-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O8SqXf/Q22CLKFhe+SyYlfx5C7o5+8N68lR8PK3DTDXtLy4Xiv2qrNLG3tr1nSX9 kmVnx5sO16p8KfiV/CvBIg== 0000950156-98-000221.txt : 19980309 0000950156-98-000221.hdr.sgml : 19980309 ACCESSION NUMBER: 0000950156-98-000221 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00242 FILM NUMBER: 98558593 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: INVESTMENT TRUST OF BOSTON FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WORLD INVESTMENT TRUST DATE OF NAME CHANGE: 19680529 N-30D 1 NEF TRUST II - GROWTH OPPORTUNITIES FUND ANNUAL REPORT - ------------------------------------------------------------------------------ [logo] NEW ENGLAND FUNDS(R) Where The Best Minds Meet(R) - ------------------------------------------------------------------------------ New England Growth Opportunities Fund [Graphic Omitted] DECEMBER 31, 1997 February 1998 - -------------------------------------------------------------------------------- "Even in 1997 . . . investors saw some sharp, short-term drops, whether they were invested in the United States or overseas, in bonds or stocks." [Photo] Dear Shareholder: In 1997, many investors once again had reason to be pleased with the performance of their mutual fund holdings. However, in times such as these, expectations tend to grow along with prices. It pays to remind ourselves that no trend is permanent, and we should keep our goals realistic and long-term needs in focus. In the third straight year of outstanding returns, the Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index -- two widely followed indicators of the performance of large-company stocks -- gained 24.9% and 33.3% respectively. At the same time, smaller-company stocks, as measured by the Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded as declining interest rates and rising prices meant solid gains. The Lehman Long Treasury Index, for example, posted a 15.1% return for the year. Results were less favorable for international investors, especially those exposed to emerging markets or the financial turmoil in Asia. Gratifying though it has been, the markets' surge of the past few years obscures the historic norm: Downturns and volatility also are regular features of investing. Even in 1997, notwithstanding the impressive overall results, investors saw some sharp, short-term drops, whether they were invested in the United States or overseas, in bonds or stocks. Market fluctuations remind us of some valuable lessons. First, volatility is inevitable, and should not disrupt long-term programs without sufficient evaluation. Those who sold in response to downturns -- October 1987 is an obvious example -- may have missed out on the subsequent uptrend. Second, sound diversification can reduce risk. A useful exercise is to review your asset allocation regularly with your financial representative. Starting in 1998, you have one more reason to consult with your representative: Newly expanded retirement options, including the new Roth IRA, could play an important role in your retirement and tax planning for years to come. With this in mind, New England Funds has introduced programs specially designed to help you make the most of the newest retirement vehicles. [Dalbar Logo] 1995 o 1996 o 1997 In addition to offering quality mutual fund choices and tax-advantaged plans, we focus on providing the highest quality customer service. This is why I am pleased to report that we have received DALBAR's Mutual Fund Service Award for "providing the highest tier of service excellence in the mutual fund industry." New England Funds is one of just three mutual fund companies to receive this award for the third consecutive year from DALBAR, an independent evaluator of mutual fund service. We are continuing to work to provide even more effective services. Two examples are: the Personal Access Line(TM) -- our enhanced automated telephone account service (800-346-5984) -- and the account information section of the New England Funds web site (www.mutualfunds.com). Each provides convenient, 24-hour access to current information about your New England Funds accounts. All of us at New England Funds thank you for your continued support and look forward to serving you in the years ahead. Sincerely, /s/ Henry L.P. Schmelzer Henry L.P. Schmelzer President NEW ENGLAND GROWTH OPPORTUNITIES FUND - -------------------------------------------------------------------------------- INVESTMENT RESULTS THROUGH DECEMBER 31, 1997 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged; there are no expenses that affect the results. In addition, few investors could purchase all of the securities necessary to match the index. And, if they could, they would incur transaction costs and other expenses. [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in Class A Shares since 12/31/87, compared to the S&P 500 Index. The data points from the graph are as follows:] Growth of a $10,000 Investment in Class A Shares DECEMBER 1987 THROUGH DECEMBER 1997 NAV MSC S&P 500 12/31/1987 $10,000 $ 9,425 $10,000 1988 $10,981 $10,350 $11,650 1989 $14,013 $13,207 $15,330 1990 $13,416 $12,644 $14,852 1991 $17,523 $16,515 $19,358 1992 $19,149 $18,048 $20,831 1993 $20,671 $19,482 $22,927 1994 $20,876 $19,675 $23,239 1995 $28,207 $26,585 $31,939 1996 $33,061 $31,160 $39,253 1997 $44,114 $41,577 $52,328 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 Class C share performance will be greater or less than that shown based on differences in inception date, fees and sales charges. All Index and Fund performance assumes reinvested distributions. NEW ENGLAND GROWTH OPPORTUNITIES FUND AVERAGE ANNUAL TOTAL RETURNS -- 12/31/97 - -------------------------------------------------------------------------------- CLASS A (Inception 5/6/31) 1 YEAR 5 YEARS 10 YEARS Net Asset Value(1) 33.43% 18.16% 16.00% With Max. Sales Charge(2) 25.73 16.77 15.31 Standard & Poor's 500 Index(4) 33.31 20.22 18.00 Lipper Growth & Income Avg.(5) 26.99 17.53 15.72 CLASS B (Inception 9/13/93) 1 YEAR 3 YEARS SINCE INCEPTION Net Asset Value(1) 32.44% 27.44% 18.75% With CDSC(3) 27.44 26.82 18.49 Standard & Poor's 500 Index(4) 33.31 31.08 21.81 Lipper Growth & Income Avg.(5) 26.99 26.48 18.48 (calculated from 9/30/93) CLASS C (Inception 5/1/95) 1 YEAR SINCE INCEPTION Net Asset Value(1) 32.63% 25.98% Standard & Poor's 500 Index(4) 33.31 29.61 Lipper Growth & Income Avg.(5) 26.99 25.35 (calculated from 4/30/95) 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 assumes a maximum 5% sales charge is applied to a redemption of Class B shares. The sales charge will decrease over time, declining to zero six years after the purchase of shares. (4) Standard & Poor's Composite Index of 500 Stocks(R) (S&P 500) 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 Analytical Services, an independent mutual fund ranking service. NEW ENGLAND GROWTH OPPORTUNITIES FUND QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER - -------------------------------------------------------------------------------- Q. Please tell us about New England Growth Opportunities Fund's 1997 performance. [Photo of Gerald Scriver] Gerald Scriver Westpeak Investment Advisors, L.P. The Fund produced a one-year total return through December 31, 1997 of 33.43% (Class A shares at net asset value), which is significantly better than the average 26.99% return of the Fund's 624 peers in the Lipper Growth and Income Fund category. The Fund's return reflects a $1.48 per share gain in net asset value to $15.35 per share and the reinvestment of $2.99 per share in distributions. For 1997, the Fund's Class B and C shares had total returns (based on net asset value) of 32.44% and 32.63%, respectively. Morningstar, an independent mutual fund rating organization, recognized this solid performance in awarding the Fund's Class B shares a 4-star rating, the second highest available. Q. What was the investment environment like? The growing economy that greeted 1997 provided an ideal environment for equities. As more and more corporations reported earnings above analysts' expectations, the markets gathered momentum and moved higher. But as institutional investors looked ahead, they grew wary that the Federal Reserve Board might undertake a series of interest rate increases aimed at forestalling possible inflation by restraining the economy's rate of expansion. Therefore, investors concentrated on a limited number of large-capitalization companies that seemed positioned to do well in a slower economy. In reality, inflation rose only modestly and the Fed boosted rates just once, by a quarter of a percentage point increase in March. Fears of a downturn abated by mid-year, prompting investors to cast a wider, more aggressive net. Smaller- and mid-sized growth stocks began to move up, and many small-company market averages outperformed the large-company-dominated S&P 500 -- at least for a time. Then, when the currency crisis in Southeast Asia unsettled the region's equity markets, investors changed focus again, backing away from the smaller- and mid-sized segments to return to the largest, most liquid companies. Q. Given this environment, what was your strategy during the year? In the first half of the year, we established a portfolio structure that was more oriented toward value than the S&P 500 Index. We emphasized large-company stocks with low price-to-earnings ratios, a measure of a stock's price relative to the issuing company's earning power. In the third quarter we tilted the Fund's portfolio mix a little more toward growth stocks, paring back the percentage of the portfolio devoted to companies with low price/earnings ratios. We also increased the Fund's orientation toward smaller companies. In terms of specific sectors, the portfolio's technology exposure, which was about equal to the S&P 500's allocation at the end of 1996, was slightly underweight by the end of 1997. Also at year-end, we were over- represented in utilities, relative to the Index. Q. What were some of the factors that affected performance, either positively or negatively? The conservative structure we created early in the year rewarded shareholders, as stocks with modest valuations outperformed the usual growth sectors of the market. We also took advantage of the market's second and third quarter shift toward growth, and to smaller- and mid-sized growth companies in particular. Performance might have been even stronger had we taken a larger position in the top tier of large-cap issues, the group that accounted for a disproportionate part of the market's rise during the first half of the year. The portfolio benefited from positions in some of the regional Bells, NationsBank, where we took profits early, and IBM. On the other hand, Loew's Corporation did poorly because of its association with the tobacco industry, although the company is also involved in other businesses. Top Ten Portfolio Holdings -- 12/31/97 % of Company Net Assets ------------------------------------------ 1. Ameritech Corp. 2.85 ------------------------------------------ 2. Ford Motor Co. 2.50 ------------------------------------------ 3. Schering-Plough Corp. 2.47 ------------------------------------------ 4. Unilever NV, 144A 2.46 ------------------------------------------ 5. Bell Atlantic Corp. 2.45 ------------------------------------------ 6. General Motors Corp. 2.40 ------------------------------------------ 7. AirTouch Communications, Inc. 2.03 ------------------------------------------ 8. Exxon Corp. 2.01 ------------------------------------------ 9. Payless ShoeSource, Inc. 1.97 ------------------------------------------ 10. IPALCO Enterprises 1.86 Portfolio holdings and asset allocations will vary. Q. What is your market outlook, and what does it imply for the Fund? Earnings surprises -- corporate earnings reports that come in lower or higher than analysts' expectations -- are one of the elements in our stock evaluation model. Whereas in the first half of 1997 surprises were predominantly positive, later in the year we began to see results coming in below Wall Street's projections. That trend could continue in 1998, especially if our expectation of slower growth for the economy is accurate. But we also think that continued low inflation and further declines in interest rates will offset the effect that lower corporate profits have on the stock market. Historically, most market declines have been driven by higher interest rates; a market decline during a period of falling interest rates is an unlikely prospect, in our opinion. In part, we believe that inflation will be held in check by faltering economies in Southeast Asia, where weak local currencies and the strong dollar could drive down prices on the billions of dollars in goods that American companies import each year. A deflationary price trend would build sentiment for a possible easing of short-term interest rates by the Federal Reserve Board, which in turn could be a stimulus to stock prices. We plan to stay fully invested, with the goal of adding value through our proprietary value/growth research and stock selection discipline. Morningstar proprietary ratings reflect risk-adjusted performance through 12/31/97, and are subject to change every month. Past performance is no guarantee of future results. Morningstar ratings are calculated from the Fund's three year return (with fee adjustments) in excess of 90-day Treasury bill returns, and a risk factor that reflects fund performance below 90-day treasury bill returns. The Fund received 4 stars for the three year period. It was rated among 2,332 funds for the three year period. PORTFOLIO COMPOSITION Investments as of December 31, 1997 COMMON STOCK--98.0% OF TOTAL NET ASSETS SHARES DESCRIPTION VALUE (a) - ------------------------------------------------------------------------------ AEROSPACE--1.7% 7,800 Thiokol Corp. ................................. $ 633,750 62,400 United Technologies Corp. ..................... 4,543,500 ------------ 5,177,250 ------------ AIRLINES--2.9% 29,000 AMR Corp. (c) ................................. 3,726,500 35,700 UAL Corp. (c) ................................. 3,302,250 31,500 US Airways Group, Inc. (c) .................... 1,968,750 ------------ 8,997,500 ------------ APPAREL & TEXTILES--0.1% 9,000 Jones Apparel Group, Inc. (c) ................. 387,000 ------------ AUTOMOTIVE--5.8% 158,600 Ford Motor Co. ................................ 7,721,837 122,000 General Motors Corp. .......................... 7,396,250 44,300 Lear Corp. (c) ................................ 2,104,250 25,400 Navistar International Corp. (c) .............. 630,238 ------------ 17,852,575 ------------ BANKS--5.9% 26,500 BankAmerica Corp. ............................. 1,934,500 24,900 Bankers Trust New York Corp. .................. 2,799,694 77,500 Barnett Banks, Inc. ........................... 5,570,312 28,300 NationsBank Corp. ............................. 1,720,994 69,100 Popular, Inc. ................................. 3,420,450 24,800 Republic New York Corp. ....................... 2,831,850 ------------ 18,277,800 ------------ BUSINESS SERVICES--0.5% 41,700 Robert Half International, Inc. (c) ........... 1,668,000 ------------ CHEMICALS--1.3% 9,300 Dow Chemical Co. .............................. 943,950 79,000 Lubrizol Corp. ................................ 2,913,125 ------------ 3,857,075 ------------ COMPUTER SOFTWARE & SERVICES--2.6% 14,400 Cadence Design Systems, Inc. (c) .............. 352,800 54,000 Compuware Corp. (c) ........................... 1,728,000 11,600 Keane, Inc. (c) ............................... 471,250 35,700 Microsoft Corp. (c) ........................... 4,614,225 37,000 Symantec Corp. (c) ............................ 811,687 ------------ 7,977,962 ------------ COMPUTERS & BUSINESS EQUIPMENT--4.0% 39,250 Compaq Computer Corp. ......................... 2,215,172 79,100 Digital Equipment Corp., Rights (c) ........... 2,926,700 32,800 EMC Corp. (c) ................................. 899,950 36,500 International Business Machines ............... 3,816,531 42,400 Iomega Corp. (c) .............................. 527,350 42,300 Lexmark International Group, Inc. (c) ......... 1,607,400 5,100 Sun Microsystems, Inc. (c) .................... 203,363 ------------ 12,196,466 ------------ CONSTRUCTION--0.5% 23,800 Centex Corp. .................................. 1,497,913 ------------ CONSUMER DURABLES--0.2% 9,200 HON Industries, Inc. .......................... 542,800 ------------ DRUGS--7.2% 19,100 Amgen, Inc. ................................... 1,033,787 38,600 Bristol-Myers Squibb Co. ...................... 3,652,525 32,600 Cardinal Health, Inc. ......................... 2,449,075 48,200 Dura Pharmaceuticals, Inc. (c) ................ 2,211,175 22,900 Merck & Co. ................................... 2,433,125 76,700 Mylan Labs, Inc. .............................. 1,605,906 109,770 PharMerica, Inc. (c) .......................... 1,138,864 122,800 Schering-Plough Corp. ......................... 7,628,950 ------------ 22,153,407 ------------ ELECTRIC UTILITIES--4.5% 50,800 AES Corp. (c) ................................. 2,368,550 27,700 American Electric Power, Inc. ................. 1,430,013 136,600 IPALCO Enterprises ............................ 5,728,662 105,500 Pinnacle West Capital Corp. ................... 4,470,562 ------------ 13,997,787 ------------ ELECTRONICS--1.5% 18,500 Intel Corp. ................................... 1,299,625 13,100 Motorola, Inc. ................................ 747,519 15,600 Raychem Corp. ................................. 671,775 7,779 Raytheon Co. .................................. 383,602 33,800 SCI Systems, Inc. (c) ......................... 1,472,412 3,700 Tellabs, Inc. (c) ............................. 195,638 ------------ 4,770,571 ------------ FINANCE--5.0% 30,300 American Express Co. .......................... 2,704,275 67,436 Bear Stearns Companies, Inc. .................. 3,203,210 9,400 Donaldson, Lufkin & Jenrette, Inc. ............ 747,300 18,900 Franklin Resources, Inc. ...................... 1,643,119 58,500 Lehman Brothers Holdings, Inc. ................ 2,983,500 7,200 Merrill Lynch & Company, Inc. ................. 525,150 26,400 Morgan Stanley Dean Witter .................... 1,560,900 38,400 Travelers Group, Inc. ......................... 2,068,800 ------------ 15,436,254 ------------ FOOD & BEVERAGES--5.4% 35,270 Archer-Daniels-Midland Co. .................... 764,918 47,600 Interstate Bakeries ........................... 1,779,050 23,800 Kellogg Co. ................................... 1,181,075 66,800 Quaker Oats Co. ............................... 3,523,700 18,600 Sara Lee Corp. ................................ 1,047,413 35,750 Tyson Foods, Inc. ............................. 732,875 121,600 Unilever NV, 144A (d) ......................... 7,592,400 ------------ 16,621,431 ------------ GAS & PIPELINE UTILITIES--1.4% 52,700 Columbia Gas Systems, Inc. .................... 4,140,244 4,400 IPL Energy, Inc ............................... 198,000 ------------ 4,338,244 ------------ HEALTH CARE--2.3% 241,200 Beverly Enterprises, Inc. (c) ................. 3,135,600 19,300 Johnson & Johnson ............................. 1,271,387 60,400 Wellpoint Health Networks, Inc. (c) ........... 2,551,900 ------------ 6,958,887 ------------ HOTELS & RESTAURANTS--0.1% 8,100 Promus Hotel Corp. ............................ 340,200 ------------ INSURANCE--4.9% 56,100 Allstate Corp. ................................ 5,098,087 13,600 AMBAC, Inc. ................................... 625,600 13,900 American National Insurance Co. ............... 1,292,700 31,600 CIGNA Corp. ................................... 5,468,775 52,000 Everest Reinsurance Holdings, Inc. ............ 2,145,000 6,400 MGIC Investment Corp. ......................... 425,600 ------------ 15,055,762 ------------ INTERNATIONAL OIL--3.4% 42,800 Chevron Corp. ................................. 3,295,600 101,400 Exxon Corp. ................................... 6,204,412 15,000 Mobil Corp., Rights ........................... 1,082,813 ------------ 10,582,825 ------------ MEDIA & ENTERTAINMENT--4.2% 30,300 Chancellor Media Corp. (c) .................... 2,261,137 47,300 Clear Channel Communications (c) .............. 3,757,394 85,600 Jacor Communications, Inc. (c) ................ 4,547,500 40,500 Time Warner, Inc. ............................. 2,511,000 ------------ 13,077,031 ------------ METAL--0.5% 26,100 Phelps Dodge Corp. ............................ 1,624,725 ------------ MORTGAGE--0.5% 27,200 Federal National Mortgage Association ......... 1,552,100 ------------ OIL -- REFINING & DISTRIBUTION--0.7% 34,900 Coastal Corp. ................................. 2,161,619 ------------ OIL SERVICES--2.3% 16,400 BJ Services Co. (c) ........................... 1,179,775 9,800 ENSCO International, Inc. ..................... 328,300 40,300 Global Marine, Inc. (c) ....................... 987,350 35,900 Smith International, Inc. (c) ................. 2,203,362 12,100 Tidewater, Inc., Rights ....................... 667,013 67,100 Union Texas Petroleum Holdings, Inc. .......... 1,396,519 9,100 Weatherford Enterra, Inc. (c) ................. 398,125 ------------ 7,160,444 ------------ PAPER & FOREST PRODUCTS--1.3% 7,100 Bowater, Inc. ................................. 315,506 31,100 Champion International Corp. .................. 1,409,219 34,400 Fort James Corp. .............................. 1,315,800 19,000 Rayonier, Inc. ................................ 808,688 ------------ 3,849,213 ------------ PRODUCER GOODS--6.1% 113,000 Caterpillar, Inc. ............................. 5,487,562 10,400 Cummins Engine, Inc. .......................... 614,250 9,600 Illinois Tool Works, Inc. ..................... 577,200 114,450 Ingersoll-Rand Co. ............................ 4,635,225 48,800 Lucent Technologies, Inc. ..................... 3,897,900 29,000 Precision Castparts Corp. ..................... 1,749,063 50,000 Timken Co. .................................... 1,718,750 ------------ 18,679,950 ------------ PUBLISHING--1.3% 17,600 Central Newspapers, Inc. ...................... 1,301,300 32,200 McGraw-Hill Companies, Inc. ................... 2,382,800 10,000 Meredith Corp. ................................ 356,875 ------------ 4,040,975 ------------ RAILROADS & EQUIPMENT--0.5% 48,000 Kansas City Southern Industries, Inc. ......... 1,524,000 ------------ RETAIL--6.8% 12,100 CompUSA, Inc. (c) ............................. 375,100 53,100 Costco Companies, Inc. (c) .................... 2,369,587 25,300 Dayton Hudson Corp. ........................... 1,707,750 96,200 Fred Meyer, Inc. (c) .......................... 3,499,275 61,200 General Nutrition Companies, Inc. (c) ......... 2,080,800 28,900 Home Depot, Inc. .............................. 1,701,488 90,800 Payless ShoeSource, Inc. (c) .................. 6,094,950 42,800 Tiffany & Co. ................................. 1,543,475 42,400 Wal-Mart Stores, Inc. ......................... 1,672,150 ------------ 21,044,575 ------------ RETAIL -- FOOD & DRUG--0.3% 15,100 Safeway, Inc. (c) ............................. 955,075 ------------ SAVINGS & LOAN--1.2% 125,400 Dime Bancorp, Inc. ............................ 3,793,350 ------------ SERVICES--0.1% 13,000 Cendant Corp. (c) ............................. 446,875 ------------ STEEL--1.3% 128,400 USX-U.S. Steel Group .......................... 4,012,500 ------------ TELECOMMUNICATION--9.4% 150,900 AirTouch Communications, Inc. (c) ............. 6,271,781 7,400 ALLTEL Corp. .................................. 303,863 109,200 Ameritech Corp. ............................... 8,790,600 83,100 Bell Atlantic Corp. ........................... 7,562,100 48,600 BellSouth Corp. ............................... 2,736,787 39,000 MCI Communications Corp. ...................... 1,669,687 34,900 U.S. West Communications Group ................ 1,574,863 ------------ 28,909,681 ------------ TOBACCO--0.3% 24,800 Universal Corp. ................................ 1,019,900 ------------ Total Common Stocks (Identified Cost $249,769,172) ................................ 302,539,722 ------------ SHORT TERM INVESTMENT--1.8% FACE AMOUNT DESCRIPTION VALUE (a) - ------------------------------------------------------------------------------ $5,462,000 Repurchase Agreement with State Street Bank & Trust Co. dated 12/31/97 at 5.00% to be repurchased at $5,463,517 on 1/02/98 collateralized by $5,430,000 U.S. Treasury Note 5.875% due 1/31/99 with a value of $5,571,967 .................................. $ 5,462,000 ------------ Total Short Term Investment (Identified Cost $5,462,000) ................................. 5,462,000 ------------ Total Investments--99.8% (Identified Cost $255,231,172) (b) ........................... 308,001,722 Other assets less liabilities ................. 711,047 ------------ Total Net Assets--100% ........................ $308,712,769 ============ (a) See Note 1a. (b) Federal Tax Information: At December 31, 1997 the net unrealized appreciation on investments based on cost of $255,264,469 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 ....... $ 56,883,377 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ........ (4,146,124) ------------ Net unrealized appreciation ................................ $ 52,737,253 ============ (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. See accompanying notes to financial statements STATEMENT OF ASSETS & LIABILITIES December 31, 1997 ASSETS Investments at value ........................ $308,001,722 Receivable for: Fund shares sold .......................... 893,172 Dividends and interest .................... 323,085 Prepaid registration expense ................ 14,000 ------------ 309,231,979 LIABILITIES Payable for: Due to custodian bank ..................... $116,597 Fund shares redeemed ...................... 123,914 Withholding Taxes ......................... 2,751 Accrued expenses: Management fees ........................... 174,367 Deferred trustees' fees ................... 12,237 Accounting and administrative ............. 4,094 Other ..................................... 85,250 -------- 519,210 ------------ NET ASSETS .................................... $308,712,769 ============ Net Assets consist of: Capital paid in ........................... $243,099,477 Overdistributed net investment income ..... (5,113) Accumulated net realized gains ............ 12,847,855 Unrealized appreciation on investments .... 52,770,550 ------------ NET ASSETS .................................... $308,712,769 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($220,912,379 divided by 14,388,146 shares of beneficial interest) .............. $15.35 ====== Offering price per share (100/94.25 of $15.35) $16.29* ====== Net asset value and offering price of Class B shares ($81,065,839 divided by 5,304,921 shares of beneficial interest) .............. $15.28** ====== Net Asset value and offering price of Class C shares ($6,734,551 divided by 440,771 shares of beneficial interest) .............. $15.28 ====== Identified cost of investments ................ $255,231,172 ============ * Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements STATEMENT OF OPERATIONS Year Ended December 31, 1997 INVESTMENT INCOME Dividends ............................... $ 4,306,594(a) Interest ................................ 193,160 ------------ 4,499,754 Expenses Management fees ....................... $1,809,523 Service fees - Class A ................ 487,914 Service and distribution fees - Class B 626,147 Service and distribution fees - Class C 52,226 Trustees' fees and expenses ........... 21,110 Accounting and administrative ......... 47,565 Custodian ............................. 99,701 Transfer agent ........................ 490,872 Audit and tax services ................ 27,510 Legal ................................. 10,779 Printing .............................. 44,825 Registration .......................... 51,296 Miscellaneous ......................... 18,561 ---------- Total Expenses .......................... 3,788,029 ------------ Net investment income ................... 711,725 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS Realized gain on Investments - net ...... 52,507,998 Unrealized appreciation on Investments - 20,723,726 ------------ Net gain on investment transactions ..... 73,231,724 ------------ NET INCREASE IN NET ASSETS FROM OPERATIONS $73,943,449 =========== (a) Net of foreign taxes of: $48,017. See accompanying notes to financial statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1997 ------------ ---------- FROM OPERATIONS Net investment income ................................... $ 1,534,989 $ 711,725 Net realized gain on investments ........................ 42,996,716 52,507,998 Unrealized appreciation (depreciation) on investments ... (12,326,308) 20,723,726 ------------ ------------ Increase in net assets from operations .................. 32,205,397 73,943,449 ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................... (1,516,167) (742,082) Class B ............................................... (104,841) (21,007) Class C ............................................... (7,388) (7,712) Net realized gain on investments Class A ............................................... (27,979,217) (35,442,350) Class B ............................................... (7,295,607) (12,117,349) Class C ............................................... (769,349) (1,087,638) ------------ ------------ (37,672,569) (49,418,138) ------------ ------------ Increase in net assets derived from capital share transactions .......................................... 38,773,337 66,455,566 ------------ ------------ Total increase in net assets ............................ 33,306,165 90,980,877 NET ASSETS Beginning of the year ..................................... 184,425,727 217,731,892 ------------ ------------ End of the year ........................................... $217,731,892 $308,712,769 ============ ============ UNDISTRIBUTED/(OVERDISTRIBUTED) NET INVESTMENT INCOME Beginning of the year ................................... $ 95,891 $ 2,484 ============ ============ End of the year ......................................... $ 2,484 $ (5,113) ============ ============
See accompanying notes to financial statements FINANCIAL HIGHLIGHTS
CLASS A ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1993 1994 1995 1996 1997 ----------- ----------- ----------- ----------- ---------- Net Asset Value, Beginning of Year ... $12.20 $12.67 $12.41 $14.39 $13.87 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income ................ 0.21 0.22 0.18 0.13 0.07(c) Net Realized and Unrealized Gain (Loss) on Investments .............. 0.75 (0.10) 4.01 2.07 4.40 ------ ------ ------ ------ ------ Total From Investment Operations ..... 0.96 0.12 4.19 2.20 4.47 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income . (0.21) (0.21) (0.18) (0.13) (0.06) Distributions in Excess of Net Investment Income .................. (0.01) 0.00 0.00 0.00 0.00 Distributions From Net Realized Capital Gains ...................... (0.27) (0.17) (2.03) (2.59) (2.93) ------ ------ ------ ------ ------ Total Distributions .................. (0.49) (0.38) (2.21) (2.72) (2.99) ------ ------ ------ ------ ------ Net Asset Value, End of Year ......... $12.67 $12.41 $14.39 $13.87 $15.35 ====== ====== ====== ====== ====== Total Return (%)(a) .................. 8.0 1.0 35.1 17.2 33.4 Ratio of Operating Expenses to Average Net Assets (%) ..................... 1.21 1.28 1.38 1.30 1.25 Ratio of Net Investment Income to Average Net Assets (%) ............. 1.70 1.75 1.31 0.92 0.46 Portfolio Turnover Rate (%) .......... 4 6 69 127 103 Average Commission Rate (b) .......... -- -- -- $0.0348 $0.0334 Net Assets, End of Year (000) ........ $109,168 $104,081 $150,693 $166,963 $220,912 (a) A sales charge is not reflected in total return calculations. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades upon which commissions are charged. This rate generally does not reflect mark- ups, mark-downs, or spreads on shares traded on a principal basis. (c) Per share net investment income has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements FINANCIAL HIGHLIGHTS -- continued
CLASS B ---------------------------------------------------------------------- SEPTEMBER 13(a) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 -------------- ---- ---- ---- ---- Net Asset Value, Beginning of Period .......................... $12.95 $12.66 $12.42 $14.40 $13.87 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) ...... 0.06 0.16 0.10 0.03 (0.05)(e) Net Realized and Unrealized Gain (Loss) on Investments ........... 0.01 (0.09) 4.01 2.07 4.40 ------ ------ ------ ------ ------ Total From Investment Operations .. 0.07 0.07 4.11 2.10 4.35 ------ ------ ------ ------ ------ Less Distributions Dividends From Net Investment Income .......................... (0.03) (0.14) (0.10) (0.04) (0.01) Distributions in Excess of Net Investment Income ............... (0.06) (0.00) (0.00) (0.00) 0.00 Distributions From Net Realized Capital Gains ................... (0.27) (0.17) (2.03) (2.59) (2.93) ------ ------ ------ ------ ------ Total Distributions ............... (0.36) (0.31) (2.13) (2.63) (2.94) ------ ------ ------ ------ ------ Net Asset Value, End of Period .... $12.66 $12.42 $14.40 $13.87 $15.28 ====== ====== ====== ====== ====== Total Return (%)(c) ............... 0.6 0.6 34.3 16.3 32.4 Ratio of Operating Expenses to Average Net Assets (%) .......... 2.08(b) 1.93 2.11 2.05 2.00 Ratio of Net Investment Income to Average Net Assets (%) .......... 0.71(b) 1.10 0.56 0.17 (0.29) Portfolio Turnover Rate (%) ....... 4 6 69 127 103 Average Commission Rate (d) ....... -- -- -- $0.0348 $0.0334 Net Assets, End of Period (000) ... $1,498 $5,185 $29,026 $46,856 $81,066 (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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups, mark-downs, or spreads on shares traded on a principal basis. (e) Per share net investment income (loss) has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements FINANCIAL HIGHLIGHTS -- continued
CLASS C ------------------------------------------- MAY 1(a) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1995 1996 1997 ------------- ------ ------ Net Asset Value, Beginning of Period .............. $13.84 $14.39 $13.85 ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) ...................... 0.06 0.04 (0.05)(e) Net Realized and Unrealized Gain (Loss) on Investments ..................................... 2.58 2.05 4.42 ------ ------ ------ Total From Investment Operations .................. 2.64 2.09 4.37 ------ ------ ------ Less Distributions Dividends From Net Investment Income .............. (0.06) (0.04) (0.01) Distributions From Net Realized Capital Gains ..... (2.03) (2.59) (2.93) ------ ------ ------ Total Distributions ............................... (2.09) (2.63) (2.94) ------ ------ ------ Net Asset Value, End of Period .................... $14.39 $13.85 $15.28 ====== ====== ====== Total Return (%)(c) ............................... 20.2 16.3 32.6 Ratio of Operating Expenses to Average Net Assets (%) ...................................... 2.11(b) 2.05 2.00 Ratio of Net Investment Income to Average Net Assets (%) ...................................... 0.56(b) 0.17 (0.29) Portfolio Turnover Rate (%) ....................... 69 127 103 Average Commission Rate (d) ....................... -- $0.0348 $0.0334 Net Assets, End of Period (000) ................... $4,707 $3,912 $6,735 (a) Commencement of operations. (b) Computed on an annualized basis. (c) Periods less than one year are not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades upon which commissions are charged. This rate generally does not reflect mark-ups, mark-downs, or spreads on shares traded on a principal basis. (e) Per share net investment income (Loss) has been calculated using the average shares outstanding during the year.
See accompanying notes to financial statements NOTES TO FINANCIAL STATEMENTS December 31, 1997 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 Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series of shares a "Fund"). The Fund offers Class A, Class B and Class C shares. The Fund commenced its public offering of Class B shares on September 13, 1993 and Class C Shares on May 1, 1995. 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 before May 1, 1997). Class C shares do not pay a front end or contingent deferred 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. Expenses of the Fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. 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, New England Funds Management L.P., and the 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. 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 (excluding short-term investments) for the Fund for the year ended December 31, 1997 were $280,841,142 and $266,029,521, 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. 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 Investment Advisors, L.P. are wholly owned subsidiaries of New England Investment Companies, L.P. ("NEIC"), which is a subsidiary of Metropolitan Life Insurance Company ("Met Life"). Fees earned by NEFM and Westpeak Investment Advisors, L.P. under the management agreement in effect during the year ended December 31, 1997 are as follows: FEES EARNED - ----------- $845,514 New England Funds Management, L.P. $964,009 Westpeak Investment Advisors, L.P. B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC 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, 1997, these expenses amounted to $47,565 and are shown separately in the financial statements as accounting and administrative. C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder servicing agent for the Fund. For the year ended December 31, 1997, the Fund paid New England Funds $357,341 as compensation for its services in that capacity. For the year ended December 31, 1997, the Fund received $5,145 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 up to 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by 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, 1997, the Fund paid New England Funds $487,914 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays New England Funds a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 1997, the Fund paid New England Funds $156,537 and $13,056 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 up to 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 1997, the Fund paid New England Funds $469,610 and $39,170 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, 1997 amounted to $604,269. 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, NEIC or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $2,091 Meeting Fee $109/meeting Committee Meeting Fee $65/meeting Committee Chairman Retainer $92/year 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, 1997 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:
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 --------------------------- -------------------------- CLASS A SHARES AMOUNT SHARES AMOUNT ---------- ----------- --------- ---------- Shares sold .......................... 1,731,542 $25,137,040 2,089,570 $32,195,156 Shares issued in connection with the reinvestment of: Dividends from net investment income 87,661 1,231,609 39,664 614,423 Distributions from net realized gain 1,854,127 24,119,428 2,099,575 31,028,150 --------- ----------- --------- ----------- 3,673,330 50,488,077 4,228,809 63,837,729 Shares repurchased ................... (2,107,684) (30,109,879) (1,875,250) (29,197,625) --------- ----------- --------- ----------- Net increase ........................ 1,565,646 $20,378,198 2,353,559 $34,640,104 --------- ----------- --------- ----------- YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 --------------------------- -------------------------- CLASS B SHARES AMOUNT SHARES AMOUNT ---------- ----------- --------- ---------- Shares sold .......................... 1,344,894 $19,592,194 1,627,496 $25,245,821 Shares issued in connection with the reinvestment of: Dividends from net investment income 6,654 92,398 1,973 30,758 Distributions from net realized gain 526,406 6,846,049 781,695 11,519,364 --------- ----------- --------- ----------- 1,877,954 26,530,641 2,411,164 36,795,943 Shares repurchased ................... (516,163) (7,464,628) (484,221) (7,468,164) --------- ----------- --------- ----------- Net increase ........................ 1,361,791 $19,066,013 1,926,943 $29,327,779 --------- ----------- --------- ----------- YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 --------------------------- -------------------------- CLASS C SHARES AMOUNT SHARES AMOUNT ---------- ----------- --------- ---------- Shares sold .......................... 406,039 $ 5,734,515 740,016 $11,332,702 Shares issued in connection with the reinvestment of: Dividends from net investment income 724 10,172 166 2,597 Distributions from net realized gain 50,246 651,884 71,295 1,050,610 --------- ----------- --------- ----------- 457,009 6,396,571 811,477 12,385,909 Shares repurchased ................... (501,555) (7,067,445) (653,225) (9,898,226) --------- ----------- --------- ----------- Net increase (decrease) .............. (44,546) $ (670,874) 158,252 $ 2,487,683 --------- ----------- --------- ----------- Increase derived from capital shares transactions ....................... 2,882,891 $38,773,337 4,438,754 $66,455,566 ========= =========== ========= ===========
REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of New England Funds Trust II and Shareholders of NEW ENGLAND GROWTH OPPORTUNITIES FUND In our opinion, the accompanying statement of assets & 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 New England Growth Opportunities Fund ("the Fund"), a series of New England Funds Trust II at December 31, 1997 and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. These financial statements and the 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 audit. We conducted our audit 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 audit, which included confirmation of securities owned at December 31, 1997 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. The statement of changes in net assets for the period ended December 31, 1996 and the financial highlights for each of the periods then ended were audited by other independent accountants whose report dated February 10, 1997 expressed an unqualified opinion on these statements. PRICE WATERHOUSE LLP Boston, Massachusetts February 12, 1998 NEW ENGLAND FUNDS Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997, November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997, July 28, 1997, November 17, 1997 and January 1, 1998); and the New England Equity Income Fund Prospectus for Class A, B and C shares dated September 1, 1997 (as supplemented November 17, 1997 and January 1, 1998). THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES: The cover page of each Prospectus is revised to reflect: o While no initial sales charge applies to Class B or Class C share purchases, a contingent deferred sales charge (a "CDSC") is imposed upon certain redemptions of Class B and Class C shares. o New England Funds Trust I, New England Funds Trust II and New England Funds Trust III are referred to in the Prospectus as the "Trusts." THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE "SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ AS FOLLOWS: CLASS C -------- Maximum Initial Sales Charge Imposed on a Purchase (as a percentage of offering price)(2) ........................................... None Maximum Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)(2) 1.00% (2) Does not apply to reinvested distributions. In the tables that appear under "Example" in the "Schedule of Fees" section, the expense amounts in the Prospectus for Class C shares for the 1 Year period assume no redemption. If shares are redeemed at period end, expense amounts for each Fund would be as follows: New England Capital Growth Fund, $33; New England Balanced Fund, $31; New England International Equity Fund, $35; New England Value Fund, $31; New England Growth Opportunities Fund, $31; New England Star Advisers Fund, $35; New England Star Worldwide Fund, $44; New England Star Small Cap Fund, $38; New England Equity Income Fund, $33. THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS REVISED TO READ AS FOLLOWS: Class C shares are offered at net asset value, without an initial sales charge, are subject to a 0.25% annual service fee and a 0.75% annual distribution fee, are subject to a CDSC of 1.00% on redemptions made within one year from the date of purchase and do not convert into another class. The Distributor pays to investment dealers at the time of sale a sales commission of 1.00% of the sales price of Class C shares sold by such investment dealer. The Distributor will retain the service and distribution fees assessed against Class C shares in the first year of investment, and the entire amount of the CDSC paid by Class C shareholders upon redemption in the first year, in order to compensate the Distributor for providing distribution- related services to the Fund in connection with the sale of Class C shares, and to reimburse the Distributor, in whole or in part, for the commissions paid (and related financing costs) to investment dealers at the time of a sale of Class C shares. Unlike Class B shares, there are no conversion features associated with Class C shares; therefore, if Class C shares are held for more than eight years Class C shareholders will thereafter be subject to higher distribution fees than shareholders of other classes. The holding period for determining the CDSC will continue to run after an exchange to Class C shares of another series of the Trusts. If an exchange is made to Class C shares of a Money Market Fund, then the one-year holding period for purposes of determining the expiration of the CDSC will stop and resumes only when an exchange is made back into Class C shares of a series of the Trusts. If the Money Market Fund shares are redeemed rather than exchanged back into a series of the Trusts, then the CDSC applies to the redemption. For purposes of the CDSC, it is assumed that the shares held longest are the first to be redeemed. The CDSC on Class C shares is not imposed on shares purchased prior to March 1, 1998. The CDSC will be assessed on an amount equal to the lesser of the cost of the shares being redeemed or their net asset value at the time of redemption. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares of the same Fund purchased with reinvested dividends or capital gain distributions. The first year of purchase ends one year after the day on which the purchase was accepted. The CDSC is deducted from the proceeds of the redemption, not the amount remaining in the account, unless otherwise requested. The CDSC may be eliminated for certain persons and organizations. See "Sales Charges--General" below. THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS-- CLASS C SHARES" IS REVISED TO READ AS FOLLOWS: You may exchange Class C shares of any series of the Trusts for Class C shares of any other series of the Trusts which offers Class C shares or for Class C shares of New England Cash Management Trust - Money Market Series. Such exchanges will be made at the next-determined net asset value of the shares. IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD SENTENCE IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS: Total return is measured by comparing the value of a hypothetical $1,000 investment in a class at the beginning of the relevant period to the value of the investment at the end of the period (assuming deduction of the current maximum sales charge on Class A shares, automatic reinvestment of all dividends and capital gains distributions and, in the case of Class B and C shares, imposition of the CDSC relevant to the period quoted). NEW ENGLAND FUNDS STOCK FUNDS Star Small Cap Fund Growth Fund Star Advisers Fund Capital Growth Fund Growth Opportunities Fund Value Fund Equity Income Fund Balanced Fund INTERNATIONAL STOCK FUNDS International Equity Fund Star Worldwide Fund BOND FUNDS High Income Fund Strategic Income Fund Bond Income Fund Government Securities Fund Limited Term U.S. Government Fund Adjustable Rate U.S. Government Fund TAX EXEMPT FUNDS Municipal Income Fund Massachusetts Tax Free Income Fund Intermediate Term Tax Free Fund of California Intermediate Term Tax Free Fund of New York MONEY MARKET FUNDS Cash Management Trust, Money Market Series Tax Exempt Money Market Trust To learn more, and for a free prospectus, contact your financial representative. VISIT OUR WORLD WIDE WEB SITE AT WWW.MUTUALFUNDS.COM New England Funds, L.P., Distributor 399 Boylston Street Boston, MA 02116 Toll Free 800-225-5478 This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Funds current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. --------------- Bulk Rate U.S. Postage Paid Brockton, MA Permit No. 770 --------------- [LOGO] NEW ENGLAND FUNDS(R) Where The Best Minds Meet (R) - ---------------------- 399 Boylston Street Boston, Massachusetts 02116 - ---------------------- - --------------------- [Logo] MUTUAL FUND SERVICE AWARD - --------------------- DALBAR HONORS COMMITMENT TO: INVESTORS - --------------------- 1995 o 1996 o 1997 GP56-1297 [Recycle Logo] Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----