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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
ADJUSTABLE RATE
U.S. GOVERNMENT
FUND
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JUNE 30, 1996
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<PAGE>
July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Adjustable Rate U.S. Government Fund,
containing your portfolio manager commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first
half of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic
growth, remained strong at 2.3% through June, just shy of what most economists
consider optimal growth. As a result, the Federal Reserve Board opted not to
tinker with interest rates through the first half of the year, save for a
quarter-point ease in short-term rates in late January. The relatively calm
economic waters had a stimulating effect on the domestic equity market, boosting
stocks 537 points to 5,654 at the end of June, as measured by the Dow Jones
Industrial Average. Bond yields did not fare as well, rising to 7.00% at the end
of June from 6.65% earlier in the year. Money market yields remained stable,
falling back only slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of
the Dow Jones Industrial Average's first-half gains. Again, we are reminded that
no bull market lasts forever. Long-term financial goals are key in times like
these and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A
financial representative can guide you through volatile markets and help you
meet your long-term financial goals. A recent study by Dalbar, Inc., a mutual
fund monitoring and analytical service, shows that, on average, mutual fund
investors who bought and held shares, with the assistance of a financial
representative, enjoyed the benefits of a long-term commitment. Consequently,
they benefitted from higher returns than direct investors and others who bought
and sold, although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our
most popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds marked their first and second birthdays, respectively. We're proud of all
of our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow
moderately and that inflationary pressures will not be excessive. While we
estimate the GDP may rise somewhat from its current level of 2.3%, the Federal
Reserve should be reluctant to tighten the money supply by raising short-term
interest rates. We also believe that the equity markets will continue to be
volatile through the rest of the year.
We believe that you will find your portfolio manager commentary informative.
If you have any questions or comments, please contact your financial
representative or New England Funds directly at 800-225-5478.
Sincerely,
/s/Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
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NEW ENGLAND ADJUSTABLE RATE U.S. GOVERNMENT FUND
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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 Fund compared to the Lehman Adjustable Rate Mortgage
Index and the Cost of living since 10/18/91 (the Fund's date of inception). The
data points for this chart are as follows:]
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A $10,000 INVESTMENT IN CLASS A SHARES
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ARM ARM Lehman Cost of
Year NAV POP ARM Living
- -------- ------- ------- ------- -------
10/18/91 $10,000 $9,700 $10,000 $10,000
1992 $10,282 $9,974 $10,285 $10,167
1993 $10,789 $10,465 $10,956 $10,471
1994 $10,936 $10,608 $11,037 $10,697
1995 $11,588 $11,241 $11,959 $11,000
1996 $12,243 $11,876 $12,714 $11,296
- --------------------------------------------------------------------------------
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
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AVERAGE ANNUAL TOTAL RETURNS 6/30/96
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CLASS A (Inception 10/18/91) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 5.65% 4.31% 4.67%
With Max. Sales Charge(2) 4.65 3.94 4.43
Lehman ARM Index(4) 6.31 4.93 n/a
Lipper ARM Average(6) 3.30 4.04 n/a
CLASS B (Inception 9/13/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 4.87% 3.49%
With CDSC(3) 0.88 2.50
Lehman ARM Index(4) 6.31 4.93
Lipper ARM Average(6) 3.30 n/a
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. Class Y shares are available only to certain institutional
investors. Share price and return may vary.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 1% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) Lehman Adjustable Rate Mortgage Index (ARM) is an unmanaged index of
adjustable rate mortgages of short to intermediate maturities. The Index
performance has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
<PAGE>
[Photo of Scott Nicholson]
NEW ENGLAND ADJUSTABLE RATE
U.S. GOVERNMENT FUND
Manager: Scott Nicholson
Back Bay Advisors, L.P.
Economic Overview
The interest rate environment during the first half of 1996 was notable for its
high level of volatility. Economic releases presented conflicting views as to
the strength of the domestic economy, and political events in Washington raised
and then dampened hopes of imminent fiscal policy reform.
Based on a fourth quarter Gross Domestic Product (GDP) rise of only 0.5% and a
January economy plagued by severe winter storms, the Federal Reserve lowered
short-term interest rates to 5.25% in late January. This decrease along with the
expectation of further rate cuts, pushed the one-year Treasury bill yield to
4.79% and the ten-year Treasury note to 5.53% by mid-February. However, with the
return of milder weather and the end of the General Motors strike, economic
activity picked up significantly, resulting in a respectable first quarter gain
GDP of 2.2%. At this point, the market's outlook for Federal Reserve policy
turned to neutral, with the one-year bill and ten-year note yields falling to
5.41% and 6.34%, respectively.
The second quarter saw continued expansion as the important housing and
automobile sectors remained strong despite the pressures of higher interest
rates. Job growth was surprisingly solid in spite of the ongoing trend toward
downsizing in many prominent corporations, and wage pressures began to appear in
certain industries and certain areas of the country. In addition, expectations
of a fiscal drag on the economy through a balanced budget agreement evaporated
as Washington returned to politics as usual. With second quarter GDP growth
expected to move above the current trend, the interest rate outlook has come
full circle. Participants are now expecting an imminent Federal Reserve
tightening and have significantly backed up rates to a point where the one-year
bill and ten-year note are yielding 5.95% and 7.02%, respectively.
How We Managed Your Fund
Based on our expectations for lower interest rates in the first quarter of the
year, we began 1996 with an adjustable rate mortgage (ARM) weighting in the
portfolio of only 67.4%, at the lower end of the prospectus range of 65% to
100%. We were concerned that continued rapid prepayment speeds caused by falling
fixed mortgage rates would erode our income stream while limiting principal
appreciation. Therefore, we chose to concentrate a larger portion of our
investments in U.S. Treasury Notes (23.5%).
However, with the reversal in market psychology late in the first quarter and
coincident lessening of prepayment fears, we began to allocate more funds to
ARMs while reducing both the size and duration of our Treasury note position. By
the end of March, the portfolio contained 81.8% ARMs and 10.7% Treasury notes.
Similar allocations were maintained throughout most of the second quarter.
Outlook
As the second quarter was coming to a close, we reduced our ARM allocation to
75.1%, raising our combined short Treasury note and cash position to 19.9%, and
providing added liquidity in a time of uncertainty about the ultimate extent of
the backup in interest rates. However, our outlook for the longer term is fairly
positive; we believe that the Federal Reserve will not have to repeat the
aggressive tightening moves of 1994, and that further increases in rates should
be moderate and measured over time. Although higher interest rates would cause
some erosion in ARM principal values, their effect should be offset to a great
degree by slowing prepayment speeds. The expected reduction in prepayments
should also increase our income flows and, we hope, allow us to increase our
distribution rate.
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YOUR FUND'S PORTFOLIO ALLOCATION 6/30/96*
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Total ARM Securities 75.1%
U.S. Treasury Notes 16.2%
Net Cash/Equivalent 3.7%
Newslice FHLB Callable Notes 3.4%
Collateralized mortgage obligations 1.6%
*Portfolio composition is based on total net assets and is subject to change.
<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 - 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.
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[LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
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NEW ENGLAND
ADJUSTABLE RATE
U.S. GOVERNMENT
FUND
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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)
BONDS AND NOTES--97.0% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
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<S> <C> <C>
GOVERNMENT AGENCIES (B)--79.1%
$ 5,000,000 Federal Home Loan Bank, 6.070%, 3/25/99 (d) ............................... $ 4,924,300
5,000,000 Federal Home Loan Bank, 6.370%, 12/18/01 (d) .............................. 4,879,000
1,991,970 Federal Home Loan Mortgage Corp., 7.000%, 2/01/16, (d) .................... 2,039,279
381,693 Federal Home Loan Mortgage Corp., 6.184%, 12/01/17, (d) ................... 375,968
4,082,238 Federal Home Loan Mortgage Corp., 7.768%, 1/01/19, (d) .................... 4,209,808
515,235 Federal Home Loan Mortgage Corp., 6.124%, 2/01/19, (d) .................... 507,829
1,372,183 Federal Home Loan Mortgage Corp., 6.732%, 4/01/19, (d) .................... 1,367,037
3,920,220 Federal Home Loan Mortgage Corp., 7.624%, 5/01/19, (d) .................... 4,032,926
6,125,143 Federal Home Loan Mortgage Corp., 7.284%, 1/01/20, (d) .................... 6,280,186
1,923,244 Federal Home Loan Mortgage Corp., 7.875%, 10/01/21, (d) ................... 1,971,325
1,597,706 Federal Home Loan Mortgage Corp., 7.750%, 1/01/22, (d) .................... 1,654,624
4,504,504 Federal Home Loan Mortgage Corp., 7.504%, 3/01/22, (d) .................... 4,604,447
3,526,299 Federal Home Loan Mortgage Corp., 7.000%, 4/01/22, (d) .................... 3,614,457
2,603,237 Federal Home Loan Mortgage Corp., 7.029%, 4/01/22, (d) .................... 2,648,794
3,100,373 Federal Home Loan Mortgage Corp., 7.351%, 5/01/22, (d) .................... 3,212,762
2,455,518 Federal Home Loan Mortgage Corp., 7.161%, 6/01/22, (d) .................... 2,524,580
1,792,780 Federal Home Loan Mortgage Corp., 7.183%, 6/01/22, (d) .................... 1,840,961
1,617,964 Federal Home Loan Mortgage Corp., 7.315%, 6/01/22, (d) .................... 1,648,301
1,832,556 Federal Home Loan Mortgage Corp., 8.250%, 7/01/22, (d) .................... 1,898,987
4,084,000 Federal Home Loan Mortgage Corp., 7.844%, 8/01/22, (d) .................... 4,232,045
1,372,722 Federal Home Loan Mortgage Corp., 7.875%, 8/01/22, (d) .................... 1,407,040
2,751,913 Federal Home Loan Mortgage Corp., 8.043%, 8/01/22, (d) .................... 2,839,630
1,420,340 Federal Home Loan Mortgage Corp., 7.965%, 9/01/22, (d) .................... 1,458,511
3,680,639 Federal Home Loan Mortgage Corp., 7.875%, 12/01/22, (d) ................... 3,781,856
2,893,017 Federal Home Loan Mortgage Corp., 7.687%, 1/01/23, (d) .................... 2,951,782
3,485,123 Federal Home Loan Mortgage Corp., 7.156%, 4/01/23, (d) .................... 3,587,499
3,607,533 Federal Home Loan Mortgage Corp., 7.284%, 5/01/23, (d) .................... 3,672,919
5,077,094 Federal Home Loan Mortgage Corp., 7.385%, 5/01/23 (d) ..................... 5,229,407
7,137,016 Federal Home Loan Mortgage Corp., 7.863%, 9/01/23 (d) ..................... 7,302,095
3,532,610 Federal Home Loan Mortgage Corp., 7.917%, 9/01/23, (d) .................... 3,651,835
5,000,000 Federal Home Loan Mortgage Corp., 7.828%, 10/01/23 (d) .................... 5,112,500
3,933,072 Federal Home Loan Mortgage Corp., 7.375%, 8/01/24, (d) .................... 4,046,147
8,922,036 Federal Home Loan Mortgage Corp., 7.757%, 9/01/24, (d) .................... 9,256,612
6,632,500 Federal Home Loan Mortgage Corp., 7.775%, 4/01/25, (d) .................... 6,825,257
6,142,454 Federal Home Loan Mortgage Corp., 7.255%, 4/01/29 (d) ..................... 6,283,546
787,517 Federal Home Loan Mortgage Corp., 6.405%, 7/01/30, (d) .................... 798,345
1,575,680 Federal Home Loan Mortgage Corp., 6.299%, 10/01/30, (d) ................... 1,554,015
1,279,989 Federal National Mortgage Association, 6.500%, 6/01/17, (d) ............... 1,272,789
1,607,343 Federal National Mortgage Association, 7.690%, 7/01/17, (d) ............... 1,658,577
347,449 Federal National Mortgage Association, 7.506%, 8/01/17, (d) ............... 356,787
2,146,413 Federal National Mortgage Association, 7.532%, 12/01/17, (d) .............. 2,209,463
7,918,245 Federal National Mortgage Association, 8.000%, 10/01/18, (d) .............. 8,244,873
661,748 Federal National Mortgage Association, 6.814%, 6/01/19, (d) ............... 663,402
2,227,351 Federal National Mortgage Association, 6.563%, 7/01/19, (d) ............... 2,213,430
1,698,386 Federal National Mortgage Association, 6.949%, 1/01/20, (d) ............... 1,711,124
613,538 Federal National Mortgage Association, 7.512%, 5/01/20, (d) ............... 630,026
2,951,434 Federal National Mortgage Association, 7.429%, 9/01/20, (d) ............... 3,034,443
3,196,323 Federal National Mortgage Association, 7.604%, 11/01/20, (d) .............. 3,306,197
2,019,069 Federal National Mortgage Association, 7.224%, 5/01/22, (d) ............... 2,079,641
4,520,763 Federal National Mortgage Association, 7.506%, 6/01/22, (d) ............... 4,676,164
3,786,476 Federal National Mortgage Association, 7.934%, 11/01/22, (d) .............. 3,930,836
2,959,034 Federal National Mortgage Association, 7.220%, 4/01/23, (d) ............... 3,029,311
2,089,180 Federal National Mortgage Association, 7.882%, 7/01/23, (d) ............... 2,132,269
545,963 Federal National Mortgage Association, 5.874%, 9/01/23, (d) ............... 541,186
4,085,304 Federal National Mortgage Association, 7.587%, 10/01/23 (d) ............... 4,172,117
3,805,028 Federal National Mortgage Association, 7.755%, 1/01/24 (d) ................ 3,954,851
5,397,840 Federal National Mortgage Association, 7.528%, 4/01/24, (d) ............... 5,542,907
464,035 Federal National Mortgage Association, 6.700%, 1/01/29, (d) ............... 454,754
3,860,113 Government National Mortgage Association, 7.375%, 4/20/16, (d) ............ 3,939,728
5,946,746 Government National Mortgage Association, 7.000%, 4/20/22, (d) ............ 6,017,363
3,895,776 Government National Mortgage Association, 7.375%, 6/20/22, (d) ............ 3,946,908
7,080,084 Government National Mortgage Association, 7.375%, 5/20/23, (d) ............ 7,137,610
4,180,820 Government National Mortgage Association, 7.375%, 6/20/23, (d) ............ 4,214,789
8,894,761 Government National Mortgage Association, 7.250%, 7/20/23, (d) ............ 8,967,032
6,443,420 Government National Mortgage Association, 6.500%, 11/20/25 (d) ............ 6,491,745
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224,756,934
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CMO--1.6%
4,689,674 Federal Home Loan Mortgage Pc Guaranteed, 6.170%, 10/15/23, (d) ........... 4,672,041
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U.S. GOVERNMENT--16.3%
5,000,000 United States Treasury Notes, 7.875%, 7/15/96 ............................. 5,005,650
10,000,000 United States Treasury Notes, 8.500%, 4/15/97 ............................. 10,211,500
15,000,000 United States Treasury Notes, 7.375%, 11/15/97 ............................ 15,272,100
15,000,000 United States Treasury Notes, 9.000%, 5/15/98 ............................. 15,756,750
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46,246,000
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Total Bonds and Notes (Identified Cost $277,787,864) ...................... 275,674,975
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SHORT TERM INVESTMENT--3.7%
10,600,000 Repurchase agreement with Goldman Sachs Group L.P. dated 06/28/96 at 5.35%
to be repurchased at $10,604,726 on 07/01/96. Collateralized by
$10,400,000 U.S. Treasury Bonds 7.625% due 11/15/22 valued at $10,826,140 10,600,000
------------
Total Short Term Investment (Identified Cost $10,600,000) ................ 10,600,000
------------
Total Investments--100.7% (Identified Cost $288,387,864) (c) ............. 286,274,975
Other assets less liabilities ........................................... (1,946,736)
------------
Total Net Assets--100% ................................................... $284,328,239
============
<FN>
(a) See Note 1a to the financial statements.
(b) The Fund's investments in mortgage backed securities of the Government National
Mortgage Association, Federal Home Loan Bank and Federal National Mortgage
Association are interests in separate pools of mortgages. All separate investments
in securities of these issues which have the same coupon rate have been aggregated
for the purpose of presentation in the schedule of investments.
(c) Federal Tax Information: At June 30, 1996 the net unrealized depreciation on
investments based on cost for federal income tax purposes of $288,387,864 was as
follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess value over tax cost ........................................................ $ 610,104
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ..................................................... (2,722,993)
------------
Net unrealized depreciation ....................................................... $ (2,112,889)
============
As of December 31, 1995 the fund has a net tax basis capital loss carry forward as
follows:
Expiring December 31, 2002 ........................................................ $ 5,625,994
December 31,2003 ......................................................... $ 6,075,626
(d) Variable rate mortgage backed securities. The interest rates change on these
instruments monthly based on changes in a designated base rate. The rates shown were
those in effect at June 30, 1996.
</FN>
</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 ......................... $286,274,975
Cash ......................................... 33,647
Receivable for:
Fund shares sold ........................... 20,288
Securities sold ............................ 83,316
Accrued interest ........................... 6,306,823
Unamortized organization cost .............. 4,419
Prepaid registration expense ................. 7,000
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292,730,468
LIABILITIES
Payable for:
Fund shares redeemed ....................... $7,391,973
Dividends declared ......................... 735,247
Accrued expenses:
Management fees ............................ 204,800
Deferred trustees' fees .................... 1,723
Other expenses ............................. 68,486
-------
8,402,229
------------
NET ASSETS ..................................... $284,328,239
============
Net Assets consist of:
Capital paid in ............................ $299,937,890
Undistributed net investment income ........ 1,068,587
Accumulated net realized losses ............ (14,565,349)
Unrealized depreciation on investments ..... (2,112,889)
-----------
NET ASSETS ..................................... $284,328,239
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($281,823,292 divided by 38,381,535
shares of beneficial interest) ............... $7.34
=====
Offering price per share (100/99 of $7.34) ..... $7.41*
=====
Net asset value and offering price of Class B
shares $2,504,947 divided by 341,214 shares of
beneficial interest) ......................... $7.34**
=====
Identified cost of investments ................. $288,387,864
============
*Based upon single purchases of less than $1,000,000. Reduced sales charges
apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF OPERATIONS
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Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest ................................. $11,053,939
Expenses
Management fees ........................ $ 829,063
Service fees--Class A .................. 383,814
Service and distribution fees--Class B . 12,356
Trustees' fees and expenses ............ 10,854
Accounting and administrative .......... 22,895
Custodian .............................. 47,957
Transfer agent ......................... 90,752
Audit and tax services ................. 11,000
Legal .................................. 9,409
Printing ............................... 14,826
Registration ........................... 21,571
Amortization of organization expenses .. 7,007
Miscellaneous .......................... 5,101
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Total expenses ........................... 1,466,605
Less expenses waived by the investment
adviser and subadviser ................. (374,033) 1,092,572
---------- -----------
Net investment income .................... 9,961,367
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Realized loss on Investments--net ........ (1,729,253)
Unrealized depreciation on Investments--net (880,826)
----------
Net loss on investment transactions ...... (2,610,079)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS . $ 7,351,288
===========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
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FROM OPERATIONS
Net investment income ..................... $ 26,292,012 $ 9,961,367
Net realized loss on investments .......... (9,361,220) (1,729,253)
Unrealized appreciation (depreciation) on
investments ............................. 18,622,227 (880,826)
------------ -------------
Increase in net assets from operations .... 35,553,019 7,351,288
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................. (24,684,115) (8,628,126)
Class B ................................. (112,561) (60,275)
------------ -------------
(24,796,676) (8,688,401)
------------ -------------
Decrease in net assets derived from capital
share transactions ...................... (168,968,965) (47,815,046)
------------ -------------
Total decrease in net assets .............. (158,212,622) (49,152,159)
NET ASSETS
Beginning of the period ................... 491,693,020 333,480,398
------------ -------------
End of the period ......................... $333,480,398 $ 284,328,239
============ =============
(OVER)/UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................... $ 313,893 $ (204,379)
============ =============
End of the period ......................... $ (204,379) $ 1,068,587
============ =============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
OCTOBER 18(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning $7.50 $7.50 $7.46 $7.45 $7.20 $7.37
----- ----- ----- ----- ----- -----
Income From Investment Operations
Net Investment Income ...... 0.09 0.42 0.33 0.37 0.47 0.41
Net Realized and Unrealized
Gain (Loss) on Investments 0.00 (0.06) (0.03) (0.31) 0.14 (0.23)
----- ----- ----- ----- ----- -----
Total From Investment
Operations ............... 0.09 0.36 0.30 0.06 0.61 0.18
----- ----- ----- ----- ----- -----
Less Distributions
Distributions From Net
Investment Income ........ (0.09) (0.40) (0.31) (0.31) (0.44) (0.21)
----- ----- ----- ----- ----- -----
Total Distributions ........ (0.09) (0.40) (0.31) (0.31) (0.44) (0.21)
----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period ................... $7.50 $7.46 $7.45 $7.20 $7.37 $7.34
===== ===== ===== ===== ===== =====
Total Return (%) (d) ....... 1.2 4.9 4.0 0.8 8.6 2.5
Ratio of Operating Expenses
to Average Net
Assets (%) (b) ........... 0.50 (c) 0.57 0.60 0.60 0.66 0.70 (c)
Ratio of Net Investment
Income to Average
Net Assets (%) ........... 6.43 (c) 5.39 4.39 4.85 6.29 6.41 (c)
Portfolio Turnover Rate (%). 52 (c) 49 54 17 73 68 (c)
Net Assets, End of Period
(000) .................... $60,684 $294,687 $734,251 $489,637 $331,112 $281,823
<FN>
(a) Commencement of operations.
(b) Commencing June 1, 1995 expenses were voluntarily limited to 0.70% of Class A average net assets. From May 1, 1995
through June 1, 1995 expenses were voluntarily limited to 0.65% of Class A average net assets. See Note 4. The ratio
of operating expenses to average net assets without giving effect to this expense limitation would have been 0.89%
for the year ended December 31, 1995 and 0.94% for the six months ended June 30, 1996. From April 1, 1992 through
May 1, 1995 expenses were voluntarily limited to 0.60% of Class A average net assets. The ratio of operating
expenses to average net assets without giving effect to this expense limitation would have been 0.96%, 0.86% and
0.88% for the years ended December 31, 1992, 1993 and 1994, respectively. From October 19, 1991 through March 31,
1992, expenses were voluntarily limited to 0.50% of average net assets. The ratio of operating expenses to average
net assets without giving effect to this expense limitation would have been 1.26% for the period ended December 31,
1991.
(c) Computed on an annualized basis.
(d) A sales charge of 1.00% (maximum) is not reflected in total return calculations. Periods less than one year are not
annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
(unaudited)
CLASS B
------------------------------------------------------
SEPTEMBER
13(A) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
----------- ------------ ----------- --------------
Net Asset Value,
Beginning of Period .. $7.52 $7.45 $7.20 $7.37
----- ----- ----- -----
Income From Investment
Operations
Net Investment Income . 0.08 0.29 0.41 0.41
Net Realized and
Unrealized Gain (Loss)
on Investments ....... (0.08) (0.29) 0.14 (0.26)
----- ----- ----- -----
Total from Investment
Operations ........... 0.00 0.00 0.55 0.15
----- ----- ----- -----
Less Distributions
Distributions From Net
Investment Income .... (0.07) (0.25) (0.38) (0.18)
----- ----- ----- -----
Total Distributions ... (0.07) (0.25) (0.38) (0.18)
----- ----- ----- -----
Net Asset Value,
End of Period ........ $7.45 $7.20 $7.37 $7.34
===== ===== ===== =====
Total Return (%) (d) .. 0.0 0.1 7.8 2.1
Ratio of Operating
Expenses to Average
Net Assets (%) (d) ... 1.35 (c) 1.35 1.41 1.45 (c)
Ratio of Net Investment
Income to Average
Net Assets (%) ....... 3.50 (c) 4.10 5.54 5.67 (c)
Portfolio Turnover
Rate (%) ............. 54 17 73 68 (c)
Net Assets, End of
Period (000) ......... $855 $2,056 $2,368 $2,505
(a) Commencement of operations.
(b) Commencing June 1,1995 expenses were voluntarily limited to 1.45% of Class
B average net assets. From May 1, 1995 through June 1, 1995 expenses were
voluntarily limited to 1.40% of Class B average net assets. See Note 4.
The ratio of operating expenses to average net assets without giving
effect to this expense limitation would have been 1.65% for the year ended
December 31, 1995 and 1.69% for the six months ended June 30, 1996. From
September 13, 1993 through May 1, 1995 expenses were voluntarily limited
to 1.35% of Class B average net assets. The ratio of operating expenses
for Class B shares would have been 1.61% for the period ended December 31,
1993, 1.63% for the year ended December 31, 1994.
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
See accompanying notes to financial statements.
<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, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 13, 1993. Class A shares are sold with
a maximum front end sales charge of 1.00%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within five years of purchase. Expenses of the Fund are borne
pro-rata by the holders of both classes of shares, except that each class
bears expenses unique to that class (including the Rule 12b-1 service and
distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 Plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors,
L.P. ("Back Bay Advisors"), under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Back Bay Advisors and other
information with respect to transactions in securities, including quotations
from securities dealers. Valuations of securities and other assets owned by
the Fund for which market quotations are readily available are based on those
quotations. Short-term obligations that will mature in 60 days or less are
stated at amortized cost, which, when combined with accrued interest or
discount earned, approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Back Bay
Advisors under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion
of discount. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to differing treatments for income recognition for mortgage-
backed securities. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid in capital.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
F. ORGANIZATION EXPENSE. Costs incurred in 1991 in connection with the Fund's
organization and initial registration, amounting to $57,650, were paid by the
Fund and are being amortized over 60 months beginning October 18, 1991.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the six months ended June 30, 1996 were as follows:
PURCHASES SALES
--------------- ---------------
U.S. GOVERNMENT U.S. GOVERNMENT
--------------- ---------------
$99,613,885 $123,840,368
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays management fees to its investment adviser, New England Funds
Management L.P. ("NEFM") at the annual rate of 0.55% of the first $200 million
of the Fund's average daily net assets, 0.51% of the next $300 million and
0.47% of such assets in excess of $500 million. NEFM pays the Fund's
investment subadviser, Back Bay Advisors at the rate of 0.275% of the first
$200 million of the Fund's average daily net assets, 0.255% of the next $300
million and 0.235% of such assets in excess of $500 million. Certain officers
and directors of NEFM and Back Bay Advisors are also officers or trustees of
the Fund. NEFM and Back Bay Advisors are wholly owned subsidiaries of New
England Investment Companies, L.P. ("NEIC"), which is a subsidiary of New
England Mutual Life Insurance Company. Fees earned by NEFM and Back Bay
Advisors under the management agreement in effect during the six months ended
June 30, 1996 are as follows:
FEES EARNED
- -----------
$414,531 (a) New England Funds Management, L.P.
$414,532 (a) Back Bay Advisors, L.P.
(a) Before reduction pursuant to voluntary expense limitations. See Note 4.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the Fund,
(ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices,
proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the six months ended June 30, 1996 these expenses
amounted to $22,895 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares
(the "Class A Plan") and a Service and Distribution Plan relating to the
Fund's Class B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1996, the Fund paid New England Funds $383,814 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(together with unreimbursed amounts from prior years) may be carried forward
for reimbursement in future years in which the Class A Plan remains in effect.
The amount of unreimbursed expenses carried forward into 1996 is $1,929,283.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class B shares, as compensation for services provided and
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class B shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1996, the Fund paid
New England Funds $3,089 in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who
may be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the six months
ended June 30, 1996, the Fund paid New England Funds $9,267 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the six months
ended June 30, 1996 amounted to $43,512.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1996, the Fund
paid New England Funds $55,045 as compensation for its services in that
capacity.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of Back Bay Advisors, New England Funds, NEIC or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $2,194
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $156/year
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Commencing June 1, 1995 and until further notice to
the Fund, Back Bay Advisors and New England Funds Management, L.P. have
voluntarily agreed to reduce management fees in order to limit the Fund's
expenses to an annual rate of 0.70% of the Fund's Class A average daily net
assets and, 1.45% of Class B average daily net assets. From May 1, 1995
through June 1, 1995 expenses were voluntarily limited to 0.65% of Class A
average net assets and 1.40% of Class B average net assets. From April 1, 1992
through May 1, 1995 expenses were voluntarily limited to 0.60% of Class A
average net assets and 1.35% of Class B average net assets. Prior to April 1,
1992 the Fund's expenses were subject to a 0.50% voluntary expense limitation
agreed to by both Back Bay Advisors and New England Funds. As a result of the
Fund's expenses exceeding the applicable voluntary expense limitation during
the six months ended June 30, 1996, Back Bay Advisors reduced its management
fee of $414,532 by $187,016 and New England Funds Management, L.P. reduced its
management fee of $414,531 by $187,017.
5. CAPITAL SHARES. At June 30, 1996 there was an unlimited number of shares
of beneficial interest authorized, divided into Two classes, Class A and Class
B capital stock. Transactions in capital shares were as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------- -------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------- ---------- -----------
Shares sold ......... 10,139,660 $ 74,377,759 4,872,794 $ 35,890,632
Shares issued in
connection with the
reinvestment of:
Distributions from
net investment
income ............ 1,309,593 9,615,221 498,183 3,667,653
---------- ------------ ---------- ------------
11,449,253 83,992,980 5,370,977 39,558,285
Shares repurchased ..(34,512,776) (253,225,090) (11,888,346) (87,522,114)
---------- ------------ ---------- ------------
Net increase
(decrease) .........(23,063,523) $(169,232,110) (6,517,369) $(47,963,829)
---------- ------------- ---------- ------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------- ---------- -----------
Shares sold ......... 229,537 $ 934,154 70,809 $ 522,246
Shares issued in
connection with the
reinvestment of:
Distributions from
net investment
income ............ 6,052 95,443 7,051 51,890
---------- ------------- ---------- ------------
235,589 1,029,597 77,860 574,136
Shares repurchased .. (65,035) (766,452) (57,835) (425,353)
---------- ------------- ---------- ------------
Net increase
(decrease) ......... 170,554 $ 263,145 20,025 $ 148,783
---------- ------------- ---------- ------------
Increase (decrease)
derived from
capital share
transactions ...... (22,892,969) $(168,968,965) (6,497,344) $(47,815,046)
========== ============= ========= ============
<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>
- -----------------------------------------------------------------------------
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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PAID
BROCKTON, MA
PERMIT NO. 770
--------------
- ---------------------
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