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NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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NEW ENGLAND
HIGH INCOME FUND
JUNE 30, 1996
<PAGE>
July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England High Income Fund, containing your portfolio
manager commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first half
of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic growth,
remained strong at 2.3% through June, just shy of what most economists consider
optimal growth. As a result, the Federal Reserve Board opted not to tinker with
interest rates through the first half of the year, save for a quarter-point ease
in short-term rates in late January. The relatively calm economic waters had a
stimulating effect on the domestic equity market, boosting stocks 537 points to
5,654 at the end of June, as measured by the Dow Jones Industrial Average. Bond
yields did not fare as well, rising to 7.00% at the end of June from 6.65%
earlier in the year. Money market yields remained stable, falling back only
slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of the
Dow Jones Industrial Average's first-half gains. Again, we are reminded that no
bull market lasts forever. Long-term financial goals are key in times like these
and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A financial
representative can guide you through volatile markets and help you meet your
long-term financial goals. A recent study by Dalbar, Inc., a mutual fund
monitoring and analytical service, shows that, on average, mutual fund investors
who bought and held shares, with the assistance of a financial representative,
enjoyed the benefits of a long-term commitment. Consequently, they benefitted
from higher returns than direct investors and others who bought and sold,
although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our most
popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds marked their first and second birthdays, respectively. We're proud of all
of our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow moderately
and that inflationary pressures will not be excessive. While we estimate the GDP
may rise somewhat from its current level of 2.3%, the Federal Reserve should be
reluctant to tighten the money supply by raising short-term interest rates. We
also believe that the equity markets will continue to be volatile through the
rest of the year.
We believe that you will find your portfolio manager commentary informative. If
you have any questions or comments, please contact your financial representative
or New England Funds directly at 800-225-5478.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
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INVESTMENT RESULTS THROUGH JUNE 30, 1996
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in Class A shares of New England High Income Fund compared to
the First Boston High Yield Index and the Cost of Living from 6/30/86. The data
points to this chart are as follows:]
A $10,000 Investment in Class A Shares
Cost of
Date Range NAV POP First Boston* Living
6/30/86 $10,000 $9,550 $10,000 $10,000
1987 $10,614 $10,136 $10,700 $10,372
1988 $10,395 $9,928 $11,676 $10,780
1989 $10,979 $10,484 $12,805 $11,338
1990 $11,003 $10,508 $12,563 $11,868
1991 $11,196 $10,692 $14,534 $12,425
1992 $14,004 $13,374 $18,192 $12,808
1993 $16,231 $15,501 $21,278 $13,192
1994 $16,911 $16,150 $22,201 $13,476
1995 $17,824 $17,022 $24,977 $13,859
1996 $19,452 $18,576 $27,467 $14,231
*First Boston High Yield Index
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvested
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/96
CLASS A (Inception 2/22/84) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 9.13% 11.68% 6.88%
With Max. Sales Charge(2) 4.22 10.66 6.39
First Boston High Yield(4) 9.97 8.75 n/a
Lipper High Yield Average(6) 11.21 12.93 8.99
CLASS B (Inception 9/20/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 8.44% 5.78%
With CDSC(3) 4.47 4.88
First Boston High Yield(4) 9.97 8.75
Lipper High Yield Average(6) 11.21 n/a
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 assumes reinvestment of all distributions and
reflects the maximum sales charge of 4.5% at the time of purchase of Class A
shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) First Boston High Yield Index is an unmanaged index of bonds issued by U.S.
and corporations rated below investment-grade by Standard & Poor's or
Moody's Investors Service. The Index performance has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper 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 HIGH INCOME BOND FUND
Economic/Market Overview
The following comments reflect the performance and activity of Back Bay
Advisors, L.P., a New England Funds affiliate and subadviser to the Fund until
June 30, 1996. For the views of Loomis, Sayles & Co., L.P., the Fund's new
subadviser, please see the Special Update on page 4.
Concerns about a fast-growing economy and higher inflation resulted in positive
news for holders of high income bonds, as inflationary fears drove bond prices
downward and yields upward through the first half of 1996. A stable interest
rate environment continues to benefit the bond market overall, with economic and
market conditions rewarding fixed income investors who maintained aggressive
positions in lower credit securities.
How Your Fund Performed
For the six months ending June 30, 1996, New England High Income Fund provided a
total return on Net Asset Value (NAV) of 5.44% on Class A shares, for a total
return of 9.13% at NAV over the 12 months ended June 30.
We are also pleased to report that the Fund generated a solid level of current
income during the first half of the year. On June 30, the Fund's 30-day SEC
yield was 8.97% for Class A shares.
How We Managed Your Fund
As part of our long-term strategy to gain higher yields, we continue to place a
greater weight on lower credit securities, with an emphasis on BBB- and CCC
rated credits. It is our belief that weighting the Fund toward lower credits
positions it nicely for a cut in short-term discount rates, which we believe is
on the horizon. In an effort to take even greater advantage of such a cut, we
have also lengthened the Fund's duration to 4.75 years (as of June 30), which is
slightly longer than the fixed income market average.
In broad Fund categories, the CCC rated bonds in our portfolio outperformed B
rated ones, with BBB rated credits lagging somewhat. At the end of the period,
CCC rated credits comprised roughly 15% of the Fund.
Please refer to "Portfolio Composition" in the attached financial report for a
more complete listing of all the sectors and individual holdings.
Special Update
On July 1, 1996, Loomis, Sayles & Co., L.P., another New England Funds
affiliate, assumed responsibility for managing New England High Income Fund. On
this date, Gary L. Goodenough and Madeline Einhorn Glick began serving as the
Fund's portfolio managers. Mr. Goodenough served as a Managing Director at Bear
Stearns and Salomon Brothers prior to joining Loomis Sayles in 1993. Ms. Glick
is the founder of MEG Asset Management and served as its president until joining
Loomis Sayles in 1991.
Mr. Goodenough and Ms. Glick, as part of their overall strategy, plan to reduce
the number of holdings in the Fund significantly. Their investment outlook
anticipates slower economic growth; consumer spending is showing signs of
deceleration and higher long-term rates may take a toll. Therefore they are
reducing the Fund's commitment to cyclical, or economically sensitive,
companies. One area of focus will be high-coupon bonds with shorter durations,
i.e., those with lower sensitivity to interest rate changes. Favored industrial
sectors include communications, gaming, health care and energy.
If, however, inflation does intensify, leading to possible interest rate hikes,
we will act accordingly and shorten the relative duration of the Fund. In the
meantime, we will continue to maintain an aggressive posture and seek lower
credit quality bonds in order to pursue solid total returns with higher current
yields for shareholders.
NEW ENGLAND HIGH INCOME
COMPOSITION AS OF 6/30/96
AAA 3.65%
B 69.55
BB 12.98
CCC 12.12
N/R 1.69
*Portfolio holdings and asset allocations may change.
<PAGE>
Glossary for Mutual Fund Investors
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by the
Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the portfolio.
DURATION - A measure, stated in years, of a bond or bond fund's sensitivity to
interest rates. Duration is a means to directly compare the volatility of
different instruments. As a general rule, for every 1% move in interest rates, a
fund is expected to fluctuate in value as indicated by its duration. For
example, if interest rates fall by 1%, a fund with a duration of 4 years should
rise in value 4%. Conversely, the fund should decline 4% if interest rates rise
1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from treasury securities is exempt from state
and local income taxes, but not from federal income taxes. There are three types
of treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and in most
cases from state and local income taxes. The two main types are General
Obligation (GO) Bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and Revenue Bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
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NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
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NEW ENGLAND
HIGH INCOME
FUND
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JUNE 30, 1996
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1996
(unaudited)
BONDS AND NOTES -- 89.9% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
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ADVERTISING--0.5%
$ 250,000 Lamar Advertising, 11.000%, 05/15/2003 .......... $ 257,500
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AUTOMOTIVE--2.7%
500,000 American General Corp., 12.875%, 05/01/2002 ..... 513,750
500,000 Johnstown America Industries, Inc., 11.750%,
08/15/2005 ...................................... 471,250
250,000 Motor Wheel Corp., 11.500%, 03/01/2000 .......... 264,063
150,000 SPX Corp., 11.750%, 06/01/2002 .................. 158,625
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1,407,688
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AVIATION/PARTS & SERVICE--1.2%
250,000 Be Aerospace, Inc., 9.875%, 02/01/06 ............ 245,625
350,000 Fairchild Corp., 13.125%, 03/15/2006 ............ 350,875
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596,500
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BUILDING MATERIALS--2.9%
500,000 Beazer USA, Inc., 9.000%, 03/01/2004 ............ 455,000
250,000 NVR, Inc., 11.000%, 04/15/2003 .................. 252,500
250,000 Pacific Lumber Co., 10.500%, 03/01/2003 ......... 242,500
500,000 Schuller International Group, Inc., 10.875%,
12/15/2004 ...................................... 535,000
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1,485,000
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CHEMICALS--3.0%
250,000 Agriculture Minerals & Chemicals, 10.750%,
09/30/2003 ...................................... 262,500
400,000 Harris Chemical North America, Inc., 10.750%,
10/15/2003 ...................................... 391,000
1,000,000 Indspec Chemical Corp., 0/11.500%, 12/01/2003 (d) 862,500
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1,516,000
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COMMUNICATIONS--9.9%
100,000 American Radio Systems, 9.000%, 09/30/2003 ...... 94,250
900,000 Bell Cablemedia PLC, 0/11.875%, 09/15/2005 (d) .. 546,750
500,000 Cablevision System Corp., 9.250%, 11/01/2005 .... 465,000
250,000 Cencall Communications Corp., 0/10.125%,
01/15/2004 (d) .................................. 151,875
500,000 Continental Cablevision Inc., 11.000%, 06/01/2007 561,250
500,000 Diamond Cable Communication, 0/11.750%,
12/15/2005 (d) .................................. 293,750
500,000 Dictaphone Corp., 11.750%, 08/01/2005 ........... 482,500
200,000 International Cabletel, Inc., 0/10.875%,
10/15/2003 (d) .................................. 145,500
450,000 International Cabletel, Inc., Zero Coupon Bond,
02/01/2006 (d) .................................. 250,312
500,000 Jones Intercable Inc., 9.625%, 03/15/2002 ....... 502,500
200,000 Katz Corp., 12.750%, 11/15/2002 ................. 222,000
500,000 Metrocall, Inc., 10.375%, 10/01/2007 ............ 462,500
500,000 Nextel Communications, Inc., 0/9.750%,
08/15/2004 (d) .................................. 293,750
1,000,000 TeleWest PLC, 0/11.000%, 10/01/2007 (d) ......... 590,000
-----------
5,061,937
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COMPUTERS--1.1%
220,000 Anacomp, Inc., 13.000%, 06/04/2002 .............. 211,200
500,000 Merisel, Inc., 12.500%, 12/31/2004 .............. 345,000
-----------
556,200
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CONGLOMERATES--1.8%
250,000 Kaiser Aluminum & Chemical Corp., 12.750%,
2/01/2003 ....................................... 263,750
430,000 Talley Industries, Inc., 0/12.250%,
10/15/2005 (d) .................................. 344,000
300,000 Talley Manufacturing & Technology, Inc., 10.750%,
10/15/2003 ...................................... 307,500
-----------
915,250
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CONSUMER PRODUCTS--4.1%
750,000 Apparel Retailers, Inc., 0/12.750%,
08/15/2005 (d) .................................. 639,375
200,000 Revlon Consumer Products Corp., 10.875%,
07/15/2010 ...................................... 200,000
750,000 Revlon Worldwide Corp., Zero Coupon Bond,
03/15/1998 ...................................... 623,438
750,000 U.S. Leather, Inc., 10.250%, 07/31/2003 ......... 637,500
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2,100,313
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CONTAINERS--2.0%
250,000 Calmar, Inc., 11.500%, 08/15/2005 ............... 243,750
750,000 Owens Illinois, Inc., 11.000%, 12/01/2003 ....... 806,250
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1,050,000
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ELECTRIC UTILITIES--1.4%
500,000 Consolidated Hydropower, Inc., 0/12.000%,
07/15/2003 (d) .................................. 105,000
1,000,000 Kenetech Corp., 12.750%, 12/15/2002 (e) ......... 620,000
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725,000
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ENTERTAINMENT--4.3%
400,000 ACT III Theaters, Inc., 11.875%, 02/01/2003 ..... 440,000
200,000 Capital Gaming International Inc., 11.500%,
02/01/2001 ...................................... 91,500
250,000 Grand Casino Inc., 10.125%, 12/01/2003 .......... 256,250
500,000 Lady Luck Gaming Financing Corp., 11.8750%,
03/01/2001 ...................................... 490,000
500,000 Players International, Inc., 10.875%, 04/15/2005 508,750
500,000 Roadmaster Industries, Inc., 11.750%, 07/15/2002 402,500
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2,189,000
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FOOD/TOBACCO--3.6%
750,000 Carrolls Corp., 11.500%, 08/15/2003 ............. 757,500
250,000 Dr. Pepper Bottling Co., 0/11.625%,
02/15/2003 (d) .................................. 211,875
500,000 Family Restaurants Inc., 0/10.875%,
02/01/2004 (d) .................................. 68,750
200,000 PMI Acquisition Corp., 10.250%, 09/01/2003 ...... 196,000
400,000 Ralph's Grocery Co., 13.750%, 06/15/2005 ........ 406,000
500,000 Specialty Foods Acquisition Corp., 13.000%,
08/15/2005 (d) .................................. 212,500
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1,852,625
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FOREIGN--2.8%
1,000,000 Cemex SA & Tolmex, 9.500%, 09/20/2001 ........... 964,375
500,000 Republic of Argentina, 9.250%, 02/23/2001 ....... 480,000
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1,444,375
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HEALTH SERVICES--0.9%
450,000 Ornda Healthcorp, 12.250%, 05/15/2002 ........... 486,000
-----------
INSURANCE--1.9%
1,000,000 Reliance Group Holdings, Inc., 9.750%, 11/15/2003 982,500
-----------
MANUFACTURING--6.2%
1,000,000 American Standard, Inc., 0/10.500%,
06/01/2005 (d) .................................. 872,500
227,000 Carbide/Graphite Group, Inc., 11.500%, 09/01/2003 241,755
800,000 Fairfield Manufacturing, 11.375%, 07/01/2001 .... 816,000
250,000 HS Resources, Inc., 9.875%, 12/01/2003 .......... 245,000
750,000 Mafco, Inc., 11.875%, 11/15/2002 ................ 791,250
250,000 Reeves Industries, Inc., 11.000%, 07/15/2002 .... 217,500
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3,184,005
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METALS/MINING--1.9%
1,000,000 Jorgensen Earle, 10.750%, 03/01/2000 ............ 990,000
-----------
OIL & GAS--5.2%
500,000 Clark R & M Holdings, Zero Coupon Bond,
02/15/2000 ...................................... 343,750
500,000 Maxus Energy Corp., 9.375%, 11/01/2003 .......... 482,500
400,000 Nuevo Energy Co., 12.500%, 06/15/2002 ........... 432,000
500,000 Petroleum Heat & Power, Inc., 10.125%, 04/01/2003 482,500
163,000 Petroleum Heat & Power, Inc., 12.250%, 02/01/2005 177,670
200,000 Santa Fe Energy Resource, Inc., 11.000%,
05/15/2004 ...................................... 214,000
300,000 Tesoro Petroleum Corp., sub. deb., 13.000%,
12/01/2000 ...................................... 299,250
250,000 United Meridian Corp., 10.375%, 10/15/2005 ...... 258,750
-----------
2,690,420
-----------
PAPER & FOREST PRODUCTS--6.6%
500,000 Ivex Holdings Corp., 0/13.250%, 03/15/2005 (d) .. 301,250
200,000 Ivex Packaging, 12.500%, 12/15/2002 ............. 210,500
500,000 P.T. Indorayon Utama, 9.125%, 10/15/2000 ........ 482,500
250,000 S.D. Warren Co., 12.000%, 12/15/2004 ............ 263,750
500,000 Stone Container Corp., 11.500%, 09/01/1999 ...... 501,250
500,000 Stone Container Corp., 10.750%, 10/01/2002 ...... 505,000
1,000,000 Tjiwi Kimia International Finance, 13.250%,
08/01/2001 ...................................... 1,120,000
-----------
3,384,250
-----------
REAL ESTATE--2.4%
500,000 Brooks Fiber Properties, Zero Coupon Bond,
03/01/2006 ...................................... 266,250
500,000 Engle Homes, Inc., 11.750%, 12/15/2000 .......... 483,750
150,000 Oriole Homes Corp., 12.500%, 01/15/2003 ......... 124,500
250,000 Ryland Group, Inc., 9.625%, 06/01/2004 .......... 236,250
154,296 U.D.C. Homes, Inc., 12.500%, 05/01/2000 ......... 143,495
-----------
1,254,245
-----------
RETAIL STORES--4.3%
500,000 Cole National Group, Inc., 11.250%, 10/01/2001 .. 528,750
1,000,000 Finlay Enterprises, Inc., 0/12.000%,
05/01/2005 (d) .................................. 801,250
200,000 Levitz Furniture, 13.375%, 10/15/1998 ........... 191,000
250,000 Levitz Furniture, 9.625%, 07/15/2003 ............ 165,000
200,000 Repap Wisconsin, Inc., 9.875%, 05/01/2006 ....... 178,000
350,000 Waban, Inc., 11.000%, 05/15/2004 ................ 364,000
-----------
2,228,000
-----------
STEEL & IRON--5.5%
750,000 AK Steel Corp., 10.750%, 04/01/2004 ............. 808,125
750,000 Acme Metals, Inc., 12.500%, 08/01/2002 .......... 766,875
750,000 GS Technologies Operation, Inc., 12.000%,
09/01/2004 ...................................... 767,812
500,000 Wheeling Pittsburgh Corp., 9.375%, 11/15/2003 ... 465,000
-----------
2,807,812
-----------
TEXTILES & APPAREL--0.7%
250,000 Bibb Co., 14.000%, 10/01/1999 (e) ............... 115,000
200,000 Dan River, Inc., 10.125%, 12/15/2003 ............ 192,000
100,000 NTC Group, Inc., 13.875%, 08/01/1999 (e) ........ 46,000
-----------
353,000
-----------
TRUCKING--0.0%
500,000 Burlington Motor Holdings, Inc., 11.500%,
11/01/2003 (e) .................................. 20,000
-----------
MISCELLANEOUS--9.7%
250,000 Alliant Techsystems, Inc, 11.750%, 03/01/2003 ... 270,000
200,000 Day International Group, Inc., 11.125%,
06/01/2005 ...................................... 207,000
250,000 Doane Products Co., 10.625%, 03/01/2006 ......... 250,000
1,000,000 Grand Union Co., 12.000%, 09/01/2004 ............ 927,500
500,000 MVE Inc., 12.500%, 02/15/2002 ................... 517,500
250,000 Owens & Minor, Inc., 10.875%, 06/01/2006 ........ 253,437
500,000 Primeco, Inc., 12.750%, 03/01/2005 .............. 520,000
500,000 Pronet, Inc., 10.875%, 09/15/2006 ............... 480,000
500,000 RBX Corp., 11.250%, 10/15/2005 .................. 472,500
500,000 Terex Corp., 13.750%, 05/15/2002 ................ 521,875
265,000 UCAR Global Enterprises, Inc., 12.000%,
01/15/2005 ....................................... 300,775
250,000 Viridian, Inc., 9.375%, 11/15/2003 .............. 258,750
-----------
4,979,337
-----------
U.S. GOVERNMENT--3.3%
300,000 U.S. Treasury Notes, 8.250%, 07/15/1998 ......... 311,859
7,550,000 U.S. Treasury Bond Strip, Zero Coupon, 08/15/2020 1,360,963
-----------
1,672,822
-----------
Total Bonds and Notes (Identified Cost
$48,275,440) .................................... 46,189,779
-----------
COMMON STOCKS AND WARRANTS -- 0.7%
SHARES
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12,750 Anacomp, Inc. (c) ............................... 134,672
6,713 Bucyrus Erie Co. (c) ............................ 67,130
5,334 Capital Gaming International, Inc. (c) .......... 693
4,550 Capital Gaming International, Inc. (Warrants) (c) 273
66 Continental Airlines, Inc. Class A (c) .......... 4,026
181 Continental Airlines, Inc. Class B (c) .......... 11,177
667 Finlay Enterprises, Inc. (c) .................... 9,171
350 Grand Union Co. (Warrants, Series 1) (c) ........ 11
700 Grand Union Co. (Warrants, Series 2) (c) ........ 11
8,837 Grand Union Co. (c) ............................. 57,441
2,688 Great Bay Power Corp. (c) ....................... 19,824
376 Host Marriott Corp. (c) ......................... 4,935
75 Host Marriott Service Corp. (c) ................. 544
620 Levitz Furniture, Inc. (Warrants) (c) ........... 6
376 Marriott International, Inc. .................... 20,210
752 Smiths Food & Drug Centers, Inc. ................ 17,954
7,500 Specialty Foods Acquisition Corp. (c) ........... 30,000
-----------
Total Common Stocks and Warrants (Identified Cost
$1,291,891) ..................................... 378,078
-----------
PREFERRED STOCK -- 1.1%
SHARES DESCRIPTION VALUE (a)
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1,000 El Paso Electric Co. (c) ........................ $ 102,500
5,000 K-III Communications Corp. ...................... 457,500
-----------
Total Preferred Stock (Identified Cost $600,000) 560,000
-----------
SHORT-TERM INVESTMENT -- 6.5%
FACE
AMOUNT
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$3,340,000 Repurchase agreement with State Street Bank &
Trust Company dated 6/28/96
at 4.750% to be repurchased at $3,341,322 on 7/
01/96 collateralized by $3,365,000 U.S. Treasury
Note 6.500% due 4/30/99 with a value of
$3,409,519 3,340,000
-----------
Total Short-Term Investment (Identified Cost
$3,340,000) ..................................... 3,340,000
-----------
Total Investments--98.2% (Identified Cost
$53,507,331) (b) ................................ 50,467,857
Other assets less liabilities ................... 938,429
-----------
Total Net Assets--100% .......................... $51,406,286
===========
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1996 the net
unrealized depreciation on investments based on cost
of $53,507,331 for federal income tax purposes was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ................................................. $ 1,578,494
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................... (4,617,968)
------------
Net unrealized depreciation .............................. $ (3,039,474)
============
As of December 31, 1995, the Fund had a net tax basis
capital loss carryforward as follows:
Expiring December 31, 1996 $253,489
Expiring December 31, 1997 $1,341,040
Expiring December 31, 1998 $527,465
Expiring December 31, 1999 $1,300,610
(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.
(e) Non-income producing; issuer filed petition under
Chapter 11 of the Federal Bankruptcy Code.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
ASSETS
Investments at value ........................... $50,467,857
Cash ........................................... 1,775
Receivable for:
Fund shares sold ............................. 74,164
Dividends and interest ....................... 1,180,776
Prepaid registration expense ................... 4,000
-----------
51,728,572
LIABILITIES
Payable for:
Fund shares redeemed ......................... $ 55,395
Dividends declared ........................... 140,817
Miscellaneous ................................ 963
Accrued expenses:
Management fees .............................. 78,862
Deferred trustees' fees ...................... 460
Other expenses ............................... 45,789
---------
322,286
-----------
NET ASSETS ....................................... $51,406,286
===========
Net Assets consist of:
Capital paid in .............................. $58,348,561
Distributions in excess of net investment
income ......................................... (30,449)
Accumulated net realized losses .............. (3,872,352)
Unrealized depreciation on investments ....... (3,039,474)
-----------
NET ASSETS ....................................... $51,406,286
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($38,601,678 divided by 4,269,845 shares
of beneficial interest) ........................ $9.04
=====
Offering price per share (100/95.50 of $9.04) .... $9.47*
=====
Net asset value and offering price of Class B
shares ($12,804,608 divided by 1,417,531 shares
of beneficial interest) ........................ $9.03**
=====
Identified cost of investments ................... $53,507,331
===========
*Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Dividends ...................................... $ 13,671
Interest ....................................... 2,714,667
----------
2,728,338
Expenses
Management fees .............................. $ 188,919
Service and distribution fees--Class A ....... 67,401
Service and distribution fees--Class B ....... 59,319
Trustees' fees and expenses .................. 5,718
Accounting and administrative ................ 25,094
Custodian .................................... 31,329
Transfer agent ............................... 49,210
Audit and tax services ....................... 11,000
Legal ........................................ 9,409
Printing ..................................... 13,834
Registration ................................. 14,579
Miscellaneous ................................ 2,811
----------
Total expenses ................................. 478,623
Less expenses waived by the investment adviser and
subadviser ..................................... (37,037) 441,586
---------- ----------
Net investment income .......................... 2,286,752
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized loss on:
Investments--net ............................. (449,748)
----------
Unrealized appreciation on:
Investments--net ............................. 760,786
-----------
Net gain on investment transactions ............ 311,038
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ....... $2,597,790
==========
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
----------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 4,373,660 $ 2,286,752
Net realized gain (loss) on investments ................... 357,087 (449,748)
Unrealized appreciation on investments .................... 165,613 760,786
----------- -----------
Increase in net assets from operations .................... 4,896,360 2,597,790
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (3,631,062) (1,767,676)
Class B ................................................. (742,598) (505,507)
In excess of net investment income
Class A ................................................. (172,611) 0
Class B ................................................. (42,339) 0
----------- -----------
(4,588,610) (2,273,183)
----------- -----------
Increase in net assets derived from capital share
transactions ............................................ 10,559,256 1,308,605
----------- -----------
Total increase in net assets .............................. 10,867,006 1,633,212
NET ASSETS
Beginning of the period ................................... 38,906,068 49,773,074
----------- -----------
End of the period ......................................... $49,773,074 $51,406,286
=========== ===========
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
Beginning of the period ................................... $ 101,090 $ (44,018)
=========== ===========
End of the period ......................................... $ (44,018) $ (30,449)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 7.56 $ 9.07 $ 9.46 $10.06 $ 8.89 $ 8.98
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........................ 1.02 0.94 0.90 0.88 0.88 0.93
Net Realized and Unrealized Gain (Loss)
on Investments ............................. 1.58 0.44 0.61 (1.19) 0.13 (0.45)
------ ------ ------ ------ ------ ------
Total From Investment Operations ............. 2.60 1.38 1.51 (0.31) 1.01 0.48
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ..... (1.02) (0.94) (0.90) (0.86) (0.88) (0.42)
Distributions in Excess of Net Investment
Income 0.00 0.00 (0.01) 0.00 (0.04) 0.00
Distributions From Paid-in Capital .......... (0.07) (0.05) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions .......................... (1.09) (0.99) (0.91) (0.86) (0.92) (0.42)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period ............... $ 9.07 $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.04
====== ====== ====== ====== ====== ======
Total Return (%) (b) ......................... 36.3 15.8 16.5 (3.3) 11.8 5.4
Ratio of Operating Expenses to
Average Net Assets (%) (a) ................. 1.50 1.50 1.54 1.60 1.60 1.60 (c)
Ratio of Net Investment Income to
Average Net Assets (%) ..................... 11.56 9.74 9.17 9.18 9.71 7.67 (c)
Portfolio Turnover Rate (%) .................. 30 19 43 33 30 29 (c)
Net Assets, End of Period (000) .............. $12,280 $20,992 $31,176 $33,673 $39,148 $38,602
<FN>
(a) Commencing October 1, 1993 expenses were voluntarily limited to 1.60% of Class A average net assets. See Note 4. From May 18,
1989 through September 30, 1993 expenses were voluntarily limited to 1.50% of average net assets. The ratios of operating
expenses to average net assets, assuming the foregoing expense limitations had not been in effect, would have been 3.02%, 2.63%,
2.00%, 1.83% and 1.72% for the years ended December 31, 1991, 1992, 1993, 1994, and 1995 respectively and 1.75% for the six
months ended June 30, 1996.
(b) A sales charge of 4.50% (maximum) is not reflected in total return calculations. Periods less than one year are not annualized.
As of January 1, 1993 the Fund discontinued the use of equalization accounting.
(c) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS B
------------------------------------------------------------------------------
SEPTEMBER 20,(a) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
--------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 9.87 $10.06 $8.88 $8.98
------ ------ ----- -----
Income From Investment Operations
Net Investment Income ........................ 0.23 0.79 0.83 0.87
Net Realized and Unrealized Gain (Loss)
on Investments ............................. 0.20 (1.18) 0.13 (0.43)
------ ------ ----- -----
Total From Investment Operations ............. 0.43 (0.39) 0.96 0.44
------ ------ ----- -----
Less Distributions
Distributions From Net Investment Income ..... (0.23) (0.78) (0.81) (0.39)
Distributions in Excess of Net Investment
Income (0.01) (0.01) (0.05) 0.00
Distributions from Paid-in Capital ........... 0.00 0.00 0.00 0.00
------ ------ ----- -----
Total Distributions .......................... (0.24) (0.79) (0.86) (0.39)
------ ------ ----- -----
Net Asset Value, End of Period ............... $10.06 $8.88 $8.98 $9.03
====== ===== ===== =====
Total Return (%) (c) ......................... 4.4 (4.0) 11.2 5.0
Ratio of Operating Expenses to
Average Net Assets (%) (b) ................. 2.25(d) 2.25 2.25 2.25 (d)
Ratio of Net Investment Income to
Average Net Assets (%) ..................... 7.66(d) 8.53 8.96 7.12 (d)
Portfolio Turnover Rate (%) .................. 43 33 30 29 (d)
Net Assets, End of Period (000) .............. $1,232 $5,233 $10,625 $12,805
<FN>
(a) Commencement of operations.
(b) Commencing October 1, 1993 expenses were voluntarily limited to 2.25% of Class B average net assets. See Note 4. The ratios of
operating expenses to average net assets, assuming the foregoing expense limitations had not been in effect for Class B shares,
would have been 2.53% for the period ended December 31, 1993, 2.48% for the year ended December 31, 1994 and 2.37% for the year
ended December 31, 1995 and 2.40% for the six months ended June 30, 1996.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
(d) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
1. The Fund is a series of New England Funds Trust II, 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 series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 20, 1993. Class A shares are sold with
a maximum front end sales charge of 4.50%. 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 five years of purchase. Expenses of the Fund are borne
pro-rata by the holders of both classes 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. The Fund's investment subadviser, under the
supervision of the Fund's trustees, determines the value of the Fund's
portfolio of securities, using valuations provided by a pricing service
selected by the Fund's subadvisor and other information with respect to
transactions in securities, including quotations from securities dealers.
Valuations of securities and other assets owned by the Fund for which market
quotations are readily available are based on those quotations. Short-term
obligations that will mature in 60 days or less are stated at amortized cost,
which, when combined with accrued interest or discount earned, approximates
market value. All other securities and assets are valued at their fair value
as determined in good faith by the 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 and interest income is
recorded on the accrual basis. Interest income is increased by the accretion
of discount. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
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
primarily relate to interest on defaulted securities and differing treatments
for income recognition on pay-in-kind securities. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid in capital.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. The Funds 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.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the six months ended June 30, 1996 were $6,877,338 and $7,639,821,
respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays management fees to its investment adviser, New England Funds
Management, L.P. ("NEFM") at the annual rate of 0.75% of the Fund's average
daily net assets. NEFM pays the Fund's investment subadviser, Back Bay
Advisors at the rate of 0.375% of the Fund's average daily net assets. Certain
officers and directors of NEFM and Back Bay Advisors are also officers or
trustees of the Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries
of New England Investment Companies, L.P. ("NEIC"), which is a subsidiary of
New England Mutual Life Insurance Company. Fees earned by NEFM and Back Bay
Advisors under the management agreement in effect during the six months ended
June 30, 1996 are as follows:
FEES EARNED (a)
- ---------------
$94,460 New England Funds Management, L.P.
$94,459 Back Bay Advisors, L.P.
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser
for the Fund.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and related clerical functions relating to the
Fund, (ii) expenses for services required in connection with the preparation
of registration statements and prospectuses, shareholder reports and notices,
proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the six months ended June 30, 1996 these expenses
amounted to $25,094 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted Service and Distribution Plans relating to the Fund's
Class A and Class B shares (the "Plans").
Under the Plans, 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 and Class B 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 A and Class B shares and/or
the maintenance of shareholder accounts. For the six months ended June 30,
1996, the Fund paid New England Funds $48,143 and $14,830 in service fees
under the Class A and B Plans respectively.
Also under the Plans, the Fund pays New England Funds monthly distribution
fees, at the annual rate of up to 0.10% of the average daily net assets
attributable to the Fund's Class A shares and up to 0.75% of the average
daily net assets attributable to the Fund's Class B 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 A and Class B shares,
respectively. For the six months ended June 30, 1996, the Fund paid New
England Funds $19,258 and $44,489 in distribution fees under the Class A and B
Plans respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the six months
ended June 30, 1996 amounted to $72,918.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1996, the Fund
paid New England Funds $36,057 as compensation for its services in that
capacity.
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 Back Bay Advisors, New England Funds, NEIC or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $734
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $123/year
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 had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Commencing October 1, 1993 and until further notice
to the Fund, Back Bay Advisors and New England Funds Management, L.P. have
voluntarily agreed to reduce management fees and, if necessary, to assume
expenses of the Fund in order to limit the Fund's expenses to an annual rate
of 1.60% of Class A average daily net assets and 2.25% of Class B average
daily net assets. From May 18, 1989 through September 30, 1993 expenses were
voluntarily limited to 1.50% of the Fund's average daily net assets. As a
result of the Fund's expenses exceeding the foregoing expense limitations
during the six months ended June 30, 1996, Back Bay Advisors reduced its
subadvisory fee of $94,459 by $18,518 and New England Funds Management L.P.
reduced it's advisory fee of $94,460 by $18,519.
5. CONCENTRATION OF CREDIT; LOWER RATED SECURITIES. The Fund invests in
securities offering high current income which generally will be rated below
investment grade by recognized rating agencies. Certain of these lower rated
securities are regarded as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligations and generally involve more credit risk than securities in the
higher rating categories. In addition, the trading market for lower rated
securities may be less liquid than the market for higher-rated securities.
6. CAPITAL SHARES. At June 30, 1996 there was an unlimited number of shares
of beneficial interest authorized, divided into two classes, Class A and Class
B capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------------------- -----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................... 1,182,928 $10,739,791 410,742 $ 3,734,588
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................... 289,825 2,629,615 137,021 1,238,928
--------- ----------- ------- -----------
1,472,753 13,369,406 547,763 4,973,516
Shares repurchased ........................................ (901,955) (8,189,417) (636,179) (5,743,005)
--------- ----------- ------- -----------
Net increase (decrease) ................................... 570,798 5,179,989 (88,416) $ (769,489)
========= =========== ======= ===========
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------------------- -----------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................... 690,304 $ 6,247,681 319,695 $ 2,851,966
Shares issued in connection with the reinvestment of:
Distributions from net investment income ................ 31,651 286,885 20,566 185,721
--------- ----------- ------- -----------
721,955 6,534,566 340,261 3,037,687
Shares repurchased ........................................ (127,062) (1,155,299) (106,596) (959,593)
--------- ----------- ------- -----------
Net increase .............................................. 594,893 $ 5,379,267 233,665 $ 2,078,094
========= =========== ======= ===========
Increase derived from capital shares transactions ......... 1,165,691 $10,559,256 145,249 $ 1,308,605
========= =========== ======= ===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING
- --------------------------------------------------------------------------------
(unaudited)
At a special shareholders' meeting held on June 28, 1996, shareholders of the
High Income Fund voted for the following proposal:
<TABLE>
<CAPTION>
VOTED VOTED ABSTAINED BROKER TOTAL
FOR AGAINST VOTES NON-VOTES VOTES
----- ------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1. Subadvisory agreement relating to the Fund
between New England Funds Management, L.P.
and Loomis, Sayles and Company L.P. 2,976,007.483 528,569.527 224,063.813 3,728,640.823
============= =========== =========== =============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REGULAR INVESTING PAYS
- --------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets
2. It's convenient and effortless
3. It requires a low minimum to get started
4. It can help you reach important long-term goals like
retirememt or college funding
5. It can help you benefit from the ups and downs of the market
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $50 a month in your New England Fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
THE POWER OF MONTHLY INVESTING
[A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:]
Monthly investments of $50
Years Growth of Monthly Investments
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high.
You can start an Investment Builder program with your current New England Fund
account, or with any of our other funds. To open an Investment Builder account
today, call your financial representative or New England Funds at
1-800-225-5478.
<PAGE>
- -------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- -------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. While it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of investor B's commitment -- and
for less than half the time. Yet investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
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To learn more, and for a free prospectus,
contact your financial representative.
VISIT OUR WORLD WIDE WEB SITE AT HTTP://WWW.MUTUALFUNDS.COM
New England Funds, L.P.
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.
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