<PAGE>
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England Tax Free
Income Fund of New York
[graphic omitted]
- --------------
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
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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>
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
- -------------------------------------------------------------------------------
INVESTMENT RESULTS THROUGH JUNE 30, 1998
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
APRIL 1993 (INCEPTION) THROUGH JUNE 1998
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Intermediate Term Tax Free Fund of New York
since inception 4/23/93 compared to the Lehman Municipal Index and the Cost of
Living. The data points for this chart are as follows:]
NET WITH LEHMAN COST
ASSET MAXIMUM SALES MUNICIPAL OF
VALUE(1) CHARGE(2) INDEX(4) LIVING(5)
- -------------------------------------------------------------------------------
4/23/93 $10,000 $ 9,750 $10,000 $10,000
6/93 $10,256 $10,000 $10,224 $10,028
6/94 $10,387 $10,128 $10,244 $10,277
6/95 $11,039 $10,763 $11,145 $10,590
6/96 $11,818 $11,522 $11,095 $10,881
6/97 $12,776 $12,457 $12,093 $11,131
6/98 $13,659 $13,318 $13,141 $11,305
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 and Class C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All Index and Fund performance assumes reinvested
distributions.
<PAGE>
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/98
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- -------------------------------------------------------------------------------
CLASS A (Inception 4/23/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 1.82% 6.91% 5.90% 6.19%
With Max. Sales Charge(2) -2.50 2.40 4.98 5.31
- -------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.45% 6.14% 4.47%
With CDSC(3) -3.52 1.14 4.12
- -------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
COMPARATIVE PERFORMANCE -- 6/30/98
- -------------------------------------------------------------------------------
SINCE SINCE
INCEPTION INCEPTION
6 MONTHS 1 YEAR 5 YEARS CLASS A* CLASS B**
Lehman Municipal Index(4) 2.69% 8.66% 6.46% 6.70% 6.06%
Lipper NY Int. Municipal Average(6) 2.00 6.69 5.13 5.32 4.81
Lipper NY Municipal Average 2.37 8.38 5.44 5.77 5.01
- -------------------------------------------------------------------------------
As of May 1998, New England Intermediate Term Tax Free Fund of New York became
New England Tax Free Income Fund of New York. The Fund's objective and strategy
have changed. Please see the Fund's prospectus for details.
* Class A calculated from 4/30/93
** Class B calculated from 9/30/93
+ The Fund's investment category changed on 5/1/98 from Intermediate New
York Municipal debt to New York Municipal Debt.
YIELDS AS OF 6/30/98
- -------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-DAY YIELD(7) 4.04% 3.41%
NY STATE TAXABLE EQUIVALENT YIELD(8) 7.21 6.08
NY CITY TAXABLE EQUIVALENT YIELD(8) 7.57 6.39
- -------------------------------------------------------------------------------
As of May 1998, New England Intermediate Term Tax Free Fund of New York became
New England Tax Free Income Fund of New York. The Fund's objective and strategy
have changed. Please see the Fund's prospectus for details.
Notes to Charts
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 2.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Municipal Index is an unmanaged index of bonds 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, as
calculated by the U.S. Bureau of Labor Statistics.
(6) Lipper NY Intermediate Municipal Average and New York Municipal Average are
averages 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 New
York state income tax bracket of 43.9% or the combined federal, New York
state and New York City income tax bracket of 46.6%. The alternative
minimum tax and some other federal and state taxes that may apply are not
taken into account.
<PAGE>
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- -------------------------------------------------------------------------------
[Photo of James Welch]
JAMES WELCH
BACK BAY ADVISORS, L.P.
Q. How did New England Tax Free Income Fund of New York perform over the past
six months?
A. For the six-month period ending June 30, 1998, the Fund's Class A shares
produced a total return of 1.82%, including a $.05 per share decline in net
asset value to $7.85 per share and the reinvestment of $0.19 per share in
dividend distributions.
Q. What was the investment environment over the past six months?
Strong New York economic growth and low inflation improved the financial
operations of many municipalities, resulting in ratings upgrades for their
bonds. State of New York general obligation bonds, state-appropriated debt and
New York City bonds all were upgraded within the past year, boosting their
prices . However, early this year municipal bond issuance reached historically
high levels, driving prices lower. On the other hand, tax-exempt yields rose
relative to their taxable counterparts, as issuers competed for investor
dollars. This situation presented investors with exceptionally attractive values
as the tax-free yields of AAA-rated municipal bonds provided approximately 90%
of the yield of taxable U.S. Treasuries with comparable maturities.
During 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 domestic economy's vigor -- a development that would be positive for the
bond market.
Q. What strategies did you use in managing the Fund?
We took advantage of a modification to the Fund's investment policies this past
May. As reflected by its recent name change to Tax Free Income Fund of New York
from New England Intermediate Term Tax Free Fund of New York, the Fund's
investment parameters were broadened to include bonds with longer-term
maturities, rather than restricting investments to bonds with intermediate-term
maturities. Over time, we believe the increased investment flexibility can
improve the Fund's potential for income and total return. Meanwhile, the change
in investment policies allowed us to extend the Fund's duration -- a measure of
a bond's price sensitivity, expressed in years, to changes in interest rates.
The longer a bond's duration, the greater its potential for price appreciation
if interest rates fall. Similarly, a longer duration can present greater
incidence of price declines if interest rates rise. As of June 30, 1998, the
Fund's duration stood at 5.82 years and its average maturity was 9 years.
CREDIT QUALITY COMPOSITION -- 6/30/98
AAA 20.7%
AA 5.5%
A 26.1%
BBB 42.3%
OTHER 5.4%
Quality is based on ratings supplied by Standard & Poor's.
Portfolio holdings are subject to change.
AVERAGE CREDIT QUALITY = A AVERAGE MATURITY = 9 YEARS
We also emphasized quality and maximized call protection to maintain the Fund's
income. As of the end of the reporting period, the average quality of the Fund
was A. The yield advantage provided by lower-rated issues over higher-rated
issues shrunk over the past six months, so higher-rated issues provided better
relative value, we believed. Meanwhile, our focus on call protection helped the
Fund lock in a bond's income for a specified period of time before it can be
"called away" by the issuer on a predetermined date. Often, bonds are retired by
the issuer when interest rates decline so that the old bonds can be refinanced
at a lower interest rate. Maximizing call protection involves selecting those
bonds with call dates that are as far in the future as possible.
Q. What is your outlook for New York municipal bonds?
We believe the Asian economic situation and its impact on the U.S. economy will
dictate the overall direction of interest rates. Falling interest rates would be
good news for bond prices. In addition, several other factors can work to the
benefit of investors in tax-exempt bonds. For example, continued economic growth
combined with minimal inflation could bolster the financial conditions of
municipalities and strengthen municipal bond prices. In addition, we expect that
the unusually heavy issuance of new bonds during the first half of 1998 may
subside. A smaller supply of new bonds together with steady demand also favors
higher municipal 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>
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PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
Investments As Of June 30, 1998
(unaudited)
TAX EXEMPT OBLIGATIONS--97.7% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (c)
(UNAUDITED)
-------------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GUAM--7.4%
$ 1,000,000 Guam Airport Authority, 6.400%, 10/01/05 .. -- BBB $ 1,082,560
500,000 Guam Airport Authority, 6.600%, 10/01/10 .. -- BBB 548,740
------------
1,631,300
------------
NEW YORK--73.0%
250,000 Albany Housing Authority, 6.250%, 10/01/12 Baa1 -- 272,572
475,000 Metropolitan Transportation Authority,
5.750%, 7/01/08 ......................... Baa1 BBB+ 516,358
500,000 Metropolitan Transportation Authority,
7.125%, 7/01/09 ......................... Baa1 BBB+ 555,195
450,000 New York City Industrial Development Civic,
6.000%, 8/01/07 ......................... Baa3 -- 486,558
250,000 New York City Municipal Water, 7.000%,
6/15/09 .................................. A2 A- 270,805
250,000 New York City Municipal Water, Pre-refunded,
7.000%, 6/15/09 ......................... Aaa AAA 272,473
500,000 New York General Obligation, 7.000%, 8/01/06
.......................................... A3 BBB+ 577,555
500,000 New York General Obligation, 7.250%, 8/15/07
.......................................... A3 BBB+ 592,740
1,000,000 New York State Certificates, 6.000%, 9/01/98
.......................................... Baa1 BBB+ 1,003,340
500,000 New York State Dorm. Authority, 5.750%,
7/01/07 .................................. Baa1 BBB+ 543,845
500,000 New York State Dorm. Authority, 5.750%,
7/01/13 ................................. Baa1 BBB+ 548,090
500,000 New York State Dorm. Authority, 6.000%,
7/01/06 ................................. Baa1 BBB+ 549,845
500,000 New York State Dorm. Authority, 6.500%,
8/15/11 ................................. A3 A- 581,425
500,000 New York State Local Government Assistance
Pre-refunded, 7.250%, 4/01/07 ........... Aaa AAA 550,645
500,000 New York State Mortgage Revenue, 6.250%,
4/01/10 ................................. Aa2 -- 546,710
750,000 New York State Urban Development Corp.,
5.000%,1/01/19 .......................... Baa1 A 722,985
565,000 New York State Urban Development Corp.,
6.000%,1/01/05 .......................... Baa1 BBB+ 613,867
290,000 New York, Pre-refunded, 8.000%, 8/01/03 ... Aaa AAA 327,033
1,065,000 New York, Pre-refunded, 8.400%, 11/15/08 .. Aaa AAA 1,224,793
500,000 Oneida Herkimer, 6.650%, 4/01/05 .......... Baa3 -- 560,285
1,000,000 Onondaga County Industrial Development
Agency, 9.000%, 10/01/07 ................ -- A 1,337,800
1,000,000 Port Authority New York & New Jersey,
7.000%, 10/01/07 ........................ -- -- 1,153,600
1,000,000 Port Authority New York & New Jersey Special
Obligation, 6.250%, 12/01/09, (MBIA) .... Aaa AAA 1,143,170
540,000 Triborough Bridge & Tunnel Authority,
6.000%, 1/01/12 ......................... Aa3 A+ 602,078
500,000 Triborough Bridge & Tunnel Authority,
6.625%, 1/01/12 ......................... Aa3 A+ 588,185
------------
16,141,952
------------
PUERTO RICO--12.4%
600,000 Commonwealth Aqueduct & Sewer Authority,
6.250%, 7/01/12 ......................... Baa1 A 685,896
300,000 Commonwealth Aqueduct & Sewer Authority,
10.250%, 7/01/09 Aaa AAA 410,970
1,000,000 Commonwealth Highway & Transportation,
5.945%, 7/01/04 ......................... Baa1 A1+ 1,113,890
500,000 Electric Power Authority, 5.900%, 7/01/03 . Baa1 BBB+ 536,020
------------
2,746,776
------------
US VIRGIN ISLANDS--4.9%
990,000 US Virgin Islands Territory, Public Finance
Authority,
7.750%, 10/01/06 ........................ -- -- 1,087,802
------------
Total Tax Exempt Obligations
(Identified Cost $20,135,161) ........... 21,607,830
------------
OPTIONS--0.2%
CONTRACTS
- --------------------------------------------------------------------------------------------------
75 U.S. Treasury Bond Futures, 126 Call, August
1998 .................................... 42,188
------------
Total Options (Identified Cost $40,172) ... 42,188
------------
Total Investments--97.9% (Identified Cost
$20,175,333) (b) ........................ 21,650,018
Other assets less liabilities ............. 475,090
------------
Total Net Assets--100% .................... 22,125,108
============
(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 $20,175,333 for federal income tax purposes
was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost ............................. $ 1,474,685
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ...................... 0
-----------
Net unrealized appreciation ............................................ $ 1,474,685
===========
As of December 31, 1997, the Fund had a capital loss carryforward of
$581,897 which expires December 31, 2002. This may be available to
offset future capital gains, if any, to the extent provided by
(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 subadvisor independently
evaluates the Fund's portfolio securities and in making investment decisions
does not rely solely on the ratings of agencies.
Legend of Portfolio abbreviations:
MBIA Municipal Bond Investors Assurance Corp.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1998
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $20,175,333) .......... $21,650,018
Cash ........................................................ 35,380
Receivable for:
Fund shares sold .......................................... 153,559
Accrued interest .......................................... 429,890
Due from investment adviser ............................... 25,164
Prepaid registration expense .............................. 6,000
-----------
22,300,011
LIABILITIES
Payable for:
Fund shares redeemed ...................................... $108,716
Dividends declared ........................................ 23,243
Accrued expenses:
Deferred trustees' fees ................................... 5,461
Accounting and administrative ............................. 1,561
Other ..................................................... 35,922
--------
174,903
-----------
NET ASSETS..................................................... $22,125,108
===========
Net Assets consist of:
Capital paid in ........................................... $21,560,597
Distributions in excess of net investment income .......... (12,490)
Accumulated net realized losses ........................... (897,684)
Unrealized appreciation on investments .................... 1,474,685
-----------
NET ASSETS .................................................... $22,125,108
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($19,510,727 divided by 2,486,746 shares of beneficial
interest) ................................................. $7.85
=====
Offering price per share (100/97.50 of $7.85) ................. $8.05*
=====
Net asset value and offering price of Class B shares
($2,614,381 divided by 334,094 shares of beneficial
interest) ................................................. $7.83**
=====
*Based upon single purchases of less than $100,000. Reduced sales charges apply
for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ....................................................... $640,786
Expenses
Management fees .............................................. $ 59,555
Service fees - Class A ....................................... 24,995
Service and distribution fees - Class B ...................... 13,458
Trustees' fees and expenses .................................. 3,417
Accounting and administrative ................................ 9,073
Custodian .................................................... 33,253
Transfer agent ............................................... 37,063
Audit and tax services ....................................... 9,130
Legal ........................................................ 743
Printing ..................................................... 14,666
Registration ................................................. 9,483
Amortization of organization expenses ........................ 2,905
Miscellaneous ................................................ 3,138
---------
Total expenses ................................................. 220,879
Less expenses waived by the investment adviser and subadviser .. (114,363) 106,516
--------- --------
Net investment income .......................................... 534,270
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ............................................ 82,606
Futures contracts - net ...................................... (11,502)
Written options contracts - net .............................. (127,063)
---------
Total realized loss on investments ............................. (55,959)
Unrealized depreciation on:
Investments - net ............................................ (91,158)
---------
Net loss on investment transactions ............................ (147,117)
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS ..................... $387,153
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 1,063,036 $ 534,270
Net realized loss on investments, written options and
futures transactions (95,866) (55,959)
Unrealized appreciation (depreciation) on investments ..... 843,923 (91,158)
------------ -----------
Increase in net assets from operations .................... 1,811,093 387,153
------------ -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (979,795) (482,709)
Class B ................................................. (104,938) (55,026)
------------ -----------
(1,084,733) (537,735)
------------ -----------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS ................................................ 1,515,584 (974,697)
------------ -----------
Total increase (decrease) in net assets ................... 2,241,944 (1,125,279)
------------ -----------
NET ASSETS
Beginning of the period ................................... 21,008,443 23,250,387
------------ -----------
End of the period ......................................... $ 23,250,387 $22,125,108
============ ===========
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME
End of the period ......................................... $ (9,025) $ (12,490)
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
APRIL 23(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 ............... $7.50 $7.76 $7.07 $7.68 $7.64 $7.90
----- ----- ----- ----- ----- -----
Income From Investment
Operations
Net Investment Income .... 0.26 0.37 0.38 0.39 0.37 0.19
Net Realized and
Unrealized Gain
(Loss) on Investments .. 0.29 (0.68) 0.62 (0.05) 0.27 (0.05)
----- ----- ----- ----- ----- -----
Total From Investment
Operations 0.55 (0.31) 1.00 0.34 0.64 0.14
----- ----- ----- ----- ----- -----
Less Distributions
Distributions From Net
Investment Income ...... (0.25) (0.38) (0.39) (0.38) (0.38) (0.19)
Distributions in excess of
Net Investment Income .. (0.04) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Total Distributions ...... (0.29) (0.38) (0.39) (0.38) (0.38) (0.19)
----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period ................. $7.76 $7.07 $7.68 $7.64 $7.90 $7.85
===== ===== ===== ===== ===== =====
Total Return (%)(d) ...... 7.4 (4.1) 14.5 4.6 8.7 1.8
Ratio of Operating
Expenses to Average Net
Assets (%)(b) .......... 0.70(c) 0.70 0.70 0.75 0.85 0.85(c)
Ratio of Net Investment
Income to Average Net
Assets (%) ............. 4.88(c) 5.13 5.18 5.15 4.88 4.80(c)
Portfolio Turnover Rate
(%) .................... 121(c) 219 155 99 40 79(c)
Net Assets, End of Period
(000) .................. $21,122 $15,875 $16,387 $18,854 $20,527 $19,511
(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 (%) ............. 2.11(c) 1.79 1.88 1.93 1.84 1.86(c)
(c) Computed on an annualized basis.
(d) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
- -------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
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 .............. $7.85 $7.76 $7.06 $7.67 $7.62 $7.88
----- ----- ----- ----- ----- -----
Income From Investment
Operations
Net Investment Income .... 0.10 0.32 0.33 0.34 0.32 0.16
Net Realized and
Unrealized Gain (Loss)
on Investments ......... (0.05) (0.69) 0.62 (0.06) 0.27 (0.05)
----- ----- ----- ----- ----- -----
Total From Investment
Operations 0.05 (0.37) 0.95 0.28 0.59 0.11
----- ----- ----- ----- ----- -----
Less Distributions
Distributions From Net
Investment Income ...... (0.10) (0.33) (0.34) (0.33) (0.33) (0.16)
Distributions in excess of
Net Investment Income .. (0.04) 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Total Distributions ...... (0.14) (0.33) (0.34) (0.33) (0.33) (0.16)
----- ----- ----- ----- ----- -----
Net Asset Value, End of
Period ................. $7.76 $7.06 $7.67 $7.62 $7.88 $7.83
===== ===== ===== ===== ===== =====
Total Return (%)(d) ...... 0.5 (4.9) 13.7 3.7 7.9 1.5
Ratio of Operating
Expenses to Average Net
Assets (%)(b) .......... 1.45(c) 1.45 1.45 1.50 1.60 1.60(c)
Ratio of Net Investment
Income to Average Net
Assets (%) ............. 3.68(c) 4.38 4.43 4.40 4.13 4.05(c)
Portfolio Turnover Rate
(%) .................... 121(c) 219 155 99 40 79(c)
Net Assets, End of Period
(000) .................. $ 555 $1,152 $1,718 $2,154 $2,724 $2,614
(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 (%) ............. 2.86(c) 2.54 2.63 2.68 2.59 2.61(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 STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998
(unaudited)
1. The Fund is a series of New England Funds Trust II, a Massachusetts business
trust (the "Trust"), which 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 New York personal income tax. The Declaration of Trust permits the trustees
to issue an unlimited number of shares of the Trust in multiple series (each
series of shares a "Fund").
The Fund offers both Class A and Class B shares. Class A shares are sold with a
maximum front end sales charge of 2.50%. Class B shares do not pay a front end
sales charge, but pay a higher ongoing distribution fee than Class A shares for
eight years (at which point they automatically convert to Class A shares), and
are subject to a contingent deferred sales charge if those shares are redeemed
within six years of purchase (or five years if purchased before May 1, 1997).
Expenses of the Fund are borne pro-rata by the holders of both classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund were liquidated. In addition, the trustees approve separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. 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 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
original issue discount. Interest income is reduced by the amortization of
premium. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
C. OPTIONS. 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 enter into 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 and are paid monthly. The timing and characterization of
certain income and capital gains distributions are determined in accordance with
federal tax regulations which may differ from generally accepted accounting
principles. These differences relate to differing treatments for trustee fees.
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 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.
H. ORGANIZATION EXPENSE. Costs incurred in 1993 in connection with the Fund's
organization and initial registration amounted to $27,000 and were paid and were
amortized over 60 months.
2. PURCHASE AND SALES OF SECURITIES. For the six months ended June 30, 1998
purchases and sales of securities (excluding short-term investments) were
$8,771,104 and $9,559,927, 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 ......... 0 $ 0
Contracts opened .................. 50 13,081
Contracts closed .................. (50) (13,081)
--- -------
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 Fund Management, L.P.
("NEFM") at the annual rate of 0.525% of the first $200 million of the Fund's
average daily net assets, 0.50% of the next $300 million and 0.475% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors, L.P. ("Back Bay Advisors") at the rate of 0.2625% of the
first $200 million of the Fund's average daily net assets, 0.25% of the next
$300 million and 0.2375% of such assets in excess of $500 million. Certain
officers and directors of NEFM are also officers or trustees of the Fund. NEFM
and Back Bay Advisors are wholly owned subsidiaries of 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
-----------
$29,778(a) NEFM
$29,777(a) Back Bay Advisors
(a) Before reduction pursuant to voluntary expense limitations. See Note 4.
B. ACCOUNTING AND ADMINISTRATION 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 related
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 $9,073 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
Fund has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds, L.P. ("New England
Funds") a monthly service fee at the annual rate of 0.25% of the average daily
net assets attributable to the Fund's Class A shares, as reimbursement for
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class A shares and/or the maintenance of
shareholder accounts. For the six months ended June 30, 1998, the Fund paid New
England Funds $24,995 in fees under the Class A Plan. If the expenses of New
England Funds that are otherwise reimbursable under the Class A Plan incurred in
any year exceed the amounts payable by the Fund under the Class A Plan, the
unreimbursed amount (together with unreimbursed amounts from prior years) may be
carried forward for reimbursement in future years in which the Class A Plan
remains in effect. The amount of unreimbursed expenses carried forward into 1998
is $222,162.
Under the Class B Plan, 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 B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class B shares and/or the maintenance of shareholder accounts.
For the six months ended June 30, 1998, the Fund paid New England Funds $3,365
in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of 0.75% of the average daily net assets
attributable to the Fund's Class B shares, as compensation for services provided
and expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in connection
with the marketing or sale of Class B shares. For the six months ended June 30,
1998, the Fund paid New England Funds $10,093 in distribution fees under the
Class B Plan.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors of shares of the Fund during the six months ended
June 30, 1998 amounted to $27,414.
D. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is the
transfer and shareholder servicing agent to the Fund. For the six months ended
June 30, 1998, the Fund paid NEFSCO $14,650 as compensation for its services in
that capacity. For the six months ended June 30, 1998, the Fund received $234 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 $124
Meeting Fee $159/meeting
Annual Committee Member Retainer $ 19
Annual Committee Chairman Retainer $ 12
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have had, had it been invested in the Fund on the
normal payment date.
4. EXPENSE LIMITATIONS. Effective September 1, 1996 until further notice to the
Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce management
fees in order to limit the Fund's expenses to an annual rate of 0.85% of the
Fund's Class A average daily net assets and 1.60% of Class B average daily net
assets. Prior to September 1, 1996 Back Bay Advisors and NEFM voluntarily agreed
to reduce management fees in order to limit the Fund's expenses to an annual
rate of 0.70% of the Fund's Class A average daily net assets and effective
September 13, 1993, 1.45% of Class B average daily net assets. As a result of
the Fund's expenses exceeding the foregoing voluntary limitation during the six
months ended June 30, 1998 Back Bay Advisors waived its entire management fee of
$29,777 and NEFM waived its entire management fee of $29,778. In addition NEFM
reimbursed the Fund $54,808 for expenses which exceeded the management fee
waiver.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of New York 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 New York municipal
securities than is a comparable municipal bond fund that is not as concentrated.
Uncertain economic and fiscal conditions may affect the ability of issuers of
New York 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: Airport, Bridges and Tunnels (23.31)
and Education (10.44).
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 ................................ 454,808 $3,505,929 171,520 $ 1,349,042
Shares issued in connection with the
reinvestment of:
Distributions from net investment income . 93,317 722,397 46,473 364,945
-------- ---------- -------- -----------
548,125 4,228,326 217,993 1,713,987
Shares repurchased ......................... (415,593) (3,192,971) (331,120) (2,597,926)
-------- ---------- -------- -----------
Net increase (decrease) .................... 132,532 $1,035,355 (113,127) $ (883,939)
-------- ---------- -------- -----------
<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 ................................ 115,852 $ 891,524 60,108 $ 470,570
Shares issued in connection with the
reinvestment of:
Distributions from net investment income . 9,940 76,802 5,073 39,732
-------- ---------- -------- -----------
125,792 968,326 65,181 510,302
Shares repurchased ......................... (62,625) (488,097) (76,894) (601,060)
-------- ---------- -------- -----------
Net increase (decrease) .................... 63,167 480,229 (11,713) (90,758)
-------- ---------- -------- -----------
Increase (decrease) derived from capital
shares transactions 195,699 $1,515,584 (124,840) $ (974,697)
======== ========== ======== ===========
</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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NEW ENGLAND FUNDS(R) U.S. POSTAGE
WHERE THE BEST MINDS MEET(R) PAID
BROCKTON, MA
PERMIT NO. 770
------------------
---------------------
399 Boylston Street
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02116
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