<PAGE>
ANNUAL REPORT
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[logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Massachusetts Tax Free
Income Fund
[Graphic Omitted]
DECEMBER 31, 1997
<PAGE>
February 1998
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"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
[Photo}
Dear Shareholder:
In 1997, many investors once again had reason to be pleased with the performance
of their mutual fund holdings. However, in times such as these, expectations
tend to grow along with prices. It pays to remind ourselves that no trend is
permanent, and we should keep our goals realistic and long-term needs in focus.
In the third straight year of outstanding returns, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index -- two widely followed
indicators of the performance of large-company stocks -- gained 24.9% and 33.3%
respectively. At the same time, smaller-company stocks, as measured by the
Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded
as declining interest rates and rising prices meant solid gains. The Lehman Long
Treasury Index, for example, posted a 15.1% return for the year. Results were
less favorable for international investors, especially those exposed to emerging
markets or the financial turmoil in Asia.
Gratifying though it has been, the markets' surge of the past few years obscures
the historic norm: Downturns and volatility also are regular features of
investing. Even in 1997, notwithstanding the impressive overall results,
investors saw some sharp, short-term drops, whether they were invested in the
United States or overseas, in bonds or stocks. Market fluctuations remind us of
some valuable lessons.
First, volatility is inevitable, and should not disrupt long-term programs
without sufficient evaluation. Those who sold in response to downturns --
October 1987 is an obvious example -- may have missed out on the subsequent
uptrend. Second, sound diversification can reduce risk. A useful exercise is to
review your asset allocation regularly with your financial representative.
Starting in 1998, you have one more reason to consult with your representative:
Newly expanded retirement options, including the new Roth IRA, could play an
important role in your retirement and tax planning for years to come. With this
in mind, New England Funds has introduced programs specially designed to help
you make the most of the newest retirement vehicles.
[Dalbar Logo]
1995 o 1996 o 1997
In addition to offering quality mutual fund choices and tax-advantaged plans, we
focus on providing the highest quality customer service. This is why I am
pleased to report that we have received DALBAR's Mutual Fund Service Award for
"providing the highest tier of service excellence in the mutual fund industry."
New England Funds is one of just three mutual fund companies to receive this
award for the third consecutive year from DALBAR, an independent evaluator of
mutual fund service. We are continuing to work to provide even more effective
services. Two examples are: the Personal Access Line(TM) -- our enhanced
automated telephone account service (800-346-5984) -- and the account
information section of the New England Funds web site (www.mutualfunds.com).
Each provides convenient, 24-hour access to current information about your New
England Funds accounts.
All of us at New England Funds thank you for your continued support and look
forward to serving you in the years ahead.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
<PAGE>
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
INVESTMENT RESULTS THROUGH DECEMBER 31. 1997
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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.
Growth of a $10,000 Investment in Class A Shares
[A chart appears here illustrating the growth of a $10,000 investment in the
Massachusetts Tax Free Fund's Class A shares since 12/31/87 compared to the
Lehman Municipal Index and the Cost of Living. The plot points for this chart
are as follows.]
DECEMBER 1987 THROUGH DECEMBER 1997
Compared to Lehman Municipal Index(4) and the Cost of Living(5)
Cost
NAV MSC Lehman* of Living
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12/31/87 $10,000 $ 9,575 $10,000 $10,000
1988 $10,974 $10,508 $11,016 $10,442
1989 $11,851 $11,374 $12,205 $10,928
1990 $12,467 $11,937 $13,094 $11,595
1991 $13,897 $13,306 $14,684 $11,950
1992 $15,157 $14,513 $15,978 $12,297
1993 $17,037 $16,313 $17,940 $12,635
1994 $15,773 $15,103 $17,012 $12,972
1995 $18,587 $17,797 $19,983 $13,302
1996 $19,189 $18,373 $20,870 $13,743
1997 $20,974 $20,082 $22,788 $13,995
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 MASSACHUSETTS TAX FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/97
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CLASS A (Inception 3/23/84) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 9.30% 6.71% 7.69%
With Max. Sales Charge(2) 4.68 5.79 7.22
Lehman Municipal Index(4) 9.19 7.36 8.58
Lipper MA Municipal Average(6) 8.64 6.76 8.10
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CLASS B (Inception 9/13/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 8.56% 9.23% 4.42%
With CDSC(3) 3.56 8.38 4.03
Lehman Municipal Index(4) 9.19 10.23 6.13
(calculated from 9/30/93)
Lipper MA Municipal Average(6) 8.64 9.48 5.24
(calculated from 9/30/93)
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 12/31/97
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CLASS A CLASS B
SEC 30-day Yield(7) 4.74% 4.32%
Taxable Equivalent Yield(8) 8.92 8.12
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 Massachusetts Municipal 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 and some other federal and state taxes may apply, which are not
reflected here.
<PAGE>
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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Q. How did New England Massachusetts Tax Free Income Fund perform over the last
12 months?
[Photo of James Welch]
James Welch
Back Bay Advisors, L.P.
I believe the Fund performed very well, providing investors a combination of
double-tax free income and appreciation in share price. For the 12-month period
ending December 31, 1997, the Fund's Class A shares generated a total return of
9.30%, reflecting a $0.63 per share gain in net asset value to $17.13 per share
and the reinvestment of $0.86 per share in dividend distributions. For the same
12-month period, the Fund's Class B shares produced a total return of 8.56%,
based on net asset value.
Q. How would you describe the investment environment for municipal bonds during
the past year?
Very positive -- interest rates fell for most of the period as a result of solid
economic growth, accompanied by continued low inflation, a declining federal
budget deficit and strong foreign demand for U.S. bonds. Foreign demand, in
fact, increased as the Asian currency crisis unfolded and investors sought the
safety of the U.S. bond market. For the tax exempt sector, stronger economic
growth generated higher tax revenues. The improved credit quality of many
municipalities reduced their need to issue debt, lowering the supply of
municipal bonds. The diminished supply helped to raise bond prices.
This positive atmosphere contrasted sharply with that of the early months of
1997, when interest rates rose and bond prices declined. Investors had become
increasingly concerned that stronger economic growth would stimulate future
inflation. In addition, the Federal Reserve Board raised short-term interest
rates in the year's first quarter to head off rising price pressures. After
peaking at 7.17% in April of 1997, the yield on long-term U.S. Treasury bonds
fell to 5.92% by year-end, fostering appreciation in bond prices.
Against this backdrop, the Commonwealth of Massachusetts experienced brisk
economic activity. The state's economic strength and improving fiscal operations
- -- which included producing a net surplus in its general fund -- prompted
Standard & Poor's to upgrade its credit rating to AA- from A+.
Q. What strategies did you use in managing the Fund?
I emphasized quality, liquidity and call protection throughout the year,
focusing on bonds that I believed would benefit from the Commonwealth's economic
strength. These included Massachusetts Transit Authority and Massachusetts Port
Authority issues -- bonds that I expected to perform well based on user fees and
tourism. And I invested in higher-grade bonds, believing they provided better
value, as lower-quality bonds offered little additional yield to compensate
investors for the greater credit risk. Reflecting this emphasis on quality, the
average quality for the portfolio was AA- as of December 31, 1997.
Credit Quality Composition -- 12/31/97
AAA 47%
A 26%
BBB 12%
AA 8%
Other 7%
Quality is based on ratings supplied by Standard & Poor's, and Moody's Investor
Service.
Average Credit Quality = AA- Average Effective Maturity = 19 Years
As a way to maintain the Fund's income stream and enhance its total return, I
also favored bonds with call dates that were as far in the future as possible.
On a bond's call date, the issue can be "called away" from the holder at a
predetermined price. This feature benefits the bond issuer if interest rates
fall, because existing bonds can then be replaced with lower-cost debt.
I also took advantage of the changing interest rate environment to emphasize
income and enhance the portfolio's price stability, namely by managing duration.
(Duration measures a bond's price sensitivity to interest rate changes -- the
longer the duration, the greater the bond's sensitivity to interest rate
changes.) I maintained a shorter duration when interest rates were rising, but
lengthened the Fund's average duration to approximately 71 1/42 years by
December 31, 1997. This strategy enabled us to capture the higher yields
available in longer-term Massachusetts bonds and helped increase the Fund's
participation in price gains when interest rates fell.
Q. What is your outlook for Massachusetts municipal bonds?
I believe many of the positive trends that benefited Massachusetts bonds in 1997
will continue. The outcome of Asia's financial difficulties, however, is a
source of uncertainty. With Asia accounting for one-third of the world's
economies, a slowdown there could substantially hinder economic growth here in
the United States, particularly in the manufacturing and export sectors.
Still, heading into 1998, I believe that at current levels, municipal bonds were
offering investors attractive after-tax yields. With AAA-rated municipal bonds
providing as much as 88% of the yield of comparable U.S. Treasuries, taxable
equivalent yields on municipal bonds were superior to those of their taxable
counterparts for investors in high tax brackets. I believe that generous yields
on top of the potential for price appreciation can make municipal bonds
attractive investment values.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1997
TAX EXEMPT OBLIGATIONS--97.9% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (c)
(UNAUDITED)
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FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
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MASSACHUSETTS BAY TRANSPORTATION
AUTHORITY--2.0%
<S> <C> <C> <C> <C>
$ 2,500,000 General Transportation Systems, Series C,
5.000%, 3/01/24, (MBIA) ............... AAA AAA $ 2,425,300
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MASSACHUSETTS MUNICIPAL--2.8%
1,000,000 Haverhill, Series A, 7.000%, 6/15/12 (FGIC) Aaa AAA 1,128,970
1,000,000 Nantucket, 6.800%, 12/01/11 .............. Aaa -- 1,113,480
1,000,000 Worcester, 6.900%, 5/15/07 (FGIC) ......... Aaa AAA 1,125,260
------------
3,367,710
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MASSACHUSETTS STATE--4.9%
5,000,000 Massachusetts State, Refunding Series A,
6.500%, 11/01/14, (MBIA) ............... Aaa AAA 5,947,200
------------
MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY
AUTHORITY--26.6%
1,500,000 Beverly Hospital Ribs, 7.440%, 6/18/20
(MBIA)(d) ............................... Aaa AAA 1,656,165
3,000,000 Boston University Ribs, Series L,
9.168%, 10/01/31, (MBIA)(d)(e) ......... Aaa AAA 3,580,560
1,750,000 Charlton Memorial Hospital, Series B,
7.250%, 7/01/13 ........................ A1 A 1,942,028
3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 3,264,270
1,000,000 Faulkner Hospital, Series C, 6.000%,
7/01/13 ................................. Baa1 -- 1,039,650
3,290,000 Harvard University Series N, 6.250%,
4/01/20(e) .............................. Aaa AAA 3,902,137
2,400,000 Medical Center of Central Mass., CIass A,
7.000%, 7/01/12 A3 A 2,621,256
1,000,000 New England Baptist, Series B, 7.300%,
7/01/11 ................................ Baa1 BBB+ 1,081,880
1,220,000 New England Deaconess Hospital, Series D,
6.875%, 4/01/22, (AMBAC) ............... Aaa AAA 1,354,212
1,190,000 New England Medical Center, Series F,
6.625%, 7/01/25, (FGIC) ................ Aaa AAA 1,307,596
2,000,000 North Adams Regional Hospital, Series C,
6.750%, 7/01/09 ......................... -- BBB- 2,185,780
4,340,000 Saints Memorial Medical Center, Series A,
6.000%, 10/01/23 ....................... B1 -- 4,342,170
1,500,000 Valley Regional Health System, Series B,
Pre-refunded, 8.000%, 7/01/18 .......... Aaa AAA 1,667,820
1,000,000 Valley Regional Health System, Series C,
6.250%, 7/01/11, (Connie Lee) .......... Aaa AAA 1,148,110
1,000,000 Wentworth Institute of Technology, Series
A, 7.400%, 4/01/10, (AMBAC) ............ Aaa AAA 1,090,700
------------
32,184,334
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MASSACHUSETTS STATE HOUSING FINANCE
AGENCY--15.5%
2,500,000 Housing Revenue, Series A, 6.375%, 4/01/21 A1 A+ 2,648,750
215,000 Housing Revenue, Series A, 9.000%, 12/01/18 Aaa A- 219,300
715,000 Multifamily Residential Development, Series
A, 7.650%, 2/01/28, (FNMA) ............. Aaa AAA 755,820
2,000,000 Residential Development, Series A,
6.900%, 11/15/24, (FNMA) ............... Aaa AAA 2,117,800
2,500,000 Residential Development, Series E,
6.250%, 11/15/12, (FNMA) ............... Aaa AAA 2,673,575
1,300,000 Residential Development, Series I,
6.900%, 11/15/25, (FNMA) ............... Aaa AAA 1,413,672
3,020,000 Single Family Mortgage, Series 13, 7.950%,
6/01/23 ................................ Aa A+ 3,230,826
3,000,000 Single Family Mortgage, Series 21, 7.125%,
6/01/25 ................................ Aa A+ 3,253,770
1,975,000 Single Family Mortgage, Series 32, 6.600%,
12/01/26 ............................... Aa A+ 2,121,861
400,000 Single Family Mortgage, Series 4, 7.375%,
6/01/14 ................................ Aa A+ 408,000
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18,843,374
------------
MASSACHUSETTS STATE INDUSTRIAL FINANCE
AGENCY--8.3%
2,000,000 FHA Briscoe House Assisted Living A,
7.125%, 2/01/36 ........................ -- AAA 2,310,180
1,000,000 Harvard Community Health Plan, Series B,
7.750%, 10/01/08, (MBIA) ............... Aaa AAA 1,048,900
5,000,000 Newton Group Property's Project, 8.000%,
9/01/27(e) ............................. -- -- 5,230,400
475,000 Ogden Haverhill Project, 7.250%, 12/01/06
(AMBAC) ................................. Aaa AAA 483,122
1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11
(AMBAC) ................................. Aaa AAA 1,017,300
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10,089,902
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MASSACHUSETTS STATE TURNPIKE AUTHORITY-- 7.7%
12,610,000 Massachusetts Turnpike Authority, Capital
Appreciation Senior Series C, Zero
Coupon, 1/01/16, (MBIA) ................ Aaa AAA 5,124,073
11,000,000 Massachusetts Turnpike Authority, Capital
Appreciation Senior Series C, Zero
Coupon, 1/01/17, (MBIA) ................ Aaa AAA 4,220,150
------------
9,344,223
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OTHER MASSACHUSETTS OBLIGATIONS--14.9%
2,000,000 Consolidated Loan, Series A, 7.625%,
6/01/08 ................................. Aaa AA- 2,259,920
1,110,000 Massachusetts Educational Loan Authority,
7.250%, 1/01/09, (AMBAC) ............... Aaa AAA 1,182,006
1,500,000 Massachusetts Municipal Wholesale Electric,
6.750%, 7/01/08 ........................ Baa2 BBB+ 1,626,450
2,500,000 Massachusetts Municipal Wholesale Electric,
6.750%, 7/01/11 ........................ Baa2 BBB+ 2,702,350
3,200,000 Massachusetts Water Resouces Authority,
Series B, 5.000%, 3/01/22, (MBIA) ...... Aaa AAA 3,112,320
3,130,000 Massachusetts Water Resources Authority,
Series A, 6.500%, 7/15/19 .............. A2 A 3,810,430
3,000,000 New England Educational Loan, Sub-Issue H,
6.900%, 11/01/09 ....................... A1 -- 3,389,070
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18,082,546
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OTHER OBLIGATIONS--7.9%
1,500,000 Guam Airport Authority Revenue Bond, Series
B, 6.600%, 10/01/10 .................... -- BBB 1,651,125
3,400,000 Guam Power Authority Revenue Bond, Series
A, 6.300%, 10/01/12 .................... -- BBB 3,611,140
3,850,000 Virgin Islands Public Financial Authority,
Series A, 7.250%, 10/01/18 ............. -- -- 4,348,498
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9,610,763
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PUERTO RICO OBLIGATIONS--7.3%
1,395,000 Aqueduct & Sewer Authority, 10.250%,
7/01/09 ................................. Aaa AAA 1,917,707
2,000,000 Aqueduct & Sewer Authority, Refunding,
6.250%, 7/01/12 ........................ Baa1 A 2,311,600
4,000,000 Puerto Rico, Aqueduct & Sewer Authority,
6.250%, 7/01/13 ........................ Baa1 A 4,609,600
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8,838,907
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Total Tax Exempt Obligations (Identified
Cost $109,468,081) 118,734,259
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OPTIONS--0.1%
CONTRACTS DESCRIPTION
- -----------------------------------------------------------------------------------------------------
200 U.S. Treasury Bond Futures, 121 Call,
February 1998 ........................... 165,625
------------
Total Options (Identified Cost $238,300) .. 165,625
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Total Investments--98.0% (Identified Cost
$109,706,381) (b) 118,899,884
Other assets less liabilities ............ 2,368,192
------------
Total Net Assets--100% .................... $121,268,076
============
WRITTEN OPTIONS
UNREALIZED
CONTRACTS DESCRIPTION APPRECIATION
- ------------------------------------------------------------------------------------------------------
U.S. Treasury Bond Futures, 124 Call, March
100 1998 .................................... $ 12,100
============
FUTURES CONTRACTS
NET
UNREALIZED
CONTRACTS DESCRIPTION DEPRECIATION
- ------------------------------------------------------------------------------------------------------
150 U.S. Treasury Bonds, March 1998 (short) ..... $ (98,693)
25 Municipal Bond Index, March 1998 (long) ..... 6,150
------------
$ (92,543)
============
(a) See Note 1a to the financial statements.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based
on cost of $109,553,262 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 ........................... $ 9,419,299
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value ........................... (72,677)
------------
Net unrealized appreciation .................................. $ 9,346,622
============
As of December 31, 1997, the fund had a capital loss carryforward of
$806,566 expiring December 31, 2002.
(c) The ratings shown are believed to be the most recent ratings available at
December 31, 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 December 31, 1997. The Fund's subadvisor independently evaluates the
Fund's portfolio securities and in making investment decisions does not rely
solely on the ratings of agencies. (d) Inverse floating rate security
(d) Inverse floating rate security.
(e) A portion of these securities have been segregated as collateral in connection
with the Fund's derivative investments at December 31, 1997.
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
MBIA -- Municipal Bond Investors Assurance Corp.
Rib -- Residual interest bond
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
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December 31, 1997
ASSETS
Investments at value ....................... $118,899,884
Cash ....................................... 638,610
Receivable for:
Fund shares sold ......................... 230,799
Securities sold .......................... 6,649,163
Accrued interest ......................... 1,903,345
Prepaid registration expense ............... 3,000
------------
128,324,801
LIABILITIES
Payable for:
Securities purchased ..................... $6,635,620
Variation margin ......................... 77,344
Written options - (proceeds of $63,663) .. 51,563
Fund shares redeemed ..................... 54,723
Dividends declared ....................... 68,547
Accrued expenses:
Management fees .......................... 103,867
Deferred trustees' fees .................. 9,909
Accounting and administrative ............ 2,433
Other .................................... 52,719
----------
7,056,725
------------
NET ASSETS ................................... $121,268,076
============
Net Assets consist of:
Capital paid in .......................... $114,208,413
Distributions in excess of net investment
income ................................. (41,118)
Accumulated net realized losses .......... (2,012,279)
Unrealized appreciation on investments,
options and futures contracts .......... 9,113,060
------------
NET ASSETS ................................... $121,268,076
============
Computation of net asset value and offering
price:
Net asset value and redemption price of Class A
shares ($113,868,828 divided by 6,648,647
shares of beneficial interest) ............ $17.13
======
Offering price per share (100/95.75 of $17.13) $17.89*
======
Net asset value and offering price of Class B
shares $7,399,248 divided by 432,834 shares
of beneficial interest) ................... $17.09**
======
Identified cost of investments ............... $109,706,381
============
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1997
INVESTMENT INCOME
Interest ................................. $ 7,300,216
Expenses
Management fees ........................ $ 691,920
Service and distribution fees - Class A 390,024
Service and distribution fees - Class B 69,485
Trustees' fees and expenses ............ 21,806
Accounting and administrative .......... 29,915
Custodian .............................. 85,804
Transfer agent ......................... 199,082
Audit and tax services ................. 26,950
Legal .................................. 10,779
Printing ............................... 30,068
Registration ........................... 10,759
Miscellaneous .......................... 9,321
----------
Total expenses ........................... 1,575,913
Less fees waived by the investment adviser
and subadviser ......................... (346,897) 1,229,016
---------- ----------
Net investment income .................... 6,071,200
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ...................... 752,806
Written options - net .................. (578,897)
Futures contracts - net ................ 101,975
-----------
Net realized gain on investments,
written options and futures
contracts ............................ 275,884
-----------
Unrealized appreciation (depreciation) on:
Investments - net ...................... 4,241,339
Written options - net .................. 12,100
Futures contracts - net ................ (92,543)
----------
Net unrealized appreciation on investments,
written options and futures
contracts ............................ 4,160,896
-----------
Net gain on investment transactions ...... 4,436,780
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS . $10,507,980
===========
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
FROM OPERATIONS
Net investment income ...................... $ 6,386,751 $ 6,071,200
Net realized gain on investments, written
options and futures contracts ............ 330,110 275,884
Unrealized appreciation (depreciation) on
investments, written options and futures
contracts ................................ (2,877,442) 4,160,896
------------ ------------
Increase in net assets from operations ..... 3,839,419 10,507,980
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A .................................. (6,049,344) (5,774,640)
Class B .................................. (326,962) (314,984)
------------ ------------
(6,376,306) (6,089,624)
------------ ------------
Decrease in net assets derived from capital
share transactions ..................... (4,013,362) (3,526,289)
------------ ------------
Total increase (decrease) in net assets .. (6,550,249) 892,067
NET ASSETS
Beginning of the year ...................... 126,926,258 120,376,009
------------ ------------
End of the year ............................ $120,376,009 $121,268,076
============ ============
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME
Beginning of the year ...................... $ (60,268) $ (49,823)
============ ============
End of the year ............................ $ (49,823) $ (41,118)
============ ============
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ....... $16.62 $17.27 $15.10 $16.85 $16.50
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................... 0.97 0.89 0.88 0.87 0.86
Net Realized and Unrealized Gain (Loss) on
Investments ............................ 1.05 (2.15) 1.76 (0.35) 0.63
------ ------ ------ ------ ------
Total From Investment Operations ......... 2.02 (1.26) 2.64 0.52 1.49
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income . (0.97) (0.89) (0.89) (0.87) (0.86)
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 ...................... (1.37) (0.91) (0.89) (0.87) (0.86)
------ ------ ------ ------ ------
Net Asset Value, End of Year ............. $17.27 $15.10 $16.85 $16.50 $17.13
====== ====== ====== ====== ======
Total Return (%) (b) ..................... 12.4 (7.4) 17.8 3.2 9.3
Ratio of Operating Expenses to Average Net
Assets (%) (a) ......................... 0.85 0.85 0.85 0.90 1.00
Ratio of Net Investment Income to Average
Net Assets (%) ......................... 5.58 5.63 5.46 5.31 5.17
Portfolio Turnover Rate (%) .............. 42 48 127 140 132
Net Assets, End of Year (000) ............ $128,797 $107,565 $120,229 $112,934 $113,869
(a) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense
limitations described in Note 4 to the
Financial Statements would have been
(%) .................................. 1.21 1.24 1.24 1.27 1.29
(b) A sales charge is not reflected in
total return calculations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS --CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
SEPTEMBER 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------
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 0.76
Net Realized and Unrealized Gain (Loss) on
Investments ............................. (0.15) (2.14) 1.74 (0.34) 0.62
------ ------ ------ ------ ------
Total From Investment Operations .......... 0.10 (1.37) 2.52 0.41 1.38
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income .. (0.22) (0.79) (0.78) (0.76) (0.76)
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) (0.76)
------ ------ ------ ------ ------
Net Asset Value, End of Period ............ $17.26 $15.08 $16.82 $16.47 $17.09
====== ====== ====== ====== ======
Total Return (%) (d) ...................... 0.4 (8.0) 17.0 2.6 8.6
Ratio of Operating Expenses to Average Net
Assets (%) (b) .......................... 1.50(c) 1.50 1.50 1.55 1.65
Ratio of Net Investment Income to Average
Net Assets (%) .......................... 4.26(c) 4.98 4.81 4.66 4.52
Portfolio Turnover Rate (%) ............... 42(c) 48 127 140 132
Net Assets, End of Period (000) ........... $1,289 $4,523 $6,697 $7,442 $7,399
(a) Commencement of operations.
(b) The ratio of operating expenses to
average net assets without giving
effect to voluntary expense limitations
described in Note 4 to the Financial
Statements would have been (%) ........ 1.86 1.89 1.89 1.92 1.94
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge is
not reflected in total return
calculations. Periods less than one
year are not annualized.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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. Debt securities (other than short-term obligations
with a remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, selected by the Fund's adviser as
authorized by the Board of Trustees, which service determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term obligations with a remaining maturity of less than sixty days are
stated at amortized cost, which approximates value. All other securities and
assets are valued at their fair value as determined in good faith by the
Fund's adviser, New England Funds Management, L.P., and the subadviser, 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 discount. In determining net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
C. OPTIONS. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to
the Fund is that the change in value of options contracts may not correspond
to the change in value of the hedged instruments. In addition, losses may
arise from changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty is unable
to perform. The maximum loss for purchased options is limited to premium
initially paid for the option. For options written by the Fund, the maximum
loss is not limited to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
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. 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. The Fund's subadviser 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 year ended December 31, 1997 were $154,318,006 and $161,608,320
respectively.
Investments in written options for the Fund for the year ended December 31,
1997 are summarized as follows:
WRITTEN OPTIONS
---------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1996 ........... 0 $ 0
Contracts opened .................... 4,525 2,022,362
Contracts closed .................... (4,425) (1,958,699)
----- ----------
Open at December 31, 1997 ........... 100 $ 63,663
===== ==========
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 L.P. ("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 year ended December 31,
1997 are as follows:
FEES EARNED(a)
--------------
$345,960 New England Funds Management
$345,960 Back Bay Advisors
(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, and financial reporting
functions and clerical functions relating to the Fund, and (ii) expenses for
services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1997 these
expenses amounted to $29,915 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 year ended December 31, 1997, the
Fund paid New England Funds $278,589 and $17,371 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 year ended December 31, 1997, the Fund paid New England
Funds $111,435 and $52,114 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 year ended
December 31, 1997, amounted to $170,601.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $154,138 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $2,325 in
transfer agent credits. The transfer agent expense in the statement of
operations is net of these credits.
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 $2,114
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
Committee Chairman 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. As a result of the Fund's
expenses exceeding the applicable voluntary expense limitation during the year
ended December 31, 1997, Back Bay Advisors reduced its subadvisory fee of
$345,960 by $173,449 and NEFM reduced its advisory fee of $345,960 by
$173,448.
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. The Fund had the following industry
concentrations in excess of 10% on December 31, 1997 as a percentage of the
Fund's total net assets: Education (10.15), Hospitals (19.36), Housing
(15.28), and Water and Sewer (11.66). The Fund had 21.0% of its total net
assets insured by Municipal Bond Investors Assurance Corporation (MBIA).
6. CAPITAL SHARES. At December 31, 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 YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold .......................... 812,524 $ 13,207,238 792,988 $ 13,125,655
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 275,016 4,511,684 256,070 4,279,009
---------- ------------ ---------- ------------
1,087,540 17,718,922 1,049,058 17,404,664
Shares repurchased ................... (1,380,081) (22,611,833) (1,243,295) (20,634,447)
---------- ------------ ---------- ------------
Net decrease ......................... (292,541) $ (4,892,911) (194,237) $ (3,229,783)
---------- ------------ ---------- ------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- ------------
Shares sold .......................... 72,803 $ 1,192,157 79,890 $ 1,325,027
Shares issued in connection with the
reinvestment of:
Distributions from net investment
income ............................. 15,083 247,027 14,270 238,056
---------- ------------ ---------- ------------
87,886 1,439,184 94,160 1,563,083
Shares repurchased ................... (34,314) (559,635) (113,037) (1,859,589)
---------- ------------ ---------- ------------
Net increase (decrease) .............. 53,572 879,549 (18,877) (296,506)
---------- ------------ ---------- ------------
Decrease derived from capital shares
transactions ....................... (238,969) $ (4,013,362) (213,114) $ (3,526,289)
========== ============ ========== ============
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Trustees of New England Funds Trust II and Shareholders of
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
In our opinion, the accompanying statement of assets & liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of New England Massachusetts Tax
Free Income Fund ("the Fund"), a series of New England Funds Trust II, at
December 31, 1997, and the results of its operations, the changes in its net
assets and the financial highlights for the year then ended, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities owned at December 31,
1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above. The
statement of changes in net assets for the period ended December 31, 1996 and
the financial highlights for each of the periods then ended were audited by
other independent accountants whose report dated February 10, 1997 expressed
an unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 12, 1998
<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 is 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 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
Equity Income 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
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>
--------------
(Logo) 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
---------------------
- ---------------------
[Logo]
MUTUAL FUND
SERVICE AWARD
- ---------------------
DALBAR
HONORS COMMITMENT TO:
INVESTORS
- ---------------------
1995 o 1996 o 1997
MA56-1297
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