-----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, N17X4klW3wYjelMF3mbup5DhW7AugXmEhZDqyBPxinQ9fnG1p6pvJIm8rZS83nOw ltpyzjESIR1DH7zl0Or4Xw== 0000950156-98-000558.txt : 19980831 0000950156-98-000558.hdr.sgml : 19980831 ACCESSION NUMBER: 0000950156-98-000558 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980828 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: SEC FILE NUMBER: 811-00242 FILM NUMBER: 98700450 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 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT - -------------------------------------------------------------------------------- [Logo](R) NEW ENGLAND FUNDS(R) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- New England Massachusetts Tax Free Income Fund [graphic omitted] - -------------- JUNE 30, 1998 - -------------- AUGUST 1998 - -------------------------------------------------------------------------------- [Photo of Henry L.P. Schmelzer] Dear Shareholder: Investors had reason for comfort during the first half of 1998. After stunning gains in each of the last three years, the stock market behaved more like its customary self: Major market indicators moved up for a time, slid back and were once again in recovery mode at the end of the period. This pattern largely reflected investors' responses to fast-changing events in Asia. Unpredictable markets call to mind the long-term experience of millions of mutual fund investors; those of us who held firm to our plans as markets entered difficult periods were often rewarded as markets recovered. The longer you stay invested the less interim ups and downs -- here or overseas -- should concern you. News from the Far East drove bond market sentiment as well. In the United States, faltering Asian economies meant lower prices on many imported goods, putting pressure on prices and corporate earnings. With slower growth now a real possibility and with little immediate evidence of inflation, the Federal Reserve Board left short-term interest rates unchanged, while long-term rates fell to record lows in mid-June. In the pages that follow, you can read about how your Fund's management dealt with the disruptions in the Pacific region and their impact on our domestic economy. But beyond Asia's present problems, and notwithstanding the inevitable ebb and flow of our own business cycle, there are reasons to be optimistic about investment prospects over the next several years. For example, vast, under-served populations in China and elsewhere represent huge potential demand for consumer goods. Here in the United States, there is the prospect of a demography-driven spending wave, as millions of baby-boomers enter their peak consumption years. Events may turn out differently -- volatility will always be part of investing -- but as much as the markets may waver, the watchwords for many long-term investors are constant: diversify and persist. While you are thinking about your investments, take a few minutes to review your portfolio. It's possible that three years of strong market gains have tilted your holdings disproportionately toward aggressive stock funds. If so, you and your financial representative can adjust the balance easily using some of New England Funds' more conservative equity or bond funds to reallocate your assets in line with your long-term goals and comfort level. Once you are satisfied with your portfolio's balance, be sure to stay in touch with your financial professional, invest regularly and don't try to guess what the market will do next. Thank you for your continued support of New England Funds. Sincerely, /s/ Henry L.P. Schmelzer Henry L.P. Schmelzer President PREPARING FOR THE YEAR 2000 New England Funds continues to work to provide high quality service as we move into the new century. Since last year we have devoted significant resources to identifying, analyzing and resolving computer issues related to Year 2000. As a further measure, we have focused on year-end 1998 as a target for preparedness by vendor and service agency systems that we rely on for support. We expect major systems to be ready before the end of the year, with a year of quality assurance to follow. - -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- Investment Results Through June 30, 1998 - -------------------------------------------------------------------------------- PUTTING PERFORMANCE IN PERSPECTIVE The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged; there are no expenses that affect the results. In addition, few investors could purchase all of the securities necessary to match the index. And, if they could, they would incur transaction costs and other expenses. GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES JUNE 1988 THROUGH JUNE 1998 Compared to Lehman Municipal Index(4) and the Cost of Living(5) [A chart appears here illustrating the growth of a $10,000 investment in the Massachusetts Tax free Fund's Class A shares since 6/30/88 compared to the Lehman Municipal Index and the Cost of Living. The plot points for this chart are as follows.] With Net Maximum Lehman Asset Sales Municipal Cost of Value(1) Charge(2) Index(4) Living(5) -------- --------- -------- ------ 6/30/88 $10,000 $ 9,575 $10,000 $10,000 6/89 $10,959 $10,493 $11,139 $10,517 6/90 $11,415 $10,930 $11,898 $11,008 6/91 $12,319 $11,795 $12,970 $11,525 6/92 $13,790 $13,204 $14,496 $11,881 6/93 $15,505 $14,846 $16,230 $12,237 6/94 $15,222 $14,575 $16,262 $12,542 6/95 $16,384 $15,688 $17,692 $12,923 6/96 $17,446 $16,705 $18,866 $13,279 6/97 $18,823 $18 023 $20,564 $13,584 6/98 $20,302 $19,439 $22,345 $13,796 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 differs from 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 -- 6/30/98 CLASS A (Inception 3/23/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS Net Asset Value(1) 1.99% 7.86% 5.54% 7.34% With Max. Sales Charge(2) -2.34 3.26 4.63 6.87 Lehman Municipal Index(4) 2.69 8.66 6.46 8.30 Lipper MA Municipal Average(6) 2.34 8.05 5.71 7.75 - -------------------------------------------------------------------------------- CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR SINCE INCEPTION Net Asset Value(1) 1.72% 7.18% 4.32% With CDSC(3) -3.25 2.18 3.98 Lehman Municipal Index(4) 2.69 8.66 6.06 (calculated from 9/30/93) Lipper MA Municipal Average(6) 2.34 8.05 5.18 (calculated from 9/30/93) - -------------------------------------------------------------------------------- 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. YIELDS AS OF 6/30/98 - -------------------------------------------------------------------------------- CLASS A CLASS B SEC Yield(7) 4.65% 4.21% Taxable Equivalent Yield(8) 8.74 7.93 - -------------------------------------------------------------------------------- NOTES TO CHARTS (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 5% sales charge is applied to a redemption of Class B shares. The sales charge will decrease over time, declining to zero six 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 Massachusetts Municipal 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. (7)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. (8)Taxable equivalent yield is based on the maximum combined federal and Massachusetts state income tax bracket of 46.85%. The alternative minimum tax and some other federal and state taxes may apply, which are not reflected here. - -------------------------------------------------------------------------------- NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER - -------------------------------------------------------------------------------- [Photo of James Welch] Back Bay Advisors, L.P. Q. How did the Fund perform over the past six months? For the six months ending June 30, 1998, the Fund's Class A shares generated a total return of 1.99%, including a $.09 per share decline in net asset value to $17.04 and the reinvestment of $0.43 per share in dividend distributions. Q. What was the investment environment for Massachusetts municipal bonds? The Massachusetts economy continued to thrive, generating higher tax revenues for the state and its localities. Strong economic conditions translated into improved municipal fiscal operations, which often resulted in ratings upgrades for many municipal bonds. In early 1998, the Commonwealth took advantage of the prevailing low interest rates both to finance projects that had been previously delayed and to refinance older, higher-cost debt. During that time, Massachusetts issued a heavy supply of municipal bonds. In addition, issuance of tax-exempt debt was extraordinarily heavy nationwide, causing Massachusetts municipal bonds to underperform other tax-exempt sectors for much of 1998's first half. Performance, however, improved once supply began to subside toward mid-year. During the six months, a period when investors were watching the effects of Asia's economic difficulties on the U.S. economy, interest rates in the United States remained generally steady. The yield on the 30-year U.S. Treasury bond moved between 5.65% and 5.90%, its narrowest range in 20 years. In the United States, economic growth was robust and inflation remained low. Measured by gross domestic product, the economy grew at a 5.4% annualized rate in the first quarter, unemployment reached a 28-year low and consumer confidence was high. Typically, strength of this magnitude stimulates investor concern about inflation. However, investors believed that a slowdown in the Asian economies could offset some of the economy's vigor -- a development that would be positive for the bond market. Q. What strategies did you use in managing the Fund? We emphasized bonds that we believed would benefit from the state's economic and fiscal conditions, focusing on quality and investing in zero coupon bonds, (which are generally priced well below their face value) as well as bonds with low coupons (stated fixed rates of interest). We chose these bonds because of their particular potential for price appreciation when interest rates fall. CREDIT QUALITY COMPOSITION -- 6/30/98 [Graphic Omitted] AAA 51.9% AA 7.0% A 22.6% BBB 12.0% Other 6.5% Quality is based on ratings supplied by Standard & Poor's. Portfolio holdings are subject to change. Average Credit Quality = AA- Average Maturity = 19.8 Years The Fund's overall quality remained high; as of June 30, 1998, the average quality was AA-. We selected bonds issued by communities with strong tax bases, such as the AAA-rated general obligation bonds of Weston and Wellesley. During the period, lower-rated bonds offered a minimal yield advantage over their high-rated counterparts. That means these bonds provided not only superior creditworthiness, but also represented better investment value. The Fund also maintained a substantial position in health care-related bond issues, which continue to generate attractive returns. Q. What is your outlook for Massachusetts municipal bonds? Our outlook is positive. We expect Massachusetts municipal bond investors to continue to benefit from the state's strong economic and fiscal conditions. In addition, the recent decline in supply could further enhance the performance of the Commonwealth's bonds. Meanwhile, we believe the Asian economic situation and its impact on the U.S. economy will dictate the overall direction of interest rates. Near term, however, we believe that Asia's problems could reinforce investor preference for high-quality investments, particularly U.S. Treasuries. This would have a positive effect on bonds in general, including municipal bonds: lower interest rates and higher bond prices. Portfolio commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes.
- ---------------------------------------------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - ---------------------------------------------------------------------------------------------------------------------- Investments as of June 30, 1998 (unaudited) TAX EXEMPT OBLIGATIONS--100.3% OF TOTAL NET ASSETS RATINGS (c) (UNAUDITED) ------------------------- FACE STANDARD AMOUNT ISSUER MOODY'S & POOR'S VALUE (a) - --------------------------------------------------------------------------------------------------------------------- MASSACHUSETTS MUNICIPAL--4.5% $ 1,000,000 Haverhill, Series A, 7.000%, 6/15/12 (FGIC) ................................. Aaa AAA $ 1,122,740 1,500,000 Wholesale Electric, 6.750%, 7/01/08 ..... Baa2 BBB+ 1,620,690 2,500,000 Wholesale Electric, 6.750%, 7/01/11 ..... Baa2 BBB+ 2,693,600 ---------------- 5,437,030 ---------------- MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY--33.5% 1,500,000 Beverly Hospital Ribs, 7.270%, 6/18/20 (MBIA)(d) .............................. Aaa AAA 1,676,760 2,000,000 Boston Medical Center Series A, 5.250%, 7/ 01/16 (FSA) ............................ AAA AAA 2,008,800 3,000,000 Boston University Ribs, Series L, 9.315%, 10/01/31, (MBIA)(d)(e) ................. Aaa AAA 3,534,600 1,750,000 Charlton Memorial Hospital, Series B, 7.250%, 7/01/13 ........................ A1 A 1,937,057 3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 3,259,410 1,000,000 Faulkner Hospital, Series C, 6.000%, 7/01/13 ................................ Baa1 -- 1,056,530 3,290,000 Harvard University Series N, 6.250%, 4/01/20 ................................ Aaa AAA 3,879,601 3,000,000 Jordan Hospital Series D, 5.250%, 10/01/18 ............................... -- BBB+ 2,959,260 2,000,000 Massachusetts Institute of Technology Series I-1, 5.200%, 1/01/28 ............ Aaa AAA 2,077,100 2,400,000 Medical Center of Central Mass., CIass A, 7.000%, 7/01/12 A3 A 2,600,880 1,110,000 Milford Whitinsville Regional C, 5.750%, 7/15/13 ................................ Baa2 BBB- 1,151,669 1,000,000 New England Baptist Hospital, Series B, 7.300%, 7/01/11 Baa1 AAA 1,108,280 1,220,000 New England Deaconess Hospital, Series D, 6.875%, 4/01/22, (AMBAC) ............... Aaa AAA 1,358,385 1,190,000 New England Medical Center, Series F, 6.625%, 7/01/25, (FGIC) ................ Aaa AAA 1,303,538 2,000,000 North Adams Regional Hospital, Series C, 6.750%, 7/01/09 ........................ -- BBB- 2,188,460 4,340,000 Saints Memorial Medical Center, Series A, 6.000%, 10/01/23 ....................... B1 -- 4,359,704 1,500,000 Valley Regional Health System, Series B, Pre-refunded, 8.000%, 7/01/18 .......... Aaa AAA 1,644,210 1,000,000 Valley Regional Health System, Series C, 6.250%, 7/01/11, (Connie Lee) .......... Aaa AAA 1,136,830 1,000,000 Wentworth Institue of Technology, Series A, 7.400%, 4/01/10, (AMBAC) ............ Aaa AAA 1,077,340 ---------------- 40,318,414 ---------------- MASSACHUSETTS STATE HOUSING FINANCE AGENCY--12.7% 555,000 Multifamily Residential Development, Series A, 7.650%, 2/01/28, (FNMA) ...... Aaa AAA 580,230 2,000,000 Residential Development, Series A, 6.900%, 11/15/24, (FNMA) ....................... Aaa AAA 2,114,080 2,500,000 Residential Development, Series E, 6.250%, 11/15/12, (FNMA) ....................... Aaa AAA 2,702,250 1,300,000 Residential Development, Series I, 6.900%, 11/15/25, (FNMA) ....................... Aaa AAA 1,411,007 2,955,000 Single Family Mortgage, Series 13, 7.950%, 6/01/23 ................................ Aa A+ 3,131,650 3,000,000 Single Family Mortgage, Series 21, 7.125%, 6/01/25 ................................ Aa A+ 3,240,540 1,945,000 Single Family Mortgage, Series 32, 6.600%, 12/01/26 ............................... Aa A+ 2,089,786 ---------------- 15,269,543 ---------------- MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY--8.5% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/36 ................................ -- AAA 2,306,400 1,000,000 Harvard Community Health Plan, Series B, 7.750%, 10/01/08, (MBIA) ............... Aaa AAA 1,028,880 5,000,000 Newton Group Property's Project, 8.000%, 9/01/27 ................................ -- -- 5,395,450 475,000 Ogden Haverhill Project, 7.250%, 12/01/06 (AMBAC) ................................ Aaa AAA 483,502 1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11 (AMBAC) ................................ Aaa AAA 1,018,100 ---------------- 10,232,332 ---------------- MASSACHUSETTS STATE TURNPIKE AUTHORITY--6.7% 3,000,000 Capital Appreciation Senior Series A, 5.000%, 1/01/37, (MBIA) ................ Aaa AAA 2,886,120 12,610,000 Capital Appreciation Senior Series C, Zero Coupon, 1/01/16, (MBIA) ................ Aaa AAA 5,209,317 ---------------- 8,095,437 ---------------- MASSACHUSETTS WATER RESOURCE AUTHORITY--7.7% 2,500,000 General Refunding Series B, 4.500%, 8/01/22 (MBIA) ......................... Aaa AAA 2,264,375 3,200,000 General Refunding Series B, 5.000%, 3/01/22 (MBIA) ......................... Aaa AAA 3,130,272 3,240,000 Series A, 6.500%, 7/15/19 ................ A1 A 3,863,052 ---------------- 9,257,699 ---------------- OTHER MASSACHUSETTS OBLIGATIONS--10.6% 2,000,000 Consolidated Loan, Series A, 7.625%, 6/01/08 ................................ Aaa AA- 2,232,380 1,075,000 Massachusetts Educational Loan Authority, 7.250%, 1/01/09, (AMBAC) ............... Aaa AAA 1,138,995 5,000,000 Massachusetts State, Refunding Series A, 6.500%, 11/01/14, (MBIA) ............... Aaa AAA 5,934,900 3,000,000 New England Educational Loan, Sub-Issue H, 6.900%, 11/01/09 ....................... A1 -- 3,401,610 ---------------- 12,707,885 ---------------- OTHER OBLIGATIONS--8.2% 1,500,000 Guam Airport Authority Revenue Bond, Series B, 6.600%, 10/01/10 ............. -- BBB 1,646,220 4,500,000 Guam Housing Corporation, Single Family Mortgage, Series A, 5.750%, 9/01/31, (FHLMC) ................................ Aaa AAA 4,795,875 3,045,000 Virgin Islands Public Financial Authority, Series A, 7.250%, 10/01/18 ............. -- AAA 3,475,776 ---------------- 9,917,871 ---------------- PUERTO RICO OBLIGATIONS--7.9% 4,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/13 ................................ Baa1 A 4,577,680 1,160,000 Aqueduct & Sewer Authority, 10.250%, 7/01/09 ................................ Aaa AAA 1,589,084 2,000,000 Aqueduct & Sewer Authority, Refunding, 6.250%, 7/01/12 ........................ Baa1 A 2,286,320 1,000,000 Commonwealth Highway & Transportation Series Y, 5.500%, 7/01/26 .............. Baa1 A 1,029,410 ---------------- 9,482,494 ---------------- Total Tax Exempt Obligations (Identified Cost $112,968,840) ......... 120,718,705 ---------------- OPTIONS--0.1% CONTRACTS - --------------------------------------------------------------------------------------------------------------------- 100 U.S. Treasury Bond Futures, 126 Call, August 1998 ............................ 56,250 200 U.S. Treasury Notes Futures, 110 Call, July 1998 .............................. 43,750 ---------------- Total Options (Identified Cost $118,688) . 100,000 ---------------- Total Investments--100.4% (Identified Cost $113,087,528 (b) ...... 120,818,705 Other assets less liabilities ............ (478,118) ---------------- Total Net Assets--100% ................... $ 120,340,587 ================ (a)See Note 1a of Notes to Financial Statements. (b)Federal Tax Information: At June 30, 1998 the net unrealized appreciation on investments based on cost of $113,087,528 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ................. $ 7,792,217 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ................. (61,040) ---------------- Net unrealized appreciation ..................................... $ 7,731,177 ================ As of December 31, 1997, the Fund had a capital loss carryforward of $806,566 expiring December 31, 2002. (c)The ratings shown are believed to be the most recent ratings available at June 30, 1998. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at June 30, 1998. 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. (d)Inverse floating rate security. (e)A portion of these securities have been segregated as collateral in connection with the Fund's derivative investments at June 30, 1998.
Legend of Portfolio abbreviations: AMBAC -- American Municipal Bond Assurance Corp. Connie Lee -- College Construction Loan Insurance Association FGIC -- Financial Guarantee Insurance Company FHLMC -- Federal Home Loan Mortgage Corporation FNMA -- Federal National Mortgage Association FSA -- Financial Security Assurance MBIA -- Municipal Bond Investors Assurance Corp. See accompanying notes to financial statements.
- ---------------------------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES - ---------------------------------------------------------------------------------------------------- June 30, 1998 (unaudited) ASSETS Investments at value (Identified cost $113,087,528) ...... $ 120,818,705 Receivable for: Fund shares sold ....................................... 40,491 Variation margin ....................................... 12,000 Accrued interest ....................................... 2,013,145 Prepaid registration expense ............................. 3,000 ---------------- 122,887,341 LIABILITIES Payable for: Securities purchased ................................... $2,019,593 Due to custodian bank .................................. 128,522 Fund shares redeemed ................................... 137,931 Dividends declared ..................................... 127,940 Miscellaneous .......................................... 6,687 Accrued expenses: Management fees ........................................ 73,261 Deferred trustees' fees ................................ 203 Accounting and administrative .......................... 15,698 Other expenses ......................................... 36,919 ---------- 2,546,754 ---------------- NET ASSETS ................................................. $ 120,340,587 ================ Net Assets consist of: Capital paid in ........................................ $ 113,889,801 Undistributed net investment income .................... 16,327 Accumulated net realized losses ........................ (1,296,718) Unrealized appreciation on investments ................. 7,731,177 ---------------- NET ASSETS ................................................. $ 120,340,587 ================ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($112,331,105 divided by 6,592,295 shares of beneficial interest) .............................................. $17.04 ====== Offering price per share (100/95.75 of $17.04) ............. $17.80* ====== Net asset value and offering price of Class B shares ($8,009,482 divided by 470,998 shares of beneficial interest) ................... $17.01** ====== *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, 1998 (unaudited) INVESTMENT INCOME Interest ...................................... $3,567,834 Expenses Management fees ............................. $ 346,497 Service and distribution fees - Class A ..... 194,336 Service and distribution fees - Class B ..... 38,569 Trustees' fees and expenses ................. 5,447 Accounting and administrative ............... 15,698 Custodian ................................... 46,809 Transfer agent .............................. 116,517 Audit and tax services ...................... 11,475 Legal ....................................... 677 Printing .................................... 20,849 Registration ................................ 8,627 Miscellaneous ............................... 3,627 ---------- Total expenses ................................ 809,128 Less expenses waived by the investment adviser and subadviser .............................. (190,243) 618,885 ---------- ---------- Net investment income ......................... 2,948,949 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ........................... 1,262,730 Written options contracts - net ............. (517) Futures contracts - net ..................... (546,653) ---------- Total realized gain on investments, written options, and futures contracts .............. 715,560 ---------- Unrealized appreciation (depreciation) on: Investments - net ........................... (1,486,526) Written options - net ....................... 12,100 Futures contracts - net ..................... 92,543 ---------- Total unrealized depreciation on investments, options, and futures contracts .............. (1,381,883) ---------- Net loss on investment transactions ........... (666,323) ---------- NET INCREASE IN NET ASSETS FROM OPERATIONS ...... $2,282,626 ========== See accompanying notes to financial statements.
- ---------------------------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - ---------------------------------------------------------------------------------------------------- (unaudited) SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1998 ------------ ------------ FROM OPERATIONS Net investment income ................................... $ 6,071,200 $ 2,948,949 Net realized gain on investments, written options and futures contracts ..................................... 275,884 715,560 Unrealized appreciation (depreciation) on investment transactions .......................................... 4,160,896 (1,381,883) ------------ ------------ Increase in net assets from operations .................. 10,507,980 2,282,626 ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................... (5,774,640) (2,725,660) Class B ............................................... (314,984) (165,844) ------------ ------------ (6,089,624) (2,891,504) ------------ ------------ DECREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ............................................ (3,526,289) (318,611) ------------ ------------ Total increase (decrease) in net assets ................. 892,067 (927,489) NET ASSETS Beginning of the period ................................. 120,376,009 121,268,076 ------------ ------------ End of the period ....................................... $121,268,076 $120,340,587 ============ ============ UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME End of the period ....................................... $ (41,118) $ 16,327 ============ ============
See accompanying notes to financial statements.
- ---------------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - ---------------------------------------------------------------------------------------------------- (unaudited) CLASS A --------------------------------------------------------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------------------------------------------------- JUNE 30, 1993 1994 1995 1996 1997 1998 ----- ----- ----- ----- ---- --------- Net Asset Value, Beginning of Period .......................... $ 16.62 $ 17.27 $ 15.10 $ 16.85 $ 16.50 $ 17.13 -------- -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ............. 0.97 0.89 0.88 0.87 0.86 0.43 Net Realized and Unrealized Gain (Loss) on Investments ........... 1.05 (2.15) 1.76 (0.35) 0.63 (0.09) -------- -------- -------- -------- -------- -------- Total From Investment Operations .. 2.02 (1.26) 2.64 0.52 1.49 0.34 -------- -------- -------- -------- -------- -------- Less Distributions Distributions From Net Investment Income ............... (0.97) (0.89) (0.89) (0.87) (0.86) (0.43) Distributions in Excess of Net Investment Income ............... 0.00 (0.02) 0.00 0.00 0.00 0.00 Distributions From Net Realized Gains ........................... (0.40) 0.00 0.00 0.00 0.00 0.00 -------- -------- -------- -------- -------- -------- Total Distributions ............... (1.37) (0.91) (0.89) (0.87) (0.86) (0.43) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period .... $ 17.27 $15.10 $16.85 $16.50 $17.13 $17.04 Total Return (%) (b) .............. 12.4 (7.4) 17.8 3.2 9.3 2.0 Ratio of Operating Expenses to Average Net Assets (%) (a) ...... 0.85 0.85 0.85 0.90 1.00 1.00(c) Ratio of Net Investment Income to Average Net Assets (%) ....... 5.58 5.63 5.46 5.31 5.17 5.01(c) Portfolio Turnover Rate (%) ....... 42 48 127 140 132 115(c) Net Assets, End of Period (000) $128,797 $107,565 $120,229 $112,934 $113,869 $112,331 (a)The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations described in Note 4 to the Financial Statements would have been (%) ....................... 1.21 1.24 1.24 1.27 1.29 1.32(c) (b)A sales charge is 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 ENDED DECEMBER 31, SIX MONTHS THROUGH ENDED DECEMBER 31, --------------------------------------------------------- JUNE 30, 1993 1994 1995 1996 1997 1998 ------------- ---- ---- ---- ---- ---------- Net Asset Value, Beginning of Period ..................... $17.78 $17.26 $15.08 $16.82 $16.47 $17.09 ------ ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income ....... 0.25 0.77 0.78 0.75 0.76 0.38 Net Realized and Unrealized Gain (Loss) on Investments . (0.15) (2.14) 1.74 (0.34) 0.62 (0.09) ------ ------ ------ ------ ------ ------ Total From Investment Operations ................. 0.10 (1.37) 2.52 0.41 1.38 0.29 ----- ----- ----- ----- ----- ----- Less Distributions Distributions From Net Investment Income ......... (0.22) (0.79) (0.78) (0.76) (0.76) (0.37) Distributions in Excess of Net Investment Income ..... 0.00 (0.02) 0.00 0.00 0.00 0.00 Distributions From Net Realized Gains ............ (0.40) 0.00 0.00 0.00 0.00 0.00 ----- ----- ----- ----- ----- ----- Total Distributions ......... (0.62) (0.81) (0.78) (0.76) (0.76) (0.37) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period .................... $17.26 $15.08 $16.82 $16.47 $17.09 $17.01 ====== ====== ====== ====== ====== ====== Total Return (%) (d) ........ 0.4 (8.0) 17.0 2.6 8.6 1.7 Ratio of Operating Expenses to Average Net Assets (%) (b) ....................... 1.50(c) 1.50 1.50 1.55 1.65 1.65(c) Ratio of Net Investment Income to Average Net Assets (%) ................ 4.26(c) 4.98 4.81 4.66 4.52 4.36(c) Portfolio Turnover Rate (%) . 42(c) 48 127 140 132 115(c) Net Assets, End of Period (000) ..................... $1,289 $4,523 $6,697 $7,442 $7,399 $8,009 (a) Commencement of operations. (b) The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations described in Note 4 to the Financial Statements would have been (%) ................. 1.86(c) 1.89 1.89 1.92 1.94 1.97(c) (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 HIGHLIGHTS - -------------------------------------------------------------------------------- June 30, 1998 (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 Fund seeks as high a level of current income exempt from federal income tax and Massachusetts personal income tax. 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 is a "Fund"). The Fund offers both Class A and Class B shares. 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 six years of purchase (or five years if purchased before May 1, 1997). 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. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser, and the subadviser, under the supervision of the Fund's trustees. B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted for on the trade date (the date the buy or sell is executed). 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. OPTIONS. The Fund uses options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. 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. 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. 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 including interest. The Fund's subadviser 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. For the six months ended June 30, 1998 purchases and sales of securities (excluding short-term investments) were $70,857,986 and $68,974,272 respectively. Transactions in written options for the six months ended June 30, 1998 are summarized as follows: WRITTEN OPTIONS ------------------------------ NUMBER OF PREMIUMS CONTRACTS RECEIVED --------- -------- Open at December 31, 1997 ........... 100 $ 63,663 Contracts opened .................... 600 414,969 Contracts closed .................... (700) (478,632) --- -------- Open at June 30, 1998 ............... 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 L.P. ("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 are also officers or trustees of the Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by NEFM and Back Bay Advisors under the management agreement in effect during the six months ended June 30, 1998 are as follows: FEES EARNED(a) -------------- $173,248 NEFM $173,249 Back Bay Advisors (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 Nvest 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, and financial reporting functions and clerical functions relating to the Fund, and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the six months ended June 30, 1998 these expenses amounted to $15,698 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 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, 1998, the Fund paid New England Funds $139,922 and $9,642 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 0.10% of the average daily net assets attributable to the Fund's Class A shares and 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, 1998, the Fund paid New England Funds $54,414 and $28,927 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, 1998, amounted to $124,577. D. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is the transfer and shareholder servicing agent to the Fund. For the six months ended June 30, 1998, the Fund paid NEFSCO $83,313 as compensation for its services in that capacity. For the six months ended June 30, 1998, the Fund received $1,239 in transfer agent credits. The transfer agent expense in the statement of operations is net of these credits. 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 NEFM, New England Funds, NEFSCO, Nvest or their affiliates, other than registered investment companies. Each other trustee is compensated by the Fund as follows: Annual Retainer $636 Meeting Fee 159/meeting Annual Committee Member Retainer 95/meeting Annual Committee Chairman Retainer 64 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. Effective September 1, 1996 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 1.00% of the Fund's Class A average daily net assets, and 1.65% of Class B average daily net assets. Prior to this, effective May 1, 1991, Back Bay Advisors and NEFM had 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. As a result of the Fund's expenses exceeding the applicable voluntary expense limitation during the six months ended June 30, 1998, Back Bay Advisors reduced its subadvisory fee of $173,249 by $95,121 and NEFM reduced its advisory fee of $173,248 by $95,122. 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. The Fund had the following industry concentrations in excess of 10% on June 30, 1998 as a percentage of the Fund's total net assets: Education (13.33), Hospitals (18.88), Housing (16.67), and Water and Sewer (11.51). The Fund had (21.33) of its total net assets insured by Municipal Bond Investors Assurance Corporation (MBIA). 6. CAPITAL SHARES. At June 30, 1998 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, 1997 JUNE 30, 1998 ----------------------------- --------------------------- CLASS A SHARES AMOUNT SHARES AMOUNT - ------- ---------- ------------- -------- ------------- Shares sold .......................... 792,988 $ 13,125,655 619,061 $ 10,558,049 Shares issued in connection with the reinvestment of: Distributions from net investment income ............................. 256,070 4,279,009 117,651 2,004,775 ---------- ------------- -------- ------------- 1,049,058 17,404,664 736,712 12,562,824 Shares repurchased ................... (1,243,295) (20,634,447) (793,064) (13,534,420) ---------- ------------- -------- ------------- Net decrease ......................... (194,237) $ (3,229,783) (56,352) $ (971,596) ---------- ------------- -------- ------------- YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1997 JUNE 30, 1998 ----------------------------- --------------------------- CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ---------- ------------- -------- ------------- Shares sold .......................... 79,890 $ 1,325,027 73,944 $ 1,262,548 Shares issued in connection with the reinvestment of: Distributions from net investment income ............................. 14,270 238,056 7,638 129,877 ---------- ------------- -------- ------------- 94,160 1,563,083 81,582 1,392,425 Shares repurchased ................... (113,037) (1,859,589) (43,418) (739,440) ---------- ------------- -------- ------------- Net increase (decrease) .............. (18,877) (296,506) 38,164 652,985 ---------- ------------- -------- ------------- Decrease derived from capital shares transactions ....................... (213,114) $ (3,526,289) (18,188) $ (318,611) ========== ============= ======== =============
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