<PAGE>
[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
NEW ENGLAND
LIMITED TERM
U.S. GOVERNMENT FUND
----------------
June 30, 1996
----------------
<PAGE>
July 25, 1996
Dear Shareholder,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Limited Term U.S. Government Fund, containing
your portfolio manager commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first
half of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic
growth, remained strong at 2.3% through June, just shy of what most economists
consider optimal growth. As a result, the Federal Reserve Board opted not to
tinker with interest rates through the first half of the year, save for a
quarter-point ease in short-term rates in late January. The relatively calm
economic waters had a stimulating effect on the domestic equity market, boosting
stocks 537 points to 5,654 at the end of June, as measured by the Dow Jones
Industrial Average. Bond yields did not fare as well, rising to 7.00% at the end
of June from 6.65% earlier in the year. Money market yields remained stable,
falling back only slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of
the Dow Jones Industrial Average's first-half gains. Again, we are reminded that
no bull market lasts forever. Long-term financial goals are key in times like
these and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A
financial representative can guide you through volatile markets and help you
meet your long-term financial goals. A recent study by Dalbar, Inc., a mutual
fund monitoring and analytical service, shows that, on average, mutual fund
investors who bought and held shares, with the assistance of a financial
representative, enjoyed the benefits of a long-term commitment. Consequently,
they benefitted from higher returns than direct investors and others who bought
and sold, although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our
most popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds marked their first and second birthdays, respectively. We're proud of all
of our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow
moderately and that inflationary pressures will not be excessive. While we
estimate the GDP may rise somewhat from its current level of 2.3%, the Federal
Reserve should be reluctant to tighten the money supply by raising short-term
interest rates. We also believe that the equity markets will continue to be
volatile through the rest of the year.
We believe that you will find your portfolio manager commentary informative.
If you have any questions or comments, please contact your financial
representative or New England Funds directly at 800-225-5478.
Sincerely,
/s/Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH JUNE 30, 1996
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares, since New England Limited Term U.S.
Government Fund's inception 1/3/89, compared to the Lehman Intermediate
Government Bond Index. The data points from the graph are as follows:]
- --------------------------------------------------------------------------------
A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
Limited Term US Govt Cost of
Year NAV MSC Lehman* Living
- ------ ------- ------- ------- -------
1/3/89 $10,000 $9,700 $10,000 $10,000
1989 $10,568 $10,251 $10,775 $10,299
1990 $11,504 $11,159 $11,608 $10,780
1991 $12,606 $12,228 $12,830 $11,286
1992 $14,161 $13,736 $14,479 $11,635
1993 $15,339 $14,879 $15,932 $11,983
1994 $15,264 $14,806 $15,903 $12,241
1995 $16,410 $15,918 $17,454 $12,589
1996 $17,068 $16,556 $18,342 $12,927
- --------------------------------------------------------------------------------
* Lehman Intermediate Government Bond Index(4)
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, C and Y 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>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS 6/30/96
- --------------------------------------------------------------------------------
CLASS A (Inception 1/3/89) 1 YEAR 3 YEAR 5 YEAR SINCE INCEPTION
Net Asset Value(1) 4.01% 3.63% 6.25% 7.40%
With Max. Sales Charge(2) 3.97 2.59 5.60 6.96
Lipper Short-Term U.S. Gov't.(6) 4.37 3.87 6.54 n/a
CLASS B (Inception 9/21/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.26% 2.47%
With CDSC(3) 0.60 1.53
Lehman Intermediate Gov't
Bond Index(4) 5.09 4.47
Lipper Short-Term U.S. Gov't.(6) 4.37 n/a
CLASS C (Inception 12/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.25% 6.39%
Lehman Intermediate Gov't
Bond Index(4) 5.09 9.50
Lipper Short-Term U.S. Gov't.(6) 4.37 n/a
CLASS Y (Inception 3/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 4.25% 5.15%
Lehman Intermediate Gov't
Bond Index(4) 5.09 6.29
Lipper Short-Term U.S. Gov't.(6) 4.37 n/a
These returns represent past performance. Investment return and principal
value will fluctuate so that shares, upon redemption, may be worth more or
less than original cost. Class Y shares are available only to certain
institutional investors. Share price and return may vary.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 3% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) Lehman Intermediate Government Bond Index is an unmanaged index of bonds
issued by the U.S. Government and its agencies having maturities between one
and ten years. The Index's performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
<PAGE>
- -----------------
[Photo of
Eric Gutterson]
- -----------------
NEW ENGLAND LIMITED TERM
U.S. GOVERNMENT FUND
Portfolio Manager: Eric Gutterson
Back Bay Advisors, L.P.
The Market
Despite expectations for a continued strong bond market in 1996, fixed income
investors were challenged by the investment environment of the past six months.
The market rally of 1995 quickly lost steam in mid-February, when reports of
stronger than expected economic activity caused interest rates to reverse
direction and move sharply higher. Long-term interest rates, as measured by the
yield on the 30-year Treasury bond, increased from 5.95% to 6.89% over the
course of the period.
This reversal was caused, in large part, by changing dynamics in the forces that
drove the market rally throughout 1995. First, strong corporate earnings without
accompanying wage and price increases continued to indicate increased
productivity. However, strong earnings, normally a positive for the bond market,
instead increased investors' preference for the stock market, depressing demand
and prices for fixed income securities.
Second, newly confident consumers reversed the low spending levels that
predominated in 1995. Such increased spending and reduced saving raised fears of
higher inflation, always a negative for the bond market.
Third, the lack of a balanced budget agreement discouraged overseas investors
and, consequently, the U.S. Government bond market lost much of the strong
international support it enjoyed during 1995.
How Your Fund Performed
New England Limited Term U.S. Government Fund had a total return of -1.0% for
Class A shares, based on net asset value, compared to a total return of 4.37%
for the Lehman Brothers Intermediate Government Bond Index. This
underperformance is due primarily to a duration that was somewhat longer than
that of the Index. In addition, our efforts to maintain an attractive level of
current income resulted in overweighting security types that did not perform as
well as the overall market.
How We Managed Your Fund
As we reported to you in the Fund's annual report, we grew more cautious during
the fourth quarter of 1995. We believed that the majority of downward interest
rate moves were behind us. As a result, we began 1996 with the Fund positioned
for a period of market consolidation that we believed would result from moderate
economic growth and low inflation levels.
While we had a relatively defensive strategy going into the market sell-off in
mid-February, we were surprised by the speed with which the market reversed
direction. We continued to shorten the Fund's duration and to barbell maturities
by adding shorter maturity bonds to decrease Funds average matuity. These moves
allowed the Fund to shorten its duration from 3.6 years at the beginning of the
period to as low as 2.5 years. We also expanded holdings in mortgage-backed
securities, which tend to perform well during periods of rising interest rates;
there is a higher likelihood that cash flows will be collected over a longer
period; since homeowners are less likely to refinance and prepay their mortgage
when interest rates are rising.
This strategy helped as the Fund regained some of the ground lost early in the
period. We continue to be cautious on the market, although a stronger fixed
income environment is possible during the second half of 1996. Therefore, we are
not inclined to shorten the Fund's duration from its current 3.2 year level.
Our Investment Outlook
We believe that the economy's current level of growth is unsustainable and that
the second half of 1996 will be weaker than the first. Despite stronger than
expected growth over the past six months, the absence of appreciable wage and
price pressure should calm the market's near-term fears of inflation. While we
believe that interest rates will continue to fluctuate and that volatility will
continue to be high, we are hopeful that rates will be lower by year-end.
The presidential election in November will almost certainly have some impact on
the bond market, although it is too early to predict the outcome. It is likely
that if the Republicans retain control of the House of Representatives the bond
market will respond favorably, while if the Democrats regain control of the
House, the expectation of increased government spending will be negative for the
market.
As a result of election uncertainty and expected market volatility, we will not
be inclined to dramatically alter the Fund's structure or implement any major
strategic changes.
TREASURY YIELD CURVE
The "yield curve" illustrates the yields available on U.S. Treasury securities
of varying maturities, ranging from 3-month Treasury bills to 30-year Treasury
bonds. Under normal conditions, a security with a longer maturity will offer a
higher yield than a shorter-term security, to compensate the bond holder for
tying up money for longer periods of time. The chart below illustrates the yield
curve at the beginning and at the end of 1995. As you can see, long-term rates
dropped substantially, with the 30-year bond falling almost two percentage
points, from 7.88% to 5.95%.
- --------------------------------------------------------------------------------
THE YIELD CURVE JANUARY - JUNE, 1996
- --------------------------------------------------------------------------------
[A chart in the form of a line chart appears here, illustrating the drop in the
yield curve of 3-month Treasury bills to 30-year Treasury bonds. The data from
the graph is as follows:]
Date Range 1/02/96 6/28/96 CHANGE
- ---------- ------- ------- ------
3 MONTH 5.113 5.152 0.0394
6 MONTH 5.179 5.358 0.1793
1 YEAR 5.175 5.674 0.4993
2 YEAR 5.175 6.107 0.9320
3 YEAR 5.225 6.269 1.0439
5 YEAR 5.381 6.462 1.0810
10 YEAR 5.587 6.714 1.1269
30 YEAR 5.95 6.894 0.9304
Source: Bloomberg
What caused this dramatic drop? Over the year it became apparent that the
economy was growing at a more subdued pace and that inflation remained under
control. (Inflation is the bond markets' primary enemy because it eats away at
the value of fixed income investments). The markets responded enthusiastically,
driving down long-term rates. Bond prices, which move in the opposite direction
of interest rates, moved sharply higher in an impressive rebound from 1994's
market decline.
<PAGE>
Glossary for Mutual Fund Investors
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by the
Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the portfolio.
DURATION - A measure, stated in years, of a bond or bond fund's sensitivity to
interest rates. Duration is a means to directly compare the volatility of
different instruments. As a general rule, for every 1% move in interest rates, a
fund is expected to fluctuate in value as indicated by its duration. For
example, if interest rates fall by 1%, a fund with a duration of 4 years should
rise in value 4%. Conversely, the fund should decline 4% if interest rates rise
1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from treasury securities is exempt from state
and local income taxes, but not from federal income taxes. There are three types
of treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and in most
cases from state and local income taxes. The two main types are General
Obligation (GO) Bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and Revenue Bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
---------------------------------------------------------------
PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
---------------------------------------------------------------
NEW ENGLAND
LIMITED TERM
U.S. GOVERNMENT
FUND
----------------
June 30, 1996
----------------
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of June 30, 1996
(unaudited)
MEDIUM & LONG TERM BONDS AND NOTES--98.3% OF TOTAL NET ASSETS
FACE
AMOUNT DESCRIPTION VALUE (A)
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES--47.0% (B)
$ 72,002 Federal Home Loan Mortgage Corporation,
10.000%, 07/01/19 ............................ $ 77,447
11,133,538 Federal Home Loan Mortgage Corporation, 11.500%,
with various maturities to 2020 .............. 12,551,950
13,500,000 Federal National Mortgage Association,
9.400%, 8/10/98 .............................. 14,331,060
10,000,000 Federal National Mortgage Association,
9.550%, 3/10/99 .............................. 10,773,400
10,000,000 Federal National Mortgage Association,
6.850%, 9/12/05 .............................. 9,701,600
10,000,000 Federal National Mortgage Association,
7.020%, 4/10/06 .............................. 9,525,400
58,870,225 Federal National Mortgage Association,
7.000%, 12/01/25 ............................. 56,625,504
162,264 Government National Mortgage Association,
12.500% with various maturities to 2015 ...... 188,447
1,672,985 Government National Mortgage Association,
16.000% with various maturities to 2013 ...... 1,971,840
773,633 Government National Mortgage Association,
17.000% with various maturities to 2012 ...... 912,640
10,000,000 Government Trust Certificates 9.250%, 11/15/01 . 10,680,500
31,227,000 Private Export Funding Corp. 9.500%, 3/31/99 ... 33,593,694
------------
160,933,482
------------
U.S. GOVERNMENT--51.3%
18,000,000 U.S. Treasury Note, 8.875%, 11/15/97 ........... 18,672,120
50,000,000 U.S. Treasury Note, 9.250%, 08/15/98 ........... 53,008,000
50,000,000 U.S. Treasury Note, 9.125%, 05/15/99 ........... 53,633,000
38,000,000 U.S. Treasury Note, 8.000%, 05/15/01 ........... 40,398,560
10,000,000 U.S. Treasury Bond, 7.125%, 02/15/23 ........... 10,107,800
------------
175,819,480
------------
Total Medium & Long Term Bonds and Notes
(Identified Cost $342,231,303) ............... 336,752,962
------------
SHORT-TERM INVESTMENT--0.1%
- --------------------------------------------------------------------------------
480,000 American Express Credit Corp. 5.25%, 7/01/96 ... 480,000
------------
Total Short-Term Investment
(Identified Cost $480,000) ................... 480,000
------------
Total Investments--98.4%
(Identified Cost $342,711,303) (c) ........... 337,232,962
Other assets less liabilities .................. 5,336,664
------------
Total Net Assets--100% ......................... $342,569,626
============
(a) See Note 1a to the financial statements.
(b) The Fund's investments in mortgage backed securities of
the Federal Home Loan Mortgage Corporation and
Government National Mortgage Association are interests
in separate pools of mortgages. All separate investments
in securities of these issuers which have the same
coupon rate have been aggregated for the purpose of
presentation in the schedule of investments.
(c) Federal Tax Information: At June 30,1996 the net
unrealized depreciation on investments based on cost for
federal income tax purposes of $342,711,303 was as
follows: Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ................................................. $ 613,786
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value .................................................... (6,092,127)
------------
Net unrealized depreciation .............................. $ (5,478,341)
============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
ASSETS
Investments at value ............................ $337,232,962
Cash ............................................ 569
Receivable for:
Fund shares sold .............................. 602,738
Dividends and interest ........................ 6,193,068
Miscellaneous ................................. 3,862
Prepaid registration expense .................... 11,000
------------
344,044,199
LIABILITIES
Payable for:
Fund shares redeemed .......................... $808,815
Dividends declared ............................ 401,877
Accrued expenses:
Management fees ............................... 179,894
Deferred trustees' fees ....................... 2,940
Other expenses ................................ 81,047
--------
1,474,573
------------
NET ASSETS ........................................ $342,569,626
============
Net Assets consist of:
Capital paid in ............................... $383,377,821
Undistributed net investment income ........... 312,694
Accumulated net realized losses ............... (35,642,548)
Unrealized depreciation on investments ........ (5,478,341)
------------
NET ASSETS ........................................ $342,569,626
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($311,977,719 divided by 27,040,638 shares
of beneficial interest) ......................... $11.54
======
Offering price per share (100/97 of $11.54) ....... $11.90*
======
Net asset value and offering price of Class B
shares ($18,123,288 divided by 1,573,094 shares
of beneficial interest) ......................... $11.52**
======
Net asset value and offering price of Class C
shares ($7,196,383 divided by 623,990 shares of
beneficial interest) ............................ $11.53
======
Net asset value and offering price of Class Y
shares ($5,272,236 divided by 456,029 shares of
beneficial interest) ............................ $11.56
======
Identified cost of investments .................... $342,711,303
============
* 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>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest .................................... $15,861,199
Expenses
Management fees ........................... $ 1,170,196
Service fees--Class A ..................... 588,715
Service and distribution fees--Class B .... 90,534
Service and distribution fees--Class C .... 32,875
Trustees' fees and expenses ............... 10,176
Accounting and administrative ............. 23,174
Custodian ................................. 57,107
Transfer agent ............................ 283,657
Audit and tax services .................... 11,000
Legal ..................................... 9,431
Printing .................................. 31,306
Registration .............................. 27,611
Miscellaneous ............................. 5,756
-----------
Total expenses .............................. 2,341,538
------------
Net investment income ....................... 13,519,661
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net .......................... (2,655,995)
Futures contracts--net .................... 236,769
Options contracts--net .................... (809,614)
-----------
Total realized loss on investments, options
and futures contracts ................... (3,228,840)
-----------
Unrealized depreciation on:
Investments--net .......................... (15,005,448)
-----------
Net loss on investment transactions ......... (18,234,288)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS .... $ (4,714,627)
============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30,
------------ ------------
FROM OPERATIONS
Net investment income ..................... $ 28,738,040 $ 13,519,661
Net realized loss on investments, options
and futures contracts ................... (3,099,077) (3,228,840)
Unrealized appreciation (depreciation) on
investments ............................. 23,699,408 (15,005,448)
------------ ------------
Increase (decrease) in net assets from
operations .............................. 49,338,371 (4,714,627)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................. (26,920,664) (12,250,746)
Class B ................................. (963,746) (600,965)
Class C ................................. (96,628) (216,484)
Class Y ................................. (343,941) (206,454)
In excess of net investment income
Class C ................................. (6,999) 0
------------ ------------
(28,331,978) (13,274,649)
------------ ------------
Decrease in net assets derived from capital
share transactions ...................... (55,882,399) (30,676,241)
------------ -----------
Total decrease in net assets .............. (34,876,006) (48,665,517)
NET ASSETS
Beginning of the period ................... 426,111,149 391,235,143
------------ ------------
End of the period ......................... $391,235,143 $342,569,626
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................... $ 400,474 $ 67,682
============ ============
End of the period ......................... $ 67,682 $ 312,694
============ ============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ................ $12.44 $12.86 $12.54 $12.49 $11.49 $12.10
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ...... 0.93 0.80 0.71 0.82 0.86 0.85
Net Realized and Unrealized
Gain (Loss) on Investments 0.69 (0.11) 0.08 (1.10) 0.59 (0.97)
------ ------ ------ ------ ------ ------
Total From Investment
Operations ............... 1.62 0.69 0.79 (0.28) 1.45 (0.12)
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ........ (0.94) (0.80) (0.71) (0.72) (0.84) (0.44)
Distributions in Excess of
Net Investment Income .... 0.00 0.00 (0.01) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains ... (0.26) (0.21) (0.12) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ........ (1.20) (1.01) (0.84) (0.72) (0.84) (0.44)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period ................... $12.86 $12.54 $12.49 $11.49 $12.10 $11.54
====== ====== ====== ====== ====== ======
Total Return (%) (b) ....... 13.8 5.7 6.4 (2.3) 13.0 (1.0)
Ratio of Operating Expenses
to Average Net Assets (%) (a) 1.25 1.16 1.14 1.18 1.22 1.24 (c)
Ratio of Net Investment
Income to Average Net
Assets (%) ............... 7.24 6.24 5.64 6.80 7.18 7.38 (c)
Portfolio Turnover Rate (%). 277 323 124 244 247 403 (c)
Net Assets, End of Period
(000) ...................... $271,966 $477,396 $562,164 $412,399 $361,520 $311,978
(a) Commencing May 18, 1989 through March 31,1992 expenses were voluntarily limited to 1.25% of average daily net assets.
(b) A sales charge of 3% maximum was not reflected in Class A total return calculations. Periods less than one year are not
annualized.
(c) Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------
SEPTEMBER 27(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 ................. $12.76 $12.49 $11.48 $12.09
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ....... 0.17 0.71 0.76 0.77
Net Realized and Unrealized
Gain (Loss) on Investments (0.24) (1.08) 0.61 (0.94)
------ ------ ------ ------
Total From Investment
Operations ................ (0.07) (0.37) 1.37 (0.17)
------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ......... (0.16) (0.64) (0.76) (0.40)
Distributions in Excess of
Net Investment Income ..... (0.01) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains .... (0.03) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions ......... (0.20) (0.64) (0.76) (0.40)
------ ------ ------ ------
Net Asset Value, End of
Period .................... $12.49 $11.48 $12.09 $11.52
====== ====== ====== ======
Total Return (%) (c) ........ (0.6) (2.9) 12.3 (1.5)
Ratio of Operating Expenses
to Average Net Assets (%) . 1.96 (b) 1.83 1.87 1.89 (b)
Ratio of Net Investment
Income to Average Net
Assets (%) ................ 4.30 (b) 6.15 6.53 6.72 (b)
Portfolio Turnover Rate (%) . 124 244 247 403 (b)
Net Assets, End of Period
(000) ..................... $6,221 $11,891 $18,056 $18,123
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) 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>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
CLASS C
------------------------------
YEAR
ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
------------ -------------
Net Asset Value, Beginning of Period ..... $11.48 $12.10
------ ------
Income From Investment Operations
Net Investment Income .................... 0.64 0.66
Net Realized and Unrealized Gain (Loss) on
Investments ............................ 0.64 (0.83)
------ ------
Total From Investment Operations ......... 1.28 (0.17)
------ ------
Less Distributions
Distributions From Net Investment Income . (0.65) (0.40)
Distributions in Excess of Net Investment
Income ................................. (0.01) 0.00
Distributions From Net Realized Capital
Gains .................................. 0.00 0.00
------ ------
Total Distributions ...................... (0.66) (0.40)
------ ------
Net Asset Value, End of Period ........... $12.10 $11.53
====== ======
Total Return (%) (b) ..................... 11.4 (1.5)
Ratio of Operating Expenses to Average Net
Assets (%) ............................. 1.87 1.89 (a)
Ratio of Net Investment Income to Average
Net Assets (%) ......................... 6.53 6.63 (a)
Portfolio Turnover Rate (%) .............. 247 403 (a)
Net Assets, End of Period (000) .......... $5,936 $7,196
(a) Computed on an annualized basis.
(b) Periods less than one year are not annualized.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
CLASS Y
-------------------------------------------------
MARCH 31(A) YEAR
THROUGH ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1994 1995 JUNE 30, 1996
------------ ------------ -------------
Net Asset Value,
Beginning of Period ... $12.11 $11.51 $12.13
------ ------ ------
Income From Investment Operations
Net Investment Income ... 0.71 0.86 0.87
Net Realized and Unrealized
Gain (Loss) on
Investments ........... (0.74) 0.63 (0.98)
------ ------ ------
Total From Investment
Operations ............ (0.03) 1.49 (0.11)
------ ------ ------
Less Distributions
Distributions From Net
Investment Income ..... (0.57) (0.87) (0.46)
Distributions in Excess
of Net Investment
Income ................ 0.00 0.00 0.00
Distributions From Net
Realized Capital
Gains ................. 0.00 0.00 0.00
------ ------ ------
Total Distributions ..... (0.57) (0.87) (0.46)
------ ------ ------
Net Asset Value, End of
Period ................ $11.51 $12.13 $11.56
====== ====== ======
Total Return (%) (c) .... (0.8) 13.3 (1.0)
Ratio of Operating
Expenses to Average
Net Assets (%) ........ 0.83 (b) 0.91 0.89 (b)
Ratio of Net Investment
Income to Average Net
Assets (%) ............ 7.15 (b) 7.53 7.72 (b)
Portfolio Turnover Rate
(%) ................... 244 247 403 (b)
Net Assets, End of
Period (000) .......... $1,822 $5,723 $5,272
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
(unaudited)
1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940 (the "1940 Act"), as amended, 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 Class A, Class B, Class C and Class Y shares. The Fund commenced
its public offering of Class B shares on September 27, 1993, Class C shares on
December 30, 1994 and of Class Y shares on March 31, 1994. Class A shares are
sold with a maximum front end sales charge of 3.00%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within five years of purchase. Class C shares do not pay a front
end or contingent deferred sales charge and do not convert to any class of
shares, but they do pay a higher ongoing distribution fee than Class A shares.
Class Y shares do not pay a front end sales charge, a contingent deferred sales
charge or distribution fees. They are intended for institutional investors with
a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro-rata by
the holders of all classes of shares, except that each class bears expenses
unique to that class (including the Rule 12b-1 service and distribution fees
applicable to such class), and votes as a class only with respect to its own
Rule 12b-1 Plan. Shares of each class would receive their pro-rata share of the
net assets of the Fund, if the Fund were liquidated. In addition, the Trustees
approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors, L.P.
("Back Bay Advisors"), under the supervision of the Fund's trustees, determines
the value of the Fund's portfolio of securities, using valuations provided by a
pricing service selected by Back Bay Advisors and other information with respect
to transactions in securities, including quotations from securities dealers.
Valuations of securities and other assets owned by the Fund for which market
quotations are readily available are based on those quotations. Short-term
obligations that will mature in 60 days or less are stated at amortized cost,
which, when combined with accrued interest or discount earned, approximates
market value. All other securities and assets are valued at their fair value as
determined in good faith by Back Bay Advisors under the supervision of the
Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income for the Fund is increased by the
accretion of discount. In determining net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and put
options on securities to manage its exposure to interest rates and the bond
market. Buying futures, writing puts, and buying calls tend to increase the
fund's exposure to the underlying instrument. Selling futures, buying puts, and
writing calls tend to decrease the fund's exposure to the underlying instrument,
or hedge other fund investments. When a fund writes a call or put option, an
amount equal to the premium received by the fund is included in the fund's
statement of assets and liabilities as an asset and as an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. The current value of a written
option is the closing price on the principal exchange on which such option is
traded. If an option which the fund has written either expires on its stipulated
expiration date, or if the fund enters into a closing purchase transaction, the
fund realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is extinguished. If a call option which the fund has written is
exercised, the fund realizes a capital gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a put option which the fund has written is exercised,
the amount of the premium originally received will reduce the cost of the
security which the fund purchases upon exercise of the option.
The premium paid by a fund for the purchase of a call or a put option is
included in the asset section of the fund's statement of assets and liabilities
as an investment and subsequently adjusted to the current market value of the
option. The current value of a purchased option is the closing price on the
principal exchange on which such option is traded. If an option which the fund
has purchased expires on the stipulated expiration date, the fund will realize a
loss in the amount of the cost of the option. If the fund enters into a closing
sale transaction, the fund will realize a gain or loss, depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. If the fund exercises a purchased put option, it will
realize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. If the fund
exercises a purchased call option, the cost of the security which the fund
purchases upon exercise will be increased by the premium originally paid.
The risk in writing a call option is that the fund relinquishes the opportunity
to profit if the market price of the underlying security increases and the
option is exercised. In writing a put option, the fund assumes the risk of
incurring a loss if the market price decreases and the option is exercised. In
addition, there is the risk the fund may not be able to enter into a closing
transaction because of an illiquid secondary market.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest rate
futures contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price (or to deliver an
amount of cash) on a future date. Upon entering into such a contract, the
purchasing fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange, currently up to $3,000 per
contract. Pursuant to the contract, the fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract.
Such receipts or payments are known as "variation margin," and are recorded by
the fund as unrealized gains or losses. When the contract is closed, the fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in the value of the hedged instruments. In addition,
there is a risk that the fund may not be able to close out its futures positions
due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
As of June 30, 1996 the fund had a net tax basis capital loss carryforward as
follows:
Expiring December 31, 2002 ...................................... $30,053,756
December 31, 2003 ...................................... 1,477,734
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to differing treatments for income recognition for mortgage-
backed securities. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Back Bay Advisors is responsible for determining that
the value of the collateral is at all times at least equal to the repurchase
price. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
Fund for the six months ended June 30, 1996 were as follows:
PURCHASES SALES
----------------------------------- -------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
---------------- ------------- --------------- ------------
$684,048,181 $34,591,703 $729,181,470 $16,778,016
Investments in written options and futures contracts for the Fund for the six
months ended June 30, 1996 are summarized as follows:
WRITTEN OPTIONS
------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1995 . 0 $ 0
Contracts opened .......... 2,710 1,078,017
Contracts closed .......... (2,710) (1,078,017)
----- -----------
Open at June 30, 1996 ..... 0 $ 0
===== ===========
FUTURES CONTRACTS
SALE OF FUTURES CONTRACTS
-------------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Open at December 31, 1995 . 0 $ 0
Contracts opened .......... 560 59,591,140
Contracts closed .......... (560) (59,591,140)
--- ------------
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 0.65% of the first $200 million
of the Fund's average daily net assets, 0.625% of the next $300 million and
0.60% of such assets in excess of $500 million. NEFM pays the Fund's
investment subadviser, Back Bay Advisors at the rate of 0.325% of the first
$200 million of the Fund's average daily net assets, 0.3125% of the next $300
million and 0.30% 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
- -----------
$585,098 New England Funds Management, L.P.
$585,098 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 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 $23,174 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
shares (the "Class A Plan") and Class B shares (the "Class B Plan") and Class C
shares (the "Class C Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. Also under the
Class A Plan, the Fund pays New England Funds a monthly distribution fee at the
annual rate of up to 0.10% 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 connection with the marketing or sale of Class A shares.
For the six months ended June 30, 1996, the Fund paid New England Funds $420,507
in service fees and $168,208 in distribution fees under the Class A Plan. If the
expenses of New England Funds that are otherwise reimbursable, as service fees
or distribution fees, respectively, under the Class A Plan incurred in any year
exceed the amounts of such fees payable by the Fund under the Class A Plan, the
unreimbursed amounts (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 expense carried forward into 1996
is $2,272,723 (reimbursable as distribution fees).
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B shares and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the six months ended June
30, 1996, the Fund paid New England Funds $22,634 and $8,219 in service fees
under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, 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 and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers who may be affiliated with New England Funds) incurred by New
England Funds in connection with the marketing or sale of Class B and Class C
shares. For the six months ended June 30, 1996, the Fund paid New England Funds
$67,900 and $24,656 in distribution fees under the Class B and Class C Plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1996 amounted to $282,691.
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 $207,374 as compensation for its services in that
capacity.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of Back Bay
Advisors, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer .................................... $2,301
Meeting Fee ........................................ $114/meeting
Committee Meeting Fee .............................. $68/meeting
Committee Chairman Annual Retainer ................. $185
A deferred compensation plan is available to the trustees on a voluntarily
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. CAPITAL SHARES. At June 30, 1996 there was an unlimited number of shares of
beneficial interest authorized, divided into four classes, Class A, Class B,
Class C and Class Y capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------------- -------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- --------- --------------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold ................... 3,171,114 $ 37,607,305 2,145,910 $ 25,340,904
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income ......... 1,847,952 21,921,032 855,156 10,040,328
---------- ------------- --------- ------------
5,019,066 59,528,337 3,001,066 35,381,232
Shares repurchased ............ (11,030,290) (130,336,285) (5,826,315) (68,406,263)
---------- ------------- --------- ------------
Net decrease .................. (6,011,224) $ (70,807,948) (2,825,249) $(33,025,031)
========== ============= ========= ============
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- --------- --------------- -------- ------------
Shares sold ................... 633,142 $ 7,488,380 291,980 $ 3,423,568
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income ......... 66,179 785,645 42,058 492,629
------- ----------- ------- -----------
699,321 8,274,025 334,038 3,916,197
Shares repurchased ............ (240,815) (2,850,637) (254,838) (2,979,676)
------- ------------- ------- -----------
Net increase .................. 458,506 $ 5,423,388 79,200 $ 936,521
======= =========== ======= ===========
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------------- -------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- --------- --------------- -------- ------------
Shares sold ................... 763,855 $ 9,083,684 784,993 $ 9,240,130
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income ......... 6,338 76,069 14,536 170,445
------- ----------- ------- -----------
770,193 9,159,753 799,529 9,410,575
Shares repurchased ............ (279,634) (3,318,226) (666,098) (7,813,764)
------- ----------- ------- -----------
Net increase .................. 490,559 $ 5,841,527 133,431 $ 1,596,811
======= =========== ======= ===========
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------------- --------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- --------- --------------- --------- -----------
Shares sold ................... 335,944 $ 3,928,529 37,213 $ 446,850
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income ......... 28,675 341,684 17,876 210,282
--------- ------------ --------- ------------
364,619 4,270,213 55,089 657,132
Shares repurchased ............ (51,079) (609,579) (70,936) (841,674)
--------- ------------ --------- ------------
Net increase (decrease) ....... 313,540 $ 3,660,634 (15,847) $ (184,542)
========= ============ ========= ============
Decrease derived from capital
shares transactions ......... (4,748,619) $(55,882,399) (2,628,465) $(30,676,241)
========= ============ ========= ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REGULAR INVESTING PAYS
- --------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets
2. It's convenient and effortless
3. It requires a low minimum to get started
4. It can help you reach important long-term goals like
retirememt or college funding
5. It can help you benefit from the ups and downs of the market
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $50 a month in your New England Fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
THE POWER OF MONTHLY INVESTING
[A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:]
Monthly investments of $50
Years Growth of Monthly Investments
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high.
You can start an Investment Builder program with your current New England Fund
account, or with any of our other funds. To open an Investment Builder account
today, call your financial representative or New England Funds at
1-800-225-5478.
<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>
- -----------------------------------------------------------------------------
INFORMATION ON CALL
- -----------------------------------------------------------------------------
YOU CAN CALL NEW ENGLAND FUNDS DAY OR NIGHT
Do you like to keep on top of your New England Funds but can't always
call us during regular business hours? With Tele#Facts, New England Funds'
24-hours a day automated telephone system, you can call us any time that's
convenient for you -- day or night!
By calling 1-800-346-5984 from any Touch-Tone(R) telephone, you can:
o Check the current value of your New England Fund account
o Find out the current yield and total return on any New England Fund
o Buy, sell or exchange fund shares
Just remember to have these four items with you before calling:
1. YOUR PERSONAL IDENTIFICATION NUMBER which is the last four digits of your
Social Security number
2. THE FUND NUMBER -- two- or three-digit number listed on the Tele#Facts
wallet card
3. FUNCTION NUMBER -- listed on the Tele#Facts wallet card
4. ACCOUNT NUMBER -- listed on all your statements
You can get the information you need to use Tele#Facts from the back of your
statement. If you need another Tele#Facts wallet card or have questions about
getting started, please call us at 1-800-225-5478.
So go ahead and give Tele#Facts a try. We think you'll enjoy this easy-to-use
and convenient service from New England Funds!
<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>
[LOGO] --------------
NEW ENGLAND FUNDS BULK RATE
Where The Best Minds Meet(TM) U.S. POSTAGE
PAID
BROCKTON, MA
PERMIT NO. 770
--------------
- ---------------------
399 Boylston Street
Boston, Massachusetts
02116
- ---------------------
[LOGO: DALBAR SEAL]
LT58-0896
[symbol] Printed on Recycled Paper
