<PAGE>
- -------------------------------------------------------------------------------
SEMIANNUAL REPORT
- -------------------------------------------------------------------------------
[graphic omitted]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
New England
High Income Fund
[graphic omitted]
June 30, 1997
<PAGE>
August 1997
- -------------------------------------------------------------------------------
[Photo of Henry L.P. Schmelzer]
Dear New England Funds Shareholder,
Spurred by bright economic prospects, the broader U.S. stock market continued
its record run during the first half of the year, experiencing only short-lived
setbacks along the way. These fresh gains come on top of significant increases
in 1995 and 1996, leaving many investors wary of what might come next. Bond
markets, meanwhile, contended with some volatility in interest rates, but have
been relatively stable this year.
Building a portfolio for variable markets
Investors should not abandon well-conceived financial programs for fear of a
down market. Whether today's market levels are excessive -- only hindsight will
tell. So you should remain patient and realistic, alert to the possibility of
periodic market declines. Consultation with your financial representative should
be a regular part of your planning. Your representative can help you take
prudent steps to adjust your portfolio, whatever the next trend may bring.
Strategic initiatives deliver shareholder benefits
Four years ago New England Funds embarked on a new strategic direction.
Expressed in our corporate slogan Where The Best Minds Meet(R), this new thrust
has meant improved performance for many of our funds, award-winning service and
a host of behind-the-scenes enhancements designed to help our shareholders and
their financial representatives.
Our sights, like yours, are focused on the long term. At the same time, we work
to enhance service every day. We also keep a disciplined eye on the performance
that each fund manager achieves. Through these persistent efforts we're
convinced we'll merit your continued commitment and loyalty. Thank you for your
confidence in New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
- --------------------- For two years running we're proud to announce that
[Logo] DALBAR, an independent evaluator of mutual fund
QUALITY service, has awarded New England Funds its Quality
TESTED SERVICE Tested Service Seal for "providing the highest
1996 tier of service excellence in the mutual fund
- --------------------- industry." New England Funds is one of just three
DALBAR mutual fund companies to earn this distinction in
HONORS COMMITMENT TO: each of the last two years -- another reason why
INVESTORS we are becoming known as the mutual fund company
- --------------------- Where The Best Minds Meet.
INVESTMENT RESULTS THROUGH JUNE 30, 1997
- --------------------------------------------------------------------------------
Putting Performance into Perspective
The charts comparing your Fund's performance to a
benchmark index provide you with a general sense of how
your Fund performed. To put this information in context,
it may be helpful to understand the special differences
between the two. Your Fund's total return for the period
shown appears with and without sales charges and
includes Fund expenses and management fees. A securities
index measures the performance of a theoretical
portfolio. Unlike a fund, the index is unmanaged; there
are no expenses that affect the results. In addition,
few investors could purchase all of the securities
necessary to match the index. And, if they could, they
would incur transaction costs and other expenses.
See next page
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
- -------------------------------------------------------------------------------
[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 6/30/87.
The data points to this chart are as follows:]
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- -------------------------------------------------------------------------------
JUNE 1987 THROUGH JUNE 1997
COMPARED TO FIRST BOSTON HIGH YIELD INDEX(4) ANDTHE COST OF LIVING(5)
NET WITH FIRST COST
ASSET MAXIMUM BOSTON OF
VALUE(1) SALES CHARGE(2) HIGH YIELD(4) LIVING(5)
------- -------------- ------------- --------
6/30/87 $10,000 $ 9,550 $10,000 $10,000
6/88 $ 9,794 $ 9,353 $10,912 $10,396
6/89 $10,343 $ 9,878 $11,968 $10,933
6/90 $10,366 $ 9,900 $11,741 $11,444
6/91 $10,549 $10,074 $13,584 $11,982
6/92 $13,194 $12,601 $17,002 $12,352
6/93 $15,292 $14,604 $19,886 $12,722
6/94 $15,933 $15,216 $20,749 $13,089
6/95 $16,793 $16,038 $23,343 $13,435
6/96 $18,326 $17,502 $25,670 $13,804
6/97 $21,361 $20,400 $29,436 $14,104
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.
- -------------------------------------------------------------------------------
CREDIT QUALITY COMPOSITION -- 6/30/97
- -------------------------------------------------------------------------------
AAA 6.5%
BB 9.6%
B 66.2%
CCC 14.9%
OTHER 2.8%
AVERAGE PORTFOLIO QUALITY: B
QUALITY IS BASED ON RATINGS PROVIDED BY STANDARD & POOR'S.
Portfolio holdings and asset allocations may change.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/97
- -------------------------------------------------------------------------------
CLASS A (Inception 2/22/84) YTD 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 6.96% 16.56% 10.12% 7.88%
With Max. Sales Charge(2) 2.19 11.27 9.10 7.39
First Boston High Yield(4) 5.86 14.67 11.60 11.40
Lipper High Yield Average(6) 5.92 14.77 11.01 9.64
- -------------------------------------------------------------------------------
CLASS B (Inception 9/20/93) YTD 1 YEAR 3 YEARS SINCE
INCEPTION
Net Asset Value(1) 6.57% 15.84% 9.57% 8.36%
With CDSC(3) 1.57 10.84 8.73 7.73
First Boston High Yield(4) 5.86 14.67 12.36 10.30
Lipper High Yield Average(6) 5.92 14.77 11.20 9.52
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. The Fund's current subadviser began managing the Fund on July 1,
1996. Results for earlier periods reflect performance under previous advisers
and subadvisers.
Notes to Charts
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge 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
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) First Boston High Yield Index is an unmanaged index of bonds issued by U.S.
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.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
- -------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
[Photo of Gary L. Goodenough and Madeline Einhorn Glick, Loomis Sayles &
Company, L.P.]
Q. How did New England High Income Fund perform during the first half of 1997?
Very well. For the six months ending June 30, 1997, the Fund had a total return
of 6.96% (Class A shares at net asset value), reflecting the reinvestment of
$0.43 per share in dividend income and the change in share price to $9.63 on
June 30, from $9.42 six months ago. This placed the Fund's performance well
ahead of the average 5.92% return of the 182 High Yield funds measured by Lipper
Analytical Services, an independent mutual fund ranking service.
High-yield bonds scored strong gains during the first half of the year,
benefiting from a favorable backdrop of low inflation and higher corporate
profits. Positive fundamentals spurred demand from individuals and institutions
who increased -- or initiated -- portfolio allocations in high-yield bonds. New
investments in high-yield mutual funds were also strong, helping to push prices
higher.
Q. How have you managed the Fund?
Since assuming responsibility for the Fund a year ago, we have reduced the
number of holdings to around 40, from more than 130. We prefer to concentrate on
a small number of companies that we can follow closely, relying on extensive,
hands-on research. That's our fundamental strategy; we are very selective,
bottom-up managers -- meaning we look for companies with strengthening
fundamentals whose bonds offer a high initial yield.
Among our successful selections in the first half of 1997 were the 11% bonds of
Altos Hornos, a leading Mexican steel firm, and the 11% bonds of Big V, a Hudson
Valley area supermarket chain. On the other hand, we were disappointed with our
holdings in Grand Union, a major U.S. grocery chain. Because the company's
fundamentals had deteriorated substantially during the period, we began
gradually eliminating Grand Union bonds from the portfolio.
Q. What is your outlook for high-yield bonds?
We believe the important positive factors of the last
year -- surprisingly low inflation with moderate growth, abetted by a watchful
and accommodating Federal Reserve Board -- will remain in place, and have
positioned the portfolio to take advantage of that scenario. Under those
conditions, and assuming Washington's deficit reduction agreement remains
viable, we remain optimistic about the high-yield bond market in the second half
of the year.
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
BONDS AND NOTES--87.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- --------------------------------------------------------------------------------------------
<C> <S> <C>
AUTOMOTIVE & RELATED--3.4%
$ 1,000,000 Csk Auto Inc., 11.000%, 11/01/06 ......................... $ 1,040,000
1,500,000 Delco Remy International, Inc., 144A, 10.625%, 8/01/06 (d) 1,601,250
---------------
2,641,250
---------------
BROADCASTING--7.4%
2,250,000 All American Communications, Inc., 10.875%, 10/15/01 ..... 2,354,063
1,750,000 FrontierVision Oper Partners L.P., 11.000%, 10/15/06 ..... 1,833,125
1,500,000 Lenfest Communications Inc., 144A, 10.500%, 6/15/06 (d) ... 1,631,250
---------------
5,818,438
---------------
ENTERTAINMENT--3.3%
3,650,000 AMF Group, Inc., 12.250%, 3/15/06 ........................ 2,600,625
---------------
FOOD-RETAILERS/WHOLESALERS--13.3%
2,250,000 Big V Supermarkets, Inc., 11.000%, 2/15/04 ............... 2,300,625
3,000,000 Flagstar Corp., 10.750%, 9/15/01 ......................... 3,045,000
3,325,000 Grand Union Co., 12.000%, 9/01/04 ........................ 2,427,250
4,800,000 Penn Traffic Co., 9.625%, 4/15/05 ........................ 2,688,000
---------------
10,460,875
---------------
FOREIGN ISSUES--18.1%
2,500,000 Altos Hornos de Mexicos S.A., 144A, 11.875%, 4/30/04 (d) .. 2,683,125
1,000,000 Azteca Holdings S.A. de CV, 144A, 11.000%, 6/15/02 (d) .. 1,006,250
2,000,000 Compania De Infraes & Services S.A., 11.625%, 6/01/04 .... 2,100,000
3,800,000 Groupo Televisa S.A. de CV, 0/13.250%, 5/15/08 (c) ...... 2,631,500
3,000,000 Kabelmedia Holding GMBL, 0/13.625%, 8/01/06 (c) ......... 1,800,000
2,500,000 Tfm S.A. de C V, 144A, 0/11.750%, 6/15/09 (c), (d) ...... 1,437,500
500,000 Tv Azteca S.A. de C V, 144A, 10.125%, 2/15/04 (d) ....... 513,750
2,000,000 Viacap S.A. de CV, 144A, 11.375%, 5/15/07 (d) ........... 2,090,000
---------------
14,262,125
---------------
INDUSTRIALS--8.2%
4,000,000 Allied Waste Industries, Inc., 144A, 0/11.300%,
6/01/07 (c), (d) ...................................... 2,480,000
1,000,000 Continental Global Group, Inc., 144A, 11.000%, 4/01/07 (d). 1,050,000
1,750,000 Motors & Gears, Inc., 10.750%, 11/15/06 .................. 1,802,500
1,000,000 Terex Corp., 13.250%, 5/15/02 ............................ 1,130,000
---------------
6,462,500
---------------
METAL--12.9%
1,750,000 Envirosource, Inc., 9.750%, 6/15/03 ...................... 1,730,312
1,500,000 Euramax International PLC, 11.250%, 10/01/06 ............. 1,601,250
1,750,000 GS Technologies, Inc., 12.250%, 10/01/05 ................. 1,907,500
2,750,000 Jorgensen Earle, 10.750%, 3/01/00 ........................ 2,750,000
2,000,000 Weirton Steel Corp., 11.375%, 7/01/04 .................... 2,140,000
---------------
10,129,062
---------------
MISCELLANEOUS--14.2%
2,750,000 Anvil Knitwear, Inc., 144A, 10.875%, 3/15/07 (d) ........ 2,777,500
2,500,000 Envirotest Systems Corp., 144A, 9.625%, 4/01/03 (d) ..... 2,262,500
3,700,000 Falcon Building Co., 144A, 0/10.500%, 6/15/07 (c), (d) .. 2,201,500
1,750,000 Greyhound Lines, Inc., 144A, 11.500%, 4/15/07 (d) ....... 1,855,000
2,000,000 Sun World International, Inc., 144A, 11.250%, 4/15/04 (d).. 2,090,000
---------------
11,186,500
---------------
PAPER--3.6%
2,750,000 Stone Container Finance Co., 144A, 11.500%, 8/15/06 (d).... 2,846,250
---------------
RAILROADS & EQUIPMENT--3.0%
2,250,000 Johnstown America Industries, 11.750%, 8/15/05 ........... 2,351,250
---------------
Total Bonds and Notes (Identified Cost $66,408,497) ...... 68,758,875
---------------
<CAPTION>
COMMON STOCKS--0.7%
SHARES
- --------------------------------------------------------------------------------------------
<C> <S> <C>
143,000 Abacan Resources Corp. .................................... 455,813
1,750 Ameriking, Inc. ........................................... 87,500
---------------
Total Common Stocks (Identified Cost $1,149,957) .......... 543,313
---------------
PREFERRED STOCK--2.7%
- --------------------------------------------------------------------------------------------
90,000 Petroleum Heat & Power, Inc. 12.875%, 2/15/09 (pay-in-kind) 2,160,000
---------------
Total Preferred Stock (Identified Cost $2,237,500) ........ 2,160,000
---------------
SHORT TERM INVESTMENT--7.5%
<CAPTION>
FACE
AMOUNT
- --------------------------------------------------------------------------------------------
<C> <S> <C>
$ 5,892,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 6/30/97 at 5.000% to be repurchased at $5,892,818
on 7/01/97, collateralized by $5,695,000 U.S. Treasury
Bonds 7.250% due 5/15/16 valued at $6,012,673 .......... 5,892,000
---------------
Total Short Term Investment (Identified Cost $5,892,000) .. 5,892,000
---------------
Total Investments--98.3% (Identified Cost $75,687,954) (b) 77,354,188
Other assets less liabilities ............................ 1,354,365
---------------
Total Net Assets--100% .................................... $ 78,708,553
===============
(a) See Note 1a to the financial statements.
(b) Federal Tax Information:
At une 30, 1997 the net unrealized appreciation on investments
based on cost for federal income tax purposes of $75,687,954 was
as follows: Aggregate gross unrealized appreciation for all
investments in
which there is an excess value over tax cost ................ $3,301,814
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............. (1,635,580)
---------------
Net unrealized appreciation ................................... $ 1,666,234
===============
As of December 31, 1996 the fund has a net tax basis capital loss
carry forward as follows:
Expiring December 31, 1997 .................................... $1,341,040
December 31, 1998 .................................... 527,465
December 31, 1999 .................................... 1,300,610
December 31, 2004 .................................... 852,055
(c) Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date.
(d) Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ...................................... $77,354,188
Cash ...................................................... 88
Receivable for:
Fund shares sold ........................................ 768,017
Securities sold ......................................... 950,213
Dividends and interest .................................. 1,571,368
Prepaid expense ........................................... 4,000
-----------
80,647,874
LIABILITIES
Payable for:
Securities purchased .................................... $1,463,441
Fund shares redeemed .................................... 67,349
Dividends declared ...................................... 230,817
Accrued expenses:
Management fees ......................................... 130,517
Deferred trustees' fees ................................. 9,440
Accounting and administrative ........................... 2,067
Other expenses .......................................... 35,690
----------
1,939,321
-----------
NET ASSETS .................................................. $78,708,553
===========
Net Assets consist of:
Capital paid in ......................................... $81,437,457
Undistributed net investment income ..................... 17,982
Accumulated net realized losses ......................... (4,413,120)
Unrealized appreciation on investments .................. 1,666,234
-----------
NET ASSETS .................................................. $78,708,553
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($49,763,360 divided by 5,167,310 shares of beneficial
interest) ............................................... $ 9.63
======
Offering price per share ( 100/95.50 of $9.63) .............. $10.08*
======
Net asset value and offering price of Class B shares ($28,945,193 divided by
3,006,184 shares of beneficial
interest) ............................................... $ 9.63**
======
Identified cost of investments .............................. $75,687,954
===========
* 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends .................................................. $ 125,344
Interest ................................................... 3,408,321
----------
3,533,665
Expenses
Management fees .......................................... $ 238,111
Service and distribution fees - Class A .................. 56,888
Service and distribution fees - Class B .................. 112,604
Trustees' fees and expenses .............................. 13,302
Accounting and administrative ............................ 12,342
Custodian ................................................ 29,723
Transfer agent ........................................... 58,056
Audit and tax services ................................... 12,750
Legal .................................................... 9,956
Printing ................................................. 9,654
Registration ............................................. 13,390
Miscellaneous ............................................ 3,797
----------
Total expenses ............................................. 570,573
Less expenses waived by the investment adviser and
subadviser ............................................... (9,894) 560,679
---------- ----------
Net investment income ...................................... 2,972,986
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments - net ........................................ 1,389,367
Unrealized appreciation on:
Investments - net ........................................ 160,061
----------
Net gain on investment transactions ........................ 1,549,428
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................. $4,522,414
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 4,715,481 $ 2,972,986
Net realized gain (loss) on investments ................... (2,633,373) 1,389,367
Unrealized appreciation on investments .................... 5,306,434 160,061
------------ ------------
Increase in net assets from operations .................... 7,388,542 4,522,414
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (3,593,146) (2,046,465)
Class B ................................................. (1,122,335) (926,521)
In excess of net investment income
Class A ................................................. (24,269) (6,379)
Class B ................................................. (14,568) (3,002)
------------ ------------
(4,754,318) (2,982,367)
------------ ------------
Increase in net assets derived from capital share
transactions ............................................ 8,351,656 16,409,552
------------ ------------
Total increase in net assets .............................. 10,985,880 17,949,599
NET ASSETS
Beginning of the period ................................... 49,773,074 60,758,954
------------ ------------
End of the period ......................................... $ 60,758,954 $ 78,708,553
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME
Beginning of the period ................................... $ (44,018) $ 27,363
============ ============
End of the period ......................................... $ 27,363 $ 17,982
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period .................... $ 9.07 $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.42
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income ....... 0.94 0.90 0.88 0.88 0.84 0.42
Net Realized and Unrealized
Gain (Loss) on Investments 0.44 0.61 (1.19) 0.13 0.44 0.22
------ ------ ------ ------ ------ ------
Total From Investment
Operations ................ 1.38 1.51 (0.31) 1.01 1.28 0.64
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income (0.94) (0.90) (0.86) (0.88) (0.83) (0.43)
Distributions in excess of
Net Investment Income ..... 0.00 (0.01) 0.00 (0.04) (0.01) 0.00
Distributions From Paid-in
Capital ................... (0.05) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ......... (0.99) (0.91) (0.86) (0.92) (0.84) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period .................... $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.42 $ 9.63
====== ====== ====== ====== ====== ======
Total Return (%) (b) ........ 15.8 16.5 (3.3) 11.8 14.9 7.0
Ratio of Operating Expenses
to Average Net Assets (%) (a) 1.50 1.54 1.60 1.60 1.53 1.40 (c)
Ratio of Net Investment
Income to Average Net
Assets (%) ................ 9.74 9.17 9.18 9.71 9.32 9.01 (c)
Portfolio Turnover Rate (%) . 19 43 33 30 134 139 (c)
Net Assets, End of Period
(000) ..................... $20,992 $31,176 $33,673 $39,148 $42,992 $49,763
(a) Effective July 1, 1996 expenses were voluntarily limited to 1.40% of Class A average net assets. Prior to that,
effective October 1, 1993 expenses were 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 2.63%, 2.00%, 1.83%, 1.72% and 1.69% for the years ended December 31, 1992, 1993, 1994, 1995,
and 1996, respectively and 1.43% for the six months ended June 30, 1997.
(b) A sales charge 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>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------
SEPTEMBER 20,(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------------------- JUNE 30,
1993 1994 1995 1996 1997
-------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ......................... $ 9.87 $10.06 $ 8.88 $ 8.98 $ 9.42
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............ 0.23 0.79 0.83 0.79 0.39
Net Realized and Unrealized Gain
(Loss) on Investments .......... 0.20 (1.18) 0.13 0.42 0.22
------ ------ ------ ------ ------
Total From Investment Operations . 0.43 (0.39) 0.96 1.21 0.61
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment
Income ......................... (0.23) (0.78) (0.81) (0.76) (0.40)
Distributions in Excess of Net
Investment Income .............. (0.01) (0.01) (0.05) (0.01) 0.00
------ ------ ------ ------ ------
Total Distributions .............. (0.24) (0.79) (0.86) (0.77) (0.40)
------ ------ ------ ------ ------
Net Asset Value, End of Period ... $10.06 $ 8.88 $ 8.98 $ 9.42 $ 9.63
====== ====== ====== ====== ======
Total Return (%) (c) ............. 4.4 (4.0) 11.2 14.1 6.6
Ratio of Net Investment Income to
Average
Net Assets (%) ................. 7.66(d) 8.53 8.96 8.33 8.26(d)
Portfolio Turnover Rate (%) ...... 43 33 30 134 139(d)
Net Assets, End of Period (000) .. $1,232 $5,233 $10,625 $17,767 $28,945
(a) Commencement of operations.
(b) Effective July 1, 1996 expenses were voluntarily limited to 2.15% of Class B average net assets. Prior to that,
effective October 1, 1993 expenses were 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,
would have been 2.53% for period ended December 31, 1993, 2.48%, 2.37% and 2.35% for the years ended December
31, 1994, 1995, and 1996, respectively and 2.18% for the six months ended June 30, 1997.
(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, 1997
(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 six years of purchase (or five years if purchased before May 1, 1997).
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 Loomis Sayles and Co.,
L.P. ("Loomis Sayles"), 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 subadviser 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 expiration of capital
loss carryforwards. 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, 1997 were $55,193,446 and $44,775,998 respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.70% of the first $200 million of the Fund's
average daily net assets and 0.65% of such assets in excess of $200 million.
NEFM pays the Fund's investment subadviser, Loomis Sayles at the rate of 0.35%
of the first $200 million of the Fund's average daily net assets and 0.30% of
such assets in excess of $200 million of the Fund's average daily net assets.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Loomis Sayles are wholly owned subsidiaries of New England
Investment Companies, L.P. ("NEIC"), which is a subsidiary of Metropolitan Life
Insurance Company ("MetLife"). Fees earned by NEFM and Loomis Sayles under the
management agreements in effect during the six months ended June 30, 1997 are as
follows:
FEES EARNED(a)
--------------
$119,056 New England Funds Management, L.P.
$119,055 Loomis, Sayles & Company, L.P.
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
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, 1997 these expenses amounted to $12,342 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 a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plan relating to the Fund's Class B
shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1997, the Fund paid New England Funds $56,888 in fees
under the Class A Plan.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class 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 B shares and/or the maintenance of shareholder accounts.
For the six months ended June 30, 1997, the Fund paid New England Funds $28,151
in service fees under the Class B Plan.
Also under the Class B Plan, 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 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 shares. For the six months
ended June 30, 1997, the Fund paid New England Funds $84,453 in distribution
fees under the Class B Plan.
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, 1997 amounted to $243,373.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1997, the Fund
paid New England Funds $37,215 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 NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $1,421
Meeting Fee $114/Meeting
Committee Meeting Fee $68/Meeting
Committee Chairman Retainer $26/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. Effective July 1, 1996 NEFM and Loomis Sayles
voluntarily reduced management fees to limit expenses to 1.40% of the Fund's
Class A average daily net assets and 2.15% of the Funds Class B average daily
net assets. Loomis Sayles has agreed to waive 50% of the subadvisory fees
payable to Loomis Sayles by NEFM until June 30, 1997. As a result of the Fund's
expenses exceeding the foregoing expense limitations during the six months ended
June 30, 1997, advisory fees were reduced by $9,894. In addition Loomis Sayles
reduced its Subadvisory fee, payable to Loomis Sayles by NEFM, by $59,528.
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, 1997 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, 1996 JUNE 30, 1997
--------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold ........................... 1,180,703 $10,845,790 1,096,777 $10,361,315
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................ 271,485 2,481,709 150,491 1,432,368
---------- ----------- --------- -----------
1,452,188 13,327,499 1,247,268 11,793,683
Shares repurchased .................... (1,246,613) (11,384,029) (643,794) (6,106,018)
---------- ----------- --------- -----------
Net increase .......................... 205,575 1,943,470 603,474 5,687,665
---------- ----------- --------- -----------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
--------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold ........................... 918,809 $ 8,381,978 1,279,214 $12,236,061
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................ 45,192 413,258 38,288 364,699
---------- ------------ --------- -----------
964,001 8,795,236 1,317,502 12,600,760
Shares repurchased .................... (261,493) (2,387,050) (197,692) (1,878,873)
---------- ------------ --------- -----------
Net increase .......................... 702,508 6,408,186 1,119,810 10,721,887
---------- ------------ --------- -----------
Increase derived from capital shares
transactions ........................ 908,083 $ 8,351,656 1,723,284 $16,409,552
========== ============ ========= ===========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND HIGH INCOME FUND
SUPPLEMENT DATED JULY 28, 1997
TO NEW ENGLAND BOND FUNDS CLASSES A, B AND C PROSPECTUS
DATED MAY 1, 1997 (AS SUPPLEMENTED MAY 28, 1997)
ON PAGE 17 UNDER THE SECTION ENTITLED "HIGH INCOME FUND", THE FIRST SENTENCE
OF THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
The High Income Fund under normal market conditions will invest at least 65%
of its total assets in fixed-income securities which are rated BBB or lower by
S&P or Baa or lower by Moody's or unrated but are of comparable quality to
securities that are so rated.
IN THIS SAME SECTION, THE FOURTH PARAGRAPH IS REVISED TO READ AS FOLLOWS:
High Income Fund expects that under normal market conditions at least 80% of
the value of its total assets will be invested in fixed-income securities of
U.S. corporations, including preferred stock and convertible securities, and
U.S. dollar-denominated fixed-income securities issued by foreign governments
or by companies organized in foreign countries. To achieve its basic
investment objective, the Fund from time to time also may invest up to 20% of
the value of its total assets in common stocks and up to 20% of the value of
its total assets in non-U.S. dollar-denominated fixed-income securities issued
by foreign governments or by companies organized in foreign countries.
However, investments in both of these types of securities on a combined basis
generally will not exceed 20% of the value of the Fund's assets. See
"Investment Risks -- Foreign Securities" below.
<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 financing retirement or
college funding.
5. It can help you benefit from the ups and downs of the market. With
Investment Builder, New England Fund's automatic investment program, you can
invest as little as $100 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 $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 Funds
account. To open an Investment Builder account today, call your financial
representative or New England Funds at 1-800-225-5478.
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- -------------------------------------------------------------------------------
STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Municipal Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
MONEY MARKET FUNDS
Cash Management Trust
-- Money Market Series
-- U.S. Government Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it is
preceded or accompanied by the Fund's current prospectus, which contains
information about distribution charges, management and other items of
interest. Investors are advised to read
the prospectus carefully before investing.
<PAGE>
--------------
(Logo) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- --------------------- ---------------------
[Logo] [Logo]
QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
- --------------------- ---------------------
DALBAR DALBAR
HONORS COMMITMENT TO: HONORS COMMITMENT TO:
INVESTORS INVESTORS
- --------------------- ---------------------
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