-----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, UREuf/Ent56Y7PTQpHQ05MuF1AiQC7X13Lu0eTEme5HTnCF8vfn0P18t5PQYcpwe CLs+hHdUuDLQsfBzwTK93Q== 0000950156-98-000229.txt : 19980309 0000950156-98-000229.hdr.sgml : 19980309 ACCESSION NUMBER: 0000950156-98-000229 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NONE 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: 98558586 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 STAR SMALL CAP FUND - NEF TRUST I - -------------------------------------------------------------------------------- ANNUAL REPORT - -------------------------------------------------------------------------------- [LOGO] NEW ENGLAND FUNDS(R) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- New England Star Small Cap Fund [Graphic Omitted] - ------------------ DECEMBER 31, 1997 - ------------------ FEBRUARY 1998 - ------------------------------------------------------------------------------- Dear Shareholder: [Photo of Henry L.P. Schmelzer] "Even in 1997 . . . investors saw some sharp, short-term drops, whether they were invested in the United States or overseas, in bonds or stocks." In 1997, many investors once again had reason to be pleased with the performance of their mutual fund holdings. However, in times such as these, expectations tend to grow along with prices. It pays to remind ourselves that no trend is permanent, and we should keep our goals realistic and long-term needs in focus. In the third straight year of outstanding returns, the Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index -- two widely followed indicators of the performance of large-company stocks -- gained 24.9% and 33.3% respectively. At the same time, smaller-company stocks, as measured by the Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded as declining interest rates and rising prices meant solid gains. The Lehman Long Treasury Index, for example, posted a 15.1% return for the year. Results were less favorable for international investors, especially those exposed to emerging markets or the financial turmoil in Asia. Gratifying though it has been, the markets' surge of the past few years obscures the historic norm: Downturns and volatility also are regular features of investing. Even in 1997, notwithstanding the impressive overall results, investors saw some sharp, short-term drops, whether they were invested in the United States or overseas, in bonds or stocks. Market fluctuations remind us of some valuable lessons. First, volatility is inevitable, and should not disrupt long-term programs without sufficient evaluation. Those who sold in response to downturns -- October 1987 is an obvious example -- may have missed out on the subsequent uptrend. Second, sound diversification can reduce risk. A useful exercise is to review your asset allocation regularly with your financial representative. Starting in 1998, you have one more reason to consult with your representative: Newly expanded retirement options, including the new Roth IRA, could play an important role in your retirement and tax planning for years to come. With this in mind, New England Funds has introduced programs specially designed to help you make the most of the newest retirement vehicles. [Dalbar logo] 1995 o 1996 o 1997 In addition to offering quality mutual fund choices and tax-advantaged plans, we focus on providing the highest quality customer service. This is why I am pleased to report that we have received DALBAR's Mutual Fund Service Award for "providing the highest tier of service excellence in the mutual fund industry." New England Funds is one of just three mutual fund companies to receive this award for the third consecutive year from DALBAR, an independent evaluator of mutual fund service. We are continuing to work to provide even more effective services. Two examples are: the Personal Access Line(TM) -- our enhanced automated telephone account service (800-346-5984) -- and the account information section of the New England Funds web site (www.mutualfunds.com). Each provides convenient, 24-hour access to current information about your New England Funds accounts. All of us at New England Funds thank you for your continued support and look forward to serving you in the years ahead. Sincerely, /s/ Henry L.P. Schmelzer Henry L.P. Schmelzer President - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- TOTAL RETURNS -- 12/31/97 - ------------------------------------------------------------------------------- CLASS A (Inception 12/31/96) 1 YEAR/SINCE INCEPTION Net Asset Value(1) 26.97% With Max. Sales Charge(2) 19.69 CLASS B (Inception 12/31/96) 1 YEAR/SINCE INCEPTION Net Asset Value(1) 26.09% With CDSC(3) 21.09 CLASS C (Inception 12/31/96) 1 YEAR/SINCE INCEPTION Net Asset Value(1) 26.09% COMPARATIVE PERFORMANCE 1 YEAR/SINCE FUND INCEPTION Russell 2000(4) 22.36% Lipper Small Cap Fund Avg.(5) 20.63 These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. NOTES TO CHARTS AND PERFORMANCE UPDATE (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 5.75% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum 5% sales charge is applied to a redemption of Class B shares. The sales charge will decrease over time, declining to zero six years after the purchase of shares. (4) Russell 2000 Small Stock Index is a popular measure of the stock price performance of small companies. The Index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. (5) Lipper Small Cap Fund 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 Analytical Services, an independent mutual fund ranking service. - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GROWTH OF A $10,000 INVESTMENT COMPARED TO RUSSELL 2000 - ------------------------------------------------------------------------------- DECEMBER 1996 THROUGH DECEMBER 1997 [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in the Star Small Cap Fund's Class A shares compared to Russell 2000. The data points to this chart are as follows:] Net With Maximum Russell Class A Asset Value(1) Sales Charge(2) 2000(4) - ------------------------------------------------------------------------------- 12/31/96 $10,000 $ 9,425 $10,000 Jan-97 $10,192 $ 9,606 $10,200 Feb-97 $ 9,920 $ 9,349 $ 9,953 Mar-97 $ 9,351 $ 8,814 $ 9,483 Apr-97 $ 9,264 $ 8,731 $ 9,510 May-97 $10,447 $ 9,847 $10,567 Jun-97 $11,040 $10,405 $11,021 Jul-97 $11,784 $11,106 $11,533 Aug-97 $12,104 $11,408 $11,797 Sep-97 $13,160 $12,403 $12,661 Oct-97 $12,673 $11,944 $12,105 Nov-97 $12,376 $11,665 $12,026 Dec-97 $12,697 $11,967 $12,237 [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in the Star Small Cap Fund's Class B shares compared to Russell 2000. The data points to this chart are as follows:] Net Russell Class B Asset Value(1) CDSC(3) 2000(4) - ------------------------------------------------------------------------------- 12/31/96 $10,000 $10,000 $10,000 Jan-97 $10,184 $10,184 $10,200 Feb-97 $ 9,912 $ 9,912 $ 9,953 Mar-97 $ 9,336 $ 9,336 $ 9,483 Apr-97 $ 9,248 $ 9,248 $ 9,510 May-97 $10,425 $10,425 $10,567 Jun-97 $11,001 $11,001 $11,021 Jul-97 $11,745 $11,745 $11,533 Aug-97 $12,057 $12,057 $11,797 Sep-97 $13,098 $13,098 $12,661 Oct-97 $12,602 $12,602 $12,105 Nov-97 $12,298 $12,298 $12,026 Dec-97 $12,609 $12,109 $12,237 [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in the Star Small Cap Fund's Class C shares compared to Russell 2000. The data points to this chart are as follows:] Net Russell Class C Asset Value(1) 2000(4) - ---------------------------------------------------------------- 12/31/96 $10,000 $10,000 Jan-97 $10,192 $10,200 Feb-97 $ 9,912 $ 9,953 Mar-97 $ 9,336 $ 9,483 Apr-97 $ 9,248 $ 9,510 May-97 $10,424 $10,567 Jun-97 $11,001 $11,021 Jul-97 $11,745 $11,533 Aug-97 $12,057 $11,797 Sep-97 $13,098 $12,661 Oct-97 $12,609 $12,105 Nov-97 $12,298 $12,026 Dec-97 $12,609 $12,237 These illustrations represent past performance 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 reinvested distributions. - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- OVERVIEW: HOW YOUR FUND PERFORMED - ------------------------------------------------------------------------------- New England Star Small Cap Fund finished its first full year in operation with strong results. For the year ending December 31, 1997, the Fund's Class A shares produced a total return of 26.97%, reflecting a $2.87 per share gain in net asset asset value to $15.37 per share and the reinvestment of $0.475 per share in capital gains distributions. For both Class B and C shares, the Fund generated a total return of 26.09%, also based on net asset value. In comparison, the Russell 2000 Small Stock Index returned 22.36%, falling well short of your Fund's 1997 performance. The 12-month period was generally positive for domestic stocks. U.S. economic growth was strong, interest rates were relatively low, and inflation remained at a modest level of 2%. For the first four months of the year, however, returns from stocks of small companies generally lagged those of large companies, which had been market leaders for more than two years. Investor sentiment began to cool toward large-company stocks during the second quarter of the year, when a strong U.S. dollar and high stock prices raised questions about whether or not large-company stocks could continue their climb. As investors sought other opportunities, small-company stocks rallied for several months, outperforming large-company stocks. During the last three months of 1997, problems in certain Asian economies and financial markets reverberated throughout the world's stock markets. U.S. stocks, in fact, declined across the board, especially small-company stocks. New England Star Small Cap Fund is composed of four separate portfolio segments, each managed by a different leading investment management firm. Your Fund's multiple-adviser approach -- the essence of the Star concept -- provides a means to diversify among not just individual securities, but among investment styles and strategies as well. Though the four portfolio segments of New England Star Small Cap Fund are managed autonomously, the following chart gives you a general sector profile of the Fund as a whole. - ------------------------------------------------------------------------------- YOUR FUND'S 10 LARGEST SECTORS -- 12/31/97 - ------------------------------------------------------------------------------- % OF SECTOR NET ASSETS - ------------------------------------------------------------------------------- 1. BUSINESS SERVICES 6.8 - ------------------------------------------------------------------------------- 2. SOFTWARE 6.8 - ------------------------------------------------------------------------------- 3. INSURANCE 4.8 - ------------------------------------------------------------------------------- 4. CONSUMER GOODS & SERVICES 4.4 - ------------------------------------------------------------------------------- 5. RETAIL 4.2 - ------------------------------------------------------------------------------- 6. BANKS 4.1 - ------------------------------------------------------------------------------- 7. INDUSTRIAL GOODS & SERVICES 3.4 - ------------------------------------------------------------------------------- 8. HEALTH CARE -D MEDICAL TECHNOLOGY 3.4 - ------------------------------------------------------------------------------- 9. SAVINGS & LOAN 3.1 - ------------------------------------------------------------------------------- 10. BROADCASTING & PUBLISHING 2.9 - ------------------------------------------------------------------------------- Portfolio holdings and asset allocations will vary. - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- OAKMARK/HARRIS ASSOCIATES L.P. - ------------------------------------------------------------------------------- Q. How do you manage the Oakmark/ Harris portion of the portfolio? Photo of Steven Reid] Steven Reid Oakmark/Harris Associates L.P. I select stocks on a case-by-case basis, though my segment's holdings during the year tended to cluster around a few themes and industry sectors. I found opportunity in a number of areas, especially financial companies and small industrial businesses, which were among the strongest contributors to performance. Q. In what types of financial companies did you invest? I emphasized companies that were leaders in specific market niches, such as reinsurance companies. Reinsurers allow individual companies to take on clients whose coverage would be too great a burden for one insurer alone to carry. A reinsurer assumes some of the risk in return for part of the premium fee paid by the insured. RenaissanceRe Holdings and PXRE Corp. are two reinsurers that contributed to the portfolio's return. The largest bank investment at year-end was People's Bank. Large banks have been acquiring small, independent Connecticut banks, and People's is one of the last remaining. The bank is well run, with some appealing characteristics: very high market share of deposits, strong credit card operation, and a unique corporate structure. Q. Industrial companies were a large part of your portion of the portfolio. What types of companies did you find attractive? Primarily two types of companies -- those that were spin-offs from larger businesses and those that had implemented restructuring programs. An example is Magnatech, which produces motors and control devices. Among its significant products are lighting ballasts, which are essential for fluorescent lighting. Q. What explains the absence of technology stocks in your portion of the portfolio? My long investment time frame exceeds the life cycles of the products of many technology companies. In many cases, today's technology is tomorrow's obsolescence. I find it is more productive to look for the companies that are the beneficiaries of new technology. LARGEST HOLDINGS IN OAKMARK/HARRIS SEGMENT - ------------------------------------------------------------------------------- % OF SEGMENT ASSETS % OF FUND ASSETS - ------------------------------------------------------------------------------- People's Bank 6.11 1.60 Catellus Development Corp. 5.15 1.35 U.S. Industries, Inc. 4.85 1.27 RenaissanceRe Holdings 4.26 1.12 Cablevision Systems Corp. 3.70 0.97 - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- LOOMIS, SAYLES & COMPANY, L.P. - ------------------------------------------------------------------------------- Q. The Loomis, Sayles & Company portion of the portfolio emphasizes small, growth stocks. How did they perform? [Photo of David Smith, Philip Fine and Christopher Ely] David Smith, Philip Fine and Christopher Ely Loomis, Sayles & Co., L.P. Small growth stocks generally underperformed both large-cap stocks and small-cap value stocks, revealing the challenging conditions for small-cap growth managers during 1997. In particular, a heavy concentration in technology stocks hampered the Loomis Sayles portion of the portfolio during the year. Q. What changes did you make to your technology holdings during the period? We reduced our technology investments, ending the year with 24% of the Loomis Sayles segment in technology, down from a high of about 42% in the third quarter. Beginning in September, we took profits in many of our electronics holdings and redeployed the proceeds into software and services. We believe these investments are less vulnerable to problems in Asia. Among the electronics companies we continued to favor were SIPEX (a producer of a proprietary chip that illuminates displays on devices such as pagers, cell phones, and watches) and ATMI (a supplier of specialized materials to semiconductor manufacturers). LARGEST HOLDINGS IN LOOMIS SEGMENT - ------------------------------------------------------------------------------- % OF SEGMENT ASSETS % OF FUND ASSETS - ------------------------------------------------------------------------------- Sipex Corp. 3.08 0.74 Network Appliance, Inc. 2.98 0.72 Sunrise Assisted Living, Inc. 2.84 0.68 FirstFed Financial 2.79 0.67 Whole Foods Market, Inc. 2.75 0.66 Q. What types of stocks helped performance? Financial stocks were very strong performers in 1997, benefiting from declining interest rates and a consolidation within the banking industry. We ended the year with 13% of our segment invested in small banks, savings and loans, and insurance companies. Q. At 16% of your segment, health care stocks were a large position. Where did you find opportunity? We focused on three areas: biotechnology, medical devices, and services. In biotechnology, we emphasized companies with drugs in late-stage clinical trials or already approved by the Food and Drug Administration. Sepracor, a company that develops improved versions of existing drugs, was one such company. In the medical device area, we were particularly excited about Novoste, which is developing a device that uses radiation to open re-narrowed arteries following coronary angioplasty. In the services area, we invested in Sunrise Assisted Living, a pioneer in building facilities for the elderly. - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- MONTGOMERY ASSET MANAGEMENT - ------------------------------------------------------------------------------- Q. How do you select stocks for the Montgomery portion of the portfolio? [Photo of Andrew Pratt] Andrew Pratt Montgomery Asset Management I take a three-step approach. First, I screen individual companies, looking for positive changes and potential for strong earnings growth. If the signs are positive, I then proceed to the second step: fundamental analysis. I talk with company managers, analyze corporate balance sheets, product lines, and market share, then apply Montgomery's own valuation criteria. Finally, to be added to the portfolio, a company must have the potential to appreciate 20% over the next 12 months. With this strategy, I built a mix of technology, finance, health care, and industrial stocks. Q. In selecting investments, did any themes surface? Yes, although my approach is to select companies on an individual basis. Across virtually all sectors of the economy, there's evidence that companies are focusing on their core businesses and outsourcing work that can be handled by specialists. I found a number of outsourcing companies attractive. For example, we invested in Caribiner, a company that helps businesses with new product launches and other public relations events. Caribiner is active in the hotel industry, where it supplies audio-visual services for special events. LARGEST HOLDINGS IN MONTGOMERY SEGMENT - -------------------------------------------------------------------------------- % OF SEGMENT ASSETS % OF FUND ASSETS - ------------------------------------------------------------------------------- Cooper Companies, Inc. 3.20 0.77 ESC Medical Systems, Ltd. 2.17 0.52 Acxiom Corp. 2.11 0.51 Jones Medical Industries, Inc. 2.01 0.48 Carpenter Technology Corp. 1.90 0.46 Information technology is another area in which outsourcing is common. Services, such as implementing applications, establishing computer networks, and solving the year 2000 problem are in demand. Rather than maintain large technical staffs, many companies keep small information technology businesses under contract. Two information technology companies that I added were Computer Task Group and Analysts International. Q. What other types of companies were attractive? Selected health care companies that we believe can be long-term contributors to the portfolio's returns constituted about 15% of the Montgomery portion of the portfolio at year-end. One example is ESC Medical Systems, Ltd., a company that makes laser equipment used by dermatologists for cosmetic skin care applications. Not only is ESC a well run business, but I believe it stands to benefit from increasing demand for skin care procedures as the population ages. - ------------------------------------------------------------------------------- NEW ENGLAND STAR SMALL CAP FUND - ------------------------------------------------------------------------------- ROBERTSON STEPHENS INVESTMENT MANAGEMENT - ------------------------------------------------------------------------------- Q. How did you structure the Robertson Stephens portion of the portfolio? [Photo of John Wallace] [Photo of John Seabern] John Wallace and John Seabern Robertson Stephens Investment Management One stock at a time -- which was a successful approach during 1997's volatile investment environ-ment for small-company stocks. During the past year, the segment's sector allocations were in line with that of the Fund's benchmark, the Russell 2000 Index. No individual stock position exceeded 3% of the segment. Q. Which investments contributed most to performance? A varied blend of stocks in a number of industries and economic sectors performed well. Vans, a sportswear and sports equipment retailer for so-called Generation X adults, was a solid performer throughout the year. The company continues to post revenue and earnings growth above 20%, yet its stock price is relatively inexpensive compared to its earnings growth. Energy service stocks helped boost performance in 1997, despite poor returns in the fourth quarter. Even though oil prices declined, major integrated oil companies continued to increase exploration and development spending. This trend was positive for oil service companies and may continue through 1998 as well. Camco International, OYO Geospace Corp., and Key Energy are some of the oil service stocks that delivered strong results. Q. What is your outlook for 1998? We're cautious about 1998, believing it's late in both the economic growth and bull market cycles. While Asian financial turmoil dominated market news in the latter part of 1997, it's impossible to predict the eventual impact of Asia's problems on the economy and financial markets in the United States. We believe the cable TV industry is an area to watch. Many cable system operators have invested heavily in technology and equipment, as they seek to expand into more households. In many cases, these investment programs are winding down and freeing up cash flow. Simultaneously, many cable operators are expanding services and raising cable fees to subscribers. We believe these trends could lead to better cash flow and potentially better stock performance. LARGEST HOLDINGS IN ROBERTSON STEPHENS SEGMENT - ------------------------------------------------------------------------------- % OF SEGMENT ASSETS % OF FUND ASSETS - ------------------------------------------------------------------------------- AgriBioTech, Inc. 2.38 0.61 EVI, Inc. 2.04 0.52 Walter Industries, Inc. 1.86 0.48 Cooper Cameron Corp. 1.80 0.46 Herman Miller 1.79 0.46 - ------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - ------------------------------------------------------------------------------- Investments as of December 31, 1997 COMMON STOCK -- 92.6% OF TOTAL NET ASSETS SHARES DESCRIPTION VALUE(A) - ------------------------------------------------------------------------------- AEROSPACE--0.9% 5,000 Alliant Techsystems, Inc. ................... $ 278,750 25,000 Tracor, Inc. ................................ 759,375 ------------ 1,038,125 ------------ AIRLINES--0.3% 7,500 Continental Airlines, Inc. .................. 360,938 ------------ APPAREL & TEXTILES--0.9% 7,000 Jones Apparel Group, Inc. (c) ............... 301,000 10,800 St. John Knits, Inc. ........................ 432,000 10,300 The Men's Wearhouse, Inc. (c) ............... 357,925 ------------ 1,090,925 ------------ AUTOMOTIVE--0.4% 30,000 Stoneridge, Inc. ............................ 480,000 ------------ BANKS--4.1% 25,000 BankAtlantic Bancorp, Inc. .................. 407,812 10,650 Commercial Federal Corp. .................... 378,741 6,000 Compass Bancshares, Inc. .................... 262,500 9,000 First Union Corp. ........................... 461,250 6,000 Long Island Bancorp, Inc. ................... 297,750 30,000 Northwest Savings Bank ...................... 423,750 50,000 People's Bank ............................... 1,900,000 10,000 TCF Financial Corp. ......................... 339,375 5,000 Union Planters Corp. ........................ 339,688 ------------ 4,810,866 ------------ BIOTECHNOLOGY--1.1% 42,500 AgriBioTech, Inc. (c) ....................... 725,156 8,200 Intercardia, Inc. (c) ....................... 146,575 21,500 Millennium Pharmaceuticals (c) .............. 408,500 ------------ 1,280,231 ------------ BROADCASTING--1.2% 8,600 Heftel Broadcasting Corp. (c) ............... 402,050 15,000 U.S. West Media Group (c) ................... 433,125 16,300 Westwood One, Inc. (c) ...................... 605,138 ------------ 1,440,313 ------------ BROADCASTING & PUBLISHING--2.9% 40,000 Ascent Entertainment Group, Inc. (c) ........ 415,000 12,000 Cablevision Systems Corp. (c) ............... 1,149,000 9,000 Catalina Marketing Corp. (c) ................ 416,250 20,000 Granite Broadcasting Corp. (c) .............. 181,250 15,800 HA-LO Industries, Inc. (c) .................. 410,800 10,000 Lee Enterprises, Inc. ....................... 295,625 18,000 Metro Networks, Inc. (c) .................... 589,500 ------------ 3,457,425 ------------ BUILDING MATERIAL & CONSTRUCTION--0.3% 15,000 Kaufman & Broad Home Corp. .................. 336,563 ------------ BUSINESS SERVICES--6.8% 11,100 Abacus Direct Corp. (c) ..................... 455,100 18,700 Alternative Resources (c) ................... 431,269 20,000 Applied Graphics Technologies, Inc. (c)...... 1,065,000 9,400 Caribiner International, Inc. (c) ........... 418,300 22,300 Checkfree Corp. (c) ......................... 602,100 9,400 Computer Learning Centers, Inc. (c) ......... 575,750 12,500 Computer Task Group, Inc. ................... 444,531 12,800 CSG Systems International, Inc. (c).......... 512,000 4,800 Fair Issac & Company, Inc. (c) .............. 159,900 21,000 Inspire Insurance Solutions, Inc. ........... 438,375 12,400 Interim Services (c) ........................ 320,850 19,700 Lamar Advertising Co. (c) ................... 783,075 31,900 PMT Services, Inc. (c) ...................... 442,612 17,100 Saville Systems PLC (c) ..................... 709,650 81,157 U-Ship, Inc. ................................ 15,217 12,800 Universal Outdoor Holdings, Inc. (c) ........ 665,600 ------------ 8,039,329 ------------ COMMERCIAL SERVICES--0.4% 12,000 Childrens Comprehensive Services ............ 222,000 7,000 Primark Corp. ............................... 284,813 ------------ 506,813 ------------ COMMUNICATION SERVICES--1.5% 17,500 Clearnet Communications, Inc. 199,062 15,400 Metromedia Fiber Network, Inc. (c) .......... 256,025 12,000 Mobile Telecommunication .................... 264,000 13,000 NEXTEL Communications, Inc................... 338,000 8,500 Startec Global Communications ............... 190,188 10,300 Winstar Communications, Inc. (c) ............ 256,856 8,500 WorldCom, Inc. (c) .......................... 257,125 ------------ 1,761,256 ------------ COMPUTER SOFTWARE & SERVICES--1.1% 6,000 Compuware Corp. (c) ......................... 192,000 14,600 Concord Communications, Inc. (c) ............ 302,950 12,800 Ontrack Data International, Inc. (c) ........ 319,200 12,000 Peritus Software Services, Inc. (c) ......... 244,500 12,800 Smallworldwide PLC (c) ...................... 280,000 ------------ 1,338,650 ------------ COMPUTERS & BUSINESS EQUIPMENT--1.6% 15,000 Imation Corp. (c) ........................... 240,000 9,400 Natural Microsystems Corp. (c) .............. 437,100 24,000 Network Appliance, Inc. (c) ................. 852,000 18,850 United States Office Products Co. (c) ....... 369,931 ------------ 1,899,031 ------------ CONSTRUCTION MATERIALS--0.2% 12,500 Giant Cement Holding, Inc. .................. 289,063 ------------ CONSUMER GOODS & SERVICES--4.4% 12,600 Budget Group, Inc. (c) ...................... 435,488 12,000 Education Management Corp. (c) .............. 372,000 36,500 Ferro Corp. ................................. 887,406 15,000 First Brands Corp. .......................... 404,063 10,500 GC Companies, Inc. (c) ...................... 497,437 23,500 Libbey, Inc. ................................ 890,062 20,000 R.G. Barry Corp. ............................ 232,500 20,000 Scotsman Industries, Inc. ................... 488,750 12,800 Standard Motor Products, Inc. ............... 288,800 25,000 Triarc Companies, Inc. (c) .................. 681,250 ------------ 5,177,756 ------------ DIVERSIFIED CONGLOMERATES--1.3% 50,000 U.S. Industries, Inc. (c) ................... 1,506,250 ------------ DRUGS & HEALTH CARE--2.1% 7,700 Gilead Sciences, Inc. (c) ................... 294,525 15,200 INCYTE Pharmacuticals, Inc. (c) ............. 684,000 12,800 Medimmune, Inc. (c) ......................... 548,800 11,100 Pharmacyclics, Inc. (c) ..................... 284,438 8,600 Sepracor, Inc. (c) .......................... 344,537 9,400 Vertex Pharmaceuticals, Inc. (c) ............ 310,200 ------------ 2,466,500 ------------ ELECTRIC UTILITIES--0.2% 10,000 Houston Industries, Inc. .................... 266,875 ------------ ELECTRICAL EQUIPMENT--0.4% 17,600 MRV Communications, Inc. (c) ................ 420,200 ------------ ELECTRONIC COMPONENTS--1.2% 24,800 ATMI, Inc. (c) .............................. 601,400 29,100 Sipex Corp. (c) ............................. 880,275 ------------ 1,481,675 ------------ ELECTRONICS--1.3% 15,100 Genrad, Inc. (c) ............................ 455,831 18,900 SBS Technologies, Inc. (c) .................. 512,663 14,600 Uniphase Corp. (c) .......................... 604,075 ------------ 1,572,569 ------------ ENERGY--2.4% 7,000 Burlington Resources, Inc. .................. 313,688 5,500 Camco International, Inc. ................... 350,281 10,600 CE Franklin, Ltd. ........................... 98,050 9,000 Cooper Cameron Corp. (c) .................... 549,000 12,000 EVI, Inc. ................................... 621,000 17,000 Mitcham Industries, Inc. .................... 310,250 20,000 OYO Geospace Corp. .......................... 377,500 25,000 Virginia Gas Co. ............................ 212,500 ------------ 2,832,269 ------------ ENTERTAINMENT--1.0% 60,000 Alliance Gaming Corp. ....................... 292,500 23,100 Grand Casinos, Inc. ......................... 314,738 19,700 Regal Cinemas, Inc. (c)...................... 549,137 ------------ 1,156,375 ------------ FINANCIAL SERVICES--1.1% 26,700 BA Merchant Services (c) .................... 473,925 12,000 Duff & Phelps Credit Rating Co. ............. 487,500 15,300 Imperial Credit Industries (c) .............. 313,650 750 Resource Bancshares Mortgage Group .......... 12,234 ------------ 1,287,309 ------------ FOOD -- AGRIBUSINESS--0.5% 17,877 Delta and Pine Land. ........................ 545,249 ------------ FOOD & BEVERAGES--2.3% 35,000 Authentic Specialty Foods, Inc. ............. 476,875 13,600 Broughton Foods Co. (c) ..................... 227,800 28,500 International Multifoods Corp. .............. 806,906 40,000 M & F Worldwide Corp. ....................... 392,500 50,000 Ralcorp Holdings, Inc. (c) .................. 846,875 ------------ 2,750,956 ------------ FOOD -- RETAILERS/ WHOLESALERS--0.3% 18,750 Tasty Baking Corp. .......................... 362,109 ------------ HEALTH CARE--1.8% 17,500 Ballard Medical Products (c) ................ 424,375 16,100 FPA Medical Management, Inc. (c) ............ 299,863 15,000 Jones Medical Industries, Inc. (c) .......... 573,750 25,100 Orthodontic Centers of America, Inc. (c) .... 417,287 11,400 Sierra Health Services, Inc. (c) ............ 383,325 ------------ 2,098,600 ------------ HEALTH CARE -- MEDICAL TECHNOLOGY--3.4% 22,300 Cooper Companies, Inc. (c) .................. 911,512 11,100 Cytyc Corp. (c) ............................. 276,113 16,000 ESC Medical Systems, Ltd. (c) ............... 620,000 15,000 Matritech, Inc. ............................. 73,125 14,600 Novoste Corp. (c) ........................... 328,500 18,500 Perclose, Inc. (c) .......................... 356,125 13,800 Sola International, Inc. (c) ................ 448,500 10,000 Spine-Tech, Inc. ............................ 514,375 12,700 Waters Corp. (c) ............................ 477,837 ------------ 4,006,087 ------------ HEALTH CARE -- SERVICES--1.5% 50,000 Medaphis Corp. (c) .......................... 325,000 17,100 Medquist, Inc. (c) .......................... 594,225 18,800 Sunrise Assisted Living, Inc. (c) ........... 810,750 ------------ 1,729,975 ------------ HOME BUILDERS--2.0% 13,000 Crossmann Communities, Inc. ................. 359,125 22,300 D.R.Horton .................................. 387,462 24,800 Lennar Corp. ................................ 534,750 10,000 Oakwood Homes Corp. ......................... 331,875 6,000 Pulte Corp. ................................. 250,875 20,000 Toll Brothers, Inc. ......................... 535,000 ------------ 2,399,087 ------------ HOTELS & RESTAURANTS--0.5% 18,800 CapStar Hotel Co. (c) ....................... 645,075 ------------ INDUSTRIAL GOODS & SERVICES--3.4% 15,000 Binks Manufacturing Co. ..................... 633,750 13,000 Columbus McKinnon ........................... 315,250 30,000 Gardner Denver Machinery, Inc. (c) .......... 759,375 45,000 MagneTek, Inc. (c) .......................... 877,500 15,000 SPX Corp. ................................... 1,035,000 13,500 Zurn Industries, Inc. ....................... 424,406 ------------ 4,045,281 ------------ INDUSTRIAL MACHINERY--0.2% 13,700 IRI International Corp. (c) ................. 191,800 ------------ INSURANCE--4.8% 13,000 Chartwell Re Corp. .......................... 438,750 15,000 Financial Security Assured Holdings, Ltd. ... 723,750 7,500 Hartford Life, Inc. (c) ..................... 339,844 25,000 Highlands Insurance Group, Inc. (c) ......... 709,375 13,700 Penn Treaty American Corp. (c) .............. 434,975 7,000 Piper Jaffray Companies, Inc. ............... 255,062 7,000 Provident Companies, Inc. ................... 270,375 25,000 PXRE Corp. .................................. 829,687 30,000 RenaissanceRe Holdings....................... 1,323,750 8,250 W. R. Berkley Corp. ......................... 361,969 ------------ 5,687,537 ------------ LEISURE & LODGING--0.7% 9,400 Interstate Hotels Co. (c) ................... 329,588 22,900 Prime Hospitality Corp. (c) ................. 466,587 ------------ 796,175 ------------ MACHINERY--1.6% 20,000 D T Industries .............................. 680,000 10,300 Manitowoc Co. ............................... 334,750 11,500 Mathews International Corp. ................. 506,000 18,000 Northwest Pipe Co. (c) ...................... 432,000 ------------ 1,952,750 ------------ MANUFACTURING--1.2% 10,000 Herman Miller ............................... 545,625 7,600 Simpson Manufacturing Co. ................... 253,175 27,500 Walter Industries, Inc. ..................... 567,188 ------------ 1,365,988 ------------ MEDIA & ENTERTAINMENT--1.0% 13,500 Comcast Corp. ............................... 426,094 14,002 Tele-Communications TCI Ventures Group ...... 396,432 15,000 Tele-Communications, Inc. (c) ............... 419,062 ------------ 1,241,588 ------------ METAL--1.2% 20,000 Atchison Casting ............................ 325,000 25,000 The Carbide/Graphite Group, Inc. (c) ........ 843,750 10,500 Titanium Metals Corp. (c) ................... 303,187 ------------ 1,471,937 ------------ NETWORK SYSTEMS--1.3% 25,000 Aware, Inc. ................................. 256,250 32,000 Concentric Network Corp. .................... 284,000 22,500 Digi International, Inc. (c) ................ 382,500 20,000 Nextlevel Systems, Inc. (c) ................. 357,500 70,000 Tidel Technologies, Inc. (c) ................ 275,625 ------------ 1,555,875 ------------ OIL--1.0% 16,500 Hvide Marine, Inc. (c) ...................... 424,875 21,000 Marine Drilling Companies, Inc. (c) ......... 435,750 11,500 Pride International, Inc. (c) ............... 290,375 ------------ 1,151,000 ------------ OIL & GAS--1.7% 93,200 Bonus Resource Services Corp. ............... 384,786 20,000 Comstock Resources, Inc. .................... 238,750 15,000 Nabors Industries, Inc. ..................... 471,562 6,500 Patterson Energy, Inc. (c) .................. 251,469 70,000 Titan Exploration, Inc. (c) ................. 665,000 ------------ 2,011,567 ------------ OIL -- INDEPENDANT PRODUCERS--0.4% 14,600 St. Mary Land & Exploration Co. ............. 511,000 ------------ PACKAGING--0.3% 16,900 Ivex Packaging Corp. (c) .................... 405,600 ------------ PAPER--0.3% 10,000 Caraustar Industries, Inc. .................. 342,500 ------------ PETROLEUM SERVICES--0.3% 8,600 Atwood Oceanics, Inc. (c) ................... 407,425 ------------ PHARMACEUTICAL--0.3% 18,800 DUSA Pharmaceuticals, Inc ................... 216,200 10,000 Neurex Corp. ................................ 138,750 ------------ 354,950 ------------ PHOTOGRAPHY--0.2% 14,900 X-Rite, Inc. ................................ 271,925 ------------ PUBLISHING--0.5% 11,900 Big Flower Holdings, Inc. (c) ............... 287,088 11,200 World Color Press, Inc. (c) ................. 297,500 ------------ 584,588 ------------ REAL ESTATE--1.8% 22,000 Canadian Hotel (Warrants) ................... 147,792 25,000 Castle & Cooke, Inc. (c) .................... 421,875 80,000 Catellus Development Corp. (c) .............. 1,600,000 ------------ 2,169,667 ------------ REAL ESTATE INVESTMENT TRUSTS--0.4% 19,000 CRIIMI MAE, Inc. ............................ 285,000 7,500 Walden Residential Properties, Inc. ......... 191,250 ------------ 476,250 ------------ RESTAURANTS--0.2% 22,200 Apple South, Inc. ........................... 291,375 ------------ RETAIL--4.2% 12,700 Borders Group, Inc. (c) ..................... 397,669 15,000 Cole National Corp. (c) ..................... 449,062 19,800 Eagle Hardware & Garden (c) ................. 383,625 15,000 Gadzooks, Inc. (c) .......................... 315,000 13,000 ONSALE, Inc. ................................ 234,000 13,800 Proffitts (c) ............................... 392,438 2,800 Rock of Ages Corp. .......................... 43,400 13,000 The Dress Barn .............................. 368,875 75,000 Ugly Duckling Corp. ......................... 637,500 35,000 Vans, Inc. .................................. 529,375 24,500 Whole Foods Market, Inc. (c) ................ 1,252,562 ------------ 5,003,506 ------------ RETAIL -- SPECIALTY--0.3% 22,000 N2K, Inc. ................................... 321,750 ------------ SAVINGS & LOAN--3.1% 13,700 Astoria Financial Corp. ..................... 763,775 15,400 Bay View Capital Corp........................ 558,250 20,600 FirstFed Financial (c) ...................... 798,250 13,700 Peoples Heritage Financial Group ............ 630,200 17,100 Reliance Bancorp, Inc. ...................... 626,287 14,600 Roslyn Bancorp .............................. 339,450 ------------ 3,716,212 ------------ SEMICONDUCTOR & EQUIPMENT--0.2% 18,000 International Rectifier Corp. (c) ........... 212,625 ------------ SOFTWARE--6.8% 31,300 Acxiom Corp. (c) ............................ 602,525 9,000 Analysts International ...................... 310,500 15,100 Boole & Babbage, Inc. (c) ................... 451,112 9,400 Daou Systems, Inc. (c)....................... 293,750 65,000 Egghead, Inc. (c) ........................... 422,500 10,000 Filenet Corp. (c) ........................... 301,250 16,400 Henry Jack & Associates, Inc. ............... 446,900 19,700 Industri Matematik International Corp. (c)... 581,150 23,000 INTERSOLV, Inc. (c) ......................... 465,750 8,900 Kronos, Inc. (c) ............................ 274,231 12,000 Lycos, Inc. (c) ............................. 496,500 10,200 National Instruments Corp. (c) .............. 295,800 4,100 Netscape Communications Corp. (c) ........... 99,938 13,000 PLATINUM Technology, Inc. ................... 367,250 27,500 Secure Computing Corp. ...................... 324,844 22,000 Structural Dynamics (c) ..................... 495,000 8,300 Synopsys, Inc. (c) .......................... 296,725 30,000 System Software Associates, Inc. ............ 262,500 12,850 Veritas Software Co. (c) .................... 655,350 15,000 Wind River Systems (c) ...................... 595,312 ------------ 8,038,887 ------------ STEEL--0.5% 11,300 Carpenter Technology Corp. .................. 543,106 ------------ TELECOMMUNICATION EQUIPMENT--1.5% 20,000 ANTEC Corp. ................................. 312,500 11,000 Comverse Technology, Inc. (c) ............... 429,000 37,600 IWL Communications, Inc. .................... 488,800 33,000 P-COMM, Inc. (c) ............................ 569,250 ------------ 1,799,550 ------------ TOBACCO--0.5% 10,900 Consolidated Cigar Holdings, Inc. (c) ....... 300,432 12,100 General Cigar Holdings, Inc. (c) ............ 257,881 ------------ 558,313 ------------ TOYS & AMUSEMENTS--0.4% 13,000 Action Performance Companies, Inc. (c) ...... 492,375 ------------ TRANSPORTATION--0.2% 10,000 Skywest, Inc. ............................... 296,250 ------------ TRUCKING & FREIGHT FORWARDING--0.7% 12,900 Halter Marine Group, Inc. (c) ............... 372,488 12,500 USFreightways Corp. ......................... 406,250 ------------ 778,738 ------------ Total Common Stock (Identified Cost $94,357,733) ............. 109,882,534 ------------ OPTIONS - 0.0% CONTRACTS - ----------------------------------------------------------------------------- 125 Polaris Industries, 30 Put, 3/22/98 ......... 22,656 ------------ Total Options (Identified Cost $23,031) ..... 22,656 ------------ SHORT TERM INVESTMENTS--11.6% FACE AMOUNT DESCRIPTION VALUE(a) - ----------------------------------------------------------------------------- $8,404,000 Repurchase Agreement with State Street Bank & Trust Co. dated 12/31/97 at 5.000% to be repurchased at $8,406,334 on 1/02/98, collateralized by $3,350,000 U.S. Treasury Note, 5.750% due 12/31/98 valued at $3,353,142 and $5,095,000 U.S. Treasury Notes 5.875% due 1/31/99 valued at $5,228,209 (d).................................. $ 8,404,000 5,369,000 Repurchase Agreement with State Street Bank & Trust Co. dated 12/31/97 at 6.000% to be repurchased at $5,370,790 on 1/02/98 collateralized by $5,340,000 U.S. Treasury Note 5.875% due 1/31/99 valued at $5,479,614 .......................... 5,369,000 ------------ Total Short Term Investments (Identified Cost $13,773,000) .............................. 13,773,000 ------------ Total Investments -- 104.2% (Identified Cost $108,153,764)(b) ............................... 123,678,190 Other assets less liabilities ..................... (5,025,570) ------------ Total Net Assets -- 100% .......................... $118,652,620 ============ SECURITIES SOLD SHORT SHARES - ----------------------------------------------------------------------------- 5,000 American Power Conversion Corp. ................... $ 118,125 5,000 Arterial Vascular Engineering, Inc. ............... 325,000 8,000 Hologic, Inc. ..................................... 165,500 ------------ Total Securities Sold Short (Total Proceeds $655,339) ........................ $ 608,625 ============ WRITTEN OPTION CONTRACTS NET UNREALIZED CONTRACTS DESCRIPTION DEPRECIATION - ------------------------------------------------------------------------------ 125 Polaris Industries, 30 Call, 3/22/98 .............. $ (379) (a) See Note 1a. (b) Federal Tax Information: At December 31, 1997 the net unrealized appreciation on investments based on cost of $108,760,253 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 ............................................... $ 18,143,989 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............................................. (3,226,052) ------------ Net unrealized appreciation .......................... $ 14,917,937 ============ (c) Non-income producing security. (d) A portion of this security has been segregated as collateral for options and short sales. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES - ------------------------------------------------------------------------------- December 31, 1997 ASSETS Investments at value ............................ $109,905,190 Repurchase agreements ........................... 13,773,000 Cash ............................................ 71,156 Cash - Restricted ............................... 1,103,551 Receivable for: Fund shares sold .............................. 663,392 Securities sold ............................... 118,453 Dividends and interest ........................ 27,222 Prepaid registration expense .................... 12,500 Unamortized organization expense ................ 34,919 ------------ 125,709,383 LIABILITIES Payable for: Securities purchased .......................... $5,658,970 Open short sales - (proceeds of $655,339) ..... 608,625 Open written options - (proceeds of $30,871) .. 31,250 Fund shares redeemed .......................... 536,643 Accrued expenses: Management fees ............................... 98,207 Deferred trustees' fees ....................... 1,357 Accounting and administrative ................. 2,313 Other ......................................... 119,398 ---------- 7,056,763 ------------ NET ASSETS ........................................ $118,652,620 ============ Net Assets consist of: Capital paid in ............................... $104,274,459 Accumulated net investment loss ............... (1,357) Accumulated net realized loss ................. (1,191,243) Unrealized appreciation on investments, securites sold short and written option transactions ................................ 15,570,761 ------------ NET ASSETS ........................................ $118,652,620 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($52,066,394 divided by 3,387,431 shares of beneficial interest) ........................ $15.37 ====== Offering price per share (100/94.25 of $15.37) .. $16.31* ====== Net asset value and offering price of Class B shares ($52,616,150 divided by 3,447,823 shares of beneficial interest) ........................ $15.26** ====== Net Asset value and offering price of Class C shares ($13,970,076 divided by 915,421 shares of beneficial interest) ........................ $15.26 ====== Identified cost of investments .................. $108,153,764 ============ *Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. **Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - ------------------------------------------------------------------------------- Year Ended December 31, 1997 INVESTMENT INCOME Dividends ...................................... $ 271,259(a) Interest ....................................... 265,405 ----------- 536,664 Expenses Management fees .............................. $ 745,638 Service fees - Class A ....................... 79,699 Service and distribution fees - Class B ...... 304,812 Service and distribution fees - Class C ...... 86,522 Trustees' fees and expenses .................. 11,158 Accounting and administrative ................ 23,420 Custodian .................................... 199,348 Transfer agent ............................... 226,514 Audit and tax services ....................... 44,300 Legal ........................................ 24,475 Printing ..................................... 26,675 Registration ................................. 69,053 Amortization of organization expenses ........ 6,755 Miscellaneous ................................ 5,408 ---------- Total expenses ................................. 1,853,777 ----------- Net investment loss ............................ (1,317,113) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, SECURITIES SOLD SHORT AND WRITTEN OPTIONS Realized gain on: Investments - net ............................ 3,518,165 Securities sold short - net .................. 34,514 ---------- Net realized gain .............................. 3,552,679 ---------- Unrealized appreciation (depreciation): Investments - net ............................ 15,524,426 Securities sold short - net .................. 46,714 Written options .............................. (379) ---------- Net unrealized appreciation .................... 15,570,761 ---------- Net gain on investment transactions ............ 19,123,440 ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS ....... $17,806,327 =========== (a) Net of foreign taxes of: $295. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 ------------ FROM OPERATIONS Net investment loss .......................................... $ (1,317,113) Net realized gain on investments and securities sold short ... 3,552,679 Unrealized appreciation on investments, securites sold short and written options .................................. 15,570,761 ------------ Increase in net assets from operations ....................... 17,806,327 ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net realized gain on investments Class A .................................................... (1,512,427) Class B .................................................... (1,578,060) Class C .................................................... (386,249) ------------ (3,476,736) ------------ Increase in net assets derived from capital share transactions . 104,322,991 ------------ Total increase in net assets ................................... 118,652,582 NET ASSETS Beginning of the year ........................................ 38 ------------ End of the year .............................................. $118,652,620 ============ ACCUMULATED NET INVESTMENT LOSS Beginning of the year ........................................ $ 0 ============ End of the year .............................................. $ (1,357) ============ See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C ------------- ------------ ------------ YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1997 1997 ------------- ------------ ------------ Net asset value, beginning of year ............ $12.50 $12.50 $12.50 ------ ------ ------ Income from investment operations Net investment loss (a) ....................... (0.20) (0.30) (0.30) Net realized and unrealized gain on investments 3.55 3.54 3.54 ------ ------ ------ Total from investment operations .............. 3.35 3.24 3.24 ------ ------ ------ Less distributions Distributions from net realized capital gains . (0.48) (0.48) (0.48) ------ ------ ------ Total distributions ........................... (0.48) (0.48) (0.48) ------ ------ ------ Net asset value, end of year .................. $15.37 $15.26 $15.26 ====== ====== ====== Total return (%) (b) .......................... 27.0 26.1 26.1 Ratio of operating expenses to average net assets (%) .................................. 2.20 2.95 2.95 Ratio of net investment loss to average net assets (%) .................................. (1.44) (2.19) (2.19) Portfolio turnover rate (%) ................... 140 140 140 Average commission rate ....................... $0.0551 $0.0551 $0.0551 Net assets, end of year (000) ................. $52,066 $52,616 $13,970 (a) Per share net investment loss has been calculated using the average shares outstanding during the year. (b) A sales charge in the case of Class A Shares and a contingent deferred sales charge in the case of Class B Shares is not reflected in total return calculations.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- December 31, 1997 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 Declaration of Trust permits the trustees to issue an unlimited number of shares of the Trust in multiple series (each such series of shares a "Fund"). The Fund offers Class A, Class B, and Class C shares. The Fund commenced its public offering of Class A, Class B and Class C shares on December 31, 1996. 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 or contingent deferred 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. Expenses of the Fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and the appropriate subadviser, 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. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders all of its income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for organization costs, wash sales, post October losses and net investment loss. Permanent book and tax basis differences will result in reclassification to capital accounts. E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price. Each sub-adviser 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 portfolio's ability to dispose of the underlying securities. F. SHORT SALES. A short sale is a transaction in which the Fund sells securities it does not own (but has borrowed) in anticipation of a decline in the market price of the securities. When the Fund makes a short sale, the proceeds it receives from the sale will be held on behalf of the broker effecting the sale until the Fund replaces the borrowed securities. To deliver the securities to the buyer, the Fund arranges through the broker to borrow the securities and, in doing so, the Fund becomes obligated to replace the securities borrowed at their market value at the time of replacement, whatever that price may be. The Fund may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the borrowed securities until the securities are replaced. At December 31, 1997, the market value of securities and cash segregated to cover short positions was $1,510,851. Securities sold short at December 31, 1997 and their related market values are set forth in the schedule of investments. G. SHORT SALES AGAINST THE BOX. In a short sale against the box, the Fund sells a borrowed security, while at the same time owning an identical security in the portfolio. While the short sale is outstanding, the Fund will not dispose of the security hedged by the short sale. When the Fund sells short against the box, it will establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale, and the Fund pledges securities or cash as additional collateral. The Fund earns interest from the broker on the proceeds of the short sale and accrues such interest on a daily basis. H. OPTIONS. The Fund may use options to enhance investment return, or to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to the premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. I. ORGANIZATION EXPENSE. Costs incurred in connection with the Fund's organization and initial registration, amounting to approximately $41,674 in the aggregate, were paid by the Fund and are being amortized by the Fund over 60 months. 2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the Fund for the year ended December 31, 1997 were $187,476,223 and $97,330,013 respectively. Transactions in written options for the Fund for the year ended December 31, 1997 are summarized as follows: WRITTEN OPTIONS ------------------------------------ NUMBER OF PREMIUMS CONTRACTS RECEIVED ----------------- ----------------- Open at December 31, 1996 0 $ 0 Contracts opened 125 30,871 Contracts closed 0 0 --- ------ Open at December 31, 1997 125 $30,871 === ======= 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays management fees to its investment adviser, New England Funds Management, L.P. ("NEFM") at the annual rate of 1.05% of the Fund's average daily net assets. NEFM pays the Fund's four investment sub-advisers, Harris Associates, L.P., Loomis, Sayles & Company, L.P., Montgomery Asset Management, L.P. and Robertson, Stephens & Company Investment Management, L.P. a sub-advisory fee as follows: Harris Associates, L.P., at the annual rate of 0.70% of the average daily net assets of its segment of the Fund, Loomis, Sayles & Company, L.P. and Robertson, Stephens & Company Investment Management, 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 which that sub-adviser manages, and 0.50% of such assets in excess of $50 million, and Montgomery Asset Management, L.P. at the annual rate of 0.65% of the first $50 million of the average daily net assets of the segment of the Fund which that sub-adviser manages, and 0.50% of such assets in excess of $50 million. Certain officers and directors of NEFM are also officers or trustees of the Fund. NEFM, Harris Associates, L.P. and Loomis, Sayles & Company, L.P. are wholly owned subsidiaries of New England Investment Companies, L.P. which is a subsidiary of Metropolitan Life Insurance Company. Fees earned by NEFM and the sub-advisers under the management agreement in effect during the year ended December 31, 1997, are as follows: FEES EARNED - ----------- $309,875 New England Funds Management, L.P. 130,052 Harris Associates, L.P. 92,832 Loomis, Sayles & Company, L.P. 112,593 Montgomery Asset Management, L.P. Robertson, Stephens & Company Investment 100,286 Management, L.P. - ------- $745,638 ======== B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England Funds"), the Fund's distributor, is a wholly owned subsidiary of New England Investment Companies, L.P. 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, financial reporting functions and clerical functions relating to the Fund and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1997, these expenses amounted to $23,420 and are shown separately in the financial statements as accounting and administrative. C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder servicing agent for the Fund. For the year ended December 31, 1997, the Fund paid New England Funds $162,177 as compensation for its services in that capacity. For the year ended December 31, 1997, the Fund received $1,408 in transfer agent credits. The transfer agent expense in the Statement of Operations is net of these credits. D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays New England Funds a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 1997, the Fund paid New England Funds $79,699 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 up to 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 1997 the Fund paid New England Funds $76,203 and $21,630 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 up to 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 1997, the Fund paid New England Funds $228,609 and $64,892 in distribution fees under the Class B and Class C plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to New England Funds by investors in shares of the Fund during the year ended December 31, 1997 amounted to $1,251,332. E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly to its officers or trustees who are directors, officers or employees of NEFM, New England Funds, New England Investment Companies, L.P. or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $714 Meeting Fee $109/meeting Committee Meeting Fee $65/meeting A deferred compensation plan is available to the trustees on a voluntary basis. Each participating trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund on the normal payment date. 4. CAPITAL SHARES. At December 31, 1997 there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C capital stock. Transactions in capital shares were as follows: YEAR ENDED DECEMBER 31, 1997 ------------------------- CLASS A SHARES AMOUNT ---------- ------------ Shares sold ..................................... 7,382,397 $102,447,455 Shares issued in connection with the reinvestment of: Distributions from net realized gain .......... 99,843 1,454,709 ---------- ------------ 7,482,240 103,902,164 Shares repurchased .............................. (4,094,809) (58,848,512) ---------- ------------ Net increase .................................... 3,387,431 $ 45,053,652 ---------- ------------ YEAR ENDED DECEMBER 31, 1997 ------------------------- CLASS B SHARES AMOUNT ---------- ------------ Shares sold ..................................... 3,659,528 $ 49,771,350 Shares issued in connection with the reinvestment of: Distributions from net realized gain .......... 98,691 1,428,060 ---------- ------------ 3,758,219 51,199,410 Shares repurchased .............................. (310,396) (4,301,792) ---------- ------------ Net increase .................................... 3,447,823 $ 46,897,618 ---------- ------------ YEAR ENDED DECEMBER 31, 1997 ------------------------- CLASS C SHARES AMOUNT ---------- ------------ Shares sold ..................................... 1,397,972 $ 19,301,406 Shares issued in connection with the reinvestment of: Distributions from net realized gain .......... 25,323 366,428 ---------- ------------ 1,423,295 19,667,834 Shares repurchased .............................. (507,874) (7,296,113) ---------- ------------ Net increase .................................... 915,421 $ 12,371,721 ---------- ------------ Increase derived from capital share transactions 7,750,675 $104,322,991 ========== ============ - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - ------------------------------------------------------------------------------- To the Trustees of New England Funds Trust I and the Shareholders of the NEW ENGLAND STAR SMALL CAP FUND. In our opinion, the accompanying statement of assets & liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of New England Star Small Cap Fund ("the Fund"), a series of New England Funds Trust I, at December 31, 1997, and the results of its operations the changes in its net assets and the financial highlights for the year then ended in conformity with generally accepted accounting principles. These financial statements and the financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit, which included confirmation of securities owned at December 31, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Boston, Massachusetts February 12, 1998 SHAREHOLDER MEETING (UNAUDITED) At a special shareholders' meeting held July 16, 1997, shareholders of the Star Small Cap Fund voted for the following proposals: 1. Subadvisory agreement relating to the Fund between NEFM and CAM Acquisition, LLC ("New Montgomery"). (New Montgomery formed due to Montgomery's acquisition by Commerzbank.)
VOTED VOTED ABSTAINED BROKER TOTAL FOR AGAINST VOTES NON-VOTES VOTES ------------- ---------- ----------- ----- ------------- 2,077,964.309 87,172.759 128,711.173 0.000 2,293,848.241
2. To the extent permitted by exemptions granted by the SEC, to permit NEFM to enter into new and amended agreements with sub-advisers with respect to the Fund without obtaining shareholder approval of such agreements, and to permit such sub-advisers to manage assets of the Fund (or a segment thereof) pursuant to such sub-advisory agreements.
VOTED VOTED ABSTAINED BROKER TOTAL FOR AGAINST VOTES NON-VOTES VOTES ------------- ---------- ----------- ----- ------------- 1,879,473.589 150,653.656 129,014.996 134,706.000 2,293,848.241
NEW ENGLAND FUNDS Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997, November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997, July 28, 1997, November 17, 1997 and January 1, 1998); and the New England Equity Income Fund Prospectus for Class A, B and C shares dated September 1, 1997 (as supplemented November 17, 1997 and January 1, 1998). THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES: The cover page of each Prospectus is revised to reflect: o While no initial sales charge applies to Class B or Class C share purchases, a contingent deferred sales charge (a "CDSC") is imposed upon certain redemptions of Class B and Class C shares. o New England Funds Trust I, New England Funds Trust II and New England Funds Trust III are referred to in the Prospectus as the "Trusts." THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE "SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ AS FOLLOWS: CLASS C ------- Maximum Initial Sales Charge Imposed on a Purchase (as a percentage of offering price)(2) ..................... None Maximum Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)(2) ................................. 1.00% (2) Does not apply to reinvested distributions. In the tables that appear under "Example" in the "Schedule of Fees" section, the expense amounts in the Prospectus for Class C shares for the 1 Year period assume no redemption. If shares are redeemed at period end, expense amounts for each Fund would be as follows: New England Capital Growth Fund, $33; New England Balanced Fund, $31; New England International Equity Fund, $35; New England Value Fund, $31; New England Growth Opportunities Fund, $31; New England Star Advisers Fund, $35; New England Star Worldwide Fund, $44; New England Star Small Cap Fund, $38; New England Equity Income Fund, $33. THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS REVISED TO READ AS FOLLOWS: Class C shares are offered at net asset value, without an initial sales charge, are subject to a 0.25% annual service fee and a 0.75% annual distribution fee, are subject to a CDSC of 1.00% on redemptions made within one year from the date of purchase and do not convert into another class. The Distributor pays to investment dealers at the time of sale a sales commission of 1.00% of the sales price of Class C shares sold by such investment dealer. The Distributor will retain the service and distribution fees assessed against Class C shares in the first year of investment, and the entire amount of the CDSC paid by Class C shareholders upon redemption in the first year, in order to compensate the Distributor for providing distribution- related services to the Fund in connection with the sale of Class C shares, and to reimburse the Distributor, in whole or in part, for the commissions paid (and related financing costs) to investment dealers at the time of a sale of Class C shares. Unlike Class B shares, there are no conversion features associated with Class C shares; therefore, if Class C shares are held for more than eight years Class C shareholders will thereafter be subject to higher distribution fees than shareholders of other classes. The holding period for determining the CDSC will continue to run after an exchange to Class C shares of another series of the Trusts. If an exchange is made to Class C shares of a Money Market Fund, then the one-year holding period for purposes of determining the expiration of the CDSC will stop and resumes only when an exchange is made back into Class C shares of a series of the Trusts. If the Money Market Fund shares are redeemed rather than exchanged back into a series of the Trusts, then the CDSC applies to the redemption. For purposes of the CDSC, it is assumed that the shares held longest are the first to be redeemed. The CDSC on Class C shares is not imposed on shares purchased prior to March 1, 1998. The CDSC will be assessed on an amount equal to the lesser of the cost of the shares being redeemed or their net asset value at the time of redemption. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares of the same Fund purchased with reinvested dividends or capital gain distributions. The first year of purchase ends one year after the day on which the purchase was accepted. The CDSC is deducted from the proceeds of the redemption, not the amount remaining in the account, unless otherwise requested. The CDSC may be eliminated for certain persons and organizations. See "Sales Charges--General" below. THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS-- CLASS C SHARES" IS REVISED TO READ AS FOLLOWS: You may exchange Class C shares of any series of the Trusts for Class C shares of any other series of the Trusts which offers Class C shares or for Class C shares of New England Cash Management Trust - Money Market Series. Such exchanges will be made at the next-determined net asset value of the shares. IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD SENTENCE IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS: Total return is measured by comparing the value of a hypothetical $1,000 investment in a class at the beginning of the relevant period to the value of the investment at the end of the period (assuming deduction of the current maximum sales charge on Class A shares, automatic reinvestment of all dividends and capital gains distributions and, in the case of Class B and C shares, imposition of the CDSC relevant to the period quoted). GLOSSARY FOR MUTUAL FUND INVESTORS - -------------------------------------------------------------------------------- TOTAL RETURN - The change in value of a mutual fund investment over a specific time period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year. PRICE/EARNINGS RATIO - Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different issues. GROWTH INVESTING - An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. VALUE INVESTING - A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks will tend to have a lower price/earnings ratio than that of growth stocks. STANDARD & POOR'S 500 - Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. - ------------------------------------------------------------------------------- NEW ENGLAND FUNDS - ------------------------------------------------------------------------------- STOCK FUNDS Star Small Cap Fund Growth Fund Star Advisers Fund Capital Growth Fund Growth Opportunities Fund Value Fund Equity Income Fund Balanced Fund INTERNATIONAL STOCK FUNDS International Equity Fund Star Worldwide Fund BOND FUNDS High Income Fund Strategic Income Fund Bond Income Fund Government Securities Fund Limited Term U.S. Government Fund Adjustable Rate U.S. Government Fund TAX EXEMPT FUNDS Municipal Income Fund Massachusetts Tax Free Income Fund Intermediate Term Tax Free Fund of California Intermediate Term Tax Free Fund of New York MONEY MARKET FUNDS Cash Management Trust, Money Market Series Tax Exempt Money Market Trust To learn more, and for a free prospectus, contact your financial representative. Visit our World Wide Web site at www.mutualfunds.com New England Funds, L.P., Distributor 399 Boylston Street Boston, MA 02116 Toll Free 800-225-5478 This material is authorized for distribution to prospective investors when it is preceded or accompanied by the 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. -------------- BULK RATE U.S. POSTAGE PAID BROCKTON, MA (Logo) PERMIT NO. 770 NEW ENGLAND FUNDS -------------- Where The Best Minds Meet(TM) --------------------- 399 Boylston Street Boston, Massachusetts 02116 --------------------- - --------------------- [Logo] MUTUAL FUND SERVICE AWARD - --------------------- DALBAR HONORS COMMITMENT TO: INVESTORS - --------------------- 1995 o 1996 o 1997 SC56-1297 [Recycle Logo] Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----