<PAGE>
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ANNUAL REPORT
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[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England Intermediate Term
Tax Free Fund of California
[graphic omitted]
Where
The Best Minds
Meet(R)
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DECEMBER 31, 1998
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<PAGE>
FEBRUARY 1999
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[Photo of Bruce R. Speca]
"Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
In September 1998, I became President of New England Funds. As an 18-year
veteran of the mutual fund industry, I was pleased and honored to accept this
important post. In my first message to you, I hope to present what I believe
you, our valued shareholders, really want to know and to offer it in a
straightforward manner.
How did my fund perform?
There's no question that long-term performance is the bottom line of your
investment program. With that in mind, please review the other sections of this
report. You'll see your fund's performance and commentary from your fund manager
that summarizes the fund's successes and shortcomings and the outlook for the
year ahead.
Our assessment of New England Funds' overall performance in 1998 is that we had
a solid, but not spectacular, year. While extremely pleased with both absolute
and relative returns in many of our stock and bond portfolios, we were
disappointed by the results of those equity funds that pursue a 'value' rather
than a 'growth' strategy. Value stocks were largely ignored in 1998, as
investors focused on very large, high visibility growth stocks (indeed, 45% of
the gain in the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500")
- -- a market value-weighted, unmanaged index of common stock prices for 500
selected stocks -- came from just 10 stocks!) and select technology companies.
Much of the underperformance in value-oriented funds can be attributed to market
cycles, but we continue to pursue strategies to increase returns in these funds.
Can the stock market keep going up?
Like any winning streak, sooner or later the market will experience setbacks.
Does that mean 1999 will see the last burst of energy from the bull market? It's
easy to argue both sides of this question. Employment is high, inflation is low
and economic growth is continuing. But corporate profits may start to lag and
commodity prices, notably oil, are depressed around the world. The conclusion?
Economists, like weathermen and other forecasters, can only hope to be right
more often than they are wrong.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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My Own Two Cents
All too often investors lament, "What I could have made if only . . ." instead
of "What I actually made." But experience has taught me that the more important
question is, "Did I stick with my investment program and make progress toward my
financial goals?"
Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score.
The mutual fund industry has become extremely complex, with more funds, new
strategies and approaches to analyzing performance. What hasn't changed is your
financial representative's primary objective: to help you sort it all out and
increase your returns in line with your goals.
Your financial adviser can help you avoid being distracted by the daily noise
and avoid what I view as the most important risk that investors face. It's the
risk of not staying invested and possibly falling short of your long-term goals.
Your adviser will help you stick with your investment program during periods of
uncertainty.
One last thought: All of us at New England Funds appreciate the trust that you
and your representative have placed in us. We look forward to serving you in the
years ahead.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
Progress on the Y2K Front
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New England Funds has been and continues to engage in initiatives aimed at
having our computer systems tested and ready to function capably for the Year
2000. We are insisting on the same standard from vendors whose systems must
interact reliably with ours as well as from the subadvisers to our funds. We are
monitoring their progress and pursuing assurances of their readiness. Our
systems are being tested on a four-digit format (2000, not 00) and updated as
needed to perform competently. Additionally, we are developing contingency plans
to diminish the possibility of inconvenience related to Year 2000. Stay informed
on our Year 2000 readiness by visiting our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness disclosure pursuant to the Year
2000 Information and Readiness Act.
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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INVESTMENT RESULTS THROUGH DECEMBER 31, 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 below 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 and does not have expenses that affect the results.
It is not possible to invest directly in an index. In addition, few investors
could purchase all of the securities necessary to match the index and would
incur transaction costs and other expenses even if they could.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the New England Intermediate Term Tax Free Fund of
California's Class A Shares compared to the Lehman Municipal Index. The data for
this chart are as follows:]
APRIL 1993 (INCEPTION) THROUGH DECEMBER 1998
Net With Lehman
Asset Maximum Municipal
Value(1) Sales Charge(2) Index(4)
04/23/1993 $10,000 $9,750 $10,000
1993 $10,864 $10,592 $10,718
1994 $10,322 $10,064 $10,164
1995 $11,756 $11,462 $11,938
1996 $12,381 $12,071 $12,469
1997 $13,367 $13,032 $13,614
1998 $13,964 $13,615 $14,497
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will differ from that shown based on differences in inception date, fees and
sales charges. All Index and Fund performance assumes reinvestment of
distributions.
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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AVERAGE ANNUAL TOTAL RETURNS AND YIELDS -- 12/31/98
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CLASS A (Inception 4/23/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 4.5% 5.2% 6.0%
With Max. Sales Charge(2) 1.9 4.6 5.6
- --------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 3.7% 4.3% 4.2%
With CDSC(3) -1.3 4.0 4.1
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<TABLE>
<CAPTION>
SINCE FUND'S SINCE FUND'S
CLASS A CLASS B
COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS INCEPTION INCEPTION
<S> <C> <C> <C> <C>
Lehman Municipal Bond Index(4) 6.5% 6.2% 6.8% 6.2%
Lipper CA Interm. Municipal Debt. Avg.(6) 5.5 5.1 5.6 5.1
Morningstar Muni CA Interm. Avg.(5) 5.4 5.1 5.6 5.0
- -----------------------------------------------------------------------------------------------
</TABLE>
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. All index and performance assumes reinvestment of distributions.
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-day Yield(7) 4.3% 3.7%
Taxable Equivalent Yield(8) 7.8 6.8
- --------------------------------------------------------------------------------
This Fund waived certain fees and expenses during the period indicated and the
Fund's average annual total returns and yields would have been lower had these
not been waived.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 2.5% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Lehman Municipal Index is an unmanaged index of bonds having maturities of
more than one year issued by states, municipalities and other governmental
entities. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments. Class B since inception return is calculated
from 9/30/93.
(5) Morningstar Muni CA Intermediate 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 Morningstar Inc., an
independent mutual fund ranking service. Class A since inception return is
calculated from 4/30/93. Class B since inception return is calculated from
9/30/93.
(6) Lipper California Intermediate 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 Inc., an independent
mutual fund ranking service. Class A since inception return is calculated
from 4/30/93. Class B since inception return is calculated from 9/30/93.
(7) SEC Yield is based on the Fund's net investment income over a 30-day period
and is calculated in accordance with Securities and Exchange Commission
guidelines.
(8) Taxable equivalent yield is based on the maximum combined federal and
California state income tax bracket of 45.22%. The alternative minimum tax
and some other federal and state taxes may apply but are not reflected here.
<PAGE>
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NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
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[Photo of James Welch]
James Welch
Back Bay Advisors, L.P.
Q. How did New England Intermediate Term Tax Free Fund of California perform
over the past 12 months?
New England Intermediate Term Tax Free Fund of California delivered a total
return of 4.5% for Class A shares at net asset value for the 12 months ending
December 31, 1998. This included a $0.04 per share loss to $7.83 and the
reinvestment of $0.38 per share in dividend distributions. In addition to its
strong total return, your Fund continued to provide a high level of tax-free
income during the year. On December 31, 1998, the Fund's 30-day yield for Class
A shares was 4.3%, which translates into a taxable equivalent yield of 7.8%
based on the maximum combined federal and California state income tax rate of
45.22%.
Q. How was the investment environment for California municipal bonds during the
period?
The investment environment during the period was quite positive. California
municipal bonds generated attractive returns amid positive economic and interest
rate climates at the national level, a strong state economy and financially
healthier municipalities in California. In addition, as an asset class,
municipal bonds paid out extremely attractive income relative to taxable bonds
in 1998. During the year, the yields paid by municipal bonds were as high as 95%
to 100% of the yields of equivalent taxable bonds. This meant that on an
after-tax basis, municipal bond investors received more income than they would
have received from taxable bonds of comparable quality and maturity.
Historically, municipal bond yields have averaged about 85% of equivalent
taxable bond yields.
During the year, the nation's favorable economic and interest rate environment
supported municipal bond prices. Moderate-to-strong economic growth and
continued minimal inflation in the United States paved the way for low interest
rates. The Federal Reserve Board cut short-term interest rates three times in
the fall of 1998 -- for a total of 0.75% -- to stimulate the economy, and as a
result, the domestic stock markets. The combination of a sound economy and low
interest rates improved the fiscal health and creditworthiness of many
municipalities. Economic strength helped generate higher tax revenues,
increasing the cash flow of many state and local governments. Further, low
interest rates often allowed municipalities to refinance existing debt at more
attractive levels, thus lowering their borrowing costs.
CREDIT QUALITY COMPOSITION -- 12/31/98
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AAA 40.9%
AA 2.6%
A 31.3%
BBB 18.2%
NR/OTHER 7.0%
Quality is based on ratings provided by Standard & Poor's Investors Service.
Portfolio holdings are subject to change.
AVERAGE PORTFOLIO QUALITY = AA- AVERAGE PORTFOLIO MATURITY = 11.6 YEARS
Municipal bonds generally suffered from greater supply than demand, however.
Investors mainly directed cash to CMP/U.S. Treasury securities and the stock
markets. In the summer of 1998, investor concerns about the stability of global
economies and financial markets fueled a "flight-to-quality" characterized by
extraordinary demand for those securities considered to have the highest degree
of safety and liquidity. Typically, demand (both domestic and international) is
greatest for the most recently issued U.S. Treasury securities. As a result of
this demand, the prices of Treasury securities rose, driving down yields.
Increased demand also drove municipal bond prices up -- pushing yields lower --
but less dramatically than U.S. Treasuries. While they are tax advantaged, the
generally lower-yielding nature of municipal bonds appeals to a smaller investor
audience -- meaning less widespread demand and therefore less price pressure.
Q. What strategies did you use in managing the Fund?
In the first half of the year, we expected interest rates to fall, so we
emphasized bonds with longer maturities, and lengthened average maturity and
duration. This strategy contributed positively to Fund performance. In the
second half of the year, we believed interest rates were less likely to continue
their decline, and so we shortened the Fund's average maturity and duration. On
December 31, 1998, the Fund's average maturity was 11.6 years and duration was
5.4 years. Average maturity and duration both are measures of a bond's price
sensitivity to interest rate changes. In general, the longer a bond's duration
or average maturity, the greater potential for price appreciation when interest
rates fall and, conversely, the greater the risk of price loss when interest
rates rise.
We also sought greater income later in the year by buying higher-yielding bonds,
which tended to be slightly lower in credit quality. Yet the Fund's average
credit quality remained relatively high at AA-, as of December 31, 1998, as
rated by Standard & Poor's Ratings Group (S&P). The S&P rating system uses a
scale in which bonds rated AAA are considered the highest quality, and bonds
rated under BBB are considered below investment grade.
In addition, we focused on general obligation bonds to benefit from California's
fiscal and economic strength. We emphasized bonds in the 10- to 15- year
maturity range to maximize yield. Throughout the year -- and particularly during
the final six months -- we invested in higher-quality bonds because the yield
advantage provided by lower-rated bonds relative to their higher-rated
counterparts diminished. This gave us the opportunity to upgrade the
creditworthiness of the portfolio's holdings while sacrificing only minimal
yield.
Q. What is your outlook for California municipal bonds over the next few months?
Our outlook is positive for California municipal bonds over the coming months.
We think California's large and diverse economy will continue to benefit from
ongoing strength in the national economy. Furthermore, we expect to see
improvement in the economies of Asia, particularly Japan, which should bode well
for California's export business. Japan is a driving force in the Asian economy
and Asia is a major trading partner with California. Japan's government has
already begun to implement a series of policies designed to rejuvenate the
country's economy.
The events of the past year reinforce the importance of quality, liquidity and
diversification in a well-rounded investor portfolio. In 1998, municipal bonds
generated solid returns and maintained a high degree of price stability. Their
merit is underscored considering the tax advantage they provide and the
attractive yield advantage they offer over U.S. Treasuries. As we look ahead, we
expect continued moderate economic growth with negligible inflation -- an ideal
climate for fixed-income investors. In our opinion, these factors enhance the
benefits of investing in municipal bonds.
A portion of income may be subject to state, federal and/or alternative minimum
tax. Capital gains, if any, are subject to capital gains tax. U.S. Treasury
bills and U.S. government bonds fluctuate in value, but they are guaranteed as
to the timely payment of interest and, if held to maturity, provide a guaranteed
return of principal. The opinions expressed are those of the manager and are
subject to change. The occurrence of forecasted events and predictions is not
certain and cannot be assured. See the Fund's prospectus for more complete
information.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1998
TAX EXEMPT OBLIGATIONS--101.1% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (C)
(UNAUDITED)
--------------
STANDARD
FACE &
AMOUNT ISSUER MOODY POOR'S VALUE (A)
- ----------------------------------------------------------------------------------------
CALIFORNIA--86.6%
<C> <S> <C> <C> <C>
$1,000,000 Alameda Public Financing Revenue, 6.125%,
9/02/2009 ............................... -- -- $ 1,055,590
1,000,000 Anaheim Public Financing Authority, Series
C,
6.000%, 9/01/2016, (FSA) ................ Aaa AAA 1,145,590
1,000,000 Berkeley Health Facility, Pre-refunded,
6.500%, 12/01/2011 ...................... A2 A+ 1,098,200
1,000,000 California Educational Facilities Authority,
7.000%, 1/01/2004 (e) Aaa AAA 1,020,000
1,120,000 California Housing Finance Agency, 6.250%,
8/01/2016 ................................ Aa2 AA- 1,196,407
2,750,000 California Pollution Control Financing
Authority, Series A,
5.900%, 6/01/2014 ........................ A2 A 3,102,220
1,000,000 California Pollution Control Financing
Authority, Series A,
6.900%, 9/01/2006 ........................ -- A+ 1,038,780
1,500,000 California State, 4.500%, 12/01/2021 ...... Aaa AAA 1,396,410
1,000,000 California State, 7.000%, 6/01/2002, (FGIC)
.......................................... Aaa AAA 1,105,570
1,000,000 California State Public Works, 5.500%,
6/01/2010 ................................ Aa3 A+ 1,109,130
1,000,000 California State Public Works, 5.500%,
6/01/2014, (MBIA) ........................ Aaa AAA 1,099,660
1,500,000 California State Public Works, 5.500%,
6/01/2015 ................................ A A 1,630,695
1,540,000 Duarte California, City of Hope National
Medical Center,
6.125%, 4/01/2013 ....................... Baa1 -- 1,623,268
2,000,000 Escondido California Union High School
District,
Zero Coupon, 5/01/2018 ................... Aaa AAA 763,100
1,295,000 Fresno United School District, 6.600%,
3/01/1999 ................................ A3 -- 1,300,724
2,030,000 Fresno United School District, 7.250%,
3/01/2007 ................................ A3 -- 2,198,855
720,000 Pleasanton Financing Authority, 5.600%,
9/02/2000 ............................... Baa1 -- 742,320
1,000,000 Riverside County Asset Lease, Series B,
5.700%, 6/01/2016, (MBIA) ............... Aaa AAA 1,111,330
1,000,000 Sacramento Utility District, 3.200%,
11/15/2006, (FSA) (d) ................... Aaa AAA 1,000,000
1,000,000 Sacramento Utility District, Series D,
7.320%, 11/15/2006, (FSA) (d) ........... Aaa AAA 1,157,940
2,000,000 San Diego Port Facilities, 6.600%,
12/01/2002 ................................ -- -- 2,104,840
1,500,000 San Francisco California International
Airport Revenue, 4.500%, 5/01/2019 ...... -- -- 1,408,545
1,000,000 Southern California Rapid Transit District,
7.500%, 7/01/2005, (MBIA) ............... Aaa AAA 1,097,390
1,285,000 Stanislaus Solid Waste Authority, 7.500%,
1/01/2005 ............................... -- BBB+ 1,345,215
2,000,000 Stanislaus Solid Waste Authority, 7.625%,
1/01/2010 ............................... -- BBB+ 2,095,900
270,000 Valley Health Systems, Series 1993, 6.250%,
5/15/1999 ............................... -- BBB- 271,358
2,000,000 Valley Health Systems, Series A, 6.500%,
5/15/2015 ............................... -- BBB- 2,176,840
2,000,000 West & Central Basin Financing Authority,
Series C, 6.220%, 8/01/2006, (AMBAC) .... Aaa AAA 2,236,920
-----------
38,632,797
-----------
PUERTO RICO--8.5%
$2,500,000 Puerto Rico Commonwealth Highway &
Transportation,
Series Y, 5.500%, 7/01/2026 ............. Baa1 A 2,603,075
1,000,000 Puerto Rico Commonwealth, 6.500%, 7/01/2015 Baa1 A 1,189,590
-----------
3,792,665
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U.S. VIRGIN ISLANDS--6.0%
1,750,000 U.S. Virgin Islands Public Finance
Authority, 7.700%, 10/01/2004 ............ -- AAA 1,844,885
760,000 U.S. Virgin Islands Public Finance
Authority, 7.750%, 10/01/2006 ............ -- -- 829,699
-----------
2,674,584
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Total Tax Exempt Obligations
(Identified Cost $43,305,420) ........... 45,100,046
-----------
Total Investments--101.1% (Identified Cost
$43,305,420) (b) 45,100,046
Other assets less liabilities ............. (492,642)
-----------
Total Net Assets--100% .................... $44,607,404
===========
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1998 the net unrealized
appreciation on investments based on cost of $43,312,732 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 ................... $ 1,910,257
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ................... (122,943)
-----------
Net unrealized appreciation ....................................... $ 1,787,314
===========
As of December 31, 1998, the Fund had a net capital loss
carryforward of $522,150 expiring December 31, 2002. This may be
available to offset future realized capital gains, if any, to the
extent provided by regulations.
(c) The ratings shown are believed to be the most recent ratings
available at December 31, 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
December 31, 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) Variable rate demand note or floating rate security. The rate
disclosed is as of December 31, 1998.
(e) At December 31, 1998, a portion of this security has been
segregated as collateral in connection with the Fund's derivative
investments.
Legend of Portfolio Abbreviations:
AMBAC American Municipal Bond Assurance Corp.
FGIC Financial Guarantee Insurance Company
FSA Financial Security Assurance
MBIA Municipal Bond Investors Assurance Corp.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $43,305,420) ........ $45,100,046
Cash ...................................................... 223,061
Receivable for:
Fund shares sold ........................................ 75,791
Interest ................................................ 717,314
Due from investment adviser ............................... 15,793
-----------
46,132,005
LIABILITIES
Payable for:
Securities purchased .................................... $1,422,510
Fund shares redeemed .................................... 15,702
Dividends declared ...................................... 30,460
Accrued expenses:
Deferred trustees' fees ................................. 6,125
Accounting and administrative ........................... 2,137
Other expenses .......................................... 47,667
----------
1,524,601
-----------
NET ASSETS .................................................. $44,607,404
===========
Net Assets consist of:
Capital paid in ......................................... $44,023,445
Undistributed net investment income ..................... 64,250
Accumulated net realized gains (losses) ................. (1,274,917)
Unrealized appreciation (depreciation) on investments,
options and futures contracts ......................... 1,794,626
-----------
NET ASSETS .................................................. $44,607,404
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($35,348,237 divided by 4,513,207 shares of beneficial
interest) ............................................... $7.83
=====
Offering price per share (100/97.50 of $7.83) ........... $8.03*
=====
Net asset value and offering price of Class B shares
($9,259,167 divided by 1,185,717 shares of beneficial
interest) ............................................... $7.81**
=====
* Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of these amounts.
**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
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ..................................................... $2,402,723
Expenses
Management fees ............................................ $ 224,690
Service fees - Class A ..................................... 83,618
Service and distribution fees - Class B .................... 93,504
Trustees' fees and expenses ................................ 7,308
Accounting and administrative .............................. 22,493
Custodian .................................................. 64,680
Transfer agent ............................................. 69,509
Audit and tax services ..................................... 27,200
Legal ...................................................... 2,822
Printing ................................................... 27,146
Registration ............................................... 13,898
Amortization of organization expenses ...................... 2,870
Miscellaneous .............................................. 6,106
---------
Total expenses ............................................... 645,844
Less expenses waived by the investment adviser and subadviser (211,919) 433,925
--------- ----------
Net investment income ........................................ 1,968,798
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net .......................................... 124,673
Written options contracts - net ............................ (109,644)
Futures contracts - net .................................... (35,996)
---------
Total realized gain (loss) on investments, written options and
futures contracts (20,967)
---------
Unrealized appreciation (depreciation) on:
Investments - net .......................................... (134,169)
---------
Net gain (loss) on investment transactions ................. (155,136)
----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......... $1,813,662
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ..................................... $ 2,006,993 $ 1,968,798
Net realized gain (loss) on investments, options and
futures transactions .................................... 150,648 (20,967)
Unrealized appreciation (depreciation) on investments,
options and futures transactions ........................ 883,350 (134,169)
------------ ------------
Increase (decrease) in net assets from operations ......... 3,040,991 1,813,662
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (1,630,169) (1,643,915)
Class B ................................................. (347,491) (390,245)
------------ ------------
(1,977,660) (2,034,160)
------------ ------------
Increase (decrease) in net assets derived from capital
share transactions ...................................... (3,687,976) 3,890,260
------------ ------------
Total increase (decrease) in net assets ................. (2,624,645) 3,669,762
NET ASSETS
Beginning of the year ..................................... 43,562,287 40,937,642
------------ ------------
End of the year ........................................... $ 40,937,642 $ 44,607,404
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the year ........................................... $ 126,392 $ 64,250
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............ $ 7.84 $ 7.08 $ 7.65 $ 7.66 $ 7.87
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ......................... 0.38 0.39 0.39 0.39 0.37
Net Realized and Unrealized Gain (Loss) on
Investments ................................. (0.76) 0.57 0.00 0.20 (0.03)
------ ------ ------ ------ ------
Total From Investment Operations .............. (0.38) 0.96 0.39 0.59 0.34
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ...... (0.38) (0.39) (0.38) (0.38) (0.38)
------ ------ ------ ------ ------
Total Distributions ........................... (0.38) (0.39) (0.38) (0.38) (0.38)
------ ------ ------ ------ ------
Net Asset Value, End of Year .................. $ 7.08 $ 7.65 $ 7.66 $ 7.87 $ 7.83
====== ====== ====== ====== ======
Total Return (%) (a) .......................... (4.9) 13.9 5.3 8.0 4.5
Ratio of Operating Expenses to Average Net
Assets (%) (b) .............................. 0.70 0.70 0.75 0.85 0.85
Ratio of Net Investment Income to Average Net
Assets (%) .................................. 5.07 5.24 5.18 5.06 4.79
Portfolio Turnover Rate (%) ................... 212 167 161 120 215
Net Assets, End of Year (000) ................. $30,293 $32,707 $35,972 $32,057 $35,348
(a) A sales charge is not reflected in total return calculations.
(b) The ratio of operating expenses to average
net assets without giving effect to
voluntary expense limitations described in
Note 4 to the Financial Statements would
have been (%) ............................. 1.33 1.31 1.34 1.33 1.35
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............ $ 7.84 $ 7.07 $ 7.63 $ 7.64 $ 7.85
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ......................... 0.32 0.33 0.33 0.34 0.32
Net Realized and Unrealized Gain (Loss) on
Investments ................................. (0.77) 0.56 0.01 0.20 (0.03)
------ ------ ------ ------ ------
Total From Investment Operations .............. (0.45) 0.89 0.34 0.54 0.29
------ ------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income ...... (0.32) (0.33) (0.33) (0.33) (0.33)
------ ------ ------ ------ ------
Total Distributions ........................... (0.32) (0.33) (0.33) (0.33) (0.33)
------ ------ ------ ------ ------
Net Asset Value, End of Year .................. $ 7.07 $ 7.63 $ 7.64 $ 7.85 $ 7.81
====== ====== ====== ====== ======
Total Return (%) (a) .......................... (5.8) 12.9 4.6 7.2 3.7
Ratio of Operating Expenses to Average Net
Assets (%) (b) .............................. 1.45 1.45 1.50 1.60 1.60
Ratio of Net Investment Income to Average Net
Assets (%) .................................. 4.32 4.49 4.43 4.31 4.04
Portfolio Turnover Rate (%) ................... 212 167 161 120 215
Net Assets, End of Year (000) ................. $5,713 $5,617 $7,590 $8,881 $9,259
(a) A contingent deferred sales charge is not
reflected in total return calculations.
(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 (%) ............................. 2.08 2.06 2.09 2.08 2.10
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998
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 a high level of current income exempt from federal income tax and
California 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 and market 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. 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 $26,500 and were paid and were
amortized over 60 months.
2. PURCHASE AND SALES OF SECURITIES. For the year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were
$98,066,125 and $94,575,971, respectively.
Investments in written options for the year ended December 31, 1998 are
summarized as follows:
WRITTEN OPTIONS
----------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Open at December 31, 1997 0 $ 0
Contracts opened (7,750) (349,184)
Contracts closed 7,750 349,184
------ ----------
Open at December 31, 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 0.525% 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"), formerly known as New England Investment Companies L.P., which is a
subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by
NEFM and Back Bay Advisors under the management agreement in effect during the
year ended December 31, 1998 are as follows:
FEES EARNED(A)
--------------
$112,345 NEFM
$112,345 Back Bay Advisors
(a) Before reduction pursuant to voluntary expense limitations. See Note 4.
The effective management fee for the year ended December 31, 1998 was 0.53%.
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 year
ended December 31, 1998 these expenses amounted to $22,493 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 year ended December 31, 1998, the Fund paid New
England Funds $83,618 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 1999
is $179,456.
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 year ended December 31, 1998, the Fund paid New England Funds $23,376 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 year ended December 31,
1998, the Fund paid New England Funds $70,128 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 year ended
December 31, 1998 amounted to $93,061.
D. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is the
transfer and shareholder servicing agent to the Fund and Boston Financial Data
Services serves as a sub-transfer agent for the Fund. For the year ended
December 31, 1998, the Fund paid NEFSCO $29,612 as compensation for its services
in that capacity. For the year ended December 31, 1998, the Fund received $918
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 NEFSCO,
Nvest, NEFM, New England Funds or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
Annual Retainer $266
Meeting Fee 152/meeting
Annual Committee Member Retainer 40
Annual Committee Chairman Retainer 27
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 the Fund's Class B average daily net assets. As a
result of the Fund's expenses exceeding the foregoing voluntary limitation
during the year ended December 31, 1998 Back Bay Advisors reduced it's
subadvisory fee of $112,345 by $105,959 and NEFM reduced it's advisory fee of
$112,345 by $105,960.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of California and its political subdivisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is more
susceptible to factors adversely affecting issuers of California municipal
securities than is a comparable municipal bond fund that is not as concentrated.
Uncertain economic and fiscal conditions may affect the ability of issuers of
California municipal securities to meet their financial obligations. The Fund
had the following industry concentrations in excess of 10% on December 31, 1998
as a percentage of the Fund's total net assets: Hospitals (11.6%).
6. CAPITAL SHARES. At December 31, 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 YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- --------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................................ 709,930 $ 5,476,156 827,069 $ 6,499,675
Shares issued in connection with the reinvestment of:
Distributions from net investment income ................. 109,983 850,703 110,552 867,672
----------- ----------- ----------- -----------
819,913 6,326,859 937,621 7,367,347
Shares repurchased ......................................... (1,439,883) (11,091,360) (497,875) (3,904,602)
----------- ----------- ----------- -----------
Net increase (decrease) .................................... (619,970) $(4,764,501) 439,746 $ 3,462,745
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- --------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................................ 243,713 $ 1,879,601 270,727 $ 2,121,992
Shares issued in connection with the reinvestment of:
Distributions from net investment income ................. 25,454 196,528 29,839 233,426
----------- ----------- ----------- -----------
269,167 2,076,129 300,566 2,355,418
Shares repurchased ......................................... (130,715) (999,604) (246,590) (1,927,903)
----------- ----------- ----------- -----------
Net increase ............................................... 138,452 $ 1,076,525 53,976 $ 427,515
----------- ----------- ----------- -----------
Increase (decrease) derived from capital shares transactions (481,518) $(3,687,976) 493,722 $ 3,890,260
=========== =========== =========== ===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of New England Funds Trust II and Shareholders of
NEW ENGLAND INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA
In our opinion, the accompanying statement of assets & liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of New England Intermediate Term Tax
Free Fund of California (the "Fund"), a series of New England Funds Trust II, at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth Opportunities Fund
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free Fund of California
Tax Free Income Fund of New York
(formerly Intermediate Term Tax Free Fund of NY)
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust
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 800-289-9999
or by visiting their Web site at www.NASDR.com.
<PAGE>
------------------
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------------------
---------------------
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02116
---------------------
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