<PAGE>
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[Logo]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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NEW ENGLAND
INTERMEDIATE TERM
TAX FREE FUND OF
CALIFORNIA
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JUNE 30, 1996
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<PAGE>
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July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Intermediate Term Tax Free Fund of California,
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.
<PAGE>
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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
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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INVESTMENT RESULTS THROUGH JUNE 30, 1996
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in the New England Intermediate Term Tax Free Fund of
California's Class A Shares compared to the Lehman Municipal Index and the Cost
of Living. The data points to this chart are as follows:]
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A $10,000 INVESTMENT IN CLASS A SHARES
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Intermediate Tax Free of CA
Cost of
Date Range NAV POP Lehman* Living
- ---------------- ------- ------ ------- -------
4/23/93 $10,000 $9,750 $10,000
1993 $10,258 $10,002 $10,224 $10,000
1994 $10,459 $10,198 $10,244 $10,215
1995 $10,990 $10,716 $11,145 $10,505
1996 $11,869 $11,572 $11,885 $10,788
*Lehman Municipal
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.
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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<TABLE>
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/96*
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<CAPTION>
Class A (Inception 4/23/93) YTD 1 Year 3 Years Since Inception
<S> <C> <C> <C> <C>
Net Asset Value(1) 0.96% 7.99% 4.98% 5.52%
With Max. Sales Charge(2) -1.61 5.27 4.08 4.69
Lipper CA Municipal Average(6) 0.04 5.69 4.41 4.78
<CAPTION>
Class B (Inception 9/13/93) YTD 1 Year Since Inception
Net Asset Value(1) 0.45% 7.06% 2.66%
With CDSC(3) -3.49 3.06 1.68
Lehman Municipal(4) -0.45 6.64 4.08
Lipper CA Municipal Average(6) 0.04 5.69 4.78
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YIELDS AS OF 6/30/96**
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<CAPTION>
Class A Class B
SEC 30-day Yield 5.17% 4.58%
Taxable Equivalent Yield 9.44 8.36
</TABLE>
* 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 California state income tax bracket of 45.22%. The alternative
minimum tax and 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 2.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge 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, as
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.
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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Photo of
James Welch
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NEW ENGLAND INTERMEDIATE TERM
TAX FREE FUND OF CALIFORNIA
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 this 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
We are pleased to tell you that your Fund received a Morningstar(TM) rating of
five stars for three- and one-year performance through June 30, 1996.* The
Fund's strong performance over the three years since its inception resulted in
the highest rating possible!
The New England Intermediate Term Tax Free Fund of California posted excellent
performance on a relative basis. For the six-month period, the Fund had a total
return of 0.96% for Class A shares, based on net asset value, well ahead of the
average return of 0.04% for the Lipper California Municipal Average.
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
SEC yield was 5.17% and 4.58% for Class A and Class B shares, respectively,
which translates into taxable equivalent yields of 9.44% and 8.36% for a fully
taxable investment, assuming the maximum combined federal and California state
income tax rate of 45.22%.
How We Managed Your Fund
We restructured much of the portfolio early in the period in the 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 the decreasing Fund's duration
from 6 years (the maximum allowable) to 5.5 years, to reduce its sensitivity to
changes in interest rates. We also increased the Fund's average coupon, call
protection and overall credit quality -- moves that protected shareholder value
as interest rates rose during the period.
Our outlook on the State of California continued to improve; the California
economy appeared to have bottomed, based on strengthening job growth and tax
revenue collections, leading us to alter the Fund's investment strategy. We
dramatically increased holdings of state and local general obligation bonds from
about 5% to 15-20%. Having avoided Orange County bonds since well before its
much publicized bankruptcy filing, we recently participated in its first
post-bankruptcy offering; we are confident that the county has addressed its
fiscal problems and stands to benefit from the improving southern California
economy. We were also comforted by the bond insurance on the issue, which paved
the way for its triple-A rating.
Overall, we continue to emphasize essential purpose revenue bonds, particularly
in the transportation sector. We expect this sector to benefit from an improving
economy, on both local and national levels. Examples include the Los Angeles,
San Francisco and Sacramento airports, Foothills/Eastern Transportation
Corridor, and the Los Angeles Metropolitan Transit Authority. In addition to
their strong fundamentals, many of these bonds are also backed by voter-approved
state sales tax allocations.
Our Investment Outlook
We continue to believe that the long-term outlook for the California municipal
bond market is positive. Tax reform proposals are behind us for now, and
municipals should continue to appreciate relative to Treasuries, gaining back
lost ground. The decline in new issue municipal volume in California is ongoing,
and we do not expect any material change in this trend. The demand for tax-free
bonds is strengthening, due in part to an improving state economy. This
combination of low supply and steady demand suggests a favorable environment for
California municipal bonds and for your Fund.
* Morningstar proprietary ratings reflect risk-adjusted performance through
6/30/96. The ratings are subject to change every month. Past performance is
no guarantee of future results. Morningstar ratings are calculated from the
Fund's three- and one-year returns (with fee adjustments) in excess of
90-day T-bill returns. The one-year rating is calculated using the same
methodology, but is not a component of the overall rating. The Fund received
five stars for three- and one-year periods, respectively. It was rated among
924 and 1691 funds respectively. Ten percent of the funds in a rating
category receive five stars, and the next 22.5% receive four stars.
** 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.
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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PORTFOLIO QUALITY AS OF JUNE 30, 1996
AAA .............. 34.51%
A ................ 30.05
BBB .............. 30.19
BB ............... 5.25
Average Portfolio Quality = A+ Average Portfolio Maturity = 10.5 Years
Quality rating provided by Standard & Poor's.
<PAGE>
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[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
- --------------------------------------------------------------------------------
NEW ENGLAND
INTERMEDIATE TERM
TAX FREE FUND
OF CALIFORNIA
- -------------
JUNE 30, 1996
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<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1996
(unaudited)
TAX EXEMPT BONDS--98.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (c)
---------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- --------------------------------------------------------------------------------------------------------------
CALIFORNIA--85.3%
<S> <C> <C> <C> <C>
$1,500,000 Berkeley California Health Facility
6.500%, 12/01/11 .................. Baa BBB+ $ 1,524,135
1,000,000 California Educational Facilities
Authority (Stanford Univ.),
7.000%, 01/01/04 .................. Aaa AAA 1,077,250
1,000,000 California Pollution Control
Financing Authority
6.900%, 09/01/06 .................. NR A+ 1,071,630
1,000,000 California Pollution Control
Financing Authority
8.750%, 01/01/07 .................. A2 A 1,072,760
1,000,000 California Pollution Control
Financing Authority
5.900%, 06/01/14 .................. A2 A 1,008,540
1,000,000 California State (FGIC) 7.000%,
06/01/02 .......................... Aaa AAA 1,111,460
1,000,000 California State Public Works 6.400%,
09/01/08 .......................... A A- 1,044,770
1,000,000 California State Public Works 5.500%,
06/01/10 .......................... A A- 978,090
1,500,000 Duarte City of Hope, CA, 5.100%,
04/01/98 .......................... Baa1 NR 1,500,615
1,000,000 Foothill/Eastern Transportation Co.,
6.000%, 01/01/16 .................. Baa BBB- 972,040
1,295,000 Fresno United School District 6.600%,
03/01/99 .......................... A NR 1,355,101
2,030,000 Fresno United School District 7.250%,
03/01/07 .......................... A NR 2,195,161
1,000,000 Northern CA Power Agency 5.650%,
07/01/07 .......................... A A 1,007,320
1,000,000 Orange County, CA, Recovery Center, AAA AAA 1,038,130
995,000 Pleasanton Financing Authority
5.600%, 09/02/00 .................. Baa NR 1,020,870
1,000,000 Redding CA Jt. Powers Financing
Authority 6.000%, 06/01/15 (MBIA) . Aaa AAA 936,190
1,000,000 Richmond CA Jt. Powers Financing NR A 921,040
1,000,000 Sacramento Utility District 6.870%,
11/15/06 (d) (FSA) ................ Aaa AAA 1,018,030
1,000,000 Sacramento Utility District 4.130%,
11/15/06 (d) (FSA) ................ Aaa AAA 1,000,000
2,700,000 San Diego Port Facilities 6.600%,
12/01/02 .......................... NR NR 2,044,080
1,000,000 Southern California Rapid Transit
District 7.500%, 7/01/05 (MBIA) ... Aaa AAA 1,119,110
1,000,000 Southgate CA Public Financing
Authority, 6.000%, 10/01/12
(FGIC) ............................ Aaa AAA 1,035,700
1,975,000 Stanislaus Solid Waste Authority
7.625%, 01/01/10 .................. NR BBB+ 2,071,133
775,000 Valley Health Systems 6.250%,
5/15/99 ........................... NR BBB- 780,766
1,000,000 Valley Health Systems 6.500%,
05/15/15 .......................... NR BBB- 968,270
2,000,000 Western & Central Basin Finance
Authority 6.380%, 08/01/06 (AMBAC) Aaa AAA 1,944,200
1,000,000 Whittier CA Health Facilities 6.250%,
6/01/09 (MBIA) .................... Aaa AAA 1,062,900
-----------
32,879,291
-----------
OTHER OBLIGATIONS--13.1%
$1,000,000 Puerto Rico Commonwealth Aqueduct Baa1 A $ 1,044,090
1,000,000 Puerto Rico Commonwealth Highway
Authority 6.750%, 07/01/05 ........ Baa1 A 1,092,390
1,750,000 Virgin Islands Public Finance
Authority 7.700%, 10/01/04 ........ NR BBB 1,904,648
945,000 Virgin Islands Territory 7.7500%,
10/01/06 .......................... NR NR 1,010,157
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5,051,285
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Total Tax Exempt Bonds (Identified Cost $37,388,943) ................. 37,930,576
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SHORT TERM INVESTMENT--2.8%
1,075,000 American Express Credit Corp. 5.390%,
07/01/96
Total Short-Term Investment (Identified Cost $1,075,000) ............. 1,075,000
-----------
Total Investments--101.2% (Identified Cost $38,463,943) (b) .......... 39,005,576
Other assets less liabilities ........................................ (459,461)
-----------
Total Net Assets--100% ............................................... $38,546,115
===========
(a) See Note 1a.
(b) Federal Tax Information: At June 30,1996 the net unrealized appreciation on
investments based on Cost of $38,463,943 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 .............................................. $ 716,908
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value .............................................. (175,275)
------------
Net unrealized appreciation ................................................... $ 541,633
============
As of December 31, 1995, the Fund had a net tax basis capital loss
carryforward as follows:
Expiring December 31, 2002 $1,488,957
(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 rated at June 30, 1996. The Fund's adviser independently evaluates the
fund's portfolio securities and in making investment decisions does not rely
solely on the ratings of agencies.
(d) Floating rate demand notes are instruments whose interest rates change on a
specific date (such as coupon date or interest payment date). These
instruments are payable on demand and are secured by a letter of credit or
other support agreements from banks.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
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June 30, 1996
(unaudited)
ASSETS
Investments at value ........................... $39,005,576
Cash ........................................... 1,004
Receivable for:
Fund shares sold ............................. 9,901
Securities sold .............................. 993,965
Dividends and interest ....................... 649,373
Due from investment adviser .................. 46,516
Unamortized organization expense ............. 17,253
Prepaid registration expense ................... 5,000
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40,728,588
LIABILITIES
Payable for:
Securities purchased ......................... $1,990,555
Fund shares redeemed ......................... 81,897
Dividends declared ........................... 71,924
Accrued expenses:
Accounting and administrative ................ 3,274
Deferred Trustees' fees ...................... 374
Other expenses ............................... 34,449
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2,182,473
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NET ASSETS ....................................... $38,546,115
===========
Net Assets consist of:
Capital paid in .............................. $39,630,085
Undistributed net investment income .......... 72,307
Accumulated net realized losses .............. (1,697,910)
Unrealized appreciation on investments ....... 541,633
-----------
NET ASSETS ....................................... $38,546,115
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($32,405,081 divided by 4,305,140 shares
of beneficial interest) ........................ $7.53
=====
Offering price per share (100/97.50 of $7.53) .... $7.72*
=====
Net asset value and offering price of Class B
shares($6,141,034 divided by 818,256 shares of
beneficial interest) ............................. $7.51**
=====
Identified cost of investments ..................... $38,463,943
===========
*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.
<PAGE>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest ....................................... $1,137,379
----------
Expenses
Management fees .............................. $ 98,889
Service fees--Class A ........................ 40,331
Service and distribution fees--Class B ....... 28,360
Trustees' fees and expenses .................. 5,870
Accounting and administrative ................ 23,828
Custodian .................................... 28,320
Transfer agent ............................... 20,125
Audit and tax services ....................... 10,500
Legal ........................................ 9,409
Printing ..................................... 10,602
Registration ................................. 18,120
Amortization of organization expenses ........ 3,245
Miscellaneous ................................ 1,938
----------
Total expenses ................................. 299,537
Less expenses waived by the investment adviser
and subadviser ............................... (145,405) 154,132
---------- ----------
Net investment income .......................... 983,247
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net ............................. (242,004)
Futures contracts--net ....................... 189,105
Options contracts--net ....................... (154,183)
----------
Total realized loss on investments ........... (207,082)
----------
Unrealized depreciation on investments--net .... (496,240)
----------
Net loss on investment transactions ............ (703,322)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ....... $ 279,925
==========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
----------- -----------
FROM OPERATIONS
Net investment income ....................... $ 1,926,651 $ 983,247
Net realized gain (loss) on investments,
options and futures transactions .......... 80,972 (207,082)
Unrealized appreciation (depreciation) on
investments, options and futures
transactions .............................. 2,839,989 (496,240)
----------- -----------
Increase in net assets from operations ...... 4,847,612 279,925
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................... (1,665,974) (810,389)
Class B ................................... (260,677) (121,454)
In excess of net investment income
Class A ................................... (9,744) 0
Class B ................................... (1,589) 0
----------- -----------
(1,937,984) (931,843)
----------- -----------
Increase (decrease) in net assets derived
from capital share transactions ........... (591,705) 874,165
----------- -----------
Total increase in net assets ................ 2,317,923 222,247
NET ASSETS
Beginning of the period ..................... 36,005,945 38,323,868
----------- -----------
End of the period ........................... $38,323,868 $38,546,115
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ..................... $ 29,558 $ 20,903
=========== ===========
End of the period ........................... $ 20,903 $ 72,307
=========== ===========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
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FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
------------------------------------------------------------------------
APRIL 23(A) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 7.50 $ 7.84 $ 7.08 $ 7.65
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................................... 0.26 0.38 0.39 0.40
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... 0.38 (0.76) 0.57 (0.13)
------ ------ ------ ------
Total From Investment Operations ........................ 0.64 (0.38) 0.96 0.27
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ................ (0.26) (0.38) (0.39) (0.39)
Distributions in Excess of Net Investment
Income ................................................ (0.04) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions ..................................... (0.30) (0.38) (0.39) (0.39)
------ ------ ------ ------
Net Asset Value, End of Period .......................... $ 7.84 $ 7.08 $ 7.65 $ 7.53
====== ====== ====== ======
Total Return (%) (d) .................................... 8.6 (4.9) 13.9 1.0
Ratio of Operating Expenses to Average
Net Assets (%) (b) .................................... 0.70(c) 0.70 0.70 0.70(c)
Ratio of Net Investment Income to Average
Net Assets (%) ........................................ 4.88(c) 5.07 5.24 2.63(c)
Portfolio Turnover Rate (%) ............................. 121(c) 212 167 187(c)
Net Assets, End of Period (000) ......................... $28,938 $30,293 $32,707 $32,405
(a) Commencement of operations.
(b) Commencing April 23, 1993 expenses were voluntarily limited to 0.70% 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 1.49% (annualized) for
the period ended December 31, 1993, 1.33% for the year ended December 31, 1994, 1.31% for the year ended December 31, 1995 and
1.47% for the six months ended June 30, 1996.
(c) Computed on an annualized basis.
(d) A sales charge of 2.50% (maximum) is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
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
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 7.92 $ 7.84 $ 7.07 $ 7.63
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ................................... 0.10 0.32 0.33 0.34
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... (0.04) (0.77) 0.56 (0.13)
------ ------ ------ ------
Total From Investment Operations ........................ 0.06 (0.45) 0.89 0.21
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ................ (0.10) (0.32) (0.33) (0.33)
Distributions in Excess of Net Investment
Income ................................................ (0.04) 0.00 0.00 0.00
----- ----- ----- -----
Total Distributions ..................................... (0.14) (0.32) (0.33) (0.33)
----- ----- ----- -----
Net Asset Value, End of Period .......................... $ 7.84 $ 7.07 $ 7.63 $ 7.51
====== ====== ====== ======
Total Return (%) (d) .................................... 0.8 (5.8) 12.9 0.6
Ratio of Operating Expenses to Average
Net Assets (%) (b) .................................... 1.45(c) 1.45 1.45 1.45(c)
Ratio of Net Investment Income to Average
Net Assets (%) ........................................ 3.68(c) 4.32 4.49 2.26(c)
Portfolio Turnover Rate (%) ............................. 121(c) 212 167 187(c)
Net Assets, End of Period (000) ......................... $1,849 $5,713 $5,617 $6,141
(a) Commencement of operations.
(b) Commencing September 13, 1993 expenses were voluntarily limited to 1.45% of Class B average net assets. See Note 4. The ratio of
operating expenses to average net assets without giving effect to this expense limitation would have been 2.24% (annualized) for
the period ended December 31, 1993, 2.08% for the year ended December 31, 1994, 2.06% for the year ended December 31, 1995 and
2.22% 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
1. The Fund is a series of The New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 13, 1993. Class A shares are sold with
a maximum front end sales charge of 2.50%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within five years of purchase. Expenses of the Fund are borne
pro-rata by the holders of both classes of shares, except that each class
bears expenses unique to that class (including the Rule 12b-1 service and
distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 Plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors,
L.P. ("Back Bay Advisors"), under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Back Bay Advisors and other
information with respect to transactions in securities, including quotations
from securities dealers. Valuations of securities and other assets owned by
the Fund for which market quotations are readily available are based on those
quotations. Short-term obligations that will mature in 60 days or less are
stated at amortized cost, which, when combined with accrued interest or
discount earned, approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Back Bay
Advisors under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion
of 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.
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.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to differing treatments for market discount. Permanent book
and tax basis differences relating to shareholder distributions will result in
reclassification to paid in capital.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. 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.
G. ORGANIZATION EXPENSE. Costs incurred in 1993 in connection with the Fund's
organization and initial registration amounted to $26,500 and were paid by the
Fund. These costs are being amortized over 60 months beginning April 23, 1993.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the six months ended June 30, 1996 were $37,010,578 and
$34,911,716, respectively.
Investments in written options and futures contracts for the Fund for the six
months ended June 30, 1996 are summarized as follows:
SALES OF FUTURES CONTRACTS
---------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Open at December 31, 1995 ....................... 0 $ 0
Contracts opened ................................ 425 47,865,050
Contracts closed ................................ (425) (47,865,050)
--- ------------
Open at June 30, 1996 ........................... 0 $ 0
--- ============
WRITTEN OPTIONS
---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1995 ....................... 0 $ 0
Contracts opened ... 450 107,325
Contracts closed ... (450) (107,325)
--- --------
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 0.525% of the first $200
million of the Fund's average daily net assets, 0.50% of the next $300 million
and 0.475% of such assets in excess of $500 million. NEFM pays the Fund's
investment subadviser, Back Bay Advisors at the rate of 0.2625% of the first
$200 million of the Fund's average daily net assets, 0.25% of the next $300
million and 0.2375% of such assets in excess of $500 million. Certain officers
and directors of NEFM and Back Bay Advisors are also officers or trustees of
the Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of New
England Investment Companies, L.P. ("NEIC"), which is a subsidiary of New
England Mutual Life Insurance Company. Fees earned by NEFM and Back Bay
Advisors under the management agreement in effect during the six months ended
June 30, 1996 are as follows:
FEES EARNED
-----------
$49,444 New England Funds Management, L.P.
$49,445 Back Bay Advisors, L.P.
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 related 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 $23,828 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares
(the "Class A Plan") and a Service and Distribution Plan relating to the
Fund's Class B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds, L.P. ("New England
Funds") a monthly service fee at the annual rate of up to 0.25% of the average
daily net assets attributable to the Fund's Class A shares, as reimbursement
for expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class A shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1996, the Fund paid
New England Funds $40,331 in fees under the Class A Plan. If the expenses of
New England Funds that are otherwise reimbursable under the Class A Plan
incurred in any year exceed the amounts payable by the Fund under the Class A
Plan, the unreimbursed amount (together with unreimbursed amounts from prior
years) may be carried forward for reimbursement in future years in which the
Class A Plan remains in effect. The amount of unreimbursed expenses carried
forward into 1996 is $179,456.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class B shares, as compensation for services provided and
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class B shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1996, the Fund paid
New England Funds $7,090 in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who
may be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the six months
ended June 30, 1996, the Fund paid New England Funds $21,270 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors of shares of the Fund during the year ended
December 31, 1995 amounted to $59,010.
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 $15,899 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 $730
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $18/year
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Commencing April 23, 1993 and until further notice
to the Fund, Back Bay Advisors and New England Funds Management, L.P. have
voluntarily agreed to reduce management fees in order to limit the Fund's
expenses to an annual rate of 0.70% of the Fund's Class A average daily net
assets and, effective September 13, 1993, 1.45% of Class B average daily net
assets. As a result of the Fund's expenses exceeding the foregoing expense
limitation during the six months ended June 30, 1996, Back Bay Advisors waived
its entire subadvisory fee of $49,444 and New England Funds Management L.P.
waived its entire advisory fee of $49,445.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of California 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 California
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 California 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:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------------ -----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................. 788,727 $ 5,839,073 544,374 $ 4,091,571
Shares issued in connection with the reinvestment of:
Distributions from net investment income .............. 125,283 929,591 60,453 456,331
-------- ----------- ------- -----------
914,010 6,768,664 604,827 4,547,902
Shares repurchased ...................................... (922,790) (6,815,110) (572,527) (4,293,028)
-------- ----------- ------- -----------
Net increase (decrease) ................................. (8,780) $ (46,446) 32,300 $ 254,874
======== =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------------ -----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold ............................................. 93,955 $ 683,998 155,704 $ 1,166,989
Shares issued in connection with the reinvestment of:
Distributions from net investment income .............. 14,354 106,386 7,976 60,013
-------- ----------- ------- -----------
108,309 790,384 163,680 1,227,002
Shares repurchased ...................................... (180,341) (1,335,643) (81,268) (607,711)
-------- ----------- ------- -----------
Net increase (decrease) ................................. (72,032) (545,259) 82,412 619,291
======== =========== ======= ===========
Increase (decrease) derived from capital shares
transactions .......................................... (80,812) $ (591,705) 114,712 $ 874,165
======== =========== ======= ===========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
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.
<PAGE>
- -----------------------------------------------------------------------------
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.
<PAGE>
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