<PAGE>
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ANNUAL 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]
Where
The Best
Minds
Meet(R)
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DECEMBER 31, 1998
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<PAGE>
FEBRUARY 1999
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[Photo of Bruce R. Speca]
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"Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
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In September 1998, I became President of New England Funds. As an 18-year
veteran of the mutual fund industry, I was pleased and honored to accept this
important post. In my first message to you, I hope to present what I believe
you, our valued shareholders, really want to know and to offer it in a
straightforward manner.
How did my fund perform?
There's no question that long-term performance is the bottom line of your
investment program. With that in mind, please review the other sections of this
report. You'll see your fund's performance and commentary from your fund manager
that summarizes the fund's successes and shortcomings and the outlook for the
year ahead.
Our assessment of New England Funds' overall performance in 1998 is that we had
a solid, but not spectacular, year. While extremely pleased with both absolute
and relative returns in many of our stock and bond portfolios, we were
disappointed by the results of those equity funds that pursue a `value' rather
than a `growth' strategy. Value stocks were largely ignored in 1998, as
investors focused on very large, high visibility growth stocks (indeed, 45% of
the gain in the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500")
- - a market value-weighted, unmanaged index of common stock prices for 500
selected stocks - came from just 10 stocks!) and select technology companies.
Much of the underperformance in value-oriented funds can be attributed to market
cycles, but we continue to pursue strategies to increase returns in these funds.
Can the stock market keep going up?
Like any winning streak, sooner or later the market will experience setbacks.
Does that mean 1999 will see the last burst of energy from the bull market? It's
easy to argue both sides of this question. Employment is high, inflation is low
and economic growth is continuing. But corporate profits may start to lag and
commodity prices, notably oil, are depressed around the world. The conclusion?
Economists, like weathermen and other forecasters, can only hope to be right
more often than they are wrong.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
My Own Two Cents
All too often investors lament, "What I could have made if only . . ." instead
of "What I actually made." But experience has taught me that the more important
question is, "Did I stick with my investment program and make progress toward my
financial goals?"
Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score.
The mutual fund industry has become extremely complex, with more funds, new
strategies and approaches to analyzing performance. What hasn't changed is your
financial representative's primary objective: to help you sort it all out and
increase your returns in line with your goals.
Your financial adviser can help you avoid being distracted by the daily noise
and avoid what I view as the most important risk that investors face. It's the
risk of not staying invested and possibly falling short of your long-term goals.
Your adviser will help you stick with your investment program during periods of
uncertainty.
One last thought: All of us at New England Funds appreciate the trust that you
and your representative have placed in us. We look forward to serving you in the
years ahead.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
PROGRESS ON THE Y2K FRONT
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New England Funds has been and continues to engage in initiatives aimed at
having our computer systems tested and ready to function capably for the Year
2000. We are insisting on the same standard from vendors whose systems must
interact reliably with ours as well as from the subadvisers to our funds. We are
monitoring their progress and pursuing assurances of their readiness. Our
systems are being tested on a four-digit format (2000, not 00) and updated as
needed to perform competently. Additionally, we are developing contingency plans
to diminish the possibility of inconvenience related to Year 2000. Stay informed
on our Year 2000 readiness by visiting our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness disclosure pursuant to the Year
2000 Information and Readiness Act.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 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 and does not have expenses that affect the results. It is not possible
to invest directly in an index. In addition, few investors could purchase all of
the securities necessary to match the index and would incur transaction costs
and other expenses even if they could.
In the past, First Boston High Yield Index served as the benchmark for New
England High Income Fund. GOING FORWARD, THE FUND'S PERFORMANCE WILL BE COMPARED
AGAINST A NEW BENCHMARK -- LEHMAN HIGH YIELD COMPOSITE INDEX. While no benchmark
is a perfect match for a managed fund, Lehman High Yield Composite Index better
reflects the bond characteristics that may be represented in the Fund.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares of the New England High Income Fund
compared to the Lehman High Yield Composite Index and the First Boston High
Yield Index from 12/31/88. The data points to this chart are as follows:]
DECEMBER 1988 THROUGH DECEMBER 1998
LEHMAN
1st BOSTON HIGH YIELD
NAV MSC HIGH YIELD COMPOSITE
12/31/88 $10,000 $ 9,550 $10,000 $10,000
/89 $10,331 $ 9,866 $10,039 $10,083
/90 $ 8,965 $ 8,562 $ 9,399 $ 9,116
/91 $12,235 $11,684 $13,510 $13,327
/92 $14,164 $13,527 $15,761 $15,426
/93 $16,504 $15,762 $18,742 $18,065
/94 $15,958 $15,240 $18,560 $17,883
/95 $17,838 $17,035 $21,787 $21,311
/96 $20,496 $19,573 $24,493 $23,898
/97 $23,642 $22,578 $27,587 $26,950
/98 $23,226 $22,180 $27,747 $27,445
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 C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvestment of
distributions.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
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- ----------------------------------------------------------------------------------------------------
CLASS A (Inception 2/22/84) 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Net Asset Value(1) -1.8% 7.1% 8.8%
With Max. Sales Charge(2) -6.2 6.1 8.3
- ----------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B (Inception 9/20/93) 1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1) -2.5% 6.3% 6.8%
With CDSC(3) -7.0 6.0 6.7
- ----------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C (Inception 3/2/98) SINCE INCEPTION
<S> <C>
Net Asset Value(1) -4.1%
With CDSC(3) -5.0
- ----------------------------------------------------------------------------------------------------
<CAPTION>
SINCE FUND'S SINCE FUND'S
CLASS B CLASS C
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C>
Lehman High Yield Composite Index(4) 1.8% 8.7% 10.6% 9.1% -0.5%
First Boston High Yield Index(5) 0.6 8.2 10.7 8.7 -1.9
Lipper High Current Yield Average(5) -2.0 6.7 8.8 7.3 -3.4
Morningstar High Yield Bond Average(7) -0.7 7.3 9.3 8.1 -3.3
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</TABLE>
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. All Index and Fund performance assumes reinvestment of
distributions. 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 performance 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 Sale Charge (CDSC) for Class B shares performance
assumes that a maximum 5% sales charge is applied to redemptions. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares. CDSC for Class C share performance assumes a maximum 1%
sales charge on redemptions within the first year of purchase.
(4) Lehman High Yield Composite Index is an unmanaged index of fixed rate,
noninvestment-grade, coupon-bearing bonds with an outstanding par value of
at least $100 million. The Index performance has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments. Investors cannot purchase an index
directly. Class B since inception return is calculated from 9/30/93. Class C
since inception return is calculated from 2/28/98.
(5) First Boston High Yield Index is an unmanaged index of bonds issued by U.S.
corporations rated below investment-grade by Standard & Poor's Ratings Group
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. Investors cannot purchase an
index directly. Class B since inception return is calculated from 9/30/93.
Class C since inception return is calculated from 2/28/98.
(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, Inc., an independent
mutual fund ranking service. Class B since inception return is calculated
from 9/30/93. Class C since inception return is calculated from 2/28/98.
(7) Morningstar High Yield Bond 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 Morningstar Inc. Class B
since inception return is calculated from 9/30/93. Class C since inception
return is calculated from 2/28/98.
<PAGE>
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NEW ENGLAND HIGH INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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[Photo of Gary L. Goodenough]
Gary L. Goodenough
Loomis Sayles &
Company, L.P.
Q. How did New England High Income Fund perform over the past 12 months?
For the 12-month period ending December 31, 1998, New England High Income Fund
continued to provide shareholders with a steady stream of income. In fact, over
the past year, we raised the Fund's monthly dividend distribution two times. At
the end of the period, the monthly distribution for Class A shares was 7.5 cents
per share. This increase marks the fourth time the Fund's monthly income has
been raised since I became portfolio manager in July 1996. Of course, past
performance doesn't guarantee future results. Total return for the Fund's Class
A shares at net asset value was -1.8% for the 12 months ending December 31,
1998.
Q.What was the investment environment like during the period?
It was a Jekyll and Hyde environment. The first six months of 1998 provided
an excellent backdrop for high-yield bonds. Economic growth was strong, stock
prices rose significantly and interest rates declined. In addition, there was an
abundance of new bond issuance. This oversupply kept bond prices low and yields
on high-yield bonds at very attractive levels. Later in the year, however, the
environment changed. In August, Russia defaulted on its foreign debt, setting
off a wave of selling in riskier markets. As a result, stocks, investment-grade
bonds, high-yield bonds and emerging market securities declined significantly in
value. Only U.S. Treasury securities benefited in this environment. As investors
embarked on a "flight-to-quality" they generally sold what they believed to be
riskier holdings and sought the quality, liquidity and relative credit safety of
U.S. Treasuries.
Q. How did you manage the Fund in this environment?
We continued to use proprietary research developed by Loomis Sayles analysts
to focus on fixed-income securities with improving credit quality and high
yields. This research-intensive process anchors all of our strategic investment
decisions, including individual bond selection. Our fixed-income research goes
beyond that of most major credit rating agencies to identify and anticipate
changes in credit quality. Over time, as the credit quality of a bond is
upgraded, we hope to earn price gains as the credit improvement is recognized by
the marketplace. This strategy has worked well for the Fund since Loomis Sayles
assumed management in July 1996.
In June 1998, issuance of new high-yield securities was running at an
extraordinarily high pace. High-yield bond prices weakened -- and yields climbed
- -- as the surge in supply outstripped the growth in demand. We began to feel
that there was too much exuberance in the high-yield bond market. Because of the
flood in supply, we raised the Fund's cash position to 15% of assets. We planned
to use this cash to take advantage of new investment opportunities as they
arose. As investors sold their bond holdings later in the summer, bond prices
declined, and we used the cash to purchase higher yielding bonds at relatively
low prices. We also lengthened the Fund's duration to 5.4 years from 4.7 years
at the beginning of the period. Duration measures a bond's price sensitivity to
interest rate changes. In general, the longer a bond's duration, the greater the
potential for price appreciation when interest rates fall and, conversely, the
greater the risk of price loss when interest rates rise.
Q. What investments helped the Fund the most?
Nearly all of the Fund's holdings performed well and contributed positively to
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 portfolio invested in a greater number of bonds.
CREDIT QUALITY COMPOSITION -- 12/31/98
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[graphic omitted]
AAA 3.5%
BB 8.8%
B 80.1%
CCC 6.6%
Other 1.0%
Quality is based on ratings provided by Standard & Poor's.
Portfolio holdings and asset allocations may change.
AVERAGE CREDIT QUALITY = B
That said, investments in two areas were particularly beneficial for the Fund:
cable television and auto parts. The cable industry is large and growing, while
individual cable companies have the potential to expand both their subscriber
bases and the types of services they offer customers. Cable companies also tend
to be cash flow generators in that they receive strong and steady cash flows
from their subscribers each month. In addition, they are resistant to economic
slowdowns and currently have no exposure to Russia, Asia or other world trouble
spots. The Fund's cable company holdings include Lenfest Communications, Century
Communications and Kabelmedia Holding, a German company. In the auto parts area,
we invested in Delco Remy International, an auto parts manufacturer, as well as
CSK Auto and Advance Holding Corp., two auto parts retailers. Auto parts
companies are benefiting from industry consolidation, which typically results in
reduced costs, greater productivity and profitability. Investor sentiment took
another turn in the fourth quarter of 1998. Lower interest rates and a
moderation in the global crisis began to relieve investor concerns, unleashing
demand for higher yielding fixed-income investments. While bond yields remained
low by historical standards, they did rise somewhat, pushing bond prices lower.
Q. What other factors affected the Fund's performance?
The Fund's performance was held back by two investments: Petroleum Heat
and Power, the largest oil distributor in the Northeast, and Penn-Traffic, a
northeastern supermarket chain. Petroleum Heat and Power was negatively impacted
by a decline in demand for heating oil. We have eliminated the company from the
portfolio because of disappointing results. We continue to hold Penn-Traffic,
however, which is reorganizing its capital structure. The company also has a new
management team, which we feel has the potential to turn the company around.
Q. What portion of the Fund's assets were invested overseas?
During the year, we continued to invest selectively in global markets, focusing
on higher-yielding bonds that had relatively stable prices. Specifically, we
selected bonds of companies that we believe to have strong balance sheets. We
found many such bonds in overseas markets, for example in Canada, England,
Germany and Mexico. At the end of the period, our foreign holdings accounted for
18% of the Fund's assets. Given our customary attention to price stability, we
invested in U.S. dollar-denominated foreign securities to eliminate the risks
associated with currency fluctuations.
Q. What is your outlook for the next few months?
We are cautiously optimistic. Looking ahead there are several positives for the
high-yield market but also a degree of uncertainty. On the positive side, yields
on virtually all other financial assets pale in comparison to those of
high-yield bonds. As a result, investors looking for high income have few
attractive investment alternatives. We believe the bonds of carefully chosen
companies should perform well as long as the domestic economy continues to grow.
U.S. economic growth, however, is influenced by the global economy -- and there
are still unresolved issues in markets around the world. For example, we
continue to be concerned about further fallout from the Asian economic and
financial crises. Early in 1999, Brazil allowed its currency to be devalued. We
are monitoring the situation. Such a devaluation could reverberate throughout
global markets and have a negative effect on Latin America, U.S. exports and the
profits of U.S. companies. We believe it will be a volatile year for high-yield
bonds. But yields remain at attractive levels and may help offset some of the
price volatility.
The opinions expressed are those of the portfolio manager and are subject to
change. The occurrence of forecasted events and predictions is not certain and
cannot be assured. The Fund may invest in foreign and emerging market
securities, which can involve special risks. Investments in lower-rated,
higher-yielding bonds may involve greater credit risk. See the Fund's prospectus
for more complete information.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1998
BONDS AND NOTES--87.7%
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- ------------------------------------------------------------------------------------------
AUTO PARTS--6.3%
<C> <S> <C>
$ 5,300,000 Advance Holding Corp., 144A, 0/12.875% 4/15/2009 (d) ... $ 3,074,000
4,000,000 CSK Auto, Inc., 11.000%, 11/01/2006 ..................... 4,220,000
1,500,000 Delco Remy International, Inc., 10.625%, 8/01/2006 ...... 1,597,500
------------
8,891,500
------------
BROADCASTING--10.8%
7,000,000 Century Communications Corp., Zero Coupon, 1/15/2008 .... 3,535,000
8,390,000 Fox Family Worldwide, Inc., 0/10.25% 11/01/2007 (d) .... 5,327,650
4,000,000 FrontierVision Holding L.P., 0/11.875% 9/15/2007 (d) ... 3,360,000
2,540,000 Lenfest Communications, Inc., 10.500%, 6/15/2006 ........ 2,971,800
------------
15,194,450
------------
ELECTRICAL EQUIPMENT--2.0%
2,750,000 Motors & Gears, Inc., 10.750%, 11/15/2006 ............... 2,818,750
------------
ENTERTAINMENT--2.4%
6,000,000 AMF Bowling Worldwide, Inc., 0/12.250% 3/15/2006 (d) ... 3,450,000
------------
EQUIPMENT--2.5%
3,500,000 United Rentals, Inc., 9.250%, 1/15/2009 ................. 3,526,250
------------
FOOD -- RETAILERS/WHOLESALERS--3.6%
846,000 Big V Supermarkets, Inc., 11.000%, 2/15/2004 ............ 867,150
4,000,000 Fleming Companies, Inc., 10.500%, 12/01/2004 ............ 3,800,000
5,500,000 Penn Traffic Co., 9.625%, 4/15/2005 ..................... 412,500
------------
5,079,650
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FOREIGN ISSUES--17.7%
3,500,000 Algoma Steel, Inc., 12.375%, 7/15/2005 .................. 2,660,000
3,250,000 Altos Hornos de Mexico S.A., 11.875%, 4/30/2004 ......... 1,885,000
4,500,000 Grupo Televisa S.A., 0/13.250%, 5/15/2008 (d) .......... 3,262,500
3,500,000 ICO Global Commerce, 15.000%, 8/01/2005 ................. 2,625,000
5,000,000 Kabelmedia Holding GMBH, 0/13.625% 8/01/2006 (d) ....... 4,100,000
1,000,000 NTL, Inc., 7.000%, 12/15/2008 ........................... 1,080,000
3,500,000 NTL, Inc., 11.500%, 10/01/2008 .......................... 3,753,750
2,000,000 Republic of Korea, 8.875%, 4/15/2008 .................... 2,057,500
6,500,000 TFM S.A., 0/11.750% 6/15/2009 (d) ...................... 3,493,750
------------
24,917,500
------------
INDUSTRIALS--10.2%
3,040,000 Continental Global Group, Inc., 11.000%, 4/01/2007 ...... 2,599,200
5,000,000 Falcon Building Products, Inc., 0/10.500%, 6/15/2007 (d). 2,950,000
1,500,000 P&L Coal Holdings Corp., 144A, 9.625%, 5/15/2008 ........ 1,526,250
4,000,000 RBX Corp., 144A, 12.000%, 1/15/2003 ..................... 3,240,000
4,000,000 Stone Container Corp., 12.750%, 4/01/2002 ............... 4,020,000
------------
14,335,450
------------
MANUFACTURING--1.0%
1,400,000 Tekni Plex, Inc., 9.250%, 3/01/2008 ..................... 1,463,000
------------
METAL--6.0%
3,000,000 Earle M Jorgenson Co., 144A, 9.500%, 4/01/2005 .......... 2,760,000
3,400,000 Euramax International plc, 11.250%, 10/01/2006 .......... 3,400,000
2,500,000 Weirton Steel Corp., 11.375%, 7/01/2004 ................. 2,262,500
------------
8,422,500
------------
PUBLISHING--1.6%
4,000,000 Liberty Group Publishing, Inc., 0/11.625% 2/01/2009 (d) 2,220,000
------------
RESTAURANTS--4.6%
4,534,342 Advantica Restaurant Group, Inc., 11.250%, 1/15/2008 .... 4,534,342
2,000,000 Dominos, Inc., 10.375%, 1/15/2009 ....................... 2,010,000
------------
6,544,342
------------
RETAIL--3.1%
4,250,000 Mothers Work, Inc., 12.625%, 8/01/2005 .................. 4,356,250
------------
TELECOMMUNICATION--11.0%
5,700,000 Intermedia Communications, Inc., 0/11.250%
7/15/2007 (d) ......................................... 3,876,000
5,000,000 Level 3 Communications, Inc., 144A, 9.125%, 5/01/2008 ... 4,950,000
7,350,000 Nextel Communications, Inc., 144A, 0/9.950%
2/15/2008 (d) ......................................... 4,391,625
4,000,000 RCN Corp., 0/11.250% 10/15/2007 (d) .................... 2,320,000
------------
15,537,625
------------
TRANSPORTATION--2.7%
3,350,000 Greyhound Lines, Inc., 11.500%, 4/15/2007 ............... 3,802,250
------------
UTILITIES--2.2%
2,993,865 Panda Funding Corp., 11.625%, 8/20/2012 ................. 3,158,528
------------
Total Bonds and Notes (Identified Cost $132,634,536) .... 123,718,045
------------
COMMON STOCK--0.0%
SHARES
- -----------------------------------------------------------------------------------------
1,750 Ameriking, Inc. (c) ..................................... 70,000
1,237 Mothers Work, Inc. ...................................... 15,462
------------
Total Common Stock (Identified Cost $81,073) .... 85,462
------------
PREFERRED STOCK--7.2%
SHARES DESCRIPTION VALUE (a)
- ----------------------------------------------------------------------------------------
61,171 Ameriking, Inc. 13.000%, 12/01/2008 (pay-in-kind) ..... $ 1,559,861
132,123 Anvil Holdings, Inc., 13.000%, 3/15/2009 (pay-in-kind) 1,321,230
30,030 CSC Holdings, Inc., 11.125%, 4/01/2001 (pay-in-kind) .. 3,355,852
44,644 Liberty Group Publishing, Inc., 14.750%, 2/01/2010 (pay-
in-kind) ............................................ 1,127,261
26,846 Nebco Evans Holding Co., 11.250%, 3/01/2008 (pay-in-kind) 1,342,300
15,000 Superior National Capital Trust, 10.750%, 12/01/2017 .. 1,485,000
------------
Total Preferred Stock (Identified Cost $13,313,137) ... 10,191,504
------------
SHORT TERM INVESTMENT--3.3%
FACE
AMOUNT
- -----------------------------------------------------------------------------------------
$ 4,605,000 Repurchase Agreement with State Street Bank and Trust Co.
dated 12/31/1998 at 4.000% to be repurchased at
$4,607,047 on 1/04/1999, collateralized by $3,450,000
U.S. Treasury Bond, at 8.125%, due 8/15/2019 valued at
$4,714,836 .......................................... 4,605,000
-----------
Total Short Term Investment (Identified Cost $4,605,000) 4,605,000
-----------
Total Investments--98.2% (Identified Cost $150,633,746)
(b) .................................................. 138,600,011
Other assets less liabilities .......................... 2,477,397
-----------
Total Net Assets -- 100% ............................. $141,077,408
============
(a)See Note 1a of Notes to the Financial Statements.
(b)Federal Tax Information: At December 31, 1998 the net unrealized
depreciation on investments based on cost for federal income tax
purposes of $150,790,835 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess value over tax cost .................. $ 3,082,730
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............... (15,273,554)
------------
Net unrealized depreciation ..................................... $(12,190,824)
============
At December 31, 1998, the Fund had a capital loss carryover of
$2,319,996 of which $1,300,610 expires on December 31, 1999 and
$1,019,386 expires on December 31, 2004. This may be available to
offset future realized capital gains, if any, to the extent
provided by regulations.
(c)Non-income producing security.
(d)Step Bond: Coupon rate is zero or below market for an initial
period and then increases to a higher coupon rate at a specified
date and rate.
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 $19,941,875 or 14.1% of
net assets.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value (Identified cost $150,633,746) ........ $138,600,011
Cash ....................................................... 485
Receivable for:
Fund shares sold ......................................... 548,383
Dividends and interest ................................... 2,551,766
Miscellaneous ............................................ 10,666
------------
141,711,311
LIABILITIES
Payable for:
Fund shares redeemed ..................................... 241,152
Dividends declared ....................................... 210,885
Accrued expenses:
Management fees .......................................... 84,064
Deferred trustees' fees .................................. 7,549
Accounting and administrative ............................ 3,563
Other .................................................... 86,690
-------
633,903
------------
NET ASSETS ................................................... $141,077,408
============
Net Assets consist of:
Capital paid in .......................................... $155,495,002
Undistributed net investment income ...................... 93,225
Accumulated net realized gains (losses) .................. (2,477,084)
Unrealized appreciation (depreciation) on investments .... (12,033,735)
------------
NET ASSETS ................................................... $141,077,408
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($73,022,790 divided by 8,245,626 shares of beneficial
interest) ................................................ $8.86
=====
Offering price per share (100/95.50 of $8.86) ................ $9.28*
=====
Net asset value and offering price of Class B shares
($60,322,478 divided by 6,813,034 shares of beneficial
interest) ................................................ $8.85**
=====
Net asset value and offering price of Class C shares
($7,732,140 divided by 873,422 shares of beneficial
interest) ................................................ $8.85**
=====
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Dividends ................................................ $ 1,481,292
Interest ................................................. 12,816,148
------------
14,297,440
Expenses
Management fees ........................................ $ 899,082
Service fees - Class A ................................. 179,478
Service and distribution fees - Class B ................ 533,715
Service and distribution fees - Class C ................ 32,112
Trustees' fees and expenses ............................ 10,746
Accounting and administrative .......................... 37,309
Custodian .............................................. 79,179
Transfer agent ......................................... 199,143
Audit and tax services ................................. 36,600
Legal .................................................. 6,756
Printing ............................................... 30,599
Registration ........................................... 41,179
Miscellaneous .......................................... 38,332
----------
Total expenses ........................................... 2,124,230
------------
Net investment income .................................... 12,173,210
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on:
Investments - net ...................................... 335,405
Unrealized appreciation (depreciation) on:
Investments - net ...................................... (15,898,625)
------------
Net gain (loss) on investment transactions ............... (15,563,220)
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .... $ (3,390,010)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ -----------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 7,024,314 $ 12,173,210
Net realized gain (loss) on investments ................. 1,698,066 335,405
Unrealized appreciation (depreciation) on investments ... 2,358,716 (15,898,625)
------------ ------------
Increase (decrease) in net assets from operations ....... 11,081,096 (3,390,010)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (4,574,797) (7,027,707)
Class B ............................................... (2,387,966) (4,862,222)
Class C ............................................... 0 (325,721)
------------ -----------
(6,962,763) (12,215,650)
------------ -----------
Increase (decrease) in net assets derived from
capital share transactions ............................ 40,263,008 51,542,773
------------ -----------
Total increase (decrease) in net assets ................... 44,381,341 35,937,113
NET ASSETS
Beginning of the year ................................... 60,758,954 105,140,295
------------ -----------
End of the year ......................................... $105,140,295 $141,077,408
============ ===========
UNDISTRIBUTED NET INVESTMENT INCOME
End of the year ......................................... $ 88,914 $ 93,225
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Year ....... $10.06 $ 8.89 $ 8.98 $ 9.42 $ 9.94
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........................ 0.88 0.88 0.84 0.87 0.92
Net Realized and Unrealized Gain (Loss) on
Investments ................................ (1.19) 0.13 0.44 0.52 (1.08)
------ ------ ------ ------ ------
Total From Investment Operations ............. (0.31) 1.01 1.28 1.39 (0.16)
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ..... (0.86) (0.88) (0.83) (0.87) (0.92)
Distributions in Excess of Net Investment
Income ..................................... 0.00 (0.04) (0.01) 0.00 0.00
------ ------ ------ ------ ------
Total Distributions .......................... (0.86) (0.92) (0.84) (0.87) (0.92)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ............. $ 8.89 $ 8.98 $ 9.42 $ 9.94 $ 8.86
====== ====== ====== ====== ======
Total Return (%) (b) ......................... (3.3) 11.8 14.9 15.4 (1.8)
Ratio of Operating Expenses to Average Net
Assets (%) (a) ............................. 1.60 1.60 1.53 1.36 1.32
Ratio of Net Investment Income to Average Net
Assets (%) ................................. 9.18 9.71 9.32 9.03 9.81
Portfolio Turnover Rate (%) .................. 33 30 134 99 75
Net Assets, End of the Year (000) ............ $33,673 $39,148 $42,992 $62,739 $73,023
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 (%) ............................ 1.83 1.72 1.69 -- --
(b) A sales charge is not reflected in total return calculations.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
CLASS B -----------
-------------------------------------------------------------------------------- MARCH 2(a)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------------------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- --------
Net Asset Value, Beginning of
<S> <C> <C> <C> <C> <C> <C>
the Period .................. $10.06 $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 9.96
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income ......... 0.79 0.83 0.79 0.80 0.85 0.69
Net Realized and Unrealized
Gain (Loss) on Investments .. (1.18) 0.13 0.42 0.51 (1.08) (1.08)
------ ------ ------ ------ ------ ------
Total From Investment
Operations .................. (0.39) 0.96 1.21 1.31 (0.23) (0.39)
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ........... (0.78) (0.81) (0.76) (0.80) (0.85) (0.72)
Distributions in Excess of Net
Investment Income ........... (0.01) (0.05) (0.01) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ........... (0.79) (0.86) (0.77) (0.80) (0.85) (0.72)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.85
====== ====== ====== ====== ====== ======
Total Return (%) (c) .......... (4.0) 11.2 14.1 14.4 (2.5) (4.1)
Ratio of Operating Expenses to
Average Net Assets (%) (b) .. 2.25 2.25 2.19 2.11 2.07 2.07(d)
Ratio of Net Investment Income
to Average Net Assets (%) ... 8.53 8.96 8.33 8.28 9.06 9.06(d)
Portfolio Turnover Rate (%) ... 33 30 134 99 75 75
Net Assets, End of Period (000) $5,233 $10,625 $17,767 $42,401 $60,322 $7,732
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 ratios 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 (%) 2.48 2.37 2.35 -- -- --
(c) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
(d) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
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 is 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 year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were
$133,806,246 and $87,862,345, 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 0.60% 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"), formerly known as New England Investment Companies, L.P.,
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 year ended December 31, 1998 are as follows:
FEES EARNED
-----------
$449,541 NEFM
$449,541 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 year ended December 31, 1998 these
expenses amounted to $37,309 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 year
ended December 31, 1998, the Fund paid New England Funds $179,478 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, 1998, the Fund paid New England Funds $133,429 and $8,028 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 year ended December 31, 1998, the Fund paid New
England Funds $400,286 and $24,084 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, 1998 amounted to $702,760.
D. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund and Boston Financial
Data Services serves as a sub-transfer agent for the Fund. For the year ended
December 31, 1998, the Fund paid NEFSCO $128,571 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $2,706 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 $791
Meeting Fee 152/meeting
Annual Committee Member Retainer 119
Annual Committee Chairman Retainer 79
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 Fund's Class B and
Class C average daily net assets. Fund expenses did not exceed the voluntary
limit for the year ended December 31, 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 higher
rating categories. In addition, the trading market for lower rated securities
may be less liquid than the market for higher-rated securities.
6. CAPITAL SHARES. At December 31, 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 YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------ --------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------- ------- ------ --------
<S> <C> <C> <C> <C>
Shares sold .......................... 2,709,896 $26,327,240 4,316,954 $41,369,578
Shares issued in connection with
the reinvestment of:
Distributions from net investment
income ............................. 319,480 3,105,107 489,352 4,590,373
---------- ----------- ---------- -----------
3,029,376 29,432,347 4,806,306 45,959,951
Shares repurchased ................... (1,278,693) (12,385,135) (2,875,199) (27,066,913)
---------- ----------- ---------- -----------
Net increase ......................... 1,750,683 $17,047,212 1,931,107 $18,893,038
---------- ----------- ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------ --------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------- ------- ------ --------
<S> <C> <C> <C> <C>
Shares sold .......................... 2,686,351 $26,155,636 3,594,978 $34,287,485
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 99,615 971,640 220,663 2,062,737
---------- ----------- ---------- -----------
2,785,966 27,127,276 3,815,641 36,350,222
Shares repurchased ................... (403,524) (3,911,480) (1,271,423) (11,923,785)
---------- ----------- ---------- -----------
Net increase ......................... 2,382,442 $23,215,796 2,544,218 $24,426,437
---------- ----------- ---------- -----------
<CAPTION>
FOR THE PERIOD
MARCH 2, 1998(a)
YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------ --------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- -------- ------- ------ --------
<S> <C> <C> <C> <C>
Shares sold .......................... 0 $ 0 950,221 $ 8,920,617
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 0 0 20,306 184,670
---------- ----------- ---------- -----------
0 0 970,527 9,105,287
Shares repurchased ................... 0 0 (97,105) (881,989)
---------- ----------- ---------- -----------
Net increase ......................... 0 0 873,422 8,223,298
---------- ----------- ---------- -----------
Increase derived from capital shares
transactions ....................... 4,133,125 $40,263,008 5,348,747 $51,542,773
========= =========== ========= ===========
(a) Commencement of operations.
</TABLE>
7. LINE OF CREDIT. The Fund along with the other portfolios that comprise
the New England Funds (the "Funds") participate in a $100,000,000 committed
line of credit provided by Citibank, N.A. under a credit agreement (the
"Agreement") dated March 5, 1998. Advances under the Agreement are taken
primarily for temporary or emergency purposes. Borrowings under the Agreement
bear interest at a rate tied to one of several short-term rates that may be
selected from time to time. In addition, the Funds are charged a facility fee
equal to 0.07% per annum on the unused portion of the line of credit. The
annual cost of maintaining the line of credit and the facility fee is
apportioned pro rata among the participating Funds. There were no borrowings
as of or during the period ended December 31, 1998.
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of New England Funds Trust II and the Shareholders of
NEW ENGLAND HIGH INCOME FUND
In our opinion, the accompanying statement of assets and 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 the New England High Income
Fund (the "Fund"), a series of New England Funds Trust II, at December 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and 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 audits. We conducted our
audits 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 audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW ENGLAND MUNICIPAL INCOME FUND
SUPPLEMENT DATED JANUARY 18, 1999
TO NEW ENGLAND BOND FUNDS CLASS A, B AND C PROSPECTUS DATED MAY 1, 1998
Effective January 1999, James S. Welch has replaced Nathan R. Wentworth as
portfolio manager of New England Municipal Income Fund. Mr. Welch is a Senior
Vice President of Back Bay Advisors and has been employed by the firm for over
five years. He also serves as the portfolio manager of New England
Intermediate Term Tax Free Fund of California, New England Massachusetts Tax
Free Income Fund and New England Tax Free Income Fund of New York and as co-
portfolio manager of New England Limited Term U.S. Government Fund.
NEW ENGLAND GOVERNMENT SECURITIES FUND
AND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
SUPPLEMENT DATED FEBRUARY 12, 1999 TO
NEW ENGLAND BOND FUNDS CLASS A, B AND C SHARES AND CLASS Y SHARES
PROSPECTUSES DATED MAY 1, 1998
The following supplements the third paragraph in the "Fund Management" section
of each Prospectus:
Effective immediately, Joel A. Damiani acts as lead portfolio manager and
Scott A. Millimet acts as co-portfolio manager of the Government Securities
Fund, and Mr. Millimet acts as lead portfolio manager and Mr. Damiani acts as
co-portfolio manager of the Limited Term U.S. Government Fund.
<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
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth Opportunities Fund
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free Fund of California
Tax Free Income Fund of New York
(formerly Intermediate Term Tax Free Fund of NY)
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust
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 800-289-9999 or by visiting their Web site at www.NASDR.com.
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399 Boylston Street
Boston, Massachusetts
02116
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