<PAGE>
- -------------------------------------------------------------------------------
ANNUAL REPORT
- -------------------------------------------------------------------------------
[graphic omitted]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
New England
High Income Fund
[graphic omitted]
December 31, 1997
<PAGE>
FEBRUARY 1998
- -------------------------------------------------------------------------------
[Photo of Henry L.P. Schmelzer]
"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
Dear Shareholder:
In 1997, many investors once again had reason to be pleased with the performance
of their mutual fund holdings. However, in times such as these, expectations
tend to grow along with prices. It pays to remind ourselves that no trend is
permanent, and we should keep our goals realistic and long-term needs in focus.
In the third straight year of outstanding returns, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index -- two widely followed
indicators of the performance of large-company stocks -- gained 24.9% and 33.3%
respectively. At the same time, smaller-company stocks, as measured by the
Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded
as declining interest rates and rising prices meant solid gains. The Lehman Long
Treasury Index, for example, posted a 15.1% return for the year. Results were
less favorable for international investors, especially those exposed to emerging
markets or the financial turmoil in Asia.
Gratifying though it has been, the markets' surge of the past few years obscures
the historic norm: Downturns and volatility also are regular features of
investing. Even in 1997, notwithstanding the impressive overall results,
investors saw some sharp, short-term drops, whether they were invested in the
United States or overseas, in bonds or stocks. Market fluctuations remind us of
some valuable lessons.
First, volatility is inevitable, and should not disrupt long-term programs
without sufficient evaluation. Those who sold in response to downturns --
October 1987 is an obvious example -- may have missed out on the subsequent
uptrend. Second, sound diversification can reduce risk. A useful exercise is to
review your asset allocation regularly with your financial representative.
Starting in 1998, you have one more reason to consult with your representative:
Newly expanded retirement options, including the new Roth IRA, could play an
important role in your retirement and tax planning for years to come. With this
in mind, New England Funds has introduced programs specially designed to help
you make the most of the newest retirement vehicles.
[Dalbar Logo]
In addition to offering quality mutual fund choices and tax-advantaged plans, we
focus on providing the highest quality customer service. This is why I am
pleased to report that we have received DALBAR's Mutual Fund Service Award for
"providing the highest tier of service excellence in the mutual fund industry."
New England Funds is one of just three mutual fund companies to receive this
award for the third consecutive year from DALBAR, an independent evaluator of
mutual fund service. We are continuing to work to provide even more effective
services. Two examples are: the Personal Access Line(TM) -- our enhanced
automated telephone account service (800-346-5984) -- and the account
information section of the New England Funds web site (www.mutualfunds.com).
Each provides convenient, 24-hour access to current information about your New
England Funds accounts.
All of us at New England Funds thank you for your continued support and look
forward to serving you in the years ahead.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
<PAGE>
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New England High Income Fund
- --------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH DECEMBER 31, 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, it they could, they would incure transaction costs and other expenses.
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in Class A Shares of New England High Income Fund compared to
the First Boston High Yield Index and the Cost of Living from 6/30/87.
The data points to this chart are as follows:]
Growth of a $10,000 Investment in Class A Shares
DECEMBER 1987 THROUGH DECEMBER 1997
COMPARED TO FIRST BOSTON HIGH YIELD INDEX(4) AND THE COST OF LIVING(5)
With First Cost
Maximum Boston of
NAV Sales Charge High Yield** Living
------- ------------ ------------ ------
12/31/87 $10,000 $ 9,550 $10,000 $10,000
1988 $10,258 $ 9,796 $11,143 $10,442
1989 $10,598 $10,121 $11,186 $10,928
1990 $ 9,197 $ 8,783 $10,473 $11,595
1991 $12,551 $11,986 $15,055 $11,950
1992 $14,530 $13,876 $17,563 $12,297
1993 $16,930 $16,168 $20,884 $12,635
1994 $16,370 $15,633 $20,681 $12,972
1995 $18,298 $17,475 $24,278 $13,302
1996 $21,024 $20,078 $27,293 $13,743
1997 $24,252 $23,160 $30,740 $13,995
**First Boston High Yield Index
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvested
distributions.
<PAGE>
- --------------------------------------------------------------------------------
New England High Income Fund
- --------------------------------------------------------------------------------
Average Annual Total Returns -- 12/31/97
- --------------------------------------------------------------------------------
CLASS A (INCEPTION 2/22/84) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 15.35% 10.79% 9.26%
With Max. Sales Charge(2) 10.20 9.76 8.76
First Boston High Yield Index(4) 12.63 11.84 11.88
Lipper High Current Yield Average(6) 12.96 11.36 10.66
CLASS B (INCEPTION 9/20/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 14.39% 13.22% 9.13%
With CDSC(3) 9.39 12.44 8.78
First Boston High Yield Index(4) 12.63 14.12 10.64
(calculated from 9/30/93)
Lipper High Current Yield Average(6) 12.96 14.17 10.08
(calculated from 9/30/93
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 reinvestment
of all distributions and 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 High Current Yield Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical Services, an
independent mutual fund ranking service.
<PAGE>
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New England High Income Fund
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
[Photo of Gary L. Goodenough and Madeline Einhorn Glick, Loomis Sayles &
Company, L.P.
Questions & Answers with Your Portfolio Managers
Q. Please tell us about New England High Income Fund's 1997 performance.
We are very gratified by the Fund's strong results -- a total return for Class A
shares of 15.35% for the 12 months ending December 31, 1997. This return
reflects a $0.52 per share gain in net asset value to $9.94 per share and the
reinvestment of $0.868 per share in dividend distributions. Total return for the
Fund's Class B shares during 1997 was 14.39%. All told, the Fund's 1997 results
were markedly better than the 12.96% average return for the 181 High Current
Yield funds measured by Lipper Analytical Services, Inc.
Q. How would you describe the investment environment?
The economic background in 1997 was nearly ideal, and
particularly so for high-yield bonds. Strong economic growth in the United
States set the scene for solid gains in corporate profits; interest rates were
lower, reducing financing costs; U.S. equity markets rose; and the dollar
strengthened abroad.
The U.S. federal budget deficit has long put upward pressure on long-term
interest rates due to the continuous need for massive government borrowings. In
1997, the deficit was reduced drastically, coming into near balance for the
first time in decades. And a vigilant Federal Reserve Board left short-term
rates untouched, except for a modest increase in March.
Q. Given this environment, what was your strategy during the course of the year?
Even in the best of economic times, the core consideration in managing a
high-yield portfolio is picking the right bonds.
We attribute much of the Fund's positive performance in 1997 to our successful
bond selection. We relied greatly on Loomis Sayles' proprietary research
department, continuing to apply our long-standing strategy of investing in
higher-yielding bonds of companies that we believe to have improving credit
potential.
The Fund also benefited from selective purchases of zero-to-full coupon bonds.
These issues start out as zero coupon bonds (discounted bonds that don't pay
interest) and normally begin paying cash interest five years after issuance. The
securities are attractive in strong markets because their prices are very
responsive to declining interest rates and positive company developments.
With two exceptions, we kept the portfolio's cash position very low throughout
the year, which aided performance. In both April and October we felt that the
high-yield market was overpriced, prompting us to raise cash to about 10%. These
moves proved fortuitous, as interest rates rose both times, allowing us to
reinvest the cash at higher yields.
CREDIT QUALITY COMPOSITION -- 12/31/97
AAA ............... 3.7%
BB ................ 8.1%
B ................. 73.1%
CCC ............... 12.3%
Other ............. 2.8%
Quality is based on rating's provided by Standard & Poor's.
Portfolio holdings and asset allocations may change.
Q. What were some of the factors that affected performance, either positively or
negatively?
More than anything else, the Fund benefited from the nearly ideal economic
environment we spoke of earlier. Investors tend to look at high-yield bonds as a
hybrid security with both debt and equity characteristics. Therefore prices of
high-yield bonds react to corporate business developments in a more pronounced
way than do bonds of companies with higher credit ratings. The strong economy in
1997 has clearly delivered benefits to companies of all shapes, sizes and credit
ratings.
No year is without its disappointments, however. Our investment in the bonds of
Grand Union, a supermarket chain, did not perform as hoped. We took our losses
early when the company's operating results came in dramatically below market
expectations.
Q. What is your market outlook, and what does it imply for the Fund?
Our outlook for the high-yield markets remains favorable. Conditions that work
to the advantage of high-yield bonds -- growth in Gross Domestic Product, low
inflation and low interest rates on higher-grade securities -- are all likely to
be present in 1998. And while corporate profits may lag 1997's levels, we
believe they nevertheless will remain supportive of the high-yield market.
Our fundamental strategy remains in place for 1998, as we seek high-yielding
bonds of companies with improving credit fundamentals. We will continue to rely
on Loomis Sayles' extensive credit analysis capability and the
research-intensive approach that is at the heart of our management style.
<PAGE>
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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1997
<TABLE>
<CAPTION>
BONDS AND NOTES--83.3% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (a)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
AUTOMOTIVE--4.9%
$ 3,200,000 CSK Auto, Inc., 11.000%, 11/01/06 ......................... $ 3,488,000
1,500,000 Delco Remy International, Inc., 144A, 10.625%, 8/01/06 (e). 1,623,750
------------
5,111,750
------------
BROADCASTING--8.1%
5,500,000 Fox Kids Worldwide, Inc., 0/10.250%, 11/01/07 (d) ........ 3,258,750
3,000,000 Frontiervision Holdings, LP., 144A, 0/11.875%,
9/15/07 (d),(e) ........................................ 2,205,000
1,250,000 FrontierVision Oper. Partners L.P., 11.000%, 10/15/06 ..... 1,387,500
1,500,000 Lenfest Communications Inc., 10.500%, 6/15/06 ............. 1,668,750
------------
8,520,000
------------
ENTERTAINMENT--2.0%
2,695,000 AMF Bowling Worldwide, Inc., 0/12.250%, 3/15/06 (d) ...... 2,118,944
------------
ENVIRONMENTAL CONTROL--3.2%
3,500,000 Envirotest Systems Corp., 9.625%, 4/01/03 ................. 3,325,000
------------
FOOD & BEVERAGES--2.1%
2,000,000 Sun World International, Inc., 11.250%, 4/15/04 ........... 2,145,000
------------
FOOD-RETAILERS/WHOLESALERS--11.6%
2,250,000 Big V Supermarkets, Inc., 11.000%, 2/15/04 ................ 2,362,500
3,250,000 Flagstar Corp., 10.750%, 9/15/01 (c) ...................... 3,419,000
3,300,000 Fleming Companies, Inc., 10.500%, 12/01/04 ................ 3,456,750
4,750,000 Penn Traffic Co., 9.625%, 4/15/05 ......................... 2,945,000
------------
12,183,250
------------
FOREIGN ISSUES--14.4%
1,500,000 Algoma Steel, Inc., 12.375%, 7/15/05 ...................... 1,740,000
3,250,000 Altos Hornos de Mexico S.A., 11.875%, 4/30/04 ............. 3,384,062
2,750,000 Compania De Infraes & Services S.A., 144A, 11.625%,
6/01/04 (e) ............................................ 2,777,500
3,000,000 Grupo Televisa S.A. de CV, 0/13.250%, 5/15/08 (d) ........ 2,246,250
3,000,000 Kabelmedia Holding GMBL, 0/13.625%, 8/01/06 (d) .......... 2,190,000
4,500,000 TFM S.A. de CV, 144A, 0/11.750%, 6/15/09 (d),(e) ......... 2,790,000
------------
15,127,812
------------
INDUSTRIALS--14.0%
4,000,000 Allied Waste Industries, Inc., 144A, 0/11.300%,
6/01/07 (d),(e) ......................................... 2,825,000
1,090,000 Continental Global Group, Inc., 11.000%, 4/01/07 .......... 1,160,850
3,000,000 Falcon Building Products, Inc., 0/10.500%, 6/15/07 (d) ... 1,987,500
2,750,000 Motors & Gears, Inc., 10.750%, 11/15/06 ................... 2,915,000
2,450,000 RBX Corp., 144A, 12.000%, 1/15/03 (e) .................... 2,511,250
3,300,000 Stone Container Corp., 12.250%, 4/01/02 ................... 3,341,250
------------
14,740,850
------------
METAL--12.0%
$3,250,000 Euramax International PLC, 11.250%, 10/01/06 .............. 3,518,125
1,750,000 GS Technologies, Inc., 12.250%, 10/01/05 .................. 1,960,000
3,000,000 Jorgensen Earle, 10.750%, 3/01/00 ......................... 3,090,000
2,000,000 Weirton Steel Corp., 11.375%, 7/01/04 ..................... 2,110,000
2,000,000 Wheeling Pittsburgh Corp., 144A, 9.250%, 11/15/07 (e) .... 1,940,000
------------
12,618,125
------------
RAILROADS & EQUIPMENT--3.1%
2,950,000 Johnstown America Industries, 11.750%, 8/15/05 ............ 3,230,250
------------
RETAIL--3.0%
3,000,000 Mothers Work, Inc., 12.625%, 8/01/05 ...................... 3,195,000
------------
TRANSPORTATION--1.8%
1,750,000 Greyhound Lines, Inc., 11.500%, 4/15/07 ................... 1,925,000
------------
UTILITIES--3.1%
2,993,865 Panda Funding Corp., 11.625%, 8/20/12 ..................... 3,293,252
------------
Total Bonds and Notes (Identified Cost $82,812,923) ....... 87,534,233
------------
COMMON STOCK--0.3%
SHARES
- --------------------------------------------------------------------------------------------
143,000 Abacan Resources Corp. (c) ................................ 223,438
1,750 Ameriking, Inc. (c) ....................................... 87,500
24 Burlington Motor Carriers Inc., (Warrants) (c) ............ 0
------------
Total Common Stocks (Identified Cost $1,150,036) .......... 310,938
------------
PREFERRED STOCK--10.8%
- --------------------------------------------------------------------------------------------
38,827 Ameriking, Inc. 13.000%, (pay-in-kind) .................... 1,048,329
116,259 Anvil Holdings, Inc. (pay-in-kind) ........................ 2,790,216
23 Burlington Motor Carriers Inc. (c) ........................ 0
26,911 Cablevision Systems Corp., 11.125%, (pay-in-kind) ......... 3,108,220
10,000 Pantry Pride, Inc. ........................................ 1,010,000
90,000 Petroleum Heat & Power, Inc. .............................. 1,890,000
15,000 Superior National Insurance Group, Inc., 144A (e) ......... 1,537,500
------------
Total Preferred Stock (Identified Cost $11,401,587) ....... 11,384,265
------------
SHORT TERM INVESTMENT--3.6%
FACE
AMOUNT DESCRIPTION VALUE (a)
- --------------------------------------------------------------------------------------------
$3,828,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/97 at 5.000% to be repurchased at $3,829,063
on 1/02/98, collateralized by $3,810,000 U.S. Treasury
Bond 5.875% due 1/31/99 valued at $3,909,612 ............ $ 3,828,000
------------
Total Short Term Investment (Identified Cost $3,828,000) .. 3,828,000
------------
Total Investments--98.0% (Identified Cost $99,192,546) (b) 103,057,436
Other assets less liabilities ............................. 2,082,859
------------
Total Net Assets--100% .................................... 105,140,295
============
(a) See Note 1a to the financial statements.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments
based on cost for federal income tax purposes of $99,349,635 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ................... $ 5,299,015
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ................... (1,591,214)
------------
Net unrealized appreciation ....................................... $ 3,707,801
============
At December 31, 1997 the Fund had a capital loss carryover of
$2,847,461 of which $527,465 expires on December 31, 1998
$1,300,610 expires on December 31, 1999 and $1,019,386 expires on
December 31, 2004. This may be available to offset future realized
capital gains, if any, to the extent provided by regulations.
(c) Non-income producing security.
(d) Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date.
(e) 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
- --------------------------------------------------------------------------------
December 31, 1997
ASSETS
Investments at value ............................ $103,057,436
Cash ............................................ 538
Receivable for:
Fund shares sold .............................. 503,721
Securities sold ............................... 213
Dividends and interest ........................ 2,110,403
Prepaid registration expense .................... 4,000
------------
105,676,311
LIABILITIES
Payable for:
Fund shares redeemed .......................... $187,106
Dividends declared ............................ 100,976
Accrued expenses:
Management fees ............................... 173,754
Deferred trustees' fees ....................... 6,247
Accounting and administrative ................. 2,211
Other ......................................... 65,722
--------
536,016
------------
NET ASSETS ........................................ $105,140,295
============
Net Assets consist of:
Capital paid in ............................... $104,191,039
Undistributed net investment income ........... 88,914
Accumulated net realized loss ................. (3,004,548)
Unrealized appreciation on investments ........ 3,864,890
------------
NET ASSETS ........................................ $105,140,295
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($62,739,391 divided by 6,314,519 shares
of beneficial interest) ........................ $ 9.94
======
Offering price per share (100/95.50 of $9.94) ..... $10.41*
=====
Net asset value and offering price of Class B
shares ($42,400,904 divided by 4,268,816 shares
of beneficial interest) ......................... $ 9.93**
======
Identified cost of investments .................... $ 99,192,546
============
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
INVESTMENT INCOME
Dividends ...................................... $ 812,679
Interest ....................................... 7,519,729
-----------
8,332,408
Expenses
Management fees .............................. $ 561,521
Service and distribution fees - Class A ...... 127,503
Service and distribution fees - Class B ...... 292,153
Trustees' fees and expenses .................. 16,843
Accounting and administrative ................ 24,855
Custodian .................................... 65,688
Transfer agent ............................... 119,396
Audit and tax services ....................... 36,500
Legal ........................................ 10,779
Printing ..................................... 21,469
Registration ................................. 23,280
Miscellaneous ................................ 8,107
----------
Total expenses ................................. 1,308,094
-----------
Net investment income .......................... 7,024,314
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments - net ............................ 1,698,066
Unrealized appreciation on:
Investments - net ............................ 2,358,716
----------
Net gain on investment transactions ............ 4,056,782
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ....... $11,081,096
===========
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
FROM OPERATIONS
Net investment income .......................... $ 4,715,481 $ 7,024,314
Net realized gain (loss) on investments ........ (2,633,373) 1,698,066
Unrealized appreciation on investments ......... 5,306,434 2,358,716
------------ ------------
Increase in net assets from operations ......... 7,388,542 11,081,096
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ...................................... (3,593,146) (4,574,797)
Class B ...................................... (1,122,335) (2,387,966)
In excess of net investment income
Class A ...................................... (24,269) 0
Class B ...................................... (14,568) 0
------------ ------------
(4,754,318) (6,962,763)
------------ ------------
Increase in net assets derived from capital share
transactions ................................. 8,351,656 40,263,008
------------ ------------
Total increase in net assets ..................... 10,985,880 44,381,341
NET ASSETS
Beginning of the year .......................... 49,773,074 60,758,954
------------ ------------
End of the year ................................ $ 60,758,954 $105,140,295
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME
Beginning of the year .......................... $ (44,018) $ 27,363
============ ============
End of the year ................................ $ 27,363 $ 88,914
============ ============
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ........... $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.42
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........................ 0.90 0.88 0.88 0.84 0.87
Net Realized and Unrealized Gain (Loss) on
Investments 0.61 (1.19) 0.13 0.44 0.52
------ ------ ------ ------ ------
Total From Investment Operations ............. 1.51 (0.31) 1.01 1.28 1.39
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ..... (0.90) (0.86) (0.88) (0.83) (0.87)
Distributions in Excess of Net Investment
Income ..................................... (0.01) 0.00 (0.04) (0.01) 0.00
------ ------ ------ ------ ------
Total Distributions .......................... (0.91) (0.86) (0.92) (0.84) (0.87)
------ ------ ------ ------ ------
Net Asset Value, End of Year ................. $10.06 $ 8.89 $ 8.98 $ 9.42 $ 9.94
====== ====== ====== ====== ======
Total Return (%)(b) .......................... 16.5 (3.3) 11.8 14.9 15.4
Ratio of Operating Expenses to Average Net
Assets (%) (a) ............................. 1.54 1.60 1.60 1.53 1.36
Ratio of Net Investment Income to Average Net
Assets (%) ................................. 9.17 9.18 9.71 9.32 9.03
Portfolio Turnover Rate (%) .................. 43 33 30 134 99
Net Assets, End of Year (000) ................ $31,176 $33,673 $39,148 $42,992 $62,739
The Subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company,
L.P. became the subadviser to the Fund.
(a) The ratio of operating expenses to average
net assets without giving effect to
voluntary expense limitations described in
Note 4 to the Financial Statements would
have been (%) ............................ 2.00 1.83 1.72 1.69 --
(b) A sales charge is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------
SEPTEMBER 20,(a)
THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
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 0.80
Net Realized and Unrealized
Gain (Loss) on Investments . 0.20 (1.18) 0.13 0.42 0.51
------ ------ ------ ------ ------
Total From Investment
Operations ................. 0.43 (0.39) 0.96 1.21 1.31
------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income .......... (0.23) (0.78) (0.81) (0.76) (0.80)
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) (0.80)
------ ------ ------ ------ ------
Net Asset Value, End of Period $10.06 $ 8.88 $ 8.98 $ 9.42 $ 9.93
====== ====== ====== ====== ======
Total Return (%) (c) ......... 4.4 (4.0) 11.2 14.1 14.4
Ratio of Operating Expenses to
Average Net Assets (%) (b) ... 2.25(d) 2.25 2.25 2.19 2.11
Ratio of Net Investment Income
to Average Net Assets (%) .. 7.66(d) 8.53 8.96 8.33 8.28
Portfolio Turnover Rate (%) .. 43(d) 33 30 134 99
Net Assets, End of Period
(000) ...................... $1,232 $5,233 $10,625 $17,767 $42,401
The Subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company,
L.P. became the subadviser to the Fund.
(a) Commencement of operations.
(b) The ratio of operating
expenses to average net
assets without giving
effect to voluntary
expense limitations
described in Note 4 to the
Financial Statements would
have been (%) ............ 2.53 2.48 2.37 2.35 --
(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
- --------------------------------------------------------------------------------
December 31, 1997
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. Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
service provides the last reported sale price for securities listed on an
applicable securities exchange or on the NASDAQ national market system, or, if
no sale was reported and in the case of over-the-counter securities not so
listed, the last reported bid price. Debt securities (other than short-term
obligations with a remaining maturity of less than sixty days) are valued on the
basis of valuations furnished by a pricing service, selected by the Fund's
adviser as authorized by the Board of Trustees, which service determines
valuations for normal, institutional-size trading units of such securities using
market information, transactions for comparable securities and various
relationships between securities which are generally recognized by institutional
traders. Short-term obligations with a remaining maturity of less than sixty
days are stated at amortized cost, which approximates value. All other
securities and assets are valued at their fair value as determined in good faith
by the Fund's adviser, New England Funds Management L.P., and 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 the 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 Fund's 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 year ended December 31, 1997 were $110,099,734 and $75,096,793
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 & Company L.P.
("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 & Company,
L.P. under the management agreements in effect during the year ended December
31, 1997 are as follows:
FEES EARNED(a)
- --------------
$280,761 New England Funds Management, L.P.
$280,760 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, and financial reporting
functions and related clerical functions relating to the Fund, and (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1997 these
expenses amounted to $24,855 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 year
ended December 31, 1997, the Fund paid New England Funds $127,503 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 year ended December 31, 1997, the Fund paid New
England Funds $73,038 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 year ended
December 31, 1997, the Fund paid New England Funds $219,115 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 year ended
December 31, 1997 amounted to $557,479.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $78,175 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $1,567 in
transfer agent credits. The transfer agent expense in the Statement of
Operations is net of these credits.
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 $1,414
Meeting Fee $109/meeting
Committee Meeting Fee $65/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 agreed to waive 50% of the subadvisory fees payable
to Loomis Sayles by NEFM until June 30, 1997. As a result, during the year
ended December 31, 1997, 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 December 31, 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 YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------------------------- --------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold ........................... 1,180,703 $10,845,790 2,709,896 $26,327,240
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................ 271,485 2,481,709 319,480 3,105,107
---------- ----------- ---------- -----------
1,452,188 13,327,499 3,029,376 29,432,347
Shares repurchased .................... (1,246,613) (11,384,029) (1,278,693) (12,385,135)
---------- ----------- ---------- -----------
Net increase ......................... 205,575 1,943,470 1,750,683 17,047,212
---------- ----------- ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
--------------------------------- --------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ---- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold ........................... 918,809 $8,381,978 2,686,351 $26,155,636
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................ 45,192 413,258 99,615 971,640
---------- ----------- ---------- -----------
964,001 8,795,236 2,785,966 27,127,276
Shares repurchased .................... (261,493) (2,387,050) (403,524) (3,911,480)
---------- ----------- ---------- -----------
Net increase ......................... 702,508 6,408,186 2,382,442 23,215,796
---------- ----------- ---------- -----------
Increase derived from capital shares
transactions ........................ 908,083 $8,351,656 4,133,125 $40,263,008
========== =========== ========== ===========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust II and Shareholders of
NEW ENGLAND HIGH INCOME FUND.
In our opinion, the accompanying statement of assets & liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of New England High Income Fund
("the Fund"), a series of New England Funds Trust II, at December 31, 1997,
and the results of its operations, the changes in its net assets and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles. These financial statements and the financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit which included confirmation of securities owned at December 31,
1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above. The
statement of changes in net assets for the period ended December 31, 1996 and
the financial highlights for each of the periods then ended were audited by
other independent accountants whose report dated February 10, 1997 expressed
an unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 12, 1998
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
Supplement dated March 1, 1998 to the New England Bond Funds Prospectus for
Class A, B and C shares dated May 1, 1997 (as supplemented May 28, 1997, July
28, 1997, November 17, 1997 and January 1, 1998);
FOR BOND FUNDS PROSPECTUS FOR CLASS A, B AND C SHARES ONLY:
Effective March 1, 1998, New England High Income Fund offers Class C shares to
the general public in addition to Class A and Class B shares. Therefore, the
following tables supplement "Annual fund operating expenses" and "Example" in
the "Schedule of Fees" section:
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
NEW ENGLAND HIGH
INCOME FUND****
----------------
CLASS C
-------
Management Fees (in the case of New England High Income
Fund, after voluntary fee waiver and expense reduction) .. 0.45%***
12b-1 Fees ................................................. 1.00%*
Other Expenses ............................................. 0.70%
Total Fund Operating Expenses (in the case of New England
High Income Fund, after voluntary fee waiver and expense
reduction) ............................................... 2.15%***
- ------------
* Because of the higher 12b-1 fees, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by rules of the National Association of Securities Dealers,
Inc.
*** Without the voluntary fee waiver and expense reduction by the Fund's
adviser, Management Fees would be 0.74% for all classes and Total Fund
Operating Expenses would be 1.69% for Class A shares, 2.44% for Class B
shares and 2.44% for Class C shares. These voluntary limitations can be
terminated by the Fund's adviser at any time. See "Fund Management."
**** The expense information contained in this table and its footnotes for New
England High Income Fund has been restated to reflect fees and expenses
currently in effect for this Fund.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) unless otherwise noted, redemption at period end. The 5%
return and expenses in the Example should not be considered indicative of
actual or expected Fund performance or expenses, both of which may be more or
less than those shown.
NEW ENGLAND HIGH
INCOME FUND
----------------
CLASS C
-------
1 year ..................................................... $ 22(2)
3 years .................................................... $ 67
5 years .................................................... $115
10 years* .................................................. $248
- ------------
* Class B shares automatically convert to Class A shares after 8 years;
therefore, Class B amounts are calculated using Class A expenses in years 9
and 10.
In addition, the disclosure that follows for all Funds offering Class C shares
applies to New England High Income Fund.
THE REMAINDER OF THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES:
The cover page of each Prospectus is revised to reflect:
o While no initial sales charge applies to Class B or Class C share purchases,
a contingent deferred sales charge (a "CDSC") is imposed upon certain
redemptions of Class B and Class C shares.
o New England Funds Trust I, New England Funds Trust II and New England Funds
Trust III are referred to in the Prospectus as the "Trusts."
THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE
"SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ
AS FOLLOWS:
CLASS C
-------
Maximum Initial Sales Charge Imposed on a Purchase (as a
percentage of offering price)(2) ......................... None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable)(2) . 1.00%
(2) Does not apply to reinvested distributions.
In the tables that appear under "Example" in the "Schedule of Fees" section,
the expense amounts in the Prospectus for Class C shares for the 1 Year period
assume no redemption. If shares are redeemed at period end, expense amounts
for each Fund would be as follows: New England High Income Fund, $32; New
England Limited Term U.S. Government Fund, $29; New England Strategic Income
Fund, $31; and New England Bond Income Fund, $28.
THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS
REVISED TO READ AS FOLLOWS:
Class C shares are offered at net asset value, without an initial sales
charge, are subject to a 0.25% annual service fee and a 0.75% annual
distribution fee, are subject to a CDSC of 1.00% on redemptions made within
one year from the date of purchase and do not convert into another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such
investment dealer. The Distributor will retain the service and distribution
fees assessed against Class C shares in the first year of investment, and the
entire amount of the CDSC paid by Class C shareholders upon redemption in the
first year, in order to compensate the Distributor for providing distribution-
related services to the Fund in connection with the sale of Class C shares,
and to reimburse the Distributor, in whole or in part, for the commissions
paid (and related financing costs) to investment dealers at the time of a sale
of Class C shares. Unlike Class B shares, there are no conversion features
associated with Class C shares; therefore, if Class C shares are held for more
than eight years Class C shareholders will thereafter be subject to higher
distribution fees than shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of another series of the Trusts. If an exchange is
made to Class C shares of a Money Market Fund, then the one-year holding
period for purposes of determining the expiration of the CDSC will stop and
resumes only when an exchange is made back into Class C shares of a series of
the Trusts. If the Money Market Fund shares are redeemed rather than exchanged
back into a series of the Trusts, then the CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held longest are the first
to be redeemed.
The CDSC on Class C shares is not imposed on shares purchased prior to March
1, 1998.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gain distributions.
The first year of purchase ends one year after the day on which the purchase
was accepted.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested. The CDSC may be
eliminated for certain persons and organizations. See "Sales Charges--General"
below.
THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS--
CLASS C SHARES" IS REVISED TO READ AS FOLLOWS:
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust - Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD
SENTENCE IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
Total return is measured by comparing the value of a hypothetical $1,000
investment in a class at the beginning of the relevant period to the value of
the investment at the end of the period (assuming deduction of the current
maximum sales charge on Class A shares, automatic reinvestment of all
dividends and capital gains distributions and, in the case of Class B and C
shares, imposition of the CDSC relevant to the period quoted).
<PAGE>
- --------------------------------------------------------------------------------
New England Funds
- --------------------------------------------------------------------------------
Stock Funds
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Equity Income Fund
Balanced Fund
International Stock Funds
International Equity Fund
Star Worldwide Fund
Bond Funds
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
Tax Exempt Funds
Municipal Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
Money Market Funds
Cash Management Trust, Money Market Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it is
preceded or accompanied by the Fund's current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
<PAGE>
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