<PAGE>
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SEMIANNUAL REPORT
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[LOGO](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- -------------------------------------------------------------------------------
New England
Massachusetts Tax Free
Income Fund
[Graphic omitted]
- ----------------
June 30, 1997
- ----------------
<PAGE>
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AUGUST 1997
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DEAR NEW ENGLAND FUNDS SHAREHOLDER,
[Photo of Henry L.P. Schmelzer]
Spurred by bright economic prospects, the broader U.S. stock market continued
its record run during the first half of the year, experiencing only short-lived
setbacks along the way. These fresh gains come on top of significant increases
in 1995 and 1996, leaving many investors wary of what might come next. Bond
markets, meanwhile, contended with some volatility in interest rates, but have
been relatively stable this year.
Building a portfolio for variable markets
Investors should not abandon well-conceived financial programs for fear of a
down market. Whether today's market levels are excessive -- only hindsight will
tell. So you should remain patient and realistic, alert to the possibility of
periodic market declines. Consultation with your financial representative should
be a regular part of your planning. Your representative can help you take
prudent steps to adjust your portfolio, whatever the next trend may bring.
Strategic initiatives deliver shareholder benefits
Four years ago New England Funds embarked on a new strategic direction.
Expressed in our corporate slogan Where The Best Minds Meet(R), this new thrust
has meant improved performance for many of our funds, award-winning service and
a host of behind-the-scenes enhancements designed to help our shareholders and
their financial representatives.
Our sights, like yours, are focused on the long term. At the same time, we work
to enhance service every day. We also keep a disciplined eye on the performance
that each fund manager achieves. Through these persistent efforts we're
convinced we'll merit your continued commitment and loyalty. Thank you for your
confidence in New England Funds.
Sincerely,
/S/Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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AWARD-WINNING SERVICE -- TWO YEARS RUNNING
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- --------------------- For two years running we're proud to announce that
[Logo] DALBAR, an independent evaluator of mutual fund
QUALITY service, has awarded New England Funds its Quality
TESTED SERVICE Tested Service Seal for "providing the highest
1996 tier of service excellence in the mutual fund
- --------------------- industry." New England Funds is one of just three
DALBAR mutual fund companies to earn this distinction in
HONORS COMMITMENT TO: each of the last two years -- another reason why
INVESTORS we are becoming known as the mutual fund company
- --------------------- Where The Best Minds Meet.
INVESTMENT RESULTS THROUGH JUNE 30, 1997
- -------------------------------------------------------------------------------
Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
See next page [symbol - hand pointing right]
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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[A chart appears here illustrating the growth of a $10,000 investment in the
Massachusetts Tax Free Fund's Class A shares since 6/30/87 compared to the
Lehman Municipal Index and the Cost of Living. The plot points for this chart
are as follows.]
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
JUNE 1987 THROUGH JUNE 1997
COMPARED TO LEHMAN MUNICIPAL INDEX(4) AND THE COST OF LIVING(5)
LEHMAN
NET ASSET WITH MAXIMUM MUNICIPAL
VALUE(1) SALES CHARGE(2) INDEX(4) COST OF LIVING(5)
-------- -------------- --------- ------------------
6/30/87 $10,000 $ 9,575 $10,000 $10,000
6/88 $10,704 $10,249 $10,742 $10,396
6/89 $11,731 $11,232 $11,966 $10,933
6/90 $12,219 $11,699 $12,780 $11,444
6/91 $13,186 $12,626 $13,932 $11,982
6/92 $14,761 $14,133 $15,572 $12,352
6/93 $16,597 $15,891 $17,434 $12,722
6/94 $16,293 $15,601 $17,469 $13,039
6/95 $17,538 $16,793 $19,004 $13,435
6/96 $18,674 $17,881 $20,266 $13,804
6/97 $20,148 $19,292 $22,090 $14,104
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/97
- --------------------------------------------------------------------------------
CLASS A (Inception 3/23/84) YTD 1 YEAR 5 YEAR 10 YEAR
Net Asset Value(1) 3.35% 7.89% 6.42% 7.26%
With Max. Sales Charge(2) -1.02 3.30 5.49 6.79
Lehman Municipal Index(4) 3.62 9.00 7.08 8.17
Lipper MA Municipal Average(6) 2.85 7.64 6.54 7.64
- --------------------------------------------------------------------------------
SINCE
CLASS B (Inception 9/13/93) YTD 1 YEAR 3 YEARS INCEPTION
Net Asset Value(1) 3.03% 7.20% 6.65% 3.58%
With CDSC(3) -1.97 2.20 5.77 2.91
Lehman Municipal Index(4) 3.62 9.00 7.72 5.41
Lipper MA Municipal Average(6) 2.85 7.64 7.09 4.41
- --------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
YIELDS AS OF 6/30/97
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-day Yield(7) 4.91% 4.48%
Taxable Equivalent Yield(8) 9.24 8.43
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.25% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Municipal Index is an unmanaged index of bonds issued by states,
municipalities and other governmental entities having maturities of more
than one year. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
(7) SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines.
(8) Taxable equivalent yield is based on the maximum combined federal and
Massachusetts state income tax bracket of 46.85%. The alternative minimum
tax may apply. Some federal and state taxes may apply.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
Q. How did New England Massachusetts Tax Free Income Fund perform over the past
six months?
- ----------------------
[Photo of James Welch]
- ----------------------
James Welch
Back Bay
Advisors, L.P.
The Fund posted strong performance. For the six-month period ended June 30,
1997, the Fund (Class A shares at net asset value) generated a total return of
3.35%, reflecting the reinvestment of $0.435 per share in dividend income and a
change in share price to $16.61 on June 30, from $16.50 six months ago. The
Fund's performance placed it ahead of the 2.85% average return for its peer
group of 53 Massachusetts Municipal funds, as measured by Lipper Analytical
Services. At the end of the period, the Fund's 30-day SEC yield was 4.91% for
Class A shares. To equal that yield, a taxable investment would have to offer a
yield of 9.24%, for investors in the maximum combined federal and Massachusetts
state income tax bracket of 46.85%.
Q. What was the environment like for municipal bonds during the period?
Very favorable. Stronger economic growth, which helped push income and corporate
tax receipts higher, and rising property assessments increased municipal
revenues. With growing incomes, state and local governments found less need to
issue bonds, reducing the supply of new municipal securities.
The economy's strength, however, sparked investor concerns about inflation,
driving interest rates higher. The Federal Reserve Board, echoing these
concerns, raised the benchmark federal funds rate by one-quarter percentage
point in March 1997. (The federal funds rate is the rate at which banks may
borrow money overnight.) Despite stronger economic activity, price pressures
remained well contained; and when signs of slower employment growth and consumer
spending appeared later in the period, interest rates declined. Low inflation
also benefited the tax-exempt sector by enhancing the "real" rate of return
earned by municipal bonds -- that is, the return received by investors after
adjusting for inflation.
Q. What strategies did you use in managing the Fund?
We focused on duration management and targeted bonds offering attractive
relative value. Measured in years, duration gauges a bond's sensitivity to
changes in interest rates -- the longer the duration, the greater the
sensitivity to interest rate changes. As interest rates rose, we shortened the
Fund's average duration to improve price stability. We extended duration
gradually as it appeared that interest rates would decline. As of June 30, 1997,
the average duration of holdings stood at 6.73 years.
We also selected bonds that we believed would benefit from economic strength and
low inflation. In addition to state and local obligations, these included
transportation bonds, specifically those issued by the Massachusetts Bay
Transportation Authority (MBTA) and Logan Airport. The health care and education
sectors also comprised a substantial portion of assets. The health care industry
continues to consolidate and provide, we believe, considerable opportunity.
Finally, the Fund took advantage of opportunities offered by bonds issued by the
Commonwealth of Puerto Rico and its authorities. These bonds are exempt from
federal, state and local taxes nationwide. Puerto Rican officials accelerated
their new issuance calendar, creating a bulge in supply. This pushed the yields
of these issues higher (compared to other bonds) and prices lower, presenting
attractive relative value.
Q. What is your outlook for the next six months?
Generally positive. The Massachusetts economy continues to exhibit strength,
keeping pace with that of the nation. Fiscally, the Commonwealth also continues
to improve. We look for supply of municipal bonds to remain limited and demand
to be steady -- a favorable combination for the Massachusetts municipal
marketplace. In this environment, our current strategy will remain unchanged --
we'll continue to look for attractive relative values by targeting situations
that we believe will benefit from solid economic growth and low inflation.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT QUALITY COMPOSITION -- 6/30/97
- --------------------------------------------------------------------------------
AAA ..................... 49.6%
AA ...................... 7.8%
A ....................... 26.5%
BBB ..................... 7.6%
Other ................... 8.5%
Quality is based on ratings supplied by Standard & Poor's.
Average Credit Quality = AA Average Portfolio Maturity = 19.5 Years
<PAGE>
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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
TAX EXEMPT OBLIGATIONS--96.7% OF TOTAL NET ASSETS
RATINGS (c)
(UNAUDITED)
---------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- ------------------------------------------------------------------------------------------------------
MASSACHUSETTS BAY TRANSPORTATION
AUTHORITY--2.8%
<C> <S> <C> <C> <C>
$ 3,520,000 General Transportation Systems, Series A,
5.000%, 3/01/19, (FGIC) ................ Aaa AAA $ 3,285,850
------------
MASSACHUSETTS MUNICIPAL--3.6%
1,000,000 Haverhill, 5.000%, 6/15/17 (FGIC) ......... AAA AAA 934,110
1,000,000 Haverhill, Series A, 7.000%,
6/15/12 (FGIC) .......................... Aaa AAA 1,101,900
1,000,000 Nantucket, 6.800%, 12/01/11 .............. A -- 1,099,440
1,000,000 Worcester, 6.900%, 5/15/07 (FGIC) ......... Aaa AAA 1,121,750
------------
4,257,200
------------
MASSACHUSETTS STATE--6.8%
6,950,000 Refunding Series A, 6.500%,
11/01/14 (MBIA) ......................... Aaa AAA 7,964,353
------------
MASSACHUSETTS STATE HEALTH & EDUCATION
FACILITY AUTHORITY--24.0%
1,500,000 Beverly Hospital Ribs, 7.170%, 6/18/20
(MBIA) .................................. Aaa AAA 1,530,945
3,000,000 Boston University Ribs, Series L, 9.132%,
10/01/31, (MBIA) ....................... Aaa AAA 3,432,540
1,750,000 Charlton Memorial Hospital, Series B,
7.250%, 7/01/13 ........................ A2 A 1,907,062
3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 3,113,700
1,000,000 Faulkner Hospital, Series C, 6.000%,
7/01/13 ................................. Baa1 -- 1,001,880
1,100,000 Harvard University Series N, 6.250%,
4/01/20 ................................. Aaa AAA 1,226,137
2,400,000 Medical Center of Central Mass., CIass A,
7.000%, 7/01/12 ........................ A3 A 2,557,248
1,000,000 New England Baptist, Series B, 7.300%,
7/01/11 ................................ Baa1 BBB+ 1,072,040
1,220,000 New England Deaconess Hospital, Series D,
6.875%, 4/01/22, (AMBAC) ............... Aaa AAA 1,333,106
1,190,000 New England Medical Center, Series F,
6.625%, 7/01/25, (FGIC) ................ Aaa AAA 1,283,796
2,000,000 North Adams Regional Hospital, Series C,
6.750%, 7/01/09 ........................ -- BBB- 2,106,300
4,340,000 Saints Memorial Medical Center, Series A,
6.000%, 10/01/23 B1 -- 3,892,850
1,500,000 Valley Regional Health System, Series B,
Pre-refunded, 8.000%, 7/01/18 .......... Aaa AAA 1,678,080
1,000,000 Valley Regional Health System, Series C,
6.250%, 7/01/11, (Connie Lee) .......... Aaa AAA 1,082,720
1,000,000 Wentworth Institute of Technology,
Series A, 7.400%, 4/01/10, (AMBAC) ..... Aaa AAA 1,096,870
------------
28,315,274
------------
MASSACHUSETTS STATE HOUSING FINANCE
AGENCY--18.7%
2,500,000 Housing Revenue, Series A, 6.375%,
4/01/21 ................................. A1 A+ 2,601,025
215,000 Housing Revenue, Series A, 9.000%,
12/01/18 ................................ -- -- 220,723
1,350,000 Housing Revenue, Series B, 6.500%, 7/01/25
(AMBAC) ................................. Aaa AAA 1,419,863
715,000 Multifamily Residential Development, Series
A, 7.650%, 2/01/28, (FNMA) ............. Aaa AAA 757,857
2,000,000 Residential Development, Series A, 6.900%,
11/15/24, (FNMA) ....................... Aaa AAA 2,099,420
2,500,000 Residential Development, Series E, 6.250%,
11/15/12, (FNMA) ....................... Aaa AAA 2,604,425
2,000,000 Residential Development, Series F, 6.250%,
11/15/12, (FNMA) ....................... Aaa AAA 2,083,540
1,300,000 Residential Development, Series I, 6.900%,
11/15/25, (FNMA) ....................... Aaa AAA 1,382,979
3,020,000 Single Family Mortgage, Series 13, 7.950%,
6/01/23 ................................ Aa A+ 3,224,907
3,000,000 Single Family Mortgage, Series 21, 7.125%,
6/01/25 ................................ Aa A+ 3,198,270
1,975,000 Single Family Mortgage, Series 32, 6.600%,
12/01/26 ............................... Aa A+ 2,056,251
400,000 Single Family Mortgage, Series 4, 7.375%,
6/01/14 ................................ Aa A+ 409,488
------------
22,058,748
------------
MASSACHUSETTS STATE INDUSTRIAL FINANCE
AGENCY--9.6%
2,000,000 College of The Holy Cross, Pre-refunded,
6.450%, 1/01/12 ........................ Aaa AAA 2,184,700
2,000,000 FHA Briscoe House Assisted Living A,
7.125%, 2/01/36 ........................ -- AAA 2,144,800
1,500,000 First Healthcare Corp. Project, 7.750%, 4/
01/19 .................................. -- -- 1,550,265
1,000,000 Harvard Community Health Plan, Series B,
7.750%, 10/01/08, (MBIA) ............... Aaa AAA 1,062,250
475,000 Ogden Haverhill Project, 7.250%, 12/01/06
(AMBAC) ................................. Aaa AAA 488,024
1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11
(AMBAC) ................................. Aaa AAA 1,028,550
3,000,000 Worcester Polytechnic, Series II, 5.125%,
9/01/27, (MBIA) ........................ Aaa AAA 2,818,260
------------
11,276,849
------------
OTHER MASSACHUSETTS OBLIGATIONS--14.8%
2,000,000 Consolidated Loan, Series A, 7.625%,
6/01/08 ................................. Aaa A+ 2,262,280
1,140,000 Massachusetts Educational Loan Authority,
7.250%, 1/01/09, (AMBAC) ............... Aaa AAA 1,203,224
1,500,000 Massachusetts Municipal Wholesale Electric,
6.750%, 7/01/08 ........................ Baa2 BBB+ 1,605,825
2,500,000 Massachusetts Municipal Wholesale Electric,
6.750%, 7/01/11 ........................ Baa2 BBB+ 2,667,325
3,200,000 Massachusetts Water Resources Authority,
Series B, 5.000%, 3/01/22, (MBIA) ...... Aaa AAA 2,932,736
3,130,000 Massachusetts Water Resources Authority,
Series A, 6.500%, 7/15/19 .............. A A 3,522,502
3,000,000 New England Educational Loan, Sub-Issue H,
6.900%, 11/01/09 ....................... A1 -- 3,284,670
------------
17,478,562
------------
OTHER OBLIGATIONS--8.3%
500,000 Guam Airport Authority Revenue Bond, Series
B, 6.400%, 10/01/05 .................... -- BBB 525,730
1,500,000 Guam Airport Authority Revenue Bond, Series
B, 6.600%, 10/01/10 .................... -- BBB 1,566,600
3,400,000 Guam Power Authority Revenue Bond, Series
A, 6.300%, 10/01/12 .................... -- BBB 3,482,858
3,850,000 Virgin Islands Public Financial Authority,
Series A, 7.250%, 10/01/18 ............. -- -- 4,194,229
------------
9,769,417
------------
PUERTO RICO OBLIGATIONS--8.1%
4,000,000 Aqueduct & Sewer Authority, 6.250%,
7/01/13 ................................. Baa1 A 4,370,080
1,000,000 Aqueduct & Sewer Authority, 10.250%,
7/01/09 ................................. Aaa AAA 1,394,670
2,000,000 Aqueduct & Sewer Authority, Refunding,
6.250%, 7/01/12 ........................ Baa1 A 2,197,040
1,750,000 Public Buildings Authority Revenue, Series
B, 5.000%, 7/01/27, (MBIA) ............. Aaa AAA 1,617,333
------------
9,579,123
------------
Total Tax Exempt Obligations (Identified
Cost $108,678,513) ...................... 113,985,376
------------
OPTIONS--0.1%
- -------------------------------------------------------------------------------------------------------
200 U.S. Treasury, 110 Put, 7/18/97 .......... 71,875
------------
Total Options (Identified Cost $69,750) ... 71,875
------------
Total Investments--96.8% (Identified Cost
$108,748,263) (b) ....................... 114,057,251
Other assets less liabilities ............ 3,790,771
------------
Total Net Assets -- 100% .................. $117,848,022
============
</TABLE>
FUTURE CONTRACTS--WRITTEN
<TABLE>
<CAPTION>
AGGREGATE MARKET
CONTRACTS DESCRIPTION EXPIRATION FACE VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
50 U.S. Treasury September 19, 1997 $5,540,375 $5,553,125 $ (12,750)
==========
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(a) See Note 1a.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments
based on cost of $108,748,263 for federal income tax purposes
was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess value over tax cost ................ $5,382,250
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............. (73,262)
----------
Net unrealized appreciation .......................... $5,308,988
==========
As of December 31, 1996, the Fund had a net tax basis capital loss
carryforward of $2,261,034 expiring December 31, 2002.
(c) The ratings shown are believed to be the most recent ratings
available at June 30, 1997. Securities are generally rated at the
time of issuance. The rating agencies may revise their ratings from
time to time. As a result there can be no assurance that the same
ratings would be assigned if the securities were rated at June 30,
1997. The Fund's subadviser independently evaluates the Fund's
portfolio securities and in making investment decisions does not
rely solely on the ratings of agencies.
</TABLE>
Legend of Portfolio abbreviations:
AMBAC -- American Municipal Bond Assurance Corp.
Connie Lee -- College Construction Loan Insurance Association
FGIC -- Financial Guarantee Insurance Company
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corp.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value ....................................... $114,057,251
Cash ....................................................... 2,108
Receivable for:
Fund shares sold ......................................... 184,995
Securities sold .......................................... 3,215,076
Accrued interest ......................................... 1,895,230
Prepaid registration expense ............................... 3,000
------------
119,357,660
LIABILITIES
Payable for:
Securities purchased ..................................... $943,203
Open futures contracts-net ............................... 12,750
Fund shares redeemed ..................................... 296,026
Dividends declared ....................................... 130,843
Miscellaneous ............................................ 4,038
Accrued expenses:
Management fees .......................................... 77,932
Deferred trustees' fees .................................. 8,014
Accounting and administrative ............................ 2,666
Other expenses ........................................... 34,166
--------
1,509,638
------------
NET ASSETS ................................................... $117,848,022
============
Net Assets consist of:
Capital paid in .......................................... $114,467,845
Distributions in excess of net investment income ......... (20,374)
Accumulated net realized losses .......................... (1,895,687)
Unrealized appreciation on investments, options and
futures contracts ...................................... 5,296,238
------------
NET ASSETS ................................................... $117,848,022
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($111,133,401 divided by 6,691,870 shares of beneficial
interest) .................................................. $16.61
======
Offering price per share (100/95.75 of $16.61) ............... $17.35*
======
Net asset value and offering price of Class B shares
($6,714,621 divided by 405,047 shares of beneficial
interest) ................................................ $16.58**
======
Identified cost of investments ............................... $108,748,263
============
</TABLE>
*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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1997
(unaudited)
INVESTMENT INCOME
<S> <C> <C>
Interest ...................................................... $3,637,430
Expenses
Management fees ............................................. $338,837
Service and distribution fees - Class A ..................... 190,727
Service and distribution fees - Class B ..................... 33,559
Trustees' fees and expenses ................................. 11,041
Accounting and administrative ............................... 15,958
Custodian ................................................... 41,053
Transfer agent .............................................. 104,163
Audit and tax services ...................................... 9,050
Legal ....................................................... 9,956
Printing .................................................... 13,906
Registration ................................................ 7,684
Miscellaneous ............................................... 4,844
--------
Total expenses ................................................ 780,778
Less expenses waived by the investment adviser and subadviser . (180,458) 600,320
-------- ----------
Net investment income ......................................... 3,037,110
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ........................................... 478,076
Futures contracts - net ..................................... 52,798
Options contracts - net ..................................... (165,526)
--------
Net realized gain (loss) on investments, options and futures
contracts ................................................. 365,348
--------
Unrealized appreciation (depreciation) on:
Investments - net ........................................... 356,824
Futures contracts - net ..................................... (12,750)
--------
Net unrealized appreciation on investments, options and
futures contracts ......................................... 344,074
--------
Net gain on investment transactions ........................... 709,422
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................... $3,746,532
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -------------
FROM OPERATIONS
<S> <C> <C>
Net investment income .................................. $ 6,386,751 $ 3,037,110
Net realized gain on investments, options and futures
contracts ............................................ 330,110 365,348
Unrealized appreciation (depreciation) on investments,
options and futures contracts ........................ (2,877,442) 344,074
------------ ------------
Increase in net assets from operations ................. 3,839,419 3,746,532
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .............................................. (6,049,344) (2,853,671)
Class B .............................................. (326,962) (153,990)
------------ ------------
(6,376,306) (3,007,661)
------------ ------------
Decrease in net assets derived from capital share
transactions ......................................... (4,013,362) (3,266,858)
------------ ------------
Total decrease in net assets ........................... (6,550,249) (2,527,987)
NET ASSETS
Beginning of the period ................................ 126,926,258 120,376,009
------------ ------------
End of the period ...................................... $120,376,009 $117,848,022
============ ============
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME
Beginning of the period ................................ $ (60,268) $ (49,823)
============ ============
End of the period ...................................... $ (49,823) $ (20,374)
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ............................. $ 16.37 $ 16.62 $ 17.27 $ 15.10 $ 16.85 $ 16.50
----------- ----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income ................... 1.03 0.97 0.89 0.88 0.87 0.44
Net Realized and Unrealized
Gain (Loss) on Investments ............ 0.40 1.05 (2.15) 1.76 (0.35) 0.11
----------- ----------- ----------- ----------- ----------- -----------
Total From Investment Operations ........ 1.43 2.02 (1.26) 2.64 0.52 0.55
----------- ----------- ----------- ----------- ----------- -----------
Less Distributions
Distributions From Net
Investment Income ..................... (1.03) (0.97) (0.89) (0.89) (0.87) (0.44)
Distributions in excess of
Net Investment Income ................. 0.00 0.00 (0.02) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains ................ (0.15) (0.40) 0.00 0.00 0.00 0.00
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions ..................... (1.18) (1.37) (0.91) (0.89) (0.87) (0.44)
----------- ----------- ----------- ----------- ----------- -----------
Net Asset Value,
End of Period ......................... $ 16.62 $ 17.27 $ 15.10 $ 16.85 $ 16.50 $ 16.61
=========== =========== =========== =========== =========== ===========
Total Return (%) (b) .................... 9.1 12.4 (7.4) 17.8 3.2 3.4
Ratio of Operating Expenses
to Average Net Assets (%) (a) ......... 0.85 0.85 0.85 0.85 0.90 1.00(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................ 6.25 5.58 5.63 5.46 5.31 5.29(c)
Portfolio Turnover Rate (%) ............. 29 42 48 127 140 142(c)
Net Assets, End of Period (000) ......... $ 91,932 $ 128,797 $ 107,565 $ 120,229 $ 112,934 $ 111,133
</TABLE>
(a) Effective September 1, 1996 expenses were voluntarily limited to 1.00% of
Class A average net assets. Prior to that effective May 1, 1991 expenses
were voluntarily limited to .85% of Class A average net assets. See Note
4. The ratio of operating expenses to average net assets, without giving
effect to this expense limitation would have been 1.26%, 1.21%, 1.24%,
1.24%, and 1.27% for the years ended December 31, 1992, 1993, 1994, 1995,
and 1996, and 1.31% for the six months ended June 30, 1997.
(b) A sales charge is not reflected in total return calculations. Periods less
than one year are not annualized.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------
SEPTEMBER 13(a) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------------------- JUNE 30,
1993 1994 1995 1996 1997
------------- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .... $ 17.78 $ 17.26 $ 15.08 $ 16.82 $ 16.47
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ................... 0.25 0.77 0.78 0.75 0.38
Net Realized and Unrealized Gain
(Loss) on Investments ................. (0.15) (2.14) 1.74 (0.34) 0.11
-------- -------- -------- -------- --------
Total From Investment Operations ........ 0.10 (1.37) 2.52 0.41 0.49
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net Investment Income (0.22) (0.79) (0.78) (0.76) (0.38)
Distributions in excess of
Net Investment Income ................. (0.00 (0.02) (0.00) (0.00) 0.00
Distributions From Net Realized Capital
Gains ................................. (0.40) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions ..................... (0.62) (0.81) (0.78) (0.76) (0.38)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .......... $ 17.26 $ 15.08 $ 16.82 $ 16.47 $ 16.58
======== ======== ======== ======== ========
Total Return (%) (d) .................... 0.4 (8.0) 17.0 2.6 3.0
Ratio of Net Investment Income to
Average Net Assets (%) ................ 4.26(c) 4.98 4.81 4.66 4.64(c)
Portfolio Turnover Rate (%) ............. 42 48 126 140 142(c)
Net Assets, End of Period (000) ......... $ 1,289 $ 4,523 $ 6,697 $ 7,442 $ 6,715
(a) Commencement of operations.
(b) Effective September 1, 1996 expenses were voluntarily limited to 1.65% of
Class B average net assets. Prior to that effective September 13, 1993
expenses were voluntarily limited to 1.50% of Class B average net assets.
See Note 4. The ratio of operating expenses to average net assets, without
giving effect to this expense limitation would have been 1.86% for the
period ended December 31, 1993, 1.89%, 1.89% and 1.92% for the years ended
December 31, 1994, 1995 and 1996 and 1.96% for the six months ended June 30,
1997.
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
June 30, 1997
(unaudited)
1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 13, 1993. Class A shares are sold with
a maximum front end sales charge of 4.25%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before
May 1, 1997). Expenses of the Fund are borne pro-rata by the holders of both
classes of shares, except that each class bears expenses unique to that class
(including the Rule 12b-1 service and distribution fees applicable to such
class), and votes as a class only with respect to its own Rule 12b-1 plan.
Shares of each class would receive their pro-rata share of the net assets of
the Fund, if the Fund were liquidated. In addition, the Trustees approve
separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors,
L.P. ("Back Bay Advisors"), under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Back Bay Advisors and other
information with respect to transactions in securities, including quotations
from securities dealers. Valuations of securities and other assets owned by
the Fund for which market quotations are readily available are based on those
quotations. Short-term obligations that will mature in 60 days or less are
stated at amortized cost, which, when combined with accrued interest or
discount earned, approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Back Bay
Advisors under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income for the Fund is increased by
the accretion of original issue discount. Interest income is reduced by the
amortization of premium. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and
put options on securities to manage its exposure to interest rates and the
bond market. Buying futures, writing puts, and buying calls tend to increase
the Fund's exposure to the underlying instrument. Selling futures, buying
puts, and writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. When a Fund writes a call or put
option, an amount equal to the premium received by the Fund is included in the
Fund's statement of assets and liabilities as an asset and as an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. The current value of a
written option is the closing price on the principal exchange on which such
option is traded. If an option which the Fund has written either expires on
its stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which
the Fund has written is exercised, the Fund realizes a capital gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received. If a put option which the Fund
has written is exercised, the amount of the premium originally received will
reduce the cost of the security which the Fund purchases upon exercise of the
option.
The premium paid by a Fund for the purchase of a call or a put option is
included in the asset section of the Fund's statement of assets and
liabilities as an investment and subsequently adjusted to the current market
value of the option. The current value of a purchased option is the closing
price on the principal exchange on which such option is traded. If an option
which the Fund has purchased expires on the stipulated expiration date, the
Fund will realize a loss in the amount of the cost of the option. If the Fund
enters into a closing sale transaction, the Fund will realize a gain or loss,
depending on whether the sales proceeds from the closing sale transaction are
greater or less than the cost of the option. If the Fund exercises a purchased
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. If the Fund exercises a purchased call option, the cost of
the security which the Fund purchases upon exercise will be increased by the
premium originally paid.
The risk in writing a call option is that the Fund relinquishes the
opportunity to profit if the market price of the underlying security increases
and the option is exercised. In writing a put option, the Fund assumes the
risk of incurring a loss if the market price decreases and the option is
exercised. In addition, there is the risk the Fund may not be able to enter
into a closing transaction because of an illiquid secondary market.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest
rate futures contracts to hedge against changes in the values of tax exempt
municipal securities the Fund owns or expects to purchase. An interest rate
futures contract is an agreement between two parties to buy and sell a
security for a set price (or to deliver an amount of cash) on a future date.
Upon entering into such a contract, the purchasing Fund is required to pledge
to the broker an amount of cash, U.S. Government securities or other high
quality debt securities equal to the minimum "initial margin" requirements of
the exchange, currently up to $3,000 per contract. Pursuant to the contract,
the Fund agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or payments
are known as "variation margin," and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a realized gain
or loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the Fund may not be able to close out its
futures positions due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. Permanent book and
tax basis differences relating to shareholder distributions will result in
reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the six months ended June 30, 1997 were $81,841,366 and $89,882,693,
respectively.
Investments in written options for the Fund for the six months ended June 30,
1997 are summarized as follows:
WRITTEN OPTIONS
------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1996 ......... 0 $ 0
Contracts opened .................. 1,550 507,281
Contracts closed .................. (1,550) (507,281)
---- -------
Open at June 30, 1997 ............. 0 $ 0
==== ========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.60% of the first $100 million Fund's average
daily net assets and 0.50% of such assets in excess of $100 million. NEFM pays
the Fund's investment subadviser, Back Bay Advisors at the rate of 0.30% of
the first $100 million of the Fund's average daily net assets and 0.25% of
such assets in excess of $100 million. Certain officers and directors of NEFM
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 Metropolitan Life Insurance Company ("MetLife"). Fees
earned by NEFM and Back Bay Advisors under the management agreement in effect
during the six months ended June 30, 1997 are as follows:
FEES EARNED(a)
--------------
$169,418 New England Funds Management, L.P.
$169,419 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, 1997 these expenses
amounted to $15,958 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted Service and Distribution Plans relating to the Fund's
Class A and Class B shares (the "Plans").
Under the Plans, the Fund pays New England Funds a monthly service fee at the
annual rate of up to 0.25% of the average daily net assets attributable to the
Fund's Class A and Class B shares, as compensation for services provided and
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class A and Class B shares and/or the
maintenance of shareholder accounts. For the six months ended June 30, 1997,
the Fund paid New England Funds $54,491 and $ 8,389 in service fees for Class
A and Class B shares, respectively.
Also under the Plans, the Fund pays New England Funds monthly distribution
fees at the annual rate of up to 0.10% of the average daily net assets
attributable to the Fund's Class A shares and up to 0.75% of the average daily
net assets attributable to the Fund's Class B shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in connection with the marketing or sale of Class A and Class B shares,
respectively. For the six months ended June 30, 1997, the Fund paid New
England Funds $136,236 and $25,170 in distribution fees for Class A and Class
B shares, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the six months
ended June 30, 1997, amounted to $109,716.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1997, the Fund
paid New England Funds $79,290 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 New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $2,128
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $51
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Effective September 1, 1996 until further notice to
the Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce their
management fees and, if necessary, to assume expenses of the Fund in order to
limit the Fund's expenses to an annual rate of 1.00% of the Fund's Class A
average daily net assets, and 1.65% of Class B average daily net assets. Prior
to this effective May 1, 1991, Back Bay Advisors and NEFM had voluntarily
agreed to reduce their management fees and, if necessary, to assume expenses
of the Fund in order to limit the Fund's expenses to an annual rate of 0.85%
of the Fund's Class A average daily net assets and, effective September 13,
1993, 1.50% of Class B average daily net assets. From May 18, 1989 through
April 30, 1991 Back Bay Advisors reduced its management fee and assumed
expenses of the Fund in order to limit the Fund's expenses to an annual rate
of 1.35%. As a result of the Fund's expenses exceeding the applicable
voluntary expense limitation during the six months ended June 30, 1997, Back
Bay Advisors reduced its subadvisory fee of $169,418 by $90,229 and NEFM
reduced its advisory fee of $169,419 by $90,229.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the Commonwealth of Massachusetts and its political subdivisions,
agencies and public authorities to obtain funds for various public purposes.
The Fund is more susceptible to factors adversely affecting issuers of
Massachusetts municipal securities than is a comparable municipal bond fund
that is not so concentrated. Uncertain economic and fiscal conditions may
affect the ability of issuers of Massachusetts municipal securities to meet
their financial obligations.
6. CAPITAL SHARES. At June 30, 1997 there was an unlimited number of shares
of beneficial interest authorized, divided into two classes, Class A and Class
B capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
--------------------------------- -------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold ............................ 812,524 $13,207,238 575,895 $ 9,449,152
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................... 275,016 4,511,684 130,089 2,142,499
---------- ----------- -------- ------------
1,087,540 17,718,922 705,984 11,591,651
Shares repurchased ..................... (1,380,081) (22,611,833) (856,998) (14,094,678)
---------- ----------- -------- ------------
Net decrease ........................... (292,541) $(4,892,911) (151,014) $ (2,503,027)
---------- ----------- -------- ------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
--------------------------------- -------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- ------------ ---------------
Shares sold ............................ 72,803 $ 1,192,157 44,123 $ 723,543
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 15,083 247,027 7,196 118,291
-------- ----------- -------- -----------
87,886 1,439,184 51,319 841,834
Shares repurchased ..................... (34,314) (559,635) (97,983) (1,605,665)
-------- ----------- -------- -----------
Net increase (decrease) ................ 53,572 879,549 (46,664) (763,831)
-------- ----------- -------- -----------
Decrease derived from
capital shares transactions .......... (238,969) $(4,013,362) (197,678) $ (3,266,858)
======== =========== ======== ============
</TABLE>
<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'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 bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond 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>
- -------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- -------------------------------------------------------------------------------
STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities 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 www.mutualfunds.com
New England Funds, L.P., Distributor
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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NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
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399 Boylston Street
Boston, Massachusetts
02116
---------------------
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