<PAGE>
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SEMIANNUAL REPORT
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[LOGO]
New England Funds(R)
Where The Best Minds Meet(R)
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New England Limited Term
U.S. Government Fund
[graphic omitted]
WHERE
THE BEST
MINDS
MEET(R)
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June 30, 1999
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<PAGE>
August 1999
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[Photo of Bruce R. Speca]
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"MOST INVESTMENT PROFESSIONALS I KNOW AGREE THAT PROPER ASSET ALLOCATION IS A
BEDROCK PRINCIPLE OF SOUND INVESTING."
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Dear Shareholder,
Performance results for the New England Family of Funds were driven mainly by
two important changes that took place in our financial markets during the first
half of 1999. First, the long, upward climb of large-capitalization stocks
slowed dramatically as attention turned to stocks with more reasonable
valuations. Then, bond investors grew fearful that our persistently strong
economy would lead the Federal Reserve Board to impose higher interest rates.
Your manager's commentary on the following pages details how these trends
affected your fund's strategy and performance.
As I watch investments come in and out of favor, I'm reminded of the importance
of asset allocation - the practice of dividing your portfolio among different
kinds of stocks and bonds. The idea is to own more or less of each investment
type according to your feelings about risk and your investment time horizon.
Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing. In addition to broadening diversification,
it seeks to avoid exposure to narrow market segments and can help reduce
volatility.
While a diversified portfolio may have given solid returns during the past year,
many investors were disappointed when they compared those returns to the
performance of large-company growth stocks or to the soaring returns of Internet
stocks. Suddenly, investors were asking: Is asset allocation dead?
Certainly not! Like so much in life, market cycles are inevitable. Different
categories of investments will be popular at different times, and a sensible
asset allocation program can help you as market trends change. I know it can be
tempting to jump on a bandwagon and go after "easy money." But I encourage you,
instead, to maintain a rational, long-term perspective and to consult your
financial representative regularly to review and fine-tune your investments,
including a well-diversified asset allocation program.
Thank you for your continued interest. We look forward to helping you achieve
your long-term financial objectives.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
<PAGE>
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NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1999
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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 below 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 has no 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.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
JUNE 1989 THROUGH JUNE 1999
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares since 6/30/89 compared to the Lehman
Intermediate Government Bond Index. The data points from the graph are as
follows:]
LEHMAN
NET MAXIMUM INTERMEDIATE
ASSET SALES GOVERNMENT
VALUE(1) CHARGE(2) BOND INDEX(4)
- --------------------------------------------------------------------------------
6/89 10,000 9,700 10,000
6/90 10,886 10,559 10,773
6/91 11,929 11,571 11,907
6/92 13,401 12,999 13,438
6/93 14,516 14,080 14,787
6/94 14,445 14,011 14,760
6/95 15,531 15,065 16,199
6/96 16,154 15,669 17,023
6/97 17,141 16,627 18,205
6/98 18,447 17,893 19,730
6/99 18,856 18,291 20,604
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B, C and Y share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvestment of
distributions.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
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NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 6/30/99
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CLASS A (Inception 1/3/89) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) -1.2% 2.2% 5.5% 6.6%
With Maximum Sales Charge(2) -4.1 -0.8 4.8 6.2
- --------------------------------------------------------------------------------
CLASS B (Inception 9/24/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) -1.6% 1.6% 4.8% 3.6
With CDSC(3) -6.4 -3.3 4.5 3.4
- --------------------------------------------------------------------------------
CLASS C (Inception 12/30/94) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) -1.6% 1.6% 5.2%
With CDSC(3) -2.5 0.6 5.2
- -------------------------------------------------------------------------------
CLASS Y (Inception 3/31/94) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) -1.0% 2.7% 5.9% 5.5%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS B CLASS C CLASS Y
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPT. INCEPT. INCEPT.
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Interm. Gov't. Bond Index(4) -0.5% 4.4% 6.9% 7.5% 5.5% 7.5% 6.4%
Lipper Short Int. U.S. Gov't. Average(5) -0.4 3.3 5.9 6.8 4.6 6.2 5.4
Morningstar Short Gov't. Average(6) 0.3 3.5 5.6 6.6 4.6 6.2 5.2
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Chart
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. Class Y shares are available to certain institutional investors
only.
(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.
Returns would have been lower had sales charges been reflected.
(2)With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 3.00% at the time of
purchase of Class A shares.
(3)With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment
of all distributions and, for Class B shares, assumes that a maximum 5.00%
sales charge is applied to redemptions. The sales charge will decrease over
time, declining to zero six years after the purchase of shares. With CDSC
performance for Class C shares assumes a maximum 1.00% sales charge on
redemptions within the first year of purchase.
(4)Lehman Intermediate Government Bond Index is an unmanaged index of bonds
issued by the U.S. government and its agencies having maturities between one
and ten years. The index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments. It is not possible to invest directly in an
index. Class B since inception return is calculated from 9/30/93.
(5)Lipper Short Intermediate U.S. Government Average is an average (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.
(6)Morningstar Short Government Average is an average (calculated on the basis
of net asset value) of funds with similar investment objectives as calculated
by Morningstar, Inc., an independent mutual fund ranking service. Class B
since inception return is calculated from 9/30/93.
<PAGE>
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NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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[Photo of Scott Millimet]
Scott Millimet
Back Bay Advisors, L.P.
Q. How did New England Limited Term U.S. Government Fund perform over the past
six months?
The first half of 1999 proved to be very difficult for almost all sectors of
the fixed-income market. Amid this backdrop, New England Limited Term U.S.
Government Fund Class A shares (calculated at NAV) produced a return of -1.2%
for the six months ending June 30, 1999. This included a $0.46 loss per share
in net asset value to $11.24 and the reinvestment of $0.33 per share in
dividend income.
Q. Why was the investment environment for U.S. fixed-income securities so
difficult during the period?
Because of an increase in interest rates. As 1998 ended and 1999 began,
investors shifted their assets from U.S. Treasuries -- which had offered
safety and liquidity amid financial turmoil in the third and fourth quarters
of 1998 -- reinvesting them in other sectors of the bond market. During the
first quarter, the performance of Treasuries suffered, while mortgage-backed
securities, corporate bonds, agency securities and other segments of the bond
market recovered from their massive sell-offs in 1998.
There were two main reasons for this market shift. First, economies in
emerging markets, particularly Latin America, showed signs of recovery. In
addition, the U.S. economy continued to show dramatic strength. In spite of
this shift, intermediate-term securities did not perform as well as long- or
shorter-term securities because of a very large amount of corporate issuance
in the intermediate maturity range during the period, and selling pressure
emanating from the mortgage market.
Mortgage-backed securities performed well in the first quarter of 1999, as
investors gravitated back to that market, perceiving it to be undervalued.
However, during the latter part of the second quarter of 1999, mortgages
underperformed Treasury securities with comparable maturities, offering the
Fund some buying opportunities in that sector.
Q. What strategies did you use to manage the Fund?
The most significant move was the addition of some high-quality corporate
bonds to the Fund for the first time in a while. The Fund enjoys the
flexibility to invest up to 35% of its assets in high-quality, non-government
securities, but the Fund's stake in this sector stood at 23.6% at the end of
the period and will probably remain at about that level.
PORTFOLIO MIX -- 6/30/99
U.S. GOV'T. AGENCIES 44.6%
U.S. TREASURY SECURITIES 25.9%
CORPORATE BONDS 23.6%
YANKEES* 5.2%
CASH & OTHER 0.7%
*Yankees are dollar-denominated foreign bonds.
Portfolio holdings and asset allocation will vary.
Corporates were attractive to us because they offered a significant yield
advantage relative to government securities. This is an economic environment
that we feel should be positive for the foreseeable future, even if the Fed
continues to raise rates modestly to slow the economy. We were attracted to
high-quality corporate securities in the finance and telecommunications
sectors in particular, because of strong consolidation activity and other
factors.
Beyond this move, we avoided structuring the Fund in anticipation that
interest rates would either rise or fall. Instead, we tried to rotate the
Fund's sector allocations among Treasuries, agencies, mortgages and now
corporates, looking to focus on those sectors that we believed offered value.
The Fund's duration -- a measure of its sensitivity to interest rates --
stood at a slightly longer than neutral level of 3.9 years at the end of the
period, while its average maturity was 6.1 years. The Fund maintained its
duration and average maturity by using a barbell strategy, concentrating
investments on either end of the maturity spectrum with little in between.
This strategy helped the Fund smooth out the underper-formance of the
intermediate-term sector.
Q. What's your outlook?
Given the substantial increases in interest rates we witnessed during the
first half of 1999, we expect that rates will stabilize and maybe even
decline during the second half of the year. Even though the Fed has
undertaken one increase in short-term interest rates, we believe there are
some factors that will keep it from pursuing an aggressive program of
interest-rate hikes. First, Latin American economies remain somewhat fragile,
as are those in Europe. In addition, with possible Year 2000 computer
problems on the horizon, we believe the Fed will want to be very cautious
about slowing the economy too much at the turn of the millennium.
Perhaps most important, even though there are signs that price pressures
might be building, we don't think inflation will rise significantly. We
believe the economy will slow somewhat and that inflation will remain
subdued. We anticipate that it will take a significant change in one of these
two variables -- economic growth or price inflation -- for us to undertake
any significant strategic moves with the Fund's duration.
The portfolio manager's 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.
The Fund invests in mortgage or asset-backed securities which are subject to
prepayment risk. Treasury bills and U.S. government bonds fluctuate in value
but they are guaranteed as to the timely payment of interest and if held to
maturity, provide a guaranteed return of principal. Government guarantees
apply to individual securities only and not to prices and yields of shares in
a managed portfolio. These risks may increase share price volatility. See the
Fund's prospectus for details.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1999
(unaudited)
<TABLE>
BONDS AND NOTES -- 99.3% OF TOTAL NET ASSETS
<CAPTION>
RATINGS (C)
-----------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FEDERAL AGENCIES -- 12.8%
$ 5,000,000 Federal National Mortgage Association, 5.375%, 3/15/2002 ......... Aaa AAA $ 4,932,050
7,000,000 Federal National Mortgage Association, 5.875%, 4/23/2004 ......... Aaa AAA 6,851,250
5,000,000 Federal National Mortgage Association, 6.250%, 5/15/2029 ......... Aaa AAA 4,750,800
10,000,000 Federal National Mortgage Association, 6.375%, 6/15/2009 ......... Aaa -- 9,915,600
--------------
26,449,700
--------------
FINANCE & BANKING -- 20.3%
6,000,000 Ford Motor Credit Co., 5.750%, 2/23/2004 ......................... A1 A 5,796,480
5,000,000 General Motors Acceptance Corp., 9.000%, 10/15/2002 .............. A2 A 5,365,600
10,000,000 Green Tree Financial Corp., 6.670%, 7/15/2030 .................... -- -- 10,036,000
10,000,000 Household Finance Corp., 6.000%, 5/01/2004 ....................... A2 A 9,730,600
5,000,000 Marsh & Mclennan Cos Inc., 6.625%, 6/15/2004 ..................... A2 AA - 5,013,250
6,000,000 Paine Webber Group, Inc., 6.375%, 5/15/2004 ...................... Baa1 BBB+ 5,875,980
--------------
41,817,910
--------------
GOVERNMENT AGENCIES -- 31.8%
65,709 Federal Home Loan Mortgage Corp., 7.500%, 6/01/2026 .............. Aaa AAA 66,427
30,780 Federal Home Loan Mortgage Corp., 10.000%, 7/01/2019 ............. Aaa AAA 33,123
4,404,508 Federal Home Loan Mortgage Corp.,
11.500%, with various maturities to 2020 (d) (e) ................ Aaa AAA 4,813,462
15,084,512 Federal National Mortgage Association, 6.500%,
with various maturities to 2029 ................................. Aaa AAA 14,551,727
4,408,914 Federal National Mortgage Association, 7.000%, 12/1/2022 (d) (e) Aaa AAA 4,373,731
10,000,000 Government National Mortgage Association, 6.500%, 5/15/2029 ...... Aaa AAA 9,615,600
30,910,416 Government National Mortgage Association,
7.000%, with various maturities to 2028 (d) ..................... Aaa AAA 30,514,980
66,206 Government National Mortgage Association,
12.500%, with various maturities to 2015 (d) .................... Aaa AAA 75,698
903,485 Government National Mortgage Association,
16.000%, with various maturities to 2013 (d) .................... Aaa AAA 1,078,508
358,273 Government National Mortgage Association,
17.000%, with various maturities to 2012 (d) .................... Aaa AAA 426,570
--------------
65,549,826
--------------
TELECOMMUNICATION -- 3.3%
7,000,000 Sprint Capital Corp., 5.875%, 5/01/2004 .......................... Baa1 BBB+ 6,770,260
--------------
U.S. GOVERNMENT -- 25.9%
10,000,000 United States Treasury Bonds, 11.125%, 8/15/2003 ................. Aaa AAA 11,926,600
7,000,000 United States Treasury Bonds, 11.750%, 2/15/2001 ................. Aaa AAA 7,669,340
10,375,000 United States Treasury Notes, 3.625%, 7/15/2002 .................. Aaa AAA 10,277,786
5,065,850 United States Treasury Notes, 3.875%, 1/15/2009 .................. Aaa AAA 5,005,668
1,000,000 United States Treasury Notes, 7.250%, 5/15/2004 .................. Aaa AAA 1,061,870
11,000,000 United States Treasury Notes, 7.875%, 8/15/2001 .................. Aaa AAA 11,501,820
4,000,000 United States Treasury Notes, 8.500%, 11/15/2000 ................. Aaa AAA 4,160,640
4,000,000 United States Treasury Stripped Bonds,
Zero Coupon, 11/15/2011 ......................................... Aaa AAA 1,872,480
--------------
53,476,204
--------------
YANKEE -- 5.2%
11,000,000 Pemex Finance, Ltd., 144A, 5.720%, 11/15/2003 .................... -- AAA 10,764,270
--------------
Total Bonds and Notes (Identified Cost $207,566,242).............. 204,828,170
--------------
SHORT TERM INVESTMENT -- 0.0%
- --------------------------------------------------------------------------------------------------------------------------
128,000 Household Finance Corp. 5.500%, 7/01/1999 ........................ 128,000
--------------
Total Short Term Investment (Identified Cost $128,000) ........... 128,000
--------------
Total Investments -- 99.3% (Identified Cost $207,694,242) (b) .... 204,956,170
Other assets less liabilities .................................... 1,355,648
--------------
Total Net Assets -- 100% ......................................... $ 206,311,818
==============
WRITTEN OPTIONS NET
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------------------------------------------------
200 U.S. Treasury Bond Futures, 116 Call, July 1999 .................. $ (72,875)
200 U.S. Treasury Bond Futures, 114 Put, July 1999 ................... 14,825
--------------
$ (58,050)
==============
FUTURES CONTRACTS NET
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------------------------------------------------
250 U.S. Treasury Note 5 Year Futures, September 1999 (short) ........ $ (187,500)
==============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 1999 the net unrealized
depreciation on investments based on cost for federal income
tax purposes of $207,694,242 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess value over tax cost ........................... $ 315,596
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ........................ (3,053,668)
--------------
Net unrealized appreciation ............................................. $ (2,738,072)
==============
At December 31, 1998 the Fund had a capital loss carryover of approximately $38,233,281 of which $30,053,756
expires on December 31, 2002, $1,001,295 expires on December 31, 2003, $4,342,078 expires on December 31, 2004 and
$2,836,152 expires on December 31, 2005. This may be available to offset future realized capital gains, if any, to
the extent provided by regulations.
(c) The ratings shown are believed to be the most recent ratings available at June 30, 1999. Securities are generally
rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there
can be no assurance that the same ratings would be assigned if the Securities were rated at June 30, 1999. The
Fund's subadviser independently Evaluates the Fund's portfolio securities and in making investment decisions does
not rely solely on the rating of agencies.
(d) The Fund's investments in mortgage backed securities of the Federal Home Loan Mortgage Corporation and Government
National Mortgage Association are interest in separate pools of mortgages. All separate investment in securities
of these issuers which have the same coupon rate have been aggregated for the purpose of presentation in the
schedule of investments.
(e) One of these securities ($9,691,000 par) has been segregated as collateral in connection with the Fund's
derivative investments at June 30, 1999. 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 period end, the value of these securities amounted to $10,764,270 or 5.2% of
net assets.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1999
(unaudited)
ASSETS
Investments at value
(Identified cost $207,694,242) ................ $ 204,898,120
Cash ........................................... 289
Receivable for:
Fund shares sold .............................. 240,514
Securities sold ............................... 10,069,650
Dividends and interest ........................ 2,581,260
Principal receivable .......................... 114,422
-------------
217,904,255
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LIABILITIES
Payable for:
Securities purchased .......................... $10,009,125
Open options contracts -- net ................. 404,450
Fund shares redeemed .......................... 778,010
Dividends declared ............................ 178,907
Accrued expenses:
Management fees ............................... 111,053
Deferred trustee's fees ....................... 15,850
Accounting and administrative ................. 11,204
Other expenses ................................ 83,838
-----------
11,592,437
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NET ASSETS ...................................... $ 206,311,818
=============
Net Assets consist of:
Capital paid in ............................... $ 252,550,226
Undistributed net investment income ........... 291,326
Accumulated net realized gains (losses) ....... (43,488,612)
Unrealized appreciation (depreciation)
on investments .............................. (3,041,122)
-------------
NET ASSETS ...................................... $ 206,311,818
=============
Computation of net asset value and offering price:
Net asset value and redemption price
of Class A shares ($171,755,466 / 15,286,018
shares of beneficial interest) ................ $ 11.24
=============
Offering price per share (100 / 97 of $11.24) .. $ 11.59*
=============
Net asset value and offering price of Class B
shares ($16,302,678 / 1,453,053 shares of
beneficial interest) .......................... $ 11.22**
=============
Net asset value and offering price of Class C
shares ($10,789,222 / 960,925 shares of
beneficial interest) .......................... $ 11.23**
=============
Net asset value and offering price of Class Y
shares ($7,464,452 / 662,560 shares of
beneficial interest) .......................... $ 11.27
=============
* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1999
(unaudited)
INVESTMENT INCOME
Interest .......................................... $ 7,985,092
Securities lending income ......................... 6,423
-----------
7,991,515
Expenses
Management fees .................................. $ 711,146
Service fees - Class A ........................... 319,013
Service and distribution fees - Class B .......... 84,929
Service and distribution fees - Class C .......... 63,196
Trustees' fees and expenses ...................... 7,715
Accounting and administrative .................... 35,024
Custodian ........................................ 62,534
Transfer agent ................................... 190,574
Audit and tax services ........................... 15,535
Legal ............................................ 4,663
Printing ......................................... 16,440
Registration ..................................... 29,381
Miscellaneous .................................... 10,413
-----------
Total expenses ..................................... 1,550,563
-----------
Net investment income .............................. 6,440,952
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, OPTIONS AND
FUTURES CONTRACTS
Realized gain (loss) on:
Investments -- net ............................... (6,128,946)
Futures contracts -- net ......................... 227,821
Options contracts -- net ......................... 85,846
-----------
Total realized gain (loss) on investments,
options and futures contracts ................... (5,815,279)
-----------
Unrealized appreciation (depreciation) on:
Investments -- net ............................... (3,352,943)
Futures and options contracts -- net ............. (161,702)
-----------
Total unrealized appreciation(depreciation)
on investments, written options and
futures contracts ............................... (3,514,645)
-----------
Net gain (loss) on investment transactions ......... (9,329,924)
-----------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS ................................... $(2,888,972)
===========
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ........................... $ 14,143,473 $ 6,440,952
Net realized gain (loss) on investments,
options and futures contracts .................. 1,363,752 (5,815,279)
Unrealized appreciation (depreciation)
on investments, options and futures contracts .. (153,856) (3,514,645)
------------- -------------
Increase (decrease) in net assets from operations 15,353,369 (2,888,972)
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ....................................... (11,989,233) (5,039,803)
Class B ....................................... (856,504) (416,272)
Class C ....................................... (808,596) (309,138)
Class Y ....................................... (389,906) (225,858)
------------- -------------
(14,044,239) (5,991,071)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ......... (26,061,543) (19,261,899)
------------- -------------
Total increase (decrease) in net assets ............ (24,752,413) (28,141,942)
NET ASSETS
Beginning of the period ........................... 259,206,173 234,453,760
------------- -------------
End of the period ................................. $ 234,453,760 $ 206,311,818
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ................................. $ (158,555) $ 291,326
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 12.49 $ 11.49 $ 12.10 $ 11.55 $ 11.64 $ 11.70
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income .................... 0.82 0.86 0.81 0.72 0.67 0.35
Net Realized and Unrealized Gain (Loss) on
Investments ............................. (1.10) 0.59 (0.54) 0.09 0.06 (0.48)
-------- -------- -------- -------- -------- --------
Total From Investment Operations ......... (0.28) 1.45 0.27 0.81 0.73 (0.13)
-------- -------- -------- -------- -------- --------
Less Distributions
Distributions From Net Investment Income . (0.72) (0.84) (0.82) (0.72) (0.67) (0.33)
-------- -------- -------- -------- -------- --------
Total Distributions ...................... (0.72) (0.84) (0.82) (0.72) (0.67) (0.33)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........... $ 11.49 $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 11.24
======== ======== ======== ======== ======== ========
Total Return (%) (a) ..................... (2.3) 13.0 2.4 7.3 6.5 (1.2)
Ratio of Operating Expenses to Average
Net Assets (%) .......................... 1.18 1.22 1.25 1.28 1.31 1.34(b)
Ratio of Net Investment Income to Average
Net Assets (%) .......................... 6.80 7.18 7.13 6.40 5.81 5.94(b)
Portfolio Turnover Rate (%) .............. 244 247 327 533 1,376 517
Net Assets, End of Period (000) .......... $412,399 $361,520 $276,178 $222,185 $194,032 $171,755
(a) A sales charge is not reflected in total return calculations.
(b) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 12.49 $ 11.48 $ 12.09 $ 11.54 $ 11.62 $ 11.69
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income .................... 0.71 0.76 0.73 0.65 0.60 0.31
Net Realized and Unrealized Gain (Loss) on
Investments ............................. (1.08) 0.61 (0.54) 0.08 0.07 (0.49)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ......... (0.37) 1.37 0.19 0.73 0.67 (0.18)
--------- --------- --------- --------- --------- ---------
Less Distributions
Distributions From Net Investment Income . (0.64) (0.76) (0.74) (0.65) (0.60) (0.29)
--------- --------- --------- --------- --------- ---------
Total Distributions ...................... (0.64) (0.76) (0.74) (0.65) (0.60) (0.29)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ........... $ 11.48 $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 11.22
========= ========= ========= ========= ========= =========
Total Return (%) (a) ..................... (2.9) 12.3 1.7 6.5 5.9 (1.6)
Ratio of Operating Expenses to Average
Net Assets (%) .......................... 1.83 1.87 1.90 1.93 1.96 1.99(b)
Ratio of Net Investment Income to Average
Net Assets (%) .......................... 6.15 6.53 6.48 5.75 5.16 5.29(b)
Portfolio Turnover Rate (%) .............. 244 247 327 533 1,376 517
Net Assets, End of Period (000) .......... $ 11,891 $ 18,056 $ 18,503 $ 16,060 $ 18,116 $ 16,303
(a) A contingent deferred sales charge is not reflected in total return calculations.
(b) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 11.48 $ 12.10 $ 11.54 $ 11.63 $ 11.70
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ................................ 0.64 0.75 0.65 0.60 0.31
Net Realized and Unrealized Gain (Loss) on Investments 0.64 (0.57) 0.09 0.07 (0.49)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations ..................... 1.28 0.18 0.74 0.67 (0.18)
---------- ---------- ---------- ---------- ----------
Less Distributions
Dividends From Net Investment Income ................. (0.65) (0.74) (0.65) (0.60) (0.29)
Distributions in Excess of Net Investment Income ..... (0.01) 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total Distributions .................................. (0.66) (0.74) (0.65) (0.60) (0.29)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................... $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 11.23
========== ========== ========== ========== ==========
Total Return (%) (a) ................................. 11.4 1.6 6.6 5.9 (1.6)
Ratio of Operating Expenses to Average
Net Assets (%) ...................................... 1.87 1.90 1.93 1.96 1.99(b)
Ratio of Net Investment Income to Average Net
Assets (%) .......................................... 6.53 6.48 5.75 5.16 5.29(b)
Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 517
Net Assets, End of Period (000) ...................... $ 5,936 $ 14,903 $ 15,699 $ 13,962 $ 10,789
(a) A contingent deferred sales charge is not reflected in total return calculations.
(b) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS Y
------------------------------------------------------------------------------------
MARCH 31(a), SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 12.11 $ 11.51 $ 12.13 $ 11.58 $ 11.66 $ 11.73
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income .................... 0.71 0.86 0.85 0.76 0.72 0.37
Net Realized and Unrealized Gain (Loss) on
Investments ............................. (0.74) 0.63 (0.54) 0.08 0.06 (0.49)
--------- --------- --------- --------- --------- ---------
Total From Investment Operations ......... (0.03) 1.49 0.31 0.84 0.78 (0.12)
--------- --------- --------- --------- --------- ---------
Less Distributions
Distributions From Net Investment Income . (0.57) (0.87) (0.86) (0.76) (0.71) (0.34)
--------- --------- --------- --------- --------- ---------
Total Distributions ...................... (0.57) (0.87) (0.86) (0.76) (0.71) (0.34)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ........... $ 11.51 $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.27
========= ========= ========= ========= ========= =========
Total Return (%) (b) ..................... (0.8) 13.3 2.8 6.9 6.9 (1.0)
Ratio of Operating Expenses to Average
Net Assets (%) .......................... 0.83(c) 0.87 0.90 0.93 0.96 0.99(c)
Ratio of Net Investment Income to Average
Net Assets (%) .......................... 7.15(c) 7.53 7.48 6.75 6.16 6.19(c)
Portfolio Turnover Rate (%) .............. 244 247 327 533 1,351 517
Net Assets, End of Period (000) .......... $ 1,822 $ 5,723 $ 5,313 $ 5,262 $ 8,345 $ 7,464
(a) Commencement of operations.
(b) A contingent deferred sales charge is not reflected in total return calculations.
(c) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the Period Ended June 30, 1999
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of New England Funds
Trust II, a Massachusetts business trust (the "Trust"), and is registered under
the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end
management investment company. The Fund seeks a high current return consistent
with preservation of capital. The Declaration of Trust permits the trustees to
issue an unlimited number of shares of the Trust in multiple series (each series
of shares a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front end sales charge of 3.00%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before May
1, 1997). Class C shares do not pay a front end sales charge and do not convert
to any 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. Class Y shares do not pay a front end sales
charge, a contingent deferred sales charge or service and distribution fees.
They are intended for institutional investors with a minimum of $1,000,000 to
invest. Expenses of the Fund are borne pro rata by the holders of all classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund were liquidated. In addition, the trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. 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 market 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. 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. OPTIONS. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to the
Fund is that the change in value of options contracts may not correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty is unable to perform.
The maximum loss for purchased options is limited to the premium initially paid
for the option. For options written by the Fund, the maximum loss is not limited
to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest rate
futures contracts to hedge against changes in the values of securities the Fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price (or to deliver an
amount of cash) on a future date. Upon entering into such a contract, the
purchasing Fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the Fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record and are paid monthly. The timing and characterization of
certain income and capital gains distributions are determined in accordance with
federal tax regulations which may differ from generally accepted accounting
principles. These differences relate primarily to differing treatments for
income recognition for mortgage-backed securities. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. 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, 1999,
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
------------------------------- -------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
------------- ------------ ------------- ------------
$ 461,174,711 $ 99,080,788 $ 501,402,047 $ 61,662,661
Transactions in written options for the six months ended June 30, 1999 are
summarized as follows:
WRITTEN OPTIONS
------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
----------- ------------
Open at December 31, 1998 (400,000) $ (214,094)
Contracts opened (11,794,000) (6,237,492)
Contracts closed 11,794,000 6,234,636
----------- -----------
Open at June 30, 1999 (400,000) $ (216,950)
=========== ===========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million, reduced by the payment to the Fund's
investment subadviser, Back Bay Advisors, L.P. ("Back Bay"), at the rate of
0.325% of the first $200 million of the Fund's average daily net assets, 0.3125%
of the next $300 million and 0.30% of such assets in excess of $500 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of Nvest
Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance
Company ("MetLife"). Fees earned by NEFM and Back Bay Advisors under the
management and subadvisory agreements in effect during the year ended June 30,
1999 are as follows:
FEES EARNED
-----------
NEFM $ 355,572
Back Bay 355,574
The effective annualized management fee for the six months ended June 30, 1999
was 0.65%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund reimburses NSC for all or part of
NSC's expenses of providing these services which include the following: (i)
expenses for personnel performing bookkeeping, accounting, financial reporting
functions and clerical functions relating to the Fund, and (ii) expenses for
services required in connection with the preparation of registration statements
and prospectuses, registration of shares in various states, shareholder reports
and notices, proxy solicitation material furnished to shareholders of the Fund
or regulatory authorities and reports and questionnaires for SEC compliance. For
the six months ended June 30, 1999 these expenses amounted to $35,024 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 Service and Distribution Plans relating to the Fund's Class A
shares (the "Class A Plan") and Service and Distribution Plans relating to the
Fund's Class B shares (the "Class B Plan") and Class C shares (the "Class C
Plan").
Under the Class A Plan, the Fund pays New England Funds L.P. ("New England
Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly
service fee at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class A shares, as reimbursement for expenses
(including certain payments to securities dealers who may be affiliated with New
England Funds) incurred by New England Funds in providing personal services to
investors in Class A shares and/or the maintenance of shareholder accounts. Also
under the Class A Plan, the Fund pays New England Funds a monthly distribution
fee at the annual rate of 0.10% of the average daily net assets attributable to
the Fund's Class A shares as reimbursement for expenses (including certain
payments to securities dealers who may be affiliated with New England Funds)
incurred by New England Funds in connection with the marketing or sale of Class
A shares.
For the six months ended June 30, 1999, the Fund paid New England Funds $227,871
in service fees and $91,142 in distribution fees under the Class A Plan. If the
expenses of New England Funds that are otherwise reimbursable, as service fees
or distribution fees, respectively, under the Class A Plan incurred in any year
exceed the amounts of such fees payable by the Fund under the Class A Plan, the
unreimbursed amounts (together with unreimbursed amounts from prior years) may
be carried forward for reimbursement in future years in which the Class A Plan
remains in effect. The amount of unreimbursed expense carried forward into 1999
is $2,272,723 (reimbursable as distribution fees).
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class B shares and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the six months ended June
30, 1999, the Fund paid New England Funds $21,232 and $15,799 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 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, 1999, the Fund paid New England Funds $63,697
and $47,397 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 June
30, 1999 amounted to $133,034.
D. TRANSFER AGENT FEES. NSC 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 six months ended June 30, 1999, the Fund paid NSC $145,949 as
compensation for its services in that capacity.
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, NSC or their affiliates. Each other Trustee receives a
retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500
for each meeting of the Board of Trustees attended. Each committee member
receives an additional retainer fee at the annual rate of $6,000 while each
committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual
rate of $4,000. These fees are allocated to the various New England Funds based
on a formula that takes into account, among other factors, the relative net
assets of each fund.
A deferred compensation plan is available to the Trustees on a voluntarily
basis. Each participating trustee will receive an amount equal to the value that
such deferred compensation would have had, had it been invested in the Fund on
the normal payment date. Deferred amounts remain in the Fund until distributed
in accordance with the Plan.
4. CAPITAL SHARES. At June 30, 1999 there was an unlimited number of shares of
beneficial interest authorized, divided into four classes, Class A, Class B,
Class C and Class Y capital shares. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 4,123,138 $ 48,268,685 2,350,408 $ 26,966,241
Shares issued in connection with the reinvestment of:
Distributions from net investment income .......... 840,320 9,821,663 367,877 4,222,791
------------ ------------ ------------ ------------
4,963,458 58,090,348 2,718,285 31,189,032
Shares repurchased .................................. (7,477,042) (87,458,802) (4,012,131) (46,096,833)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. (2,513,584) $(29,368,454) (1,293,846) $(14,907,801)
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 833,639 $ 9,747,616 275,022 $ 3,168,849
Shares issued in connection with the reinvestment of:
Distributions from net investment income .......... 62,517 729,951 31,859 365,100
------------ ------------ ------------ ------------
896,156 10,477,567 306,881 3,533,949
Shares repurchased .................................. (728,200) (8,484,510) (403,957) (4,654,098)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 167,956 $ 1,993,057 (97,076) $ (1,120,149)
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 2,387,115 $ 27,924,776 948,964 $ 10,947,898
Shares issued in connection with the reinvestment of:
Distributions from net investment income .......... 55,475 647,654 21,836 250,564
------------ ------------ ------------ ------------
2,442,590 28,572,430 970,800 11,198,462
Shares repurchased .................................. (2,598,863) (30,335,980) (1,203,592) (13,864,477)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. (156,273) $ (1,763,550) (232,792) $ (2,666,015)
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 331,891 $ 3,916,548 48,346 $ 557,194
Shares issued in connection with the reinvestment of:
Distributions from net investment income .......... 32,935 386,339 20,194 232,420
------------ ------------ ------------ ------------
364,826 4,302,887 68,540 789,614
Shares repurchased .................................. (104,719) (1,225,483) (117,219) (1,357,548)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 260,107 $ 3,077,404 (48,679) $ (567,934)
------------ ------------ ------------ ------------
Decrease derived from capital shares transactions ... (2,241,794) $(26,061,543) (1,672,393) $(19,261,899)
============ ============ ============ ============
</TABLE>
5. SECURITY LENDING. The Fund has entered into an agreement with a third party
to lend its securities. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. The Fund receives fees for lending its securities. At June
30, 1999 the Fund loaned securities having a market value of $38,257,940
collateralized by cash in the amount of 39,022,650 which was invested in a
short-term instrument.
<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 portfolio.
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. A small portion of
income may be subject to federal and/or alternative minimum tax. Capital gains,
if any, are subject to a capital gains tax.
<PAGE>
- --------------------------------------------------------------------------------
REGULAR INVESTING PAYS
- --------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets.
2. It's convenient and effortless.
3. It requires a low minimum to get started.
4. It can help you reach important long-term goals like financing retirement or
college funding.
5. It can help you benefit from the ups and downs of the market.
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $100 a month in your New England fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
- --------------------------------------------------------------------------------
THE POWER OF MONTHLY INVESTING
- --------------------------------------------------------------------------------
[A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:]
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high. Because this program involves
continuous investment in securities regardless of fluctuating prices, the
investor should consider his or her financial ability to continue purchases
during periods of high or low prices.
You can start an Investment Builder program with your current New England Funds
account. To open an Investment Builder account today, call your financial
representative or New England Funds at 1-800-225-5478.
Past performance is no guarantee of future results. Please call New England
Funds for a prospectus, which contains more information, including charges and
other ongoing expenses. Please read prospectus carefully before you invest.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed will require considerable financial resources. While it's never
too late to start a retirement savings program, it's certainly never too early:
The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulated the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. Past performance is no guarantee of
future results. For illustrative purposes only and not indicative of future
performance of any New England Fund. The value of a New England fund will
fluctuate with changing market conditions.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs. We will include a prospectus,
which contains more information including charges and other ongoing expenses.
Please read the prospectus carefully before you invest.
<PAGE>
NEW ENGLAND FUNDS
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth and Income Fund
(formerly 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
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
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust,
Money Market Series
Tax Exempt Money Market Trust
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
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.
Y2K Readiness Report: New England Funds has kept pace with the Y2K
challenge. Mission critical systems have been tested and non-mission
critical systems are scheduled for completion by September 30, 1999.
Y2K is a top priority at New England Funds. For more information on
our Y2K readiness, please visit our Web site at www.mutualfunds.com.
THIS MATERIAL REPRESENTS YEAR 2000 READINESS DISCLOSURE PURSUANT TO THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
<PAGE>
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Where The Best Minds Meet(R) Paid
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399 Boylston Street
Boston, Massachusetts
02116
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