[LOGO OF NEW ENGLAND FUNDS APPEARS HERE]
Where the Best Minds Meet(TM)
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Annual Report and Performance Update
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NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
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December 31, 1995
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<PAGE>
January 31, 1996
DEAR SHAREHOLDER,
It's a real pleasure to present to you the 1995 Annual Report for New
England Limited Term U.S. Government Fund, containing your portfolio
manager's commentary and complete financial information.
FAVORABLE ECONOMIC CONDITIONS IN 1995
In 1995 subdued economic growth with little or no inflation created a
very favorable backdrop for the bond and stock markets. Long term interest
Rates dipped on the positive inflation news, with the yield on the 30-year
Treasury bond falling to a low of 5.95% at year end. The stock market, fueled
by lower interest rates and solid corporate earnings growth, advanced 37.6%,
as measured by the Standard & Poor's 500 Index,* for its best showing since
1958. In July and in December, the Federal Reserve Board lowered short term
rates, signaling its belief that the economy was indeed on a path towards
slow, non-inflationary growth.
NEW ENGLAND FUNDS - WHERE THE BEST MINDS MEET
Over this past year we launched our new corporate identity - Where
the Best Minds Meet -which we believe reflects the essence of New England
Funds. Our unique multiple adviser structure brings together some of the best
investment minds in the business. As recent examples, consider New England
Star Advisers Fund, managed by four prominent equity advisers, and New
England Star Worldwide Fund, a global fund introduced this January which
builds off the Star Advisers concept. In addition, last May we launched New
England Strategic Income Fund, under the management of Dan Fuss of Loomis
Sayles. One of the industry's most respected managers, Dan Fuss was named
1995's "Bond Fund Manager of the Year" by Morningstartrademark for his past
record of accomplishment in fund management at Loomis Sayles.**
* Standard & Poor's 500 is an unmanaged index representing 500 major
companies, the majority of which are listed on the New York Stock Exchange.
** Morningstar is a third party, independent mutual fund rating service.
<PAGE>
1995 DALBAR AWARD FOR SERVICE EXCELLENCE
Where the Best Minds Meet also refers to your financial adviser and
all the people at New England Funds who provide you with quality service. We
are proud to report that in recognition of our ongoing quality initiatives,
New England Funds has been named a 1995 Quality Tested Service Seal Winner by
DALBAR, an independent mutual fund service rating company. The coveted
DALBAR award was given to only seven companies for "providing the highest
tier of service excellence in the mutual fund industry."
OUTLOOK FOR 1996
Looking ahead, we believe interest rates are likely to remain flat as
the economy continues on its slow, steady, non-inflationary growth path. While
this scenario is extremely positive for the long term, it is unlikely that
1996 will see a repeat of last year's stellar performance. At this time it's
worth reiterating that long-term investors should not focus on one year's
performance. Instead, we recommend that you review your asset allocation
program with your financial adviser, then remain committed to that program to
carry out its objectives.
We believe you will find your portfolio manager's commentary
informative. If you have any questions or comments, please contact your
financial representative or New England Funds directly at 800-225-5478.
Also, please contact New England Funds for a prospectus on any of the funds
mentioned above. The prospectus details investment objectives and risks, as
well as management fees and expenses. You should read it carefully before
investing or sending money.
Sincerely,
/S/Peter S. Voss /S/Henry L.P. Schmelzer
Peter S. Voss Henry L.P. Schmelzer
Chairman President
<PAGE>
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New England Limited Term U.S. Government Fund
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INVESTMENT RESULTS THROUGH DECEMBER 31, 1995
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 $10,000 INVESTMENT IN CLASS A SHARES
COMPARED TO LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX(4) AND THE COST OF
LIVING(5)
A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares compared to Lehman Intermediate
Government Bond Index (4) and the Cost of Living (5). The data points
from the graph are as follows:
<TABLE>
<CAPTION>
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND - NET ASSET VALUE(1)
Year Amount
- ---- ------
<S> <C>
1995 $17,248
1994 $15,262
1993 $15,618
1992 $14,676
1991 $13,891
1990 $12,205
1989 $11,041
1/3/89 $10,000
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND -
WITH MAXIMUM SALES CHARGE(2)
Year Amount
- ---- ------
1995 $16,731
1994 $14,805
1993 $15,150
1992 $14,236
1991 $13,475
1990 $11,839
1989 $10,710
1/3/89 $ 9,700
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX(4)
Year Amount
- ---- ------
1995 $18,317
1994 $16,008
1993 $16,293
1992 $15,062
1991 $14,086
1990 $12,346
1989 $11,269
1/3/89 $10,000
COST OF LIVING(5)
Year Amount
- ---- ------
1995 $12,748
1994 $12,424
1993 $12,100
1992 $11,776
1991 $11,444
1990 $11,104
1989 $10,465
1/3/89 $10,000
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, C and Y 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.
<PAGE>
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New England Limited Term U.S. Government Fund
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AVERAGE ANNUAL TOTAL RETURNS 12/31/95
CLASS A (INCEPTION 1/3/89) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 13.01% 7.16 8.11
With Max. Sales Charge(2) 9.57 6.52 7.64
Lehman Intermediate Gov't Bond Index(4) 14.43 5.42 n/a
Lipper Short US Gov't(6) 11.25 6.62 n/a
CLASS B (INCEPTION 9/24/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 12.30% 3.60
With CDSC(3) 8.30 2.48
Lehman Intermediate Gov't. Bond Index(4) 14.43 5.42
Lipper Short US Gov't(6) 11.25 4.19
CLASS C (INCEPTION 12/30/94) 1 YEAR
Net Asset Value(1) 11.35%
Lehman Intermediate Gov't. Bond Index(4) 14.43
CLASS Y (INCEPTION 3/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 13.33% 7.25
Lehman Intermediate Gov't. Bond Index(4) 14.43 8.11
<FN>
These returns represent past performance. Investment return and principal
value
will fluctuate so that shares, upon redemption, may be worth more or less
than
original cost. Class Y shares are available only to certain institutional
investors. Share price and return may vary.
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 3% 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 Lehman Intermediate Government Bond Index is an unmanaged index of bonds
issued
by the U.S. Government and its agencies having maturities between one and ten
years.
The Index's 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.
<PAGE>
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New England Limited Term U.S. Government Fund
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[PHOTO]
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
Portfolio Manager: Eric Gutterson
Back Bay Advisors, L.P.
THE MARKET
Despite predictions for a mediocre 1995, the bond market rallied strongly
last year, offering fixed income investors handsome returns. After a
disappointing 1994, it was a spectacular comeback, fueled by slow economic
growth, low inflation and an accommodative Federal Reserve. American
business, consumers and the federal government each played a dynamic role.
In the corporate sector, growing computerization increased productivity,
adding value without contributing to inflation.
The spending and saving patterns of consumers began to change. The aging
baby boom generation spent less and saved more, creating an ample,
inexpensive source of long-term capital to fund non-inflationary economic
growth. Lower consumer spending also helped ease inflationary pressure.
The federal government's initial moves toward a balanced budget sparked
foreign confidence and investment in the U.S. market. Additionally,
interest rate cuts by the Federal Reserve helped maintain slow, steady
non-inflationary economic growth.
HOW YOUR FUND PERFORMED
New England Limited Term U.S. Government Fund participated in the rise of the
bond market in 1995. The Fund had a total return of 13.01% on net asset
value for Class A shares, compared to 14.43% for the Lehman Intermediate
<PAGE>
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New England Limited Term U.S. Government Fund
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Government Bond Index.4 We increased dividends four times during the year,
in February, May, June and July.
YOUR FUND'S INVESTMENT STRATEGY
Beginning in January, we managed the Fund with the belief that interest rates
would decline in 1995 and produce a market rally. This led us to overweight
non-callable Treasuries and to maintain a portfolio duration longer than that
of comparable mutual funds.*
As we expected, rates did decline and direct U.S. Treasury obligations
performed well throughout the year. We increased the Fund's position in
these securities substantially during the first quarter and made no
reductions until the fall. Our focus on high coupons contributed to the
Fund's increasing yield, while our decision to overweight Treasuries provided
added protection against credit risk. Simultaneously, we de-emphasized callable
securities, such as asset- and mortgage-backed instruments, which perform poorly
in a strongly rallying market.
We began the year with a duration of 3.4 years, then in mid-summer assumed a
more bullish posture by pushing it out to the Fund's allowable maximum of 4
years.
We grew more cautious in the fourth quarter, reducing duration to 3.6 years in
the belief that the majority of current interest rate moves was near completion.
During the fourth quarter, we owned securities across the yield curve, but
overweighted short and long maturities
* Non-callable bonds cannot be "called in" when rates drop, to be reissued at
lower rates. Duration is a commonly used measure of the Fund's sensitivity to
interest rate changes. The longer the duration, the more the Fund's price
will
fluctuate in response to interest rate moves.
<PAGE>
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New England Limited Term U.S. Government Fund
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while underweighting intermediate maturities. This action positioned the
Fund more defensively in a period of market consolidation.
INVESTMENT OUTLOOK
We do not believe the bond market will be as strong in 1996 as it was this
past year, but look for rates to fall further if factors such as corporate
cost cutting, higher consumer savings rates and diminished projected
government spending continue to dominate the market. Initially, we expect
to see a saw tooth performance pattern where interest rates may fluctuate
within a limited range before declining again.
A balanced budget would probably slow the economy
further because it will reduce the economic stimulus that government spending
sometimes provides. A recession is unlikely, but the economy may grow weaker
by the middle of 1996, as it reacts to sluggish domestic demand, slowing world
wide growth and ongoing consumer concerns about corporate downsizing.
As a result, we will be less inclined to extend duration as much as we did in
1995. We anticipate that rates will fall somewhat further, so we will
continue to maintain a duration that is longer than our peer group's. Other
potential actions include lowering the percentage of non-callable Treasury
securities and increasing the weighting of callable asset- and mortgage-
backed securities. The latter may outperform Treasuries in the less volatile
interest rate environment we anticipate.
As always, the Fund will seek to meet the goals of shareholders by pursuing
positive total returns and attractive dividend yields.
<PAGE>
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New England Limited Term U.S. Government Fund
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TREASURY YIELD CURVE
The "yield curve" illustrates the yields available on U.S. Treasury
securities of varying maturities, ranging from
3-month Treasury bills to 30-year Treasury bonds. Under normal conditions, a
security with a longer maturity will offer a higher yield than a shorter term
security, to compensate the bond holder for tying up money for longer periods
of time. The chart below illustrates the yield curve at the beginning and at
the end of 1995. As you can see, long-term rates dropped substantially, with
the 30-year bond falling almost two percentage points, from 7.88% to 5.95%.
THE YIELD CURVE JANUARY-DECEMBER, 1995
[A chart in the form of a line graph appears here, illustrating the yield curve
of U.S. Treasury securities as of the beginning of 1995 and as of December 29,
1995. The data points from the graph are as follows:]
As of 1/2/95:
Maturity Yield
- --------- ------
3 Month 5.68%
6 Month 6.50%
1 Year 7.16%
3 Year 7.78%
5 Year 7.83%
10 Year 7.83%
30 Year 7.88%
As of 12/29/95:
Maturity Yield
- --------- ------
3 Month 5.07%
6 Month 5.15%
1 Year 5.13%
3 Year 5.21%
5 Year 5.37%
10 Year 5.57%
30 Year 5.95%
Source: Bloomberg
What caused this dramatic drop? Over the year it became apparent that the
economy was growing at a more subdued pace and that inflation remained under
control. (Inflation is the bond market's primary enemy because it eats away
at the value of fixed income investments). The markets responded
enthusiastically, driving down long term rates. Bond prices, which move in
the opposite direction from interest rates, moved sharply higher in an
impressive rebound from 1994's market decline.
<PAGE>
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New England Limited Term U.S. Government Fund
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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.
<PAGE>
[LOGO OF NEW ENGLAND FUNDS WHERE THE BEST MINDS MEET(TM) APPEARS HERE]
- --------------------------------------------------------------------------------
Portfolio Composition, Financial Statements and Highlights
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NEW ENGLAND
LIMITED TERM
U.S. GOVERNMENT
FUND
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December 31, 1995
- -----------------
<PAGE>
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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1995
Medium & Long Term Bonds and Notes--97.5% of Total Net Assets
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Description
Value (a)
- --------------------------------------------------------------------------------
- ---------
Asset Backed--4.0%
<S> <C> <C>
$ 10,000,000 Case Equipment Loan Trust 8.100%, 6/15/01...................... $
10,425,000
5,000,000 Conti Mortgage Home Equity Trust 8.700%, 04/15/10..............
5,287,500
---
- ---------
15,712,500
---
- ---------
Government Agencies--26.3%
8,000,000 Federal Farm Credit, 11.900%, 10/20/97.........................
8,884,960
5,000,000 Federal Farm Credit, 8.130%, 12/02/99..........................
5,094,100
10,000,000 Federal Home Loan Mortgage Corporation, 8.600%, 01/26/00.......
10,593,100
6,491,461 Federal Home Loan Mortgage Corporation, 8.360%, 02/28/00.......
5,023,450
22,970,150 Federal Home Loan Mortgage Corporation, 9.500%, 11/01/05.......
24,290,934
6,145,762 Federal Home Loan Mortgage Corporation, 8.7500%, 05/01/09......
6,491,461
18,429,478 Federal Home Loan Mortgage Corporation, 9.000%, 02/01/17.......
19,443,099
83,973 Federal Home Loan Mortgage Corporation, 10.000%, 07/01/19......
91,687
13,049,828 Federal Home Loan Mortgage Corporation,
11.5%,with various maturities to 2020(b).....................
14,721,773
4,699,861 Government National Mortgage Association,
8.000% with various maturities to 2008(b)....................
4,952,893
179,485 Government National Mortgage Association,
12.500% with various maturities to 2015(b)...................
211,510
2,258,206 Government National Mortgage Association,
16.000% with various maturities to 2013(b)...................
2,263,326
838,056 Government National Mortgage Association,
17.000% with various maturities to 2012(b)...................
989,425
---
- ---------
103,051,718
---
- ---------
U.S. Government--67.2%
12,000,000 U.S. Treasury Note, 9.375%, 04/15/96...........................
12,136,920
91,000,000 U.S. Treasury Note, 9.250%, 08/15/98...........................
99,815,170
35,000,000 U.S. Treasury Note, 9.125%, 05/15/99...........................
39,057,900
13,000,000 U.S. Treasury Bond, 11.750%, 02/15/01..........................
16,694,860
21,000,000 U.S. Treasury Bond, 13.750%, 08/15/04..........................
32,563,020
20,000,000 U.S. Treasury Bond, 10.625%, 08/15/15..........................
30,634,400
22,000,000 U.S. Treasury Bond, 9.875%, 11/15/15...........................
31,821,020
---
- ---------
262,723,290
---
- ---------
Total Medium & Long Term Bonds and Notes
(Identified Cost $371,960,400)...............................
381,487,508
---
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<PAGE>
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PORTFOLIO COMPOSITION--continued
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Investments as of December 31, 1995
Face
Amount Description
Value (a)
- --------------------------------------------------------------------------------
- ---------
Short-Term Investment--0.3%
$ 1,335,000 Household Finance Corp. 5.650%, 1/02/96........................ $
1,334,791
---
- ---------
Total Short-Term Investment (Identified Cost $1,334,791).......
1,334,791
---
- ---------
Total Investments--97.9% (Identified Cost $373,295,191)(b).....
$382,822,299
Cash and Receivables...........................................
10,196,194
Liabilities....................................................
(1,783,350)
---
- ---------
Total Net Assets--100%.........................................
$391,235,143
============
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<FN>
(a) See Note 1a to the financial statements.
(b) The Fund's investments in mortgage backed securities of the Federal
Home Loan Mortgage Corporation and Government National Mortgage
Association are interests in separate pools of mortgages. All
separate investments in securities of these issuers which have the
same coupon rate have been aggregated for the purpose of presentation
in the schedule of investments.
(c) Federal Tax Information: At December 31,1995 the net unrealized
appreciation on investments based on cost for federal income tax
purposes of $373,295,191 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost............................ $
9,850,207
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value............................
(323,099)
-----
- -------
Net unrealized appreciation.......................................... $
9,527,108
============
As of December 31, 1995, the fund had a net tax basis capital loss
carryforward as follows:
Expiring December 31, 2002.......................................... $
30,053,756
December 31, 2003..........................................
1,477,734
</TABLE>
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value..........................................
$382,822,299
Cash..........................................................
5,772
Receivable for:
Fund shares sold............................................
778,540
Accrued interest............................................
9,400,882
Prepaid registration expense..................................
11,000
---
- ---------
393,018,493
LIABILITIES
Payable for:
Fund shares redeemed........................................ $ 992,844
Dividends declared.......................................... 481,303
Accrued expenses:
Management fees............................................. 209,997
Deferred trustees' fees..................................... 3,719
Other expenses.............................................. 95,487
---------
1,783,350
---
- ---------
NET ASSETS......................................................
$391,235,143
============
Net Assets consist of:
Capital paid in.............................................
$414,054,062
Undistributed net investment income.........................
67,682
Accumulated net realized losses.............................
(32,413,709)
Unrealized appreciation on investments......................
9,527,108
---
- ---------
NET ASSETS......................................................
$391,235,143
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($361,519,661 divided by 29,865,887 shares of beneficial
interest).................................................
$12.10
======
Offering price per share (100/97 of $12.10).....................
$12.47*
======
Net asset value and offering price of Class B shares
($18,056,381 divided by 1,493,894 shares of beneficial
interest).................................................
$12.09**
======
Net asset value and offering price of Class C shares
($5,935,913 divided by 490,559 shares of beneficial
interest).................................................
$12.10
======
Net asset value and offering price of Class Y shares
($5,723,188 divided by 471,856 shares of beneficial
interest).................................................
$12.13
======
Identified cost of investments..................................
$373,295,191
============
</TABLE>
* Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of these amounts.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
<PAGE>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................
$33,735,703
Expenses
Management fees......................................... $ 2,560,201
Service and distribution fees--Class A.................. 1,332,412
Service and distribution fees--Class B.................. 147,768
Service and distribution fees--Class C.................. 15,410
Trustees' fees and expenses............................. 23,999
Custodian............................................... 171,335
Transfer agent.......................................... 596,249
Audit and tax services.................................. 22,000
Legal................................................... 17,496
Printing................................................ 52,704
Registration............................................ 44,975
Miscellaneous........................................... 13,114
-----------
Total expenses............................................
4,997,663
---
- -------
Net investment income.....................................
28,738,040
REALIZED and UNREALIZED GAIN (LOSS) on INVESTMENTS, OPTIONS
and FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net.......................................... (2,933,878)
Futures contracts--net.................................... 63,025
Options contracts--net.................................... (228,224)
-----------
Total realized loss on investments........................ (3,099,077)
-----------
Unrealized appreciation on:
Investments--net.......................................... 23,699,408
-----------
Net gain on investment transactions.......................
20,600,331
----
- -------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................
$49,338,371
===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Year Ended
December 31,
December 31,
1994
1995
------------- ---
- ---------
<S> <C> <C>
FROM OPERATIONS
Net investment income................................... $ 33,871,995 $
28,738,040
Net realized loss on investments........................ (33,235,907)
(3,099,077)
Unrealized appreciation (depreciation) on investments... (12,496,351)
23,699,408
------------- ---
- ---------
Increase (decrease) in net assets from operations....... (11,860,263)
49,338,371
------------- ---
- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A............................................... (29,623,496)
(26,920,664)
Class B............................................... (542,209)
(963,746)
Class C............................................... 0
(96,628)
Class Y............................................... (123,393)
(343,941)
In excess of net investment income
Class C............................................... 0
(6,999)
------------- ---
- ---------
(30,289,098)
(28,331,978)
------------- ---
- ---------
Decrease in net assets derived from capital share
transactions.......................................... (100,124,500)
(55,882,399)
------------- ---
- ---------
Total decrease in net assets............................ (142,273,861)
(34,876,006)
NET ASSETS
Beginning of the year................................... 568,385,010
426,111,149
------------- ---
- ---------
End of the year......................................... $ 426,111,149
$391,235,143
=============
============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year................................... $ 0 $
400,474
=============
============
End of the year......................................... $ 400,474 $
67,682
=============
============
</TABLE>
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------
- --------
Year Ended December 31,
-----------------------------------------
- --------
1991 1992 1993 1994
1995
------- ------- ------- -------
- -------
<S> <C> <C> <C> <C>
<C>
Net Asset Value, Beginning of
Period........................... $ 12.44 $ 12.86 $ 12.54 $ 12.49
$ 11.49
-------- -------- -------- --------
- --------
Income From Investment Operations
Net Investment Income.............. 0.93 0.80 0.71 0.82
0.86
Net Realized and Unrealized Gain
(Loss)
on Investments................... 0.69 (0.11) 0.08
(1.10) 0.59
-------- -------- -------- --------
- --------
Total From Investment Operations... 1.62 0.69 0.79
(0.28) 1.45
-------- -------- -------- --------
- --------
Less Distributions
Distributions From Net Investment
Income........................... (0.94) (0.80) (0.71)
(0.72) (0.84)
Distributions in Excess of Net
Investment Income................ 0.00 0.00 (0.01) 0.00
0.00
Distributions From Net Realized
Capital Gains.................... (0.26) (0.21) (0.12) 0.00
0.00
-------- -------- -------- --------
- --------
Total Distributions................ (1.20) (1.01) (0.84)
(0.72) (0.84)
-------- -------- -------- --------
- --------
Net Asset Value, End of Period..... $ 12.86 $ 12.54 $ 12.49 $ 11.49
$ 12.10
======== ======== ======== ========
========
Total Return (%)(b)................ 13.8 5.7 6.4
(2.3) 13.0
Ratio of Operating Expenses to
Average Net Assets (%)(a)........ 1.25 1.16 1.14 1.18
1.22
Ratio of Net Investment Income to
Average Net Assets (%)........... 7.24 6.24 5.64 6.80
7.18
Portfolio Turnover Rate (%)........ 277 323 124 244
247
Net Assets, End of Period (000).... $271,966 $477,396 $562,164 $412,399
$361,520
<FN>
(a) Commencing May 18, 1989 through March 31,1992 expenses were voluntarily
limited to 1.25% of average daily net assets.
(b) A sales charge of 3% maximum was not reflected in Class A total return
calculations.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------
- --------------
September 27,(a)
through Year Ended
Year ended
December 31, December 31,
December 31,
1993 1994
1995
---------------- ------------
- ------------
<S> <C> <C>
<C>
Net Asset Value, Beginning of Period......... $12.76 $ 12.49
$ 11.48
------ ------
- ------
Income From Investment Operations
Net Investment Income........................ 0.17 0.71
0.76
Net Realized and Unrealized Gain (Loss) on
Investments................................ (0.24) (1.08)
0.61
------ ------
- ------
Total From Investment Operations............. (0.07) (0.37)
1.37
------ ------
- ------
Less Distributions
Distributions From Net Investment Income..... (0.16) (0.64)
(0.76)
Distributions in Excess of Net Investment
Income..................................... (0.01) 0.00
0.00
Distributions From Net Realized Capital
Gains...................................... (0.03) 0.00
0.00
------ ------
- ------
Total Distributions.......................... (0.20) (0.64)
(0.76)
------ ------
- ------
Net Asset Value, End of Period............... $12.49 $ 11.48
$ 12.09
====== ======
======
Total Return (%)(c).......................... (0.6) (2.9)
12.3
Ratio of Operating Expenses to Average
Net Assets (%)............................. 1.96(b) 1.83
1.87
Ratio of Net Investment Income to Average
Net Assets (%)............................. 4.30(b) 6.15
6.53
Portfolio Turnover Rate (%).................. 124 244
247
Net Assets, End of Period (000).............. $6,221 $11,891
$18,056
<FN>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class
Y
------------ ---------------
- -------------
Year March 31,(a)
Year
ended through
ended
December 31, December 31,
December 31,
1995 1994
1995
------------ ------------
- ------------
<S> <C> <C>
<C>
Net Asset Value, Beginning of Period............ $11.48 $12.11
$11.51
-------- --------
- --------
Income From Investment Operations
Net Investment Income........................... 0.64 0.71
0.86
Net Realized and Unrealized Gain (Loss) on
Investments................................... 0.64 (0.74)
0.63
-------- --------
- --------
Total From Investment Operations................ 1.28 (0.03)
1.49
-------- --------
- --------
Less Distributions
Distributions From Net Investment Income........ (0.65) (0.57)
(0.87)
Distributions in Excess of Net Investment
Income........................................ (0.01) 0.00
0.00
Distributions From Net Realized Capital Gains... 0.00 0.00
0.00
-------- --------
- --------
Total Distributions............................. (0.66) (0.57)
(0.87)
-------- --------
- --------
Net Asset Value, End of Period.................. $12.10 $11.51
$12.13
======== ========
========
Total Return (%)(c)............................. 11.4 (0.8)
13.3
Ratio of Operating Expenses to Average
Net Assets (%)................................ 1.87 0.83(b)
0.87
Ratio of Net Investment Income to Average
Net Assets (%)................................ 6.53 7.15(b)
7.53
Portfolio Turnover Rate (%)..................... 247 244
247
Net Assets, End of Period (000)................. $5,936 $1,822
$5,723
<FN>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1995
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 (the "1940 Act"), as amended, 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 Class A, Class B, Class C and Class Y shares. The Fund
commenced its public offering of Class B shares on September 27, 1993, Class C
shares on December 30, 1994 and of Class Y shares on March 31, 1994. Class A
shares are sold with a maximum front end sales charge of 3.00%. 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. Class C shares do not
pay a front end or contingent deferred sales charge and do not convert to any
class of shares, but they do pay a higher ongoing distribution fee than Class
A shares. Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or distribution fees. They are intended for
institutional investors with a minimum of $1,000,000 to invest. Expenses of
the Fund are borne pro-rata by the holders of all 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 adviser, Back Bay Advisors, L.P.
("Back Bay Advisors"), 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 Back Bay Advisors 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
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
and assets are valued at their fair value as determined in good faith by Back
Bay Advisors 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 for the Fund is increased by
the accretion of discount. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and
put options on securities to manage its exposure to interest rates and the
bond market. Buying futures, writing puts, and buying calls tend to increase
the fund's exposure to the underlying instrument. Selling futures, buying
puts, and writing calls tend to decrease the fund's exposure to the underlying
instrument, or hedge other fund investments. When a fund writes a call or put
option, an amount equal to the premium received by the fund is included in the
fund's statement of assets and liabilities as an asset and as an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. The current value of a
written option is the closing price on the principal exchange on which such
option is traded. If an option which the fund has written either expires on
its stipulated expiration date, or if the fund enters into a closing purchase
transaction, the fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which
the fund has written is exercised, the fund realizes a capital gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received. If a put option which the fund
has written is exercised, the amount of the premium originally received will
reduce the cost of the security which the fund purchases upon exercise of the
option.
The premium paid by a fund for the purchase of a call or a put option is
included in the asset section of the fund's statement of assets and
liabilities as an investment and subsequently adjusted to the current market
value of the option. The current value of a purchased option is the closing
price on the principal exchange on which such option is traded. If an option
which the fund has purchased expires on the stipulated expiration date, the
fund will realize a loss in the amount of the cost of the option. If the fund
enters into a closing sale transaction, the fund will realize a gain or loss,
depending on whether the sales proceeds from the closing sale transaction are
greater or less than the cost of the option. If the fund exercises a purchased
put option, it will realize a gain or loss from the sale of the underlying
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
security and the proceeds from such sale will be decreased by the premium
originally paid. If the fund exercises a purchased call option, the cost of
the security which the fund purchases upon exercise will be increased by the
premium originally paid.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security increases
and the option is exercised. In writing a put option, the fund assumes the
risk of incurring a loss if the market price decreases and the option is
exercised. In addition, there is the risk the fund may not be able to enter
into a closing transaction because of an illiquid secondary market.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest
rate futures contracts to hedge against changes in the values of securities
the fund owns or expects to purchase. An interest rate futures contract is an
agreement between two parties to buy and sell a security for a set price (or
to deliver an amount of cash) on a future date. Upon entering into such a
contract, the purchasing fund is required to pledge to the broker an amount of
cash, U.S. Government securities or other high quality debt securities equal
to the minimum "initial margin" requirements of the exchange, currently up to
$3,000 per contract. Pursuant to the contract, the fund agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation in value
of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the fund as unrealized gains or losses. When the contract is closed, the fund
records a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it was
closed.
The potential risk to the fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the fund may not be able to close out its
futures positions due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record 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
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
generally accepted accounting principles. These differences relate primarily
to differing treatments for income recognition for mortgage-backed securities.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors 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 Fund for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------- ----------------------------
U.S. U.S.
Government Other Government Other
------------ ----------- ------------ -----------
<S> <C> <C> <C>
$957,612,963 $13,187,129 $990,219,677 $37,310,384
</TABLE>
Investments in written options and futures contracts for the Fund for the year
ended December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Written Options
-------------------------
Number of Premiums
Contracts Received
--------- -----------
<S> <C> <C>
Contracts opened................... 6,200 $ 2,310,156
Contracts closed................... (6,200) (2,310,156)
-------- -----------
Open at December 31, 1995.......... 0 $ 0
======== ===========
</TABLE>
Futures Contracts
<TABLE>
<CAPTION>
Sale of Futures Contracts
------------------------------
Number of Aggregate Face
Contracts Value of Contracts
--------- ------------------
<S> <C> <C>
Open at December 31, 1994.................. 0 $ 0
Contracts opened........................... 200 21,549,737
Contracts closed........................... (200) (21,549,737)
------- ------------
Open at December 31, 1995.................. 0 $ 0
======= ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. During the year
ended December 31, 1995, the Fund incurred management fees payable to its
investment adviser, Back Bay Advisors. Certain officers and directors of the
adviser and its affiliated companies are also officers or trustees of the
Fund. Back Bay Advisors is a wholly owned subsidiary of New England Investment
Companies, L.P., ("NEIC") which is a majority owned subsidiary of New England
Mutual Life Insurance Company. The management agreement in effect during the
year ended December 31, 1995 provided for fees as set forth below:
<TABLE>
<CAPTION>
Annual Percentage Fund Annual Net Asset Value
Fees Earned Rate Levels
- ---------- ------------------ ------------------------------
<S> <C> <C>
$2,560,201 0.650% the first $200 million
0.625% the next $300 million
0.600% the excess over $500 million
</TABLE>
Effective January 1, 1996, New England Funds Management, L.P. became the
adviser for the Fund with the aforementioned adviser being retained as the
Fund's sub-adviser.
B. 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 shares (the "Class A Plan") and Class B shares (the "Class B Plan")
and Class C shares (the "Class C Plan").
Under the Class A Plan, the Fund pays New England Funds, L.P. ("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. Also under the Class A Plan, the Fund pays New England
Funds a monthly distribution fee at the annual rate of up to 0.10% 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
connection with the marketing or sale of Class A shares.
For the year ended December 31, 1995, the Fund paid New England Funds $951,742
in service fees and $380,670 in distribution fees under the Class A Plan. If
the expenses of New England Funds that are otherwise reimbursable, as service
fees or distribution fees, respectively, under the Class A Plan incurred in
any year exceed the amounts of such fees payable by the Fund under the Class A
Plan, the unreimbursed amounts (together with unreimbursed amounts from prior
years) may be carried forward for reimbursement in future years in which the
Class A Plan
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
remains in effect. The amount of unreimbursed expense carried forward into
1995 is $2,272,723 (reimbursable as distribution fees).
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 shares 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, 1995, the Fund paid New England Funds $36,942 and $3,853 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee 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, 1995, the Fund paid New
England Funds $110,826 and $11,557 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, 1995 amounted to $556,865.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1995, the Fund
paid New England Funds $432,493 as compensation for its services in that
capacity.
D. 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............................ $2,400
Meeting Fee................................ $125/meeting
Committee Meeting Fee...................... $75/meeting
Committee Chairman Annual Retainer......... $125
A deferred compensation plan is available to the trustees on a voluntarily
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.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
4. CAPITAL SHARES. At December 31, 1995 there was an unlimited number of
shares of beneficial interest authorized, divided into four classes, Class A,
Class B, Class C and Class Y. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended Year
ended
December 31, 1994
December 31, 1995
--------------------------- ------------
- ---------------
Class A Shares Amount Shares
Amount
- ------- ----------- ------------- -----------
- -------------
<S> <C> <C> <C>
<C>
Shares sold.......................... 7,249,522 $ 87,450,145 3,171,114
$ 37,607,305
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income........................... 1,977,543 23,571,740 1,847,952
21,921,032
----------- ------------- -----------
- -------------
9,227,065 111,021,885 5,019,066
59,528,337
Shares repurchased................... (18,344,360) (219,584,415) (11,030,290)
(130,336,285)
----------- ------------- -----------
- -------------
Net increase (decrease).............. (9,117,295) $(108,562,530) (6,011,224)
$ (70,807,948)
=========== ============= ===========
=============
<CAPTION>
Year ended Year
ended
December 31, 1994
December 31, 1995
--------------------------- ------------
- ---------------
Class B Shares Amount Shares
Amount
- ------- ----------- ------------- -----------
- -------------
<S> <C> <C> <C>
<C>
Shares sold.......................... 754,998 $ 9,077,621 633,142
$ 7,488,380
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income........................... 36,690 434,371 66,179
785,645
----------- ------------- -----------
- -------------
791,688 9,511,992 699,321
8,274,025
Shares repurchased................... (254,298) (3,025,313) (240,815)
(2,850,637)
----------- ------------- -----------
- -------------
Net increase (decrease).............. 537,390 $ 6,486,679 458,506
$ 5,423,388
=========== ============= ===========
=============
<CAPTION>
Year ended Year
ended
December 31, 1994
December 31, 1995
--------------------------- ------------
- ---------------
Class C Shares Amount Shares
Amount
- ------- ----------- ------------- -----------
- -------------
<S> <C> <C> <C>
<C>
Shares sold.......................... 0 $ 0 763,855
$ 9,083,684
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income........................... 0 0 6,338
76,069
----------- ------------- -----------
- -------------
0 0 770,193
9,159,753
Shares repurchased................... 0 0 (279,634)
$ (3,318,226)
----------- ------------- -----------
- -------------
Net increase (decrease).............. 0 $ 0 490,559
$ 5,841,527
=========== ============= ===========
=============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--continued
- --------------------------------------------------------------------------------
December 31, 1995
<TABLE>
<CAPTION>
Year ended
Year ended
December 31, 1994
December 31, 1995
--------------------------- ----------
- ---------------
Class Y Shares Amount Shares
Amount
- ------- ----------- ------------- ----------
- ------------
<S> <C> <C> <C>
<C>
Shares sold............................ 246,464 $ 2,978,092 335,944
$ 3,928,529
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income............................. 10,363 122,236 28,675
341,684
----------- ------------- ----------
- ------------
256,827 3,100,328 364,619
4,270,213
Shares repurchased..................... (98,511) (1,148,977)
(51,079) (609,579)
----------- ------------- ----------
- ------------
Net increase (decrease)................ 158,316 $ 1,951,351 313,540
$ 3,660,634
=========== ============= ==========
============
Increase (decrease) derived from
capital shares transactions.......... (8,421,589) $(100,124,500)
(4,748,619) $(55,882,399)
=========== ============= ==========
============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees of New England Funds Trust II and the Shareholders of
the NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of the New England Limited
Term U.S. Government Fund as of December 31, 1995, and the related statement
of operations for the year then ended, and the statements of changes in net
assets for each of the two years in the period then ended, and financial
highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
New England Limited Term U.S. Government Fund as of December 31, 1995 the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated herein, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 2, 1996
<PAGE>
- -------------------------------------------------------------------------------
SHAREHOLDER MEETING
- -------------------------------------------------------------------------------
At a special shareholders' meeting held on December 28, 1995, shareholders of
the Limited Term U.S. Government Fund voted for the following proposals:
<TABLE>
<CAPTION>
Voted Voted Abstained Broker
Total
For Against Votes Non-Votes
Votes
-------------- ------------- ----------- ----------
- --------------
<S> <C> <C> <C> <C>
<C>
1. To approve new
investment advisory
arrangements to be
effective upon the
merger of New England
Mutual Life Insurance
Company into
Metropolitan Life
Insurance Company,
such arrangements to
be substantially
identical to the
investment advisory
arrangements in effect
for the Fund
immediately prior to
such merger........... 16,559,844.098 515,234.333 779,188.257
17,854,266.688
============== ============ ===========
2. To approve a new
Advisory Agreement
between the Fund and
New England Funds
Management, L.P.
("NEFM").............. 15,783,283.329 1,115,911.435 894,034.924 61,037.000
17,854,266.688
============== ============= =========== ==========
3. To approve a related
Sub-Advisory Agreement
between NEFM and such
Fund's current
investment adviser.... 15,785,158.289 1,047,024.438 961,046.961 61,037.000
17,854,266.688
============== ============= =========== ==========
</TABLE>
<PAGE>
- -----------------------------------------------------------------------
Saving For Retirement
- -----------------------------------------------------------------------
An Early Start Can Make a Big Difference
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. While it's
never too late to start a retirement savings program, it's certainly never
too early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at
age 30, saves for just 10 years, then leaves the investment to grow. The
second investor starts 10 years later but saves much longer - for 25 years,
in fact. Can you guess which investor accumulates the greater retirement nest
egg?
For the answer, look at the chart.
AN EARLY START CAN MAKE A BIG DIFFERENCE
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins 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.
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New England Funds
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STOCK FUNDS
Growth Fund of Israel
International Equity Fund
Star Worldwide Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Government Securities Fund
Bond Income 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
- U.S. Government Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
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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