-----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, CCgqjqDqjDbT8/AVGZvC/uI1juQFv8vUzllwyM8MZ/VM01UK6RIrG/rxixA7r2kZ g5p9QsyBdTuTvp8oUv7lvQ== 0000950156-96-000643.txt : 19960816 0000950156-96-000643.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950156-96-000643 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96612171 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 NEFUNDS TRUST II - GROWTH FUND OF ISRAEL - ------------------------------------------------------------------------------ [logo] - ------------------------------------------------------------------------------ SEMIANNUAL REPORT AND PERFORMANCE UPDATE - ------------------------------------------------------------------------------ GROWTH FUND OF ISRAEL JUNE 30, 1996 July 25, 1996 DEAR SHAREHOLDER, New England Funds welcomes the opportunity to present you with the 1996 Semiannual Report for New England Growth Fund of Israel, containing your portfolio managers' commentary and complete financial information. ECONOMIC GROWTH IN THE FIRST HALF OF 1996 Moderate growth with low inflation was the economic story during the first half of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic growth, remained strong at 2.3% through June, just shy of what most economists consider optimal growth. As a result, the Federal Reserve Board opted not to tinker with interest rates through the first half of the year, save for a quarter-point hike in short-term rates in late January. The relatively calm economic waters had a stimulating effect on the domestic equity market, boosting stocks 537 points to 5,654 at the end of June, as measured by the Dow Jones Industrial Average. Bond yields did not fare as well, rising to 7.00% at the end of June from 6.65% earlier in the year. Money market yields remained stable, falling back only slightly during the past six months. THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS But the market volatility of the first three weeks in July claimed 5.5% of the Dow Jones Industrial Average's first-half gains. Again, we are reminded that no bull market lasts forever. Long-term financial goals are key in times like these and it's important to anticipate this type of market volatility and remain committed to your financial plan. It's also a good idea to ask your financial representative for help. A financial representative can guide you through volatile markets and help you meet your long-term financial goals. A recent study by Dalbar, Inc., a mutual fund monitoring and analytical service, shows that, on average, mutual fund investors who bought and held shares, with the assistance of a financial representative, enjoyed the benefits of a long-term commitment. Consequently, they benefitted from higher returns than direct investors and others who bought and sold, although this does not occur in every case. CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS During the past two months, we've celebrated the birthdays of three of our most popular funds: New England Growth Opportunities Fund; New England Strategic Income Fund and New England Star Advisers Fund. Demonstrating the remarkable scope and breadth of our funds, the Growth Opportunities Fund celebrated its 65th birthday in May while the fast-growing Strategic Income and Star Advisers Funds mark their first and second birthdays, respectively. We're proud of all of our funds, but take special pride in recognizing that, whether six months or 65-years-old, all New England Funds are designed to help investors achieve their goals. NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM) The longevity of our more seasoned funds and the potential for growth of our newer ones illustrates the ongoing progress of New England Funds. Our unique multiple-adviser approach brings together some of the best minds in the investment business. The ability to attract top-notch investment advisers and our multiple-adviser approach to fund management are the cornerstones of New England Funds' investment philosophy and the essence of our corporate logo, Where The Best Minds Meet(TM). OUTLOOK FOR THE REST OF 1996 Going forward, we anticipate that the economy will continue to grow moderately and that inflationary pressures will not be excessive. While we estimate the GDP may rise somewhat from its current level of 2.3%, the Federal Reserve should be reluctant to tighten the money supply by raising short-term interest rates. We also believe that the equity markets will continue to be volatile through the rest of the year. We believe that you will find your portfolio manager commentary informative. If you have any questions or comments, please contact your financial representative or New England Funds directly at 800-225-5478. Sincerely, /s/ Henry L.P. Schmelzer Henry L.P. Schmelzer, President GROWTH FUND OF ISRAEL INVESTMENT RESULTS THROUGH JUNE 30, 1996 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. GROWTH FUND OF ISRAEL A $10,000 INVESTMENT COMPARED TO MISHTANIM INDEX(4) CLASS A SHARES, INCEPTION 3/15/96 [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 Mishtanim Index (4).] Growth Fund of Israel - Net Asset Value(1) Date Amount - ---- ------ Jun-96 $ 9,960 May-96 $10,296 Apr-96 $10,408 Mar-96 $ 9,960 15-Mar-96 $10,000 Growth Fund of Israel - With Maximum Sales Charge(2) Date Amount - ---- ------ Jun-96 $ 9,387 May-96 $ 9,704 Apr-96 $ 9,810 Mar-96 $ 9,387 15-Mar-96 $ 9,425 Mishtanim Index(4) Date Amount - ---- ------ Jun-96 $ 9,504 May-96 $ 9,856 Apr-96 $10,078 Mar-96 $ 9,514 15-Mar-96 $10,000 These illustrations represent 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. GROWTH FUND OF ISRAEL AVERAGE ANNUAL TOTAL RETURNS 6/30/96 CLASS A (INCEPTION 3/15/96) SINCE INCEPTION Net Asset Value(1) -0.60% With Max. Sales Charge(2) -6.32 Mishtanim Index(4) -4.96 CLASS B (INCEPTION 3/15/96) SINCE INCEPTION Net Asset Value(1) -0.70% With Max. Sales Charge(2) -4.70 Mishtanim Index(4) -4.96 CLASS C (INCEPTION 3/15/96) SINCE INCEPTION Net Asset Value(1) -0.60% Mishtanim Index(4) -4.96 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. Class Y shares are available only to certain institutional investors. Share price and return may vary. 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 Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 4.5% at the time of purchase of Class A shares. 3 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 The Mishtanim Index comprises 100 of the most liquid Israeli securities traded on the Tel Aviv Stock Exchange. These issues have the highest average daily turnover, and collectively account for approximately 73% of total turnover and market value TASE shares. GROWTH FUND OF ISRAEL GROWTH FUND OF ISRAEL Portfolio Managers: Adam Schor, David Herro Oakmark/Harris Associates, L.P. With growing privatization, the opening of neighboring and overseas markets and a major influx of capital, the investment climate in Israel remains very healthy in 1996 despite a changing economic and political picture. The presidential election in late May, while important politically, had only a temporary effect on the Israeli stock market. Overall, the market as measured by the Mishtanim Index(4), was down slightly for the six-month period. Currency fluctuation was problematic for U.S. investors in Israel. The weakening of the shekel dampened returns when converted to U.S. dollars. However, we expect the long-term impact on your Fund to be offset by the value that a weak shekel provides to our investment in Israeli companies that rely on exports. How Your Fund Performed For the period ending June 30, 1996, the Fund generated a -0.60% total return for Class A shares. This decrease compares favorably with the Israeli stock market index -- the Mishtanim -- which was down -5.8% in U.S. dollar terms for the same period. How We Managed Your Fund During the period, we acquired shares of a number of well-managed, growing Israeli companies. All, in our opinion, were reasonably valued given their tremendous growth potential and strong fundamentals. Twenty-five percent of the portfolio is currently invested in high-tech companies. Some of our biggest and best technology holdings include Scitex, a leading manufacturer of electronic prepress equipment for the printing industry; Orbotech, a worldwide manufacturer of computerized inspection equipment for printed circuit boards; and Nice Systems, which makes digital telephone recording systems for the burgeoning needs of Wall Street trading firms, direct marketers and air traffic controllers around the globe. We are also finding opportunities for growth in sectors that may be unexpected for Israel -- telecommunications, agri-chemicals and paper products. Our largest telecommunications position is in Bezek, which has benefited from privatization in a rapidly growing industry. Mahkteshim, a maker of generic pesticides and herbicides, is another favorite. The company is benefiting from growing export opportunities in the United States and South America. The Fund also profited from an investment in America Israel Paper Mills, a large manufacturer of consumer paper products. We believe this company, often overlooked by foreign and Israeli investors, would have a 50% higher price if it were valued like its U.S. counterparts. Throughout the period, we have remained 94% invested in equities and maintained a low cash level of only 6%. Investment Outlook Israel should enjoy a very healthy investment climate for the balance of 1996. Good opportunities are likely to be plentiful given the growing privatization of the telecommunications, shipping and airline industries. Israeli companies are positioned to take advantage of the potential benefits of the peace process, as new markets open up and foreign investors take notice. For the balance of the year, we will keep a watchful eye on government spending. We hope the new administration is prepared to tighten spending in order to gain some control over inflation and allow for potentially lower interest rates. However, it is just too soon to tell. We remain optimistic about long-term corporate profitability and earnings growth, the most important determinants of the Fund's performance. By continuing to focus on well-managed, growing Israeli companies that are trading at an acceptable discount, we will pursue our goal of capital appreciation for our shareholders. YOUR FUND'S THREE LARGEST INVESTMENTS 6/30/96 PERCENTAGE COMPANY OF ASSETS ------------------------------------------------- 1. BEZEQ 4.31% Telephone company of Israel 2. ELITE INDUSTRIES, LTD. 4.29% Food & beverage company 3. ISRAEL PETROCHEM 4.10% Chemical company - --------------------------------------------------------- [logo] NEW ENGLAND FUNDS WHERE THE BEST MINDS MEET(TM) - ---------------------------------------------------------- PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS - ---------------------------------------------------------- GROWTH FUND OF ISRAEL - -------------- JUNE 30, 1996 - -------------- - ------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - ------------------------------------------------------------------------------- COMMON STOCK--94.3% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a) - -------------------------------------------------------------------------------------- BANKS--8.9% 3,565 First International Bank of Israel, Ltd. (c) .............. $ 395,449 13,600 Investment Company of Bank Hapoalim, Ltd. (c) ............. 400,114 5,900 Israel General Bank, Ltd. (c) ............................. 167,108 ----------- 962,671 ----------- BROADCASTING--4.1% 26,500 Matav Cable Systems Media, Ltd. (ADR) (c) (d) ............. 440,563 ----------- BUSINESS SERVICES--2.7% 10,800 Tadiran, Ltd. (ADR) (d) ................................... 291,600 ----------- CHEMICALS--11.5% 479,000 Israel Chemical, Ltd. (c) ................................. 400,382 95,100 Israel Petrochemical Enterprises, Ltd. (c) ................ 445,329 73,780 Makhteshim Chemical Works, Ltd. (c) ....................... 402,807 ----------- 1,248,518 ----------- COMPUTER SOFTWARE & SERVICES--7.4% 20,700 Nice Systems, Ltd. (ADR) (c) (d) .......................... 393,300 23,500 Scitex Corp., Ltd. (ADR) (d) .............................. 405,375 ----------- 798,675 ----------- DRUGS & HEALTH CARE--7.4% 53,750 Agis Industries, Ltd. (c) ................................. 374,289 11,400 Teva Pharmaceutical Industries, Ltd. (ADR) (d) ............ 431,775 ----------- 806,064 ----------- ELECTRIC--5.7% 8,280 Elco Holdings, Ltd. (c) ................................... 326,034 29,800 Tower Semi Conductor, Ltd. (ADR) (c)(d) ................... 290,550 ----------- 616,584 ----------- ELECTRONICS--6.1% 2,570 Clal Electric Industries, Ltd. (c) ........................ 261,792 30,750 Orbotech, Ltd. (ADR) (d) .................................. 399,750 ----------- 661,542 ----------- FOOD & BEVERAGES--4.3% 124,548 Elite Industries, Ltd. (c) ................................ 465,575 ----------- INDUSTRIAL MACHINERY--2.4% 116,920 Ytong, Ltd. (c) ........................................... 263,035 ----------- INSURANCE--3.3% 67,200 Clal Insurance Co., Ltd. (c) .............................. 354,563 ----------- INVESTMENT COMPANIES--6.8% 360 Africa Israel Investor, Ltd. (c) .......................... 337,320 50 Africa Israel Investor, Ltd. (c) .......................... 42,154 61,500 Osem Investment, Ltd. (c) ................................. 360,033 ----------- 739,507 ----------- MISCELLANEOUS--8.9% 6,735 Elbit, Ltd. (c) ........................................... $ 399,052 24,500 Koor Industries, Ltd. (ADR) (d) ........................... 422,625 20,500 The Blue Square Chain Investments & Properities, Ltd. (c) . 142,306 ----------- 963,983 ----------- PAPER--4.6% 3,750 American Israeli Paper Mills, Ltd. (ADR) (d) .............. 158,438 8,400 American Israeli Paper Mills, Ltd. (c) .................... 345,219 ----------- 503,657 ----------- RETAIL--3.2% 16,725 Super-Sol, Ltd. (c) ....................................... 353,760 ----------- TELECOMMUNICATION--7.0% 176,900 Bezeq (c) ................................................. 467,233 18,500 Tadiran Telecommunications, Ltd. (ADR) (c) (d) ............ 296,000 ----------- 763,233 ----------- Total Common Stock (Identified Cost $10,354,811) .......... 10,233,530 ----------- SHORT TERM INVESTMENT--6.9% FACE AMOUNT - -------------------------------------------------------------------------------------- $750,000 United States Treasury Bills, 4.200% 7/05/96 .............. 749,679 ----------- Total Short Term Investment (Identified Cost $749,679) .... 749,679 ----------- Total Investments--101.2% (Identified Cost $11,104,490) ... 10,983,209 Other assets less liabilities (e) ......................... (133,072) ----------- Total Net Assets--100% .................................... $10,850,137 =========== (a) See Note 1a. (b) Federal Tax Information: At June 30, 1996 the net unrealized depreciation on investments based on cost of $11,104,490 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................ $ 380,707 Aggregate gross unrealized depreciation for all investments in (501,988) which there is an excess of tax cost over value. .............. --------- Net unrealized depreciation. .................................. $(121,281) ========= (c) Non-income producing security. (d) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described. The values of ADRs are significantly influenced by trading on exchanges not located in the United States or Canada. (e) Including deposits in foreign denominated currencies with a value of $24,227 and a cost of $24,197.
See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENTS OF ASSETS & LIABILITIES - ------------------------------------------------------------------------------- June 30, 1996 (unaudited) ASSETS Investments at value ............................. $10,983,209 Cash ............................................. 49,180 Foreign cash at value ............................ 24,227 Receivable for: Fund shares sold ............................... 156,437 Due from investment adviser .................... 30,308 Prepaid registration expense ..................... 28,793 Unamortized organization expense ................. 79,713 ----------- 11,351,867 LIABILITIES Payable for: Securities purchased ........................... $471,433 Fund shares redeemed ........................... 2,501 Accrued expenses: Deferred trustees' fees ........................ 200 Accounting and administrative .................. 4,452 Other expenses ................................. 23,144 -------- 501,730 ----------- NET ASSETS ......................................... $10,850,137 =========== Net Assets consist of: Capital paid in ................................ $10,961,587 Undistributed net investment income (loss) ..... (30,210) Accumulated net realized gains ................. 39,051 Unrealized depreciation on investments and foreign currency ............................. (120,291) ----------- NET ASSETS ......................................... $10,850,137 =========== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($9,249,813 divided by 744,344 shares of beneficial interest) ........................... $12.43 ====== Offering price per share (100/94.25 of $12.43) ..... $13.19* ====== Net asset value and offering price of Class B shares ($1,450,632 divided by 116,937 shares of beneficial interest) ............................. $12.41** ====== Net asset value and offering price of Class C shares ($149,692 divided by 12,046 shares of beneficial interest) ........................................ $12.43 ====== Identified cost of investments ..................... $11,104,490 =========== *Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. **Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - ------------------------------------------------------------------------------- For the Period March 15, 1996 (a) through June 30, 1996 (unaudited) INVESTMENT INCOME Dividends ...................................... $ 31,783 (b) Interest ....................................... 21,426 --------- 53,209 Expenses Management fees .............................. $ 30,308 Service fees--A .............................. 6,222 Service and distribution fees--B ............. 2,470 Service and distribution fees--C ............. 185 Trustees' fees and expenses .................. 3,141 Accounting and administrative ................ 13,237 Custodian .................................... 17,060 Transfer agent ............................... 21,956 Audit and tax services ....................... 3,000 Legal ........................................ 1,388 Printing ..................................... 581 Registration ................................. 9,640 Amortization of organization expenses ........ 4,200 Miscellaneous ................................ 339 ---------- Total expenses ................................. 113,727 Less expenses waived by the investment adviser . (30,308) 83,419 ---------- --------- Net investment income (loss) ................... (30,210) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments--net ............................. 50,339 Foreign currency transactions--net ........... (11,288) ---------- Total realized gain on investments and foreign currency transactions ...................... 39,051 ---------- Unrealized appreciation (depreciation) on: Investments--net ............................. (121,252) Foreign currency transactions--net ........... 961 ---------- Total unrealized depreciation on investments and foreign currency transactions .......... (120,291) ---------- Net loss on investment transactions ............ (81,240) --------- NET DECREASE IN NET ASSETS FROM OPERATIONS ....... $(111,450) ========= (a) Commencement of Operations. (b) Net of foreign taxes of: $10,095. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------- (unaudited) FOR THE PERIOD MARCH 15, 1996(a) THROUGH JUNE 30, 1996 ------------- FROM OPERATIONS Net investment income (loss) ............................... $ (30,210) Net realized gain on investments and foreign currency transactions ............................................. 39,051 Unrealized depreciation on investments, and foreign currency transactions ............................................. (120,291) ----------- Decrease in net assets from operations ..................... (111,450) Increase in net assets derived from capital share transactions ............................................. 10,961,587 ----------- Total increase in net assets ............................... 10,850,137 NET ASSETS Beginning of the period .................................... 0 ----------- End of the period .......................................... $10,850,137 =========== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) Beginning of the period .................................... $ 0 =========== End of the period .......................................... $ (30,210) =========== (a) Commencement of Operations. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (unaudited) CLASS A CLASS B CLASS C ------------------ ------------------ ------------------ FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD MARCH 15, 1996(a) MARCH 15, 1996(a) MARCH 15, 1996(a) THROUGH THROUGH THROUGH JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996 ------------------ ------------------ ------------------ Net Asset Value, Beginning of Period .. $12.50 $12.50 $12.50 ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) ............... (0.03) (0.05) (0.05) Net Realized and Unrealized Gain (Loss) on Investments ....... (0.04) (0.04) (0.02) ------ ------ ------ Total From Investment Operations ........... (0.07) (0.08) (0.06) ------ ------ ------ Net Asset Value, End of Period ............... $12.43 $12.41 $12.43 ====== ====== ====== Total Return (%) (b) ... (0.6) (0.7) (0.6) Ratio of Operating Expenses to Average Net Assets (%) (e) ... 2.95(c) 3.70(c) 3.70(c) Ratio of Net Investment Income (Loss) to Average Net Assets (%) (0.78)(c) (1.53)(c) (1.53)(c) Portfolio Turnover Rate (%) 7(c) 7(c) 7(c) Average Commission Rate (d) 0.0086 0.0086 0.0086 Net Assets, End of Period (000) ......... $9,250 $1,451 $150 (a) Commencement of operations. (b) A sales charge in the case of Class A Shares and a contingent deferred sales charge in the case of Class B Shares are not reflected in total return calculations. Not annualized. (c) Computed on an annualized basis. (d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades on which commissions are charged. This rate generally does not reflect mark- ups, mark-downs, or spreads on shares traded on a principal basis. (e) The ratio of operating expenses to average net assets without giving effect to the waiver of management fee described in note 3a to the Financial Statements would have been (%) ...... 4.05(c) 4.80(c) 4.80(c) See accompanying notes to financial statements. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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 Class A, Class B, and Class C shares. The Fund commenced its public offering of Class A, Class B and Class C shares on March 15, 1996. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within five years of purchase. Class C shares do not pay front end or contingent deferred sales charges and do not convert to any other class of shares, but they do pay a higher ongoing distribution fee than Class A shares. Expenses of the Fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by New England Funds Management L.P. 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 or when the Fund learns of the dividend, and interest income is recorded on the accrual basis. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities at period end, resulting from changes in the exchange rate. FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the Fund's investments against currency fluctuation. Also, a contract to buy or sell can offset a previous contract. These contracts involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. The U.S. dollar value of the currencies the Fund has committed to buy or sell (if any) is shown in the portfolio composition under the caption "Forward Currency Contracts Outstanding." This amount represents the aggregate exposure to each currency the Fund has acquired or hedged through currency contracts outstanding at period end. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. All contracts are "marked-to-market" daily at the applicable translation rates and any gains or losses are recorded for financial statement purposes as unrealized until settlement date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. D. 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. E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for organization costs and foreign currency transactions for book and tax purposes. Permanent book and tax basis differences will result in reclassification to capital accounts. F. 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. Harris Associates, L.P. 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 portfolio's ability to dispose of the underlying securities. G. ORGANIZATION EXPENSE. Costs incurred in fiscal 1996 in connection with the Fund's organization and registration, amounting to approximately $83,913 in the aggregate, were paid by the Fund and are being amortized by the Fund over 60 months. 2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the Fund for the period June 30, 1996 were $10,507,874 and $203,438, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays management fees to its investment adviser, New England Funds Management L.P. ("NEFM") at the annual rate of 1.10% of the Fund's average daily net assets. NEFM pays the Fund's investment subadviser, Harris Associates, L.P. ("Harris Associates"), a fee at the annual rate of 0.70% of the first $50 million of the Fund's average daily net assets, and 0.60% of such assets in excess of $50 million. NEFM pays the Fund's special economic and market subadviser, Batchua Securities and Investments, Ltd. ("Batchua Securities"), a fee at the annual rate of 0.10% of the Fund's average daily assets. Certain officers and directors of NEFM and Harris Associates are also officers or trustees of the Fund. NEFM and Harris Associates are wholly owned subsidiaries of New England Investment Companies, L.P. which is a subsidiary of New England Mutual Life Insurance Company. Fees earned by NEFM and those paid by NEFM to Harris Associates and Batchua Securities during the period ended June 30, 1996, are as follows: FEES EARNED BY NEFM FEES PAID ----------- --------- $30,308(a) -- NEFM -- $19,287 Harris Associates -- 2,755 Batchua Securities ----------- --------- $30,308(a) $22,042 =========== ========= (a) NEFM has agreed to waive its management fees from the commencement of operations of the Fund until further notice. B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New England Funds"), the Fund's distributor, is a wholly owned subsidiary of New England Investment Companies, L.P. and performs certain accounting and administrative services for the Fund. The Fund reimburses New England Funds for all or part of New England Funds' expenses of providing these services which include the following: (i) expenses for personnel performing bookkeeping, accounting, internal auditing and financial reporting functions and clerical functions relating to the Fund, (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance, and (iii) registration, filing and other fees in connection with requirements of regulatory authorities. For the period ended June 30, 1996, these expenses amounted to $13,237 and are shown separately in the financial statements as Accounting and administrative. C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder servicing agent for the Fund. For the period ended June 30, 1996, the Fund paid New England Funds $17,999 as compensation for its services in that capacity. D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays New England Funds a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by the New England Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the period ended June 30, 1996, the Fund paid New England Funds $6,222 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays New England Funds monthly service fees at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. For the period ended June 30, 1996 the Fund paid New England Funds $618 and $46 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plan, the Fund pays New England Funds monthly distribution fees at the annual rate of up to 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in connection with the marketing or sale of Class B and Class C shares. For the period ended June 30, 1996, the Fund paid New England Funds $1,852 and $139 in distribution fees under the Class B and Class C plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to New England Funds by investors in shares of the Fund during the period ended June 30, 1996 amounted to $118,806. E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly to its officers or trustees who are directors, officers or employees of Harris Associates, New England Funds, New England Investment Companies or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $714 Meeting Fee $114/meeting Committee Meeting Fee $68/meeting 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. 5. CAPITAL SHARE TRANSACTIONS. At June 30, 1996 there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B, and Class C capital stock. Transactions in capital shares were as follows: FOR THE PERIOD MARCH 15, 1996 (a) THROUGH JUNE 30, 1996 ----------------------- SHARES AMOUNT CLASS A --------- ----------- Shares sold ....................................... 748,714 $ 9,384,349 Shares repurchased ................................ (4,370) (55,431) -------- ----------- Net increase ...................................... 744,344 9,328,918 -------- ----------- FOR THE PERIOD MARCH 15, 1996 (a) THROUGH JUNE 30, 1996 ----------------------- SHARES AMOUNT CLASS B --------- ----------- Shares sold ....................................... 119,044 1,508,362 Shares repurchased ................................ (2,107) (27,073) -------- ----------- Net increase ...................................... 116,937 1,481,289 -------- ----------- FOR THE PERIOD MARCH 15, 1996 (a) THROUGH JUNE 30, 1996 ----------------------- SHARES AMOUNT CLASS C --------- ----------- Shares sold ....................................... 12,087 151,880 Shares repurchased ................................ (41) (500) -------- ----------- Net increase ...................................... 12,046 151,380 -------- ----------- Increase derived from capital shares transactions . 873,327 $10,961,587 ======== =========== (a) Commencement of operations. 6. CONCENTRATION OF CREDIT. The Fund primarily invest in Israeli equity securities. Investments in Israeli and other foreign securities present risks not typically associated with investments in comparable securities of U.S. issuers. The Israeli securities market is substantially smaller, less liquid and more volatile than the major securities markets in the United States. Other risks include those resulting from future adverse political or economic developments and the possible imposition of currency exchange blockages or other Israeli governmental laws or restrictions. - -------------------------------------------------------------------------------- REGULAR INVESTING PAYS - -------------------------------------------------------------------------------- FIVE GOOD REASONS TO INVEST REGULARLY 1. It's an easy way to build assets 2. It's convenient and effortless 3. It requires a low minimum to get started 4. It can help you reach important long-term goals like retirememt or college funding 5. It can help you benefit from the ups and downs of the market With Investment Builder, New England Funds' 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. - ------------------------------------------------------------------------------- SAVING FOR RETIREMENT - ------------------------------------------------------------------------------- AN EARLY START CAN MAKE A BIG DIFFERENCE With today's lengthening life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulates the greater retirement nest egg? For the answer, look at the chart. [A chart in the form of a line graph appears here, comparing the growth of investments made for 10 years by an investor who begins investing at age 30 to the growth of investments made for twenty-five years by an investor who begins investing at age 40. A hypothetical appreciation of 10% is assumed. The data points from the graph are as follows:] Investor A - Begins at age 30 for 10 years: Age Growth of Investments 30 $2,000 35 $15,431 40 $35,062 45 $90,943 55 $146,464 60 $235,882 65 $379,890 Investor B - Begins investing at age 40 for 25 years: Age Growth of Investments 40 $2,000 45 $15,431 50 $37,062 55 $71,899 60 $128,005 65 $216,364 Assumes 10% hypothetical appreciation. For illustrative purposes only and not indicative of future performance of any New England Fund. Investor A invested $20,000, less than half of investor B's commitment -- and for less than half the time. Yet investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start. New England Funds has prepared a number of informative retirement planning guides. Call your financial representative or New England Funds today, and ask for the guide that best fits your personal needs. - -------------------------------------------------------------------------------- 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 can't always call us during regular business hours? With Tele#Facts, New England Funds' 24-hours a day automated telephone system, you can call us any time that's convenient for you -- day or night! By calling 1-800-346-5984 from any Touch-Tone(R) telephone, you can: o Check the current value of your New England Fund account o Find out the current yield and total return on any New England Fund o 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 you'll enjoy this easy-to-use and convenient service from New England Funds! NEW ENGLAND FUNDS STOCK FUNDS Growth Fund Star Advisers Fund Capital Growth Fund Value Fund Growth Opportunities Fund Balanced Fund INTERNATIONAL STOCK FUNDS Growth Fund of Israel International Equity Fund Star Worldwide 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. VISIT OUR WORLD WIDE WEB SITE AT http://www.mutualfunds.com 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 Funds current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. PRESORTED FIRST CLASS U.S. POSTAGE PAID BOSTON, MA PERMIT NO. 770 [LOGO] Sailboat (R) NEW ENGLAND FUNDS Where The Best Minds Meet(TM) - ---------------------- 399 Boylston Street Boston, Massachusetts 02116 - ---------------------- GI58-0896 [LOGO] Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----