<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England Short Term
Corporate Income Fund
[graphic omitted]
WHERE
THE BEST MINDS
MEET(R)
- -----------------
DECEMBER 31, 1998
- -----------------
<PAGE>
FEBRUARY 1999
- --------------------------------------------------------------------------------
Photo of Bruce R. Speca
- --------------------------------------------------------------------------------
"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 500 Stock Index -- 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.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<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
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
NEW ENGLAND SHORT TERM CORPORATE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH DECEMBER 31, 1998
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.
In the past, the Lehman ARM Index served as the benchmark for New England
Adjustable Rate U.S. Government Fund. When the Fund became New England Short
Term Corporate Income Fund on December 1, 1998 its benchmark was changed to the
Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index. This index
better compares to the Fund's new strategy of investing primarily in corporate
securities to achieve its objective of a high level of current income consistent
with preservation of capital. As of December 1, 1998, the sales charge on new
purchases of the Fund's Class A shares increased to 3.0% from 1.0%. Class B
pricing is unchanged, and a new Class C share became available December 7, 1998.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
[A chart in the form of a line graph appears here illustratng a $10,000
investment in the Fund compared to the Lehman Adjustable Rate Mortgage Index and
the Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index since
12/31/91. The data for this chart are as follows:]
DECEMBER 1991 THROUGH DECEMBER 1998
ST Corp ST Corp Lehman LB Mutual Fundd
NAV(1) MSC(2) ARM(7) Short (1-5)(4)
- ---------------------------------------------------------------------------
12/31/1991 $10,000 $ 9,700 $10,000 $10,000
1992 $10,494 $10,179 $10,502 $10,758
1993 $10,916 $10,588 $11,131 $11,675
1994 $11,000 $10,670 $11,132 $11,640
1995 $11,948 $11,590 $12,437 $13,321
1996 $12,645 $12,265 $13,263 $14,004
1997 $13,430 $13,027 $14,142 $15,020
1998 $13,970 $13,551 $14,887 $16,156
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and C share
performance will vary based on differences in inception date, fees and sales
charges. All Index and Fund performance assumes reinvested distributions.
Although the Fund's inception was on 10/18/91, this chart begins on 12/31/91
because the Lehman ARM Index was not established until 12/31/91.
New England Short Term Corporate Income Fund
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS - 12/31/98
CLASS A (Inception 10/18/91) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 4.0% 5.1% 4.9%
With Max. Sales Charge(2) 0.9 4.4 4.5
- --------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 3.4% 4.3% 4.0%
With CDSC(3) -1.6 3.9 3.9
- --------------------------------------------------------------------------------
CLASS C (Inception 12/7/98) SINCE INCEPTION
Net Asset Value1 0.3%
With CDSC3 -0.7
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS A CLASS B CLASS C
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS INCEPTION INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C>
LB Mutual Fund Short (1-5) Invest. Grade Debt Index(4) 7.6% 6.7% 7.3% 6.5% N/A
Lipper Short Term Investment Grade(5) 5.8 5.4 5.9 5.3 N/A
Morningstar Short Term Bond Average(6) 6.3 5.5 6.1 5.2 N/A
Lehman ARM Index(7) 5.3 6.1 N/A 5.9 N/A
Lipper ARM Average(8) 4.0 5.0 4.8 4.8 N/A
Morningstar Short Gov't Average(9) 6.1 5.2 5.6 5.0 N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
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 3% at the time of
purchase of Class A shares. Actual historical performance would have been
higher; the Fund's sales charge was increased from 1% to 3% on December 1,
1998 when its objective and strategy changed.
(3) With Contingent Deferred Sale 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) Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index is an
unmanaged index including all publicly issued, fixed-rate, nonconvertible
investment grade domestic corporate debt with maturities of 1 to 5 years.
The Index performance has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to mutual
fund investments. Investors cannot purchase an index directly. Class A since
inception return is calculated from 10/31/91. Class B since inception return
is calculated from 9/30/93.
(5) Lipper Short Term Investment Grade 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. Class A since
inception return is calculated from 10/31/91. Class B since inception return
is calculated from 9/30/93.
(6) Morningstar Short Term Bond Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Morningstar Inc. Class A
since inception return is calculated from 10/31/91. Class B since inception
return is calculated from 9/30/93.
(7) Lehman Adjustable Rate Mortgage (ARM) Index is an unmanaged index of
adjustable rate mortgages of short to intermediate maturities. The Index
performance has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund investments.
Investors cannot purchase an index directly. Since the Index was not
established until 12/31/91, there is no since inception return for Class A
shares. Since inception return for Class B is calculated from 9/30/93.
(8) Lipper Adjustable Rate Mortgage (ARM) 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 A since inception return is
calculated from 10/31/91. Class B since inception return is calculated from
9/30/93.
(9) Morningstar Short Government Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Morningstar Inc. Class A
since inception return is calculated from 10/31/91. Class B since inception
return is calculated from 9/30/93.
<PAGE>
NEW ENGLAND SHORT TERM CORPORATE INCOME FUND
Questions & Answers with Your Portfolio Manager
- --------------------------------------------------------------------------------
[Photo of Scott Nicholson]
Back Bay Advisors, L.P.
- --------------------------------------------------------------------------------
Q. How did New England Short Term Corporate Income Fund perform over
the past year?
For the 12-month period ending December 31, 1998, the Fund's Class A shares
generated a total return, based on net asset value, of 4.0%, including a $0.09
per share drop to $7.30 and the reinvestment of $0.38 per share in dividend
distributions.
Q. The Fund recently changed its strategy and its name. Can you
please summarize the reasons for these changes?
As of December 1, 1998, the Fund's name changed from New England Adjustable Rate
U.S. Government Fund to New England Short Term Corporate Income Fund.
Previously, the Fund focused at least 65% of its investments on adjustable rate
mortgage securities (ARMs). However, since the Fund was introduced in 1991, the
investment environment for these types of securities has changed dramatically,
and their return advantage over money market instruments has diminished
substantially.
Other factors came into play as well in bringing about the Fund's change in
strategy and name. First, a revision to the tax law requires that certain
mortgage prepayments be applied to ARMs' principal. In the past, such
prepayments only affected the income generated by these securities. As a result
of this change, the Fund's price-per-share stability would have been undermined
if it had remained an ARM fund. In addition, new issuance of ARMs has been
minimal because many consumers have opted for fixed-rate mortgages, given the
low level of interest rates.
By shifting the Fund's focus to the short-term corporate market, we believe that
we will be able to pursue more attractive yields and total returns with limited
additional risk. Although the Fund's strategy has changed, its investment
objective remains essentially the same. Going forward, the Fund's investment
objective will continue to be a high level of current income consistent with the
preservation of capital. As of December 1, 1998 the sales charge on new
purchases of the Fund's Class A shares increased to 3.0% from 1.0%. The Fund's
new benchmark is the Lehman Brothers Mutual Fund Short (1-5) Investment Grade
Debt Index. Its Lipper category is Short-Term Investment Grade Debt and its
Morningstar category is Short Term Bond.
Q. What will the structure of the Fund look like with its changeover?
The Fund's transition from an ARM Fund to a short-term bond fund will be
gradual, as a result of difficult market conditions for adjustable rate
securities and the need to maintain a liquid portfolio. However, we aim to
complete the Fund's asset reallocation by February 28, 1999.
The Fund will invest primarily in corporate and U.S. government and agency
securities, normally maintaining a minimum average dollar-weighted credit
quality of "A" as rated by Standard & Poor's and an average maturity of three
years or less. By February 28, the Fund should have at least 65% of its assets
invested in corporate securities, depending on market conditions. In addition,
the Fund will be able to invest as much as 10% of its assets in
below-investment-grade corporate securities. We'll maintain at least a 10% stake
in U.S. government or government agency securities. The Fund also may invest up
to 10% in securities denominated in foreign currencies, and up to 25% of its
assets in U.S. dollar-denominated securities of foreign issuers. Again, the size
of these allocations will depend on market conditions.
Q. How was the Fund structured at the end of the period, on December 31, 1998?
At the end of the period, the Fund held approximately 40% of its assets in U.S.
government and government agency securities, approximately 27% in ARMs,
approximately 29% in corporate securities, approximately 4% in cash and cash
equivalents. Naturally, the ARM position is higher than it will be, as we were
still in the process of reducing the Fund's allocation to ARMs at the end of
December.
Q. What is your outlook as we enter 1999?
Our outlook for the first half of 1999 calls for an economic slowdown. Growth in
U.S. Gross Domestic Product (GDP) in the third quarter came in at 3.7%, and
estimates for the fourth quarter are in the 3% to 3.5% range. With growth at
these levels, we'd normally look for the Federal Reserve Board (the Fed) to
increase short-term interest rates as a way to slow growth and head off
inflation. However, the Fed was biased toward lowering rates at the end of 1998
because of concerns about global economic growth.
The Fed has shown that although the domestic economy is its primary concern,
global issues are important factors weighing on its decisions at this point. As
a result, we feel the Fed will provide more liquidity to the global markets by
lowering interest rates further, at some time in the early part of 1999.
PORTFOLIO MIX -- 12/31/98
Gov'ts & Gov't Agencies 40%
ARMs 27%
Corporates 29%
Cash & Cash Equivalents 4%
Looking more closely at the domestic situation, inflation has not been a
concern. In fact, we've seen deflation, especially in commodity prices. While
service industries presently are faring well due to strong consumer spending,
U.S. manufacturers generally are struggling. We believe that the effect on
domestic corporations of the recent Asian economic crisis may become more
pronounced in the first quarter, which will in turn put pressure on earnings. As
a result, we believe corporate profits in the United States will decline. Lower
earnings would have a negative influence on the U.S. stock market and
consequently a ripple effect on corporate bonds. From that standpoint, we'll
look to invest in higher-quality bonds and in industries that tend to hold up
well in an economic slowdown, such as utilities. In addition, in the process of
restructuring the portfolio, we may decide to hold on to some of the
non-corporate securities already in the Fund if we feel they are solid defensive
investments in that kind of environment.
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 may invest in foreign securities, which can involve special risks.
Investments in lower-rated, higher-yielding bonds may involve greater credit
risk. Mortgage-backed securities are subject to the risk that unanticipated
prepayments may occur, reducing the value of the securities. Government
guarantees apply to individual securities only and not to prices and yields of
shares in a managed portfolio. See the Fund's prospectus for details.
Scott Nicholson
Back Bay Advisors, L.P.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1998
BONDS AND NOTES--96.1% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
MOUNT DESCRIPTION VALUE (a)
- ----------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES (c)--56.2%
<C> <S> <C>
$ 3,000,000 Federal Home Loan Mortgage Corp., 6.000%, 6/15/2001 ...... $ 3,008,430
2,846,674 Federal Home Loan Mortgage Corp., 6.276%, 10/15/2023, (e) 2,864,466
1,004,968 Federal Home Loan Mortgage Corp., 7.168%, 11/01/2035 ..... 1,026,323
2,283,089 Federal Home Loan Mortgage Corp., 7.261%, 1/01/2025 ...... 2,323,408
830,949 Federal Home Loan Mortgage Corp., 7.404%, 3/01/2025, (d) . 844,452
329,207 Federal Home Loan Mortgage Corp., 7.510%, 12/01/2025 ..... 331,100
927,869 Federal Home Loan Mortgage Corp., 7.693%, 12/01/2022, (d) 943,819
1,017,784 Federal Home Loan Mortgage Corp., 7.845%, 7/01/2025, (d) . 1,035,911
378,459 Federal National Mortgage Association, 5.882%, 9/01/2023,
(d) .................................................... 377,040
5,000,000 Federal National Mortgage Association, 6.100%, 10/06/2000 5,039,050
1,563,460 Federal National Mortgage Association, 6.397%, 7/01/2019,
(d) .................................................... 1,576,655
323,092 Federal National Mortgage Association, 6.640%, 6/01/2019,
(d) .................................................... 326,626
960,803 Federal National Mortgage Association, 6.788%, 1/01/2020,
(d) .................................................... 974,764
2,360,670 Federal National Mortgage Association, 6.888%, 4/01/2026 . 2,400,518
194,293 Federal National Mortgage Association, 7.190%, 8/01/2017,
(d) .................................................... 196,176
296,968 Federal National Mortgage Association, 7.201%, 5/01/2020,
(d) .................................................... 301,238
1,442,301 Federal National Mortgage Association, 7.331%, 7/01/2024,
(d) .................................................... 1,462,811
654,642 Federal National Mortgage Association, 7.333%, 5/01/2025,
(d) .................................................... 664,566
2,403,503 Federal National Mortgage Association, 7.362%, 6/01/2022,
(d) .................................................... 2,494,764
1,156,114 Federal National Mortgage Association, 7.376%, 11/01/2025,
(d) .................................................... 1,172,739
492,456 Federal National Mortgage Association, 7.438%, 7/01/2023,
(d) .................................................... 503,383
1,427,907 Federal National Mortgage Association, 7.881%, 1/01/2024,
(d) .................................................... 1,464,718
11,093,729 Government National Mortgage Association, 6.875%, with
various maturities to 6/20/2023, (d) ................... 11,275,222
6,414,219 Small Business Administration Guaranteed Loan, 5.250%,
1/25/2023 .............................................. 6,446,290
5,204,757 Small Business Administration Pool Certificates, 5.250%,
6/25/2023 .............................................. 5,230,781
-----------
54,285,250
-----------
U.S. GOVERNMENT--11.1%
5,000,000 United States Treasury Notes, 7.500%, 11/15/2001 ......... 5,376,550
5,000,000 United States Treasury Notes, 8.500%, 11/15/2000 ......... 5,340,600
-----------
10,717,150
-----------
CORPORATE BONDS--28.8%
2,000,000 Arizona Public Service Co., 5.750%, 9/15/2000 ............ 2,011,000
2,500,000 CIT Group Inc. 5.570%, 12/08/2003 ........................ 2,487,475
2,000,000 Conseco Inc., 7.875%, 12/15/2000 ......................... 2,006,760
1,969,000 Finova Capital Corp., 6.450%, 6/01/2000 .................. 1,986,386
3,000,000 General Motors Acceptance Corp., 5.480%, 12/16/2002 ...... 2,972,700
2,500,000 Houston Lighting & Power Co., 8.150%, 5/01/2002 .......... 2,706,875
2,500,000 Owens Illinois, Inc., 7.850%, 5/15/2004 .................. 2,627,325
3,000,000 Pemex Finance, Ltd., 5.720%, 11/15/2003 .................. 3,000,000
2,000,000 Raytheon Co., 6.450%, 8/15/2002 .......................... 2,046,840
2,000,000 Rite Aid Corp., 5.500%, 12/15/2000 ....................... 1,993,020
1,000,000 State Street Boston Corp., 5.950%, 9/15/2003 ............. 1,018,710
2,000,000 Texas Utilities Co., 5.940%, 10/15/2001 .................. 2,001,820
1,000,000 Union Pacific Corp., 5.780%, 10/15/2001 .................. 989,340
-----------
27,848,251
-----------
Total Bonds and Notes (Identified Cost $93,104,549) ...... 92,850,651
-----------
SHORT TERM INVESTMENTS--4.1%
- -----------------------------------------------------------------------------------------------
$ 4,000,000 Merrill Lynch & Co., 5.000%, 1/04/1999 ................... 3,998,333
-----------
Total Short Term Investments (Identified Cost $3,998,333) 3,998,333
-----------
Total Investments--100.2% (Identified Cost $97,102,882)
(b) .................................................... 96,848,984
Other assets less liabilities ........................... (186,232)
----------
Total Net Assets--100% ................................... $96,662,752
===========
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1998 the net unrealized
depreciation on investments based on cost for federal income tax
purposes of $97,102,882 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess value over tax cost ........................... $ 172,550
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value ........................ (426,448)
----------
Net unrealized depreciation ........................................ $ (253,898)
==========
At December 31, 1998 the Fund had a capital loss carryover of
approximately $15,735,913 of which $5,625,994 expires on December
31, 2002, $6,075,626 expires on December 31, 2003, $2,134,629
expires on December 31, 2004, $455,288 expires on December 31, 2005
and $1,444,376 expires on December 31, 2006. This may be available
to offset future realized capital gains, if any, to the extent
provided by regulations.
(c) The Fund's investments in mortgage backed securities of the Federal
Home Loan Mortgage Corporation and Federal National Mortgage
Association and Government National Mortgage Association are
interests in separate pools of mortgages. All separate investments
in securities of these issues which have the same coupon rate have
been aggregated for the purpose of presentation in the portfolio
composition.
(d) Variable rate mortgage backed securities. The interest rates change
on these instruments monthly based on changes in a designated base
rate. The rates shown were those in effect at December 31, 1998.
(e) Collateralized mortgage obligation.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1998
ASSETS
Investments at value
(Identified cost $97,102,882) .............. $ 96,848,984
Cash ........................................ 106,301
Receivable for:
Fund shares sold .......................... 402,950
Securities sold ........................... 332,041
Accrued interest .......................... 1,471,950
-------------
99,162,226
LIABILITIES
Payable for:
Securities purchased ...................... $2,046,458
Fund shares redeemed ...................... 230,876
Dividends declared ........................ 98,834
Accrued expenses:
Management fees ........................... 34,755
Deferred trustees' fees ................... 12,239
Accounting and administrative ............. 4,019
Other ..................................... 72,293
----------
2,499,474
-------------
NET ASSETS .................................... $ 96,662,752
=============
Net Assets consist of:
Capital paid in ........................... $ 113,008,462
Undistributed net investment income ....... 15,910
Accumulated net realized gains (losses) ... (16,107,722)
Unrealized appreciation (depreciation)
on investments .. ......................... (253,898)
-------------
NET ASSETS .................................... $ 96,662,752
=============
Computation of net asset value and offering price:
Net asset value and redemption price of
Class A shares ($92,668,534 divided by
12,693,540 shares of beneficial interest) .... $7.30
=====
Offering price per share (100/97 of $7.30) .... $7.53*
=====
Net asset value and offering price of
Class B shares ($3,761,112 divided by
516,052 shares of beneficial interest) ....... $7.29**
=====
Net asset value and offering price of
Class C shares ($233,106 divided by
31,981 shares of beneficial interest)......... $7.29**
=====
* Based upon single purchases of less than $1,000,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
December 31, 1998
INVESTMENT INCOME
Interest .................................... $12,011,860
Expenses
Management fees ........................... $1,013,997
Service fees - Class A .................... 444,423
Service and distribution fees - Class B ... 31,994
Service and distribution fees - Class C ... 100
Trustees' fees and expenses ............... 14,241
Accounting and administrative ............. 45,463
Custodian ................................. 90,727
Transfer agent ............................ 138,697
Audit and tax services .................... 30,600
Legal ..................................... 7,932
Printing .................................. 27,550
Registration .............................. 60,246
Miscellaneous ............................. 10,100
----------
Total expenses .............................. 1,916,070
Less expenses waived by the investment
adviser and subadviser .................... (625,150) 1,290,920
----------- ------------
Net investment income ....................... 10,720,940
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on:
Investments - net ......................... (2,163,351)
------------
Unrealized appreciation (depreciation) on:
Investments - net ......................... (1,383,310)
------------
Net gain (loss) on investment transactions .. (3,546,661)
------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS .............................. $ 7,174,279
============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998
-------- --------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 14,116,845 $ 10,720,940
Net realized loss on investments ........................ (2,347,087) (2,163,351)
Unrealized appreciation (depreciation) on investments ... 1,792,855 (1,383,310)
------------ -------------
Increase in net assets from operations .................. 13,562,613 7,174,279
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (12,791,602) (9,320,304)
Class B ............................................... (142,367) (145,098)
Class C ............................................... 0 (340)
------------ -------------
(12,933,969) (9,465,742)
------------ -------------
Decrease in net assets derived from capital share
transactions ......................................... (26,369,546) (100,934,285)
------------ -------------
Total decrease in net assets ............................ (25,740,902) (103,225,748)
NET ASSETS
Beginning of the year ................................... 225,629,402 199,888,500
------------ -------------
End of the year ......................................... $199,888,500 $ 96,662,752
============ =============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
End of the year ......................................... $ (14,193) $ 15,910
============ =============
</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 Year ........ $ 7.45 $ 7.20 $ 7.37 $ 7.37 $ 7.39
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ..................... 0.37 0.47 0.43 0.47(c) 0.38
Net Realized and Unrealized Gain (Loss) on
Investments ............................. (0.31) 0.14 (0.01) (0.02) (0.09)
------ ------ ------ ------ ------
Total From Investment Operations .......... 0.06 0.61 0.42 0.45 0.29
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income .. (0.31) (0.44) (0.42) (0.43) (0.38)
------ ------ ------ ------ ------
Total Distributions ....................... (0.31) (0.44) (0.42) (0.43) (0.38)
------ ------ ------ ------ ------
Net Asset Value, End of Year .............. $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30
====== ====== ====== ====== ======
Total Return (%) (b) ...................... 0.8 8.6 5.8 6.2 4.0
Ratio of Operating Expenses to Average Net
Assets (%) (a) .......................... 0.60 0.66 0.70 0.70 0.70
Ratio of Net Investment Income to Average
Net Assets (%) .......................... 4.85 6.29 6.39 6.27 5.93
Portfolio Turnover Rate (%) ............... 17 73 54 49 105
Net Assets, End of Year (000) ............. $489,637 $331,112 $222,809 $196,928 $92,669
(a) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense limitations
described in Note 4 to the Financial
Statements would have been (%) ........ 0.88 0.89 0.94 0.98 1.05
(b) A sales charge is not reflected in
total return calculations.
(c) Per share net investment income does
not reflect the period's
reclassification of permanent
differences between book and tax basis
net investment income. See Note 1d to
the Financial Statements.
</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 Year ........... $ 7.45 $ 7.20 $ 7.37 $ 7.36 $ 7.38
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ........................ 0.29 0.41 0.37 0.41(c) 0.33
Net Realized and Unrealized Gain (Loss) on
Investments ................................ (0.29) 0.14 (0.02) (0.02) (0.09)
------ ------ ------ ------ ------
Total From Investment Operations ............. 0.00 0.55 0.35 0.39 0.24
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ..... (0.25) (0.38) (0.36) (0.37) (0.33)
------ ------ ------ ------ ------
Total Distributions .......................... (0.25) (0.38) (0.36) (0.37) (0.33)
------ ------ ------ ------ ------
Net Asset Value, End of Year ................. $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29
====== ====== ====== ====== ======
Total Return (%) (b) ......................... 0.1 7.8 4.9 5.4 3.4
Ratio of Operating Expenses to Average Net
Assets (%) (a) ............................. 1.35 1.41 1.45 1.45 1.45
Ratio of Net Investment Income to Average Net
Assets (%) ................................. 4.10 5.54 5.64 5.52 5.18
Portfolio Turnover Rate (%) .................. 17 73 54 49 105
Net Assets, End of Year (000) ................ $2,056 $2,368 $2,821 $2,961 $3,761
(a) The ratio of operating expenses to average
net assets without giving effect to
voluntary expense limitations described in
Note 4 to the Financial Statements would
have been (%) ............................ 1.63 1.65 1.69 1.73 1.80
(b) A contingent deferred sales charge is not
reflected in total return calculations.
(c) Per share net investment income does not
reflect the period's reclassification of
permanent differences between book and tax
basis net investment income. See Note 1d
to the Financial Statements.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
CLASS C
--------------------
DECEMBER 7, 1998(a)
THROUGH
DECEMBER 31, 1998
--------------------
Net Asset Value, Beginning of Period ..................... $7.28
-----
Income From Investment Operations
Net Investment Income .................................... 0.01
Net Realized and Unrealized Gain (Loss) on Investments ... 0.01(e)
-----
Total From Investment Operations ......................... 0.02
-----
Less Distributions
Distributions From Net Investment Income ................. (0.01)
-----
Total Distributions ...................................... (0.01)
-----
Net Asset Value, End of Period ........................... $7.29
=====
Total Return (%) (d) ..................................... 0.3
Ratio of Operating Expenses to Average Net Assets (%) (b). 1.45(c)
Ratio of Net Investment Income to Average Net Assets (%) . 5.18(c)
Portfolio Turnover Rate (%) .............................. 105
Net Assets, End of Period (000) .......................... $233
(a) Commencement of operations.
(b) The ratio of operating expenses to average net assets
without giving effect to voluntary expense limitations
described in Note 4 to the Financial Statements would
have been (%) ........................................ 1.80(c)
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge is not reflected in
total return calculations. Periods less than one year
are not annualized.
(e) The amount shown for a share outstanding does not
correspond with the aggregate net gain/(loss) on
investments for the period ended December 31, 1998,
due to the timing of purchases and redemptions of
Fund shares in relation to fluctuating market
values of the investments of the Fund.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Fund seeks a high level of current income 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 is a "Fund").
The Fund offers Class A, Class B and Class C 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. Expenses of the Fund are
borne pro rata by the holders of both 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 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).
Interest income is recorded on the accrual basis. Interest income is increased
by the accretion of discount. In determining net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
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.
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 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. PURCHASE AND SALES OF SECURITIES. For the year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
- ------------------------------------- --------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ---------------------- ------------- ------------------ ------------
$145,593,488 $27,873,637 $268,654,819 $55,437
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 0.55% of the first $200 million of the Fund's
average daily net assets, 0.51% of the next $300 million and 0.47% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors L.P. ("Back Bay Advisors") at the rate of 0.275% of the
first $200 million of the Fund's average daily net assets, 0.255% of the next
$300 million and 0.235% 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") formerly know as New England Invesment Companies, L.P., which is a
subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by
NEFM and Back Bay Advisors under the management agreement in effect during the
year ended December 31, 1998 are as follows:
FEES EARNED(a)
- --------------
$506,999 NEFM
$506,998 Back Bay Advisors
(a) Before reduction pursuant to voluntary expense limitations. See Note 4.
The effective management fee for the year ended December 31, 1998 was 0.56%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, 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 $45,463 and are shown separately in the financial
statements as accounting and administrative.
C. SERVICE AND DISTRIBUTION EXPENSE. 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 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 $444,423 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(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 expenses carried forward into 1999 is $1,929,283.
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 $7,998 in service fees
under the Class B Plan and $25 in service fees under Class C Plan.
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 year ended December 31, 1998, the Fund paid New England Funds $23,996
in distribution fees under the Class B Plan and $75 in distribution fees under
the Class C Plan.
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 $67,684.
D. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund and Boston Financial
Data Services serves as a sub-transfer agent for the Fund. For the year ended
December 31, 1998, the Fund paid NEFSCO $85,179 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $3,906 in transfer agent credits. The transfer agent expense in the
Statement of Operations is net of these credits.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEFSCO, Nvest or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $931
Meeting Fee 152/meeting
Annual Committee Member Retainer 140
Annual Committee Chairman Retainer 93
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Commencing June 1, 1995 and until further notice to
the Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce
management fees in order to limit the Fund's expenses to an annual rate of
0.70% of the Fund's Class A average daily net assets and, 1.45% of Class B and
Class C average daily net assets. From May 1, 1995 through May 31, 1995
expenses were voluntarily limited to 0.65% of Class A average net assets and
1.40% of Class B average net assets. From April 1, 1992 through April 30, 1995
expenses were voluntarily limited to 0.60% of Class A average net assets and
1.35% of Class B average net assets. As a result of the Fund's expenses
exceeding the applicable voluntary expense limitation during the year ended
December 31, 1998, Back Bay Advisors reduced its management fee of $506,998 by
$312,575 and NEFM reduced its management fee of $506,999 by $312,575.
5. CAPITAL SHARES. At December 31, 1998 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class C capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------------- -------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold .................... 10,184,271 $ 75,205,511 9,823,863 $ 72,248,743
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income ............ 901,119 6,657,982 744,999 5,472,019
------------ --------------- ------------ --------------
11,085,390 81,863,493 10,568,862 77,720,762
Shares repurchased ............. (14,678,342) (108,373,107) (24,534,160) (179,732,109)
------------ --------------- ------------ --------------
Net decrease ................... (3,592,952) $ (26,509,614) (13,965,298) $(102,011,347)
------------ --------------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
CLASS B ----------- --------------- ----------- -------------
- -------
<S> <C> <C> <C> <C>
Shares sold .................... 104,271 $ 777,704 261,970 $ 1,920,476
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income ............ 17,276 127,549 17,255 126,641
----------- ---------- ---------- -------------
121,547 905,253 279,225 2,047,117
Shares repurchased ............. (103,688) (765,185) (164,137) (1,203,273)
----------- ---------- --------- -------------
Net increase ................... 17,859 $ 140,068 115,088 $ 843,844
----------- ---------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
CLASS C ----------- --------------- ----------- -------------
- -------
<S> <C> <C> <C> <C>
Shares sold .................... 0 $ 0 31,970 $ 233,136
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income ............ 0 0 11 82
----------- -------------- --------------- -------------
0 0 31,981 233,218
Shares repurchased ............. 0 0 0 0
----------- -------------- --------------- -------------
Net increase ................... 0 $ 0 31,981 $ 233,218
----------- -------------- --------------- -------------
Decrease derived from capital
shares
transactions ................. (3,575,093) $ (26,369,546) (13,818,229) $(100,934,285)
========== ============== =========== =============
</TABLE>
6. 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 SHORT TERM CORPORATE INCOME FUND
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio composition, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the New England Short Term
Corporate Income Fund (formerly the Adjustable Rate U.S. Government 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 and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW ENGLAND MUNICIPAL INCOME FUND
SUPPLEMENT DATED JANUARY 18, 1999
TO NEW ENGLAND BOND FUNDS CLASS A, B AND C PROSPECTUS DATED MAY 1, 1998
Effective January 1999, James S. Welch has replaced Nathan R. Wentworth as
portfolio manager of New England Municipal Income Fund. Mr. Welch is a Senior
Vice President of Back Bay Advisors and has been employed by the firm for over
five years. He also serves as the portfolio manager of New England
Intermediate Term Tax Free Fund of California, New England Massachusetts Tax
Free Income Fund and New England Tax Free Income Fund of New York and as co-
portfolio manager of New England Limited Term U.S. Government Fund.
NEW ENGLAND GOVERNMENT SECURITIES FUND
AND
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
SUPPLEMENT DATED FEBRUARY 12, 1999 TO
NEW ENGLAND BOND FUNDS CLASS A, B AND C SHARES AND CLASS Y SHARES
PROSPECTUSES DATED MAY 1, 1998
The following supplements the third paragraph in the "Fund Management" section
of each Prospectus:
Effective immediately, Joel A. Damiani acts as lead portfolio manager and
Scott A. Millimet acts as co-portfolio manager of the Government Securities
Fund, and Mr. Millimet acts as lead portfolio manager and Mr. Damiani acts as
co-portfolio manager of the Limited Term U.S. Government Fund.
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by
the Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the potfolio.
DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
<PAGE>
- --------------------------------------------------------------------------------
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 of 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 accumulates 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. For illustrative purposes only and not
indicative of future performance of any New England Fund.
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.
<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
---------------------
S156-1298
[recycle symbol] Printed On Recycled Paper
