0000950135-95-001917.txt : 19950915 0000950135-95-001917.hdr.sgml : 19950915 ACCESSION NUMBER: 0000950135-95-001917 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950914 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: 95573934 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 N.E. MASSACHUSETTS TAX FREE INCOME FUND 1 [NEW ENGLAND FUNDS LOGO] SEMIANNUAL REPORT AND PERFORMANCE UPDATE NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND [ARTWORK APPEARS HERE] JUNE 30, 1995 2 July 20, 1995 DEAR SHAREHOLDER: We have good news to present in this Semiannual Report for New England Massachusetts Tax Free Income Fund, which includes your Portfolio Manager's commentary and complete financial information. MARKET OVERVIEW Investors who stayed the course in 1995 were amply rewarded. Major U.S. stock market indices soared to record highs and the bond market staged a spectacular comeback from its 1994 lows. Fueling the rally was clear evidence that the economy had begun to slow down as a result of the interest rate hikes engineered by the Federal Reserve Board to keep inflation in check. Indeed, with declining housing starts and rising unemployment numbers reported in the first half of 1995, expectations grew that the Fed's next move would be downward, to prevent the slowing economy from slipping into recession. The bond market surged at the prospect of lower rates, and the stock market followed suit, with the Standard & Poor's 500(R) Index gaining 20.14% during the first half of the year. The large, blue-chip companies led the way, in part because a weak U.S. dollar gave them a competitive advantage overseas and contributed to surprisingly healthy earnings reports. Finally, on July 6, just after this reporting period ended, the Fed lowered a key short-term rate by 0.25%, a relatively modest move, but a significant psychological change in direction. YOUR FINANCIAL ADVISER -- A TRUSTED ALLY As a shareholder in New England Funds, you have a valuable ally you can turn to at all times -- your financial adviser. This experienced 3 professional can help you design an asset allocation program suitable to your goals and risk tolerance. Most important, during times of market volatility or uncertainty, your adviser can help you avoid making costly mistakes, such as trying to "time" the market. Investors who go it alone can overreact to short-term market events, buying and selling on the basis of this week's headlines, or chasing the latest "hot" investment. Such behavior can derail an otherwise prudent investment program. But investors who work with a financial adviser receive guidance throughout the market's ups and downs. Your adviser will help you place short-term market swings in their proper perspective and keep you focused on your long-term investment program. Your adviser is just one of the experts whose talents we have tapped in our effort to bring the best minds in the business to the task of managing your money. These experts are a vital part of the investment process at New England Funds, and we encourage you to take advantage of their skills to the fullest. We invite you to read the accompanying management commentary and financial highlights. If you have any questions or comments, please contact your financial adviser or New England Funds directly at 800-225-5478. Once again, we appreciate your continued confidence and investment in New England Funds. Sincerely, /s/ PETER S. VOSS /s/ HENRY L.P. SCHMELZER ----------------- ------------------------ Peter S. Voss Henry L.P. Schmelzer Chairman President 4 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND INVESTMENT RESULTS THROUGH JUNE 30, 1995 Putting Performance into Perspective The graph comparing your Fund's 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 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 $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 ---- ------ 6/30/85 $10,000 6/86 $11,328 6/87 $12,184 6/88 $13,042 6/89 $14,293 6/90 $14,888 6/91 $16,068 6/92 $17,987 6/93 $20,224 6/94 $19,854 6/95 $21,369
New England Massachusetts Tax Free Income Fund - With Maximum Sales Charge(2)
Year Amount ---- ------ 6/30/85 $ 9,575 6/86 $10,847 6/87 $11,667 6/88 $12,488 6/89 $13,685 6/90 $14,255 6/91 $15,385 6/92 $17,222 6/93 $19,365 6/94 $19,010 6/95 $20,461
Lehman Municipal Index(4)
Year Amount ---- ------ 6/30/85 $10,000 6/86 $11,651 6/87 $12,655 6/88 $13,594 6/89 $15,143 6/90 $16,174 6/91 $17,631 6/92 $19,706 6/93 $22,063 6/94 $22,107 6/95 $24,051
Cost of Living(5)
Year Amount ---- ------ 6/30/85 $10,000 6/86 $10,174 6/87 $10,552 6/88 $10,968 6/89 $11,535 6/90 $12,074 6/91 $12,641 6/92 $13,031 6/93 $13,421 6/94 $13,710 6/95 $14,099
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. 1 5 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND AVERAGE ANNUAL TOTAL RETURNS 6/30/95*
CLASS A (Inception 3/23/84) YEAR TO DATE 1 YEAR 5 YEARS 10 YEARS --------------------------- ------------ ------ ------- -------- Net Asset Value(1) 9.45% 7.64% 7.49% 7.89% With Max. Sales Charge(2) 4.80 3.07 6.57 7.42 Lipper MA Municipal Average(6) 8.89 9.43 7.98 7.99 CLASS B (Inception 9/13/93) YEAR TO DATE 1 YEAR SINCE INCEPTION --------------------------- ------------ ------ --------------- Net Asset Value(1) 9.11% 7.02% 0.47% With CDSC(3) 5.11 3.02 (1.04) Lehman Municipal Index(4) 9.65 8.79 3.00 Lipper MA Municipal Average(6) 8.89 9.43 n/a YIELDS AS OF 6/30/95* CLASS A CLASS B ------- ------- SEC 30-day Yield 5.29% 4.87% Taxable Equivalent Yield 9.95 9.16 SEC Yield is based on the Fund's 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.
2 6 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND [PHOTO OF JAMES WELCH IN UPPER RIGHT-HAND CORNER] NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND Portfolio Manager: James Welch, Back Bay Advisors, L.P.(R) Buoyed by falling interest rates and diminishing concerns about inflation, the stock and bond markets shook off the painful memory of 1994, and greeted the new year with an enthusiastic rally. But for municipal bonds, the market's upbeat mood was akin to being invited to a dinner party and being offered only part of the meal. Although munis led the rally in the first three months of 1995, they lost momentum in the second quarter, as investors were diverted from tax-exempt bonds by the stock market's strength and widespread talk of tax reform. How Your Fund Performed Despite the twists and turns in the municipal bond market, your Fund's performance was outstanding in absolute terms as well as within its peer group, thanks in a large measure to successful planning on our part. We anticipated the upturn months in advance and positioned the portfolio to benefit from falling yields and rising prices. This preemptive move helped generate a 7.65% total return, for Class A shares at net asset value, for just the first three months of 1995. And despite the slowdown in the second quarter, the Fund's Class A share total return for the first six months of 1995 was 9.45%, placing New England Massachusetts Tax Free Income Fund in the top 25% of its Lipper peer group of 48 funds. 3 7 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND We are also pleased to report that your Fund generated an attractive level of current income over the six-month period. On June 30, the Fund's 30-day SEC yield was 5.29% for Class A shares, based on net asset value, which is equivalent to a 9.95% taxable yield for Massachusetts taxpayers in the combined maximum federal and state bracket of 46.85%.* How We Managed Your Fund Carefully guarding the quality of your fund's holdings and maintaining a solid measure of call protection are two important goals of our investment process. We have been able to purchase high-quality bonds while maintaining an attractive yield because these bonds are currently inexpensive relative to lower-rated issues. The portfolio is currently overweighted in essential-purpose revenue bonds with their own revenue streams; examples are water and sewer, municipal utility, higher education, and transportation issues. We also hold high-quality state general obligation bonds. Although Massachusetts has a high concentration of hospitals, we have reduced our hospital exposure due to uncertainties surrounding the future of Medicare and Medicaid, the outlook for reform, and a market that is overcrowded with health care providers. Currently, about 17% of the portfolio is invested in Massachusetts health care bonds, approximately 10% of which are insured. * The alternative minimum tax may apply. Some federal and state taxes may apply. 4 8 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND Unlike individual bond holders who face billions of dollars in early call redemptions in June and July, your Fund is very well protected against early bond calls. Call protection is an ongoing focus for us, not a sporadic effort. The portfolio holds bonds with 10-12 years of call protection, as well as some non-callable bonds. The supply of non-callable bonds is now plentiful, and we have been taking full advantage of their low prices. Mindful of your need to reduce taxes, we have a minimal exposure to bonds that are subject to the alternative minimum tax (AMT). To allow your Fund to benefit from what we believe is a very favorable bond market environment, we have positioned the portfolio's duration at around eight years, reflecting our basically constructive outlook. Duration is a measure of the fund's sensitivity to interest-rate moves. Outlook for the Municipal Market The current economic and business climate bodes well for the overall bond market, and we believe municipal bonds are poised to regain investors' favor over the next several months. First, the Federal Reserve Board has piloted the economy into a "soft landing," which has brought a slowing economy and diminished inflation concerns. Second, our predictions of dwindling municipal bond supply are materializing, with forward supply down 46.9 % year over year, and year-to-date at less than half of issuance in 1993.* We expect the scarcity may already be evident, as billions in muni bonds were * Source: BusinessWeek, June 19, 1995. 5 9 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND called by their issuers this summer, forcing their holders back into the market to reinvest their proceeds. Finally, municipals currently offer exceptional value relative to Treasury bonds, with some tax-exempt yields as high as 90% of taxable yields.* A spate of recent economic reports has indicated the early onset of an economic slowdown, which prompted the Federal Reserve Board in early July to make its first rate cut in three years, in an effort to stave off a recession. In our opinion, the chances of recession this year are small. So far the economic softness has been concentrated in a few industries. Much of the economy is perking along nicely, with powerful support from stock and bond market rallies, declining long-term interest rates, and the export-enhancing weakness of the dollar. We think the talk of federal tax reform that has unsettled the municipal market during the broader bond rally is creating premature concern. Overhauling our current tax system is a monumental task that could take years. In the meantime, we are finding solid buying opportunities and we remain optimistic on the long-term outlook for the Massachusetts municipal market. * Source: Wall Street Journal, June 15, 1995. 6 10 NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND PORTFOLIO QUALITY AS OF 6/30/95 [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 37% AA 10% A 37% BBB 11% BB/not rated 5%
Average Credit Quality = AA- Average Portfolio Maturity = 11 Years Credit ratings supplied by Standard & Poor's. 7 11 [NEW ENGLAND FUNDS LOGO] PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND JUNE 30, 1995 12 -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION Investments as of June 30, 1995 (unaudited) TAX EXEMPT BONDS--100.0% OF TOTAL NET ASSETS
RATINGS (C) ------------------ FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) ------------------------------------------------------------------------------------- MASSACHUSETTS STATE GENERAL OBLIGATION--3.1% $ 2,000,000 Massachusetts State Consolidated Loan, Series A, 7.625%, 06/01/08................................ AAA AAA $ 2,328,780 1,500,000 Massachusetts State Consolidated Loan, Series A, 5.000%, 01/01/13................................ A1 A+ 1,344,885 ------------ 3,673,665 ------------ MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY--23.6% 1,000,000 Berkshire Health System, Series C, 5.900%, 10/01/11........................................ -- BBB- 862,000 3,000,000 Boston University Ribs, Series L, 8.838%, 10/01/31 (MAIA).......................................... Aaa AAA 3,273,900 2,500,000 Central Massachusetts Medical Center, Series A, 7.100%, 07/01/21 (AMBAC)........................ Aaa AAA 2,736,425 1,750,000 Charlton Memorial Hospital, Series B, 7.250%, 07/01/13........................................ A A- 1,836,275 1,500,000 Children's Hospital, Series E, 6.125%, 10/01/12... Aa AA 1,509,795 2,250,000 Dana Farber, Series G-1, 5.500%, 12/01/27......... A1 A 1,904,850 1,410,000 Faulkner Hospital, Series C, 6.000%, 07/01/13..... Baa1 BBB+ 1,293,915 2,400,000 Medical Center of Central Mass, Issue A, 7.000%, 07/01/12........................................ A1 A- 2,481,336 1,000,000 New England Baptist Hospital, Series B, 7.300%, 07/01/11........................................ A BBB+ 1,026,070 1,220,000 New England Deaconess Hospital, Series D, 6.875%, 04/01/22 (AMBAC)........................ Aaa AAA 1,299,288 1,190,000 New England Medical Center, Series F, 6.625%, 07/01/25 (FGIC)......................... Aaa AAA 1,235,208 400,000 Newton-Wellesley Hospital, Series C, 8.000%, 07/01/18 (BIGI)......................... Aaa AAA 440,036 1,000,000 Tufts University, Series D, 7.750%, 08/01/13...... A1 A+ 1,081,390 1,500,000 Valley Regional Health System, Series B, 8.000%, 07/01/18........................................ AAA -- 1,746,645 1,000,000 Valley Regional Health System, Series C, 6.250%, 07/01/11 (CONNIE LEE)................... -- AAA 1,023,390 1,000,000 Wentworth Institute of Technology Series A, 7.400%, 04/01/10................................ Aaa AAA 1,133,970 1,500,000 Wentworth Institute of Technology Series B 5.500%,10/01/23 (CONNIE LEE).................... -- AAA 1,355,160 1,500,000 Wentworth Institute of Technology Series B 5.625%, 10/01/13 (CONNIE LEE)................... -- AAA 1,422,075 ------------ 27,661,728 ------------
See accompanying notes to financial statements. 2 13 -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION--CONTINUED Investments as of June 30, 1995 (unaudited) TAX EXEMPT BONDS--CONTINUED
RATINGS (C) ------------------ FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) ------------------------------------------------------------------------------------- MASSACHUSETTS STATE HOUSING FINANCE AGENCY--16.3% $ 215,000 Housing Revenue, Series A., 9.000%, 12/01/18...... -- A+ $ 225,971 635,000 Housing Revenue, Series A., 7.750%, 12/01/19...... -- A 654,729 4,750,000 Housing Revenue, Series A, 6.375%, 04/01/21....... A1 A+ 4,722,640 715,000 Multifamily Residential Development, Series A, 7.650%, 02/01/28 (FNMA)......................... Aaa AAA 745,838 2,000,000 Residential Development, Series F, 6.250%, 11/15/12 (FNMA)......................... Aaa AAA 2,030,920 1,300,000 Residential Development, Series I, 6.900%, 11/15/25 (FNMA)......................... AAA AAA 1,352,520 2,000,000 Residential Development-FNMA COLL-A, 6.900%, 11/15/24........................................ Aaa AAA 2,072,060 1,000,000 Residential Development-FNMA COLL-D, 6.800%, 11/15/12........................................ Aaa AAA 1,040,320 3,000,000 Single Family Mortgage, Series A., 6.300%, 10/01/13........................................ A A+ 2,993,190 415,000 Single Family Mortgage, Series 4, 7.375%, 06/01/14........................................ Aa A+ 428,185 160,000 Single Family Mortgage, Series A., 9.500%, 12/01/16........................................ Aa A+ 165,618 1,590,000 Single Family Mortgage, Series 13, 7.950%, 06/01/23........................................ Aa A+ 1,674,954 1,000,000 Single Family Mortgage, Series 32, 6.600%, 12/01/26........................................ Aa A+ 1,000,700 ------------ 19,107,645 ------------ MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY--7.0% 1,000,000 Harvard Community Health Plan, Series B, 7.750%, 10/01/08................................ Aaa AAA 1,099,420 3,000,000 Holy Cross College, 6.450%, 01/01/12.............. A1 A+ 3,094,740 1,500,000 First Healthcare Corp Project, 7.750%, 04/01/19... -- -- 1,511,415 475,000 Ogden Haverhill Project, 7.250%,12/01/06 (AMBAC)......................................... Aaa AAA 500,593 1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11 (AMBAC)......................................... Aaa AAA 1,046,480 1,000,000 Refusetech Inc., Series A, 6.300%, 07/01/05....... Baa1 BBB 1,019,200 ------------ 8,271,848 ------------
See accompanying notes to financial statements. 3 14 -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION--CONTINUED Investments as of June 30, 1995 (unaudited) TAX EXEMPT BONDS--CONTINUED
RATINGS (C) ------------------ FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) ------------------------------------------------------------------------------------- OTHER MASSACHUSETTS OBLIGATIONS--28.9% $ 3,125,000 Massachusetts Bay Transportation Authority, Series A, 5.500%, 03/01/12............................. A1 A+ $ 3,006,125 115,000 Massachusetts College Student Loan Authority, 10.000%, 05/01/01............................... -- AAA 116,796 1,310,000 Massachusetts Educational Loan Authority, 7.250%, 01/01/09 (MBIA)......................... Aaa AAA 1,367,483 1,000,000 Massachusetts Educational Loan Authority, 6.300%, 07/01/12 (AMBAC)........................ Aaa AAA 1,013,430 1,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/08................................ A BBB+ 1,600,845 2,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/11................................ A BBB+ 2,598,850 2,400,000 Massachusetts Municipal Wholesale Electric, 5.000%, 07/01/14 (AMBAC)........................ Aaa AAA 2,120,232 1,450,000 Massachusetts Municipal Wholesale Electric, 5.000%, 07/01/17 (AMBAC)........................ Aaa AAA 1,259,847 1,000,000 Massachusetts Pollution Control, Eastern Edison, 5.875%, 08/01/08................................ Baa2 BBB- 951,370 605,000 Massachusetts Port Authority, Series B, 9.375%, 07/01/15................................ Aa AA- 617,100 2,000,000 Massachusetts Turnpike Authority, Series A, 5.000%, 01/01/13................................ A1 A+ 1,789,180 2,000,000 Massachusetts Turnpike Authority, Series A, 5.000%, 01/01/20................................ A1 A+ 1,726,680 1,645,000 Massachusetts Water Pollution Abatement, Series A, 5.450%, 02/01/13................................ Aa A+ 1,552,600 2,100,000 Massachusetts Water Pollution Abatement, Series B, 5.250%, 08/01/14................................ Aa A+ 1,922,424 1,250,000 Massachusetts Water Resource Authority, Series A, 6.750%, 07/15/12................................ Aaa AAA 1,415,800 3,870,000 Massachusetts Water Resource Authority, Series B, 5.500%, 03/01/17................................ A A 3,549,178 2,500,000 Massachusetts Water Resource Authority, Series B, 5.250%, 03/01/13................................ A A 2,272,025 2,345,000 Massachusetts Water Resource Authority, Series B, 5.500%, 11/01/15................................ A A 2,156,579 3,200,000 Massachusetts Water Resource Authority, Series B, 5.000%, 03/01/22 (MBIA)......................... Aaa AAA 2,754,016 ------------ 33,790,560 ------------
See accompanying notes to financial statements. 4 15 -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION--CONTINUED Investments as of June 30, 1995 (unaudited) TAX EXEMPT BONDS--CONTINUED
RATINGS (C) ------------------ FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) ------------------------------------------------------------------------------------- MASSACHUSETTS MUNICIPALITIES--7.8% $ 2,500,000 Boston City Hospital Series B., 5.750%, 02/15/13 (FHA)........................................... Aa AA $ 2,408,775 3,635,000 Boston Water & Sewer Commission 5.250%, 11/01/11 (FGIC).......................................... Aaa AAA 3,436,565 1,000,000 Haverhill, Series A, 7.000%, 06/15/12 (FGIC)...... Aaa AAA 1,071,080 1,000,000 Nantucket 6.800%, 12/01/11........................ A -- 1,067,750 1,000,000 Worcester 6.900%, 05/15/07 (MBIA)................. Aaa AAA 1,095,190 ------------ 9,079,360 ------------ PUERTO RICO OBLIGATIONS--2.6% 750,000 Puerto Rico Aqueduct & Sewer Authority 10.250%, 07/01/09........................................ Aaa AAA 1,049,993 2,000,000 Puerto Rico Electric Power Authority, 6.250%, 07/01/17........................................ Baa1 A- 2,006,780 ------------ 3,056,773 ------------ OTHER OBLIGATIONS--10.6% 2,300,000 Guam Airport Authority Revenue Bond, Series B, 6.600%, 10/01/10................................ -- BBB 2,306,463 2,925,000 Guam Power Authority Revenue Bond, Series A, 5.250%, 10/01/13................................ -- BBB 2,545,831 4,000,000 Guam Government, Series A, 5.375%, 11/15/13....... -- BBB 3,576,400 3,850,000 Virgin Islands Public Financial Authority, Series A, 7.250%, 10/01/18............................. -- -- 3,977,435 ------------ 12,406,129 ------------ Total Investments--100.0% (Identified Cost $115,107,893) (b)........ 117,047,708 Receivables......................................................... 2,550,156 Liabilities......................................................... (2,494,693) ------------ Total Net Assets--100%.............................................. $117,103,171 ===========
See accompanying notes to financial statements. 5 16 -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION--CONTINUED Investments as of June 30, 1995 (unaudited) -------------------------------------------------------------------------------- (a) See Note 1a to the financial statements. Federal Tax Information: At June 30, 1995 the net unrealized appreciation on (b) investments based on cost of $115,107,893 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............................. $ 3,669,478 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value............................. (1,729,663) ----------- Net unrealized appreciation........................................... $ 1,939,815 ========== As of December 31, 1994 the Fund had a net tax basis capital loss carryforward as follows: Expiring December 31, 2002............................................ $ 3,516,324 (c) The ratings shown are believed to be the most recent ratings available at June 30, 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 June 30, 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.
See accompanying notes to financial statements. 6 17 -------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES June 30, 1995 (unaudited) ASSETS Investments at value........................................ $117,047,708 Receivable for: Fund shares sold.......................................... 275,822 Accrued interest.......................................... 2,274,334 ------------ 119,597,864 LIABILITIES Payable for: Securities purchased...................................... $1,008,107 Fund shares redeemed...................................... 1,130,876 Dividends declared........................................ 138,969 Due to Custodian Bank..................................... 123,906 Accrued expenses: Management fees........................................... 42,296 Deferred trustees' fees................................... 1,451 Other expenses............................................ 49,088 ---------- 2,494,693 ------------ NET ASSETS.................................................... $117,103,171 ============ Net Assets consist of: Capital paid in........................................... $117,814,968 Distributions in excess of net investment income.......... (44,878) Accumulated net realized losses........................... (2,606,734) Unrealized appreciation on investments.................... 1,939,815 ------------ NET ASSETS.................................................... $117,103,171 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($111,543,001 divided by 6,941,199 shares of beneficial interest)................................................... $16.07 ====== Offering price per share (100/95.75 of $16.07)................ $16.78* ====== Net asset value and offering price of Class B shares ($5,560,170 divided by 346,525 shares of beneficial interest)................................................... $16.05** ====== Identified cost of investments................................ $115,107,893 ============ * 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.
See accompanying notes to financial statements. 7 18 -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Six Months Ended June 30, 1995 (unaudited) INVESTMENT INCOME Interest..................................................... $ 3,756,367 ----------- Expenses Management fees............................................ $ 340,886 Service and distribution fees--Class A..................... 195,130 Service and distribution fees--Class B..................... 25,081 Trustees' fees and expenses................................ 12,157 Custodian.................................................. 46,793 Transfer agent............................................. 80,416 Audit and tax services..................................... 11,405 Legal...................................................... 12,993 Printing................................................... 20,278 Registration............................................... 8,579 Miscellaneous.............................................. 3,591 ---------- 757,309 Less expenses waived by the investment adviser............. (245,802) 511,507 ---------- ----------- Net investment income........................................ 3,244,860 REALIZED AND UNREALIZED GAIN ON INVESTMENTS Realized gain on investments--net............................ 947,100 Unrealized appreciation on investments--net.................. 6,119,651 ---------- Net gain on investment transactions.......................... 7,066,751 ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $10,311,611 ==========
See accompanying notes to financial statements. 8 19 -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS (unaudited)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1994 1995 ------------ ---------------- FROM OPERATIONS Net investment income................................. $ 6,848,147 $ 3,244,860 Net realized gain (loss) on investment transactions... (3,539,373) 947,100 Unrealized appreciation (depreciation) on investments......................................... (12,872,878) 6,119,651 ------------ ---------------- Increase (decrease) in net assets from operations..... (9,564,104) 10,311,611 ------------ ---------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A............................................. (6,682,041) (3,110,242) Class B............................................. (166,109) (123,971) In excess of net investment income Class A............................................. (142,043) -- Class B............................................. (3,669) -- ------------ ---------------- (6,993,862) (3,234,213) ------------ ---------------- Decrease from capital share transactions.............. (1,440,896) (2,061,548) ------------ ---------------- Total increase (decrease) in net assets............... (17,998,862) 5,015,850 NET ASSETS Beginning of the period............................... 130,086,183 112,087,321 ------------ ---------------- End of the period..................................... $112,087,321 $117,103,171 =========== ============= DISTRIBUTION IN EXCESS OF NET INVESTMENT INCOME Beginning of the period............................... $ 40,189 $ (55,525) =========== ============= End of the period..................................... $ (55,525) $ (44,878) =========== =============
See accompanying notes to financial statements. 9 20 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (unaudited)
CLASS A -------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 1990 1991 1992 1993 1994 1995 ------- ------- ------- -------- -------- ---------- Net Asset Value, Beginning of Period....................... $ 16.27 $ 16.01 $ 16.37 $ 16.62 $ 17.27 $ 15.10 ------- ------- ------- -------- -------- -------- Income From Investment Operations Net Investment Income......... 1.04 1.08 1.03 0.97 0.89 0.45 Net Realized and Unrealized Gain (Loss) on Investments................. (0.24) 0.69 0.40 1.05 (2.15) 0.97 ------- ------- ------- -------- -------- -------- Total From Investment Operations.................. 0.80 1.77 1.43 2.02 (1.26) 1.42 ------- ------- ------- -------- -------- -------- Less Distributions Distributions From Net Investment Income........... (1.03) (1.07) (1.03) (0.97) (0.89) (0.45) Distributions in excess of net investment income........... 0.00 0.00 0.00 0.00 (0.02) 0.00 Distributions From Net Realized Capital Gains...... (0.03) (0.34) (0.15) (0.40) 0.00 0.00 ------- ------- ------- -------- -------- -------- Total Distributions........... (1.06) (1.41) (1.18) (1.37) (0.91) (0.45) ------- ------- ------- -------- -------- -------- Net Asset Value, End of Period...................... $ 16.01 $ 16.37 $ 16.62 $ 17.27 $ 15.10 $ 16.07 ======= ======= ======= ======== ======== ======== Total Return (%) (c).......... 5.2 11.5 9.1 12.4 (7.4) 9.5 Ratio of Operating Expenses to Average Net Assets (%) a)... 1.35 1.00 0.85 0.85 0.85 0.85(b) Ratio of Net Investment Income to Average Net Assets (%)... 6.48 6.62 6.25 5.58 5.63 5.79(b) Portfolio Turnover Rate (%)... 21 86 29 42 48 145(b) Net Assets, End of Year (000)....................... $55,903 $68,534 $91,932 $128,797 $107,565 $111,543 (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 1.27% for the six months ended June 30, 1995. From May 18, 1989 through April 30, 1991 expenses were voluntarily limited to 1.35% of average net assets. The ratio of operating expenses to average net assets without giving effect to this expense limitation would have been 1.37% for the year ended December 31, 1990. (b) Computed on an annualized basis. (c) A sales charge of 4.25% (maximum) was not reflected in total return calculations. Periods less than one year are not annualized.
See accompanying notes to financial statements. 10 21 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS--CONTINUED (unaudited)
CLASS B -------------------------------------------- SEPTEMBER 13,(A) SIX MONTHS THROUGH YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 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 0.40 Net Realized and Unrealized Gain (Loss) on Investments................................. (0.15) (2.14) 0.97 ------ ------ ------ Total From Investment Operations.............. 0.10 (1.37) 1.37 ------ ------ ------ Less Distributions Distributions From Net Investment Income...... (0.22) (0.79) (0.40) 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 ------ ------ ------ Total Distributions........................... (0.62) (0.81) (0.40) ------ ------ ------ Net Asset Value, End of Period................ $17.26 $15.08 $16.05 ====== ====== ====== Total Return (%) (d).......................... 0.4 (8.0) 9.1 Ratio of Operating Expenses to Average Net Assets (%) (b).............................. 1.50(c) 1.50 1.50(c) Ratio of Net Investment Income to Average Net Assets (%).................................. 4.26(c) 4.98 5.14(c) Portfolio Turnover Rate (%)................... 42 48 145(c) Net Assets, End of Period (000)............... $1,289 $4,523 $5,560 (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 1.92% for the six months ended June 30, 1995. (c) Computed on an annualized basis. (d) Periods less than one year are not annualized.
See accompanying notes to financial statements. 11 22 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS June 30, 1995 (unaudited) 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, 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 attributable to their class, if the Fund were liquidated. In addition, the Trustees declare 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. 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 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. 12 23 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS--CONTINUED June 30, 1995 (unaudited) 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 six months ended June 30, 1995 were $83,489,739 and $84,385,023, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. During the six months ended June 30, 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 Insurance Company. The management agreement for the Fund in effect during the year ended December 31, 1994 provided for fees as set forth below:
ANNUAL PERCENTAGE FEES EARNED RATE ANNUAL NET ASSET VALUE LEVELS -------- ------------------ ------------------------------ $340,886(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.
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"). 13 24 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS--CONTINUED June 30, 1995 (unaudited) 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 six months ended June 30, 1995, the Fund paid New England Funds $139,379 and $6,270 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 six months ended June 30, 1995, the Fund paid New England Funds $55,751 and $18,811 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 six months ended June 30, 1995 amounted to $81,780. C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder servicing agent to the Fund. For the six months ended June 30, 1995, the Fund paid New England Funds $80,416 as compensation for its services in that capacity. 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. 14 25 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS--CONTINUED June 30, 1995 (unaudited) 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 six months ended June 30, 1995, management fees of $340,886 were reduced by $245,802. 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. 15 26 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS--CONTINUED June 30, 1995 (unaudited) 6. CAPITAL SHARES. At June 30, 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 SIX MONTHS ENDED DECEMBER 31, 1994 JUNE 30, 1995 --------------------------- ------------------------- CLASS A SHARES AMOUNT SHARES AMOUNT ------- ---------- ------------ -------- ------------ Shares sold...................... 1,495,711 $ 24,082,024 552,851 $ 8,883,341 Shares issued in connection with the reinvestment of: Distributions from net investment income............ 319,675 5,081,475 147,173 2,354,834 Distributions from net realized gain......................... -- -- -- -- Distributions from paid-in capital...................... -- -- -- -- ---------- ------------ -------- ------------ 1,815,386 29,163,499 700,024 11,238,175 Shares redeemed.................. (2,152,761) (34,240,511) (880,702) (14,052,330) ---------- ------------ -------- ------------ Net decrease..................... (337,375) $ (5,077,012) (180,678) $ (2,814,155) ========= =========== ======== ===========
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1994 JUNE 30, 1995 ------------------------ ------------------------ CLASS B SHARES AMOUNT SHARES AMOUNT ------- -------- ----------- -------- ----------- Shares sold.......................... 236,907 $ 3,824,321 53,904 $ 849,202 Shares issued in connection with the reinvestment of: Distributions from net investment income................ 8,342 130,950 5,081 97,158 Distributions from net realized gain............................. -- -- -- -- Distributions from paid-in capital.......................... -- -- -- -- -------- ----------- -------- ----------- 245,249 3,955,271 58,985 946,360 Shares redeemed...................... (19,965) (319,155) (12,453) (193,753) -------- ----------- -------- ----------- Net increase......................... 225,284 $ 3,636,116 46,532 $ 752,607 ======== ========== ======== ========== Total decrease from capital share transactions................. (112,091) $(1,440,896) (134,146) $(2,061,548) ======== ========== ======== ==========
16 27 NEW ENGLAND FUNDS STOCK FUNDS International Equity 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 Tax Exempt 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 Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. 28 [NEW ENGLAND FUNDS LOGO] --------------------- 399 Boylston Street Boston, Massachusetts 02116 --------------------- 95-0766 (MA58) [RECYCLED LOGO]