-----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, H0+DZEsEvL3OM/m4+s6PhkE1z5KVBuz6IxmMt5o4lAWdBP/E4V7fEocj1kit9jdm M046HLduQW5SCeVYpY817A== 0000950156-96-000782.txt : 19960910 0000950156-96-000782.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950156-96-000782 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960906 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: 96626722 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: INVESTMENT TRUST OF BOSTON FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WORLD INVESTMENT TRUST DATE OF NAME CHANGE: 19680529 N-30D 1 NEF TRUST II - ADJUSTABLE RATE U.S. GOV'T FUND [LOGO] NEW ENGLAND FUNDS Where The Best Minds Meet(TM) - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND PERFORMANCE UPDATE - -------------------------------------------------------------------------------- NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND - ------------- 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 Adjustable Rate U.S. Government Fund, containing your portfolio manager 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 ease 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 marked 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 - -------------------------------------------------------------------------------- NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND - -------------------------------------------------------------------------------- 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. [A chart in the form of a line graph appears here, illustrating the growth of a $10,000 investment in the Fund compared to the Lehman Adjustable Rate Mortgage Index and the Cost of living since 10/18/91 (the Fund's date of inception). The data points for this chart are as follows:] - -------------------------------------------------------------------------------- A $10,000 INVESTMENT IN CLASS A SHARES - -------------------------------------------------------------------------------- ARM ARM Lehman Cost of Year NAV POP ARM Living - -------- ------- ------- ------- ------- 10/18/91 $10,000 $9,700 $10,000 $10,000 1992 $10,282 $9,974 $10,285 $10,167 1993 $10,789 $10,465 $10,956 $10,471 1994 $10,936 $10,608 $11,037 $10,697 1995 $11,588 $11,241 $11,959 $11,000 1996 $12,243 $11,876 $12,714 $11,296 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS 6/30/96 - -------------------------------------------------------------------------------- CLASS A (Inception 10/18/91) 1 YEAR 3 YEARS SINCE INCEPTION Net Asset Value(1) 5.65% 4.31% 4.67% With Max. Sales Charge(2) 4.65 3.94 4.43 Lehman ARM Index(4) 6.31 4.93 n/a Lipper ARM Average(6) 3.30 4.04 n/a CLASS B (Inception 9/13/93) 1 YEAR SINCE INCEPTION Net Asset Value(1) 4.87% 3.49% With CDSC(3) 0.88 2.50 Lehman ARM Index(4) 6.31 4.93 Lipper ARM Average(6) 3.30 n/a 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) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 1% 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 Adjustable Rate Mortgage Index (ARM) is an unmanaged index of adjustable rate mortgages of short to intermediate maturities. The Index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. (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. [Photo of Scott Nicholson] NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND Manager: Scott Nicholson Back Bay Advisors, L.P. Economic Overview The interest rate environment during the first half of 1996 was notable for its high level of volatility. Economic releases presented conflicting views as to the strength of the domestic economy, and political events in Washington raised and then dampened hopes of imminent fiscal policy reform. Based on a fourth quarter Gross Domestic Product (GDP) rise of only 0.5% and a January economy plagued by severe winter storms, the Federal Reserve lowered short-term interest rates to 5.25% in late January. This decrease along with the expectation of further rate cuts, pushed the one-year Treasury bill yield to 4.79% and the ten-year Treasury note to 5.53% by mid-February. However, with the return of milder weather and the end of the General Motors strike, economic activity picked up significantly, resulting in a respectable first quarter gain GDP of 2.2%. At this point, the market's outlook for Federal Reserve policy turned to neutral, with the one-year bill and ten-year note yields falling to 5.41% and 6.34%, respectively. The second quarter saw continued expansion as the important housing and automobile sectors remained strong despite the pressures of higher interest rates. Job growth was surprisingly solid in spite of the ongoing trend toward downsizing in many prominent corporations, and wage pressures began to appear in certain industries and certain areas of the country. In addition, expectations of a fiscal drag on the economy through a balanced budget agreement evaporated as Washington returned to politics as usual. With second quarter GDP growth expected to move above the current trend, the interest rate outlook has come full circle. Participants are now expecting an imminent Federal Reserve tightening and have significantly backed up rates to a point where the one-year bill and ten-year note are yielding 5.95% and 7.02%, respectively. How We Managed Your Fund Based on our expectations for lower interest rates in the first quarter of the year, we began 1996 with an adjustable rate mortgage (ARM) weighting in the portfolio of only 67.4%, at the lower end of the prospectus range of 65% to 100%. We were concerned that continued rapid prepayment speeds caused by falling fixed mortgage rates would erode our income stream while limiting principal appreciation. Therefore, we chose to concentrate a larger portion of our investments in U.S. Treasury Notes (23.5%). However, with the reversal in market psychology late in the first quarter and coincident lessening of prepayment fears, we began to allocate more funds to ARMs while reducing both the size and duration of our Treasury note position. By the end of March, the portfolio contained 81.8% ARMs and 10.7% Treasury notes. Similar allocations were maintained throughout most of the second quarter. Outlook As the second quarter was coming to a close, we reduced our ARM allocation to 75.1%, raising our combined short Treasury note and cash position to 19.9%, and providing added liquidity in a time of uncertainty about the ultimate extent of the backup in interest rates. However, our outlook for the longer term is fairly positive; we believe that the Federal Reserve will not have to repeat the aggressive tightening moves of 1994, and that further increases in rates should be moderate and measured over time. Although higher interest rates would cause some erosion in ARM principal values, their effect should be offset to a great degree by slowing prepayment speeds. The expected reduction in prepayments should also increase our income flows and, we hope, allow us to increase our distribution rate. - -------------------------------------------------------------------------------- YOUR FUND'S PORTFOLIO ALLOCATION 6/30/96* - -------------------------------------------------------------------------------- Total ARM Securities 75.1% U.S. Treasury Notes 16.2% Net Cash/Equivalent 3.7% Newslice FHLB Callable Notes 3.4% Collateralized mortgage obligations 1.6% *Portfolio composition is based on total net assets and is subject to change. Glossary for Mutual Fund Investors TOTAL RETURN - The change in value of a mutual fund investment over a specific time period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year. YIELD - The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission. MATURITY - The period of time before principal repayment on a bond is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. DURATION - A measure, stated in years, of a bond or bond fund's sensitivity to interest rates. Duration is a means to directly compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a fund is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a fund with a duration of 4 years should rise in value 4%. Conversely, the fund should decline 4% if interest rates rise 1%. TREASURIES - Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). MUNICIPAL BOND - A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and in most cases from state and local income taxes. The two main types are General Obligation (GO) Bonds, which are backed by the full faith and credit and taxing powers of the municipality; and Revenue Bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. [LOGO] NEW ENGLAND FUNDS Where The Best Minds Meet(TM) - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS - -------------------------------------------------------------------------------- NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND - ------------- JUNE 30, 1996 - ------------- - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- Investments as of June 30, 1996 (unaudited) BONDS AND NOTES--97.0% OF TOTAL NET ASSETS
FACE AMOUNT DESCRIPTION VALUE (a) - ------------------------------------------------------------------------------------------------------ GOVERNMENT AGENCIES (B)--79.1% $ 5,000,000 Federal Home Loan Bank, 6.070%, 3/25/99 (d) ............................... $ 4,924,300 5,000,000 Federal Home Loan Bank, 6.370%, 12/18/01 (d) .............................. 4,879,000 1,991,970 Federal Home Loan Mortgage Corp., 7.000%, 2/01/16, (d) .................... 2,039,279 381,693 Federal Home Loan Mortgage Corp., 6.184%, 12/01/17, (d) ................... 375,968 4,082,238 Federal Home Loan Mortgage Corp., 7.768%, 1/01/19, (d) .................... 4,209,808 515,235 Federal Home Loan Mortgage Corp., 6.124%, 2/01/19, (d) .................... 507,829 1,372,183 Federal Home Loan Mortgage Corp., 6.732%, 4/01/19, (d) .................... 1,367,037 3,920,220 Federal Home Loan Mortgage Corp., 7.624%, 5/01/19, (d) .................... 4,032,926 6,125,143 Federal Home Loan Mortgage Corp., 7.284%, 1/01/20, (d) .................... 6,280,186 1,923,244 Federal Home Loan Mortgage Corp., 7.875%, 10/01/21, (d) ................... 1,971,325 1,597,706 Federal Home Loan Mortgage Corp., 7.750%, 1/01/22, (d) .................... 1,654,624 4,504,504 Federal Home Loan Mortgage Corp., 7.504%, 3/01/22, (d) .................... 4,604,447 3,526,299 Federal Home Loan Mortgage Corp., 7.000%, 4/01/22, (d) .................... 3,614,457 2,603,237 Federal Home Loan Mortgage Corp., 7.029%, 4/01/22, (d) .................... 2,648,794 3,100,373 Federal Home Loan Mortgage Corp., 7.351%, 5/01/22, (d) .................... 3,212,762 2,455,518 Federal Home Loan Mortgage Corp., 7.161%, 6/01/22, (d) .................... 2,524,580 1,792,780 Federal Home Loan Mortgage Corp., 7.183%, 6/01/22, (d) .................... 1,840,961 1,617,964 Federal Home Loan Mortgage Corp., 7.315%, 6/01/22, (d) .................... 1,648,301 1,832,556 Federal Home Loan Mortgage Corp., 8.250%, 7/01/22, (d) .................... 1,898,987 4,084,000 Federal Home Loan Mortgage Corp., 7.844%, 8/01/22, (d) .................... 4,232,045 1,372,722 Federal Home Loan Mortgage Corp., 7.875%, 8/01/22, (d) .................... 1,407,040 2,751,913 Federal Home Loan Mortgage Corp., 8.043%, 8/01/22, (d) .................... 2,839,630 1,420,340 Federal Home Loan Mortgage Corp., 7.965%, 9/01/22, (d) .................... 1,458,511 3,680,639 Federal Home Loan Mortgage Corp., 7.875%, 12/01/22, (d) ................... 3,781,856 2,893,017 Federal Home Loan Mortgage Corp., 7.687%, 1/01/23, (d) .................... 2,951,782 3,485,123 Federal Home Loan Mortgage Corp., 7.156%, 4/01/23, (d) .................... 3,587,499 3,607,533 Federal Home Loan Mortgage Corp., 7.284%, 5/01/23, (d) .................... 3,672,919 5,077,094 Federal Home Loan Mortgage Corp., 7.385%, 5/01/23 (d) ..................... 5,229,407 7,137,016 Federal Home Loan Mortgage Corp., 7.863%, 9/01/23 (d) ..................... 7,302,095 3,532,610 Federal Home Loan Mortgage Corp., 7.917%, 9/01/23, (d) .................... 3,651,835 5,000,000 Federal Home Loan Mortgage Corp., 7.828%, 10/01/23 (d) .................... 5,112,500 3,933,072 Federal Home Loan Mortgage Corp., 7.375%, 8/01/24, (d) .................... 4,046,147 8,922,036 Federal Home Loan Mortgage Corp., 7.757%, 9/01/24, (d) .................... 9,256,612 6,632,500 Federal Home Loan Mortgage Corp., 7.775%, 4/01/25, (d) .................... 6,825,257 6,142,454 Federal Home Loan Mortgage Corp., 7.255%, 4/01/29 (d) ..................... 6,283,546 787,517 Federal Home Loan Mortgage Corp., 6.405%, 7/01/30, (d) .................... 798,345 1,575,680 Federal Home Loan Mortgage Corp., 6.299%, 10/01/30, (d) ................... 1,554,015 1,279,989 Federal National Mortgage Association, 6.500%, 6/01/17, (d) ............... 1,272,789 1,607,343 Federal National Mortgage Association, 7.690%, 7/01/17, (d) ............... 1,658,577 347,449 Federal National Mortgage Association, 7.506%, 8/01/17, (d) ............... 356,787 2,146,413 Federal National Mortgage Association, 7.532%, 12/01/17, (d) .............. 2,209,463 7,918,245 Federal National Mortgage Association, 8.000%, 10/01/18, (d) .............. 8,244,873 661,748 Federal National Mortgage Association, 6.814%, 6/01/19, (d) ............... 663,402 2,227,351 Federal National Mortgage Association, 6.563%, 7/01/19, (d) ............... 2,213,430 1,698,386 Federal National Mortgage Association, 6.949%, 1/01/20, (d) ............... 1,711,124 613,538 Federal National Mortgage Association, 7.512%, 5/01/20, (d) ............... 630,026 2,951,434 Federal National Mortgage Association, 7.429%, 9/01/20, (d) ............... 3,034,443 3,196,323 Federal National Mortgage Association, 7.604%, 11/01/20, (d) .............. 3,306,197 2,019,069 Federal National Mortgage Association, 7.224%, 5/01/22, (d) ............... 2,079,641 4,520,763 Federal National Mortgage Association, 7.506%, 6/01/22, (d) ............... 4,676,164 3,786,476 Federal National Mortgage Association, 7.934%, 11/01/22, (d) .............. 3,930,836 2,959,034 Federal National Mortgage Association, 7.220%, 4/01/23, (d) ............... 3,029,311 2,089,180 Federal National Mortgage Association, 7.882%, 7/01/23, (d) ............... 2,132,269 545,963 Federal National Mortgage Association, 5.874%, 9/01/23, (d) ............... 541,186 4,085,304 Federal National Mortgage Association, 7.587%, 10/01/23 (d) ............... 4,172,117 3,805,028 Federal National Mortgage Association, 7.755%, 1/01/24 (d) ................ 3,954,851 5,397,840 Federal National Mortgage Association, 7.528%, 4/01/24, (d) ............... 5,542,907 464,035 Federal National Mortgage Association, 6.700%, 1/01/29, (d) ............... 454,754 3,860,113 Government National Mortgage Association, 7.375%, 4/20/16, (d) ............ 3,939,728 5,946,746 Government National Mortgage Association, 7.000%, 4/20/22, (d) ............ 6,017,363 3,895,776 Government National Mortgage Association, 7.375%, 6/20/22, (d) ............ 3,946,908 7,080,084 Government National Mortgage Association, 7.375%, 5/20/23, (d) ............ 7,137,610 4,180,820 Government National Mortgage Association, 7.375%, 6/20/23, (d) ............ 4,214,789 8,894,761 Government National Mortgage Association, 7.250%, 7/20/23, (d) ............ 8,967,032 6,443,420 Government National Mortgage Association, 6.500%, 11/20/25 (d) ............ 6,491,745 ------------ 224,756,934 ------------ CMO--1.6% 4,689,674 Federal Home Loan Mortgage Pc Guaranteed, 6.170%, 10/15/23, (d) ........... 4,672,041 ------------ U.S. GOVERNMENT--16.3% 5,000,000 United States Treasury Notes, 7.875%, 7/15/96 ............................. 5,005,650 10,000,000 United States Treasury Notes, 8.500%, 4/15/97 ............................. 10,211,500 15,000,000 United States Treasury Notes, 7.375%, 11/15/97 ............................ 15,272,100 15,000,000 United States Treasury Notes, 9.000%, 5/15/98 ............................. 15,756,750 ------------ 46,246,000 ------------ Total Bonds and Notes (Identified Cost $277,787,864) ...................... 275,674,975 ------------ SHORT TERM INVESTMENT--3.7% 10,600,000 Repurchase agreement with Goldman Sachs Group L.P. dated 06/28/96 at 5.35% to be repurchased at $10,604,726 on 07/01/96. Collateralized by $10,400,000 U.S. Treasury Bonds 7.625% due 11/15/22 valued at $10,826,140 10,600,000 ------------ Total Short Term Investment (Identified Cost $10,600,000) ................ 10,600,000 ------------ Total Investments--100.7% (Identified Cost $288,387,864) (c) ............. 286,274,975 Other assets less liabilities ........................................... (1,946,736) ------------ Total Net Assets--100% ................................................... $284,328,239 ============ (a) See Note 1a to the financial statements. (b) The Fund's investments in mortgage backed securities of the Government National Mortgage Association, Federal Home Loan Bank and Federal National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of these issues which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (c) Federal Tax Information: At June 30, 1996 the net unrealized depreciation on investments based on cost for federal income tax purposes of $288,387,864 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost ........................................................ $ 610,104 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ..................................................... (2,722,993) ------------ Net unrealized depreciation ....................................................... $ (2,112,889) ============ As of December 31, 1995 the fund has a net tax basis capital loss carry forward as follows: Expiring December 31, 2002 ........................................................ $ 5,625,994 December 31,2003 ......................................................... $ 6,075,626 (d) Variable rate mortgage backed securities. The interest rates change on these instruments monthly based on changes in a designated base rate. The rates shown were those in effect at June 30, 1996.
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES - -------------------------------------------------------------------------------- June 30, 1996 (unaudited) ASSETS Investments at value ......................... $286,274,975 Cash ......................................... 33,647 Receivable for: Fund shares sold ........................... 20,288 Securities sold ............................ 83,316 Accrued interest ........................... 6,306,823 Unamortized organization cost .............. 4,419 Prepaid registration expense ................. 7,000 ------------ 292,730,468 LIABILITIES Payable for: Fund shares redeemed ....................... $7,391,973 Dividends declared ......................... 735,247 Accrued expenses: Management fees ............................ 204,800 Deferred trustees' fees .................... 1,723 Other expenses ............................. 68,486 ------- 8,402,229 ------------ NET ASSETS ..................................... $284,328,239 ============ Net Assets consist of: Capital paid in ............................ $299,937,890 Undistributed net investment income ........ 1,068,587 Accumulated net realized losses ............ (14,565,349) Unrealized depreciation on investments ..... (2,112,889) ----------- NET ASSETS ..................................... $284,328,239 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($281,823,292 divided by 38,381,535 shares of beneficial interest) ............... $7.34 ===== Offering price per share (100/99 of $7.34) ..... $7.41* ===== Net asset value and offering price of Class B shares $2,504,947 divided by 341,214 shares of beneficial interest) ......................... $7.34** ===== Identified cost of investments ................. $288,387,864 ============ *Based upon single purchases of less than $1,000,000. Reduced sales charges apply for purchases in excess of this amount. **Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- Six Months Ended June 30, 1996 (unaudited) INVESTMENT INCOME Interest ................................. $11,053,939 Expenses Management fees ........................ $ 829,063 Service fees--Class A .................. 383,814 Service and distribution fees--Class B . 12,356 Trustees' fees and expenses ............ 10,854 Accounting and administrative .......... 22,895 Custodian .............................. 47,957 Transfer agent ......................... 90,752 Audit and tax services ................. 11,000 Legal .................................. 9,409 Printing ............................... 14,826 Registration ........................... 21,571 Amortization of organization expenses .. 7,007 Miscellaneous .......................... 5,101 ---------- Total expenses ........................... 1,466,605 Less expenses waived by the investment adviser and subadviser ................. (374,033) 1,092,572 ---------- ----------- Net investment income .................... 9,961,367 REALIZED AND UNREALIZED LOSS ON INVESTMENTS Realized loss on Investments--net ........ (1,729,253) Unrealized depreciation on Investments--net (880,826) ---------- Net loss on investment transactions ...... (2,610,079) ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS . $ 7,351,288 =========== See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- (unaudited) SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------- ------------- FROM OPERATIONS Net investment income ..................... $ 26,292,012 $ 9,961,367 Net realized loss on investments .......... (9,361,220) (1,729,253) Unrealized appreciation (depreciation) on investments ............................. 18,622,227 (880,826) ------------ ------------- Increase in net assets from operations .... 35,553,019 7,351,288 ------------ ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................. (24,684,115) (8,628,126) Class B ................................. (112,561) (60,275) ------------ ------------- (24,796,676) (8,688,401) ------------ ------------- Decrease in net assets derived from capital share transactions ...................... (168,968,965) (47,815,046) ------------ ------------- Total decrease in net assets .............. (158,212,622) (49,152,159) NET ASSETS Beginning of the period ................... 491,693,020 333,480,398 ------------ ------------- End of the period ......................... $333,480,398 $ 284,328,239 ============ ============= (OVER)/UNDISTRIBUTED NET INVESTMENT INCOME Beginning of the period ................... $ 313,893 $ (204,379) ============ ============= End of the period ......................... $ (204,379) $ 1,068,587 ============ ============= See accompanying notes to financial statements. - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------------- (unaudited)
CLASS A -------------------------------------------------------------------------------------------- OCTOBER 18(a) SIX MONTHS THROUGH YEAR ENDED DECEMBER 31, ENDED DECEMBER 31, -------------------------------------------------- JUNE 30, 1991 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- ----- Net Asset Value, Beginning $7.50 $7.50 $7.46 $7.45 $7.20 $7.37 ----- ----- ----- ----- ----- ----- Income From Investment Operations Net Investment Income ...... 0.09 0.42 0.33 0.37 0.47 0.41 Net Realized and Unrealized Gain (Loss) on Investments 0.00 (0.06) (0.03) (0.31) 0.14 (0.23) ----- ----- ----- ----- ----- ----- Total From Investment Operations ............... 0.09 0.36 0.30 0.06 0.61 0.18 ----- ----- ----- ----- ----- ----- Less Distributions Distributions From Net Investment Income ........ (0.09) (0.40) (0.31) (0.31) (0.44) (0.21) ----- ----- ----- ----- ----- ----- Total Distributions ........ (0.09) (0.40) (0.31) (0.31) (0.44) (0.21) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period ................... $7.50 $7.46 $7.45 $7.20 $7.37 $7.34 ===== ===== ===== ===== ===== ===== Total Return (%) (d) ....... 1.2 4.9 4.0 0.8 8.6 2.5 Ratio of Operating Expenses to Average Net Assets (%) (b) ........... 0.50 (c) 0.57 0.60 0.60 0.66 0.70 (c) Ratio of Net Investment Income to Average Net Assets (%) ........... 6.43 (c) 5.39 4.39 4.85 6.29 6.41 (c) Portfolio Turnover Rate (%). 52 (c) 49 54 17 73 68 (c) Net Assets, End of Period (000) .................... $60,684 $294,687 $734,251 $489,637 $331,112 $281,823 (a) Commencement of operations. (b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class A average net assets. From May 1, 1995 through June 1, 1995 expenses were voluntarily limited to 0.65% 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 0.89% for the year ended December 31, 1995 and 0.94% for the six months ended June 30, 1996. From April 1, 1992 through May 1, 1995 expenses were voluntarily limited to 0.60% of Class A average net assets. The ratio of operating expenses to average net assets without giving effect to this expense limitation would have been 0.96%, 0.86% and 0.88% for the years ended December 31, 1992, 1993 and 1994, respectively. From October 19, 1991 through March 31, 1992, expenses were voluntarily limited to 0.50% of average net assets. The ratio of operating expenses to average net assets without giving effect to this expense limitation would have been 1.26% for the period ended December 31, 1991. (c) Computed on an annualized basis. (d) A sales charge of 1.00% (maximum) is not reflected in total return calculations. Periods less than one year are not annualized.
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- continued - -------------------------------------------------------------------------------- (unaudited) CLASS B ------------------------------------------------------ SEPTEMBER 13(A) YEAR YEAR THROUGH ENDED ENDED SIX MONTHS DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED 1993 1994 1995 JUNE 30, 1996 ----------- ------------ ----------- -------------- Net Asset Value, Beginning of Period .. $7.52 $7.45 $7.20 $7.37 ----- ----- ----- ----- Income From Investment Operations Net Investment Income . 0.08 0.29 0.41 0.41 Net Realized and Unrealized Gain (Loss) on Investments ....... (0.08) (0.29) 0.14 (0.26) ----- ----- ----- ----- Total from Investment Operations ........... 0.00 0.00 0.55 0.15 ----- ----- ----- ----- Less Distributions Distributions From Net Investment Income .... (0.07) (0.25) (0.38) (0.18) ----- ----- ----- ----- Total Distributions ... (0.07) (0.25) (0.38) (0.18) ----- ----- ----- ----- Net Asset Value, End of Period ........ $7.45 $7.20 $7.37 $7.34 ===== ===== ===== ===== Total Return (%) (d) .. 0.0 0.1 7.8 2.1 Ratio of Operating Expenses to Average Net Assets (%) (d) ... 1.35 (c) 1.35 1.41 1.45 (c) Ratio of Net Investment Income to Average Net Assets (%) ....... 3.50 (c) 4.10 5.54 5.67 (c) Portfolio Turnover Rate (%) ............. 54 17 73 68 (c) Net Assets, End of Period (000) ......... $855 $2,056 $2,368 $2,505 (a) Commencement of operations. (b) Commencing June 1,1995 expenses were voluntarily limited to 1.45% of Class B average net assets. From May 1, 1995 through June 1, 1995 expenses were voluntarily limited to 1.40% of Class B 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 1.65% for the year ended December 31, 1995 and 1.69% for the six months ended June 30, 1996. From September 13, 1993 through May 1, 1995 expenses were voluntarily limited to 1.35% of Class B average net assets. The ratio of operating expenses for Class B shares would have been 1.61% for the period ended December 31, 1993, 1.63% for the year ended December 31, 1994. (c) Computed on an annualized basis. (d) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. See accompanying notes to financial statements. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- June 30, 1996 (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 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 1.00%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within five years of purchase. Expenses of the Fund are borne pro-rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. The Fund's investment subadviser, 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 is increased by the accretion of discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders all of its income and any net realized capital gains at least annually. Accordingly, no provision for federal income tax has been made. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences relate primarily to differing treatments for income recognition for mortgage- backed securities. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to paid in capital. E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price. 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. F. ORGANIZATION EXPENSE. Costs incurred in 1991 in connection with the Fund's organization and initial registration, amounting to $57,650, were paid by the Fund and are being amortized over 60 months beginning October 18, 1991. 2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the Fund for the six months ended June 30, 1996 were as follows: PURCHASES SALES --------------- --------------- U.S. GOVERNMENT U.S. GOVERNMENT --------------- --------------- $99,613,885 $123,840,368 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays management fees to its investment adviser, New England Funds Management L.P. ("NEFM") at the annual rate of 0.55% of the first $200 million of the Fund's average daily net assets, 0.51% of the next $300 million and 0.47% of such assets in excess of $500 million. NEFM pays the Fund's investment subadviser, Back Bay Advisors at the rate of 0.275% of the first $200 million of the Fund's average daily net assets, 0.255% of the next $300 million and 0.235% of such assets in excess of $500 million. Certain officers and directors of NEFM and Back Bay Advisors are also officers or trustees of the Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of New England Investment Companies, L.P. ("NEIC"), which is a subsidiary of New England Mutual Life Insurance Company. Fees earned by NEFM and Back Bay Advisors under the management agreement in effect during the six months ended June 30, 1996 are as follows: FEES EARNED - ----------- $414,531 (a) New England Funds Management, L.P. $414,532 (a) Back Bay Advisors, L.P. (a) Before reduction pursuant to voluntary expense limitations. See Note 4. B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC and performs certain accounting and administrative services for the Fund. The Fund reimburses New England Funds for all or part of New England 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 six months ended June 30, 1996 these expenses amounted to $22,895 and are shown separately in the financial statements as accounting and administrative. C. 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 a Service and Distribution Plan relating to the Fund's Class B shares (the "Class B Plan"). 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 New England Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 1996, the Fund paid New England Funds $383,814 in fees under the Class A Plan. If the expenses of New England Funds that are otherwise reimbursable under the Class A Plan incurred in any year exceed the amounts payable by the Fund under the Class A Plan, the unreimbursed amount (together with unreimbursed amounts from prior years) may be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expenses carried forward into 1996 is $1,929,283. Under the Class B 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 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 B shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 1996, the Fund paid New England Funds $3,089 in service fees under the Class B Plan. Also under the Class B Plan, the Fund pays New England Funds a monthly distribution fee at the annual rate of up to 0.75% of the average daily net assets attributable to the Fund's Class B 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 shares. For the six months ended June 30, 1996, the Fund paid New England Funds $9,267 in distribution fees under the Class B Plan. 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, 1996 amounted to $43,512. D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder servicing agent to the Fund. For the six months ended June 30, 1996, the Fund paid New England Funds $55,045 as compensation for its services in that capacity. 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 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 $2,194 Meeting Fee $114/meeting Committee Meeting Fee $68/meeting Committee Chairman Retainer $156/year A deferred compensation plan is available to the trustees on a voluntary basis. Each participating trustee will receive an amount equal to the value that such deferred compensation would have had, had it been invested in the Fund on the normal payment date. 4. EXPENSE LIMITATIONS. Commencing June 1, 1995 and until further notice to the Fund, Back Bay Advisors and New England Funds Management, L.P. have voluntarily agreed to reduce management fees in order to limit the Fund's expenses to an annual rate of 0.70% of the Fund's Class A average daily net assets and, 1.45% of Class B average daily net assets. From May 1, 1995 through June 1, 1995 expenses were voluntarily limited to 0.65% of Class A average net assets and 1.40% of Class B average net assets. From April 1, 1992 through May 1, 1995 expenses were voluntarily limited to 0.60% of Class A average net assets and 1.35% of Class B average net assets. Prior to April 1, 1992 the Fund's expenses were subject to a 0.50% voluntary expense limitation agreed to by both Back Bay Advisors and New England Funds. As a result of the Fund's expenses exceeding the applicable voluntary expense limitation during the six months ended June 30, 1996, Back Bay Advisors reduced its management fee of $414,532 by $187,016 and New England Funds Management, L.P. reduced its management fee of $414,531 by $187,017. 5. CAPITAL SHARES. At June 30, 1996 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, 1995 JUNE 30, 1996 -------------------------- ------------------------- CLASS A SHARES AMOUNT SHARES AMOUNT - ------- ---------- ------------- ---------- ----------- Shares sold ......... 10,139,660 $ 74,377,759 4,872,794 $ 35,890,632 Shares issued in connection with the reinvestment of: Distributions from net investment income ............ 1,309,593 9,615,221 498,183 3,667,653 ---------- ------------ ---------- ------------ 11,449,253 83,992,980 5,370,977 39,558,285 Shares repurchased ..(34,512,776) (253,225,090) (11,888,346) (87,522,114) ---------- ------------ ---------- ------------ Net increase (decrease) .........(23,063,523) $(169,232,110) (6,517,369) $(47,963,829) ---------- ------------- ---------- ------------ YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 -------------------------- ------------------------- CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ---------- ------------- ---------- ----------- Shares sold ......... 229,537 $ 934,154 70,809 $ 522,246 Shares issued in connection with the reinvestment of: Distributions from net investment income ............ 6,052 95,443 7,051 51,890 ---------- ------------- ---------- ------------ 235,589 1,029,597 77,860 574,136 Shares repurchased .. (65,035) (766,452) (57,835) (425,353) ---------- ------------- ---------- ------------ Net increase (decrease) ......... 170,554 $ 263,145 20,025 $ 148,783 ---------- ------------- ---------- ------------ Increase (decrease) derived from capital share transactions ...... (22,892,969) $(168,968,965) (6,497,344) $(47,815,046) ========== ============= ========= ============ - -------------------------------------------------------------------------------- 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. - ----------------------------------------------------------------------------- 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 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. [LOGO] -------------- NEW ENGLAND FUNDS BULK RATE Where The Best Minds Meet(TM) U.S. POSTAGE PAID BROCKTON, MA PERMIT NO. 770 -------------- - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- [LOGO: DALBAR SEAL] AR58-0896 [symbol] Printed on Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----