strong returns. Despite positive overall performance, there were a few disappointments. Our investments in oil services stocks had a rough first quarter because the decline in oil prices outweighed the technological advancements in the sector. Eventually, we sold several oil sector stocks at a loss. However, the segment's biggest disappointment of the year came in July when Parametric Technology announced an earnings shortfall. This earnings decline was the result of a change in the company's product line, and as a result we liquidated the position. After the market tumult of late summer, we continued to concentrate on high quality companies with broad franchises or niche products. This served us well. When the market rebounded in October, investors no longer focused on liquidity. Instead, they emphasized the underlying fundamentals of specific companies. This change in investor attitude helped performance in the final four months of the year. LARGEST HOLDINGS IN JANUS SEGMENT - ------------------------------------------------------------------------------- % OF % OF SEGMENT ASSETS FUND ASSETS - ------------------------------------------------------------------------------- 1. Nokia Corp. (ADR) 6.3 1.9 2. Time Warner, Inc. 5.3 1.6 3. Comcast 4.7 1.4 4. Cisco Systems 4.5 1.4 5. TCI Ventures Group 3.8 1.2 We positioned the segment to capitalize on the productivity benefit that has resulted from technology and on the meteoric rise of Internet usage. For instance, our position in Amazon.com had a tremendous run. While Amazon.com's stock has risen to dizzying levels by virtually any traditional measure, we believe the company's potential is open-ended. Amazon.com has moved beyond being simply an Internet bookseller. It is adding to its product offerings, and we have found that its prominent brand name is an asset. On a fundamental level, we like the company's business model. The company immediately receives cash for the products it sells, but it does not have to pay its vendors for a relatively long period. Looking ahead, after a six-year expansion, it appears the economy is slowing. However, we believe slower economic activity is the optimal environment for adept stock pickers. Against a backdrop of vigorous growth, as we have seen over the past few years, it is relatively easy for businesses to increase their profits. In a slow growth environment, that is not the case, and we have already seen many businesses become less profitable. We will continue to search for selected nimble businesses that have the potential to increase their earnings through pricing or because of their leading positions in dynamic industries. The opinions expressed are those of the portfolio managers and are subject to change. The occurrence of forcasted events and predictions is not certain and cannot be assured. The Fund may invest in foreign and emerging market securities,which involves special risks. Investments in small-cap companies involve greater risk than is customarily associated with more established companies. The Fund may invest in high yielding, lower-rated securities, which may involve greater credit risk. The Fund may invest 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. This Fund may invest in derivative securities for hedging purposes. See the Fund's prospectus for more complete information. - ------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - ------------------------------------------------------------------------------- Investments as of December 31, 1998 AEROSPACE & DEFENSE--2.2% 30,300 Alliant Techsystems............................ $ 2,497,856 31,400 GenCorp........................................ 783,038 80,000 Lockheed Martin Corp........................... 6,780,000 43,400 Newport News Shipbuilding, Inc................. 1,451,187 48,600 Nichols Research Corp.......................... 1,014,525 43,675 Orbital Sciences Corp. (c).................................... 1,932,619 299,000 The Boeing Co.................................. 9,754,875 -------------- 24,214,100 -------------- AIRLINES--0.2% 113,115 Southwest Airlines............................. 2,538,018 -------------- APPAREL & TEXTILES--1.4% 23,150 Cintas Corp.................................... 1,630,628 37,200 Liz Claiborne, Inc............................. 1,174,125 301,670 NIKE, Inc., Class B............................ 12,236,489 -------------- 15,041,242 -------------- AUTO PARTS--0.3% 28,025 Danaher Corp................................... 1,522,108 27,565 Federal-Mogul.................................. 1,640,117 -------------- 3,162,225 -------------- AUTOMOTIVE--0.9% 31,154 DaimlerChrysler AG............................. 2,992,731 50,900 Dura Automotive Systems (c).................... 1,736,962 17,225 Harley Davidson, Inc........................... 816,034 93,800 Intermet Corp.................................. 1,225,263 19,700 SPX Corp. (c).................................. 1,319,900 54,100 Tower Automotive, Inc.......................... 1,349,119 -------------- 9,440,009 -------------- BANKS & THRIFTS--6.3% 258,000 Banc One Corp.................................. 13,174,125 239,955 Bank of New York Company, Inc.................. 9,658,189 50,900 Bank United.................................... 1,997,825 54,300 City National.................................. 2,260,237 33,160 CNB Bancshares................................. 1,546,085 78,737 Commercial Federal............................. 1,825,714 91,900 Community First Bankshares, Inc................ 1,935,644 37,400 Cullen/Frost Bankers........................... 2,052,325 50,150 Downey Financial............................... 1,275,691 52,078 Firstar Corp................................... 4,856,273 63,600 Local Financial Corp........................... 572,400 150,000 Mellon Bank Corp............................... 10,312,500 16,825 Northern Trust Corp............................ 1,469,033 4,100 Pacific Bank National Association.............. 178,863 20,275 State Street Corp.............................. 1,410,380 50,300 Staten Islands Bancorp, Inc.................... 1,002,856 40,275 U.S. Bancorp................................... 1,429,762 272,500 Washington Mutual, Inc......................... 10,406,094 33,100 Western Bancorp................................ 968,175 -------------- 68,332,171 -------------- BROADCASTING--4.8% 61,415 Cablevision Systems (c)........................ 3,082,265 70,390 Chancellor Media Corp. (c)..................... 3,369,921 349,345 Comcast........................................ 20,502,185 71,765 Cox Communications (c)......................... 4,960,756 51,800 Hearst-Argyle Television, Inc.................. 1,709,400 216,800 MediaOne Group, Inc. (c)..................................... 10,189,600 72,625 Tele-Communications, Inc....................... 3,345,289 135,660 United International Holdings, Inc............. 2,611,455 90,310 USA Networks, Inc.............................. 2,991,519 -------------- 52,762,390 -------------- BUILDING & RELATED--0.7% 101,200 Champion Enterprises (c)....................... 2,770,350 75,400 Furniture Brands International................. 2,054,650 43,700 Giant Cement Holding, Inc...................... 1,081,575 58,600 Shaw Industries, Inc........................... 1,421,050 -------------- 7,327,625 -------------- BUSINESS SERVICES--1.0% 13,900 Automatic Data Processing, Inc................. 1,114,606 60,087 Fiserv, Inc. (c)............................... 3,090,725 106,494 Outdoor Systems (c)............................ 3,194,820 82,147 Penton Media, Inc.............................. 1,663,477 30,275 Robert Half International, Inc. (c)............ 1,352,914 9,675 The Interpublic Group of Companies, Inc........ 771,581 -------------- 11,188,123 -------------- CHEMICALS--1.3% 47,500 CUNO, Inc...................................... 771,875 44,300 Cytec Industries, Inc.......................... 941,375 58,700 Ferro Corp..................................... 1,526,200 28,800 Great Lakes Chemical Corp...................... 1,152,000 29,400 Minerals Technologies, Inc..................... 1,203,563 116,245 Monsanto Co.................................... 5,521,637 34,100 Scotts Co...................................... 1,310,719 78,900 Solutia, Inc................................... 1,765,387 -------------- 14,192,756 -------------- COMPUTER SOFTWARE & SERVICES--3.8% 41,100 ChoicePoint, Inc. (c).......................... 2,650,950 35,125 Computer Sciences (c).......................... 2,263,367 66,700 DSP Group (c).................................. 1,392,363 380,000 First Data Corp................................ 12,041,250 149,030 IMS Health, Inc................................ 11,242,451 123,500 PLATINUM Technology (c)........................ 2,361,937 91,295 Sapient Corp................................... 5,112,520 45,900 Sterling Software, Inc......................... 1,242,169 71,600 Symantec Corp. (c)............................. 1,557,300 53,575 Technology Solutions (c)....................... 574,257 53,100 Wang Labs, Inc................................. 1,473,525 -------------- 41,912,089 -------------- COMPUTERS & BUSINESS EQUIPMENT--1.4% 1,890 CDW Computer Ctrs, Inc......................... 181,322 35,575 Compaq Computer Corp........................... 1,491,927 50,325 Dell Computer Corp. (c).................................... 3,683,161 50,750 EMC Corp. (c).................................. 4,313,750 31,650 International Business Machines Corp........... 5,847,337 -------------- 15,517,497 -------------- CONGLOMERATES--1.0% 139,294 TYCO International, Ltd........................ 10,507,991 -------------- COMPUTER HARDWARE--0.8% 72,000 Digi International (c)......................... 801,000 69,300 FORE Systems (c)............................... 1,269,056 21,500 Hutchinson Technology, Inc..................... 765,937 35,100 Micron Electronics (c)......................... 607,669 64,200 Quantum Corp. (c).............................. 1,364,250 85,500 Sequent Computer Systems, Inc.................. 1,031,344 46,000 SMART Modular Technologies, Inc................ 1,276,500 18,150 Sun Microsystems, Inc. (c)..................... 1,554,094 -------------- 8,669,850 -------------- CONSUMER GOODS & SERVICES--2.0% 250,000 H & R Block, Inc............................... 11,250,000 301,650 Mattel, Inc.................................... 6,881,391 210,000 Polaroid Corp.................................. 3,924,375 -------------- 22,055,766 -------------- CONSUMER-JEWELRY/NOVELTY/ GIFTS--0.2% 53,800 Jostens, Inc................................... 1,408,888 25,800 Zale Corp...................................... 832,050 -------------- 2,240,938 -------------- DRUGS & HEALTH CARE--8.0% 128,065 ALZA Corp. (c)................................. 6,691,396 44,625 Amgen, Inc. (c)................................ 4,666,102 44,700 Biovail Corporation International (c).......... 1,690,219 37,275 Bristol-Myers Squibb........................... 4,987,861 40,240 Centocor, Inc. (c)............................. 1,815,830 25,800 ChiRex, Inc.................................... 551,475 380,000 Columbia/HCA Healthcare........................ 9,405,000 117,675 Eli Lilly...................................... 10,458,366 10,725 Glaxo Wellcome, Inc. (ADR)..................... 745,387 17,400 Johnson & Johnson.............................. 1,459,425 41,800 Jones Pharma, Inc.............................. 1,525,700 21,675 Merck & Co..................................... 3,201,127 162,910 Pfizer, Inc.................................... 20,435,023 61,695 Pharmacia & Upjohn, Inc........................ 3,493,479 101,125 Schering-Plough Corp........................... 5,587,156 DRUGS & HEALTH CARE--CONTINUED 1 SmithKline Beecham plc ........................ 14 146,405 Warner-Lambert Co.............................. 11,007,826 -------------- 87,721,386 -------------- ELECTRIC--1.2% 130,525 General Electric Co............................ 13,321,708 -------------- ELECTRIC UTILITIES--0.6% 28,500 BEC Energy..................................... 1,173,844 25,700 Commonwealth Energy Systems.................... 1,040,850 43,600 Rochester Gas & Electric Corp.................. 1,362,500 77,200 WPS Resources Corp............................. 2,721,300 -------------- 6,298,494 -------------- ELECTRICAL EQUIPMENT--0.3% 26,800 Alpha Industries............................... 964,800 54,400 Artesyn Technologies, Inc...................... 761,600 89,800 Sensormatic Electronics Corp................... 622,987 68,170 Vishay Intertechnology......................... 988,465 -------------- 3,337,852 -------------- ELECTRONIC COMPONENTS--0.6% 70,775 Maxim Integrated Products (c).................. 3,091,983 83,105 Vitesse Semiconductor Corp. (c)................ 3,791,665 -------------- 6,883,648 -------------- ELECTRONICS--1.8% 28,500 ATMI, Inc. (c)................................. 719,625 52,400 AVX Corp....................................... 887,525 33,300 Beckman Coulter, Inc........................... 1,806,525 29,900 Credence Systems Corp.......................... 553,150 108,900 Cypress Semiconductor Corp..................... 905,231 27,500 Litton Industries, Inc. (c)..................................... 1,794,375 68,350 Lucent Technologies, Inc....................... 7,518,500 21,000 Motorola, Inc.................................. 1,282,312 6,000 Novellus Systems, Inc.......................... 297,000 21,100 Photronics, Inc................................ 505,741 28,400 Speedfam International......................... 486,350 47,600 Tektronix, Inc................................. 1,430,975 11,200 Texas Instruments, Inc......................... 958,300 3,850 The Perkin-Elmer Corp.......................... 375,616 -------------- 19,521,225 -------------- ENTERTAINMENT--0.1% 46,000 CEC Entertainment, Inc......................... 1,276,500 -------------- FINANCE--0.4% 30,700 American Express Co............................ 3,139,075 18,400 Hartford Financial Services Group.............. 1,009,700 -------------- 4,148,775 -------------- FINANCIAL SERVICES--1.9% 140,700 AMRESCO, Inc................................... 1,231,125 131,200 Anthracite Capital............................. 1,025,000 39,048 Associates First Capital....................... 1,654,659 90,900 Brandywine Realty Trust (c).................... 1,624,838 133,500 Capital Automotive............................. 1,985,812 13,750 Charles Schwab Corp............................ 772,578 16,575 Franklin Resources, Inc........................ 530,400 81,550 Healthcare Realty Trust........................ 1,819,584 32,810 Household International........................ 1,300,096 88,300 Imperial Credit Industries (c)................. 739,513 67,700 Koger Equity, Inc.............................. 1,163,594 92,200 Liberty Property Trust......................... 2,270,425 22,455 Newcourt Credit Group, Inc..................... 784,522 70,200 Sun Communities, Inc........................... 2,443,837 10,910 The FINOVA Group, Inc.......................... 588,458 154,300 Unicapital Corp................................ 1,137,963 -------------- 21,072,404 -------------- FOOD & BEVERAGES--7.0% 84,225 Coca-Cola Co................................... 5,632,547 27,600 Corn Products International, Inc............... 838,350 195,000 H.J. Heinz Co.................................. 11,041,875 11,700 Hershey Foods.................................. 727,594 60,600 International Home Foods, Inc.................. 1,022,625 98,800 International Multifoods....................... 2,550,275 95,900 Michael Foods, Inc............................. 2,877,000 220,000 Nabisco Holdings Corp.......................... 9,130,000 35,850 PepsiCo, Inc................................... 1,467,609 501,575 Philip Morris Cos.............................. 26,834,262 160,000 Quaker Oats Co................................. 9,520,000 167,823 Raisio Group plc............................... 1,843,124 1,325 Tootsie Roll Industries Inc.................... 51,841 30,400 Vlasic Foods International, Inc................ 723,900 51,500 Whitman Corp................................... 1,306,813 8,125 William Wrigley Jr. Co......................... 727,695 -------------- 76,295,510 -------------- GOVERNMENT AGENCIES--0.5% 70,575 Federal National Mortgage Association.......... 5,222,550 -------------- HEALTH CARE -- MEDICAL TECHNOLOGY--2.7% 86,000 ADAC Labs...................................... 1,717,313 55,705 Arterial Vascular Engineering, Inc............. 2,924,512 101,850 Conmed Corp. (c)............................... 3,361,050 95,900 DENTSPLY International......................... 2,469,425 88,800 DVI, Inc. (c).................................. 1,609,500 132,900 EndoSonics Corp................................ 1,320,694 60,790 Medtronic, Inc................................. 4,513,657 10,080 MiniMed, Inc................................... 1,055,880 39,700 PSS World Medical.............................. 913,100 52,700 Respironics, Inc............................... 1,055,647 43,800 Safeskin Corp.................................. 1,056,675 52,155 Sofamor/Danek Group, Inc. (c).................. 6,349,871 47,300 Steris Corp.................................... 1,345,094 -------------- 29,692,418 -------------- HEALTH CARE -- SERVICES--0.4% 52,800 Alternative Living Services.................... 1,808,400 76,200 Capital Senior Living Corp..................... 1,062,037 48,600 Curative Technologies, Inc..................... 1,628,100 -------------- 4,498,537 -------------- HOTELS & RESTAURANTS--1.0% 42,400 Brinker International, Inc..................... 1,224,300 78,700 Foodmaker, Inc................................. 1,736,319 53,300 McDonald's Corp................................ 4,084,112 68,701 MeriStar Hospitality Corp...................... 1,275,262 42,575 Outback Steakhouse, Inc........................ 1,697,678 56,200 Wendy's International, Inc..................... 1,225,863 -------------- 11,243,534 -------------- HOUSEHOLD PRODUCTS--2.1% 200,000 Black & Decker Corp............................ 11,212,500 6,550 Clorox Co...................................... 765,122 24,200 Colgate-Palmolive.............................. 2,247,575 47,300 Dial Corp...................................... 1,365,787 92,425 Gillette Co.................................... 4,465,283 37,600 Procter & Gamble............................... 3,433,350 -------------- 23,489,617 -------------- INFORMATION SERVICES--1.5% 72,000 ACNielson Corp................................. 2,034,000 400,000 Dun & Bradstreet Corp.......................... 12,625,000 78,600 Nielsen Media Research, Inc.................... 1,414,800 -------------- 16,073,800 -------------- INSURANCE--3.3% 44,575 American International Group................... 4,307,059 41,200 AmerUs Life Holdings, Inc...................... 921,850 3,050 Berkshire Hathaway, Inc., Class B, (c)......... 7,167,500 52,500 Capital Re Corp................................ 1,053,281 58,987 Citigroup, Inc................................. 2,919,856 25,200 CMAC Investment Corp........................... 1,157,625 74,600 Everest Reinsurance Holdings................... 2,904,738 67,200 Horace Mann Educators.......................... 1,915,200 53,650 Marsh & McLennan............................... 3,135,172 30,650 Medical Assurance, Inc......................... 1,013,366 86,100 Protective Life Corp........................... 3,427,856 22,600 Reinsurance Group America, Inc................. 1,582,000 136,500 Reliance Group Holdings, Inc................... 1,757,438 59,300 Trigon Healthcare, Inc......................... 2,212,631 11,815 UNUM Corp...................................... 689,701 -------------- 36,165,273 -------------- INTERNET CONTENT--3.2% 36,320 Amazon.com, Inc. (c)........................... 11,667,800 109,431 America Online................................. 17,508,960 46,415 At Home Corp................................... 3,446,314 57,440 DoubleClick, Inc............................... 2,617,110 -------------- 35,240,184 -------------- INVESTMENT COMPANIES--1.2% 537,635 TCI Ventures Group (c)......................... 12,668,025 -------------- LEISURE--0.4% 17,225 Carnival Corp.................................. 826,800 113,125 Walt Disney Co................................. 3,393,750 -------------- 4,220,550 -------------- MANUFACTURING--1.5% 46,200 A.O. Smith..................................... 1,134,788 40,100 Cognex Corp. (c)............................... 802,000 28,100 Crane Co....................................... 848,269 71,100 Federal Signal................................. 1,946,362 84,000 Hussmann International......................... 1,627,500 24,125 Illinois Tool Works, Inc....................... 1,399,250 72,900 MascoTech, Inc................................. 1,248,413 31,000 National Service Industries, Inc............... 1,178,000 45,000 Pentair, Inc................................... 1,791,562 98,000 Premark International.......................... 3,393,250 41,600 Regal Beloit Corp.............................. 956,800 -------------- 16,326,194 -------------- METALS & MINING--0.8% 39,600 AK Steel Holding Corp.......................... 930,600 76,700 Bethlehem Steel Corp. (c)...................... 642,363 448,000 De Beers Centenary AG (ADR).................... 5,712,000 7,300 Quanex Corp. (c)............................... 164,706 118,400 Worthington Industries, Inc.................... 1,480,000 -------------- 8,929,669 -------------- NATURAL GAS--0.6% 40,200 Eastern Enterprises............................ 1,758,750 86,900 MCN Corp....................................... 1,656,531 17,900 New Jersey Resources Corp...................... 707,050 50,500 Public Service North Carolina, Inc............. 1,313,000 33,800 Washington Gas Light Co..................................... 916,825 -------------- 6,352,156 -------------- OFFICE EQUIPMENT & SUPPLIES--0.4% 43,600 Bell & Howell (c).............................. 1,648,625 37,200 HON Industries................................. 890,475 43,200 National Computer Systems...................... 1,598,400 -------------- 4,137,500 -------------- OIL & GAS/EXPLORATION & PRODUCTION--0.3% 109,500 Forcenergy, Inc. (c)........................... 287,438 55,800 Newfield Exploration Co........................ 1,164,825 67,400 Plains Resources (c)........................... 947,812 119,400 Vintage Petroleum, Inc......................... 1,029,825 -------------- 3,429,900 -------------- PAPER & FOREST PRODUCTS--0.1% 33,600 Chesapeake Corp. (Rights)...................... 1,239,000 -------------- PETROLEUM SERVICES--0.3% 74,600 BJ Services (c)................................ 1,165,625 66,300 Key Energy Group (c)........................... 310,781 1,532,285 Ocean Rig ASA.................................. 419,445 23,150 Schlumberger, Ltd.............................. 1,073,581 -------------- 2,969,432 -------------- PUBLISHING--3.3% 200,000 Knight-Ridder, Inc............................. 10,225,000 83,825 Lamar Advertising (c).......................... 3,122,481 5,025 McGraw-Hill Companies, Inc..................... 511,922 181,100 R. H. Donnelley Corp........................... 2,637,269 311,304 Time Warner, Inc............................... 19,320,304 -------------- 35,816,976 -------------- RETAIL--3.5% 23,450 Bed Bath & Beyond, Inc. (c).................... 800,231 12,750 Best Buy Company, Inc. (c)..................... 782,531 30,800 BJ's Wholesale Club (c)..................................... 1,426,425 114,700 Burlington Coat Factory........................ 1,871,044 38,300 Claire's Stores................................ 785,150 86,950 Costco Cos. (c)................................ 6,276,703 5,405 Dollar Tree Stores, Inc........................ 236,131 42,150 Gap, Inc....................................... 2,370,938 78,625 Home Depot, Inc................................ 4,810,867 29,375 Kohls Corp. (c)................................ 1,804,727 26,500 Payless ShoeSource, Inc. (c)................... 1,255,438 33,500 Ross Stores, Inc............................... 1,319,063 85,090 Staples, Inc. (c).............................. 3,717,369 41,600 Talbots, Inc................................... 1,305,200 108,700 Venator Group, Inc. (c)........................ 699,756 83,050 Wal-Mart Stores, Inc........................... 6,763,384 37,200 Walgreen Co.................................... 2,178,525 -------------- 38,403,482 -------------- RETAIL -- GROCERY--0.4% 14,700 Great Atlantic & Pacific Tea Co................ 435,487 41,500 Hannaford Brothers............................. 2,199,500 37,700 Safeway, Inc. (c).............................. 2,297,344 -------------- 4,932,331 -------------- SERVICES--1.2% 77,300 Borg-Warner Security Corp...................... 1,449,375 49,500 Cort Business Services (c)..................... 1,200,375 91,900 Daisytek International Corp.................... 1,746,100 59,150 DeVry, Inc (c)................................. 1,811,469 48,400 Information Resources (Rights)................. 493,075 900 StaffMark, Inc................................. 20,137 25,500 Sykes Enterprises, Inc. (c).................... 777,750 171,000 Viad Corp...................................... 5,194,125 -------------- 12,692,406 -------------- SOFTWARE--3.3% 3,055 Inktomi Corp................................... 395,241 74,755 Intuit, Inc. (c)............................... 5,419,738 173,065 Microsoft Corp. (c)............................ 24,001,952 42,025 Solectron Corp. (c)............................ 3,905,698 43,762 Wind River Systems (c)......................... 2,056,814 -------------- 35,779,443 -------------- SPECIALTY PRINTING--0.5% 33,625 Banta Corp..................................... 920,484 44,800 Cadmus Communications.......................... 845,600 34,800 Deluxe Corp.................................... 1,272,375 22,000 Gannett Co..................................... 1,419,000 52,600 Harte-Hanks, Inc............................... 1,499,100 -------------- 5,956,559 -------------- TECHNOLOGY--3.4% 218,425 Cisco Systems (c).............................. 20,272,570 81,275 Intel Corp..................................... 9,636,167 33,675 Oracle Systems Corp. (c)....................... 1,452,235 164,514 Pittway Corp................................... 5,439,244 -------------- 36,800,216 -------------- TELECOMMUNICATION--4.0% 57,550 AirTouch Communications, Inc. (c).............. 4,150,794 59,900 BellSouth Corp................................. 2,987,512 7,780 Global Crossing, Ltd........................... 351,073 147,650 MCI Worldcom, Inc. (c)......................... 10,593,887 44,920 Qwest Communications International, Inc. (c)..................................... 2,246,000 54,800 SBC Communications, Inc........................ 2,938,650 301,759 Tele-Communications, Inc. (c).................. 16,691,045 363,511 Telecom Italia S.p.A........................... 3,099,885 19,200 Transaction Network Services, Inc.............. 385,200 -------------- 43,444,046 -------------- TELECOMMUNICATION EQUIPMENT--2.5% 39,600 General Instrument Corp. (c)................... 1,343,925 58,200 Inter Tel, Inc................................. 1,360,425 196,650 Nokia Corp. (ADR).............................. 23,684,035 61,700 Tekelec, Inc................................... 1,021,906 -------------- 27,410,291 -------------- TRUCKING & FREIGHT FORWARDING--0.2% 46,300 CNF Transportation, Inc........................ 1,739,144 -------------- UTILITIES--0.1% 36,500 American States Water Co....................... 994,625 -------------- WASTE MANAGEMENT--0.0% 6,975 World Fuel Services Corp....................... 74,981 -------------- Total Common Stock (Identified Cost $852,536,428) .............. 1,014,923,131 -------------- BONDS AND NOTES--0.0% FACE AMOUNT - ------------------------------------------------------------------------------- INTERNET CONTENT--0.0% $ 158,000 Amazon.com, Inc., 0/10.00% 5/01/2008 (d)....................... 105,070 -------------- Total Bonds and Notes (Identified Cost $89,855) ................... 105,070 -------------- SHORT TERM INVESTMENTS--6.2% - ------------------------------------------------------------------------------- FACE AMOUNT DESCRIPTION VALUE(a) - ------------------------------------------------------------------------------- $15,015,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/31/98 at 4.00% to be repurchased at $15,021,673 on 1/04/99, collateralized by $11,235,000 U.S. Treasury Bond 8.125% due 8/15/19 with a value of $15,353,967.................................. $ 15,015,000 15,340,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/31/98 at 4.50% to be repurchased at $15,347,670 on 1/04/99, collateralized by $11,480,000 U.S. Treasury Bond 8.125% due 8/15/19 with a value of $15,688,788.................................. 15,340,000 13,600,000 CIT Group Holdings, 5.300%, 1/04/1999......... 13,593,993 11,611,289 Associates First Capital, 5.000%, 1/04/1999... 11,611,289 10,000,000 Federal National Mortgage Association Discount Notes, Zero Coupon, 4/01/1999................ 9,876,750 2,100,000 Chevron Corp., 4.800%, 1/04/1999.............. 2,100,000 -------------- Total Short Term Investments (Identified Cost $67,537,032) ............................... 67,537,032 -------------- Total Investments--99.1% (Identified Cost $920,163,315) (b) .......................... 1,082,565,233 Other assets less liabilities ................ 9,903,306 -------------- Total Net Assets--100% ....................... $1,092,468,539 ==============
FORWARD CURRENCY CONTRACTS OUTSTANDING -- at December 31, 1998 LOCAL AGGREGATE UNREALIZED DELIVERY CURRENCY FACE TOTAL APPRECIATION/ DATE AMOUNT VALUE VALUE (DEPRECIATION) ------------- ------------------- --------------- --------------- ---------------- Finnish Markka (sold)..... 1/22/99 44,400,000 $ 8,719,408 $ 8,717,200 $ 2,208 Finnish Markka (sold)..... 1/26/99 14,600,000 2,886,739 2,867,042 19,697 Italian Lira (sold)....... 1/22/99 1,050,000,000 633,943 635,706 (1,763) Italian Lira (sold)....... 1/26/99 3,050,000,000 1,884,669 1,846,928 37,741 ------------ $ 57,883 ============ (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 $921,913,041 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 ............................................................... $212,149,068 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............................................................... (51,496,876) ------------ Net unrealized appreciation ............................................................ $160,652,192 ============ (c) Non-income producing security. (d) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. 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. - ------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES - ------------------------------------------------------------------------------- December 31, 1998 ASSETS Investments at value (Identified cost $920,163,315) ... $1,082,565,233 Cash .................................................. 79,768 Receivable for: Fund shares sold .................................... 6,727,009 Securities sold ..................................... 33,075,105 Open forward currency contracts - net ............... 57,883 Accrued dividends and interest ...................... 1,148,714 Tax reclaims ........................................ 11,659 Unamortized organization expense ...................... 25,125 -------------- 1,123,690,496 LIABILITIES Payable for: Securities purchased ................................ $26,230,720 Fund shares redeemed ................................ 3,797,661 Accrued expenses: Management fees ..................................... 924,623 Deferred trustees' fees ............................. 23,149 Accounting and administrative ....................... 17,056 Other ............................................... 228,748 ----------- 31,221,957 -------------- NET ASSETS .............................................. $1,092,468,539 ============== Net Assets consist of: Capital paid in ..................................... $ 878,120,873 Undistributed net investment income ................. 163,718 Accumulated net realized gains (losses) ............. 51,723,374 Unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions ...................................... 162,460,574 -------------- NET ASSETS .............................................. $1,092,468,539 ============== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($443,165,006 divided by 22,131,746 shares of beneficial interest) ................................ $20.02 ====== Offering price per share (100/94.25 of $20.02) .......... $21.24* ====== Net asset value and offering price of Class B shares ($508,937,215 divided by 26,459,982 shares of beneficial interest) ................................. $19.23** ====== Net asset value and offering price of Class C shares ($97,849,290 divided by 5,083,452 shares of beneficial interest) ............................................ $19.25** ====== Net asset value, offering and redemption price of Class Y shares ($42,517,028 divided by 2,087,425 shares of beneficial interest) ........................................... $20.37 ====== * 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. - ------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - ------------------------------------------------------------------------------- Year Ended December 31, 1998 INVESTMENT INCOME Dividends (Net of foreign taxes of: $49,327) ............ $ 11,009,396 Interest ................................................ 3,501,398 ------------ 14,510,794 Expenses Management fees ....................................... $ 10,961,734 Service fees - Class A ................................ 1,072,116 Service and distribution fees - Class B ............... 4,826,734 Service and distribution fees - Class C ............... 958,465 Trustees' fees and expenses ........................... 56,849 Accounting and administrative ......................... 191,247 Custodian ............................................. 472,561 Transfer agent ........................................ 2,135,502 Audit and tax services ................................ 46,000 Legal ................................................. 74,306 Printing .............................................. 238,159 Registration .......................................... 127,138 Amortization of organization expenses ................. 33,000 Miscellaneous ......................................... 42,531 ------------ Total expenses .......................................... 21,236,342 ------------ Net investment loss ..................................... (6,725,548) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments - net ..................................... 120,836,368 Forward currency contracts - net ...................... (488,909) Foreign currency transactions - net ................... (4,014) ------------ Total realized gain (loss) on investments, forward currency contracts and foreign currency transactions ......................... 120,343,445 ------------ Unrealized appreciation (depreciation) on: Investments - net ..................................... 65,141,097 Forward currency contracts - net ...................... 94,795 Foreign currency transactions - net ................... 1,569 ------------ Total unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions .. 65,237,461 ------------ Net gain (loss) on investment transactions .............. 185,580,906 ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS . $178,855,358 ============
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1997 1998 -------------- -------------- FROM OPERATIONS Net investment loss ................................. $ (5,022,287) $ (6,725,548) Net realized gain (loss) on investments, forward currency contracts and foreign currency transactions ...................................... 180,780,558 120,343,445 Unrealized appreciation (depreciation) on investments, forward currency contracts and foreign currency transactions ............................. (10,460,445) 65,237,461 -------------- -------------- Increase (decrease) in net assets from operations ... 165,297,826 178,855,358 -------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net realized gain on investments Class A ........................................... (71,019,226) (29,743,099) Class B ........................................... (80,282,014) (34,777,382) Class C ........................................... (16,094,369) (6,853,215) Class Y ........................................... (5,967,515) (2,746,734) -------------- -------------- (173,363,124) (74,120,430) -------------- -------------- Increase (decrease) in net assets derived from capital share transactions ................................ 204,607,502 (22,655,877) -------------- -------------- Total increase (decrease) in net assets ............. 196,542,204 82,079,051 NET ASSETS Beginning of the year ............................... 813,847,284 1,010,389,488 -------------- -------------- End of the year ..................................... $1,010,389,488 $1,092,468,539 ============== ============== UNDISTRIBUTED NET INVESTMENT INCOME End of the year ..................................... $ 162,760 $ 163,718 ============== ==============
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------
CLASS A -------------------------------------------------------------------------------------------------------------- JULY 7, 1994(a) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 1998 ----------------------- ------------------ -------------------- -------------------- -------------------- Net Asset Value, Beginning of Period ......... $12.50 $13.25 $16.78 $18.18 $18.17 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) .. 0.05 0.00 (0.06)(e) (0.02)(e) (0.05)(e) Net Realized and Unrealized Gain (Loss) on Investments .... 0.75 4.52 3.17 3.62 3.28 ------ ------ ------ ------ ------ Total From Investment Operations ..... 0.80 4.52 3.11 3.60 3.23 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income ......... (0.05) 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains .. 0.00 (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Total Distributions .... (0.05) (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Net Asset Value, End of Period .. $13.25 $16.78 $18.18 $18.17 $20.02 ====== ====== ====== ====== ====== Total Return (%)(c) 6.4 34.4 19.0 20.2 19.3 Ratio of Operating Expenses to Average Net Assets (%) (d) . 1.94(b) 1.82 1.68 1.66 1.62 Ratio of Net Investment Income to Average Net Assets (%) ..... 1.06(b) (0.33) (0.36) (0.14) (0.24) Portfolio Turnover Rate (%) 100 142 127 168 101 Net Assets, End of Period (000) ... $91,218 $223,596 $348,573 $416,938 $443,165 (a) Commencement of operations. (b) Computed on an annualized basis. (c) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) The ratio of operating expenses to average net assets, without giving effect to the voluntary fee waiver in effect through December 31, 1994 would have been 1.98% for period ended December 31, 1994. (e) Per share net investment loss has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- continued - -------------------------------------------------------------------------------
CLASS B -------------------------------------------------------------------------------------------------------------- JULY 7, 1994(a) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 1998 ----------------------- ------------------ -------------------- -------------------- -------------------- Net Asset Value, Beginning of Period ......... $12.50 $13.23 $16.63 $17.86 $17.63 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) .. 0.02 0.00 (0.20)(e) (0.17)(e) (0.18)(e) Net Realized and Unrealized Gain (Loss) on Investments .... 0.73 4.39 3.14 3.55 3.16 ------ ------ ------ ------ ------ Total From Investment Operations ..... 0.75 4.39 2.94 3.38 2.98 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income ......... (0.02) 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains .. 0.00 (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Total Distributions .... (0.02) (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Net Asset Value, End of Period .. $13.23 $16.63 $17.86 $17.63 $19.23 ====== ====== ====== ====== ====== Total Return (%)(c) 6.0 33.4 18.1 19.3 18.4 Ratio of Operating Expenses to Average Net Assets (%) (d) . 2.69(b) 2.57 2.43 2.41 2.37 Ratio of Net Investment Income to Average Net Assets (%) ..... 0.31(b) (1.08) (1.11) (0.89) (0.99) Portfolio Turnover Rate (%) 100 142 127 168 101 Net Assets, End of Period (000) ... $72,889 $220,017 $366,314 $462,034 $508,937 (a) Commencement of operations. (b) Computed on an annualized basis. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) The ratio of operating expenses to average net assets, without giving effect to the voluntary fee waiver in effect through December 31, 1994 would have been 2.75% for period ended December 31, 1994. (e) Per share net investment loss has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- continued - -------------------------------------------------------------------------------
CLASS C -------------------------------------------------------------------------------------------------------------- JULY 7, 1994(a) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 1998 ----------------------- ------------------ -------------------- -------------------- -------------------- Net Asset Value, Beginning of Period ......... $12.50 $13.24 $16.65 $17.87 $17.64 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) .. 0.02 0.00 (0.20)(e) (0.17)(e) (0.18)(e) Net Realized and Unrealized Gain (Loss) on Investments .... 0.74 4.40 3.13 3.55 3.17 ------ ------ ------ ------ ------ Total From Investment Operations ..... 0.76 4.40 2.93 3.38 2.99 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income ......... (0.02) 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains .. 0.00 (0.99) (1.71) (3.61) (1.38) ----- ----- ----- ----- ----- Total Distributions .... (0.02) (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Net Asset Value, End of Period .. $13.24 $16.65 $17.87 $17.64 $19.25 ====== ====== ====== ====== ====== Total Return (%)(c) 6.0 33.4 18.0 19.3 18.5 Ratio of Operating Expenses to Average Net Assets (%) (d) . 2.69(b) 2.57 2.43 2.41 2.37 Ratio of Net Investment Income to Average Net Assets (%) ..... 0.31(b) (1.08) (1.11) (0.89) (0.99) Portfolio Turnover Rate (%) 100 142 127 168 101 Net Assets, End of Period (000) ... $20,096 $45,672 $80,312 $94,412 $97,849 (a) Commencement of operations. (b) Computed on an annualized basis. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) The ratio of operating expenses to average net assets, without giving effect to the voluntary fee waiver in effect through December 31, 1994 would have been 2.75% for period ended December 31, 1994. (e) Per share net investment loss has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- continued - -------------------------------------------------------------------------------
CLASS Y -------------------------------------------------------------------------------------------------------------- NOVEMBER 15(a) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 1998 ---------------------- ------------------- -------------------- -------------------- -------------------- Net Asset Value, Beginning of Period ......... $13.59 $13.24 $16.83 $18.33 $18.41 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) .. 0.06 0.00 (0.02)(e) 0.03(e) 0.00(e) Net Realized and Unrealized Gain (Loss) on Investments .... (0.35) 4.58 3.23 3.66 3.34 ------ ------ ------ ------ ------ Total From Investment Operations ..... (0.29) 4.58 3.21 3.69 3.34 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income ......... (0.06) 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains .. 0.00 (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Total Distributions .... (0.06) (0.99) (1.71) (3.61) (1.38) ------ ------ ------ ------ ------ Net Asset Value, End of Period (000) $13.24 $16.83 $18.33 $18.41 $20.37 ====== ====== ====== ====== ====== Total Return (%)(c) (2.1) 34.8 19.6 20.5 19.6 Ratio of Operating Expenses to Average Net Assets (%) (d) . 1.79(b) 1.57 1.43 1.41 1.37 Ratio of Net Investment Income to Average Net Assets (%) ..... 2.26(b) (0.08) (0.11) 0.11 0.01 Portfolio Turnover Rate (%) 100 142 127 168 101 Net Assets, End of Period (000) ... $196 $5,569 $18,649 $37,006 $42,517 (a) Commencement of operations. (b) Computed on an annualized basis. (c) Periods less than one year are not annualized. (d) The ratio of operating expenses to average net assets, without giving effect to the voluntary fee waiver in effect through December 31, 1994 would have been 1.90% for period ended December 31, 1994. (e) Per share net investment loss has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- December 31, 1998 1. The Fund is a series of New England Funds Trust I, 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 growth of capital. The Declaration of Trust permits the trustees to issue an unlimited number of shares of the Trust in multiple series (each such series of shares a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. The Fund seeks long term growth of capital. 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 (or five years if purchased before May 1, 1997). 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. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. 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. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service as authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. 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 subadvisers, under the supervision of the Fund's trustees. B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions are accounted for on the trade date (the date the buy or sell is executed). Dividend income is recorded on the ex-dividend date or when the Fund learns of the dividend and interest income is recorded on the accrual basis. Interest income for the Fund is increased by the accretion of discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained in U.S. Dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. Dollars are translated into U.S. Dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities at fiscal year end, resulting from changes in the exchange rate. D. FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the Fund's investments against currency fluctuation. Also, a contract to buy or sell can offset a previous contract. These contracts involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. The U.S. Dollar value of the currencies the Fund has committed to buy or sell (if any) is shown in the portfolio composition under the caption "Forward Currency Contracts Outstanding." This amount represents the aggregate exposure to each currency the Fund has acquired or hedged through currency contracts outstanding at period end. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. All contracts are "marked-to-market" daily at the applicable translation rates and any gains or losses are recorded for financial statement purposes as unrealized until settlement date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. E. 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. F. 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, distributions from real estate investment trusts and foreign currency transactions for book and tax purposes. Permanent book and tax basis differences will result in reclassification to capital accounts. G. 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. Each 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. H. ORGANIZATION EXPENSE. Costs incurred in fiscal 1994 in connection with the Fund's organization and registration, amounting to approximately $165,000 in the aggregate, were paid 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 $986,127,201 and $1,098,618,386, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays management fees to its adviser, New England Funds Management, L.P. ("NEFM"), at the annual rate of 1.05% on the first $1 billion of the Fund's average daily net assets and 1.00% of such assets in excess of $1 billion. NEFM pays the Fund's investment subadvisers, Founders Asset Management, Inc., Harris Associates, Janus Capital Corporation and Loomis, Sayles & Company, L.P. (the "Subadvisers") as follows: Founders Asset Management, Inc., Janus Capital Corporation and Loomis, Sayles & Company, L.P. at the annual rate of 0.55% of the first $50 million of the average daily net assets of the segment of the Fund that the subadviser manages, 0.50% of the next $200 million and 0.475% of such assets in excess of $250 million. NEFM pays Harris Associates at the annual rate of 0.65% of the first $50 million of the average daily net assets of the segment of the Fund that the subadviser manages, 0.60% of the next $50 million and 0.55% of such assets in excess of $100 million. Certain officers and directors of the Adviser are also officers or trustees of the Fund. NEFM, Harris Associates and Loomis, Sayles & Company, L.P. are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") formerly New England Investment Companies, L.P., which is a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees retained by NEFM and paid to each Subadviser under the management agreement in effect during the year ended December 31, 1998 are as follows: $ 5,476,306 NEFM 1,350,200 Harris Associates 1,463,599 Founders Asset Management, Inc. 1,358,439 Janus Capital Corporation 1,313,190 Loomis, Sayles & Company, L.P. ----------- $10,961,734 =========== The effective management fee for the year ended December 31, 1998 was 1.05%. 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 $191,247 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 to the Fund and Boston Financial Data Services serves as a sub-transfer agent for the Fund. For the year ended December 31, 1998, the Fund paid NEFSCO $1,731,776 as compensation for its services in that capacity. For the year ended December 31, 1998, the Fund received $21,969 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 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 $1,072,116 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays New England Funds monthly service fees 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 $1,206,684 and $239,616 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plan, 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 $3,620,050 and $718,849 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 $2,573,691. 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 New England Funds, NEFSCO, Nvest, NEFM or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $5,684 Meeting Fee 152/meeting Annual Committee Member Retainer 853 Annual Committee Chairman Retainer 568 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. CAPITAL SHARES. At December 31, 1998 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y capital stock. Transactions in capital shares were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------------------ ------------------------------ CLASS A SHARES AMOUNT SHARES AMOUNT - ------- ------------- ------------- ------------- ------------- Shares sold .................... 11,237,845 $ 216,916,475 7,745,900 $ 144,536,590 Shares issued in connection with the reinvestment of: Distributions from net realized gain ......................... 3,794,070 69,274,984 1,738,294 29,133,801 ------------- ------------- ------------- ------------- 15,031,915 286,191,459 9,484,194 173,670,391 Shares repurchased ............. (11,253,282) (216,169,035) (10,305,177) (192,986,379) ------------- ------------- ------------- ------------- Net increase (decrease) ........ 3,778,633 $ 70,022,424 (820,983) $ (19,315,988) ------------- ------------- ------------- ------------- YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------------------ ------------------------------ CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ------------- ------------- ------------- ------------- Shares sold .................... 4,908,106 $ 89,778,147 3,638,826 $ 67,366,177 Shares issued in connection with the reinvestment of: Distributions from net realized gain ......................... 4,286,660 76,148,745 2,058,653 33,226,657 ------------- ------------- ------------- ------------- 9,194,766 165,926,892 5,697,479 100,592,834 Shares repurchased ............. (3,497,668) (65,093,904) (5,444,982) (99,728,292) ------------- ------------- ------------- ------------- Net increase ................... 5,697,098 $ 100,832,988 252,497 $ 864,542 ------------- ------------- ------------- ------------- YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------------------ ------------------------------ CLASS C SHARES AMOUNT SHARES AMOUNT - ------- ------------- ------------- ------------- ------------- Shares sold .................... 1,933,560 $ 35,540,097 1,232,859 $ 22,880,050 Shares issued in connection with the reinvestment of: Distributions from net realized gain ......................... 877,348 15,592,950 411,134 6,639,808 ------------- ------------- ------------- ------------- 2,810,908 51,133,047 1,643,993 29,519,858 Shares repurchased ............. (1,953,987) (36,192,030) (1,911,802) (34,992,392) ------------- ------------- ------------- ------------- Net increase (decrease) ........ 856,921 $ 14,941,017 (267,809) $ (5,472,534) ------------- ------------- ------------- ------------- YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------------------ ------------------------------ CLASS Y SHARES AMOUNT SHARES AMOUNT - ------- ------------- ------------- ------------- ------------- Shares sold .................... 1,010,270 $ 19,247,891 499,785 $ 9,729,009 Shares issued in connection with the reinvestment of: Distributions from net realized gain ....................... 322,823 5,967,509 161,193 2,746,731 ------------- ------------- ------------- ------------- 1,333,093 25,215,400 660,978 12,475,740 Shares repurchased ............. (340,009) (6,404,327) (584,070) (11,207,637) ------------- ------------- ------------- ------------- Net increase ................... 993,084 $ 18,811,073 76,908 $ 1,268,103 ------------- ------------- ------------- ------------- Increase (decrease) derived from capital shares transactions ................. 11,325,736 $ 204,607,502 (759,387) $ (22,655,877) ============= ============= ============= =============
5. 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. - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - ------------------------------------------------------------------------------- To the Trustees of New England Funds Trust I and Shareholders of NEW ENGLAND STAR ADVISERS 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 Star Advisers Fund (the "Fund"), a series of New England Funds Trust I, 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 - ------------------------------------------------------------------------------- SUPPLEMENT DATED FEBRUARY 12, 1999 TO NEW ENGLAND STAR FUNDS PROSPECTUS DATED MAY 1, 1998 AND NEW ENGLAND STOCK FUNDS CLASS Y PROSPECTUS DATED MAY 1, 1998 NEW ENGLAND STAR SMALL CAP FUND CHANGE IN PORTFOLIO MANAGER The following supplements the paragraph entitled "Montgomery" in the "Fund Management" section of each prospectus: Effective March 1, 1999, Kathryn Peters replaces Andrew Pratt as the portfolio manager of the Montgomery segment of the Fund. Ms. Peters, Vice President of Montgomery, joined the firm in 1995. Prior to 1995 she was an associate in the investment banking division of Donaldson, Lufkin & Jenrette in New York. CHANGE IN CONTROL Effective February 12, 1999, the following supplements the paragraph entitled "Robertson Stephens" in the "Fund Management" section of each Prospectus: Members of senior management of Robertson Stephens have agreed to purchase Robertson Stephens Investment Management Co. Inc., Robertson Stephens's parent company, from BankAmerica Corporation, in a transaction expected to be completed in March 1999. Robertson Stephens will continue to serve as a subadviser to the Star Small Cap Fund following the transaction, and it is expected that John L. Wallace and John Seabern will continue to serve as co- managers of Robertson Stephens segment of the Fund. The trustees of the New England Funds Trust I approved the continuation of the Star Small Cap Fund's current arrangements with Robertson Stephens following the consummation of the transaction. NEW ENGLAND STAR ADVISERS FUND CHANGE IN PORTFOLIO MANAGERS The following supplements the paragraph entitled "Founders" in the "Fund Management" section of each Prospectus: Effective January 1999, the Founders segment of the Star Advisers Fund is managed by Scott A. Chapman and Thomas M. Arrington. Mr. Chapman and Mr. Arrington have been Vice Presidents of Investments at Founders since December 1998. Prior to joining Founders, Mr. Chapman was Vice President and Director of Growth Strategy and Mr. Arrington served as Vice President and Director of Income Equity Strategy at HighMark Capital Management. - ------------------------------------------------------------------------------- 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. ------------------ [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 --------------------- SA56-1298 [Recycle Logo] Printed on Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----