<PAGE>
- -------------------------------------------------------------------------------
SEMIANNUAL REPORT
- -------------------------------------------------------------------------------
[graphic omitted]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
New England Limited Term
U.S. Government Fund
[graphic omitted]
- -------------
June 30, 1997
- -------------
<PAGE>
AUGUST 1997
Dear New England Funds Shareholder,
[Photo of Henery L.P. Schmelzer]
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 LIMITED TERM U.S. GOVERNMENT 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 in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
See next page o
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
- -------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares, since New England Limited Term U.S.
Government Fund's inception 1/3/89, compared to the Lehman Intermediate
Government Bond Index and the Cost of Living Index. The data points from the
graph are as follows:]
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- -------------------------------------------------------------------------------
JANUARY 1989 (INCEPTION) THROUGH JUNE 1997
COMPARED TO LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX(4)
AND THE COST OF LIVING(5)
LEHMAN
NET ASSET WITH MAXIMUM INTERMEDIATE COST OF
VALUE(1) SALES CHARGE(2) GOVERNMENT(4) LIVING(5)
--------- --------------- -------------- --------
1/3/89 $10,000 $ 9,700 $10,000 $10,000
6/89 $10,568 $10,251 $10,775 $10,299
6/90 $11,504 $11,159 $11,608 $10,780
6/91 $12,606 $12,228 $12,830 $11,286
6/92 $14,162 $13,737 $14,479 $11,635
6/93 $15,340 $14,880 $15,932 $11,983
6/94 $15,265 $14,807 $15,903 $12,282
6/95 $16,413 $15,921 $17,454 $12,655
6/96 $17,071 $16,559 $18,342 $13,003
6/97 $18,114 $17,571 $19,615 $13,385
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>
- -------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/97
- -------------------------------------------------------------------------------
CLASS A (Inception 1/3/89) YTD 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 2.55% 6.11% 5.05% 7.25%
With Max. Sales Charge(2) -0.54 2.90 4.41 6.86
Lehman Intermediate
Gov't Bond Index(4) 2.76 6.94 6.29 8.27
Lipper Short US Gov't(6) 2.57 6.33 5.28 7.32
- -------------------------------------------------------------------------------
CLASS B (Inception 9/24/93) YTD 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 2.23% 5.53% 5.20% 3.27%
With CDSC(3) -2.74 0.55 4.32 2.61
Lehman Intermediate Gov't
Bond Index(4) 2.76 6.94 7.25 5.12
Lipper Short US Gov't(6) 2.57 6.33 6.23 4.28
- -------------------------------------------------------------------------------
SINCE
CLASS C (Inception 12/30/94) YTD 1 YEAR INCEPTION
Net Asset Value(1) 2.22% 5.43% 6.01%
Lehman Intermediate Gov't
Bond Index(4) 2.76 6.94 8.47
Lipper Short US Gov't(6) 2.57 6.33 7.40
- -------------------------------------------------------------------------------
SINCE
CLASS Y (Inception 3/31/94) YTD 1 YEAR INCEPTION
Net Asset Value(1) 2.73% 6.56% 5.80%
Lehman Intermediate Gov't
Bond Index(4) 2.76 6.94 6.49
Lipper Short US Gov't(6) 2.57 6.33 5.46
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.
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 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
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) 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>
- -------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
- -------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
[Photo of James Welch]
[Photo of Scott Millimet]
James Welch and
Scott Millimet,
Back Bay Advisors, L.P.
James Welch and Scott Millimet became the Fund's portfolio managers in May
1997. Mr. Welch, a graduate of The Pennsylvania State University, is a
specialist in short- to intermediate-term fixed-income securities. Mr. Millimet,
a professional with more than 15 years of investment experience, develops and
implements strategies designed to enhance portfolio returns. He holds B.S. and
M.S. degrees from Texas A&M University.
Q. What market developments influenced New England Limited Term U.S. Government
Fund's performance during the first half of 1997?
A major force was the general rise in interest rates, triggered by the Federal
Reserve's March hike in short-term interest rates. Strong economic growth and
concerns about escalating inflation prompted the Fed's action. Though
inflationary pressures were negligible, investor expectations for further
interest rate hikes pushed rates up even further. During the six-month period
ended June 30, 1997, higher yields helped to offset nearly flat bond prices,
enabling your Fund to produce a positive total return of 2.55% (Class A shares
at net asset value). This return reflects the reinvestment of $0.36 per share in
dividend distributions and a change in share price to $11.48 on June 30, from
$11.55 six months ago.
- -------------------------------------------------------------------------------
Q. What's been your strategy since taking the Fund's helm on May 1 of this year?
It's been a two-fold strategy: managing the Fund's duration and investing
selectively in different types of government issues. (Duration measures, in
years, a security's sensitivity to interest-rate changes -- the longer the
duration, the more sensitive a bond is to rate changes.) We've recently extended
the Fund's average duration from 2.5 years to 3.1 years, as interest rates have
stabilized following some choppiness earlier in the year. Investing in somewhat
longer-term securities helps the Fund to earn higher income. We've also invested
in securities with shorter durations as a way to protect prices in the event
interest rates begin to rise.
With respect to issue selection, we've slightly increased your Fund's emphasis
on mortgage-backed securities and -- to a larger degree -- its emphasis on bonds
issued by U.S. government agencies. These securities provided opportunities to
earn more attractive income than is available from U.S. Treasury securities.
The Fund's average credit quality remained high at AAA. By design, the Fund
invests only in the most creditworthy investments around and continues to carry
Standard & Poor's* top rating for mutual funds -- AAAf.
*Standard & Poor's is a nationally recognized independent rating service. The
rating is not a recommendation to buy, sell or hold, nor does it guarantee the
value of fund shares.
- -------------------------------------------------------------------------------
Q. What's your outlook for the Fund?
It's a healthy environment for bond investing in general. Inflation is well
contained, translating into high real (adjusted for inflation) rates of return
for bonds. Meanwhile, slowing economic growth should help keep inflation levels
in check, fostering a stable interest-rate environment. Shorter-term bonds, such
as those in which your Fund invests, have an additional advantage at the moment:
Yields between short- and long-term rates have narrowed and increased the
attractiveness of shorter-term investments, which now are available at lower
prices and higher yields. In addition, the yield gap is narrowing between
higher-yielding mortgage and agency products and higher-quality (and
lower-yielding) U.S. Treasury securities, providing an opportunity for your Fund
to invest in the highest quality investments available without giving up much in
current income.
Generally speaking, it's a good time to be looking at fixed-income investments.
At the moment, there is tremendous value in government bonds, compared to
stocks, which are primarily growth-oriented securities that have risen to
unprecedented heights. As stock prices have climbed, some investors have become
wary of a potential decline -- and have turned to bonds as a diversification
tool. Strengthening demand for bonds could further improve bond values.
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
BONDS AND NOTES--94.5% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C>
GOVERNMENT AGENCIES(c)--68.6%
$ 5,000,000 Federal Home Loan Mortgage Corp., 5.740%, 9/17/03 ....... $ 4,738,300
14,290,681 Federal Home Loan Mortgage Corp., 7.000%, 6/1/09 ........ 14,330,838
129,618 Federal Home Loan Mortgage Corp., 7.500%, 6/1/26 ........ 130,327
15,000,000 Federal Home Loan Mortgage Corp., 8.190%, 10/6/04 ....... 15,410,100
55,416 Federal Home Loan Mortgage Corp., 10.000%, 7/1/19 ....... 60,559
8,410,690 Federal Home Loan Mortgage Corp., 11.500%, with various
maturities to 2020 .................................... 9,486,111
10,000,000 Federal National Mortgage Association, 6.350%, 11/23/01 . 9,875,000
10,000,000 Federal National Mortgage Association, 6.570%, 6/20/02 .. 9,926,600
4,996,450 Federal National Mortgage Association, 6.765%, 5/1/07 ... 4,980,861
5,907,695 Federal National Mortgage Association, 6.799%, 3/1/07 ... 5,894,757
4,989,620 Federal National Mortgage Association, 6.805%, 3/1/07 ... 4,980,289
4,989,668 Federal National Mortgage Association, 6.910%, 3/1/07 ... 4,997,452
5,000,000 Federal National Mortgage Association, 6.940%, 3/19/07 .. 4,950,800
5,000,000 Federal National Mortgage Association, 7.190%, 11/6/06 .. 4,990,600
21,827,505 Federal National Mortgage Association, 7.500%, with
various maturities to 2009 ............................ 22,205,280
19,364,188 Federal National Mortgage Association, 8.000%, 2/1/24 ... 19,878,307
15,000,000 Federal National Mortgage Association, 9.150%, 4/10/98 .. 15,330,450
14,581,691 Government National Mortgage Association, 7.500%, with
various maturities to 2024 ............................ 14,677,346
151,680 Government National Mortgage Association, 12.500%, with
various maturities to 2015 ............................ 177,360
1,301,891 Government National Mortgage Association, 16.000%, with
various maturities to 2013 ............................ 1,601,357
571,209 Government National Mortgage Association, 17.000%, with
various maturities to 2012 ............................ 697,058
20,227,000 Private Export Funding Corp., 9.500%, 3/31/99 ........... 21,329,978
------------
190,649,730
------------
U.S. GOVERNMENT--25.9%
19,000,000 United States Treasury Bond, 8.250%, 5/15/05 ............ 19,890,530
35,000,000 United States Treasury Note, 7.750%, 1/31/00 ............ 36,274,350
7,000,000 United States Treasury Note, Strip, 5/15/99 ............. 6,257,440
13,000,000 United States Treasury Security, Strip, 2/15/05 ......... 7,935,460
3,000,000 United States Treasury Bond, Strip, 8/15/05 ............. 1,766,670
------------
72,124,450
------------
Total Bonds and Notes (Identified Cost $263,024,665) .... 262,774,180
OPTION--0.0%
- ----------------------------------------------------------------------------------------------------------
------------
300 U.S. Treasury, 110 Put, 7/19/97 ......................... 107,813
------------
Total Option (Identified Cost $104,625) ................. 107,813
------------
SHORT TERM INVESTMENT--3.9%
- ----------------------------------------------------------------------------------------------------------
$10,714,000 Household Finance Corp., 6.080%, 7/01/97 ................ 10,714,000
------------
Total Short Term Investment (Identified Cost $10,714,000).. 10,714,000
------------
Total Investments--98.4% (Identified Cost $273,843,290)(b) 273,595,993
Other assets less liabilities ........................... 4,573,595
------------
Total Net Assets--100% ................................... $278,169,588
============
WRITTEN OPTION CONTRACTS
NET
STRIKE AGGREGATE MARKET UNREALIZED
CONTRACTS EXPIRATION PRICE FACE AMOUNT VALUE APPRECIATION
- --------------------------------------------------------------------------------
400 September 1997 $107.00 $135,500 $62,500 $ 73,000
250 August 1997 106.50 92,500 27,344 65,156
--------
$138,156
========
(a) See Note 1a to the financial statements.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized depreciation on investments
based on cost for federal income tax purposes of $273,843,290 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess value over tax cost ........................ $1,075,948
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ..................... (1,323,245)
-----------
Net unrealized depreciation ........................................... $ (247,297)
===========
(c) 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value ....................................... $273,595,993
Cash ....................................................... 1,990
Receivable for:
Fund shares sold ......................................... 1,991,572
Accrued interest ......................................... 3,669,271
Prepaid registration expense ............................... 11,000
------------
279,269,826
LIABILITIES
Payable for:
Open Options contracts - net ............................. $ 89,844
Fund shares redeemed ..................................... 532,475
Dividends declared ....................................... 244,321
Accrued expenses:
Management fees .......................................... 147,366
Deferred trustees' fees .................................. 8,287
Accounting and administrative ............................ 4,846
Other expenses ........................................... 73,099
--------
1,100,238
------------
NET ASSETS ................................................... $278,169,588
============
Net Assets consist of:
Capital paid in .......................................... $320,407,438
Undistributed net investment income ...................... 320,240
Accumulated net realized loss ............................ (42,448,949)
Unrealized depreciation on investments and options ....... (109,141)
------------
NET ASSETS ................................................... $278,169,588
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($241,396,260 divided by 21,019,918 shares of beneficial
interest) ................................................ $11.48
======
Offering price per share (100/97 of $11.48) .................. $11.84*
======
Net asset value and offering price of Class B shares
($16,852,854 divided by 1,469,606 shares of beneficial
interest) ................................................ $11.47**
======
Net asset value and offering price of Class C shares
($14,613,804 divided by 1,273,613 shares of beneficial
interest) ................................................ $11.47
======
Net asset value and offering price of Class Y shares
($5,306,670 divided by 461,018 shares of beneficial
interest) ................................................ $11.51
======
Identified cost of investments ............................... $273,843,290
============
*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
Interest .................................................. $11,507,674
Expenses
Management fees ......................................... $ 935,006
Service fees - Class A .................................. 444,982
Service and distribution fees - Class B ................. 87,324
Service and distribution fees - Class C ................. 71,334
Trustees' fees and expenses ............................. 10,986
Accounting and administrative ........................... 29,105
Custodian ............................................... 61,124
Transfer agent .......................................... 260,282
Audit and tax services .................................. 12,750
Legal ................................................... 9,956
Printing ................................................ 32,432
Registration ............................................ 23,826
Miscellaneous ........................................... 4,578
----------
Total expenses ............................................ 1,983,685
-----------
Net investment income ..................................... 9,523,989
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS
AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ....................................... (5,589,694)
Futures contracts - net ................................. 343,479
Options contracts - net ................................. (67,763)
----------
Total realized loss on investments, options and futures
contracts ............................................. (5,313,978)
----------
Unrealized appreciation (depreciation) on:
Investments - net ....................................... 2,665,793
Options contracts - net ................................. 138,156
----------
Total unrealized appreciation on investments and options 2,803,949
----------
Net loss on investment transactions ....................... (2,510,029)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................ $ 7,013,960
===========
</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 ................................... $ 24,683,130 $ 9,523,989
Net realized loss on investments, options and futures
contracts ............................................. (5,398,562) (5,313,978)
Unrealized appreciation (depreciation) on investments ... (12,440,197) 2,803,949
------------ ------------
Increase in net assets from operations .................. 6,844,371 7,013,960
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (22,194,536) (7,892,957)
Class B ............................................... (1,162,270) (486,811)
Class C ............................................... (582,457) (396,502)
Class Y ............................................... (389,325) (172,404)
------------ ------------
(24,328,588) (8,948,674)
------------ ------------
Decrease in net assets derived from capital share
transactions .......................................... (58,854,951) (34,791,673)
------------ ------------
Total decrease in net assets ............................ (76,339,168) (36,726,387)
NET ASSETS
Beginning of the period ................................. 391,235,143 314,895,975
------------ ------------
End of the period ....................................... $314,895,975 $278,169,588
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
Beginning of the period ................................. $ 67,682 $ (255,075)
============ ============
End of the period ....................................... $ (255,075) $ 320,240
============ ============
</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 .. $12.86 $12.54 $12.49 $11.49 $12.10 $11.55
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income .. 0.80 0.71 0.82 0.86 0.81 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments ....... (0.11) 0.08 (1.10) 0.59 (0.54) (0.09)
------ ------ ------ ------ ------ ------
Total From Investment
Operations ........... 0.69 0.79 (0.28) 1.45 0.27 0.29
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ...... (0.80) (0.71) (0.72) (0.84) (0.82) (0.36)
Distributions in Excess
of Net Investment
Income ............... 0.00 (0.01) 0.00 0.00 0.00 0.00
Distributions From Net
Realized Capital
Gains ................ (0.21) (0.12) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions .... (1.01) (0.84) (0.72) (0.84) (0.82) (0.36)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period ............... $12.54 $12.49 $11.49 $12.10 $11.55 $11.48
====== ====== ====== ====== ====== ======
Total Return (%) (b) ... 5.7 6.4 (2.3) 13.0 2.4 2.6
Ratio of Operating
Expenses to Average
Net Assets (%) (a) ... 1.16 1.14 1.18 1.22 1.25 1.28(c)
Ratio of Net Investment
Income to Average Net
Assets (%) ........... 6.24 5.64 6.80 7.18 7.13 6.61(c)
Portfolio Turnover
Rate (%) ............. 323 124 244 247 327 437(c)
Net Assets, End of
Period (000) ......... $477,396 $562,164 $412,399 $361,520 $276,178 $241,396
(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 is not reflected in Class A total return calculations.
Periods less than one year are not annualized.
(c) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------
SEPTEMBER 27(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 ...................... $12.76 $12.49 $11.48 $12.09 $11.54
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ......... 0.17 0.71 0.76 0.73 0.36
Net Realized and Unrealized
Gain (Loss) on Investments .. (0.24) (1.08) 0.61 (0.54) (0.11)
------ ------ ------ ------ ------
Total From Investment
Operations .................. (0.07) (0.37) 1.37 0.19 0.25
------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ........... (0.16) (0.64) (0.76) (0.74) (0.32)
Distributions in Excess of Net
Investment Income ........... (0.01) 0.00 0.00 0.00 0.00
Distributions From Net Realized
Capital Gains ............... (0.03) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ........... (0.20) (0.64) (0.76) (0.74) (0.32)
------ ------ ------ ------ ------
Net Asset Value, End of Period $12.49 $11.48 $12.09 $11.54 $11.47
====== ====== ====== ====== ======
Total Return (%) (c) .......... (0.6) (2.9) 12.3 1.7 2.2
Ratio of Operating Expenses to
Average Net Assets (%) ...... 1.96(b) 1.83 1.87 1.90 1.93 (b)
Ratio of Net Investment Income
to Average Net Assets (%) ... 4.30(b) 6.15 6.53 6.48 5.96 (b)
Portfolio Turnover Rate (%) ... 124 244 247 327 437 (b)
Net Assets, End of Period (000) $6,221 $11,891 $18,056 $18,503 $16,853
(a) Commencement of Operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1995 1996 1997
----- ----- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $11.48 $12.10 $11.54
------ ------ ------
Income From Investment Operations
Net Investment Income .............................. 0.64 0.75 0.35
Net Realized and Unrealized Gain (Loss) on
Investments ...................................... 0.64 (0.57) (0.10)
------ ------ ------
Total From Investment Operations ................... 1.28 0.18 0.25
------ ------ ------
Less Distributions
Distributions From Net Investment Income ........... (0.65) (0.74) (0.32)
Distributions in Excess of Net Investment Income ... (0.01) 0.00 0.00
------ ------ ------
Total Distributions ................................ (0.66) (0.74) (0.32)
------ ------ ------
Net Asset Value, End of Period ..................... $12.10 $11.54 $11.47
====== ====== ======
Total Return (%) (b) ............................... 11.4 1.6 2.2
Ratio of Operating Expenses to Average
Net Assets (%) ................................... 1.87 1.90 1.93(a)
Ratio of Net Investment Income to Average
Net Assets (%) ................................... 6.53 6.48 5.96(a)
Portfolio Turnover Rate (%) ........................ 247 327 437(a)
Net Assets, End of Period (000) .................... $5,936 $14,903 $14,614
(a) Computed on an annualized basis.
(b) Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------------------
MARCH 31(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ------------------------- JUNE 30,
1994 1995 1996 1997
----------------- ----- ----- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period .............. $12.11 $11.51 $12.13 $11.58
------ ------ ------ ------
Income From Investment
Operations
Net Investment Income .... 0.71 0.86 0.85 0.41
Net Realized and
Unrealized Gain
(Loss) on Investments .. (0.74) 0.63 (0.54) (0.10)
------ ------ ------ ------
Total From Investment
Operations ............. (0.03) 1.49 0.31 0.31
------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ...... (0.57) (0.87) (0.86) (0.38)
------ ------ ------ ------
Total Distributions ...... (0.57) (0.87) (0.86) (0.38)
------ ------ ------ ------
Net Asset Value,
End of Period .......... $11.51 $12.13 $11.58 $11.51
====== ====== ====== ======
Total Return (%) (c) ..... (0.8) 13.3 2.8 2.7
Ratio of Operating Expenses
to Average Net Assets (%) 0.83(b) 0.91 0.90 0.93(b)
Ratio of Net Investment
Income to Average
Net Assets (%) ......... 7.15(b) 7.53 7.48 6.96(b)
Portfolio Turnover Rate (%) 244 247 327 437(b)
Net Assets, End of
Period (000) ........... $1,822 $5,723 $5,313 $5,307
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
</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
(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 six years of purchase (or five years if purchased before May
1, 1997). 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 subadviser, 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 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).
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 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.
As of June 30, 1997 the Fund had a net tax basis capital loss carryforward as
follows:
Expiring December 31, 2002 $30,053,756
December 31, 2003 1,001,295
December 31, 2004 3,925,924
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 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 six months ended June 30, 1997 were as follows:
PURCHASES SALES
---------------------------------- --------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ----- --------------- -----
$533,517,002 $11,786,025 $537,725,058 $50,955,223
Investments in written options for the Fund for the six months ended June 30,
1997 are summarized as follows:
WRITTEN OPTIONS
-------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1996 ....... 0 $ 0
Contracts opened ................ 2,750 1,103,547
Contracts closed ................ (2,100) (875,547)
----- ----------
Open at June 30, 1997 ........... 650 $ 228,000
===== ==========
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 0.65% of the first $200 million of the Fund's
average daily net assets, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors at the rate of 0.325% of the first $200 million of the Fund's
average daily net assets, 0.3125% of the next $300 million and 0.30% of such
assets in excess of $500 million. Certain officers and directors of NEFM are
also officers or trustees of the Fund. NEFM and Back Bay Advisors are wholly
owned subsidiaries of New England Investment Companies, L.P. ("NEIC"), which is
a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by
NEFM and Back Bay Advisors under the management agreement in effect during the
six months ended June 30, 1997 are as follows:
FEES EARNED
-----------
$467,503 New England Funds Management, L.P.
$467,503 Back Bay Advisors, L.P.
3B. 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 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 $29,105 and are shown separately
in the financial statements as accounting and administrative.
3C. 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 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 six months ended June 30, 1997, the Fund paid New England Funds $317,851
in service fees and $127,131 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
remains in effect. The amount of unreimbursed expense carried forward into 1997
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 six months ended June
30, 1997, the Fund paid New England Funds $21,831 and $17,834 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 six months ended June 30, 1997, the Fund paid New England Funds
$65,493 and $53,500 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 six months ended
June 30, 1997 amounted to $186,616.
3D. 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 $184,354 as compensation for its services in that
capacity.
3E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of New
England Funds, NEFM, NEIC or their affiliates, other than registered investment
companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $2,105
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $132
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.
4. CAPITAL SHARES. At June 30, 1997 there was an unlimited number of shares of
beneficial interest authorized, divided into four classes, Class A, Class B,
Class C and Class Y capital stock. Transactions in capital shares were as
follows:
<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 ...................... 3,730,062 $43,600,272 2,586,369 $29,647,715
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income ............ 1,533,282 17,879,364 566,443 6,495,426
-------------- ---------------- --------------- ----------------
5,263,344 61,479,636 3,152,812 36,143,141
Shares repurchased ............... (11,224,787) (130,751,712) (6,037,338) (69,253,248)
-------------- ---------------- --------------- ----------------
Net decrease ..................... (5,961,443) (69,272,076) (2,884,526) (33,110,107)
-------------- ---------------- --------------- ----------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- -----------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------------- ---------------- --------------- ----------------
Shares sold ...................... 499,018 $5,811,793 179,015 $2,070,312
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income............. 81,083 943,106 36,738 409,157
--------------- --------------- --------------- ----------------
580,101 6,754,899 215,753 2,479,469
Shares repurchased ............... (470,314) (5,466,085) (349,828) (4,004,278)
-------------- --------------- --------------- ----------------
Net increase (decrease) .......... 109,787 1,288,814 (134,075) (1,524,809)
-------------- --------------- --------------- ----------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- -----------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- --------------- ---------------- --------------- -----------------
Shares sold ...................... 2,452,099 $28,487,303 1,005,466 $11,524,929
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income............. 37,778 439,187 26,046 298,390
--------------- ---------------- --------------- ----------------
2,489,877 28,926,490 1,031,512 11,823,319
Shares repurchased ............... (1,689,523) (19,647,316) (1,048,812) (12,013,102)
--------------- ---------------- --------------- ----------------
Net increase (decrease) .......... 800,354 9,279,174 (17,300) (189,783)
--------------- ---------------- --------------- ----------------
<PAGE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1995
---------------------------------- -----------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- --------------- ---------------- --------------- ----------------
Shares sold ...................... 120,869 $ 1,421,313 28,576 $ 334,887
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income .............. 33,402 390,110 15,268 175,437
---------- ----------- ---------- ----------------
154,271 1,811,423 43,844 510,324
Shares repurchased ............... (167,273) (1,962,286) (41,680) (477,298)
---------- ------------ ---------- ----------------
Net increase (decrease) .......... (13,002) (150,863) 2,164 33,026
---------- ------------ ---------- ----------------
Decrease derived from capital
shares transactions ............ (5,064,304) $(58,854,951) (3,033,737) $(34,791,673)
========== ============ ========= ============
</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>
- --------------------------------------------------------------------------------
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
- --------------------- ---------------------
LT58-0697
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