<PAGE>
- -------------------------------------------------------------------------------
SEMIANNUAL REPORT
- -------------------------------------------------------------------------------
[graphic omitted](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England Intermediate Term
Tax Free Fund of California
[graphic omitted]
- ---------------
June 30, 1997
- ---------------
<PAGE>
AUGUST 1997
- --------------------------------------------------------------------------------
[Photo of Henry L.P. Schmelzer]
Dear New England Funds Shareholder,
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>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
- --------------------- 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
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the New England Intermediate Term Tax Free Fund of
California's Class A Shares compared to the Lehman Municipal Index and the Cost
of Living. The data for this chart are as follows:]
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
APRIL 1993 (INCEPTION) THROUGH JUNE 1997
COMPARED TO LEHMAN MUNICIPAL INDEX(4) AND COST OF LIVING INDEX(5)
With Lehman
Net Maximum Municipal Cost of
Asset Value Sales Charge(2) Index(4) Living(5)
----------- --------------- --------- ---------
4/23/93 $10,000 $ 9,750 $10,000 $10,000
6/93 $10,258 $10,002 $10,224 $10,028
6/94 $10,458 $10,197 $10,244 $10,247
6/95 $10,989 $10,715 $11,145 $10,559
6/96 $11,867 $11,571 $11,885 $10,849
6/97 $12,760 $12,441 $12,955 $11,085
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>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/97*
- --------------------------------------------------------------------------------
CLASS A (Inception 4/23/93) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.07% 7.52% 5.99%
With Max. Sales Charge(2) 0.45 4.88 5.36
CLASS B (Inception 9/13/93) YTD 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.69% 6.89% 3.75%
With CDSC(3) -2.31 1.89 3.06
*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.
COMPARATIVE PERFORMANCE
- --------------------------------------------------------------------------------
YTD 1 YEAR SINCE INCEPTION SINCE INCEPTION
CLASS A CLASS B
Lehman Municipal(4) 3.62% 9.00% 6.22% 5.41%
Lipper CA Intmd. Muni.
Avg.(6) 2.55 6.72 5.27 4.45
YIELDS AS OF 6/30/97
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC Yield(7) 4.82% 4.20%
Taxable Equivalent Yield(8) 8.80 7.67
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 2.5% 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 having maturities of
more than one year issued by states, municipalities and other governmental
entities. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, as
calculated by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
(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
California state income tax bracket of 45.22%. The alternative minimum tax
and some federal and state taxes may apply.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
[Photo of James Welch]
James Welch,
Back Bay Advisors, L.P.
Q. How did New England Intermediate Term Tax Free Fund of California
perform during the period?
The Fund continued to provide a strong total return and a relatively high level
of double tax-exempt income. For the six-month period ended June 30, 1997, the
Fund (Class A shares at net asset value) generated a total return of 3.07%,
reflecting the reinvestment of $0.192 per share in dividend income and an
increase in share price to $7.70 on June 30, from $7.66 six months ago. The
Fund's performance was well ahead of the 2.55% average return for its peer
group, the 31 California Intermediate Municipal funds measured by Lipper
Analytical Services. As of June 30, 1997, the Fund's 30-day SEC yield was 4.82%
for Class A shares. For investors in the maximum combined federal and California
state income tax bracket of 45.22%, this yield translates into an equivalent
yield of 8.80% for a taxable investment.
Q. How did you manage the Fund during the six months under review?
Because economic growth early in 1997 was well above the Federal Reserve Board's
target of 2.5%, we correctly anticipated that the Fed would raise interest rates
as a way to keep inflation in check. Based on our expectations, we structured
the Fund to reduce share price volatility and exposure to credit risk. We
decreased the Fund's duration slightly, to 5.3 years from nearly six years at
the start of the period. Duration measures (in years) a portfolio's sensitivity
to interest rate changes. A lower overall portfolio duration results in smaller
price declines when interest rates rise.
In addition, we emphasized higher-quality A-rated securities. Because there was
relatively little difference between the yields on higher-quality and
lower-quality bonds, bondholders were not compensated for taking on the higher
risk associated with lower-quality bonds.
Q. What strategic changes did you make during the period?
We made a number of changes that helped boost the Fund's performance. We
increased investments in the health care sector. After years of consolidation,
many health care facilities have strong financial structures and relatively high
credit quality ratings. An example is Alta Bates Medical Center, a new addition
to your Fund. When Alta Bates became affiliated with Sutter Health Group,
independent rating agencies, such as Standard & Poor's, upgraded the hospital's
credit quality from BBB to A. This upgrade automatically increased the value of
the Fund's Alta Bates bonds.
In the utilities sector, the opposite was true. Uncertainty over deregulation
led to credit downgrades for many utilities. Because we had anticipated
downgrades, we greatly reduced the Fund's exposure to utility bonds before their
quality ratings were lowered.
Meanwhile, we added general obligation bonds (GOs) to the portfolio. GOs are
repaid from a state or city's general revenues, rather than from income streams
of specific public purpose projects. Because robust economic growth has
increased tax revenues in city and state coffers, California's GOs carry high
credit ratings and are in demand by investors.
Q. What is your investment outlook?
Entering the second half of 1997, we believe economic growth is slowing,
reducing the likelihood that the Fed will dramatically increase interest rates.
However, we would not be surprised to see the Fed fine tune interest rates over
an extended period. We expect California to continue to lead the country in
economic growth -- and strong growth may limit issuance of municipal bonds. With
demand for municipal securities expected to remain steady, the supply/demand
imbalance should tilt favorably for your Fund.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
- --------------------------------------------------------------------------------
-------------------------------------------
Credit Quality Composition -- June 30, 1997
-------------------------------------------
AAA .......... 27.67%
AA ........... 7.67%
A ............ 21.37%
BBB .......... 35.49%
NR/Other ..... 7.8%
Quality is based on ratings provided by Standard & Poor's.
Average Portfolio Quality = A Average Portfolio Maturity = 10.3 Years
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
TAX EXEMPT OBLIGATIONS--97.4% OF TOTAL NET ASSETS
RATINGS (c)
(UNAUDITED)
-------------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- ------------------------------------------------------------------------------------------------------------
CALIFORNIA--87.9%
<S> <C> <C> <C> <C>
$ 1,000,000 Alameda California Public Financing Revenue,
6.125%, 9/02/09 ......................... -- -- $ 1,021,610
1,500,000 Berkeley California Health Facility, 6.500%,
12/01/11 ................................ Baa2 BBB+ 1,565,175
1,000,000 California Educational Facilities Authority,
6.125%, 6/01/09 ......................... Baa -- 1,024,780
1,000,000 California Educational Facilities Authority,
7.000%, 1/01/04 ......................... Aaa AAA 1,061,040
1,120,000 California Housing Finance Agency, 6.250%,
8/01/16 ................................. Aa2 AA- 1,162,560
1,750,000 California Pollution Control Financing
Authority, 5.900%, 6/01/14 .............. A2 A 1,846,128
1,000,000 California Pollution Control Financing
Authority, 6.900%, 9/01/06 .............. -- A+ 1,065,060
1,000,000 California Pollution Control Financing
Authority, 8.750%, 1/01/07 .............. A2 A+ 1,038,040
1,000,000 California State, 7.000%, 6/01/02 (FGIC) .. Aaa AAA 1,109,930
1,000,000 California State Department Water Resources,
5.000%, 12/01/13 ........................ Aa AA 944,290
1,000,000 California State Public Works, 5.500%,
6/01/10 .................................. A1 A 1,026,950
1,000,000 California State Public Works Board Revenue,
5.500%, 6/01/14 ......................... Aaa AAA 1,010,940
1,540,000 Duarte, CA Certificates of Participation,
6.125%, 4/01/13 ......................... Baa1 -- 1,563,978
1,295,000 Fresno United School District, 6.600%,
3/01/99 .................................. A3 -- 1,342,578
2,030,000 Fresno United School District, 7.250%,
3/01/07 .................................. A3 -- 2,197,008
970,000 Pleasanton Financing Authority, 5.600%,
9/02/00 ................................. Baa3 -- 1,000,778
1,000,000 Sacramento Utility District, 3.950%,
11/15/06, (FSA) (d) ..................... Aaa AAA 1,000,000
1,000,000 Sacramento Utility District, 6.570%,
11/15/06, (FSA) (d) ..................... Aaa AAA 1,068,290
2,000,000 San Diego Port Facilities, 6.600%,
12/01/02 ................................. -- -- 2,089,280
1,000,000 San Francisco California Public Utilities
Common, 5.000%, 11/01/15 ................ Aa AA- 948,170
1,000,000 Southern California Rapid Transit District,
7.500%, 7/01/05, (MBIA) ................. Aaa AAA 1,116,370
1,420,000 Stanislaus Solid Waste Authority, 7.500%,
1/01/05 ................................. -- BBB+ 1,520,465
1,885,000 Stanislaus Solid Waste Authority, 7.625%,
1/01/10 ................................. -- BBB+ 2,023,811
530,000 Valley Health Systems, 6.250%, 5/15/99 .... -- BBB- 536,355
2,000,000 Valley Health Systems, 6.500%, 5/15/15 .... -- BBB- 2,059,480
2,000,000 West & Central Basin Financing Authority,
6.280%, 8/01/06, (AMBAC) ................ Aaa AAA 2,085,080
1,000,000 Whittier Health Facilities, 6.250%, 6/01/09,
(MBIA) .................................. Aaa AAA 1,103,540
-----------
35,531,686
-----------
PUERTO RICO--2.5%
$ 950,000 Puerto Rico Municipal Finance Agency,
6.000%, 7/01/12, (FSA) .................. Aaa AAA $ 1,031,557
-----------
US VIRGIN ISLANDS--7.0%
1,750,000 Virgin Islands Public Finance Authority,
7.700%, 10/01/04 ........................ -- BBB 1,877,558
885,000 Virgin Islands Public Finance Authority,
7.750%, 10/01/06 ........................ -- -- 970,942
-----------
2,848,500
-----------
Total Tax Exempt Obligations
(Identified Cost $38,298,960) ........... 39,411,743
-----------
SHORT TERM INVESTMENTS--1.1%
- ---------------------------------------------------------------------------------------------------------------------
440,000 Household Finance Corp., 6.080%, 7/01/97 .. 440,000
-----------
Total Short Term Investments (Identified
Cost $440,000) .......................... 440,000
-----------
Total Investments--98.5% (Identified Cost
$38,738,960) (b) ........................ 39,851,743
Other assets less liabilities ............. 588,211
-----------
Total Net Assets--100% .................... $40,439,954
===========
(a) See Note 1a.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments
based on cost of $38,738,960 for federal income tax purposes was
as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost .............. $1,211,956
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value .............. (99,173)
----------
Net unrealized appreciation .................................. $1,112,783
==========
As of December 31, 1996, the Fund had a net tax basis capital loss
carryforward as follows:
Expiring December 31, 2002 ..................................... $1,325,032
==========
(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.
(d) Floating rate demand notes are instruments whose interest rates
change on a specific date (such as coupon date or interest payment
date). These instruments are payable on demand and are secured by
a letter of credit or other support agreements from banks.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------------------------------------------------------------------------
June 30, 1997
(unaudited)
ASSETS
<S> <C> <C>
Investments at value ........................................ $39,851,743
Cash ........................................................ 346
Receivable for:
Fund shares sold .......................................... 95,119
Accrued interest .......................................... 597,958
Prepaid registration expense ................................ 5,000
Unamortized organization expense ............................ 7,690
40,557,856
LIABILITIES
Payable for:
Fund shares redeemed ...................................... 3,454
Dividends declared ........................................ 72,516
Accrued expenses:
Management fees ........................................... 6,169
Deferred trustees' fees ................................... 4,085
Accounting and administrative ............................. 1,752
Other expenses ............................................ 29,926
------
117,902
-----------
NET ASSETS .................................................... $40,439,954
===========
Net Assets consist of:
Capital paid in ........................................... $40,515,914
Undistributed net investment income ....................... 105,937
Accumulated net realized losses ........................... (1,294,682)
Unrealized appreciation on investments .................... 1,112,785
-----------
NET ASSETS .................................................... $40,439,954
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($32,437,347 divided by 4,212,528 shares of beneficial
interest) ................................................. $7.70
=====
Offering price per share (100/97.50 of $7.70) ................. $7.90*
=====
Net asset value and offering price of Class B shares
($8,002,607 divided by 1,042,255 shares of beneficial
interest) ................................................. $7.68**
=====
Identified cost of investments ................................ $38,738,960
===========
*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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest ..................................................... $1,236,255
Expenses
Management fees ............................................ $107,384
Service fees - Class A ..................................... 41,258
Service and distribution fees - Class B .................... 39,524
Trustees' fees and expenses ................................ 5,940
Accounting and administrative .............................. 10,507
Custodian .................................................. 31,980
Transfer agent ............................................. 21,629
Audit and tax services ..................................... 9,000
Legal ...................................................... 9,956
Printing ................................................... 10,658
Registration ............................................... 8,211
Amortization of organization expenses ...................... 4,742
Miscellaneous .............................................. 3,939
--------
Total expenses ............................................... 304,728
Less expenses waived by the investment adviser and subadviser (101,215) 203,513
-------- ----------
Net investment income ........................................ $1,032,742
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net .......................................... 190,267
Futures contracts - net .................................... (80,300)
Options contracts - net .................................... (36,306)
--------
Net realized gain on investments ........................... 73,661
--------
Unrealized appreciation on:
Investments - net .......................................... 67,340
--------
Net gain on investment transactions ........................ 141,001
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ..................... $1,173,743
==========
</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 .................................... $ 2,035,330 $ 1,032,742
Net realized gain on investments, options and futures
transactions ........................................... 122,484 73,661
Unrealized appreciation on investments ................... 7,573 67,340
----------- -----------
Increase in net assets from operations ................... 2,165,387 1,173,743
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (1,717,606) (822,906)
Class B ................................................ (274,603) (167,923)
----------- -----------
(1,992,209) (990,829)
----------- -----------
Increase (decrease) in net assets derived from capital
share transactions 5,065,241 (3,305,247)
----------- -----------
Total increase (decrease) in net assets .................. 5,238,419 (3,122,333)
NET ASSETS
Beginning of the period .................................. 38,323,868 43,562,287
----------- -----------
End of the period ........................................ $43,562,287 $40,439,954
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period .................................. $ 20,903 $ 64,024
=========== ===========
End of the period ........................................ $ 64,024 $ 105,937
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
APRIL 23,(a) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period .............................. $ 7.50 $ 7.84 $ 7.08 $ 7.65 $ 7.66
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ................... 0.26 0.38 0.39 0.39 0.20
Net Realized and Unrealized Gain
(Loss) on Investments .................. 0.38 (0.76) 0.57 0.00 0.03
-------- -------- -------- -------- --------
Total From Investment Operations ........ 0.64 (0.38) 0.96 0.39 0.23
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income ...................... (0.26) (0.38) (0.39) (0.38) (0.19)
Distributions in Excess of Net
Investment Income ...................... (0.04) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions ..................... (0.30) (0.38) (0.39) (0.38) (0.19)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .......... $ 7.84 $ 7.08 $ 7.65 $ 7.66 $ 7.70
======== ======== ======== ======== ========
Total Return (%)(d) ..................... 8.6 (4.9) 13.9 5.3 3.1
Ratio of Operating Expenses to
Average Net Assets (%) (b) .............. 0.70(c) 0.70 0.70 0.75 0.85(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................. 4.88(c) 5.07 5.24 5.18 5.20(c)
Portfolio Turnover Rate (%) ............. 121(c) 212 167 161 117(c)
Net Assets, End of Period (000) ......... $ 28,938 $ 30,293 $ 32,707 $ 35,972 $ 32,437
(a) Commencement of operations.
(b) Effective September 1, 1996 expenses were voluntarily limited to 0.85% of class A average
net assets. Prior to September 1, 1996 expenses were voluntarily limited to 0.70% of Class
A average net assets. See Note 4. The ratio of operating expenses to average net assets
without giving effect to this expense limitation would have been 1.49% (annualized) for the
period ended December 31, 1993, 1.33%, 1.31% and 1.34% for the years ended December 31,
1994, 1995 and 1996, respectively and 1.34% for the six months ended June 30, 1997.
(c) Computed on an annualized basis.
(d) A sales charge is not reflected in total return calculations. Periods less than one year
are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
SEPT. 13,(a) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period .............................. $ 7.92 $ 7.84 $ 7.07 $ 7.63 $ 7.64
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ................... 0.10 0.32 0.33 0.33 0.17
Realized and Unrealized Gain (Loss)
on Investments ......................... (0.04) (0.77) 0.56 0.01 0.03
-------- -------- -------- -------- --------
Total From Investment Operations ........ 0.06 (0.45) 0.89 0.34 0.20
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income ...................... (0.10) (0.32) (0.33) (0.33) (0.16)
Distributions in Excess of Net
Investment Income ...................... (0.04) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions ..................... (0.14) (0.32) (0.33) (0.33) (0.16)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .......... $ 7.84 $ 7.07 $ 7.63 $ 7.64 $ 7.68
======== ======== ======== ======== ========
Total Return (%)(d) ..................... 0.8 (5.8) 12.9 4.6 2.7
Ratio of Operating Expenses to
Average Net Assets (%) (b) ............. 1.45(c) 1.45 1.45 1.50 1.60(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................. 3.68(c) 4.32 4.49 4.43 4.45(c)
Portfolio Turnover Rate (%) ............. 121(c) 212 167 161 117(c)
Net Assets, End of Period (000) ......... $ 1,849 $ 5,713 $ 5,617 $ 7,590 $ 8,003
(a) Commencement of operations.
(b) Effective September 1, 1996 expenses were voluntarily limited to 1.60% of Class B average
net assets. Prior to September 1, 1996 expenses were voluntarily limited to 1.45% of Class
B average net assets. See Note 4. The ratio of operating expenses to average net assets
without giving effect to this expense limitation would have been 2.24% (annualized) for the
period ended December 31, 1993, 2.08%, 2.06%, 2.09% for the years ended December 31, 1994,
1995 and 1996, respectively and 2.09% 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 STATEMENTS
- --------------------------------------------------------------------------------
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 series of shares a "Fund").
The Fund offers both Class A and Class B shares. The Fund commenced its public
offering of Class B shares on September 13, 1993. Class A shares are sold with
a maximum front end sales charge of 2.50%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within 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 INCOME. Security transactions are
accounted for on the trade date (the date the buy or sell is executed).
Interest income is recorded on the accrual basis. Interest income is increased
by the accretion of original issue discount. Interest income is reduced by the
amortization of premium. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and
put options on securities to manage its exposure to interest rates and the
bond market. Buying futures, writing puts, and buying calls tend to increase
the Fund's exposure to the underlying instrument. Selling futures, buying
puts, and writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. When a Fund writes a call or put
option, an amount equal to the premium received by the Fund is included in the
Fund's statement of assets and liabilities as an asset and as an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. The current value of a
written option is the closing price on the principal exchange on which such
option is traded. If an option which the Fund has written either expires on
its stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which
the Fund has written is exercised, the Fund realizes a capital gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received. If a put option which the Fund
has written is exercised, the amount of the premium originally received will
reduce the cost of the security which the Fund purchases upon exercise of the
option.
The premium paid by a Fund for the purchase of a call or a put option is
included in the asset section of the Fund's statement of assets and
liabilities as an investment and subsequently adjusted to the current market
value of the option. The current value of a purchased option is the closing
price on the principal exchange on which such option is traded. If an option
which the Fund has purchased expires on the stipulated expiration date, the
Fund will realize a loss in the amount of the cost of the option. If the Fund
enters into a closing sale transaction, the Fund will realize a gain or loss,
depending on whether the sales proceeds from the closing sale transaction are
greater or less than the cost of the option. If the Fund exercises a purchased
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. If the Fund exercises a purchased call option, the cost of
the security which the Fund purchases upon exercise will be increased by the
premium originally paid.
The risk in writing a call option is that the Fund relinquishes the
opportunity to profit if the market price of the underlying security increases
and the option is exercised. In writing a put option, the Fund assumes the
risk of incurring a loss if the market price decreases and the option is
exercised. In addition, there is the risk the Fund may not be able to enter
into a closing transaction because of an illiquid secondary market.
INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest rate
futures contracts to hedge against changes in the values of tax exempt
municipal securities the Fund owns or expects to purchase. An interest rate
futures contract is an agreement between two parties to buy and sell a
security for a set price (or to deliver an amount of cash) on a future date.
Upon entering into such a contract, the purchasing Fund is required to pledge
to the broker an amount of cash, U.S. Government securities or other high
quality debt securities equal to the minimum "initial margin" requirements of
the exchange, currently up to $3,000 per contract. Pursuant to the contract,
the Fund agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or payments
are known as "variation margin", and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a realized gain
or loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The potential risk to the Fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the Fund may not be able to close out its
futures positions due to an illiquid secondary market.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. Permanent book and
tax basis differences relating to shareholder distributions will result in
reclassification to paid in capital.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in 1993 in connection with the Fund's
organization and initial registration amounted to $26,500 and were paid by the
Fund. These costs are being amortized over 60 months beginning April 23, 1993.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the six months ended June 30, 1997 were $ 24,146,520 and
$28,947,124 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 .................................. 300 106,062
Contracts closed .................................. (300) (106,062)
--- ---------
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 0.525% of the first $200 million of the Fund's
average daily net assets, 0.50% of the next $300 million and 0.475% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors at the rate of 0.2625% of the first $200 million of the
Fund's average daily net assets, 0.25% of the next $300 million and 0.2375% of
such assets in excess of $500 million. Certain officers and directors of NEFM
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)
--------------
$53,692 New England Funds Management, L.P.
$53,692 Back Bay Advisors, L.P.
(a) Before reduction pursuant to voluntary expense limitation. 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 related clerical functions relating to the
Fund, (ii) expenses for services required in connection with the preparation
of registration statements and prospectuses, shareholder reports and notices,
proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the six months ended June 30, 1997 these expenses
amounted to $10,507 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares
(the "Class A Plan") and a Service and Distribution Plan relating to the
Fund's Class B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds, L.P. ("New England
Funds") a monthly service fee at the annual rate of up to 0.25% of the average
daily net assets attributable to the Fund's Class A shares, as reimbursement
for expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class A shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1997, the Fund paid
New England Funds $41,258 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 1997 is $179,456.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class B shares, as compensation for services provided and
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class B shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1997, the Fund paid
New England Funds $9,881 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, 1997, the Fund paid New England Funds $29,643 in distribution
fees under the Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors of shares of the Fund during the six months
ended June 30, 1997 amounted to $62,515.
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 $15,437 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 NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $709
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Retainer $18/year
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Effective September 1, 1996 until further notice to
the Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce
management fees 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 1.60% of Class B
average daily net assets. Prior to September 1, 1996 Back Bay Advisors and
NEFM had voluntarily agreed to reduce management fees in order to limit the
Fund's expenses to an annual rate of 0.70% of the Fund's Class A average daily
net assets and, effective September 13, 1993, 1.45% of Class B average daily
net assets. As a result of the Fund's expenses exceeding the foregoing expense
limitations during the six months ended June 30, 1997, Back Bay Advisors
waived its entire subadvisory fee of $53,692 and NEFM waived $47,523 of it's
advisory fee.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of California and its political subdivisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is
more susceptible to factors adversely affecting issuers of California
municipal securities than is a comparable municipal bond fund that is not so
concentrated. Uncertain economic and fiscal conditions may affect the ability
of issuers of California municipal securities to meet their financial
obligations.
6. CAPITAL SHARES. At June 30, 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 ........................... 2,067,648 $ 15,581,682 410,163 $ 3,133,925
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income .............................. 122,617 929,169 57,579 440,560
---------- ------------- -------- -----------
2,190,265 16,510,851 467,742 3,574,485
Shares repurchased .................... (1,769,674) (13,385,231) (948,645) (7,258,999)
---------- ------------- -------- -----------
Net increase (decrease) ............... 420,591 $ 3,125,620 (480,903) $(3,684,514)
---------- ------------- -------- -----------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------- -------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ---------------- ------------ ---------------
Shares sold ........................... 443,797 $ 3,344,406 136,914 $ 1,048,130
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income .............................. 17,906 135,371 12,166 92,839
---------- ------------- -------- -----------
461,703 3,479,777 149,080 1,140,969
Shares repurchased .................... (204,258) (1,540,156) (100,114) (761,702)
---------- ------------- -------- -----------
Net increase (decrease) ............... 257,445 1,939,621 48,966 379,267
---------- ------------- -------- -----------
Increase (decrease) derived from
capital shares
transactions ........................ 678,036 $ 5,065,241 (431,937) $(3,305,247)
======= ============= ======== ===========
</TABLE>
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>
--------------
(Logo)(R) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
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