<PAGE>
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SEMIANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England
Massachusetts Tax Free
Income Fund
[Graphic Omitted]
Where
The Best Minds
Meet(R)
- --------------------------
June 30, 1999
- --------------------------
<PAGE>
August 1999
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[Photo of Bruce R. Speca]
"Most investment
professionals I know
agree that proper
asset allocation is
a bedrock principle
of sound investing."
Dear Shareholder,
Performance results for the New England Family of Funds were driven mainly by
two important changes that took place in our financial markets during the first
half of 1999. First, the long, upward climb of large-capitalization stocks
slowed dramatically as attention turned to stocks with more reasonable
valuations. Then, bond investors grew fearful that our persistently strong
economy would lead the Federal Reserve Board to impose higher interest rates.
Your manager's commentary on the following pages details how these trends
affected your fund's strategy and performance.
As I watch investments come in and out of favor, I'm reminded of the importance
of asset allocation - the practice of dividing your portfolio among different
kinds of stocks and bonds. The idea is to own more or less of each investment
type according to your feelings about risk and your investment time horizon.
Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing. In addition to broadening diversification,
it seeks to avoid exposure to narrow market segments and can help reduce
volatility.
While a diversified portfolio may have given solid returns during the past year,
many investors were disappointed when they compared those returns to the
performance of large-company growth stocks or to the soaring returns of Internet
stocks. Suddenly, investors were asking: Is asset allocation dead?
Certainly not! Like so much in life, market cycles are inevitable. Different
categories of investments will be popular at different times, and a sensible
asset allocation program can help you as market trends change.
I know it can be tempting to jump on a bandwagon and go after "easy money." But
I encourage you, instead, to maintain a rational, long-term perspective and to
consult your financial representative regularly to review and fine-tune your
investments, including a well-diversified asset allocation program.
Thank you for your continued interest. We look forward to helping you achieve
your long-term financial objectives.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
<PAGE>
NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
Investment Results Through June 30, 1999
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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
[A chart appears here illustrating the growth of a $10,000 investment in the
Massachusetts Tax Free Fund's Class A shares since 6/30/89 compared to the
Lehman Municipal Index. The plot points for this chart are as follows:]
June 1989 through June 1999
Lehman Municipal
Net Asset Value(1) Maximum Sales Charge(2) Bond Index(5)
------------------ ----------------------- ----------------
6/89 $10,000 $ 9,575 $10,000
6/90 10,416 9,973 10,681
6/91 11,241 10,763 11,643
6/92 12,583 12,048 13,014
6/93 14,148 13,547 14,570
6/94 13,890 13,299 14,599
6/95 14,951 14,315 15,883
6/96 15,920 15,243 16,937
6/97 17,176 16,446 18,462
6/98 18,526 17,738 20,060
6/99 18,796 17,997 20,614
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.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS -- 6/30/99
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A (Inception 3/23/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1),(4) -1.4% 1.5% 6.2% 6.5%
With Maximum Sales Charge(2),(4) -5.6 -2.9 5.3 6.1
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1),(4) -1.6% -0.8% 5.6% 3.7%
With CDSC(3),(4) -6.4 -4.0 5.2 3.6
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SINCE
FUND'S
CLASS B
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
Lehman Municipal Bond Index(5) -0.9% 2.8% 7.0% 7.4% 5.5%
Lipper MA Municipal Debt Average(6) -1.7 1.3 6.2 6.8 4.5
Morningstar Muni Single State Long Avg.(7) -1.5 1.5 6.2 6.8 4.5
- -------------------------------------------------------------------------------------------------
</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.
YIELDS AS OF 6/30/99
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-day Yield(8) 4.7% 4.2%
Taxable Equivalent Yield(9) 8.2 7.5
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NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
Returns would have been lower had sales charges been reflected.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.25% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes
reinvestment of all distributions and, for Class B shares, assumes that a
maximum 5.00% sales charge is applied to redemptions. The sales charge will
decrease over time, declining to zero six years after the purchase of
shares. With CDSC performance for Class C shares assumes a maximum 1% sales
charge on redemptions within the first year of purchase.
(4) The Fund waived certain fees and expenses during the period indicated and
its average total return would have been lower had these fees not been
waived.
(5) Lehman Municipal Bond Index is an unmanaged index of bonds issued by states,
municipalities and other government entities having maturities of more than
one year. The performance of the index has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments. It is not possible to invest directly in an
index. Class B since inception return is calculated from 9/30/93.
(6) Lipper Massachusetts Municipal Debt Average is an average (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
B since inception return is calculated from 9/30/93.
(7) Morningstar Muni Single State Long Average is an average (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 B since inception return is calculated from 9/30/93.
(8) 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.
(9) Taxable equivalent yield is based on the maximum combined federal and MA
income tax of 43.19%. A portion of income may be subject to federal, state
or alternative minimum tax. Capital gains, if any, are subject to capital
gains tax.
<PAGE>
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NEW ENGLAND MASSACHUSETTS TAX FREE INCOME FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
[Photo of James Welch]
James Welch
Back Bay Advisors, L.P.
Q. How did New England Massachusetts Tax Free Income Fund perform over the past
six months?
New England Massachusetts Tax Free Income Fund delivered a total return of -1.4%
for Class A shares at net asset value for the six months ended June 30, 1999,
including a $0.64 per share loss to $16.38 and the reinvestment of $0.42 per
share in dividend distributions. Although disappointing, your Fund's performance
was comparable to that of its peer group of 58 Massachusetts Municipal Debt
Funds which ended the period with a return of -1.7%, as tracked by Lipper Inc.
Your Fund also continued to provide a high level of tax-free income. At the end
of the period, your Fund's 30-day SEC yield for Class A shares was 4.7%, which
translates into a taxable equivalent yield of 8.2%, based on the maximum
combined federal and Massachusetts state income tax rate of 43.19%.
Q. What was the investment environment for Massachusetts municipal bonds during
the period?
The investment climate for fixed income markets in general was challenging as
the past six months have seen generally rising interest rates. Bonds in most
sectors, including municipal securities, tended to decline in price. However, a
generally favorable environment in Massachusetts helped mute the effects of
rising interest rates and declining prices.
Supported by a robust national economy, the Massachusetts economy prospered.
This economic strength helped generate higher tax revenues, which, in turn,
increased the cash flow and improved the fiscal health and creditworthiness of
state and local governments.
In addition, as we entered 1999, municipal bond yields were at historically high
levels compared to U.S. Treasury yields. On both an absolute and relative basis,
municipal bond yields at times were higher than those of their U.S. government
counterparts -- providing individual investors more income than U.S. Treasuries,
both before and after taxes.
Q. Did supply and demand impact the Massachusetts municipal market?
In contrast to taxable bonds, tax-exempt issues are greatly influenced by supply
and demand. Throughout the period, investors flocked to Massachusetts municipal
securities because of their extremely attractive yields as well as their total
return potential.
In fact, the supply of Massachusetts municipal bonds fell short of demand. This
imbalance of supply and demand prevented greater loss in the Fund's net asset
value in a generally rising interest rate environment. Remember, as interest
rates rise, bond prices fall. Over the past six months, municipal securities
provided investors with a smart alternative to taxable investments, which were
impacted to a greater degree by rising rates.
Q. What strategies did you use in managing the Fund?
We emphasized bonds that we believed would benefit from the state's positive
economic and fiscal conditions, focusing on quality, income and value throughout
the period.
As of June 30, 1999, the Fund's average credit quality was "AA" (as rated by
Standard & Poor's), average maturity was 18.6 years and duration stood at 7.6
years.
Despite an overall lack of supply of Massachusetts municipal bonds, issuance of
municipal bonds to finance the "Big Dig" Boston highway project remained heavy
throughout the period. However, we continued to seek better value in sectors we
felt were being overlooked.
For example, we saw attractive opportunities in the housing sector, which
continued to reap the rewards of a strong economy. Higher interest rates, and
therefore lower demand for mortgage refinancings, has also helped renew interest
in these recently out-of-favor bonds.
We also increased the Fund's investment in the education sector, purchasing
bonds issued by Tufts, Williams and Harvard, among others. Massachusetts is
known for the quality of its higher education, which is reflected in the high
credit quality of bonds issued by the state's many colleges and universities.
To free up assets for new investment opportunities, we decreased our exposure to
health care issues. The future of the health care sector remains uncertain due
to intense consolidation and profit pressures.
Finally, given the uncertain interest rate climate, we adopted a more defensive
policy, focusing on bonds in the 15-20 year maturity range, which offered
attractive yields yet greater liquidity and stability than longer-term issues.
Q. What is your outlook for Massachusetts municipal bonds over the next few
months?
We are optimistic that the Massachusetts municipal market will continue its
positive trend over the coming months.
Yields of Massachusetts municipal securities remain high on a relative basis
when compared to taxable securities. In addition, we expect the state's economy
to continue to flourish, helping municipalities to improve from a credit
standpoint. Finally, an ongoing decline in supply could further enhance the
performance of the Commonwealth's bonds.
Looking ahead, we aren't overly concerned about the Federal Reserve's decision
to increase short-term interest rates. We think the municipal market has already
absorbed most of the effects of higher rates, so any reaction to further rate
hikes should be muted in our opinion.
The portfolio manager's 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.
A portion of income may be subject to federal, state and/or alternative minimum
tax. Capital gains, if any, 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. Government guarantees apply to individual securities only and not
to prices and yields of shares in a managed portfolio. See the Fund's prospectus
for details.
Credit Quality Composition -- 6/30/99
AAA 43.1%
AA 9.2%
A 30.1%
BBB 12.2%
BB 2.6%
B 2.8%
Average Credit Quality = AA
Average Portfolio Maturity = 18.6 Years
Quality is based on ratings provided by Standard & Poor's.
Portfolio holdings and asset allocation will vary.
<PAGE>
<TABLE>
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PORTFOLIO COMPOSITION
- -----------------------------------------------------------------------------------------------------------------------------------
Investments as of June 30, 1999
(unaudited)
TAX EXEMPT OBLIGATIONS -- 97.2% OF TOTAL NET ASSETS
<CAPTION>
RATINGS (C)
------------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GUAM -- 2.2%
$ 1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/01/2010 ................. -- BBB $ 1,602,315
1,000,000 Housing Corporation, Single Family Mortgage, Series A,
5.750%, 9/01/2031, (FHLMC) ................................................. -- AAA 1,032,810
------------
2,635,125
------------
MASSACHUSETTS BAY TRANSPORTATION AUTHORITY -- 3.1%
4,000,000 General Transportation Systems Series C, 5.000% , 3/01/2024 .................. Aa3 AA- 3,716,240
------------
MASSACHUSETTS DEVELOPMENT FINANCE AGENCY -- 6.8%
2,300,000 Boston University, Series P, 6.000%, 5/15/2029 ............................... A3 BBB+ 2,418,726
2,500,000 Boston University Series P, 6.000%, 5/15/2059 ................................ A3 BBB+ 2,593,425
3,150,000 Revenue, 5.900%, 11/01/2018 .................................................. Ba2 -- 3,054,429
------------
8,066,580
------------
MASSACHUSETTS MUNICIPAL -- 14.8%
2,000,000 Consolidated Loan, Series A, 7.625%, 6/01/2008 ............................... Aaa AA- 2,165,860
990,000 Educational Loan Authority, 7.250%, 1/01/2009, (AMBAC) ....................... Aaa AAA 1,030,055
1,000,000 Haverhill, Series A, 7.000%, 6/15/2012, (FGIC) ............................... Aaa AAA 1,092,350
3,000,000 New England Educational Loan, Sub-Issue H, 6.900%, 11/01/2009 ................ A3 -- 3,369,840
5,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA) ........................ Aaa AAA 5,708,750
1,500,000 Wholesale Electric, 6.750%, 7/01/2008 ........................................ Baa2 BBB+ 1,584,135
2,500,000 Wholesale Electric, 6.750%, 7/01/2011 ........................................ Baa2 BBB+ 2,632,425
------------
17,583,415
------------
MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY -- 30.8%
1,500,000 Beverly Hospital Ribs, 7.570%, 6/18/2020, (MBIA)(d) .......................... Aaa AAA 1,559,250
3,000,000 Boston University Ribs, Series L, 9.791%, 10/01/2031, (MBIA) (d) ............. Aaa AAA 3,384,030
1,750,000 Charlton Memorial Hospital, Series B, 7.250%, 7/01/2013 ...................... -- A 1,884,645
3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 .................................. A1 A 3,184,800
1,000,000 Faulkner Hospital, Series C, Pre-refunded, 6.000%, 7/01/2013 ................. Baa1 AAA 1,072,820
4,000,000 Harvard University, Series N, 6.250%, 4/01/2020 (e) .......................... Aaa AAA 4,479,640
2,400,000 Medical Center of Central Mass., CIass A, 7.000%, 7/01/2012 .................. A3 AAA 2,570,952
1,000,000 New England Baptist Hospital, Series B, 7.300%, 7/01/2011 .................... Baa1 AAA 1,077,890
1,220,000 New England Deaconess Hospital, Series D, 6.875%, 4/01/2022, (AMBAC) ......... Aaa AAA 1,322,883
1,190,000 New England Medical Center, Series F, 6.625%, 7/01/2025, (FGIC) .............. Aaa AAA 1,279,024
6,000,000 Nichols College Issue, Series C, 6.000%, 10/01/2017 .......................... -- BBB- 5,895,000
2,000,000 Partners Healthcare Systems, Series B, 5.125%, 7/01/2019 ..................... A1 AA- 1,884,300
3,340,000 Saints Memorial Medical Center, Series A, 6.000%, 10/01/2023 ................. Ba2 -- 3,260,508
1,500,000 Valley Regional Health System, Series B, Pre-refunded,
8.000%, 7/01/2018 .......................................................... Aaa -- 1,593,855
1,000,000 Valley Regional Health System, Series C,
6.250%, 7/01/2011, (Connie Lee) ............................................ - AAA 1,100,290
1,000,000 Wentworth Institue of Technology, Series A,
7.400%, 4/01/2010, (AMBAC) ................................................. Aaa AAA 1,047,520
------------
36,597,407
------------
MASSACHUSETTS STATE HOUSING FINANCE AGENCY -- 9.9%
555,000 Multifamily Residential Development, Series A, 7.650%, 2/01/2028, (FNMA) ..... Aaa AAA $ 567,399
2,000,000 Residential Development, Series A, 6.900%, 11/15/2024, (FNMA) ................ Aaa AAA 2,145,480
2,500,000 Residential Development, Series E, 6.250%, 11/15/2012, (FNMA) ................ Aaa AAA 2,653,650
1,300,000 Residential Development, Series I, 6.900%, 11/15/2025, (FNMA) ................ Aaa AAA 1,385,397
2,960,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 ......................... Aa A+ 3,112,499
1,790,000 Single Family Mortgage, Series 32, 6.600%, 12/01/2026 ........................ Aa A+ 1,859,810
------------
11,724,235
------------
MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY -- 6.5%
2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 ......................... -- AAA 2,234,560
5,000,000 Newton Group Property's Project, 8.000%, 9/01/2027 ........................... -- -- 5,463,650
------------
7,698,210
------------
MASSACHUSETTS STATE TURNPIKE AUTHORITY -- 3.8%
6,500,000 Metropolitan Highway System, Capital Appreciation, Senior Series C,
Zero Coupon, 1/01/2016, (MBIA) ............................................. Aaa AAA 2,687,295
1,945,000 Metropolitan, Senior Series A, 5.125%, 1/01/2023, (MBIA) ..................... Aaa AAA 1,846,991
------------
4,534,286
------------
MASSACHUSETTS WATER RESOURCE AUTHORITY -- 5.6%
3,200,000 General Refunding, Series B, 5.000%, 3/01/2022, (MBIA) ....................... Aaa AAA 2,990,048
3,240,000 Series A, 6.500%, 7/15/2019 .................................................. A1 A+ 3,651,286
------------
6,641,334
------------
PUERTO RICO -- 10.8%
4,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 ................................ Baa1 A 4,451,720
1,460,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 ............................... Aaa AAA 1,899,168
2,000,000 Aqueduct & Sewer Authority, Refunding Bond, 6.250%, 7/01/2012 ................ Baa1 A 2,234,640
4,125,000 Commonwealth Highway & Transportation Series Y, 5.500%, 7/01/2026 ............ Baa1 A 4,162,785
------------
12,748,313
------------
VIRGIN ISLANDS -- 2.9%
3,045,000 Public Financial Authority, Series A, 7.250%, 10/01/2018 ..................... -- AAA 3,379,189
------------
Total Tax Exempt Obligations (Identified Cost $111,331,007) .................. 115,324,334
------------
OPTIONS CONTRACTS -- 0.0%
- -----------------------------------------------------------------------------------------------------------------------------------
150 U.S. Treasury Bonds Futures, 110 Put, July 1999 ............................... 7,031
------------
Total Options (Identified Cost $26,531) ...................................... 7,031
------------
SHORT TERM INVESTMENT -- 1.3%
$ 1,551,000 Household Finance Corp., 5.500%, 7/01/1999 .................................... $ 1,551,000
------------
Total Short Term Investment (Identified Cost $1,551,000) ...................... 1,551,000
------------
Total Investments -- 98.5% (Identified Cost $112,908,538) (b) ................. 116,882,365
Other assets less liabilities ................................................. 1,787,691
------------
Total Net Assets-- 100% ....................................................... $118,670,056
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At June 30, 1999 the net unrealized appreciation on investments
based on cost of $112,908,538 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 ........................................................... $ 4,767,603
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value. ........................................................ (793,776)
------------
Net unrealized appreciation ............................................................. $ 3,973,827
============
As of December 31, 1998, the Fund had a capital loss carryforward of $806,566 expiring December 31, 2002.
(c) The ratings shown are believed to be the most recent ratings available at June 30, 1999. 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, 1999. The Fund's subadviser independently evaluates
the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies.
(d) Inverse floating rate security
(e) A portion of this security ($2,000,000 par) has been segregated as collateral in connection with the Fund's derivative
investments at June 30, 1999.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC -- American Municipal Bond Assurance Corp.
Connie Lee -- College Construction Loan Insurance Association
FGIC -- Financial Guarantee Insurance Company
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
MBIA -- Municipal Bond Investors Assurance Corp.
Rib -- Residual interest bond
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------------------------------------------------------------------
June 30, 1999
(unaudited)
<S> <C> <C>
ASSETS
Investments at value (Identified Cost $112,908,538) ...... $116,882,365
Cash ..................................................... 456
Receivable for:
Fund shares sold ....................................... 80,615
Accrued interest ....................................... 2,090,050
------------
119,053,486
LIABILITIES
Payable for:
Fund shares redeemed ................................ $ 106,347
Dividends declared .................................. 131,030
Accrued expenses:
Management fees .......................................... 85,268
Deferred trustees' fees .................................. 12,347
Accounting and administrative ............................ 7,360
Other expenses ........................................... 41,078
---------
383,430
------------
NET ASSETS ............................................... $118,670,056
============
Net Assets consist of:
Capital paid in ...................................... $116,963,200
Undistributed net investment income .................. 26,502
Accumulated net realized gains (losses) .............. (2,293,473)
Unrealized appreciation (depreciation) on investments. 3,973,827
------------
NET ASSETS ............................................... $118,670,056
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($109,819,201 / 6,702,513 shares of beneficial interest) $ 16.38
========
Offering price per share (100 / 95.75 of $16.38) ....... $ 17.11*
========
Net asset value and offering price of Class B shares
($8,850,855 / 541,331 shares of beneficial interest) ... $ 16.35**
========
* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
- ---------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999
(unaudited)
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................. $ 3,559,950
Expenses
Management fees ........................................ $ 352,209
Service fees - Class A ................................. 196,386
Service and distribution fees - Class B ................ 44,139
Trustees' fees and expenses ............................ 5,389
Accounting and administrative .......................... 22,544
Custodian .............................................. 43,846
Transfer agent ......................................... 111,603
Audit and tax services ................................. 13,475
Legal .................................................. 1,578
Printing ............................................... 6,382
Registration ........................................... 7,722
Insurance .............................................. 1,200
Miscellaneous .......................................... 8,890
---------
Total expenses ........................................... 815,363
Less expenses waived by the investment adviser and
subadviser ............................................. (181,433) 633,930
--------- ------------
Net investment income ...................................... 2,926,020
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS
AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments-- net .................................... (223,951)
Futures contracts-- net .............................. 66,369
Options contracts-- net .............................. (82,878)
---------
Total realized gain (loss) on investments ............ (240,460)
---------
Unrealized appreciation (depreciation) on:
Investments -- net ................................... (4,369,195)
---------
Total unrealized appreciation (depreciation)
on investments .................................... (4,369,195)
----------
Net gain (loss) on investment transactions ............... (4,609,655)
------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .... $ (1,683,635)
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 5,907,941 $ 2,926,020
Net realized gain (loss) on investments ................. 631,480 (240,460)
Net unrealized appreciation (depreciation) on investments (770,037) (4,369,195)
------------- -------------
Increase (decrease) in net assets from operations ....... 5,769,384 (1,683,635)
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (5,592,703) (2,717,372)
Class B ............................................... (353,477) (185,693)
Net realized gain on investments
Class A ............................................... (546,044) 0
Class B ............................................... (43,269) 0
------------- -------------
(6,535,493) (2,903,065)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS ................. 2,433,927 320,862
------------- -------------
Total increase (decrease) in net assets ................... 1,667,818 (4,265,838)
NET ASSETS
Beginning of the period ................................. 121,268,076 122,935,894
------------- -------------
End of the period ....................................... $ 122,935,894 $ 118,670,056
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ....................................... $ 3,547 $ 26,502
============= =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS A
----------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
----------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................... $ 17.27 $ 15.10 $ 16.85 $ 16.50 $ 17.13 $ 17.02
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income .............................................. 0.89 0.88 0.87 0.86 0.86 0.42
Net Realized and Unrealized Gain (Loss) on Investments ............. (2.15) 1.76 (0.35) 0.63 (0.04) (0.64)
------- ------- ------- ------- ------- -------
Total From Investment Operations ................................... (1.26) 2.64 0.52 1.49 0.82 (0.22)
------- ------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income ............................... (0.89) (0.89) (0.87) (0.86) (0.85) (0.42)
Distributions in Excess of Net Investment Income ................... (0.02) 0.00 0.00 0.00 0.00 0.00
Distributions From Net Realized Gains .............................. 0.00 0.00 0.00 0.00 (0.08) 0.00
------- ------- ------- ------- ------- -------
Total Distributions ................................................ (0.91) (0.89) (0.87) (0.86) (0.93) (0.42)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period ..................................... $ 15.10 $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 16.38
======= ======= ======= ======= ======= =======
Total Return (%) (b) ............................................... (7.4) 17.8 3.2 9.3 4.9 (1.4)
Ratio of Operating Expenses to Average
Net Assets (%) (a) ................................................ 0.85 0.85 0.90 1.00 1.00 1.00(c)
Ratio of Net Investment Income to
Average Net Assets (%) ............................................ 5.63 5.46 5.31 5.17
4.93 4.88(c)
Portfolio Turnover Rate (%) ........................................ 48 127 140 132 125 87
Net Assets, End of Period (000) .................................... $107,565 $120,229 $112,934 $113,869 $113,910 $109,819
(a) The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations described in
Note 4 to the Financial Statements would have been (%) ......... 1.24 1.24 1.27 1.29 1.31 1.30
(b) A sales charge is not reflected in total return calculations.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<CAPTION>
CLASS B
-----------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
----------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................... $ 17.26 $ 15.08 $ 16.82 $ 16.47 $ 17.09 $ 16.98
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income .............................................. 0.77 0.78 0.75 0.76 0.74 0.36
Net Realized and Unrealized Gain (Loss) on Investments ............. (2.14) 1.74 (0.34) 0.62 (0.03) (0.63)
------- ------- ------- ------- ------- -------
Total From Investment Operations ................................... (1.37) 2.52 0.41 1.38 0.71 (0.27)
------- ------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income ............................... (0.79) (0.78) (0.76) (0.76) (0.74) (0.36)
Distributions in Excess of Net
Investment Income ................................................. (0.02) 0.00 0.00 0.00 0.00 0.00
Distributions From Net Realized Gains .............................. 0.00 0.00 0.00 0.00 (0.08) 0.00
------- ------- ------- ------- ------- -------
Total Distributions ................................................ (0.81) (0.78) (0.76) (0.76) (0.82) (0.36)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period ..................................... $ 15.08 $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 16.35
======= ======= ======= ======= ======= =======
Total Return (%) (b) ............................................... (8.0) 17.0 2.6 8.6 4.2 (1.6)
Ratio of Operating Expenses to Average Net Assets (%) (a) .......... 1.50 1.50 1.55 1.65 1.65 1.65(c)
Ratio of Net Investment Income to Average Net Assets (%) ........... 4.98 4.81 4.66 4.52 4.28 4.23(c)
Portfolio Turnover Rate (%) ........................................ 48 127 140 132 125 87
Net Assets, End of Period (000) .................................... $ 4,523 $ 6,697 $ 7,442 $ 7,399 $ 9,026 $ 8,851
(a) The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations described in
Note 4 to the Financial Statements would have been (%) ......... 1.89 1.89 1.92 1.94 1.96 1.95
(b) A contingent deferrred sales charge is not reflected in total return calculations.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the Period Ended June 30, 1999
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of New England Funds
Trust II, a Massachusetts business trust (the "Trust"), and is registered under
the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end
management investment company. The Fund seeks a high level of current income
exempt from federal income tax and Massachusetts personal income tax. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each such series of shares is a "Fund").
The Fund offers both Class A and Class B shares. Class A shares are sold with a
maximum front end sales charge of 4.25%. Class B shares do not pay a front end
sales charge, but pay a higher ongoing distribution fee than Class A shares for
eight years (at which point they automatically convert to Class A shares), and
are subject to a contingent deferred sales charge if those shares are redeemed
within six years of purchase (or five years if purchased before May 1, 1997).
Expenses of the Fund are borne pro rata by the holders of both classes of
shares, except that each class bears expenses unique to that class (including
the Rule 12b-1 service and distribution fees applicable to such class), and
votes as a class only with respect to its own Rule 12b-1 plan. Shares of each
class would receive their pro rata share of the net assets of the Fund, if the
Fund was 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 market 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. 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 purchase and sell interest rate
futures contracts to hedge against changes in the values of 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 are primarily due to differing treatments of
market discount for book and tax purposes. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to capital accounts.
g. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price including interest. The Fund's subadviser is responsible
for determining that the value of the collateral is at all times at least equal
to the repurchase price. Repurchase agreements could involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 1999
purchases and sales of securities (excluding short-term investments) were
$52,567,513 and $54,644,105, respectively.
Transactions in written options for the six months ended June 30, 1999 are
summarized as follows:
WRITTEN OPTIONS
-------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Open at December 31, 1998 (100) $ (38,662)
Contracts opened (1,675) (665,822)
Contracts closed 1,775 704,484
------ ---------
Open at June 30, 1999 0 $ 0
====== =========
3a. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 0.60% of the first $100 million of the Fund's
average daily net assets and 0.50% of such assets in excess of $100 million
reduced by payments to the Fund's investment subadviser, Back Bay Advisors L.P.
("Back Bay"), at the rate of 0.30% of the first $100 million of the Fund's
average daily net assets and 0.25% of such assets in excess of $100 million.
Certain officers and directors of NEFM are also officers or Trustees of the
Fund. NEFM and Back Bay 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 under the management and subadvisory agreements
in effect during the period ended June 30, 1999 are as follows:
Fees Earned (a)
---------------
NEFM $ 176,105
Back Bay 176,104
(a) Before reduction pursuant to voluntary expense limitations. See note 4.
The effective annualized management fee for the six months ended June 30, 1999
was 0.58%.
b. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company ("NSC") is a
wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund reimburses NSC for all or part of
NSC's expenses for personnel performing bookkeeping, accounting, and financial
reporting functions and clerical functions relating to the Fund, and (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, registration of shares in various
states, shareholder reports and notices, proxy solicitation material furnished
to shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the six months ended June 30, 1999 these
expenses amounted to $22,544 and are shown separately in the financial
statements as accounting and administrative.
c. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a Service and Distribution 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 Plans, the Fund pays New England Funds L.P. ("New England Funds"), the
Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee
at the annual rate of 0.25% of the average daily net assets attributable to the
Fund's Class A and Class B shares, as reimbursement for services provided and
expenses (including certain payments to securities dealers, who may be
affiliated with New England Funds) incurred by New England Funds in providing
personal services to investors in Class A and Class B shares and/or the
maintenance of shareholder accounts. For the six months ended June 30, 1999, the
Fund paid New England Funds $140,276 and $11,035 in service fees for Class A and
Class B shares, respectively.
Also under the Plans, the Fund pays New England Funds monthly distribution fees
at the annual rate of 0.10% of the average daily net assets attributable to the
Fund's Class A shares and 0.75% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in connection with the
marketing or sale of Class A and Class B shares, respectively. For the six
months ended June 30, 1999, the Fund paid New England Funds $56,110 and $33,104
in distribution fees for Class A and Class B shares, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1999, amounted to $85,948.
d. TRANSFER AGENT FEES. NSC 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 six months ended June 30, 1999, the Fund paid NSC $96,803 as
compensation for its services.
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, Nvest, NSC or their affiliates, other than registered
investment companies. Each other Trustee receives a retainer fee at the annual
rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the
Board of Trustees attended. Each committee member receives an additional
retainer fee at the annual rate of $6,000 while each committee chairman receives
a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees
are allocated to the various New England Funds based on a formula that takes
into account, among other factors, the relative net assets of each fund.
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. Deferred amounts remain in the Fund until distributed in
accordance with the Plan.
4. EXPENSE LIMITATIONS. Effective September 1, 1996 until further notice to the
Fund, Back Bay and NEFM have voluntarily agreed to reduce their management fees
and, if necessary, to assume expenses of the Fund in order to limit the Fund's
expenses to an annual rate of 1.00% of the Fund's Class A average daily net
assets, and 1.65% of Class B average daily net assets. Prior to this date,
effective May 1, 1991, Back Bay and NEFM had voluntarily agreed to reduce their
management fees and, if necessary, to assume expenses of the Fund in order to
limit the Fund's expenses to an annual rate of 0.85% of the Fund's Class A
average daily net assets and, effective September 13, 1993, 1.50% of Class B
average daily net assets. As a result of the Fund's expenses exceeding the
applicable voluntary expense limitation during the six months ended June 30,
1999, Back Bay reduced its subadvisory fee by $90,716 and NEFM reduced its
advisory fee by $90,717.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the Commonwealth of Massachusetts and its political subdivisions,
agencies and public authorities to obtain funds for various public purposes. The
Fund is more susceptible to factors adversely affecting issuers of Massachusetts
municipal securities than is a comparable municipal bond fund that is not so
concentrated. Uncertain economic and fiscal conditions may affect the ability of
issuers of Massachusetts municipal securities to meet their financial
obligations. The Fund had the following industry concentrations in excess of 10%
on June 30, 1999 as a percentage of the Fund's total net assets: College
(24.0%), Hospital (12.0%), Water and Sewer (12.0%), Housing (11.0%) and Highway
(11.0%) . The Fund had investments in securities of issuers insured by Municipal
Bond Investors Assurance Corporation (MBIA) which aggregates 25.0% of its total
net assets at June 30, 1999.
6. CAPITAL SHARES. At June 30, 1999 there was an unlimited number of shares of
beneficial interest authorized, divided into two classes, Class A and Class B
capital shares. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Shares sold .............................................. 1,003,641 $ 17,141,843 289,201 $ 4,890,071
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................... 234,443 3,998,786 119,231 2,008,184
Distributions from net realized gain .................... 25,725 437,073 0 0
---------- ------------ -------- -----------
1,263,809 21,577,702 408,432 6,898,255
Shares repurchased ....................................... (1,219,436) (20,828,010) (398,939) (6,735,728)
---------- ------------ -------- -----------
Net increase (decrease) .................................. 44,373 $ 749,692 9,493 $ 162,527
---------- ----------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- -------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Shares sold .............................................. 139,399 $ 2,380,236 54,816 $ 919,203
Shares issued in connection with the reinvestment of:
Dividends from net investment income .................... 15,918 271,316 8,577 144,126
Distributions from net realized gain .................... 2,236 37,896 0 0
---------- ------------ -------- -----------
157,553 2,689,448 63,393 1,063,329
Shares repurchased ....................................... (58,973) (1,005,213) (53,476) (904,994)
---------- ------------ -------- -----------
Net increase (decrease) .................................. 98,580 $ 1,684,235 9,917 $ 158,335
---------- ------------ -------- -----------
Increase (decrease) derived from capital share transactions 142,953 $ 2,433,927 19,410 $ 320,862
========== ============ ======== ===========
</TABLE>
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- --------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME Distributions - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by the
Securities and Exchange Commission.
MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the portfolio.
DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.
TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes, but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).
MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges. A small portion of
income may be subject to federal and/or alternative minimum tax. Capital gains,
if any, are subject to a capital gains tax.
<PAGE>
- --------------------------------------------------------------------------------
REGULAR INVESTING PAYS
- --------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
- --------------------------------------------------------------------------------
1. It's an easy way to build assets.
2. It's convenient and effortless.
3. It requires a low minimum to get started.
4. It can help you reach important long-term goals like financing retirement or
college funding.
5. It can help you benefit from the ups and downs of the market.
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $100 a month in your New England fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
- --------------------------------------------------------------------------------
THE POWER OF MONTHLY INVESTING
- --------------------------------------------------------------------------------
[A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:]
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high. Because this program involves
continuous investment in securities regardless of fluctuating prices, the
investor should consider his or her financial ability to continue purchases
during periods of high or low prices.
You can start an Investment Builder program with your current New England Funds
account. To open an Investment Builder account today, call your financial
representative or New England Funds at 1-800-225-5478.
Past performance is no guarantee of future results. Please call New England
Funds for a prospectus, which contains more information, including charges and
other ongoing expenses. Please read prospectus carefully before you invest.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth and Income Fund
(formerly 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
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
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust,
Money Market Series
Tax Exempt Money Market Trust
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
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.
Y2K Readiness Report: New England Funds has kept pace with the Y2K
challenge. Mission critical systems have been tested and non-mission
critical systems are scheduled for completion by September 30, 1999.
Y2K is a top priority at New England Funds. For more information on
our Y2K readiness, please visit our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act.
<PAGE>
------------------
[LOGO](R) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
------------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
MA58-0699
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