<PAGE>
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SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where the Best Minds Meet(R)
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New England High Income Fund
[Graphic Omitted]
- ---------------------
June 30, 1998
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<PAGE>
August 1998
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
Investors had reason for comfort during the first half of 1998.
After stunning gains in each of the last three years, the stock market behaved
more like its customary self: Major market indicators moved up for a time, slid
back and were once again in recovery mode at the end of the period. This pattern
largely reflected investors' responses to fast-changing events in Asia.
Unpredictable markets call to mind the long-term experience of millions of
mutual fund investors; those of us who held firm to our plans as markets entered
difficult periods were often rewarded as markets recovered. The longer you stay
invested the less interim ups and downs -- here or overseas -- should concern
you.
News from the Far East drove bond market sentiment as well. In the United
States, faltering Asian economies meant lower prices on many imported goods,
putting pressure on prices and corporate earnings. With slower growth now a real
possibility and with little immediate evidence of inflation, the Federal Reserve
Board left short-term interest rates unchanged, while long-term rates fell to
record lows in mid-June.
In the pages that follow, you can read about how your Fund's management dealt
with the disruptions in the Pacific region and their impact on our domestic
economy. But beyond Asia's present problems, and notwithstanding the inevitable
ebb and flow of our own business cycle, there are reasons to be optimistic about
investment prospects over the next several years. For example, vast,
under-served populations in China and elsewhere represent huge potential demand
for consumer goods. Here in the United States, there is the prospect of a
demography-driven spending wave, as millions of baby-boomers enter their peak
consumption years. Events may turn out differently -- volatility will always be
part of investing -- but as much as the markets may waver, the watchwords for
many long-term investors are constant: diversify and persist.
While you are thinking about your investments, take a few minutes to review your
portfolio. It's possible that three years of strong market gains have tilted
your holdings disproportionately toward aggressive stock funds. If so, you and
your financial representative can adjust the balance easily using some of New
England Funds' more conservative equity or bond funds to reallocate your assets
in line with your long-term goals and comfort level. Once you are satisfied with
your portfolio's balance, be sure to stay in touch with your financial
professional, invest regularly and don't try to guess what the market will do
next.
Thank you for your continued support of New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
PREPARING FOR THE YEAR 2000
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New England Funds continues to work to provide high quality service as we move
into the new century. Since last year we have devoted significant resources to
identifying, analyzing and resolving computer issues related to Year 2000. As a
further measure, we have focused on year-end 1998 as a target for preparedness
by vendor and service agency systems that we rely on for support. We expect
major systems to be ready before the end of the year, with a year of quality
assurance to follow.
<PAGE>
NEW ENGLAND HIGH INCOME FUND
INVESTMENT RESULTS THROUGH JUNE 30, 1998
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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.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
[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 6/30/88.
The data points to this chart are as follows:]
JUNE 1988 THROUGH JUNE 1998
COMPARED TO FIRST BOSTON HIGH YIELD INDEX(4) AND THE COST OF LIVING(5)
With First Cost
Maximum Boston of
NAV(1) Sales Charge(2) High Yield(4) Living(5)
- ------------------------------------------------------------------------------
6/30/88 $10,000 $ 9,550 $10,000 $10,000
6/89 $10,561 $10,086 $10,968 $10,517
6/90 $10,584 $10,108 $10,760 $11,008
6/91 $10,771 $10,286 $12,448 $11,525
6/92 $13,472 $12,866 $15,581 $11,881
6/93 $15,614 $14,911 $18,224 $12,237
6/94 $16,268 $15,536 $19,015 $12,542
6/95 $17,146 $16,375 $21,392 $12,923
6/96 $18,712 $17,870 $23,525 $13,279
6/97 $21,811 $20,829 $26,976 $13,584
6/98 $24,260 $23,168 $29,938 $13,796
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 differ from that shown based on differences in inception date, fees and
sales charges. All index and Fund performance assumes reinvested distributions.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
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CLASS A (Inception 2/22/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 3.25% 11.34% 9.24% 9.28%
With Max. Sales Charge(2) -1.41 6.37 8.24 8.78
First Boston High Yield Index(4) 4.31 10.98 10.43 11.59
Lipper High Current Yield Average(6) 4.42 11.45 9.90 10.23
- --------------------------------------------------------------------------------
CLASS B (Inception 9/20/93) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.86% 10.41% 8.78%
With CDSC(3) -2.08 5.41 8.48
First Boston High Yield Index(4) 4.31 10.98 10.44
(calculated from 9/30/93)
Lipper High Current Yield Average(6) 4.42 11.45 9.99
(calculated from 9/30/93)
- --------------------------------------------------------------------------------
CLASS C (Inception 3/2/98) SINCE INCEPTION
Net Asset Value(1) 1.21%
With CDSC(3) 0.22
First Boston High Yield Index(4) 1.77
Lipper High Current Yield Average(6) 1.66
- --------------------------------------------------------------------------------
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
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. CDSC for Class C
shares assumes a maximum 1% sales charge on redemptions within the first
year of purchase.
(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
- --------------------------------------------------------------------------------
[Photo of Gary L. Goodenough]
Gary L. Goodenough
Loomis Sayles & Company, L.P.
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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Q. How did New England High Income Fund perform?
For the six-month period that ended June 30, 1998, the Fund continued to provide
investors a generous level of monthly income. In fact, immediately after the
semiannual reporting period on July 1, the Fund raised its monthly dividend
distribution to $0.075 per share -- the fifth such increase in the past two
years. Total return for the Fund's Class A shares was 3.25% for the six months,
reflecting a $0.12 per share drop in net asset value to $9.82 per share and the
reinvestment of $0.44 per share in dividend distributions.
Q. What was the investment environment during the period?
It was very challenging. At the beginning of 1998, the high-yield bond market
was strong. Interest rates declined, economic growth was solid and U.S. equity
markets made significant gains. During the second quarter of 1998, however,
concerns that Asia's economic problems could eventually dampen corporate
profits, and thereby U.S. economic growth, created uncertainty in the high-yield
marketplace. In addition, investors had to cope with an overabundance of supply.
High-yield investors absorbed $120 billion worth of new bonds in 1997. In 1998,
new issuance is running at a rate that is double 1997's rate of issuance.
High-yield bond prices weakened as the surge in supply outstripped the growth in
demand.
Q. What affected the Fund's performance?
Most investments in the portfolio performed in line with our expectations,
contributing positively to the Fund's performance. The impact of each individual
holding on the total portfolio can be considerable, given our concentrated
investment approach. In other words, each holding will tend to have greater
influence on overall performance -- whether good or bad -- than a more
diversified portfolio stretched across a greater number of holdings. That said,
two sizable holdings worked against the Fund during the period -- Petroleum Heat
& Power Company, the largest oil distributor in the northeast, and Penn-Traffic,
a northeastern supermarket chain. Because of an unusually warm winter, Petroleum
Heat & Power felt the negative effects of the reduced demand for home heating
oil. We eliminated the company from the portfolio because of disappointing
results. In contrast, we retained the Fund's investment in Penn-Traffic, which
has been struggling amidst intense competition in the supermarket industry.
Viewing Penn-Traffic's problems as manageable, we decided to keep it in the
portfolio. We feel the company's new management team, in now for about a year,
has the potential to turn the company around.
Q. What strategies did you use in managing the Fund?
We continued to invest in higher-yielding bonds that had relatively stable
prices. Specifically, we selected bonds of companies that we believe to have
strong balance sheets. In addition, we invested in shorter-term bonds, whose
prices tend to be less volatile than those of longer-term bonds. We also
upgraded the quality of the portfolio by cutting exposure to emerging markets
from 10% to 6% of assets, as the Asian fallout clouded these markets. We
continued to invest selectively in global bond markets but, as usual, eliminated
the risks associated with currency fluctuations by investing only in
U.S.-denominated securities. At the end of the period, the only emerging market
securities in the Fund were U.S. dollar-denominated Mexican bonds. Mexico has
been the strongest of the emerging market countries.
Because the Asian crisis relieved inflationary pressures and slowed economic
growth around the world, we avoided most commodity-based companies, which tend
to do well in an inflationary environment. These included energy, metals, steel
and chemical companies. Because of the flood in supply, we built up the
portfolio's cash position to about 10% of assets. We plan to use this cash in
the coming weeks to take advantage of investment opportunities that may arise.
At the end of the period, the average quality of the portfolio was B.
Q. In what market sectors did you invest?
We invested in several sectors, including cable television, manufacturing,
food-related companies, autos, and telecommunications. At 15% of assets, cable
companies accounted for the largest portion of Fund's portfolio. We favored
these companies for their stable growth characteristics and tendency to be
cash-flow generators. Cable company bonds, especially, performed well and we
believe their long-term outlook is good.
Q. What is your outlook?
We are cautious yet optimistic about the high-yield bond market. We believe the
economy will continue to grow at a moderate rate -- around 2%, which is the
historical norm. We also think that inflation and interest rates will remain
relatively low. In other words, conditions that would be favorable for
high-yield bonds. Meanwhile, given the abundant supply of high-yield bonds,
prices are relatively cheap and yields are high -- especially when compared to
yields of higher-grade corporate bonds and Treasury securities. We believe these
factors contribute to supporting the investment value of high-yield bonds.
Portfolio commentary reflects the conditions and actions taken during the
reporting period, which are subject to change. A shift in opinion may result in
strategic and other portfolio changes.
- ----------------------------------------------------------
CREDIT QUALITY COMPOSITION -- 6/30/98
AAA 10.5%
BB 6.4%
B 76.3%
CCC 4.8%
Other 1.9%
Quality is based on ratings provided by Standard & Poor's.
Portfolio holdings and asset allocations may change.
Average Credit Quality = B
- -----------------------------------------------------------
<PAGE>
<TABLE>
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PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------------------------------
Investments as of June 30, 1998
(unaudited)
BONDS AND NOTES--78.9% OF TOTAL NET ASSETS
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTO PARTS--4.0%
$ 3,580,000 CSK Auto, Inc., 11.000%, 11/01/06 ...................... $ 3,946,950
1,500,000 Delco Remy International, Inc., 10.625%, 8/01/06 ....... 1,620,000
------------
5,566,950
------------
BROADCASTING--10.2%
7,000,000 Century Communications Corp., Zero Coupon, 1/15/08 ..... 3,220,000
8,390,000 Fox Family Worldwide, Inc., 0/10.25% 11/01/07 (c) ...... 5,495,450
3,000,000 FrontierVision Holding, L.P., 0/11.875% 9/15/07 (c) .... 2,385,000
1,250,000 FrontierVision Oper. Partners, L.P., 11.000%, 10/15/06 . 1,392,187
1,500,000 Lenfest Communications, Inc., 10.500%, 6/15/06 ......... 1,755,000
------------
14,247,637
------------
COAL--1.1%
1,500,000 P&L Coal Holdings Corp., 144A, 9.625%, 5/15/08 ......... 1,548,750
------------
ELECTRICAL EQUIPMENT--2.1%
2,750,000 Motors & Gears, Inc., 10.750%, 11/15/06 ................ 2,915,000
------------
ENTERTAINMENT--3.5%
6,000,000 AMF Bowling Worldwide, Inc., 0/12.250% 3/15/06 (c) ..... 4,852,500
------------
ENVIRONMENTAL CONTROL--3.3%
4,600,000 Envirotest Systems Corp., 9.625%, 4/01/03 .............. 4,600,000
------------
FOOD -- RETAILERS/WHOLESALERS--5.9%
2,706,000 Big V Supermarkets, Inc., 11.000%, 2/15/04 ............. 2,841,300
3,300,000 Fleming Companies, Inc., 10.500%, 12/01/04 ............. 3,448,500
5,500,000 Penn Traffic Co., 9.625%, 4/15/05 ...................... 1,952,500
------------
8,242,300
------------
FOREIGN ISSUES--7.0%
1,500,000 Algoma Steel, Inc., 12.375%, 7/15/05 ................... 1,687,500
3,250,000 Altos Hornos de Mexico S.A., 11.875%, 4/30/04 .......... 3,266,250
3,000,000 Grupo Televisa S.A., 0/13.250%, 5/15/08 (c) ............ 2,430,000
3,000,000 Kablemedia Holding GMBL, 0/13.625%, 8/01/06 (c) ........ 2,325,000
------------
9,708,750
------------
INDUSTRIALS--15.0%
3,800,000 Advance Holding Corp., 144A, 0/12.875% 4/15/09 (c) ..... 2,242,000
4,000,000 Allied Waste Industries, Inc., 0/11.300% 6/01/07 (c) ... 2,940,000
3,750,000 Chesapeake Energy Corp., 144A, 9.625%, 5/01/05 ......... 3,778,125
1,190,000 Continental Global Group, Inc., 11.000%, 4/01/07 ....... 1,273,300
5,000,000 Falcon Building Products, Inc., 0/10.500%, 6/15/07 (c) . 3,375,000
4,000,000 RBX Corp., 144A, 12.000%, 1/15/03 ...................... 3,800,000
3,300,000 Stone Container Corp., 12.250%, 4/01/02 ................ 3,382,500
------------
20,790,925
------------
METAL--4.7%
3,000,000 Earle M. Jorgensen, 144A, 9.500%, 4/01/05 .............. 2,910,000
3,400,000 Euramax International PLC, 11.250%, 10/01/06 ........... 3,689,000
------------
6,599,000
------------
MISCELLANEOUS--2.8%
4,000,000 Liberty Group Publishing, Inc., 0/11.625% 2/01/09 (c) .. 2,420,000
1,400,000 Tekni Plex, Inc., 9.250%, 3/01/08 ...................... 1,407,000
------------
3,827,000
------------
RESTAURANTS--3.1%
4,034,342 Advantica Restaurant Group, Inc., 11.250%, 1/15/08 ..... 4,306,660
------------
RETAIL--3.3%
4,250,000 Mothers Work, Inc., 12.625%, 8/01/05 ................... 4,579,375
------------
TELECOMMUNICATION--5.8%
4,000,000 Level 3 Communications, Inc., 144A, 9.125%, 5/01/08 .... 3,915,000
6,350,000 Nextel Communications, Inc., 144A, 0/9.950% 2/15/08 (c). 4,087,813
------------
8,002,813
------------
TRANSPORTATION--4.7%
3,350,000 Greyhound Lines, Inc., 11.500%, 4/15/07 ................ 3,735,250
4,500,000 TFM S.A., 0/11.750% 6/15/09 (c) ........................ 2,790,000
------------
6,525,250
------------
UTILITIES--2.4%
2,993,865 Panda Funding Corp., 11.625%, 8/20/12 .................. 3,278,282
------------
Total Bonds and Notes (Identified Cost $107,347,320) ... 109,591,192
------------
COMMON STOCK--0.1%
SHARES
- ------------------------------------------------------------------------------------------------------
1,237 Mothers Work, Inc. ..................................... $ 8,659
1,750 Ameriking, Inc. (d) .................................... 87,500
------------
Total Common Stock (Identified Cost $81,073) ........... 96,159
------------
PREFERRED STOCK--9.4%
- ------------------------------------------------------------------------------------------------------
25,398 Nebco Evans Holding Co., 14.250, 3/01/08 (pay-in-kind) . 2,596,946
123,938 Anvil Holdings, Inc., 13.000%, 3/15/09(pay-in-kind) .... 3,005,496
28,428 CSC Holdings, Inc., 11.825%, 4/01/01 (pay-in-kind) ..... 3,262,113
15,000 Superior National Capital Trust, 10.750%, 12/01/17 ..... 1,605,000
41,526 Liberty Group Publishing, Inc., 14.750%, 2/01/10 (pay-
in-kind) ............................................... 1,090,058
57,382 Ameriking, Inc. 13.000%, 12/01/08 (pay-in-kind) ........ 1,549,314
------------
Total Preferred Stock (Identified Cost $12,630,826) .... 13,108,927
------------
SHORT TERM INVESTMENT--10.5%
FACE
AMOUNT
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$14,609,000 Repurchase Agreement with State Street Corp. dated
6/30/98 at 5.000% to be repurchased at $14,610,029
on 7/01/98 collateralized by $11,345,000 U.S.
Treasury Bond due 8/15/19 valued at $14,902,588 ...... $ 14,609,000
------------
Total Short Term Investment (Identified Cost
$14,609,000) ......................................... 14,609,000
------------
Total Investments--98.9% (Identified Cost
$134,668,219)(b) ..................................... 137,405,278
Other assets less liabilities .......................... 1,564,755
------------
Total Net Assets--100% ................................. $138,970,033
============
(a) See Note 1a of Notes to the Financial Statements.
(b) Federal Tax Information: At June 30, 1998 the net unrealized
appreciation on investments based on cost for federal income tax
purposes of $134,668,219 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess value over tax cost ................................. $ 4,758,721
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value .............................. (2,021,662)
------------
Net unrealized appreciation ............................................ $ 2,737,059
============
At December 31, 1997 the Fund had a capital loss carryforward 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) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
(d) Non-income producing security.
144A - 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. At the period
end, the value of these securities amounted to $22,281,688 or 16.0% of
net assets.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at value
Securities ................................................. $122,796,278
Repurchase agreements ...................................... 14,609,000
------------
Total Investments at value (Identified cost $134,668,219). 137,405,278
Cash ......................................................... 387
Receivable for:
Fund shares sold ........................................... 521,436
Dividends and interest ..................................... 2,204,039
Miscellaneous .............................................. 1,227
Prepaid registration expense ................................. 4,000
------------
140,136,367
LIABILITIES
Payable for:
Securities purchased ....................................... $201,664
Fund shares redeemed ....................................... 268,555
Dividends declared ......................................... 418,493
Accrued expenses:
Management fees ............................................ 225,418
Deferred trustees' fees .................................... 7,129
Accounting and administrative .............................. 3,037
Other ...................................................... 42,038
--------
1,166,334
------------
NET ASSETS ..................................................... $138,970,033
============
Net Assets consist of:
Capital paid in ............................................ $139,718,120
Undistributed net investment income ........................ 652,795
Accumulated net realized losses ............................ (4,137,941)
Unrealized appreciation on investments ..................... 2,737,059
------------
NET ASSETS ..................................................... $138,970,033
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($79,383,128 divided by 8,087,530 shares of beneficial
interest) .................................................. $9.82
=====
Offering price per share (100/95.50 of $9.82) .................. $10.28*
======
Net asset value and offering price of Class B shares
($56,356,992 divided by 5,743,099 shares of beneficial
interest) .................................................... $9.81**
=====
Net asset value and offering price of Class C shares
($3,229,913 divided by 329,189 shares of beneficial
interest) .................................................... $9.81**
=====
*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.
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
<S> <C> <C>
INVESTMENT INCOME
Dividends .................................................... $ 713,592
Interest ..................................................... 5,894,610
----------
6,608,202
Expenses
Management fees .............................................. $420,894
Service fees - Class A ....................................... 87,401
Service and distribution fees - Class B ...................... 245,940
Service and distribution fees - Class C ...................... 5,067
Trustees' fees and expenses .................................. 5,627
Accounting and administrative ................................ 15,868
Custodian .................................................... 38,869
Transfer agent ............................................... 90,472
Audit and tax services ....................................... 16,265
Legal ........................................................ 1,877
Printing ..................................................... 15,156
Registration ................................................. 17,609
Miscellaneous ................................................ 21,731
--------
Total expenses ............................................... 982,776
----------
Net investment income ........................................ 5,625,426
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
Realized loss on:
Investments - net .......................................... (1,133,393)
Unrealized depreciation on:
Investments - net .......................................... (1,127,831)
----------
Net loss on investment transactions ........................ (2,261,224)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................... $3,364,202
==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 7,024,314 $ 5,625,426
Net realized gain (loss) on investments ................. 1,698,066 (1,133,393)
Unrealized appreciation (depreciation) on investments, .. 2,358,716 (1,127,831)
------------ ------------
Increase in net assets from operations .................. 11,081,096 3,364,202
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (4,574,797) (3,052,211)
Class B ............................................... (2,387,966) (1,964,448)
Class C ............................................... 0 (44,886)
------------ ------------
(6,962,763) (5,061,545)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS .......................................... 40,263,008 35,527,081
------------ ------------
Total increase in net assets .............................. 44,381,341 33,829,738
NET ASSETS
Beginning of the period ................................. 60,758,954 105,140,295
------------ ------------
End of the period ....................................... $105,140,295 $138,970,033
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ....................................... $ 88,914 $ 652,795
============ ============
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------- SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period $ 9.46 $10.06 $ 8.89 $ 8.98 $ 9.42 $ 9.94
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........... 0.90 0.88 0.88 0.84 0.87 0.48
Net Realized and Unrealized Gain
(Loss) on Investments ......... 0.61 (1.19) 0.13 0.44 0.52 (0.16)
------ ------ ------ ------ ------ ------
Total From Investment Operations 1.51 (0.31) 1.01 1.28 1.39 0.32
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment
Income ........................ (0.90) (0.86) (0.88) (0.83) (0.87) (0.44)
Distributions in Excess of Net
Investment Income ............. (0.01) 0.00 (0.04) (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ............. (0.91) (0.86) (0.92) (0.84) (0.87) (0.44)
------ ------ ------ ------ ------ ------
Net Asset Value, End of the
Period ........................ $10.06 $ 8.89 $ 8.98 $ 9.42 $ 9.94 $ 9.82
====== ====== ====== ====== ====== ======
Total Return (%)(b) ............. 16.5 (3.3) 11.8 14.9 15.4 3.3
Ratio of Operating Expenses to
Average Net Assets (%) (a) .... 1.54 1.60 1.60 1.53 1.36 1.32(c)
Ratio of Net Investment Income to
Average Net Assets (%) ........ 9.17 9.18 9.71 9.32 9.03 9.67(c)
Portfolio Turnover Rate (%) ..... 43 33 30 134 99 93(c)
Net Assets, End of the Period
(000) ......................... $31,176 $33,673 $39,148 $42,992 $62,739 $79,383
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. Periods less than one year are not annualized.
(c) Computed on an annualized basis.
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS continued
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B CLASS C
--------------------------------------------------------------------------------------------------- ------------
SEPTEMBER 20,(a) SIX MONTHS MARCH 2(a)
THROUGH YEAR ENDED DECEMBER 31, ENDED THROUGH
DECEMBER 31, ----------------------------------------------------------- JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1998 1998
---------------- --------- -------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period .......... $ 9.87 $10.06 $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 9.96
------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income .... 0.23 0.79 0.83 0.79 0.80 0.44 0.28
Net Realized and Unrealized
Gain (Loss) on
Investments ............ 0.20 (1.18) 0.13 0.42 0.51 (0.16) (0.16)
------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations ... 0.43 (0.39) 0.96 1.21 1.31 0.28 0.12
------ ------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ...... (0.23) (0.78) (0.81) (0.76) (0.80) (0.40) (0.27)
Distributions in Excess of
Net Investment Income .. (0.01) (0.01) (0.05) (0.01) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------
Total Distributions ...... (0.24) (0.79) (0.86) (0.77) (0.80) (0.40) (0.27)
------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of the
Period ....... $10.06 $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 9.81 $ 9.81
====== ====== ====== ====== ====== ====== ======
Total Return (%) (c) ..... 4.4 (4.0) 11.2 14.1 14.4 2.9 1.2
Ratio of Operating Expenses
to Average Net
Assets (%) (b).......... 2.25(d) 2.25 2.25 2.19 2.11 2.07(d) 2.33(d)
Ratio of Net Investment
Income to Average Net
Assets (%) ............. 7.66(d) 8.53 8.96 8.33 8.28 8.92(d) 9.50(d)
Portfolio Turnover Rate (%) 43(d) 33 30 134 99 93(d) 93(d)
Net Assets, End of the
Period (000) ........... $1,232 $5,233 $10,625 $17,767 $42,401 $56,357 $3,230
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>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1998
(unaudited)
1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the trustees to issue an unlimited
number of shares of the Trust in multiple series (each series of shares a
"Fund").
The Fund offers Class A, Class B and Class C shares. The Fund commenced its
public offering of Class C shares on March 2, 1998. 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). Class C shares do not pay a front end 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 and may be subject to a contingent
deferred sales charge if those shares are redeemed within one year. 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. 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,
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, and 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 For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were
$77,592,736 and $53,792,390 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 Nvest Companies,
L.P. ("Nvest"), which is a subsidiary of Metropolitan Life Insurance Company
("MetLife"). Fees earned by NEFM and Loomis Sayles under the management
agreements in effect during the six months ended June 30, 1998 are as follows:
FEES EARNED
-----------
$210,447 NEFM
$210,447 Loomis Sayles
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest
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 six months ended June 30, 1998
these expenses amounted to $15,868 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 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 New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1998, the Fund paid New England Funds $87,401 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 six months
ended June 30, 1998, the Fund paid New England Funds $61,485 and $1,266 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of up to 0.75% of the average
daily net assets attributable to the Fund's Class B and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the six months ended June 30, 1998, the Fund paid New
England Funds $184,455 and $3,801 in distribution fees under the Class B and
Class C Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the six months
ended June 30, 1998 amounted to $411,549.
D. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund. For the six months
ended June 30, 1998, the Fund paid NEFSCO $60,011 as compensation for its
services in that capacity. For the six months ended June 30, 1998, the Fund
received $1,285 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, Nvest, NEFSCO or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $652
Meeting Fee 159/meeting
Annual Committee Member Retainer 98
Annual Committee Chairman Retainer 65
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 agreed to reduce 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 and
Class C average daily net assets. Fund expenses did not exceed the voluntary
limit for the six months ended
June 30, 1998.
5. CONCENTRATION OF CREDIT; LOWER RATED SECURITIES. The Fund invests in
securities offering high current income which generally will be rated below
investment grade by recognized rating agencies. Certain of these lower rated
securities are regarded as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligations and generally involve more credit risk than securities in the
higher rating categories. In addition, the trading market for lower rated
securities may be less liquid than the market for higher-rated securities.
6. CAPITAL SHARES. At June 30, 1998 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 SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
---------------------------- ---------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 2,709,896 $26,327,240 2,568,185 $25,460,847
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 319,480 3,105,107 207,565 2,059,132
--------- ----------- --------- -----------
3,029,376 29,432,347 2,775,750 27,519,979
Shares repurchased ................... (1,278,693) (12,385,135) (1,002,739) (9,917,136)
--------- ----------- --------- -----------
Net increase ......................... 1,750,683 $17,047,212 1,773,011 $17,602,843
========= =========== ========= ===========
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
---------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 2,686,351 $26,155,636 1,850,208 $18,385,617
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 99,615 971,640 87,248 865,309
--------- ----------- --------- -----------
2,785,966 27,127,276 1,937,456 19,250,926
Shares repurchased ................... (403,524) (3,911,480) (463,173) (4,589,462)
--------- ----------- --------- -----------
Net increase ......................... 2,382,442 $23,215,796 1,474,283 $14,661,464
========= =========== ========= ===========
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
---------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................... 0 $ 0 337,319 $ 3,344,232
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 0 0 2,833 27,941
--------- ----------- --------- -----------
0 0 340,152 3,372,173
Shares repurchased ................... 0 0 (10,963) (109,399)
--------- ----------- --------- -----------
Net increase ......................... 0 0 329,189 3,262,774
--------- ----------- --------- -----------
Increase derived from capital shares
transactions ....................... 4,133,125 $40,263,008 3,576,483 $35,527,081
========= =========== ========= ===========
(a) Commencement of operations.
</TABLE>
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by
the Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the potfolio.
DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Bullseye Fund
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
Tax Free Income Fund of New York
Intermediate Term Tax Free Fund of California
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.
New England Funds, L.P., and other firms selling shares of New England Funds
are members of the National Association of Securities Dealers, Inc.
(NASD). As a service to investors, the NASD has asked that we inform you
of the availability of a brochure on its Public Disclosure Program.
The program provides access to information about
securities firms and their representatives. Investors may obtain
a copy by contacting the NASD at 1-800-289-9999 or by
visiting their web site at www.NASDR.com.
<PAGE>
------------------
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NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
---------------------
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