-----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, SrtJeq9ghklffqtzU4Miw9ofPldFnrXFHdRspnQvC2o/1uuqtEGZXe8mU3nFzP0f IlzosBl1+QyXxuFKLosKeg== 0000915707-96-000047.txt : 19960314 0000915707-96-000047.hdr.sgml : 19960314 ACCESSION NUMBER: 0000915707-96-000047 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960312 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: 1940 Act SEC FILE NUMBER: 811-00242 FILM NUMBER: 96533912 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 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND [LOGO] NEW ENGLAND FUNDS WHERE THE BEST MINDS MEET ANNUAL REPORT AND PERFORMANCE UPDATE NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND [ARTWORK APPEARS HERE] DECEMBER 31, 1995 January 31, 1996 Dear Shareholder, ItOs a real pleasure to present to you the 1995 Annual Report for New England Massachusetts Tax Free Income Fund, containing your portfolio managerOs commentary and complete financial information. Favorable Economic Conditions in 1995 In 1995 subdued economic growth with little or no inflation created a very favorable backdrop for the bond and stock markets. Long term interest rates dipped on the positive inflation news, with the yield on the 30-year Treasury bond falling to a low of 5.95% at year end. The stock market, fueled by lower interest rates and solid corporate earnings growth, advanced 37.6%, as measured by the Standard & PoorOs 500 Index,* for its best showing since 1958. In July and in December, the Federal Reserve Board lowered short term rates, signaling its belief that the economy was indeed on a path towards slow, non-inflationary growth. New England Funds - Where the Best Minds Meet Over this past year we launched our new corporate identity - Where the Best Minds Meet -which we believe reflects the essence of New England Funds. Our unique multiple adviser structure brings together some of the best investment minds in the business. As recent examples, consider New England Star Advisers Fund, managed by four prominent equity advisers, and New England Star Worldwide Fund, a global fund introduced this January which builds off the Star Advisers concept. In addition, last May we launched New England Strategic Income Fund, under the management of Dan Fuss of Loomis Sayles. One of the industryOs most respected managers, Dan Fuss was named 1995Os OBond Fund Manager of the YearO by Morningstar for his past record of accomplishment in fund management at Loomis Sayles.** * Standard & PoorOs 500 is an unmanaged index representing 500 major companies, the majority of which are listed on the New York Stock Exchange. ** Morningstar is a third party, independent mutual fund rating service. 1995 DALBAR AWARD FOR SERVICE EXCELLENCE Where the Best Minds Meet also refers to your financial adviser and all the people at New England Funds who provide you with quality service. We are proud to report that in recognition of our ongoing quality initiatives, New England Funds has been named a 1995 Quality Tested Service Seal Winner by DALBAR, an independent mutual fund service rating company. The coveted DALBAR award was given to only seven companies for Oproviding the highest tier of service excellence in the mutual fund industry.O OUTLOOK FOR 1996 Looking ahead, we believe interest rates are likely to remain flat as the economy continues on its slow, steady, non-inflationary growth path. While this scenario is extremely positive for the long term, it is unlikely that 1996 will see a repeat of last yearOs stellar performance. At this time itOs worth reiterating that long-term investors should not focus on one yearOs performance. Instead, we recommend that you review your asset allocation program with your financial adviser, then remain committed to that program to carry out its objectives. We believe you will find your portfolio managerOs commentary informative. If you have any questions or comments, please contact your financial representative or New England Funds directly at 800-225- 5478. Also, please contact New England Funds for a prospectus on any of the funds mentioned above. The prospectus details investment objectives and risks, as well as management fees and expenses. You should read it carefully before investing or sending money. Sincerely, /s/PETER S. VOSS /s/HENRY L.P. SCHMELZER Peter S. Voss Henry L.P. Schmelzer Chairman President NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 1995 Putting Performance into Perspective The graph comparing your FundOs performance to a benchmark index provides 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 FundOs 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 $10,000 INVESTMENT IN CLASS A SHARES COMPARED TO LEHMAN MUNICIPAL INDEX(4) AND THE COST OF LIVING(5) [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in Class A Shares compared to Lehman Municipal Index(4) and the Cost of Living(5). The data points from the graph are as follows:] New England Massachusetts Tax Free Income Fund - Net Asset Value(1) Year Amount - ----- ------ 1995 $21,705 1994 $18,419 1993 $19,896 1992 $17.701 1991 $16,229 1990 $14,559 1989 $13,839 1988 $12,815 1987 $11,678 1986 $11,599 3/23/84 $10,000 New England Massachusetts Tax Free Income Fund - With Maximum Sales Charge(2) Year Amount - ----- ------ 1995 $20,783 1994 $17,637 1993 $19,050 1992 $16,948 1991 $15,539 1990 $13,940 1989 $13,251 1988 $12,271 1987 $11,182 1986 $11,106 3/23/84 $9,575 Lehman Municipal Index(4) Year Amount - ----- ------ 1995 $24,203 1994 $20,606 1993 $21,729 1992 $19,352 1991 $17,786 1990 $15,860 1989 $14,782 1988 $13,343 1987 $12,112 1986 $11,932 3/23/84 $10,000 Cost of Living(5) Year Amount - ----- ------ 1995 $14,055 1994 $13,697 1993 $13,340 1992 $12,983 1991 $12,617 1990 $12,242 1989 $11,537 1988 $11,025 1987 $10,558 1986 $10,110 3/23/84 $10,000 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 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 MASSACHUSETTS TAX FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/95* CLASS A 1 YEAR 5 YEARS 10 YEARS Net Asset Value(1) 17.84% 8.31% 8.06% With Max. Sales Charge(2) 12.83 7.38 7.59 Lipper MA Municipal Average(6)16.82 8.70 8.11 CLASS B (INCEPTION 9/13/93) 1 YEAR SINCE INCEPTION Net Asset Value(1) 17.03% 3.47% With CDSC(3) 13.03 2.28 Lehman Municipal Index(4) 17.46 5.63 Lipper MA Municipal Average(6) 16.82 4.58 YIELDS AS OF 12/31/95* CLASS A CLASS B SEC 30-day Yield 4.96% 4.54% Taxable Equivalent Yield 9.33 8.54 SEC Yield is based on the FundOs net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. Taxable equivalent yield is based on the maximum combined federal and Massachusetts state income tax bracket of 46.85%. The alternative minimum tax may apply. Some federal and state taxes may apply. * These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. NOTES TO CHARTS AND PERFORMANCE UPDATE 1 Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. 2 With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 4.25% at the time of purchase of Class A shares. 3 With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum 4% sales charge is applied to a redemption of Class B shares. The sales charge will decrease over time, declining to zero five years after the purchase of shares. 4 Lehman Municipal Index is an unmanaged index of bonds issued by states, municipalities and other governmental entities having maturities of more than one year. The Index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. 5 Cost of Living is based on the Consumer Price Index, a widely recognized measure of the cost of goods and services in the United States, calculated by the U.S. Bureau of Labor Statistics. 6 Lipper 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 MASSACHUSETTS TAX FREE INCOME FUND [PHOTO] MASSACHUSETTS TAX FREE INCOME FUND Portfolio Manager: James Welch Back Bay Advisers, L.P. For investors in both stocks and bonds, 1995 was an outstanding year. The stock market, as measured by the Dow Jones Industrial Average1, repeatedly reached record highs, and the bond market provided attractive yields and total returns. In large measure, this reflected the Federal Reserve BoardOs success at bringing the economy in for a Osoft landingO: At year-end, economic growth was moderate, and inflation under control. Almost all sectors of the bond market participated in a rally that sustained itself for most of the year. There was a modest pull back during the second quarter, as investors turned their attention to the stock market, but momentum was regained over the final six months of the year. The rally was driven by a sharp decline in interest rates. From the beginning to the end of the FundOs fiscal year, the yield on 30-year Treasury bonds fell by 1.75 percentage points, from 7.70% to 5.95%. Although U.S. government bonds were the biggest beneficiaries of this decline, most other fixed-income securities, including municipal bonds, received a significant boost as well. How Your Fund Performed The FundOs Class A shares posted a positive total return of 17.84% for the 12-month period, based on net asset value. We had anticipated the economyOs soft landing, NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND and had positioned the Fund early on to take advantage of such an environment. We began upgrading the quality of the securities in the FundOs portfolio during the prior fiscal year, and continued to do so throughout 1995. As interest rates declined, the Oyield gapO between bonds of higher and lower quality narrowed, making it possible to invest in relatively high quality bonds without sacrificing performance. This strategy also helped the Fund perform very well relative to other funds with similar objectives. The FundOs total return stands up nicely when compared to the 16.82% return for the Lipper Massachusetts Municipal Average2. In addition to its strong total return, your Fund continued to provide a high level of tax-exempt income during the year. On December 31, 1995, the FundOs yields for Class A and Class B shares were 4.96% and 4.54%, respectively.a. These translate into taxable equivalent yields of 9.33% for Class A shares and 8.54% for Class B shares, based on the maximum combined federal and Massachusetts state income tax rate of 46.85%3. How We Managed Your Fund The stateOs economy has fully recovered from the lows of the early O90s. We now plan to invest in general obligation bonds issued by the state and local municipalities, although revenue bonds continue to receive emphasis. a. Yield is calculated using a standard formula established by the Securities and Exchange Commission, and is an annualized percentage based on the yield earned for the FundOs Class A and Class B shares during the 30 days ending December 31, 1995. NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND Because the Fund had been positioned in high-quality, longer-term Massachusetts municipal bonds, it received the full benefit of declining interest rates. At year end the average maturity of the securities in the portfolio was 20 years, and the average quality rating was AA-. Given the likelihood of further consolidation in the healthcare industry and the CongressOs stated desire to reform Medicare and Medicaid, we have dramatically reduced our investments in the healthcare sector. As healthcare bonds were sold, assets were invested in other sectors, including transportation and utilities. Utility bonds offer liquidity; they also tend to enhance portfolio stability. The transportation sector showed particular improvement as the economy picked up steam. The technology sector was also a source of some attractive investments. This sector, which continues to play a prominent role in the stateOs economy, has strengthened in recent years as a result of the reorganizations of many formerly troubled companies. Outlook For the Municipal Market We believe the long-term outlook for the Massachusetts municipal bond market is positive. The impact of events such as the impasse over the federal governmentOs debt ceiling and ongoing discussions about tax reform should prove to be short-term in nature. In fact, lower prices that resulted from the marketOs concerns about tax reform were taken as a buying opportunity for the Fund. Municipal bonds may also continue to enjoy their current attractiveness compared to Treasury securities. NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND With some municipal bonds yielding as much as 90% of Treasuries at year-end, they offer exceptional value for investors. This becomes even more apparent when municipal bond yields are compared to Treasuries on a taxable-equivalent basis. In recent years, there has been a steady decline in the volume of new issue municipal bonds in Massachusetts - $4.7 billion were issued in 1995, down 5% from 1994. This trend should continue in the future. The combination of relatively low supply and steady demand from investors seeking relief from federal and state income taxes suggests a favorable environment for Massachusetts municipal bonds and for the Fund. A special note Shareholders of the Fund recently approved a proposal to eliminate the restriction on the FundOs ability to purchase securities that could generate interest subject to the Federal Alternative Minimum Tax (AMT). We believe the FundOs change will enhance its ability to achieve a higher yield. While the amount of income subject to AMT may increase, causing some shareholders to pay additional taxes, most shareholders are not affected. You may wish to consult your tax adviser to learn if you are affected. 1 The Dow Jones Industrial Average is an unmanaged index of the price of 30 stocks, all of which are traded on the New York Stock Exchange. 2 The Lipper Average is an average of the total return performance (calculated on the basis of net asset value) of funds with similar objectives, as calculated by Lipper Analytical Services, an independent mutual fund ranking service. 3 Alternative minimum tax (AMT) may apply. Some federal or state taxes may apply. NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND PORTFOLIO QUALITY AS OF 12/31/95 [A pie chart appears here, illustrating the portfolio quality of New England Massachusetts Tax Free Income Fund at June 30, 1995. The pie chart is broken in pieces representing credit ratings in the following percentages:] CREDIT RATINGS PERCENTAGE - ------------------------------- AAA 43.3% AA 7.9% A 32.1% BBB 12.2% Below BBB 4.5% - ------------------------------- AVERAGE CREDIT QUALITY = AA- AVERAGE PORTFOLIO MATURITY = 20 YEARS Credit ratings supplied by Standard & PoorOs [LOGO] NEW ENGLAND FUNDS WHERE THE BEST MINDS MEET PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND DECEMBER 31, 1995 PORTFOLIO COMPOSITION Investments as of December 31, 1995 TAX EXEMPT BONDS--99.5% OF TOTAL NET ASSETS
RATINGS (C) (UNAUDITED) ------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) - -------------------------------------------------------------------------------- - ------------ MASSACHUSETTS STATE GENERAL OBLIGATION--3.0% $2,000,000 Massachusetts State Consolidated Loan, Series A, 7.625%, 06/01/08 AAA AAA $2,349,520 1,500,000 Massachusetts State Consolidated Loan, Series A, 5.000%, 01/01/13 A1 A+ 1,441,860 ------------ 3,791,380 ------------ MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY--23.7% 2,000,000 Baystate Medical Center, Series D, 5.000%, 07/01/20 (AMBAC) AAA AAA 1,889,420 1,000,000 Berkshire Health System, Series C, 5.900%, 10/01/11 -- BBB- 896,800 3,000,000 Boston University Ribs, Series L, 9.092%, 10/01/31 (MBIA). Aaa AAA 3,519,630 2,500,000 Central Massachusetts Medical Center, Series A, 7.100%, 07/01/21 (AMBAC) Aaa AAA 2,858,875 1,750,000 Charlton Memorial Hospital, Series B, 7.250%, 07/01/13 A A- 1,878,888 1,000,000 Children's Hospital, Series E, 6.125%, 10/01/12Aa AA 1,050,600 5,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 5,169,450 1,410,000 Faulkner Hospital, Series C, 6.000%, 07/01/13 Baa1 BBB+ 1,386,030 2,400,000 Medical Center of Central Mass, Issue A, 7.000%, 07/01/12 A1 A- 2,579,400 1,000,000 New England Baptist Hospital, Series B, 7.300%, 07/01/11 A BBB+ 1,068,210 1,220,000 New England Deaconess Hospital, Series D, 6.875%, 04/01/22 (AMBAC) Aaa AAA 1,347,368 1,190,000 New England Medical Center, Series F, 6.625%, 07/01/25 (FGIC). Aaa AAA 1,293,958 1,000,000 Tufts University, Series D, 7.750%, 08/01/13 A1 A+ 1,108,120 1,500,000 Valley Regional Health System, Series B, 8.000%, 07/01/18 AAA -- 1,752,630 1,000,000 Valley Regional Health System, Series C, 6.250%, 07/01/11 (CONNIE LEE) -- AAA 1,100,640 1,000,000 Wentworth Institute of Technology Series A, 7.400%, 04/01/10 (AMBAC) Aaa AAA 1,139,820 ------------ 30,039,839 PORTFOLIO COMPOSITION--continued Investments as of December 31, 1995 TAX EXEMPT BONDS--CONTINUED RATINGS (C) (UNAUDITED) ------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) - -------------------------------------------------------------------------------- - ------------ Massachusetts State Housing Finance Agency--17.7% $215,000 Housing Revenue, Series A., 9.000%, 12/01/18 -- A+ $ 225,941 635,000 Housing Revenue, Series A., 7.750%, 12/01/19 -- A 654,438 4,640,000 Housing Revenue, Series A, 6.375%, 4/01/21 A1 A+ 4,764,816 1,350,000 Housing Revenue, Series B, 6.500%, 07/01/25 (AMBAC) Aaa AAA 1,415,745 715,000 Multifamily Residential Development, Series A, 7.650%, 02/01/28 (FNMA). Aaa AAA 753,345 2,500,000 Residential Development, Series E, 6.250%, 11/15/12 (FNMA). Aaa AAA 2,601,475 2,000,000 Residential Development, Series F, 6.250%, 11/15/12 Aaa AAA 2,096,800 1,300,000 Residential Development, Series I, 6.900%, 11/15/25 (FNMA). AAA AAA 1,401,075 2,000,000 Residential Development-FNMA COLL-A, 6.900%, 11/15/24 (FNMA). Aaa AAA 2,148,820 1,000,000 Residential Development-FNMA COLL-D, 6.800%, 11/15/12 Aaa AAA 1,080,270 1,175,000 Single Family Mortgage, Series A., 6.300%, 10/01/13 A A+ 1,213,047 400,000 Single Family Mortgage, Series 4, 7.375%, 06/01/14 Aa A+ 413,276 1,555,000 Single Family Mortgage, Series 13, 7.950%, 06/01/23 Aa A+ 1,654,924 2,000,000 Single Family Mortgage, Series 32, 6.600%, 12/01/26 Aa A+ 2,088,380 ------------ 22,512,352 ------------ MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY--6.6% 1,000,000 Harvard Community Health Plan, Series B, 7.750%, 10/01/08 (MBIA). Aaa AAA 1,109,600 3,000,000 Holy Cross College, 6.450%, 01/01/12 A1 A+ 3,246,330 1,500,000 First Healthcare Corp Project, 7.750%, 4/01/19 -- -- 1,519,605 475,000 Ogden Haverhill Project, 7.250%,12/01/06 (AMBAC). Aaa AAA 497,905 1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11 (AMBAC). Aaa AAA 1,049,690 1,000,000 Refusetech Inc., Series A, 6.300%, 07/01/05 Baa1 BBB 1,060,650 ------------ 8,483,780 PORTFOLIO COMPOSITION--continued Investments as of December 31, 1995 TAX EXEMPT BONDS--CONTINUED RATINGS (C) (UNAUDITED) ------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) - -------------------------------------------------------------------------------- - ------------ Other Massachusetts Obligations--30.3% $2,500,000 Massachusetts Bay Transportation Authority, Series A, 5.750%, 03/01/18 A1 A+ $2,547,225 1,310,000 Massachusetts Educational Loan Authority, 7.250%, 01/01/09 (MBIA). Aaa AAA 1,354,239 1,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/08 A BBB+ 1,655,190 2,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/11 A BBB+ 2,725,300 2,400,000 Massachusetts Municipal Wholesale Electric, 5.000%, 07/01/14 (AMBAC) Aaa AAA 2,318,496 4,450,000 Massachusetts Municipal Wholesale Electric, 5.000%, 07/01/17 (AMBAC) Aaa AAA 4,285,439 4,000,000 Massachusetts Pollution Control, Boston Edison, Series A, 5.750%, 02/01/14. Baa2 BBB 4,002,800 2,690,000 Massachusetts Port Authority, Series A, 5.000%, 07/01/15 Aa AA- 2,592,649 3,315,000 Massachusetts State Convention Center, Series A, 5.375%, 09/01/13 A1 A+ 3,328,359 2,100,000 Massachusetts Water Pollution Abatement, Series B, 5.250%, 08/01/14 Aa A+ 2,132,382 1,250,000 Massachusetts Water Resource Authority, Series A, 6.750%, 07/15/12 Aaa AAA 1,433,950 3,185,000 Massachusetts Water Resource Authority, Series B, 5.500%, 03/01/17 A A 3,149,424 3,000,000 Massachusetts Water Resource Authority, Series B, 4.750%, 12/01/21 (MBIA). AAA AAA 2,768,820 4,300,000 Massachusetts Water Resource Authority, Series B, 5.000%, 03/01/22 (MBIA). Aaa AAA 4,118,239 ------------ 38,412,512 ------------ MASSACHUSETTS MUNICIPALITIES--5.5% 3,635,000 Boston Water & Sewer Commission 5.250%, 11/01/11 (FGIC). Aaa AAA 3,676,439 1,000,000 Haverhill, Series A, 7.000%, 06/15/12 (FGIC). Aaa AAA 1,112,440 1,000,000 Nantucket 6.800%, 12/01/11 A -- 1,096,270 1,000,000 Worcester 6.900%, 05/15/07 (MBIA). Aaa AAA 1,155,560 ------------ 7,040,709 ------------ PORTFOLIO COMPOSITION--continued Investments as of December 31, 1995 TAX EXEMPT BONDS--CONTINUED RATINGS (C) (UNAUDITED) ------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) - -------------------------------------------------------------------------------- - ------------ PUERTO RICO OBLIGATIONS--3.0% $750,000 Puerto Rico Aqueduct & Sewer Authority 10.250%, 07/01/09 Aaa AAA $1,068,203 1,000,000 Puerto Rico Aqueduct & Sewer Authority 6.250%, 07/01/13 BAA1 A 1,085,920 1,600,000 Commonwealth of Puerto Rico, Highway & Transportation Authority, 5.500%, 07/01/13 BAA1 A 1,603,552 ------------ 3,757,675 ------------ OTHER OBLIGATIONS--9.7% 1,000,000 Guam Airport Authority Revenue Bond, Series B, 6.400%, 10/01/05 -- BBB 1,029,060 2,500,000 Guam Airport Authority Revenue Bond, Series B, 6.600%, 10/01/10 -- BBB 2,562,800 2,925,000 Guam Power Authority Revenue Bond, Series A, 5.250%, 10/01/13 -- BBB 2,675,234 2,000,000 Guam Government, Series A, 5.375%, 11/15/13. -- BBB 1,831,180 3,850,000 Virgin Islands Public Financial Authority, Series A, 7.250%, 10/01/18 -- -- 4,140,366 ------------ 12,238,640 ------------ Total Investments--99.5% (Identified Cost $118,447,282)(b) 126,276,887 Cash and Receivables 3,739,589 Liabilities. (3,090,218) ------------ Total Net Assets--100%. $126,926,258 ============ PORTFOLIO COMPOSITION--continued Investments as of December 31, 1995 (a) See Note 1a to the financial statements. (b) Federal Tax Information: At December 31, 1995 the net unrealized appreciation on investments based on cost of $118,505,421 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 $ 7,959,847 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (188,381) ----------- Net unrealized appreciation $ 7,771,466 ========== As of December 31, 1995, the Fund had a net tax basis capital loss carryforward as follows: Expiring December 31, 2002 $ 2,495,494 (c) The ratings shown are believed to be the most recent ratings available at December 31, 1995. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 1995. The Fund's adviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies.
STATEMENT OF ASSETS & LIABILITIES December 31, 1995 ASSETS Investments at value $126,276,887 Cash 838,496 Receivable for: Fund shares sold 99,706 Securities sold 514,338 Accrued interest 2,284,049 Prepaid registration expense 3,000 ------------ 130,016,476 LIABILITIES Payable for: Securities purchased. $2,781,882 Fund shares redeemed. 57,275 Dividends declared 128,143 Accrued expenses: Management fees 76,654 Deferred trustees' fees 1,451 Other expenses. 44,813 ---------- 3,090,218 ------------ NET ASSETS. $126,926,258 =========== Net Assets consist of: Capital paid in $121,748,064 Distributions in excess of net investment income (60,268) Accumulated net realized losses (2,591,144) Unrealized appreciation on investments. 7,829,606 ------------ NET ASSETS. $126,926,258 =========== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($120,229,135 divided by 7,135,425 shares of beneficial interest) $16.85 ======== Offering price per share (100/95.75 of $16.85) $17.60* ======== Net asset value and offering price of Class B shares ($6,697,123 divided by 398,139 shares of beneficial interest) $16.82** ======== Identified cost of investments $118,447,282 ============= * Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of these amounts. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.
STATEMENT OF OPERATIONS Year ended December 31, 1995 INVESTMENT INCOME Interest $ 7,541,154 Expenses Management fees. $697,878 Service and distribution fees--Class A 399,216 Service and distribution fees--Class B 55,139 Trustees' fees and expenses 21,465 Custodian 92,445 Transfer agent 164,861 Audit and tax services 16,000 Legal 20,481 Printing 24,865 Registration. 15,331 Miscellaneous 7,218 --------- Total expenses. 1,514,899 Less expenses waived by the investment adviser (462,668) 1,052,231 --------- --------- Net investment income 6,488,923 REALIZED and UNREALIZED GAIN on INVESTMENTS Realized gain on Investments--net. 964,359 Unrealized appreciation on investments--net. 12,009,442 ----------- Net gain on investment transactions 12,973,801 ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS $19,462,724 ===========
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ FROM OPERATIONS Net investment income $6,848,147 $6,488,923 Net realized gain (loss) on investments.(3,539,373) 964,359 Unrealized appreciation (depreciation) on investments, (12,872,878) 12,009,442 ------------ ------------ Increase (decrease) in net assets from operations (9,564,104) 19,462,724 ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (6,682,041) (6,224,656) Class B (166,109) (264,268) In excess of net investment income Class A (142,043) (20,659) Class B (3,669) (1,520) ------------ ------------ (6,993,862) (6,511,103) ------------ ------------ Increase (decrease) in net assets derived from capital share transactions. (1,440,896) 1,887,316 ------------ ------------ Total increase (decrease) in net assets (17,998,862) 14,838,937 NET ASSETS Beginning of the year 130,086,183 112,087,321 ------------ ------------ End of the year. $112,087,321 $126,926,258 =========== =========== UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME Beginning of the year$ 40,189 $ (55,525) =========== =========== End of the year. $ (55,525) $ (60,268) =========== ===========
FINANCIAL HIGHLIGHTS
CLASS A --------------------------------------- YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 1995 ----- ----- ----- ----- ----- Net Asset Value, Beginning of Period $ 16.01 $ 16.37 $16.62 $17.27 $15.10 ------ ------ ------- ------- ------- Income From Investment Operations Net Investment Income 1.08 1.03 0.97 0.89 0.88 Net Realized and Unrealized Gain (Loss) on Investments 0.69 0.40 1.05 (2.15) 1.76 ------ ------ ------- ------- ------- Total From Investment Operations 1.77 1.43 2.02 (1.26) 2.64 ------ ------ ------- ------- ------- Less Distributions Distributions From Net Investment Income (1.07) (1.03) (0.97) (0.89) (0.89) Distributions in Excess of Net Investment Income 0.00 0.00 0.00 (0.02) 0.00 Distributions From Net Realized Capital Gains (0.34) (0.15) (0.40) 0.00 0.00 ------ ------ ------- ------- ------- Total Distributions. (1.41) (1.18) (1.37) (0.91) (0.89) ------ ------ ------- ------- ------- Net Asset Value, End of Period $ 16.37 $ 16.62 $17.27 $15.10 $16.85 ======= ====== ====== ====== ====== Total Return (%) (b). 11.5 9.1 12.4 (7.4) 17.8 Ratio of Operating Expenses to Average Net Assets (%) (a).1.00 0.85 0.85 0.85 0.85 Ratio of Net Investment Income to Average Net Assets (%) 6.62 6.25 5.58 5.63 5.46 Portfolio Turnover Rate (%) 86 29 42 48 127 Net Assets, End of Period (000) $68,534 $91,932 $128,797 $107,565 $120,229 (a) Commencing May 1,1991 expenses were voluntarily limited to 0.85% of Class A average net assets. See Note 4. The ratio of operating expenses to average net assets, without giving effect to this expense limitation would have been 1.34%, 1.26%, 1.21% and 1.24% for the years ended December 31, 1991, 1992, 1993 and 1994 respectively and 1.24% for the year ended December 31, 1995. From May 18, 1989 through April 30,1991 expenses were voluntarily limited to 1.35% of average net assets. (b) A sales charge of 4.25% (maximum) was not reflected in total return calculations.
FINANCIAL HIGHLIGHTS--continued
CLASS B -------------------------------------------- SEPTEMBER 13,(A) THROUGH YEAR ENDED YEAR ENDED DECEMBER 31,DECEMBER 31, DECEMBER 31, 1993 1994 1995 ----- ----- ----- Net Asset Value, Beginning of Period $17.78 $17.26 $15.08 ------ ------ ------ Income From Investment Operations Net Investment Income 0.25 0.77 0.78 Net Realized and Unrealized Gain (Loss) on Investments (0.15) (2.14) 1.74 ------ ------ ------ Total From Investment Operations. 0.10 (1.37) 2.52 ------ ------ ------ Less Distributions Distributions From Net Investment Income. (0.22) (0.79) (0.78) Distributions in Excess of Net Investment Income. 0.00(0.02) 0.00 Distributions From Net Realized Capital Gains (0.40) 0.00 0.00 Distributions From Paid-in Capital 0.00 0.00 0.00 ------ ------ ------ Total Distributions. (0.62) (0.81) (0.78) ------ ------ ------ Net Asset Value, End of Period. $17.26 $15.08 $16.82 ====== ====== ====== Total Return (%) (d) 0.4 (8.0) 17.0 Ratio of Operating Expenses to Average Net Assets (%) (b). 1.50(c) 1.50 1.50 Ratio of Net Investment Income to Average Net Assets (%) 4.26(c) 4.98 4.81 Portfolio Turnover Rate (%). 42 48 126 Net Assets, End of Period (000) $1,289 $4,523 $6,697 (a) Commencement of operations. (b) Effective September 13, 1993 expenses were voluntarily limited to 1.50% of Class B average net assets. See Note 4. The ratio of operating expenses for Class B shares would have been 1.86% for the period ended December 31, 1993, 1.89% for the year ended December 31, 1994 and 1.89% for the year ended December 31, 1995. (c) Computed on an annualized basis. (d) Periods less than one year are not annualized.
NOTES TO FINANCIAL STATEMENTS December 31, 1995 1.The Fund is a series of New England Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series of shares a "Fund"). The Fund offers both Class A and Class B shares. The Fund commenced its public offering of Class B shares on September 13, 1993. Class A shares are sold with a maximum front end sales charge of 4.25%. 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 five years of purchase. 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.The Fund's investment adviser, Back Bay Advisors, L.P. ("Back Bay Advisors"), under the supervision of the Fund's trustees, determines the value of the Fund's portfolio of securities, using valuations provided by a pricing service selected by Back Bay Advisors and other information with respect to transactions in securities, including quotations from securities dealers. Valuations of securities and other assets owned by the Fund for which market quotations are readily available are based on those quotations. Short-term obligations that will mature in 60 days or less are stated at amortized cost, which, when combined with accrued interest or discount earned, approximates market value. All other securities and assets are valued at their fair value as determined in good faith by Back Bay Advisors under the supervision of the Fund's trustees. B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME.Security transactions are accounted for on the trade date (the date the buy or sell is executed). Dividend income is recorded on the ex-dividend date and interest income is recorded on the NOTES TO FINANCIAL STATEMENTS--continued December 31, 1995 accrual basis. Interest income for the Fund is increased by the accretion of original issue discount. Interest income is reduced by the amortization of premium. 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 the amortization of market discount. 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. Back Bay Advisors 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 year ended December 31, 1995 were $150,806,533 and $148,384,593, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.During the year ended December 31, 1995, the Fund incurred management fees payable to its investment adviser, Back Bay Advisors. Certain officers and directors of the adviser and its affiliated companies are also officers or trustees of the Fund. Back Bay Advisors is a wholly owned subsidiary of New England Investment Companies, L.P. ("NEIC"), which is a majority owned subsidiary of New England Mutual Life NOTES TO FINANCIAL STATEMENTS--continued December 31, 1995 Insurance Company. The management agreement for the Fund in effect during the year ended December 31, 1995 provided for fees as set forth below: FEES EARNED ANNUAL PERCENTAGE RATE ANNUAL NET ASSET VALUE LEVELS - ----------- ----------------------- ----------------------------- $697,878(a) 0.600% the first $100 million 0.500% the excess over $100 million (a) Before reduction pursuant to voluntary expense limitations. See Note 4. Effective January 1, 1996, New England Funds Management, L.P. became the adviser for the Fund with the aforementioned adviser being retained as the Fund's sub-adviser. B. SERVICE AND DISTRIBUTION FEES.Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted Service and Distribution Plans relating to the Fund's Class A and Class B shares (the "Plans"). Under the Plans, the Fund pays New England Funds, L.P. ("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 and Class B 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 A and Class B shares and/or the maintenance of shareholder accounts. For the year ended December 31, 1995, the Fund paid New England Funds $285,120 and $39,381 in service fees for Class A and Class B shares respectively. Also under the Plans, the Fund pays New England Funds monthly distribution fees at the annual rate of up to 0.10% of the average daily net assets attributable to the Fund's Class A shares and up to 0.75% of the average daily net assets attributable to the Fund's Class B 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 A and Class B shares, respectively. For the year ended December 31, 1995, the Fund paid New England Funds $114,096 and $15,758 in distribution fees for Class A and Class B shares 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, 1995, amounted to $185,109. C. TRANSFER AGENT FEES.New England Funds is the transfer and shareholder servicing agent to the Fund. For the year ended December 31, 1995, the Fund paid New England Funds $128,315 as compensation for its services in that capacity. NOTES TO FINANCIAL STATEMENTS--continued December 31, 1995 D. TRUSTEES FEES AND EXPENSES.The Fund does not pay any compensation directly to its officers or trustees who are directors, officers or employees of Back Bay Advisors, New England Funds, NEIC or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $2,400 Meeting Fee $125/meeting Committee Meeting Fee $75/meeting Committee Chairman Annual Retainer $125 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 May 1, 1991 and until further notice to the Fund, Back Bay Advisors has voluntarily agreed to reduce its management fee and, if necessary, to assume expenses of the Fund in order to limit the Fund's expenses to an annual rate of 0.85% of the Fund's Class A average daily net assets and, effective September 13, 1993, 1.50% of Class B average daily net assets. From May 18, 1989 through April 30, 1991 Back Bay Advisors reduced its management fee and assumed expenses of the Fund in order to limit the Fund's expenses to an annual rate of 1.35%. As a result of the Fund's expenses exceeding the applicable voluntary expense limitation during the year ended December 31, 1995, management fees of $697,878 were reduced by $462,668. 5.CONCENTRATION OF CREDIT.The Fund primarily invests in debt obligations issued by the Commonwealth of Massachusetts and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of Massachusetts municipal securities than is a comparable municipal bond fund that is not so concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of Massachusetts municipal securities to meet their financial obligations. NOTES TO FINANCIAL STATEMENTS--continued December 31, 1995 6.CAPITAL SHARES.At December 31, 1995 there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B capital stock. Transactions in capital shares were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- CLASS A SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 1,495,711 $ 24,082,024 1,129,898 $ 18,233,627 Shares issued in connection with the reinvestment of: Distributions from net investment income 319,675 5,081,475 287,896 4,667,423 ------- --------- -------- ---------- 1,815,386 29,163,499 1,417,794 22,901,050 Shares repurchased (2,152,761) (34,240,511) (1,404,246) (22,616,973) ------- --------- -------- ---------- Net increase (decrease) (337,375) $ (5,077,012) 13,548 $ 284,077 ========= =========== ========= =========== YEAR ENDED YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 236,907 $3,824,321 108,712 $1,767,504 Shares issued in connection with the reinvestment of: Distributions from net investment income 8,342 130,950 12,879 208,742 245,249 3,955,271 121,591 1,976,246 Shares repurchased. (19,965) (319,155) (23,445) (373,007) ------- --------- -------- ---------- Net increase (decrease).225,284 $3,636,116 98,146 $1,603,239 ========= =========== ========= =========== Increase (decrease) derived from capital share transactions. (112,091) $ (1,440,896) 111,694 $1,887,316 ========= =========== ========= ===========
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees of the New England Funds Trust II, and the Shareholders of the NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of the New England Massachusetts Tax Free Income Fund as of December 31, 1995, and the related statement of operations for the year then ended, and the statements of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the periods indicated herein. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the New England Massachusetts Tax Free Income Fund as of December 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated herein, in conformity with generally accepted accounting principles. COOPERS & LYBRAND LLP Boston, Massachusetts February 2, 1996 SHAREHOLDER MEETING (unaudited) At a special shareholders' meeting held on December 28, 1995, shareholders of the Massachusetts Tax Free Income Fund voted for the following proposals:
VOTED VOTED ABSTAINED BROKER TOTAL FOR AGAINST VOTES NON-VOTES VOTES ------------- ----------- ----------- ----------- ------------- 1. To approve new investment advisory arrangements to be effective upon the merger of New England Mutual Life Insurance Company into Metropolitan Life Insurance Company, such arrangements to be substantially identical to the investment advisory arrangements in effect for the Fund immediately prior to such merger. 4,277,898.148 142,109.010 155,405.160 4,575,412.318 ============= =========== =========== 2. To approve a new Advisory Agreement between the Fund and New England Funds Management, L.P. ("NEFM") 4,192,156.651 187,308.679 174,084.980 21,862.008 4,575,412.318 ============= =========== =========== ========== 3. To approve a related Sub- Advisory Agreement between NEFM and such Fund's current investment adviser 4,141,831.401 198,082.532 213,636.380 21,862.005 4,575,412.318 ============= =========== =========== ========== 4. To approve changes in the Fund's fundamental investment restrictions, in order to permit the Fund to engage in transactions in options and futures contracts 3,312,652.062 502,882.637 202,562.610 557,315.009 4,575,412.318 ============= =========== =========== ========== 5. To approve a change in the Fund's fundamental investment policies, in order to permit the Fund, under normal market conditions, to invest up to 20% of its net assets in securities that produce income that is subject to the regular federal income tax, the Massachusetts personal income tax or the federal alternative minimum tax 3,182,400.260 610,908.436 220,604.620 561,499.002 4,575,412.318 ============= =========== =========== ==========
REGULAR INVESTING PAYS FIVE GOOD REASONS TO INVEST REGULARLY 1. ItOs an easy way to build assets 2. ItOs convenient and effortless 3. It requires a low minimum to get started 4. It can help you reach important long-term goals like retirement or college funding 5. It can help you benefit from the ups and downs of the market With Investment Builder, New England FundsO automatic investment program, you can invest as little as $50 a month in your New England Fund automatically - without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. THE POWER OF MONTHLY INVESTING [A line graph appears here, illustrating the hypothetical accumulation of monthly investments at an 8% annual rate of return. The data points of the graph are as follows:] Monthly investments of $50 Years Growth of Monthly Investments 0 $0 5 $3,661 10 $9,040 15 $16,943 20 $28,555 25 $45,618 Monthly investments of $100 Years Growth of Monthly Investments 0 $0 5 $7,322 10 $18,079 15 $33,886 20 $57,111 25 $91,236 Monthly investments of $200 Years Growth of Monthly Investments 0 $0 5 $14,643 10 $36,158 15 $67,772 20 $114,222 25 $182,472 Monthly investments of $500 Years Growth of Monthly Investments 0 $0 5 $36,608 10 $90,396 15 $169,429 20 $285,555 25 $456,181 For illustrative purposes only. These figures represent hypothetical accumulation at an 8% annual rate of return, and are not indicative of future performance of any New England Fund. The value of a New England Fund will fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. You can start an Investment Builder program with your current New England Fund account, or with any of our other funds. To open an Investment Builder account today, call your financial representative or New England Funds at 1-800-225-5478. INFORMATION ON CALL YOU CAN CALL NEW ENGLAND FUNDS DAY OR NIGHT Do you like to keep on top of your New England Funds but canOt always call us during regular business hours? With Tele#Facts, New England FundsO 24-hours a day automated telephone system, you can call us any time thatOs convenient for you - day or night! By calling 1-800-346-5984 from any Touch-Tone(R) telephone, you can: - - Check the current value of your New England Fund account - - Find out the current yield and total return on any New England Fund - - Buy, sell or exchange fund shares Just remember to have these four items with you before calling: 1.YOUR PERSONAL IDENTIFICATION NUMBER which is the last four digits of your Social Security number 2.THE FUND NUMBER - two- or three-digit number listed on the Tele#Facts wallet card 3.FUNCTION NUMBER - listed on the Tele#Facts wallet card 4.ACCOUNT NUMBER - listed on all your statements You can get the information you need to use Tele#Facts from the back of your statement. If you need another Tele#Facts wallet card or have questions about getting started, please call us at 1-800-225-5478. So go ahead and give Tele#Facts a try. We think youOll enjoy this easy- to-use and convenient service from New England Funds! NEW ENGLAND FUNDS STOCK FUNDS Growth Fund of Israel International Equity Fund Star Worldwide Fund Growth Fund Star Advisers Fund Capital Growth Fund Value Fund Growth Opportunities Fund Balanced Fund BOND FUNDS High Income Fund Strategic Income Fund Government Securities Fund Bond Income 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 - U.S. Government Series Tax Exempt Money Market Trust To learn more, and for a free prospectus, contact your financial representative. New England Funds, L.P. 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 FundOs 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 WHERE THE BEST MINDS MEET 399 Boylston Street Boston, Massachusetts 02116 [LOGO] QUALITY TESTED SERVICE 1996 DALBAR HONORS COMMITMENT TO: INVESTORS MA56 [RECYCLE LOGO] PRINTED ON RECYCLED PAPER APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND EDGAR-FILED TEXTS. (1) Rule lines for tables are omitted. (2) Italic typefaces is displayed in normal type. (3) Boldface type is displayed in capital letters. (4) Headers (e.g. the names of the fund) and footers (e.g. page numbers and OSee accompanying notes to financial statementsO) are omitted. (5) Because the printed page breaks are not reflected, certain tabular and columnar headings and symbols are displayed differently in this filing. (6) Bullet points, leaders and similar graphic symbols are omitted. (7) Page numbering is different. -----END PRIVACY-ENHANCED MESSAGE-----