<PAGE>
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SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Massachusetts Tax Free
Income Fund
[graphic omitted]
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JUNE 30, 1998
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<PAGE>
AUGUST 1998
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[Photo of Henry L.P. Schmelzer]
Dear Shareholder:
Investors had reason for comfort during the first half of 1998.
After stunning gains in each of the last three years, the stock market behaved
more like its customary self: Major market indicators moved up for a time, slid
back and were once again in recovery mode at the end of the period. This pattern
largely reflected investors' responses to fast-changing events in Asia.
Unpredictable markets call to mind the long-term experience of millions of
mutual fund investors; those of us who held firm to our plans as markets entered
difficult periods were often rewarded as markets recovered. The longer you stay
invested the less interim ups and downs -- here or overseas -- should concern
you.
News from the Far East drove bond market sentiment as well. In the United
States, faltering Asian economies meant lower prices on many imported goods,
putting pressure on prices and corporate earnings. With slower growth now a real
possibility and with little immediate evidence of inflation, the Federal Reserve
Board left short-term interest rates unchanged, while long-term rates fell to
record lows in mid-June.
In the pages that follow, you can read about how your Fund's management dealt
with the disruptions in the Pacific region and their impact on our domestic
economy. But beyond Asia's present problems, and notwithstanding the inevitable
ebb and flow of our own business cycle, there are reasons to be optimistic about
investment prospects over the next several years. For example, vast,
under-served populations in China and elsewhere represent huge potential demand
for consumer goods. Here in the United States, there is the prospect of a
demography-driven spending wave, as millions of baby-boomers enter their peak
consumption years. Events may turn out differently -- volatility will always be
part of investing -- but as much as the markets may waver, the watchwords for
many long-term investors are constant: diversify and persist.
While you are thinking about your investments, take a few minutes to review your
portfolio. It's possible that three years of strong market gains have tilted
your holdings disproportionately toward aggressive stock funds. If so, you and
your financial representative can adjust the balance easily using some of New
England Funds' more conservative equity or bond funds to reallocate your assets
in line with your long-term goals and comfort level. Once you are satisfied with
your portfolio's balance, be sure to stay in touch with your financial
professional, invest regularly and don't try to guess what the market will do
next. Thank you for your continued support of New England Funds.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
PREPARING FOR THE YEAR 2000
New England Funds continues to work to provide high quality service as we move
into the new century. Since last year we have devoted significant resources to
identifying, analyzing and resolving computer issues related to Year 2000. As a
further measure, we have focused on year-end 1998 as a target for preparedness
by vendor and service agency systems that we rely on for support. We expect
major systems to be ready before the end of the year, with a year of quality
assurance to follow.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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Investment Results Through June 30, 1998
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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
JUNE 1988 THROUGH JUNE 1998
Compared to Lehman Municipal Index(4) and the Cost of Living(5)
[A chart appears here illustrating the growth of a $10,000 investment in the
Massachusetts Tax free Fund's Class A shares since 6/30/88 compared to the
Lehman Municipal Index and the Cost of Living. The plot points for this chart
are as follows.]
With
Net Maximum Lehman
Asset Sales Municipal Cost of
Value(1) Charge(2) Index(4) Living(5)
-------- --------- -------- ------
6/30/88 $10,000 $ 9,575 $10,000 $10,000
6/89 $10,959 $10,493 $11,139 $10,517
6/90 $11,415 $10,930 $11,898 $11,008
6/91 $12,319 $11,795 $12,970 $11,525
6/92 $13,790 $13,204 $14,496 $11,881
6/93 $15,505 $14,846 $16,230 $12,237
6/94 $15,222 $14,575 $16,262 $12,542
6/95 $16,384 $15,688 $17,692 $12,923
6/96 $17,446 $16,705 $18,866 $13,279
6/97 $18,823 $18 023 $20,564 $13,584
6/98 $20,302 $19,439 $22,345 $13,796
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
differs from that shown based on differences in inception date, fees and sales
charges. All Index and Fund performance assumes reinvested distributions.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
CLASS A (Inception 3/23/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 1.99% 7.86% 5.54% 7.34%
With Max. Sales Charge(2) -2.34 3.26 4.63 6.87
Lehman Municipal Index(4) 2.69 8.66 6.46 8.30
Lipper MA Municipal Average(6) 2.34 8.05 5.71 7.75
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CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.72% 7.18% 4.32%
With CDSC(3) -3.25 2.18 3.98
Lehman Municipal Index(4) 2.69 8.66 6.06
(calculated from 9/30/93)
Lipper MA Municipal Average(6) 2.34 8.05 5.18
(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 6/30/98
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC Yield(7) 4.65% 4.21%
Taxable Equivalent Yield(8) 8.74 7.93
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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>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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[Photo of James Welch]
Back Bay Advisors, L.P.
Q. How did the Fund perform over the past six months?
For the six months ending June 30, 1998, the Fund's Class A shares generated a
total return of 1.99%, including a $.09 per share decline in net asset value to
$17.04 and the reinvestment of $0.43 per share in dividend distributions.
Q. What was the investment environment for Massachusetts municipal bonds?
The Massachusetts economy continued to thrive, generating higher tax revenues
for the state and its localities. Strong economic conditions translated into
improved municipal fiscal operations, which often resulted in ratings upgrades
for many municipal bonds.
In early 1998, the Commonwealth took advantage of the prevailing low interest
rates both to finance projects that had been previously delayed and to refinance
older, higher-cost debt. During that time, Massachusetts issued a heavy supply
of municipal bonds. In addition, issuance of tax-exempt debt was extraordinarily
heavy nationwide, causing Massachusetts municipal bonds to underperform other
tax-exempt sectors for much of 1998's first half. Performance, however, improved
once supply began to subside toward mid-year. During the six months, a period
when investors were watching the effects of Asia's economic difficulties on the
U.S. economy, interest rates in the United States remained generally steady. The
yield on the 30-year U.S. Treasury bond moved between 5.65% and 5.90%, its
narrowest range in 20 years. In the United States, economic growth was robust
and inflation remained low. Measured by gross domestic product, the economy grew
at a 5.4% annualized rate in the first quarter, unemployment reached a 28-year
low and consumer confidence was high. Typically, strength of this magnitude
stimulates investor concern about inflation. However, investors believed that a
slowdown in the Asian economies could offset some of the economy's vigor -- a
development that would be positive for the bond market.
Q. What strategies did you use in managing the Fund?
We emphasized bonds that we believed would benefit from the state's economic and
fiscal conditions, focusing on quality and investing in zero coupon bonds,
(which are generally priced well below their face value) as well as bonds with
low coupons (stated fixed rates of interest). We chose these bonds because of
their particular potential for price appreciation when interest rates fall.
CREDIT QUALITY COMPOSITION -- 6/30/98
[Graphic Omitted]
AAA 51.9%
AA 7.0%
A 22.6%
BBB 12.0%
Other 6.5%
Quality is based on ratings supplied by Standard & Poor's.
Portfolio holdings are subject to change.
Average Credit Quality = AA- Average Maturity = 19.8 Years
The Fund's overall quality remained high; as of June 30, 1998, the average
quality was AA-. We selected bonds issued by communities with strong tax bases,
such as the AAA-rated general obligation bonds of Weston and Wellesley. During
the period, lower-rated bonds offered a minimal yield advantage over their
high-rated counterparts. That means these bonds provided not only superior
creditworthiness, but also represented better investment value. The Fund also
maintained a substantial position in health care-related bond issues, which
continue to generate attractive returns.
Q. What is your outlook for Massachusetts municipal bonds?
Our outlook is positive. We expect Massachusetts municipal bond investors
to continue to benefit from the state's strong economic and fiscal conditions.
In addition, the recent decline in supply could further enhance the performance
of the Commonwealth's bonds.
Meanwhile, we believe the Asian economic situation and its impact on the U.S.
economy will dictate the overall direction of interest rates. Near term,
however, we believe that Asia's problems could reinforce investor preference for
high-quality investments, particularly U.S. Treasuries. This would have a
positive effect on bonds in general, including municipal bonds: lower interest
rates and higher bond prices.
Portfolio commentary reflects the conditions and actions taken during the
reporting period, which are subject to change. A shift in opinion may result in
strategic and other portfolio changes.
<PAGE>
<TABLE>
<CAPTION>
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PORTFOLIO COMPOSITION
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Investments as of June 30, 1998
(unaudited)
TAX EXEMPT OBLIGATIONS--100.3% OF TOTAL NET ASSETS
RATINGS (c)
(UNAUDITED)
-------------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- ---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS MUNICIPAL--4.5%
<S> <C> <C> <C>
$ 1,000,000 Haverhill, Series A, 7.000%, 6/15/12
(FGIC) ................................. Aaa AAA $ 1,122,740
1,500,000 Wholesale Electric, 6.750%, 7/01/08 ..... Baa2 BBB+ 1,620,690
2,500,000 Wholesale Electric, 6.750%, 7/01/11 ..... Baa2 BBB+ 2,693,600
----------------
5,437,030
----------------
MASSACHUSETTS STATE HEALTH & EDUCATION
FACILITY AUTHORITY--33.5%
1,500,000 Beverly Hospital Ribs, 7.270%, 6/18/20
(MBIA)(d) .............................. Aaa AAA 1,676,760
2,000,000 Boston Medical Center Series A, 5.250%, 7/
01/16 (FSA) ............................ AAA AAA 2,008,800
3,000,000 Boston University Ribs, Series L, 9.315%,
10/01/31, (MBIA)(d)(e) ................. Aaa AAA 3,534,600
1,750,000 Charlton Memorial Hospital, Series B,
7.250%, 7/01/13 ........................ A1 A 1,937,057
3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/22 A1 A 3,259,410
1,000,000 Faulkner Hospital, Series C, 6.000%,
7/01/13 ................................ Baa1 -- 1,056,530
3,290,000 Harvard University Series N, 6.250%,
4/01/20 ................................ Aaa AAA 3,879,601
3,000,000 Jordan Hospital Series D, 5.250%,
10/01/18 ............................... -- BBB+ 2,959,260
2,000,000 Massachusetts Institute of Technology
Series I-1, 5.200%, 1/01/28 ............ Aaa AAA 2,077,100
2,400,000 Medical Center of Central Mass., CIass A,
7.000%, 7/01/12 A3 A 2,600,880
1,110,000 Milford Whitinsville Regional C, 5.750%,
7/15/13 ................................ Baa2 BBB- 1,151,669
1,000,000 New England Baptist Hospital, Series B,
7.300%, 7/01/11 Baa1 AAA 1,108,280
1,220,000 New England Deaconess Hospital, Series D,
6.875%, 4/01/22, (AMBAC) ............... Aaa AAA 1,358,385
1,190,000 New England Medical Center, Series F,
6.625%, 7/01/25, (FGIC) ................ Aaa AAA 1,303,538
2,000,000 North Adams Regional Hospital, Series C,
6.750%, 7/01/09 ........................ -- BBB- 2,188,460
4,340,000 Saints Memorial Medical Center, Series A,
6.000%, 10/01/23 ....................... B1 -- 4,359,704
1,500,000 Valley Regional Health System, Series B,
Pre-refunded, 8.000%, 7/01/18 .......... Aaa AAA 1,644,210
1,000,000 Valley Regional Health System, Series C,
6.250%, 7/01/11, (Connie Lee) .......... Aaa AAA 1,136,830
1,000,000 Wentworth Institue of Technology, Series
A, 7.400%, 4/01/10, (AMBAC) ............ Aaa AAA 1,077,340
----------------
40,318,414
----------------
MASSACHUSETTS STATE HOUSING FINANCE
AGENCY--12.7%
555,000 Multifamily Residential Development,
Series A, 7.650%, 2/01/28, (FNMA) ...... Aaa AAA 580,230
2,000,000 Residential Development, Series A, 6.900%,
11/15/24, (FNMA) ....................... Aaa AAA 2,114,080
2,500,000 Residential Development, Series E, 6.250%,
11/15/12, (FNMA) ....................... Aaa AAA 2,702,250
1,300,000 Residential Development, Series I, 6.900%,
11/15/25, (FNMA) ....................... Aaa AAA 1,411,007
2,955,000 Single Family Mortgage, Series 13, 7.950%,
6/01/23 ................................ Aa A+ 3,131,650
3,000,000 Single Family Mortgage, Series 21, 7.125%,
6/01/25 ................................ Aa A+ 3,240,540
1,945,000 Single Family Mortgage, Series 32, 6.600%,
12/01/26 ............................... Aa A+ 2,089,786
----------------
15,269,543
----------------
MASSACHUSETTS STATE INDUSTRIAL FINANCE
AGENCY--8.5%
2,000,000 FHA Briscoe House Assisted Living, 7.125%,
2/01/36 ................................ -- AAA 2,306,400
1,000,000 Harvard Community Health Plan, Series B,
7.750%, 10/01/08, (MBIA) ............... Aaa AAA 1,028,880
5,000,000 Newton Group Property's Project, 8.000%,
9/01/27 ................................ -- -- 5,395,450
475,000 Ogden Haverhill Project, 7.250%, 12/01/06
(AMBAC) ................................ Aaa AAA 483,502
1,000,000 Ogden Haverhill Project, 7.375%, 12/01/11
(AMBAC) ................................ Aaa AAA 1,018,100
----------------
10,232,332
----------------
MASSACHUSETTS STATE TURNPIKE
AUTHORITY--6.7%
3,000,000 Capital Appreciation Senior Series A,
5.000%, 1/01/37, (MBIA) ................ Aaa AAA 2,886,120
12,610,000 Capital Appreciation Senior Series C, Zero
Coupon, 1/01/16, (MBIA) ................ Aaa AAA 5,209,317
----------------
8,095,437
----------------
MASSACHUSETTS WATER RESOURCE
AUTHORITY--7.7%
2,500,000 General Refunding Series B, 4.500%,
8/01/22 (MBIA) ......................... Aaa AAA 2,264,375
3,200,000 General Refunding Series B, 5.000%,
3/01/22 (MBIA) ......................... Aaa AAA 3,130,272
3,240,000 Series A, 6.500%, 7/15/19 ................ A1 A 3,863,052
----------------
9,257,699
----------------
OTHER MASSACHUSETTS OBLIGATIONS--10.6%
2,000,000 Consolidated Loan, Series A, 7.625%,
6/01/08 ................................ Aaa AA- 2,232,380
1,075,000 Massachusetts Educational Loan Authority,
7.250%, 1/01/09, (AMBAC) ............... Aaa AAA 1,138,995
5,000,000 Massachusetts State, Refunding Series A,
6.500%, 11/01/14, (MBIA) ............... Aaa AAA 5,934,900
3,000,000 New England Educational Loan, Sub-Issue H,
6.900%, 11/01/09 ....................... A1 -- 3,401,610
----------------
12,707,885
----------------
OTHER OBLIGATIONS--8.2%
1,500,000 Guam Airport Authority Revenue Bond,
Series B, 6.600%, 10/01/10 ............. -- BBB 1,646,220
4,500,000 Guam Housing Corporation, Single Family
Mortgage, Series A, 5.750%, 9/01/31,
(FHLMC) ................................ Aaa AAA 4,795,875
3,045,000 Virgin Islands Public Financial Authority,
Series A, 7.250%, 10/01/18 ............. -- AAA 3,475,776
----------------
9,917,871
----------------
PUERTO RICO OBLIGATIONS--7.9%
4,000,000 Aqueduct & Sewer Authority, 6.250%,
7/01/13 ................................ Baa1 A 4,577,680
1,160,000 Aqueduct & Sewer Authority, 10.250%,
7/01/09 ................................ Aaa AAA 1,589,084
2,000,000 Aqueduct & Sewer Authority, Refunding,
6.250%, 7/01/12 ........................ Baa1 A 2,286,320
1,000,000 Commonwealth Highway & Transportation
Series Y, 5.500%, 7/01/26 .............. Baa1 A 1,029,410
----------------
9,482,494
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Total Tax Exempt Obligations
(Identified Cost $112,968,840) ......... 120,718,705
----------------
<CAPTION>
OPTIONS--0.1%
CONTRACTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
100 U.S. Treasury Bond Futures, 126 Call,
August 1998 ............................ 56,250
200 U.S. Treasury Notes Futures, 110 Call,
July 1998 .............................. 43,750
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Total Options (Identified Cost $118,688) . 100,000
----------------
Total Investments--100.4%
(Identified Cost $113,087,528 (b) ...... 120,818,705
Other assets less liabilities ............ (478,118)
----------------
Total Net Assets--100% ................... $ 120,340,587
================
<CAPTION>
(a)See Note 1a of Notes to Financial Statements.
(b)Federal Tax Information:
At June 30, 1998 the net unrealized appreciation on investments
based on cost of $113,087,528 for federal income tax purposes was
as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ................. $ 7,792,217
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ................. (61,040)
----------------
Net unrealized appreciation ..................................... $ 7,731,177
================
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 June 30, 1998. 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,
1998. 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)Inverse floating rate security.
(e)A portion of these securities have been segregated as collateral in
connection with the Fund's derivative investments at June 30, 1998.
</TABLE>
Legend of Portfolio abbreviations:
AMBAC -- American Municipal Bond Assurance Corp.
Connie Lee -- College Construction Loan Insurance Association
FGIC -- Financial Guarantee Insurance Company
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corp.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
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STATEMENT OF ASSETS & LIABILITIES
- ----------------------------------------------------------------------------------------------------
June 30, 1998
(unaudited)
ASSETS
<S> <C> <C>
Investments at value (Identified cost $113,087,528) ...... $ 120,818,705
Receivable for:
Fund shares sold ....................................... 40,491
Variation margin ....................................... 12,000
Accrued interest ....................................... 2,013,145
Prepaid registration expense ............................. 3,000
----------------
122,887,341
LIABILITIES
Payable for:
Securities purchased ................................... $2,019,593
Due to custodian bank .................................. 128,522
Fund shares redeemed ................................... 137,931
Dividends declared ..................................... 127,940
Miscellaneous .......................................... 6,687
Accrued expenses:
Management fees ........................................ 73,261
Deferred trustees' fees ................................ 203
Accounting and administrative .......................... 15,698
Other expenses ......................................... 36,919
----------
2,546,754
----------------
NET ASSETS ................................................. $ 120,340,587
================
Net Assets consist of:
Capital paid in ........................................ $ 113,889,801
Undistributed net investment income .................... 16,327
Accumulated net realized losses ........................ (1,296,718)
Unrealized appreciation on investments ................. 7,731,177
----------------
NET ASSETS ................................................. $ 120,340,587
================
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($112,331,105 divided by 6,592,295 shares of beneficial
interest) .............................................. $17.04
======
Offering price per share (100/95.75 of $17.04) ............. $17.80*
======
Net asset value and offering price of Class B shares ($8,009,482 divided by
470,998 shares of beneficial interest) ................... $17.01**
======
*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>
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STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
INVESTMENT INCOME
Interest ...................................... $3,567,834
Expenses
Management fees ............................. $ 346,497
Service and distribution fees - Class A ..... 194,336
Service and distribution fees - Class B ..... 38,569
Trustees' fees and expenses ................. 5,447
Accounting and administrative ............... 15,698
Custodian ................................... 46,809
Transfer agent .............................. 116,517
Audit and tax services ...................... 11,475
Legal ....................................... 677
Printing .................................... 20,849
Registration ................................ 8,627
Miscellaneous ............................... 3,627
----------
Total expenses ................................ 809,128
Less expenses waived by the investment adviser
and subadviser .............................. (190,243) 618,885
---------- ----------
Net investment income ......................... 2,948,949
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ........................... 1,262,730
Written options contracts - net ............. (517)
Futures contracts - net ..................... (546,653)
----------
Total realized gain on investments, written
options, and futures contracts .............. 715,560
----------
Unrealized appreciation (depreciation) on:
Investments - net ........................... (1,486,526)
Written options - net ....................... 12,100
Futures contracts - net ..................... 92,543
----------
Total unrealized depreciation on investments,
options, and futures contracts .............. (1,381,883)
----------
Net loss on investment transactions ........... (666,323)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...... $2,282,626
==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
(unaudited)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
FROM OPERATIONS
<S> <C> <C>
Net investment income ................................... $ 6,071,200 $ 2,948,949
Net realized gain on investments, written options and
futures contracts ..................................... 275,884 715,560
Unrealized appreciation (depreciation) on investment
transactions .......................................... 4,160,896 (1,381,883)
------------ ------------
Increase in net assets from operations .................. 10,507,980 2,282,626
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (5,774,640) (2,725,660)
Class B ............................................... (314,984) (165,844)
------------ ------------
(6,089,624) (2,891,504)
------------ ------------
DECREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ............................................ (3,526,289) (318,611)
------------ ------------
Total increase (decrease) in net assets ................. 892,067 (927,489)
NET ASSETS
Beginning of the period ................................. 120,376,009 121,268,076
------------ ------------
End of the period ....................................... $121,268,076 $120,340,587
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
End of the period ....................................... $ (41,118) $ 16,327
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------
(unaudited)
CLASS A
---------------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period .......................... $ 16.62 $ 17.27 $ 15.10 $ 16.85 $ 16.50 $ 17.13
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ............. 0.97 0.89 0.88 0.87 0.86 0.43
Net Realized and Unrealized Gain
(Loss) on Investments ........... 1.05 (2.15) 1.76 (0.35) 0.63 (0.09)
-------- -------- -------- -------- -------- --------
Total From Investment Operations .. 2.02 (1.26) 2.64 0.52 1.49 0.34
-------- -------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income ............... (0.97) (0.89) (0.89) (0.87) (0.86) (0.43)
Distributions in Excess of Net
Investment Income ............... 0.00 (0.02) 0.00 0.00 0.00 0.00
Distributions From Net Realized
Gains ........................... (0.40) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total Distributions ............... (1.37) (0.91) (0.89) (0.87) (0.86) (0.43)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .... $ 17.27 $15.10 $16.85 $16.50 $17.13 $17.04
Total Return (%) (b) .............. 12.4 (7.4) 17.8 3.2 9.3 2.0
Ratio of Operating Expenses to
Average Net Assets (%) (a) ...... 0.85 0.85 0.85 0.90 1.00 1.00(c)
Ratio of Net Investment Income
to Average Net Assets (%) ....... 5.58 5.63 5.46 5.31 5.17 5.01(c)
Portfolio Turnover Rate (%) ....... 42 48 127 140 132 115(c)
Net Assets, End of Period (000) $128,797 $107,565 $120,229 $112,934 $113,869 $112,331
<CAPTION>
(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
<S> <C> <C> <C> <C> <C> <C>
been (%) ....................... 1.21 1.24 1.24 1.27 1.29 1.32(c)
(b)A sales charge is not reflected in total return calculations. Periods less
than one year are not annualized.
(c)Computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- ----------------------------------------------------------------------------------------------
(unaudited)
CLASS B
----------------------------------------------------------------------------------------------------
SEPTEMBER 13(a) YEAR ENDED DECEMBER 31, SIX MONTHS
THROUGH ENDED
DECEMBER 31, --------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------------- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ..................... $17.78 $17.26 $15.08 $16.82 $16.47 $17.09
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ....... 0.25 0.77 0.78 0.75 0.76 0.38
Net Realized and Unrealized
Gain (Loss) on Investments . (0.15) (2.14) 1.74 (0.34) 0.62 (0.09)
------ ------ ------ ------ ------ ------
Total From Investment
Operations ................. 0.10 (1.37) 2.52 0.41 1.38 0.29
----- ----- ----- ----- ----- -----
Less Distributions
Distributions From Net
Investment Income ......... (0.22) (0.79) (0.78) (0.76) (0.76) (0.37)
Distributions in Excess of
Net Investment Income ..... 0.00 (0.02) 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gains ............ (0.40) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Total Distributions ......... (0.62) (0.81) (0.78) (0.76) (0.76) (0.37)
----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period .................... $17.26 $15.08 $16.82 $16.47 $17.09 $17.01
====== ====== ====== ====== ====== ======
Total Return (%) (d) ........ 0.4 (8.0) 17.0 2.6 8.6 1.7
Ratio of Operating Expenses
to Average Net Assets (%)
(b) ....................... 1.50(c) 1.50 1.50 1.55 1.65 1.65(c)
Ratio of Net Investment
Income to Average Net
Assets (%) ................ 4.26(c) 4.98 4.81 4.66 4.52 4.36(c)
Portfolio Turnover Rate (%) . 42(c) 48 127 140 132 115(c)
Net Assets, End of Period
(000) ..................... $1,289 $4,523 $6,697 $7,442 $7,399 $8,009
<CAPTION>
(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
<S> <C> <C> <C> <C> <C> <C>
been (%) ................. 1.86(c) 1.89 1.89 1.92 1.94 1.97(c)
(c) Computed on an annualized basis.
(d) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
June 30, 1998
(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
Fund seeks as high a level of current income exempt from federal income tax and
Massachusetts personal income tax. 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 is a "Fund").
The Fund offers both Class A and Class B shares. 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, 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, 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 including interest. 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. For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were
$70,857,986 and $68,974,272 respectively.
Transactions in written options for the six months ended June 30, 1998 are
summarized as follows:
WRITTEN OPTIONS
------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1997 ........... 100 $ 63,663
Contracts opened .................... 600 414,969
Contracts closed .................... (700) (478,632)
--- --------
Open at June 30, 1998 ............... 0 $ 0
=== =========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.60% of the first $100 million Fund's average
daily net assets and 0.50% of such assets in excess of $100 million. NEFM pays
the Fund's investment subadviser, Back Bay Advisors 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 Nvest Companies, L.P. ("Nvest"), 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, 1998 are as follows:
FEES EARNED(a)
--------------
$173,248 NEFM
$173,249 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 Nvest 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 six
months ended June 30, 1998 these expenses amounted to $15,698 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 0.25% of the average daily net assets attributable to the Fund's
Class A and Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class A and Class B shares and/or the maintenance of shareholder
accounts. For the six months ended June 30, 1998, the Fund paid New England
Funds $139,922 and $9,642 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 0.10% of the average daily net assets attributable to the
Fund's Class A shares and 0.75% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in connection with the
marketing or sale of Class A and Class B shares, respectively. For the six
months ended June 30, 1998, the Fund paid New England Funds $54,414 and $28,927
in distribution fees for Class A and Class B shares, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1998, amounted to $124,577.
D. TRANSFER AGENT FEES. New England Funds Services Corporation ("NEFSCO") is the
transfer and shareholder servicing agent to the Fund. For the six months ended
June 30, 1998, the Fund paid NEFSCO $83,313 as compensation for its services in
that capacity. For the six months ended June 30, 1998, the Fund received $1,239
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 NEFM,
New England Funds, NEFSCO, Nvest or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $636
Meeting Fee 159/meeting
Annual Committee Member Retainer 95/meeting
Annual Committee Chairman Retainer 64
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 six months
ended June 30, 1998, Back Bay Advisors reduced its subadvisory fee of $173,249
by $95,121 and NEFM reduced its advisory fee of $173,248 by $95,122.
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 June 30, 1998 as a percentage of the Fund's total net assets: Education
(13.33), Hospitals (18.88), Housing (16.67), and Water and Sewer (11.51). The
Fund had (21.33) of its total net assets insured by Municipal Bond Investors
Assurance Corporation (MBIA).
6. CAPITAL SHARES. At June 30, 1998 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, 1997 JUNE 30, 1998
----------------------------- ---------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Shares sold .......................... 792,988 $ 13,125,655 619,061 $ 10,558,049
Shares issued in connection with the reinvestment of:
Distributions from net investment
income ............................. 256,070 4,279,009 117,651 2,004,775
---------- ------------- -------- -------------
1,049,058 17,404,664 736,712 12,562,824
Shares repurchased ................... (1,243,295) (20,634,447) (793,064) (13,534,420)
---------- ------------- -------- -------------
Net decrease ......................... (194,237) $ (3,229,783) (56,352) $ (971,596)
---------- ------------- -------- -------------
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Shares sold .......................... 79,890 $ 1,325,027 73,944 $ 1,262,548
Shares issued in connection with the reinvestment of:
Distributions from net investment
income ............................. 14,270 238,056 7,638 129,877
---------- ------------- -------- -------------
94,160 1,563,083 81,582 1,392,425
Shares repurchased ................... (113,037) (1,859,589) (43,418) (739,440)
---------- ------------- -------- -------------
Net increase (decrease) .............. (18,877) (296,506) 38,164 652,985
---------- ------------- -------- -------------
Decrease derived from capital shares
transactions ....................... (213,114) $ (3,526,289) (18,188) $ (318,611)
========== ============= ======== =============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Bullseye Fund
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
Tax Free Income Fund of New York
Intermediate Term Tax Free Fund of California
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.
New England Funds, L.P., and other firms selling shares of New England Funds
are members of the National Association of Securities Dealers, Inc.
(NASD). As a service to investors, the NASD has asked that we inform you
of the availability of a brochure on its Public Disclosure Program.
The program provides access to information about
securities firms and their representatives. Investors may obtain
a copy by contacting the NASD at 1-800-289-9999 or by
visiting their web site at www.NASDR.com.
<PAGE>
------------------
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------------------
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