-----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, T+LsJhkazEeEEhFctbUjkHPDLr/4YchZV3o/90fhNIN2gMoel5QKjQgj2qQWSM3D ISyLDsw8ebxxPXa+UK/wYQ== 0000950156-96-000799.txt : 19960910 0000950156-96-000799.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950156-96-000799 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960909 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: 96627236 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 MASS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NEW ENGLAND FUNDS Where The Best Minds Meet (TM) - ------------------------------------------------------- SEMIANNUAL REPORT AND PERFORMANCE UPDATE - ------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME 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 Massachusetts Tax Free Income 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 Massachusetts Tax Free Income 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 appears here illustrating the growth of a $10,000 investment in the Massachusetts Tax Free Fund's Class A Shares since 6/30/86 compared the Lehman Municipal Index and the Cost of Living. The plot points for this chart are as follows:] - -------------------------------------------------------------------------------- A $10,000 INVESTMENT IN CLASS A SHARES - -------------------------------------------------------------------------------- Net Asset Value(1) Lehman Municipal Index(4) With Maximum Sales Charge(2) Cost of Living(5) Cost of NAV POP Lehman* Living 6/30/86 $10,000 $ 9,575 $10,000 $10,000 1987 $10,756 $10,299 $10,862 $10,372 1988 $11,513 $11,024 $11,668 $10,780 1989 $12,617 $12,081 $12,997 $11,338 1990 $13,142 $12,584 $13,882 $11,868 1991 $14,184 $13,582 $15,133 $12,425 1992 $15,878 $15,203 $16,914 $12,808 1993 $17,853 $17,094 $18,937 $13,192 1994 $17,527 $16,782 $18,975 $13,476 1995 $18,864 $18,062 $20,643 $13,859 1996 $20,086 $19,233 $22,013 $14,231 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B share performance will be greater or less than that shown based on differences in inception date, fees and sales charges. All Index and Fund performance assumes reinvested distributions. - -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/96* - -------------------------------------------------------------------------------- CLASS A (INCEPTION 3/23/84) YTD 1 YEAR 5 YEAR 10 YEAR Net Asset Value(1) -1.09% 6.48% 7.21% 7.22% With Max. Sales Charge(2) -5.31 1.98 6.28 6.76 Lipper MA Municipal Average(6) -1.14 6.03 7.46 7.24 SINCE CLASS B (INCEPTION 9/13/93) YTD 1 YEAR INCEPTION Net Asset Value(1) -1.42% 5.73% 2.32% With CDSC(3) -5.27 1.73 1.37 Lehman Municipal Index(4) n/a 6.64 4.08 Lipper MA Municipal Average(6) -1.14 6.03 n/a - -------------------------------------------------------------------------------- Yields as of 6/30/96** - -------------------------------------------------------------------------------- CLASS A CLASS B SEC 30-day Yield 5.25% 4.85% Taxable Equivalent Yield 9.88 9.13 * 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. ** SEC Yield is based on the Fund's net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. Taxable equivalent yield is based on the maximum combined federal and Massachusetts state income tax bracket of 46.85%. The alternative minimum tax may apply. Some federal and state taxes may apply. NOTES TO CHARTS AND PERFORMANCE UPDATE (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 4.25% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum 4% sales charge is applied to a redemption of Class B shares. The sales charge will decrease over time, declining to zero five years after the purchase of shares. (4) Lehman Municipal Index is an unmanaged index of bonds issued by states, municipalities and other governmental entities having maturities of more than one year. The Index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. (5) Cost of Living is based on the Consumer Price Index, a widely recognized measure of the cost of goods and services in the United States, calculated by the U.S. Bureau of Labor Statistics. (6) Lipper Average is an average of the total return performance (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Analytical Services, an independent mutual fund ranking service. - -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- [Photo of James Welch] MASSACHUSETTS TAX FREE INCOME FUND Portfolio Manager: James Welch Back Bay Advisors, L.P. The Market The first six months of 1996 were challenging for fixed income investments, and municipal bonds were no exception. The strong bond market rally of 1995 quickly lost steam early in the year, as unexpectedly strong economic activity caused interest rates to reverse direction and move sharply higher. From the beginning to the end of the period, long-term interest rates, as measured by the yield on the 30-year U.S. Treasury bond, climbed almost a full percentage point, from 5.95% to 6.89%. The good news for the municipal bond market was that fears generated by tax reform proposals, particularly those promoting a flat tax, finally eased. Triple-A rated, 30-year municipal bonds had yields close to 90% of comparable Treasury bonds at the end of 1995. This ratio declined during the first half of 1996 to about 85%, indicating that municipal bonds had appreciated relative to Treasury bonds, losing less value than Treasury bonds during the market sell-off. How Your Fund Performed New England Massachusetts Tax Free Income Fund posted excellent performance on a relative basis. For the six-month period ending 6/30/96, the Fund had a total return of -1.09% for Class A shares, based on net asset value. This performance is better than the average return of -1.14% for the Lipper Massachusetts Municipal Average.(6) In addition to its strong total return, your Fund continued to provide a high level of tax-exempt income during the period*. As of June 28, 1996, the Fund's yield was 4.96% and 4.54% for Class A and Class B shares, respectively, which translates into taxable equivalent yields of 9.88% and 9.13% respectively, for a fully taxable investment, assuming the maximum combined federal and Massachusetts state income tax rate of 46.85%. How We Managed Your Fund We restructured much of the portfolio early in the period to reflect our belief that the bond market may have risen too far, too fast. Consecutive interest rate reductions in December and January by the Federal Reserve, coupled with a lack of resolution regarding a balanced budget agreement, led us to position the Fund more defensively. We accomplished this, in part, by decreasing the Fund's duration from 8.5 years to 7.5 years to reduce its sensitivity to changes in interest rates. We also increased the average coupon, call protection and overall credit quality of the Fund, all moves that together protected shareholder value as interest rates rose during the period. The Massachusetts economy continues to be strong, having fully recovered from the real estate and high technology driven recession of the early 1990s. The Fund is invested in both state and local general obligation bonds that have benefited from this improvement. We also continued to emphasize essential purpose revenue bonds as well as housing bonds, which represented about 20% of the Fund's holdings. Housing bonds do very well in a rising interest rate environment because investors have greater confidence that interest payments will be collected over longer periods; property owners are less likely to refinance and prepay their mortgages when rates are rising. The Fund also benefited from investments in the technology, utility and transportation sectors, all of which have enjoyed positive performance in the state's strong economy. Our Investment Outlook We continue to believe that the long-term outlook for the Massachusetts municipal bond market is positive. Tax reform proposals have lost steam, at least for the time being, and municipals should continue to appreciate relative to Treasuries, gaining back ground lost in the fourth quarter of 1995 when these fears peaked. The decline in volume of new-issue municipal bonds in Massachusetts continues, and we do not expect any material change in this trend. Meanwhile, the demand for Massachusetts bonds is strengthening, due in part to the state's strong economy and high tax burden. This combination of low supply and steady demand suggests a favorable environment for Massachusetts municipal bonds and for your Fund. While we expect to see some price volatility in the fixed income markets in the months ahead, we continue to believe that both fundamental and technical factors favor an improving climate for investors in the tax-exempt market sector. Your Fund has delivered both attractive total return and superior after-tax income; we will continue to pursue both of these attributes for the benefit of our shareholders. *Alternative minimum tax and some federal or state taxes may apply. Yield is calculated using a standard formula established by the SEC and is an annualized percentage based on the yield earned for the Fund's Class A and B shares during the 30 days ending June 28, 1996. PORTFOLIO QUALITY AS OF 6/30/96 AAA AA A BBB Others 44.09% 6.61% 32.28% 12.44% 4.58% AVERAGE CREDIT QUALITY - AA AVERAGE PORTFOLIO MATURITY - 20 YEARS Credit ratings supplied by Standard & Poor's. - -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- 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 - Refers to 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 Massachusetts Tax Free Income Fund ----------------- June 30, 1996 ----------------- - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- Investments as of June 30, 1996 (unaudited) TAX EXEMPT BONDS--97.7% OF TOTAL NET ASSETS
RATINGS (C) ------------------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (A) - --------------------------------------------------------------------------------------------------- MASSACHUSETTS STATE GENERAL OBLIGATION--5.5% $2,000,000 Massachusetts State Consolidated Loan, Series A, 7.625%, 06/01/08 ............ Aaa AAA $ 2,280,880 4,750,000 Massachusetts State Consolidated Loan, Series A, 5.125%, 11/01/15 (FGIC) ..... Aaa AAA 4,385,057 ------------ 6,665,937 ------------ MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY--24.7% 3,000,000 Boston University Ribs, Series L, 9.365%, 10/01/31 (MBIA) ............... Aaa AAA 3,278,520 2,500,000 Central Massachusetts Medical Center, Series A, 7.100%, 07/01/21 (AMBAC) .... Aaa AAA 2,692,550 1,750,000 Charlton Memorial Hospital, Series B, 7.250%, 07/01/13 ...................... A A- 1,849,943 2,000,000 Cooley Dickenson Hospital, Issue B, 5.500%, 11/15/25 (AMBAC) .............. Aaa AAA 1,867,740 4,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 4,006,160 1,410,000 Faulkner Hospital, Series C, 6.000%, 07/01/13 ...................... Baa1 -- 1,333,945 2,400,000 Medical Center of Central Mass, Issue A, 7.000%, 07/01/12 ...................... A1 A- 2,504,856 1,000,000 New England Baptist Hospital, Series B, 7.300%, 07/01/11 ...................... Baa1 BBB+ 1,065,360 1,220,000 New England Deaconess Hospital, Series D, 6.875%, 04/01/22 (AMBAC) .............. Aaa AAA 1,309,389 1,190,000 New England Medical Center, Series F, 6.625%, 07/01/25 (FGIC) ............... Aaa AAA 1,252,082 2,000,000 North Adams Regional Hospital, Series C, 6.750%, 07/01/09 ...................... -- BBB- 1,996,560 2,000,000 Smith College, Series D, 5.750%, 07/01/24 Aa AA- 1,943,120 1,000,000 Tufts University, Series D, 7.750%, 08/01/13 ...................... A1 A+ 1,082,790 1,500,000 Valley Regional Health System, Series B, 8.000%, 07/01/18 ...................... Aaa -- 1,703,280 1,000,000 Valley Regional Health System, Series C, 6.250%, 07/01/11 (Connie Lee) ......... -- AAA 1,036,530 1,000,000 Wentworth Institute of Technology, Series A, 7.400%, 04/01/10 (AMBAC) .... Aaa AAA 1,110,240 ------------ 30,033,065 ------------ MASSACHUSETTS STATE HOUSING FINANCE AGENCY--16.7% 215,000 Housing Revenue, Series A, 9.000%, 12/01/18 ...................... -- A+ 223,262 635,000 Housing Revenue, Series A, 7.750%, 12/01/19 ...................... -- A 648,995 4,000,000 Housing Revenue, Series A, 6.375%, 4/01/21 ....................... A1 A+ 4,006,120 1,350,000 Housing Revenue, Series B, 6.500%, 07/01/25 (AMBAC) .............. Aaa AAA 1,390,608 715,000 Multifamily Residential Development, Series A, 7.650%, 02/01/28 (FNMA) ..... Aaa AAA 740,669 2,500,000 Residential Development, Series E, 6.250%, 11/15/12 (FNMA) ............... Aaa AAA 2,551,925 2,000,000 Residential Development, Series F, 6.250%, 11/15/12 (FNMA) ............... Aaa AAA 2,041,540 1,300,000 Residential Development, Series I, 6.900%, 11/15/25 (FNMA) ............... AAA AAA 1,360,970 2,000,000 Residential Development, FNMA COLL A, 6.900%, 11/15/24 (FNMA) ............... Aaa AAA 2,115,220 1,000,000 Residential Development, FNMA COLL D, 6.800%, 11/15/12 ...................... Aaa AAA 1,064,300 400,000 Single Family Mortgage, Series 4, 7.375%, 06/01/14 ...................... Aa A+ 410,200 1,545,000 Single Family Mortgage, Series 13, 7.950%, 06/01/23 ...................... Aa A+ 1,615,668 2,000,000 Single Family Mortgage, Series 32, 6.600%, 12/01/26 ...................... Aa A+ 2,040,560 ------------ 20,210,037 ------------ MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY--9.1% 1,000,000 Harvard Community Health Plan, Series B, 7.750%, 10/01/08 (MBIA) ............... Aaa AAA 1,083,050 3,000,000 College of The Holy Cross, 6.450%, 01/01/12 ...................... AAA AAA 3,260,010 4,000,000 College of The Holy Cross, 5.500%, 03/01/20 (MBIA) ............... Aaa AAA 3,763,000 1,500,000 First Healthcare Corp. Project, 7.750%, 4/01/19 ....................... -- -- 1,474,560 475,000 Ogden Haverhill Project, 7.250%, 12/01/06 (AMBAC) ............................... Aaa AAA 489,621 1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11 (AMBAC) ............................... Aaa AAA 1,031,660 ------------ 11,101,901 ------------ OTHER MASSACHUSETTS OBLIGATIONS--21.9% 3,400,000 Massachusetts Bay Transportation Authority, Series A, 5.750%, 03/01/18 . A1 A+ 3,325,574 1,230,000 Massachusetts Educational Loan Authority, 7.250%, 01/01/09 (MBIA) .............. Aaa AAA 1,281,525 1,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/08 ........... A BBB+ 1,595,040 2,500,000 Massachusetts Municipal Wholesale Electric, 6.750%, 07/01/11 ........... A BBB+ 2,609,625 2,975,000 Massachusetts Municipal Wholesale Electric, 5.000%, 07/01/14 (AMBAC) ... Aaa AAA 2,671,431 4,000,000 Massachusetts Pollution Control, Boston Edison, Series A, 5.750%, 02/01/14 ... Baa2 BBB 3,800,480 2,100,000 Massachusetts Water Pollution Abatement, Series B, 5.250%, 08/01/14 ........... Aa A+ 1,998,675 1,250,000 Massachusetts Water Resource Authority, Series A, 6.750%, 07/15/12 ........... Aaa AAA 1,391,638 1,000,000 Massachusetts Water Resource Authority, 5.750%, 12/01/21 ...................... A A 970,080 4,300,000 Massachusetts Water Resource Authority, Series B, 5.000%, 03/01/22 (MBIA) ..... Aaa AAA 3,791,224 3,000,000 New England Educational Loan, Sub-Issue H, 6.900%, 11/01/09 ................... A1 -- 3,191,040 ------------ 26,626,332 ------------ MASSACHUSETTS MUNICIPALITIES--2.7% 1,000,000 Haverhill, Series A, 7.000%, 06/15/12 (FGIC) ................................ Aaa AAA 1,087,020 1,000,000 Nantucket, 6.800%, 12/01/11 ............. A -- 1,091,690 1,000,000 Worcester, 6.900%, 05/15/07 (MBIA) ...... Aaa AAA 1,121,330 ------------ 3,300,040 ------------ PUERTO RICO OBLIGATIONS--7.2% 750,000 Puerto Rico Aqueduct & Sewer Authority, 10.250%, 07/01/09 ..................... Aaa AAA 1,022,415 2,600,000 Puerto Rico Aqueduct & Sewer Authority, 6.250%, 07/01/12 ...................... Baa1 A 2,743,130 2,000,000 Puerto Rico Aqueduct & Sewer Authority, 6.250%, 07/01/13 ...................... Baa1 A 2,103,080 3,000,000 Puerto Rico Commonwealth Highway & Trans., Series Y, 5.500%, 07/01/26 .... Baa1 A 2,812,170 ------------ 8,680,795 ------------ OTHER OBLIGATIONS--9.9% 1,000,000 Guam Airport Authority Revenue Bond, Series B, 6.400%, 10/01/05 ............ -- BBB 1,025,090 2,500,000 Guam Airport Authority Revenue Bond, Series B, 6.600%, 10/01/10 ............ -- BBB 2,527,200 2,925,000 Guam Power Authority Revenue Bond, Series A, 5.250%, 10/01/13 ................... -- BBB 2,593,217 2,000,000 Guam Government, Series A, 5.375%, 11/15/13 .............................. -- BBB 1,782,920 3,850,000 Virgin Islands Public Financial Authority, Series A, 7.250%, 10/01/18 ............ -- -- 4,066,678 ------------ 11,995,105 ------------ Total Tax Exempt Bonds (Identified Cost $114,851,621) .............. 118,613,212 ------------ SHORT-TERM INVESTMENTS--2.0% - -------------------------------------------------------------------------------------------------- 2,474,000 American Express Credit Corp., 5.390%, 07/01/96 ................................................. 2,474,000 ------------ Total Short-Term Investment (Identified Cost $2,474,000) ........... 2,474,000 ------------ Total Investments--99.7% (Identified Cost $117,325,621)(b) ......... 121,087,212 Other assets less liabilities ...................................... 278,916 ------------ Total Net Assets--100% ............................................. $121,366,128 ------------ (a) See Note 1a to the financial statements. (b) Federal Tax Information: At June 30, 1996 the net unrealized appreciation on investments based on cost of $117,325,621 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 ............................................ $ 4,292,068 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............................................ (530,477) ------------ Net unrealized appreciation ................................................. $ 3,761,591 ============= (c) The ratings shown are believed to be the most recent ratings available at June 30, 1996. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rates at June 30, 1996. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. See accompanying notes to financial statements.
- -------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES - -------------------------------------------------------------------------------- June 30, 1996 (unaudited) ASSETS Investments at value .......................... $121,087,212 Cash .......................................... 1,381 Receivable for: Fund shares sold ............................ 25,722 Securities sold ............................. 3,137,543 Accrued interest ............................ 2,205,179 Prepaid registration expense .................. 3,000 ------------ 126,460,037 LIABILITIES Payable for: Securities purchased ........................ $4,783,501 Fund shares redeemed ........................ 92,695 Dividends declared .......................... 133,343 Miscellaneous ............................... 1,932 Accrued expenses: Management fees ............................. 34,633 Deferred trustees' fees ..................... 708 Other expenses .............................. 47,097 ---------- 5,093,909 ------------ $121,366,128 ============ NET ASSETS Net Assets consist of: Capital paid in ............................. $120,708,397 Undistributed net investment income ......... 29,165 Accumulated net realized losses ............. (3,133,025) Unrealized appreciation on investments ...... 3,761,591 ------------ NET ASSETS ...................................... $121,366,128 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($114,426,168 divided by 7,049,913 shares of beneficial interest) .......................... $16.23 ====== Offering price per share (100/95.75 of $16.23) .. $16.95* ====== Net asset value and offering price of Class B shares ($6,939,960 divided by 428,349 shares of beneficial interest) .......................... $16.20** ====== Identified cost of investments .................. $117,325,621 ============ *Based upon single purchases of less than $100,000. 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 .................................... $ 3,754,707 Expenses Management fees ........................... $ 350,887 Service and distribution fees--Class A .... 198,979 Service and distribution fees--Class B .... 33,810 Trustees' fees and expenses ............... 9,766 Accounting and administrative ............. 22,910 Custodian ................................. 39,381 Transfer agent ............................ 91,122 Audit and tax services .................... 11,000 Legal ..................................... 11,230 Printing .................................. 13,765 Registration .............................. 11,069 Miscellaneous ............................. 2,848 ----------- Total expenses .............................. 796,767 Less expenses waived by the investment adviser and subadviser .................... (262,816) 533,951 ----------- ----------- Net investment income ....................... 3,220,756 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments--net .......................... (504,306) Futures contracts--net .................... (212,775) Options contracts--net .................... 175,200 ----------- Total realized loss on investments ........ (541,881) ----------- Unrealized depreciation on: Investments--net .......................... (4,068,014) ----------- Net loss on investment transactions ......... (4,609,895) ----------- NET DECREASE IN NET ASSETS FROM OPERATIONS .... $(1,389,139) =========== See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- (unaudited) YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1995 JUNE 30, 1996 ------------- ------------- FROM OPERATIONS Net investment income ..................... $ 6,488,923 $ 3,220,756 Net realized gain (loss) on investments, options and futures contracts ........... 964,359 (541,881) Unrealized appreciation (depreciation) on investments ............................. 12,009,442 (4,068,014) ------------ ------------ Increase (decrease) in net assets from operations .............................. 19,462,724 (1,389,139) ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................. (6,224,656) (2,975,592) Class B ................................. (264,268) (155,731) In excess of net investment income Class A ................................. (20,659) 0 Class B ................................. (1,520) 0 ------------ ------------ (6,511,103) (3,131,323) ------------ ------------ Increase (decrease) in net assets derived from capital share transactions ......... 1,887,316 (1,039,668) ------------ ------------ Total increase (decrease) in net assets ... 14,838,937 (5,560,130) NET ASSETS Beginning of the period ................... 112,087,321 126,926,258 ------------ ------------ End of the period ......................... $126,926,258 $121,366,128 ============ ============ UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME Beginning of the period ................... $ (55,525) $ (60,268) ============ ============ End of the period ......................... $ (60,268) $ 29,165 ============ ============ See accompanying notes to financial statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- (unaudited) CLASS A ------------------------------------------------------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ---------------------------------------------------------------------- JUNE 30, 1991 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- ----- Net Asset Value, Beginning of Period ...................... $16.01 $16.37 $16.62 $17.27 $15.10 $16.85 ------ ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income ............ 1.08 1.03 0.97 0.89 0.88 0.90 Net Realized and Unrealized Gain (Loss) on Investments ..... 0.69 0.40 1.05 (2.15) 1.76 (0.63) ------ ------ ------ ------ ------ ------ Total From Investment Operations ..................... 1.77 1.43 2.02 (1.26) 2.64 0.27 ------ ------ ------ ------ ------ ------ Less Distributions Distributions From Net Investment Income .............. (1.07) (1.03) (0.97) (0.89) (0.89) (0.89) Distributions in excess of Net Investment Income .......... 0.00 0.00 0.00 (0.02) 0.00 0.00 Distributions From Net Realized Capital Gains .................. (0.34) (0.15) (0.40) 0.00 0.00 0.00 ------ ------ ------ ------ ------ ------ Total Distributions .............. (1.41) (1.18) (1.37) (0.91) (0.89) (0.89) ------ ------ ------ ------ ------ ------ Net Asset Value, End of Period ... $16.37 $16.62 $17.27 $15.10 $16.85 $16.23 ====== ====== ====== ====== ====== ====== Total Return (%) (b) ............. 11.5 9.1 12.4 (7.4) 17.8 (1.1) Ratio of Operating Expenses to Average Net Assets (%) (a) ..... 1.00 0.85 0.85 0.85 0.85 0.85(c) Ratio of Net Investment Income to Average Net Assets (%) ......... 6.62 6.25 5.58 5.63 5.46 5.35(c) Portfolio Turnover Rate (%) ...... 86 29 42 48 127 120(c) Net Assets, End of Period (000) .. $68,534 $91,932 $128,797 $107,565 $120,229 $114,426 (a) Commencing May 1, 1991 expenses were voluntarily limited to 0.85% of Class A average net assets. See Note 4. The ratio of operating expenses to average net assets, without giving effect to this expense limitation would have been 1.34%, 1.26%, 1.21%, 1.24% and 1.24% for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 respectively and 1.29% for the six months ended June 30, 1996. From May 18, 1989 through April 30, 1991 expenses were voluntarily limited to 1.35% of average net assets. (b) A sales charge of 4.25% (maximum) was not reflected in total return calculations. Periods less than one year are not annualized. (c) Computed on an annualized basis. 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 ............... $17.78 $17.26 $15.08 $16.82 ------ ------ ------ ------ Income From Investment Operations Net Investment Income .............................. 0.25 0.77 0.78 0.79 Net Realized and Unrealized Gain (Loss) on Investments ....................................... (0.15) (2.14) 1.74 (0.62) ------ ------ ------ ------ Total From Investment Operations .................... 0.10 (1.37) 2.52 0.17 ------ ------ ------ ------ Less Distributions Distributions From Net Investment Income ............ (0.22) (0.79) (0.78) (0.79) Distributions in excess of Net Investment Income .... 0.00 (0.02) 0.00 0.00 Distributions From Net Realized Capital Gains ....... (0.40) 0.00 0.00 0.00 ------ ------ ------ ------ Total Distributions ................................. (0.62) (0.81) (0.78) (0.79) ------ ------ ------ ------ Net Asset Value, End of Period ...................... $17.26 $15.08 $16.82 $16.20 ====== ====== ====== ====== Total Return (%) (d) ................................ 0.4 (8.0) 17.0 (1.4) Ratio of Operating Expenses to Average Net Assets (%) (b) .................................... 1.50 (c) 1.50 1.50 1.50 (c) Ratio of Net Investment Income to Average Net Assets (%) ........................................ 4.26 (c) 4.98 4.81 4.71 (c) Portfolio Turnover Rate (%) ......................... 42 48 126 120 (c) Net Assets, End of Period (000) ..................... $1,289 $4,523 $6,697 $6,940 (a) Commencement of operations. (b) Effective September 13, 1993 expenses were voluntarily limited to 1.50% of Class B average net assets. See Note 4. The ratio of operating expenses for Class B shares would have been 1.86% for the period ended December 31, 1993, 1.89% for the year ended December 31, 1994, 1.89% for the year ended December 31, 1995 and 1.94% for the six months ended June 30, 1996. (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 such series of shares a "Fund"). The Fund offers both Class A and Class B shares. The Fund commenced its public offering of Class B shares on September 13, 1993. Class A shares are sold with a maximum front end sales charge of 4.25%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within five years of purchase. Expenses of the Fund are borne pro-rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. The Fund's investment 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 for the Fund is increased by the accretion of original issue discount. Interest income is reduced by the amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and put options on securities to manage its exposure to interest rates and the bond market. Buying futures, writing puts, and buying calls tend to increase the Fund's exposure to the underlying instrument. Selling futures, buying puts, and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. When a Fund writes a call or put option, an amount equal to the premium received by the Fund is included in the Fund's statement of assets and liabilities as an asset and as an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. The current value of a written option is the closing price on the principal exchange on which such option is traded. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a call option which the Fund has written is exercised, the Fund realizes a capital gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchases upon exercise of the option. The premium paid by a Fund for the purchase of a call or a put option is included in the asset section of the Fund's statement of assets and liabilities as an investment and subsequently adjusted to the current market value of the option. The current value of a purchased option is the closing price on the principal exchange on which such option is traded. If an option which the Fund has purchased expires on the stipulated expiration date, the Fund will realize a loss in the amount of the cost of the option. If the Fund enters into a closing sale transaction, the Fund will realize a gain or loss, depending on whether the sales proceeds from the closing sale transaction are greater or less than the cost of the option. If the Fund exercises a purchased put option, it will realize a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. If the Fund exercises a purchased call option, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid. The risk in writing a call option is that the Fund relinquishes the opportunity to profit if the market price of the underlying security increases and the option is exercised. In writing a put option, the Fund assumes the risk of incurring a loss if the market price decreases and the option is exercised. In addition, there is the risk the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest rate futures contracts to hedge against changes in the values of tax exempt municipal securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange, currently up to $3,000 per contract. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The potential risk to the Fund is that the change in value of futures contracts primarily corresponds with the value of underlying instruments which may not correspond to the change in the value of the hedged instruments. In addition, there is a risk that the Fund may not be able to close out its futures positions due to an illiquid secondary market. E. 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. F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences relate primarily to the amortization of market discount. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to paid in capital. G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price. Back Bay Advisors is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price. Repurchase agreements could involve certain risks in the event of default or insolvency of the other party including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the six months ended June 30, 1996 were $71,369,969 and $74,633,634, respectively. Investments in written options and futures contracts for the Fund for the six months ended June 30, 1996 are summarized as follows: WRITTEN OPTIONS ----------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED --------- -------- Contracts opened ..................... (1,200) $ 506,350 Contracts closed ..................... (1,200) (506,350) ----- --------- Open at June 30, 1996 ................ 0 $ 0 ===== ========= SALES OF FUTURES CONTRACTS ----------------------------- AGGREGATE NUMBER OF FACE VALUE CONTRACTS OF CONTRACTS --------- ------------ Contracts opened .................... 1,000 $ 114,214,094 Contracts closed .................... (1,000) (114,214,094) ----- ------------- Open at June 30, 1996 ............... 0 $ 0 ===== ============= 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 0.60% of the first $100 million Fund's average daily net assets and 0.50% of such assets in excess of $100 million. NEFM pays the Fund's investment subadviser, Back Bay Advisors at the rate of 0.30% of the first $100 million of the Fund's average daily net assets and 0.25% of such assets in excess of $100 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(A) - -------------- $175,444 New England Funds Management, L.P. $175,443 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 $22,910 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 Service and Distribution Plans relating to the Fund's Class A and Class B shares (the "Plans"). Under the Plans, the Fund pays New England Funds a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class A and Class B shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in providing personal services to investors in Class A and Class B shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 1996, the Fund paid New England Funds $142,126 and $8,453 in service fees for Class A and Class B shares, respectively. Also under the Plans, the Fund pays New England Funds monthly distribution fees at the annual rate of up to 0.10% of the average daily net assets attributable to the Fund's Class A shares and up to 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with New England Funds) incurred by New England Funds in connection with the marketing or sale of Class A and Class B shares, respectively. For the six months ended June 30, 1996, the Fund paid New England Funds $56,853 and $25,357 in distribution fees for Class A and Class B shares, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to New England Funds by investors in shares of the Fund during the six months ended June 30, 1996, amounted to $70,614. 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 $68,130 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 Annual Retainer $60 A deferred compensation plan is available to the trustees on a voluntary basis. Each participating trustee will receive an amount equal to the value that such deferred compensation would have had, had it been invested in the Fund on the normal payment date. 4. EXPENSE LIMITATIONS. Commencing May 1, 1991 and until further notice to the Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce their management fees and, if necessary, to assume expenses of the Fund in order to limit the Fund's expenses to an annual rate of 0.85% of the Fund's Class A average daily net assets and, effective September 13, 1993, 1.50% of Class B average daily net assets. From May 18, 1989 through April 30, 1991 Back Bay Advisors reduced its management fee and assumed expenses of the Fund in order to limit the Fund's expenses to an annual rate of 1.35%. As a result of the Fund's expenses exceeding the applicable voluntary expense limitation during the six months ended June 30, 1996, Back Bay Advisors reduced its subadvisory fee of $175,443 by $131,408 and NEFM reduced its advisory fee of $175,444 by $131,408. 5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations issued by the Commonwealth of Massachusetts and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of Massachusetts municipal securities than is a comparable municipal bond fund that is not so concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of Massachusetts municipal securities to meet their financial obligations. 6. 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 ...... 1,129,898 $ 18,233,627 456,986 $ 7,424,666 Shares issued in connection with the reinvestment of: Distributions from net nvestment income ....... 287,896 4,667,423 137,440 2,251,796 ---------- ------------- ------- ------------ 1,417,794 22,901,050 594,426 9,676,462 Shares repurchased (1,404,246) (22,616,973) (679,938) (11,213,368) ---------- ------------- ------- ------------ Net increase (decrease) .... 13,548 284,077 (85,512) (1,536,906) ========== ============= ======= ============ YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ---------------------------- -------------------------- CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ------ -------------- ------ -------------- Shares sold ....... 108,712 1,767,504 34,301 562,741 Shares issued in connection with the reinvestment of: Distributions from net investment income ........ 12,879 208,742 7,295 119,266 ------- ---------- ------- ----------- 121,591 1,976,246 41,596 682,007 Shares repurchased (23,445) (373,007) (11,386) (184,769) ------- ---------- ------- ----------- Net increase (decrease) ...... 98,146 1,603,239 30,210 497,238 ======= ========== ======= =========== Increase (decrease) derived from capital share transactions .... 111,694 $1,887,316 (55,302) $(1,039,668) ======= ========== ======= ===========
- -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- SUPPLEMENT DATED SEPTEMBER 1, 1996 TO PROSPECTUS DATED MAY 1, 1996 Effective September 1, 1996, until further notice to New England Massachusetts Tax Free Income Fund (the "Fund"), New England Funds Management, L.P. ("NEFM"), the Fund's adviser, is modifying its current voluntary management fee waiver and operating expense reduction for the Fund, described on page 8 of the prospectus, by raising the limit on the Fund's expenses from an annual rate of 0.85% to an annual rate of 1.00% of average daily net assets for the Fund's Class A shares and from an annual rate of 1.50% to an annual rate of 1.65% of average daily net assets for the Fund's Class B shares. Accordingly, in the Schedule of Fees section on page 1 of the prospectus, the tables appearing under the captions "Annual Fund Operating Expenses" and "Example" are replaced with the following: ANNUAL FUND OPERATING EXPENSES* (as a percentage of average net assets) CLASS A CLASS B ------- -------- Management Fees (after voluntary fee waiver and expense limitations)*** ..................................... 0.31% 0.31% 12b-1 Fees ............................................ 0.35% 1.00%** Other Expenses ........................................ 0.34% 0.34% Total Fund Operating Expenses (after voluntary fee waiver and expense limitations)*** .................. 1.00% 1.65% * The expense information contained in this table and its footnotes has been restated to reflect fees and expenses currently in effect for the Fund. ** Because of the higher 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by rules of the National Association of Securities Dealers, Inc. *** Without the voluntary fee waiver and expense limitations by the Fund's adviser, Management Fees would be 0.59% for Class A and Class B shares and Total Fund Operating Expenses would be 1.28% for Class A shares and 1.93% for Class B shares. The voluntary waiver and limitation can be terminated by the Fund's adviser at any time. See "Fund Management" in the prospectus, as supplemented above. EXAMPLE You would pay the following expenses on a $1,000 investment assuming (1) a 5% annual return and (2) unless otherwise noted, redemption at period end. The 5% return and expenses in the Example should not be considered indicative of actual or expected Fund performance or expenses, both of which will vary. CLASS A CLASS B --------- ------------ (1) (2) 1 year .......................................... $ 52 $ 57 $ 17 3 years ......................................... $ 73 $ 82 $ 52 5 years ......................................... $ 95 $100 $ 90 10 years* ....................................... $160 $178 $178 (1) Assumes redemption at end of period. (2) Assumes no redemption at end of period. * Class B shares automatically convert to Class A shares after 8 years; therefore, Class B amounts are calculated using Class A expenses in years 9 and 10. - -------------------------------------------------------------------------------- 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 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. -------------- BULK RATE U.S. POSTAGE PAID BROCKTON, MA (Logo) PERMIT NO. 770 NEW ENGLAND FUNDS -------------- Where The Best Minds Meet(TM) --------------------- 399 Boylston Street Boston, Massachusetts 02116 --------------------- (Logo) MA58-0896 Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----