<PAGE>
ANNUAL REPORT
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[logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Growth Opportunities Fund
[Graphic Omitted]
DECEMBER 31, 1997
<PAGE>
February 1998
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"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
[Photo]
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]
1995 o 1996 o 1997
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>
NEW ENGLAND GROWTH OPPORTUNITIES FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 1997
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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.
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares since 12/31/87, compared to the S&P 500
Index. The data points from the graph are as follows:]
Growth of a $10,000 Investment in Class A Shares
DECEMBER 1987 THROUGH DECEMBER 1997
NAV MSC S&P 500
12/31/1987 $10,000 $ 9,425 $10,000
1988 $10,981 $10,350 $11,650
1989 $14,013 $13,207 $15,330
1990 $13,416 $12,644 $14,852
1991 $17,523 $16,515 $19,358
1992 $19,149 $18,048 $20,831
1993 $20,671 $19,482 $22,927
1994 $20,876 $19,675 $23,239
1995 $28,207 $26,585 $31,939
1996 $33,061 $31,160 $39,253
1997 $44,114 $41,577 $52,328
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 and Class C 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.
NEW ENGLAND GROWTH OPPORTUNITIES FUND
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/97
- --------------------------------------------------------------------------------
CLASS A (Inception 5/6/31) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 33.43% 18.16% 16.00%
With Max. Sales Charge(2) 25.73 16.77 15.31
Standard & Poor's 500 Index(4) 33.31 20.22 18.00
Lipper Growth & Income Avg.(5) 26.99 17.53 15.72
CLASS B (Inception 9/13/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 32.44% 27.44% 18.75%
With CDSC(3) 27.44 26.82 18.49
Standard & Poor's 500 Index(4) 33.31 31.08 21.81
Lipper Growth & Income Avg.(5) 26.99 26.48 18.48
(calculated from 9/30/93)
CLASS C (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 32.63% 25.98%
Standard & Poor's 500 Index(4) 33.31 29.61
Lipper Growth & Income Avg.(5) 26.99 25.35
(calculated from 4/30/95)
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
their original cost.
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 5.75% 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) Standard & Poor's Composite Index of 500 Stocks(R) (S&P 500) is an unmanaged
index representing the performance of 500 major companies, most of which are
listed on the New York Stock Exchange. The S&P 500 performance has not been
adjusted for ongoing management, distribution and operating expenses and
sales charges applicable to mutual fund investments.
(5) Lipper Growth & Income 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 GROWTH OPPORTUNITIES FUND
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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Q. Please tell us about New England Growth Opportunities Fund's 1997
performance.
[Photo of Gerald Scriver]
Gerald Scriver
Westpeak Investment Advisors, L.P.
The Fund produced a one-year total return through December 31, 1997 of 33.43%
(Class A shares at net asset value), which is significantly better than the
average 26.99% return of the Fund's 624 peers in the Lipper Growth and Income
Fund category. The Fund's return reflects a $1.48 per share gain in net asset
value to $15.35 per share and the reinvestment of $2.99 per share in
distributions.
For 1997, the Fund's Class B and C shares had total returns (based on net asset
value) of 32.44% and 32.63%, respectively. Morningstar, an independent mutual
fund rating organization, recognized this solid performance in awarding the
Fund's Class B shares a 4-star rating, the second highest available.
Q. What was the investment environment like?
The growing economy that greeted 1997 provided an ideal environment for
equities. As more and more corporations reported earnings above analysts'
expectations, the markets gathered momentum and moved higher. But as
institutional investors looked ahead, they grew wary that the Federal Reserve
Board might undertake a series of interest rate increases aimed at forestalling
possible inflation by restraining the economy's rate of expansion. Therefore,
investors concentrated on a limited number of large-capitalization companies
that seemed positioned to do well in a slower economy. In reality, inflation
rose only modestly and the Fed boosted rates just once, by a quarter of a
percentage point increase in March.
Fears of a downturn abated by mid-year, prompting investors to cast a wider,
more aggressive net. Smaller- and mid-sized growth stocks began to move up, and
many small-company market averages outperformed the large-company-dominated S&P
500 -- at least for a time. Then, when the currency crisis in Southeast Asia
unsettled the region's equity markets, investors changed focus again, backing
away from the smaller- and mid-sized segments to return to the largest, most
liquid companies.
Q. Given this environment, what was your strategy during the year?
In the first half of the year, we established a portfolio structure that was
more oriented toward value than the S&P 500 Index. We emphasized large-company
stocks with low price-to-earnings ratios, a measure of a stock's price relative
to the issuing company's earning power.
In the third quarter we tilted the Fund's portfolio mix a little more toward
growth stocks, paring back the percentage of the portfolio devoted to companies
with low price/earnings ratios. We also increased the Fund's orientation toward
smaller companies.
In terms of specific sectors, the portfolio's technology exposure, which was
about equal to the S&P 500's allocation at the end of 1996, was slightly
underweight by the end of 1997. Also at year-end, we were over- represented in
utilities, relative to the Index.
Q. What were some of the factors that affected performance, either positively or
negatively?
The conservative structure we created early in the year rewarded shareholders,
as stocks with modest valuations outperformed the usual growth sectors of the
market. We also took advantage of the market's second and third quarter shift
toward growth, and to smaller- and mid-sized growth companies in particular.
Performance might have been even stronger had we taken a larger position in the
top tier of large-cap issues, the group that accounted for a disproportionate
part of the market's rise during the first half of the year.
The portfolio benefited from positions in some of the regional Bells,
NationsBank, where we took profits early, and IBM. On the other hand, Loew's
Corporation did poorly because of its association with the tobacco industry,
although the company is also involved in other businesses.
Top Ten Portfolio Holdings -- 12/31/97
% of
Company Net Assets
------------------------------------------
1. Ameritech Corp. 2.85
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2. Ford Motor Co. 2.50
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3. Schering-Plough Corp. 2.47
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4. Unilever NV, 144A 2.46
------------------------------------------
5. Bell Atlantic Corp. 2.45
------------------------------------------
6. General Motors Corp. 2.40
------------------------------------------
7. AirTouch Communications, Inc. 2.03
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8. Exxon Corp. 2.01
------------------------------------------
9. Payless ShoeSource, Inc. 1.97
------------------------------------------
10. IPALCO Enterprises 1.86
Portfolio holdings and asset allocations will vary.
Q. What is your market outlook, and what does it imply for the Fund?
Earnings surprises -- corporate earnings reports that come in lower or higher
than analysts' expectations -- are one of the elements in our stock evaluation
model. Whereas in the first half of 1997 surprises were predominantly positive,
later in the year we began to see results coming in below Wall Street's
projections. That trend could continue in 1998, especially if our expectation of
slower growth for the economy is accurate. But we also think that continued low
inflation and further declines in interest rates will offset the effect that
lower corporate profits have on the stock market. Historically, most market
declines have been driven by higher interest rates; a market decline during a
period of falling interest rates is an unlikely prospect, in our opinion. In
part, we believe that inflation will be held in check by faltering economies in
Southeast Asia, where weak local currencies and the strong dollar could drive
down prices on the billions of dollars in goods that American companies import
each year. A deflationary price trend would build sentiment for a possible
easing of short-term interest rates by the Federal Reserve Board, which in turn
could be a stimulus to stock prices.
We plan to stay fully invested, with the goal of adding value through our
proprietary value/growth research and stock selection discipline.
Morningstar proprietary ratings reflect risk-adjusted performance through
12/31/97, and are subject to change every month. Past performance is no
guarantee of future results. Morningstar ratings are calculated from the Fund's
three year return (with fee adjustments) in excess of 90-day Treasury bill
returns, and a risk factor that reflects fund performance below 90-day treasury
bill returns. The Fund received 4 stars for the three year period. It was rated
among 2,332 funds for the three year period.
<PAGE>
PORTFOLIO COMPOSITION
Investments as of December 31, 1997
COMMON STOCK--98.0% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
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AEROSPACE--1.7%
7,800 Thiokol Corp. ................................. $ 633,750
62,400 United Technologies Corp. ..................... 4,543,500
------------
5,177,250
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AIRLINES--2.9%
29,000 AMR Corp. (c) ................................. 3,726,500
35,700 UAL Corp. (c) ................................. 3,302,250
31,500 US Airways Group, Inc. (c) .................... 1,968,750
------------
8,997,500
------------
APPAREL & TEXTILES--0.1%
9,000 Jones Apparel Group, Inc. (c) ................. 387,000
------------
AUTOMOTIVE--5.8%
158,600 Ford Motor Co. ................................ 7,721,837
122,000 General Motors Corp. .......................... 7,396,250
44,300 Lear Corp. (c) ................................ 2,104,250
25,400 Navistar International Corp. (c) .............. 630,238
------------
17,852,575
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BANKS--5.9%
26,500 BankAmerica Corp. ............................. 1,934,500
24,900 Bankers Trust New York Corp. .................. 2,799,694
77,500 Barnett Banks, Inc. ........................... 5,570,312
28,300 NationsBank Corp. ............................. 1,720,994
69,100 Popular, Inc. ................................. 3,420,450
24,800 Republic New York Corp. ....................... 2,831,850
------------
18,277,800
------------
BUSINESS SERVICES--0.5%
41,700 Robert Half International, Inc. (c) ........... 1,668,000
------------
CHEMICALS--1.3%
9,300 Dow Chemical Co. .............................. 943,950
79,000 Lubrizol Corp. ................................ 2,913,125
------------
3,857,075
------------
COMPUTER SOFTWARE & SERVICES--2.6%
14,400 Cadence Design Systems, Inc. (c) .............. 352,800
54,000 Compuware Corp. (c) ........................... 1,728,000
11,600 Keane, Inc. (c) ............................... 471,250
35,700 Microsoft Corp. (c) ........................... 4,614,225
37,000 Symantec Corp. (c) ............................ 811,687
------------
7,977,962
------------
COMPUTERS & BUSINESS EQUIPMENT--4.0%
39,250 Compaq Computer Corp. ......................... 2,215,172
79,100 Digital Equipment Corp., Rights (c) ........... 2,926,700
32,800 EMC Corp. (c) ................................. 899,950
36,500 International Business Machines ............... 3,816,531
42,400 Iomega Corp. (c) .............................. 527,350
42,300 Lexmark International Group, Inc. (c) ......... 1,607,400
5,100 Sun Microsystems, Inc. (c) .................... 203,363
------------
12,196,466
------------
CONSTRUCTION--0.5%
23,800 Centex Corp. .................................. 1,497,913
------------
CONSUMER DURABLES--0.2%
9,200 HON Industries, Inc. .......................... 542,800
------------
DRUGS--7.2%
19,100 Amgen, Inc. ................................... 1,033,787
38,600 Bristol-Myers Squibb Co. ...................... 3,652,525
32,600 Cardinal Health, Inc. ......................... 2,449,075
48,200 Dura Pharmaceuticals, Inc. (c) ................ 2,211,175
22,900 Merck & Co. ................................... 2,433,125
76,700 Mylan Labs, Inc. .............................. 1,605,906
109,770 PharMerica, Inc. (c) .......................... 1,138,864
122,800 Schering-Plough Corp. ......................... 7,628,950
------------
22,153,407
------------
ELECTRIC UTILITIES--4.5%
50,800 AES Corp. (c) ................................. 2,368,550
27,700 American Electric Power, Inc. ................. 1,430,013
136,600 IPALCO Enterprises ............................ 5,728,662
105,500 Pinnacle West Capital Corp. ................... 4,470,562
------------
13,997,787
------------
ELECTRONICS--1.5%
18,500 Intel Corp. ................................... 1,299,625
13,100 Motorola, Inc. ................................ 747,519
15,600 Raychem Corp. ................................. 671,775
7,779 Raytheon Co. .................................. 383,602
33,800 SCI Systems, Inc. (c) ......................... 1,472,412
3,700 Tellabs, Inc. (c) ............................. 195,638
------------
4,770,571
------------
FINANCE--5.0%
30,300 American Express Co. .......................... 2,704,275
67,436 Bear Stearns Companies, Inc. .................. 3,203,210
9,400 Donaldson, Lufkin & Jenrette, Inc. ............ 747,300
18,900 Franklin Resources, Inc. ...................... 1,643,119
58,500 Lehman Brothers Holdings, Inc. ................ 2,983,500
7,200 Merrill Lynch & Company, Inc. ................. 525,150
26,400 Morgan Stanley Dean Witter .................... 1,560,900
38,400 Travelers Group, Inc. ......................... 2,068,800
------------
15,436,254
------------
FOOD & BEVERAGES--5.4%
35,270 Archer-Daniels-Midland Co. .................... 764,918
47,600 Interstate Bakeries ........................... 1,779,050
23,800 Kellogg Co. ................................... 1,181,075
66,800 Quaker Oats Co. ............................... 3,523,700
18,600 Sara Lee Corp. ................................ 1,047,413
35,750 Tyson Foods, Inc. ............................. 732,875
121,600 Unilever NV, 144A (d) ......................... 7,592,400
------------
16,621,431
------------
GAS & PIPELINE UTILITIES--1.4%
52,700 Columbia Gas Systems, Inc. .................... 4,140,244
4,400 IPL Energy, Inc ............................... 198,000
------------
4,338,244
------------
HEALTH CARE--2.3%
241,200 Beverly Enterprises, Inc. (c) ................. 3,135,600
19,300 Johnson & Johnson ............................. 1,271,387
60,400 Wellpoint Health Networks, Inc. (c) ........... 2,551,900
------------
6,958,887
------------
HOTELS & RESTAURANTS--0.1%
8,100 Promus Hotel Corp. ............................ 340,200
------------
INSURANCE--4.9%
56,100 Allstate Corp. ................................ 5,098,087
13,600 AMBAC, Inc. ................................... 625,600
13,900 American National Insurance Co. ............... 1,292,700
31,600 CIGNA Corp. ................................... 5,468,775
52,000 Everest Reinsurance Holdings, Inc. ............ 2,145,000
6,400 MGIC Investment Corp. ......................... 425,600
------------
15,055,762
------------
INTERNATIONAL OIL--3.4%
42,800 Chevron Corp. ................................. 3,295,600
101,400 Exxon Corp. ................................... 6,204,412
15,000 Mobil Corp., Rights ........................... 1,082,813
------------
10,582,825
------------
MEDIA & ENTERTAINMENT--4.2%
30,300 Chancellor Media Corp. (c) .................... 2,261,137
47,300 Clear Channel Communications (c) .............. 3,757,394
85,600 Jacor Communications, Inc. (c) ................ 4,547,500
40,500 Time Warner, Inc. ............................. 2,511,000
------------
13,077,031
------------
METAL--0.5%
26,100 Phelps Dodge Corp. ............................ 1,624,725
------------
MORTGAGE--0.5%
27,200 Federal National Mortgage Association ......... 1,552,100
------------
OIL -- REFINING & DISTRIBUTION--0.7%
34,900 Coastal Corp. ................................. 2,161,619
------------
OIL SERVICES--2.3%
16,400 BJ Services Co. (c) ........................... 1,179,775
9,800 ENSCO International, Inc. ..................... 328,300
40,300 Global Marine, Inc. (c) ....................... 987,350
35,900 Smith International, Inc. (c) ................. 2,203,362
12,100 Tidewater, Inc., Rights ....................... 667,013
67,100 Union Texas Petroleum Holdings, Inc. .......... 1,396,519
9,100 Weatherford Enterra, Inc. (c) ................. 398,125
------------
7,160,444
------------
PAPER & FOREST PRODUCTS--1.3%
7,100 Bowater, Inc. ................................. 315,506
31,100 Champion International Corp. .................. 1,409,219
34,400 Fort James Corp. .............................. 1,315,800
19,000 Rayonier, Inc. ................................ 808,688
------------
3,849,213
------------
PRODUCER GOODS--6.1%
113,000 Caterpillar, Inc. ............................. 5,487,562
10,400 Cummins Engine, Inc. .......................... 614,250
9,600 Illinois Tool Works, Inc. ..................... 577,200
114,450 Ingersoll-Rand Co. ............................ 4,635,225
48,800 Lucent Technologies, Inc. ..................... 3,897,900
29,000 Precision Castparts Corp. ..................... 1,749,063
50,000 Timken Co. .................................... 1,718,750
------------
18,679,950
------------
PUBLISHING--1.3%
17,600 Central Newspapers, Inc. ...................... 1,301,300
32,200 McGraw-Hill Companies, Inc. ................... 2,382,800
10,000 Meredith Corp. ................................ 356,875
------------
4,040,975
------------
RAILROADS & EQUIPMENT--0.5%
48,000 Kansas City Southern Industries, Inc. ......... 1,524,000
------------
RETAIL--6.8%
12,100 CompUSA, Inc. (c) ............................. 375,100
53,100 Costco Companies, Inc. (c) .................... 2,369,587
25,300 Dayton Hudson Corp. ........................... 1,707,750
96,200 Fred Meyer, Inc. (c) .......................... 3,499,275
61,200 General Nutrition Companies, Inc. (c) ......... 2,080,800
28,900 Home Depot, Inc. .............................. 1,701,488
90,800 Payless ShoeSource, Inc. (c) .................. 6,094,950
42,800 Tiffany & Co. ................................. 1,543,475
42,400 Wal-Mart Stores, Inc. ......................... 1,672,150
------------
21,044,575
------------
RETAIL -- FOOD & DRUG--0.3%
15,100 Safeway, Inc. (c) ............................. 955,075
------------
SAVINGS & LOAN--1.2%
125,400 Dime Bancorp, Inc. ............................ 3,793,350
------------
SERVICES--0.1%
13,000 Cendant Corp. (c) ............................. 446,875
------------
STEEL--1.3%
128,400 USX-U.S. Steel Group .......................... 4,012,500
------------
TELECOMMUNICATION--9.4%
150,900 AirTouch Communications, Inc. (c) ............. 6,271,781
7,400 ALLTEL Corp. .................................. 303,863
109,200 Ameritech Corp. ............................... 8,790,600
83,100 Bell Atlantic Corp. ........................... 7,562,100
48,600 BellSouth Corp. ............................... 2,736,787
39,000 MCI Communications Corp. ...................... 1,669,687
34,900 U.S. West Communications Group ................ 1,574,863
------------
28,909,681
------------
TOBACCO--0.3%
24,800 Universal Corp. ................................ 1,019,900
------------
Total Common Stocks (Identified Cost
$249,769,172) ................................ 302,539,722
------------
SHORT TERM INVESTMENT--1.8%
FACE
AMOUNT DESCRIPTION VALUE (a)
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$5,462,000 Repurchase Agreement with State Street
Bank & Trust Co. dated 12/31/97 at 5.00% to be
repurchased at $5,463,517 on 1/02/98
collateralized by $5,430,000 U.S. Treasury
Note 5.875% due 1/31/99 with a value of
$5,571,967 .................................. $ 5,462,000
------------
Total Short Term Investment (Identified Cost
$5,462,000) ................................. 5,462,000
------------
Total Investments--99.8% (Identified Cost
$255,231,172) (b) ........................... 308,001,722
Other assets less liabilities ................. 711,047
------------
Total Net Assets--100% ........................ $308,712,769
============
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1997 the net
unrealized appreciation on investments based on cost of
$255,264,469 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $ 56,883,377
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (4,146,124)
------------
Net unrealized appreciation ................................ $ 52,737,253
============
(c) Non-income producing security.
(d) Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
See accompanying notes to financial statements
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
December 31, 1997
ASSETS
Investments at value ........................ $308,001,722
Receivable for:
Fund shares sold .......................... 893,172
Dividends and interest .................... 323,085
Prepaid registration expense ................ 14,000
------------
309,231,979
LIABILITIES
Payable for:
Due to custodian bank ..................... $116,597
Fund shares redeemed ...................... 123,914
Withholding Taxes ......................... 2,751
Accrued expenses:
Management fees ........................... 174,367
Deferred trustees' fees ................... 12,237
Accounting and administrative ............. 4,094
Other ..................................... 85,250
--------
519,210
------------
NET ASSETS .................................... $308,712,769
============
Net Assets consist of:
Capital paid in ........................... $243,099,477
Overdistributed net investment income ..... (5,113)
Accumulated net realized gains ............ 12,847,855
Unrealized appreciation on investments .... 52,770,550
------------
NET ASSETS .................................... $308,712,769
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($220,912,379 divided by 14,388,146
shares of beneficial interest) .............. $15.35
======
Offering price per share (100/94.25 of $15.35) $16.29*
======
Net asset value and offering price of Class B
shares ($81,065,839 divided by 5,304,921
shares of beneficial interest) .............. $15.28**
======
Net Asset value and offering price of Class C
shares ($6,734,551 divided by 440,771
shares of beneficial interest) .............. $15.28
======
Identified cost of investments ................ $255,231,172
============
* Based upon single purchases of less than $50,000.
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 ............................... $ 4,306,594(a)
Interest ................................ 193,160
------------
4,499,754
Expenses
Management fees ....................... $1,809,523
Service fees - Class A ................ 487,914
Service and distribution fees - Class B 626,147
Service and distribution fees - Class C 52,226
Trustees' fees and expenses ........... 21,110
Accounting and administrative ......... 47,565
Custodian ............................. 99,701
Transfer agent ........................ 490,872
Audit and tax services ................ 27,510
Legal ................................. 10,779
Printing .............................. 44,825
Registration .......................... 51,296
Miscellaneous ......................... 18,561
----------
Total Expenses .......................... 3,788,029
------------
Net investment income ................... 711,725
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on Investments - net ...... 52,507,998
Unrealized appreciation on Investments - 20,723,726
------------
Net gain on investment transactions ..... 73,231,724
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $73,943,449
===========
(a) Net of foreign taxes of: $48,017.
See accompanying notes to financial statements
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
------------ ----------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 1,534,989 $ 711,725
Net realized gain on investments ........................ 42,996,716 52,507,998
Unrealized appreciation (depreciation) on investments ... (12,326,308) 20,723,726
------------ ------------
Increase in net assets from operations .................. 32,205,397 73,943,449
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (1,516,167) (742,082)
Class B ............................................... (104,841) (21,007)
Class C ............................................... (7,388) (7,712)
Net realized gain on investments
Class A ............................................... (27,979,217) (35,442,350)
Class B ............................................... (7,295,607) (12,117,349)
Class C ............................................... (769,349) (1,087,638)
------------ ------------
(37,672,569) (49,418,138)
------------ ------------
Increase in net assets derived from capital share
transactions .......................................... 38,773,337 66,455,566
------------ ------------
Total increase in net assets ............................ 33,306,165 90,980,877
NET ASSETS
Beginning of the year ..................................... 184,425,727 217,731,892
------------ ------------
End of the year ........................................... $217,731,892 $308,712,769
============ ============
UNDISTRIBUTED/(OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the year ................................... $ 95,891 $ 2,484
============ ============
End of the year ......................................... $ 2,484 $ (5,113)
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
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 ... $12.20 $12.67 $12.41 $14.39 $13.87
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................ 0.21 0.22 0.18 0.13 0.07(c)
Net Realized and Unrealized Gain
(Loss) on Investments .............. 0.75 (0.10) 4.01 2.07 4.40
------ ------ ------ ------ ------
Total From Investment Operations ..... 0.96 0.12 4.19 2.20 4.47
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income . (0.21) (0.21) (0.18) (0.13) (0.06)
Distributions in Excess of Net
Investment Income .................. (0.01) 0.00 0.00 0.00 0.00
Distributions From Net Realized
Capital Gains ...................... (0.27) (0.17) (2.03) (2.59) (2.93)
------ ------ ------ ------ ------
Total Distributions .................. (0.49) (0.38) (2.21) (2.72) (2.99)
------ ------ ------ ------ ------
Net Asset Value, End of Year ......... $12.67 $12.41 $14.39 $13.87 $15.35
====== ====== ====== ====== ======
Total Return (%)(a) .................. 8.0 1.0 35.1 17.2 33.4
Ratio of Operating Expenses to Average
Net Assets (%) ..................... 1.21 1.28 1.38 1.30 1.25
Ratio of Net Investment Income to
Average Net Assets (%) ............. 1.70 1.75 1.31 0.92 0.46
Portfolio Turnover Rate (%) .......... 4 6 69 127 103
Average Commission Rate (b) .......... -- -- -- $0.0348 $0.0334
Net Assets, End of Year (000) ........ $109,168 $104,081 $150,693 $166,963 $220,912
(a) A sales charge is not reflected in total return calculations.
(b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades upon which commissions are charged. This rate generally does not reflect
mark- ups, mark-downs, or spreads on shares traded on a principal basis.
(c) Per share net investment income has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------
SEPTEMBER 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------
1993 1994 1995 1996 1997
-------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period .......................... $12.95 $12.66 $12.42 $14.40 $13.87
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) ...... 0.06 0.16 0.10 0.03 (0.05)(e)
Net Realized and Unrealized Gain
(Loss) on Investments ........... 0.01 (0.09) 4.01 2.07 4.40
------ ------ ------ ------ ------
Total From Investment Operations .. 0.07 0.07 4.11 2.10 4.35
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income .......................... (0.03) (0.14) (0.10) (0.04) (0.01)
Distributions in Excess of Net
Investment Income ............... (0.06) (0.00) (0.00) (0.00) 0.00
Distributions From Net Realized
Capital Gains ................... (0.27) (0.17) (2.03) (2.59) (2.93)
------ ------ ------ ------ ------
Total Distributions ............... (0.36) (0.31) (2.13) (2.63) (2.94)
------ ------ ------ ------ ------
Net Asset Value, End of Period .... $12.66 $12.42 $14.40 $13.87 $15.28
====== ====== ====== ====== ======
Total Return (%)(c) ............... 0.6 0.6 34.3 16.3 32.4
Ratio of Operating Expenses to
Average Net Assets (%) .......... 2.08(b) 1.93 2.11 2.05 2.00
Ratio of Net Investment Income to
Average Net Assets (%) .......... 0.71(b) 1.10 0.56 0.17 (0.29)
Portfolio Turnover Rate (%) ....... 4 6 69 127 103
Average Commission Rate (d) ....... -- -- -- $0.0348 $0.0334
Net Assets, End of Period (000) ... $1,498 $5,185 $29,026 $46,856 $81,066
(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.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades upon which commissions are charged. This rate generally does not reflect
mark-ups, mark-downs, or spreads on shares traded on a principal basis.
(e) Per share net investment income (loss) has been calculated using the average shares outstanding during the
year.
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------
MAY 1(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1995 1996 1997
------------- ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .............. $13.84 $14.39 $13.85
------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) ...................... 0.06 0.04 (0.05)(e)
Net Realized and Unrealized Gain (Loss) on
Investments ..................................... 2.58 2.05 4.42
------ ------ ------
Total From Investment Operations .................. 2.64 2.09 4.37
------ ------ ------
Less Distributions
Dividends From Net Investment Income .............. (0.06) (0.04) (0.01)
Distributions From Net Realized Capital Gains ..... (2.03) (2.59) (2.93)
------ ------ ------
Total Distributions ............................... (2.09) (2.63) (2.94)
------ ------ ------
Net Asset Value, End of Period .................... $14.39 $13.85 $15.28
====== ====== ======
Total Return (%)(c) ............................... 20.2 16.3 32.6
Ratio of Operating Expenses to Average Net
Assets (%) ...................................... 2.11(b) 2.05 2.00
Ratio of Net Investment Income to Average Net
Assets (%) ...................................... 0.56(b) 0.17 (0.29)
Portfolio Turnover Rate (%) ....................... 69 127 103
Average Commission Rate (d) ....................... -- $0.0348 $0.0334
Net Assets, End of Period (000) ................... $4,707 $3,912 $6,735
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its
average commission rate per share for trades upon which commissions are charged. This rate
generally does not reflect mark-ups, mark-downs, or spreads on shares traded on a principal
basis.
(e) Per share net investment income (Loss) has been calculated using the average shares
outstanding during the year.
</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 (the "Trust"), a
Massachusetts business trust, 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 such series of shares a
"Fund").
The Fund offers Class A, Class B and Class C shares. The Fund commenced its
public offering of Class B shares on September 13, 1993 and Class C Shares on
May 1, 1995. Class A shares are sold with a maximum front end sales charge of
5.75%. 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 other class of shares, but they do pay a higher ongoing distribution fee
than Class A shares. Expenses of the Fund are borne pro-rata by the holders of
each class 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. 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 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 and distributions
are recorded on the ex-dividend date. 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. 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 Fund for the year ended December 31, 1997 were $280,841,142 and
$266,029,521, 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, 0.65% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Westpeak Investment Advisors, L.P. at the rate of 0.50% of the first $25
million of the Fund's average daily net assets, 0.40% of the next $75 million,
0.35% of the next $100 million and 0.30% of such assets in excess of $200
million. Certain officers and directors of NEFM are also officers or trustees
of the Fund. NEFM and Westpeak Investment Advisors, L.P. are wholly owned
subsidiaries of New England Investment Companies, L.P. ("NEIC"), which is a
subsidiary of Metropolitan Life Insurance Company ("Met Life"). Fees earned by
NEFM and Westpeak Investment Advisors, L.P. under the management agreement in
effect during the year ended December 31, 1997 are as follows:
FEES EARNED
- -----------
$845,514 New England Funds Management, L.P.
$964,009 Westpeak Investment Advisors, L.P.
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 Fund's
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting and financial reporting
functions and 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 $47,565 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $357,341 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $5,145 in
transfer agent credits. The transfer agent expense in the Statement of
Operations is net of these credits.
D. 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 Plans relating to the Fund's
Class B and Class C shares (the "Class B and Class C Plans").
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 the 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 $487,914 in fees
under the Class A Plan.
Under the Class B and Class C Plans, the Fund pays New England Funds a monthly
service fee at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class 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 providing personal services to investors in Class B and Class C
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1997, the Fund paid New England Funds $156,537 and $13,056 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C 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 and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the year ended December 31, 1997, the Fund paid New
England Funds $469,610 and $39,170 in distribution fees under the Class B and
Class C Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1997 amounted to $604,269.
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 $2,091
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
Committee Chairman Retainer $92/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 been, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At December 31, 1997 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class C capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------- --------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,731,542 $25,137,040 2,089,570 $32,195,156
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 87,661 1,231,609 39,664 614,423
Distributions from net realized gain 1,854,127 24,119,428 2,099,575 31,028,150
--------- ----------- --------- -----------
3,673,330 50,488,077 4,228,809 63,837,729
Shares repurchased ................... (2,107,684) (30,109,879) (1,875,250) (29,197,625)
--------- ----------- --------- -----------
Net increase ........................ 1,565,646 $20,378,198 2,353,559 $34,640,104
--------- ----------- --------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------- --------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,344,894 $19,592,194 1,627,496 $25,245,821
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 6,654 92,398 1,973 30,758
Distributions from net realized gain 526,406 6,846,049 781,695 11,519,364
--------- ----------- --------- -----------
1,877,954 26,530,641 2,411,164 36,795,943
Shares repurchased ................... (516,163) (7,464,628) (484,221) (7,468,164)
--------- ----------- --------- -----------
Net increase ........................ 1,361,791 $19,066,013 1,926,943 $29,327,779
--------- ----------- --------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------- --------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold .......................... 406,039 $ 5,734,515 740,016 $11,332,702
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 724 10,172 166 2,597
Distributions from net realized gain 50,246 651,884 71,295 1,050,610
--------- ----------- --------- -----------
457,009 6,396,571 811,477 12,385,909
Shares repurchased ................... (501,555) (7,067,445) (653,225) (9,898,226)
--------- ----------- --------- -----------
Net increase (decrease) .............. (44,546) $ (670,874) 158,252 $ 2,487,683
--------- ----------- --------- -----------
Increase derived from capital shares
transactions ....................... 2,882,891 $38,773,337 4,438,754 $66,455,566
========= =========== ========= ===========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of New England Funds Trust II and Shareholders of
NEW ENGLAND GROWTH OPPORTUNITIES 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 Growth Opportunities
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, 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 these statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 12, 1998
<PAGE>
NEW ENGLAND FUNDS
Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for
Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997,
November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus
for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997,
July 28, 1997, November 17, 1997 and January 1, 1998); and the New England
Equity Income Fund Prospectus for Class A, B and C shares dated September 1,
1997 (as supplemented November 17, 1997 and January 1, 1998).
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 Capital Growth Fund, $33; New
England Balanced Fund, $31; New England International Equity Fund, $35; New
England Value Fund, $31; New England Growth Opportunities Fund, $31; New
England Star Advisers Fund, $35; New England Star Worldwide Fund, $44; New
England Star Small Cap Fund, $38; New England Equity Income Fund, $33.
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 Funds 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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Boston, Massachusetts
02116
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MUTUAL FUND
SERVICE AWARD
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HONORS COMMITMENT TO:
INVESTORS
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