<PAGE>
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ANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England
Growth Opportunities Fund
[graphic omitted]
Where
The Best
Minds
Meet(R)
- -----------------
DECEMBER 31, 1998
- -----------------
<PAGE>
FEBRUARY 1999
- --------------------------------------------------------------------------------
[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."
- --------------------------------------------------------------------------------
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 GROWTH OPPORTUNITIES 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 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 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.
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 since 12/31/88, compared to the S&P 500
Index. The data points from the graph are as follows:]
DECEMBER 1988 THROUGH DECEMBER 1998
WITH
NET MAXIMUM S&P
ASSET SALES 500
VALUE CHARGE INDEX
- ---------------------------------------------------------------
12/31/88 $10,000 $ 9,425 $10,000
89 $12,761 $12,027 $13,159
90 $12,217 $11,515 $12,748
91 $15,957 $15,040 $16,616
92 $17,438 $16,435 $17,881
93 $18,824 $17,742 $19,680
94 $19,011 $17,918 $19,947
95 $25,687 $24,210 $27,416
96 $30,108 $28,377 $33,694
97 $40,173 $37,863 $44,917
98 $49,774 $49,912 $57,727
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, Class C and Class 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.
<PAGE>
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NEW ENGLAND GROWTH OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A (Inception 5/6/31) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value1 23.9% 21.5% 17.4%
With Max. Sales Charge(2) 16.8 20.0 16.7
- -----------------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 23.1% 20.7% 19.6%
With CDSC(3) 18.1 20.5 19.5
- -----------------------------------------------------------------------------------------
CLASS C (Inception 5/1/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 22.9% 25.1%
With CDSC(3) 21.9 25.1
- -----------------------------------------------------------------------------------------
CLASS Y (Inception 11/18/98) SINCE INCEPTION
Net Asset Value(1) 8.1%
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS B CLASS C CLASS Y
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C> <C> <C>
Standard & Poor's 500 Index(4) 28.5 24.0 19.2 23.1% 29.3% 7.8%
Lipper Growth & Income Avg.(5) 15.6 18.4 15.5 17.9 22.6 4.5
Morningstar Large Value Avg.(6) 12.3 17.9 15.5 17.3 21.6 3.4
- ----------------------------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value will fluctuate so
that shares, upon redemption, may be worth more or less than their original cost.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect
the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the
maximum sales charge of 5.75% at the time of purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance for Class B shares 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. With CDSC performance for Class C
shares assumes a maximum 1% sales charge on redemptions within the first year of purchase.
(4) Standard & Poor's Composite Index of 500 Stocks (S&P 500(R)) is an unmanaged index representing
the performance of 500 major companies, most of which are listed on the New York Stock Exchange.
The S&P 500 performance has not been adjusted for ongoing management, distribution and operating
expenses and sales charges applicable to mutual fund investments.
(5) Lipper Growth & Income Average is an average of the total return performance (calculated on the
basis of net asset value) of funds with similar investment objectives as calculated by Lipper
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 4/30/95. Class Y since inception
return is calculated from 11/30/98.
(6) Morningstar Large Value 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., 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 4/30/95. Class Y
since inception return is calculated from 11/30/98.
</TABLE>
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NEW ENGLAND GROWTH OPPORTUNITIES FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
[Photo of Gerald Scriver]
Gerald Scriver
Westpeak Investment Advisors, L.P.
Q. Please tell us about New England Growth Opportunities Fund's performance
during 1998.
For the 12 months ending December 31, 1998, New England Growth Opportunities
Fund's Class A shares had a total return of 23.9%. This return includes a $1.22
per share gain based on net asset value, and reinvested distributions of $2.11
per share. The Fund's results lagged the 28.5% return of the Standard & Poor's
Composite Index of 500 Stocks (S&P 500(R)) during the period.
Q. Describe the market environment in 1998.
Extending what is by now a familiar story, 1998's market results were defined by
the performance of a relative handful of very large capitalization stocks. The
markets adjusted to the ongoing tumult in Asia and recorded a fourth consecutive
year of double-digit returns in the Dow Jones Industrial Average and the S&P
500, two widely followed indicators of market activity. Along the way, U.S.
markets displayed remarkable resilience, snapping back smartly from a sharp
summer decline. The market's July plunge had its origins in Moscow, where the
Russian government failed to repay debt that it owed to other countries; fears
of parallel events in Brazil -- and therefore much of Latin America -- extended
the slide. Bond markets were especially affected, as a flight from overseas
markets into the reassuring quality of U.S. government securities left other
fixed-income sectors adrift in search of buyers.
The Federal Reserve Board took an assertive stance against the looming credit
crunch with three interest rate cuts between September and November, lowering
short-term interest rates by an aggregate three-quarters of a percentage point.
These steps encouraged buyers to return to the markets for both stocks and
bonds, and the Dow Jones Industrial Average closed the year at 9181, not far
from its then record high of 9374, set on November 23.
Q. Given this environment, what was your investment strategy during the year?
Our portfolio-building style is based on the analysis of dozens of fundamental
and technical measures that we use to identify stocks that may be candidates for
purchase. To that quantitative information we apply our professional judgment
and the lessons of experience to make final investment selections. Because we
always keep the Fund fully invested and never try to gauge the market's next
moves, the overall investment environment does not influence our positioning of
the Fund.
Over the course of the year, we gradually shifted the Fund's portfolio emphasis
from growth stocks to stocks in the S&P 500 with lower price-to-earnings ratios,
an objective measure that permits investors to compare the costs of stocks. We
kept the Fund underweighted in overvalued growth sectors and in very expensive
technology stocks; in both instances we thought prospects for earnings expansion
were fully reflected in market valuations. We overweighted the Fund's portfolio
(relative to the S&P 500) in technology and telecommunications, favoring those
stocks with potential growth at reasonable prices. We were underweighted in drug
companies, whose high valuations did not seem justified, and in consumer
staples.
Q. What were the principal factors affecting performance?
Our underweighted position in the largest-cap growth stocks left the Fund
underrepresented in one of the year's most productive sectors. Avoiding
extremely high-priced technology companies also hampered performance. Among the
sectors that helped performance were the regional Bell companies and established
technology companies with demonstrated earnings, including Cisco Systems, which
manufactures products for computer networks, and Sun Microsystems, the leading
producer of networked workstations. Other selections that helped boost
performance were healthcare companies Genentech and Omnicare, as well as IBM,
United Technology and Gulfstream, a manufacturer of jet aircraft for businesses.
Q. What is your current outlook for the market and the Fund?
We believe that business conditions in Asia and elsewhere are stabilizing, and
that some overseas economies may already have begun to climb out of their
troughs. Without the drag of crisis-weakened export markets, growth in our Gross
Domestic Product should continue, but at a lower rate than in 1998. Inflation
represents no immediate threat, and we think there is enough momentum in the
economy to forestall any likelihood of a recession, especially given the current
climate of lower interest rates.
But the Federal Reserve Board will continue to have a huge impact on market
psychology, and any rise in interest rates could represent a significant risk
for the market. Therefore we believe that markets in 1999 will oscillate between
optimism over continued low rates and concern that continued growth could
trigger a rate hike on the part of the Federal Reserve Board, cutting short any
earnings expansion and darkening the mood of investors.
Perhaps most importantly, we expect that investors will finally put aside their
obsession with the very largest capitalization growth companies as valuations
for these stocks become more and more unrealistic -- there must come a point
where valuations mean something, in our opinion. The implication for the markets
could be a greater focus on value than in recent years, an eventuality that we
believe we can address successfully through the proprietary stock selection
techniques that we have been fine-tuning for over 25 years.
The portfolio manager's commentary reflects the conditions and actions taken
during the reporting period and are subject to change. A shift in opinion may
result in strategic and other portfolio changes. The Fund may invest in foreign
securities, which can involve special risks. See the Fund's prospectus for
details.
TOP 10 PORTFOLIO HOLDINGS -- 12/31/98
% OF
COMPANY NET ASSETS
- -----------------------------------------------------
1. Cisco Systems 3.6
- -----------------------------------------------------
2. AT&T Corp. 2.9
- -----------------------------------------------------
3. International Business Machines Corp. 2.7
- -----------------------------------------------------
4. Amgen, Inc. 2.6
- -----------------------------------------------------
5. Federal National Mortgage Association 2.6
- -----------------------------------------------------
6. Schering-Plough Corp. 2.6
- -----------------------------------------------------
7. Intel Corp. 2.5
- -----------------------------------------------------
8. Lexmark International Group 2.3
- -----------------------------------------------------
9. Unilever NV 2.3
- -----------------------------------------------------
10. Wal-Mart Stores, Inc. 2.2
- -----------------------------------------------------
Portfolio holdings and asset allocation will vary.
- -----------------------------------------------------
<PAGE>
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PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments as of December 31, 1998
COMMON STOCKS--97.6% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
- -------------------------------------------------------------------------------
AIRLINES--1.9%
102,100 AMR Corp. (c) ................................. $ 6,062,188
57,600 US Airways Group, Inc. (c) .................... 2,995,200
------------
9,057,388
------------
AUTOMOTIVE--2.2%
175,600 Ford Motor Co. ................................ 10,305,525
------------
BANKS--5.7%
148,800 BB&T Corp. .................................... 5,998,500
108,750 Comerica, Inc. ................................ 7,415,391
119,700 PNC Bank Corp. ................................ 6,478,762
34,400 SunTrust Banks, Inc. .......................... 2,631,600
130,100 UnionBanCal Corp. ............................. 4,431,531
------------
26,955,784
------------
BANKS & THRIFTS--1.0%
94,200 Banc One Corp. ................................ 4,810,088
------------
BUSINESS SERVICES--0.6%
52,100 Omnicom Group ................................. 3,021,800
------------
CHEMICALS--1.5%
55,500 Dow Chemical Co. .............................. 5,047,031
52,400 Ecolab, Inc. .................................. 1,896,225
------------
6,943,256
------------
COMPUTER SOFTWARE & SERVICES--2.2%
80,100 Compuware Corp. (c) ........................... 6,257,812
100,800 NCR Corp. (c) ................................. 4,208,400
------------
10,466,212
------------
COMPUTERS & BUSINESS EQUIPMENT--9.4%
186,150 Cisco Systems (c) ............................. 17,277,047
39,600 EMC Corp. (c) ................................. 3,366,000
70,200 International Business Machines Corp. ......... 12,969,450
110,100 Lexmark International Group (c) ............... 11,065,050
------------
44,677,547
------------
CONSTRUCTION--1.6%
35,300 Armstrong World Industries, Inc. .............. 2,129,031
83,900 Fluor Corp. ................................... 3,570,994
47,700 Lafarge Corp. ................................. 1,931,850
------------
7,631,875
------------
DEFENSE & AEROSPACE--3.3%
54,000 B.F. Goodrich Co. ............................. 1,937,250
72,400 Gulfstream Aerospace Corp. (c) ................ 3,855,300
38,600 Litton Industries, Inc. (c) ................... 2,518,650
147,200 Sundstrand Corp. .............................. 7,636,000
------------
15,947,200
------------
DRUGS--9.0%
119,500 Amgen, Inc. (c) ............................... 12,495,219
97,400 Genentech, Inc. (c) ........................... 7,761,562
88,900 McKesson Corp. ................................ 7,028,656
35,800 Omnicare, Inc. ................................ 1,244,050
34,200 Pharmacia & Upjohn, Inc. ...................... 1,936,575
221,200 Schering-Plough Corp. ......................... 12,221,300
------------
42,687,362
------------
ELECTRIC UTILITIES--3.4%
160,400 DTE Energy Co. ................................ 6,877,150
44,800 FirstEnergy Corp. (c) ......................... 1,458,800
100,000 Houston Industries, Inc. ...................... 3,212,500
62,400 Pinnacle West Capital Corp. ................... 2,644,200
63,800 Western Resources, Inc. ....................... 2,121,350
------------
16,314,000
------------
ELECTRONICS--3.7%
41,800 Comverse Technology (c) ....................... 2,967,800
105,100 Honeywell, Inc. ............................... 7,915,344
25,900 Lucent Technologies, Inc. ..................... 2,849,000
49,000 QUALCOMM, Inc. (c) ............................ 2,538,812
22,800 Tellabs, Inc. (c) ............................. 1,563,225
------------
17,834,181
------------
ENERGY RESERVES--1.8%
115,400 Exxon Corp. ................................... 8,438,625
------------
FINANCIAL SERVICES--4.7%
91,100 Countrywide Credit Industries, Inc. ........... 4,572,081
168,200 Federal National Mortgage Association ......... 12,446,800
57,300 Golden West Financial ......................... 5,253,694
------------
22,272,575
------------
FOOD & BEVERAGES--3.2%
66,800 Quaker Oats Co. ............................... 3,974,600
133,300 Unilever NV 144A (d) .......................... 11,055,569
------------
15,030,169
------------
GAS & PIPELINE UTILITIES--1.6%
273,700 LG&E Energy Corp. ............................. 7,749,131
------------
HEALTH CARE - PRODUCTS--1.9%
36,000 Allegiance Corp. .............................. 1,678,500
96,200 TYCO International, Ltd. ...................... 7,257,088
------------
8,935,588
------------
INDUSTRIAL PARTS & MACHINERY--5.1%
113,000 Caterpillar, Inc. ............................. 5,198,000
203,850 Ingersoll-Rand Co. ............................ 9,568,209
86,900 United Technologies Corp. ..................... 9,450,375
------------
24,216,584
------------
LEISURE--1.2%
79,000 Eastman Kodak Co. ............................. 5,688,000
------------
LIFE INSURANCE--5.9%
213,100 Allstate Corp. ................................ 8,230,987
58,800 American General .............................. 4,586,400
66,800 Jefferson Pilot ............................... 5,010,000
87,300 Transamerica Corp. ............................ 10,083,150
------------
27,910,537
------------
LIQUOR--2.0%
149,200 Anheuser-Busch Cos ............................ 9,791,250
------------
METALS & MINING--1.9%
290,000 Alcan Aluminum, Ltd. .......................... 7,848,125
49,100 USX-U.S. Steel Group .......................... 1,129,300
------------
8,977,425
------------
OIL - REFINING & DISTRIBUTION--1.2%
69,800 Coastal Corp. ................................. 2,438,637
61,900 Enron Corp. ................................... 3,532,169
------------
5,970,806
------------
PROPERTY & CASUALTY INSURANCE--1.0%
59,000 CIGNA Corp. ................................... 4,561,438
------------
PUBLISHING--2.0%
92,600 Deluxe Corp. .................................. 3,385,688
121,900 Knight-Ridder, Inc. ........................... 6,232,137
------------
9,617,825
------------
RETAIL - CLOTHING--1.7%
273,500 Limited, Inc. ................................. 7,965,688
------------
RETAIL - DEPARTMENT STORE--4.4%
191,700 Dayton Hudson Corp. ........................... 10,399,725
129,800 Wal-Mart Stores, Inc. ......................... 10,570,587
------------
20,970,312
------------
RETAIL - FOOD & DRUG--2.1%
154,600 Albertson's, Inc. ............................. 9,846,088
------------
SECURITIES & ASSET MANAGEMENT--1.1%
116,400 Lehman Brothers Holdings ...................... 5,128,875
------------
SEMI-CONDUCTORS--2.5%
101,200 Intel Corp. ................................... 11,998,525
------------
TELECOMMUNICATION--6.8%
110,100 Ameritech Corp. ............................... 6,977,587
182,400 AT&T Corp. .................................... 13,725,600
135,200 Bell Atlantic Corp. ........................... 7,165,600
71,500 U.S. West, Inc. ............................... 4,620,688
------------
32,489,475
------------
Total Common Stocks (Identified Cost
$379,792,326) ............................... 464,211,134
------------
<PAGE>
SHORT TERM INVESTMENT--1.9%
FACE
AMOUNT
- -------------------------------------------------------------------------------
$9,126,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/1998 at 4.00% to be repurchased
at $9,130,056 on 1/04/1999 collateralized by
$6,830,000 U.S. Treasury Bond 8.125% due
8/15/2019 with a value of $9,334,230 ........ 9,126,000
------------
Total Short Term Investment (Identified Cost
$9,126,000) ................................. 9,126,000
------------
Total Investments--99.5% (Identified Cost
$388,918,326)(b) ............................ 473,337,134
Other assets less liabilities ................. 2,460,217
------------
Total Net Assets--100% ........................ $475,797,351
============
(a) See Note 1a of Notes to Financial Statements
(b) Federal Tax Information: At December 31, 1998 the net unrealized
appreciation on investments based on cost of $388,918,326 for federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $ 90,751,620
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (6,332,812)
------------
Net unrealized appreciation ................................ $ 84,418,808
============
(c) Non-income producing security.
(d) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31,
1998 the value of these securities amounted to $11,055,569 or 2.3% of total
net assets.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $388,918,326) ........ $473,337,134
Cash ....................................................... 999
Receivable for:
Fund shares sold ......................................... 5,436,853
Dividends and interest ................................... 641,039
Tax reclaims ............................................. 1,419
------------
479,417,444
LIABILITIES
Payable for:
Fund shares redeemed ................................... $3,213,627
Accrued expenses:
Management fees ........................................ 256,106
Deferred trustees' fees ................................ 19,717
Accounting and administrative .......................... 7,838
Other .................................................. 122,805
----------
3,620,093
------------
NET ASSETS ................................................. $475,797,351
============
Net Assets consist of:
Capital paid in ........................................ $379,543,084
Undistributed net investment income .................... 101,283
Accumulated net realized gains (losses) ................ 11,734,176
Unrealized appreciation (depreciation) on investments .. 84,418,808
------------
NET ASSETS ................................................. $475,797,351
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($304,139,234 divided by 18,350,323 shares of beneficial
interest) ................................................ $ 16.57
============
Offering price per share (100/94.25 of $16.57) ............. $ 17.58*
============
Net asset value and offering price of Class B shares
($153,369,323 divided by 9,371,366 shares of beneficial
interest) ................................................ $ 16.37**
============
Net asset value and offering price of Class C shares
($18,288,032 divided by 1,118,714 shares of beneficial
interest) ................................................ $ 16.35**
============
Net asset value, offering and redemption price of Class Y shares
($762 divided by 46 shares of beneficial interest) ....... $ 16.57
============
* 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of: $12,582) .............. $ 5,537,685
Interest .................................................. 415,009
------------
5,952,694
Expenses
Management fees ......................................... $2,586,482
Service fees - Class A .................................. 645,966
Service and distribution fees - Class B ................. 1,126,327
Service and distribution fees - Class C ................. 115,170
Trustees' fees and expenses ............................. 22,118
Accounting and administrative ........................... 80,888
Custodian ............................................... 113,697
Transfer agent .......................................... 715,502
Audit and tax services .................................. 27,500
Legal ................................................... 20,469
Printing ................................................ 66,049
Registration ............................................ 73,386
Miscellaneous ........................................... 25,635
----------
Total expenses ............................................ 5,619,189
------------
Net investment income ..................................... 333,505
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on Investments - net ................. 48,697,181
Unrealized appreciation (depreciation) on Investments - net 31,648,258
------------
Net gain (loss) on investment transactions ................ 80,345,439
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ....... $ 80,678,944
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ........................ $ 711,725 $ 333,505
Net realized gain (loss) on investments ...... 52,507,998 48,697,181
Unrealized appreciation (depreciation) on
investments ................................ 20,723,726 31,648,258
------------ ------------
Increase (decrease) in net assets from
operations ..................................... 73,943,449 80,678,944
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .................................... (742,082) (227,108)
Class B .................................... (21,007) 0
Class C .................................... (7,712) 0
Class Y .................................... 0 (1)
Net realized gain on investments
Class A .................................... (35,442,350) (32,875,714)
Class B .................................... (12,117,349) (15,243,587)
Class C .................................... (1,087,638) (1,691,556)
Class Y .................................... 0 (3)
------------ ------------
(49,418,138) (50,037,969)
------------ ------------
Increase (decrease) in net assets derived from 66,455,566 136,443,607
------------ ------------
Total increase (decrease) in net assets ...... 90,980,877 167,084,582
NET ASSETS
Beginning of the year ........................ 217,731,892 308,712,769
------------ ------------
End of the year .............................. $308,712,769 $475,797,351
============ ============
UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME
End of the year .............................. $ (5,113) $ 101,283
============ ============
</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 .............................. $12.67 $12.41 $14.39 $13.87 $15.35
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............... 0.22 0.18 0.13 0.07(b) 0.04
Net Realized and Unrealized Gain
(Loss) on Investments ............. (0.10) 4.01 2.07 4.40 3.29
------ ------ ------ ------ ------
Total From Investment Operations .... 0.12 4.19 2.20 4.47 3.33
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.21) (0.18) (0.13) (0.06) (0.01)
Distributions From Net Realized
Capital Gains (0.17) (2.03) (2.59) (2.93) (2.10)
------ ------ ------ ------ ------
Total Distributions ................. (0.38) (2.21) (2.72) (2.99) (2.11)
------ ------ ------ ------ ------
Net Asset Value, End of the Year .... $12.41 $14.39 $13.87 $15.35 $16.57
====== ====== ====== ====== ======
Total Return (%)(a) ................. 1.0 35.1 17.2 33.4 23.9
Ratio of Operating Expenses to
Average Net Assets (%) ............ 1.28 1.38 1.30 1.25 1.23
Ratio of Net Investment Income to
Average Net Assets (%) ............ 1.75 1.31 0.92 0.46 0.33
Portfolio Turnover Rate (%) ......... 6 69 127 103 114
Net Assets, End of the Year (000) ... $104,081 $150,693 $166,963 $220,912 $304,139
(a) A sales charge is not reflected in total return calculations.
(b) Per share net investment income has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Year ............................. $12.66 $12.42 $14.40 $13.87 $15.28
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income (Loss) ....... 0.16 0.10 0.03 (0.05)(b) (0.05)
Net Realized and Unrealized Gain
(Loss) on Investments ............ (0.09) 4.01 2.07 4.40 3.24
------ ------ ------ ------ ------
Total From Investment Operations ... 0.07 4.11 2.10 4.35 3.19
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.14) (0.10) (0.04) (0.01) 0.00
Distributions From Net Realized
Capital Gains (0.17) (2.03) (2.59) (2.93) (2.10)
------ ------ ------ ------ ------
Total Distributions ................ (0.31) (2.13) (2.63) (2.94) (2.10)
------ ------ ------ ------ ------
Net Asset Value, End of the Year ... $12.42 $14.40 $13.87 $15.28 $16.37
====== ====== ====== ====== ======
Total Return (%)(a) ................ 0.6 34.3 16.3 32.4 23.1
Ratio of Operating Expenses to
Average Net Assets (%) ........... 1.93 2.11 2.05 2.00 1.98
Ratio of Net Investment Income to
Average Net Assets (%) ........... 1.10 0.56 0.17 (0.29) (0.42)
Portfolio Turnover Rate (%) ........ 6 69 127 103 114
Net Assets, End of the Year (000) .. $5,185 $29,026 $46,856 $81,066 $153,369
(a) A contingent deferred sales charge is not reflected in total return calculations.
(b) Per share net investment income has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Y
-------------------------------------------------------------- -----------------------
MAY 1, (a) NOVEMBER 18, (a)
THROUGH YEAR ENDED DECEMBER 31, THROUGH
DECEMBER 31, --------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1998
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period ............ $13.84 $14.39 $13.85 $15.28 $15.42
------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income (Loss) 0.06 0.04 (0.05)(d) (0.04) 0.02
Net Realized and Unrealized
Gain on Investments ...... 2.58 2.05 4.42 3.21 1.22
------ ------ ------ ------ ------
Total From Investment
Operations ............... 2.64 2.09 4.37 3.17 1.24
------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income ........ (0.06) (0.04) (0.01) 0.00 (0.02)
Distributions From Net
Realized Capital Gains ... (2.03) (2.59) (2.93) (2.10) (0.07)
------ ------ ------ ------ ------
Total Distributions ........ (2.09) (2.63) (2.94) (2.10) (0.09)
------ ------ ------ ------ ------
Net Asset Value, End of the
Period ................... $14.39 $13.85 $15.28 $16.35 $16.57
====== ====== ====== ====== ======
Total Return (%)(c) ........ 20.2 16.3 32.6 22.9 8.1
Ratio of Operating Expenses
to Average Net Assets (%) 2.11(b) 2.05 2.00 1.98 0.98(b)
Ratio of Net Investment
Income to Average Net
Assets (%) ............... 0.56(b) 0.17 (0.29) (0.42) 0.58(b)
Portfolio Turnover Rate (%) 69 127 103 114 114
Net Assets, End of the
Period (000) ............. $4,707 $3,912 $6,735 $18,288 $1
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one
year are not annualized.
(d) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
1. The Fund is a series of New England Funds Trust II (the "Trust"), a
Massachusetts business trust, registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company.
The Fund seeks opportunities for long-term growth of capital and income. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series of shares is 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 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased prior to
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. Class Y shares do not
pay a front end sales charge, a contingent deferred sales charge or 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 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 ask price. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates value. All other securities and assets are valued at their fair
value as determined in good faith by the Fund's adviser and subadviser, under
the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted
for on the trade date (the date the buy or sell is executed). Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Interest income is increased by the accretion of discount. In determining
net gain or loss on securities sold, the cost of securities has been determined
on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassification to paid in capital.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price, 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 year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were
$507,925,373 and $426,599,401, respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser New England Funds Management, L.P.
("NEFM") at the annual rate of 0.70% of the first $200 million of the Fund's
average daily net assets, 0.65% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Westpeak Investment Advisors, L.P. ("Westpeak") at the rate of 0.50% of the
first $25 million of the Fund's average daily net assets, 0.40% of the next $75
million, 0.35% of the next $100 million and 0.30% of such assets in excess of
$200 million. Certain officers and directors of NEFM are also officers or
trustees of the Fund. NEFM and Westpeak 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 Westpeak under the management agreement in effect during
the year ended December 31, 1998 are as follows:
FEES EARNED
-----------
$1,263,874 NEFM
1,322,608 Westpeak
The effective management fee for the year ended December 31, 1998 was 0.68%.
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 Fund's expenses of
providing these services which include the following: (i) expenses for personnel
performing bookkeeping, accounting and financial reporting functions and
clerical functions relating to the Fund and (ii) expenses for services required
in connection with the preparation of registration statements and prospectuses,
registration of shares in various states, shareholder reports and notices, proxy
solicitation material furnished to shareholders of the Fund or regulatory
authorities and reports and questionnaires for SEC compliance. For the year
ended December 31, 1998, these expenses amounted to $80,888 and are shown
separately in the financial statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is the
transfer and shareholder servicing agent to the Fund and Boston Financial Data
Services serves as the sub-transfer agent for the Fund. For the year ended
December 31, 1998, the Fund paid NEFSCO $527,999 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $8,175 in transfer agent credits. The transfer agent expense in the
Statement of Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class A shares, as reimbursement for expenses (including certain payments
to securities dealers, who may be affiliated with New England Funds) incurred by
the New England Funds in providing personal services to investors in Class A
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1998, the Fund paid New England Funds $645,966 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 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 $281,582 and $28,792 in service fees under
the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds a
monthly distribution fee at the annual rate of 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 $844,745
and $86,378 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 $1,481,080.
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, NEFSCO, Nvest or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $2,255
Meeting Fee 152/meeting
Annual Committee Member Retainer 338
Annual Committee Chairman Retainer 226
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have been, had it been invested in the Fund on the
normal payment date.
4. CAPITAL SHARES. At December 31, 1998 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 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 ......................................... 2,089,570 $ 32,195,156 9,065,395 $144,572,219
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 39,664 614,423 11,442 187,649
Distributions from net realized gain .............. 2,099,575 31,028,150 2,031,262 29,158,832
------------ ------------ ------------ ------------
4,228,809 63,837,729 11,108,099 173,918,700
Shares repurchased .................................. (1,875,250) (29,197,625) (7,145,922) (112,760,204)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 2,353,559 $ 34,640,104 3,962,177 $ 61,158,496
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 1,627,496 $ 25,245,821 4,248,677 $ 69,373,470
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 1,973 30,758 0 0
Distributions from net realized gain .............. 781,695 11,519,364 1,005,847 14,281,653
------------ ------------ ------------ ------------
2,411,164 36,795,943 5,254,524 83,655,123
Shares repurchased .................................. (484,221) (7,468,164) (1,188,079) (19,142,794)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 1,926,943 $ 29,327,779 4,066,445 $ 64,512,329
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 740,016 $ 11,332,702 1,217,463 $ 19,862,147
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 166 2,597 0 0
Distributions from net realized gain .............. 71,295 1,050,610 112,955 1,604,497
------------ ------------ ------------ ------------
811,477 12,385,909 1,330,418 21,466,644
Shares repurchased .................................. (653,225) (9,898,226) (652,475) (10,694,572)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 158,252 $ 2,487,683 677,943 $ 10,772,072
------------ ------------ ------------ ------------
<CAPTION>
NOVEMBER 18, 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 46 $ 710
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 0 0 0 0
Distributions from net realized gain .............. 0 0 0 0
------------ ------------ ------------ ------------
0 0 46 710
Shares repurchased .................................. 0 0 0 0
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 0 $ 0 46 $ 710
------------ ------------ ------------ ------------
Increase (decrease) derived from capital shares
transactions ...................................... 4,438,754 $ 66,455,566 8,706,611 $136,443,607
============ ============ ============ ============
(a) Commencement of operations.
</TABLE>
5. 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 GROWTH OPPORTUNITIES 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 Growth
Opportunities 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 EQUITY INCOME FUND
SUPPLEMENT DATED FEBRUARY 12, 1999
TO THE NEW ENGLAND STOCK FUNDS CLASS A, B AND C AND
CLASS Y PROSPECTUSES EACH DATED MAY 1, 1998
The following information supplements the second paragraph in the "Fund
Management" section of each Prospectus:
Effective immediately, Peter Ramsden and Tom Kolefas act as portfolio managers
of the Equity Income 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.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its earnings
per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more aggressive than
"value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
<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.
<PAGE>
------------------
[LOGO](R) Bulk Rate
NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
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GP56-1298
[Recycle Logo] Printed on Recycled Paper
