<PAGE>
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ANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------
New England Tax Free
Income Fund of New York
[graphic omitted]
Where
The Best
Minds
Meet(R)
- -----------------
DECEMBER 31, 1998
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<PAGE>
FEBRUARY 1999
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[Photo of Bruce R. Speca]
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"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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<PAGE>
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.
<PAGE>
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NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
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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
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Intermediate Term Tax Free Fund of New York
since inception 4/23/93 compared to the Lehman Municipal Index. The data points
for this chart are as follows:
NAV MSC LEHMAN MUNI
4/23/93 $10,000 $ 9,575 $10,000
93 $10,738 $10,282 $10,718
94 $10,303 $ 9,865 $10,164
95 $11,799 $11,298 $11,938
96 $12,347 $11,822 $12,469
97 $13,415 $12,844 $13,614
98 $14,045 $13,448 $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 TAX FREE INCOME FUND OF NEW YORK
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
<TABLE>
<CAPTION>
CLASS A (Inception 4/23/93) 1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Net Asset Value(1) 4.7% 5.5% 6.2%
With Max. Sales Charge(2) 0.3 4.6 5.4
- ----------------------------------------------------------------------------------------------------
CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 3.9% 4.7% 4.5%
With CDSC(3) -1.1 4.4 4.4
- ----------------------------------------------------------------------------------------------------
<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 NY Municipal Debt Average(6) 5.6 5.2 5.9 5.2
Morningstar Municipal NY Interm. Avg.(5) 5.1 4.6 5.2 4.7
- ----------------------------------------------------------------------------------------------------
</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.
As of May 1998, New England Intermediate Term Tax Free Fund of New York became
New England Tax Free Income Fund of New York. The Fund's objective and strategy
changed accordingly. Please see the Fund's prospectus for details.
YIELDS AS OF 12/31/98
- --------------------------------------------------------------------------------
CLASS A CLASS B
SEC 30-day Yield(7) 4.0% 3.4%
NY State Taxable Equivalent Yield(8) 7.1 6.1
NY City Taxable Equivalent Yield(8) 7.5 6.4
- --------------------------------------------------------------------------------
This Fund waived certain fees and expenses during the period indicated and the
Fund's average annual total return 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 Bond Index is an unmanaged index of bonds issued by states,
municipalities and other governmental entities having maturities of more
than one year. The Index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments. Class A since inception return is calculated
from 9/30/93. Class B since inception return is calculated from 4/30/93.
(5) Morningstar Municipal New York 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 New York Municipal Debt 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. The Fund's investment category changed on
5/1/98 from Intermediate NY Municipal Debt to New York Municipal Debt. 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 New
York state income tax bracket of 43.90% or the combined federal, New York
State and New York City income tax bracket of 46.60%. The alternative
minimum tax and some other federal and state taxes that may apply are not
taken into account.
<PAGE>
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NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
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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 Tax Free Income Fund of New York perform over the past
12 months?
New England Tax Free Income Fund of New York delivered a total return of 4.72%
for Class A shares at net asset value for the 12 months ending December 31,
1998. This included a $0.01 per share loss to $7.89 and the reinvestment of
$0.37 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 SEC yield for Class A shares
was 4.0%, which translates into a taxable equivalent yield of 7.1% based on the
maximum combined federal and New York State income tax rate of 43.90%. For New
York City residents in the maximum combined tax bracket of 46.60%, the taxable
equivalent yield was 7.5%.
Q. What was the investment environment for New York municipal bonds during the
period?
The investment environment during the period was extremely positive. Investors
benefited from favorable economic and interest rate climates at the national
level; and in New York, from continued economic strength and improving fiscal
conditions. 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.
Municipal bonds generally suffered from greater supply than demand, however.
Investors mainly directed cash to U.S. Treasury securities and the stock market.
In the summer of 1998, investor concerns about the stability of global economies
and financial market 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, 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.
CREDIT QUALITY COMPOSITION -- 12/31/98
- --------------------------------------------------------------------------------
AAA 18.5%
AA 11.2%
A 25.5%
BBB 40.3%
BB/Other 4.5%
Quality is based on ratings aupplied by Standard & Poor's.
Portfolio holdings are subject to change.
AVERAGE CREDIT QUALITY = A AVERAGE MATURITY = 14 YEARS
In New York, the economy thrived and the financial health of state and local
governments improved, setting the stage for rising bond prices. Continued
success on Wall Street and revenue growth in New York-based Fortune 500
companies fueled the state's economic engine, adding to municipal tax receipts.
Tax-exempt bond issuance remained heavy in New York, feeding demand and keeping
the state's municipal bond yields at attractive levels. The year's most notable
deal was a $3.5 billion municipal bond package issued by Long Island Power
Authority (LIPA). The LIPA deal came to market in the spring of 1998 and was the
largest municipal bond issue in tax-exempt history.
Q. How did you manage the Fund in this environment?
We emphasized quality and income, while taking advantage of a change in the
Fund's objective and investment strategy that enabled us to invest in
longer-term maturities. Prior to this change on 5/1/98, the Fund was restricted
to investing in bonds with intermediate-term maturities. We believe the added
flexibility improves the Fund's ability to generate greater income and increases
the potential for price appreciation. As of December 31, 1998, the Fund's
average credit quality was A, average maturity was 14 years (longer than the
9-year average maturity at mid-year) and duration stood at 6.8 years.
Duration and average maturity are two 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.
During 1998 when interest rates generally fell, the portfolio's longer duration
and average maturity enhanced the Fund's total return. We emphasized
higher-rated bonds throughout the year, believing that they provided the most
attractive relative value. Lower-rated, and therefore higher-yielding, bonds
offered minimal yield advantage. In this environment, we took the opportunity to
upgrade the quality of the Fund's holdings while sacrificing only negligible
yield. While we watched for attractive relative value in all sectors, we focused
primarily on New York general obligation bonds to capitalize on the positive
economic and fiscal conditions in the state. The Fund's higher-rated holdings
also helped offset some of the increased interest rate risk that comes with
lengthening average maturity and duration.
Q. What is your outlook for New York municipal bonds over the next few months?
We think New York municipal bonds should be solid performers. We expect many of
the trends that have been positive for bonds -- including moderate economic
growth and minimal inflation -- to continue. This should bode well for the
fiscal conditions of municipalities. Further, while there have been considerable
improvements in the stability of global economies and financial markets, we
think both the Federal Reserve Board and investors will monitor the situation
closely and proceed with extreme caution. Therefore, we expect interest rates to
remain low.
The uncertainties and concerns of 1998 reinforced the value of high-quality,
liquid investments in a well-rounded investor portfolio. Municipal bonds
generated competitive tax-free income and solid returns over the past 12 months.
The performance of municipal bonds was particularly attractive considering the
low level of inflation -- meaning more "real income" in investors' pockets --
and municipal bonds' tax-advantaged status.
As we head into 1999, we look forward to the continuation of positive economic
and interest rate conditions for fixed-income investors. Against this backdrop,
we think municipal bonds will continue to offer attractive yields and could
outperform U.S. Treasuries in the coming months.
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 portfolio 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
- --------------------------------------------------------------------------------
Investments as of December 31, 1998
TAX EXEMPT OBLIGATIONS--100.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
RATINGS (c)
(UNAUDITED)
----------------------
FACE STANDARD
AMOUNT ISSUER MOODY'S & POOR'S VALUE (a)
- ----------------------------------------------------------------------------------------------------
GUAM--8.4%
<C> <S> <C> <C> <C>
$1,000,000 Guam Airport Authority, 6.400%, 10/01/2005 -- BBB $ 1,086,100
500,000 Guam Airport Authority, 6.600%, 10/01/2010 . -- BBB 549,240
500,000 Guam Housing Corp. Single Family, 5.750%,
9/01/2031 ............................... -- AAA 542,120
------------
2,177,460
------------
NEW YORK--71.8%
250,000 Albany Housing Authority, 6.250%,
10/01/2012 ............................... Baa1 -- 280,108
205,000 Metropolitan Transportation Authority,
5.500%, 7/01/2017 ........................ Baa1 BBB+ 219,325
475,000 Metropolitan Transportation Authority,
5.750%, 7/01/2008 ........................ Baa1 BBB+ 526,623
500,000 Metropolitan Transportation Authority,
7.125%,7/01/2009 ........................ Baa1 BBB+ 558,735
1,000,000 New York City Industrial Development Agency,
5.750%, 10/01/2036 ...................... Baa3 BBB- 1,028,290
450,000 New York City Industrial Development Civic,
6.000%, 8/01/2007 ........................ Baa3 -- 494,518
250,000 New York City Municipal Water, 7.000%,
6/15/2009 ................................ A1 A 268,153
250,000 New York City Municipal Water, Pre-refunded,
7.000%, 6/15/2009 ....................... -- A 271,675
500,000 New York General Obligation, 7.000%,
8/01/2006 ................................ A3 A- 584,305
500,000 New York General Obligation, 7.250%,
8/15/2007 ................................ A3 A- 600,770
1,000,000 New York City Municipal Water Finance,
4.750%, 6/15/2025 ....................... A1 A 945,300
1,170,000 New York City Transitional, 5.000%,
8/15/2027 ................................ Aa3 AA 1,154,158
500,000 New York State Dorm. Authority, 5.750%,
7/01/2007 ............................... Baa1 BBB+ 549,600
500,000 New York State Dorm. Authority, 5.750%,
7/01/2013 ............................... Baa1 BBB+ 550,830
500,000 New York State Dorm. Authority, 6.000%,
7/01/2006 ................................ Baa1 BBB+ 554,250
500,000 New York State Dorm. Authority, 6.500%,
8/15/2011 ............................... A3 A- 590,620
500,000 New York State Local Government Assistance
Pre-refunded, 7.250%, 4/01/2007 ......... Aaa -- 547,500
500,000 New York State Mortgage Revenue, 6.250%,
4/01/2010 ............................... Aa2 -- 540,390
1,000,000 New York State Urban Development Corp.,
5.000%, 4/01/2018 Baa1 BBB+ 982,940
1,000,000 New York State Urban Development Corp.,
Zero Coupon, 4/01/2013 .................. Aaa AAA 511,150
1,000,000 New York State Urban Development Corp.,
5.000%, 1/01/2025 Baa1 BBB+ 970,280
290,000 New York, Pre-refunded, 8.000%, 8/01/2003 . Aaa AAA 324,626
1,065,000 New York, Pre-refunded, 8.400%, 11/15/2008
(d) ...................................... Aaa AAA 1,215,453
500,000 Oneida Herkimer, 6.650%, 4/01/2005 ........ Baa3 -- 561,665
1,000,000 Onondaga County Industrial Development
Agency, 9.000%, 10/01/2007 .............. -- A 1,332,270
1,000,000 Port Authority New York & New Jersey,
7.000%, 10/01/2007 ....................... -- -- 1,164,700
540,000 Triborough Bridge & Tunnel Authority,
6.000%, 1/01/2012 ........................ Aa3 A+ 621,880
500,000 Triborough Bridge & Tunnel Authority,
6.625%, 1/01/2012 ........................ Aa3 A+ 597,620
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18,547,734
------------
PUERTO RICO--16.6%
500,000 Electric Power Authority, 5.900%, 7/01/2003 Baa1 BBB+ 540,575
500,000 Puerto Rico Commonwealth, 4.750%, 7/01/2023 Baa1 A 476,350
300,000 Puerto Rico Commonwealth Aqueduct & Sewer
Authority, 10.250%, 7/01/2009 ............ Aaa AAA 409,017
600,000 Puerto Rico Commonwealth Aqueduct & Sewer
Authority, 6.250%, 7/01/2012 ............ Baa1 A 700,644
1,000,000 Puerto Rico Commonwealth Highway &
Transportation, 5.945%, 7/01/2004 ....... Baa1 A1+ 1,126,920
1,000,000 Puerto Rico Electric Power Authority,
5.500%, 7/01/2020 ....................... Baa1 BBB+ 1,032,430
------------
4,285,936
------------
US VIRGIN ISLANDS--3.8%
910,000 US Virgin Islands Public Finance Authority,
7.750%, 10/01/2006 ....................... -- -- 993,456
------------
Total Tax Exempt Obligations
(Identified Cost $24,489,197) ........... 26,004,586
------------
Total Investments--100.6% (Identified Cost
$24,489,197) (b) ......................... 26,004,586
Other assets less liabilities ............. (156,135)
------------
Total Net Assets--100% .................... $ 25,848,451
============
(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 $24,489,197 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 ......................... $ 1,529,790
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ......................... (14,401)
-----------
Net unrealized appreciation ............................................. $ 1,515,389
===========
As of December 31, 1998, the Fund had a capital loss carryforward
of $275,736 which expires December 31, 2002. This may be available
to offset future 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 sub-advisor independently evaluates
the Fund's portfolio securities and in making investment decisions
does not rely solely on the ratings of agencies.
(d)At December 31, 1998, a portion of this security has been
segregated as collateral in connection with the Fund's derivative
instruments.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------------------------------------------------------------------------
December 31, 1998
ASSETS
<S> <C> <C>
Investments at value (Identified cost $24,489,197) .......... $26,004,586
Receivable for:
Accrued interest .......................................... 476,134
Due from investment adviser ............................... 48,332
-----------
26,529,052
LIABILITIES
Payable for:
Due to custodian bank ..................................... $538,452
Fund shares redeemed ...................................... 46,100
Dividends declared ........................................ 17,211
Accrued expenses:
Deferred trustees' fees ................................... 6,009
Accounting and administrative ............................. 1,769
Other expenses ............................................ 71,060
--------
680,601
-----------
NET ASSETS .................................................... $25,848,451
===========
Net Assets consist of:
Capital paid in ........................................... $25,165,189
Distributions in excess of net investment income .......... (3,183)
Accumulated net realized gains (losses) ................... (828,944)
Unrealized appreciation (depreciation) on investments ..... 1,515,389
-----------
NET ASSETS .................................................... $25,848,451
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($22,775,929 divided by 2,886,818 shares of beneficial
interest) ................................................. $7.89
=====
Offering price per share (100/95.75 of $7.89) ................. $8.24*
=====
Net asset value and offering price of Class B shares
($3,072,522 divided by 390,455 shares of
beneficial interest) ........................................ $7.87**
=====
</TABLE>
* 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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
INVESTMENT INCOME
<S> <C> <C>
Interest ...................................................... $1,270,012
----------
Expenses
Management fees ............................................. $119,572
Service fees - Class A ...................................... 50,031
Service and distribution fees - Class B ..................... 27,632
Trustees' fees and expenses ................................. 6,391
Accounting and administrative ............................... 19,015
Custodian ................................................... 64,940
Transfer agent .............................................. 71,319
Audit and tax services ...................................... 27,200
Legal ....................................................... 1,587
Printing .................................................... 23,447
Registration ................................................ 17,919
Amortization of organization expenses ....................... 2,905
Miscellaneous ............................................... 5,072
--------
Total expenses ................................................ 437,030
Less expenses waived and assumed by the investment adviser and
subadviser .................................................. (222,713) 214,317
--------
----------
Net investment income ......................................... 1,055,695
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
WRITTEN OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net ........................................... 265,872
Futures contracts - net ..................................... (21,815)
Written options contracts - net ............................. (220,290)
--------
Total realized gain (loss) on investments ..................... 23,767
--------
Unrealized appreciation (depreciation) on:
Investments - net ........................................... (50,454)
--------
Net gain (loss) on investment transactions .................... (26,687)
----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ......... $1,029,008
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
------ ------
FROM OPERATIONS
<S> <C> <C>
Net investment income ..................................... $ 1,063,036 $ 1,055,695
Net realized gain (loss) on investments, written options
and futures transactions ................................ (95,866) 23,767
Unrealized appreciation (depreciation) on investments,
written options and futures transactions ................ 843,923 (50,454)
------------ ------------
Increase (decrease) in net assets from operations ......... 1,811,093 1,029,008
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................. (979,795) (950,474)
Class B ................................................. (104,938) (110,364)
------------ ------------
(1,084,733) (1,060,838)
------------ ------------
Increase (decrease) in net assets derived from capital
share transactions ...................................... 1,515,584 2,629,894
------------ ------------
Total increase (decrease) in net assets ................... 2,241,944 2,598,064
NET ASSETS
Beginning of the year ..................................... 21,008,443 23,250,387
------------ ------------
End of the year ........................................... $ 23,250,387 $ 25,848,451
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT INCOME
End of the year ........................................... $ (9,025) $ (3,183)
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $7.76 $7.07 $7.68 $7.64 $7.90
----- ----- ----- ----- -----
Income From Investment Operations
Net Investment Income ................. 0.37 0.38 0.39 0.37 0.37
Net Realized and Unrealized Gain (Loss)
on Investments ...................... (0.68) 0.62 (0.05) 0.27 (0.01)
----- ----- ----- ----- -----
Total From Investment Operations ...... (0.31) 1.00 0.34 0.64 0.36
----- ----- ----- ----- -----
Less Distributions
Distributions From Net Investment
Income .............................. (0.38) (0.39) (0.38) (0.38) (0.37)
----- ----- ----- ----- -----
Total Distributions ................... (0.38) (0.39) (0.38) (0.38) (0.37)
----- ----- ----- ----- -----
Net Asset Value, End of Year .......... $7.07 $7.68 $7.64 $7.90 $7.89
===== ===== ===== ===== =====
Total Return (%) (b) .................. (4.1) 14.5 4.6 8.7 4.7
Ratio of Operating Expenses to Average
Net Assets (%) (a) .................. 0.70 0.70 0.75 0.85 0.85
Ratio of Net Investment Income to
Average Net Assets (%) .............. 5.13 5.18 5.15 4.88 4.73
Portfolio Turnover Rate (%) ........... 219 155 99 40 158
Net Assets, End of Year (000) ......... $15,875 $16,388 $18,854 $20,527 $22,776
(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 (%) .......................... 1.79 1.88 1.93 1.84 1.83
(b) A sales charge is not reflected in
total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $7.76 $7.06 $7.67 $7.62 $7.88
----- ----- ----- ----- -----
Income From Investment Operations
Net Investment Income ...................... 0.32 0.33 0.34 0.32 0.31
Net Realized and Unrealized Gain (Loss) on
Investments .............................. (0.69) 0.62 (0.06) 0.27 (0.01)
----- ----- ----- ----- -----
Total From Investment Operations ........... (0.37) 0.95 0.28 0.59 0.30
----- ----- ----- ----- -----
Less Distributions
Distributions From Net Investment Income ... (0.33) (0.34) (0.33) (0.33) (0.31)
----- ----- ----- ----- -----
Total Distributions ........................ (0.33) (0.34) (0.33) (0.33) (0.31)
----- ----- ----- ----- -----
Net Asset Value, End of Year ............... $7.06 $7.67 $7.62 $7.88 $7.87
===== ===== ===== ===== =====
Total Return (%) (b) ....................... (4.9) 13.7 3.7 7.9 3.9
Ratio of Operating Expenses to Average Net
Assets (%) (a) ........................... 1.45 1.45 1.50 1.60 1.60
Ratio of Net Investment Income to Average
Net
Assets (%) ............................... 4.38 4.43 4.40 4.13 3.98
Portfolio Turnover Rate (%) ................ 219 155 99 40 158
Net Assets, End of Year (000) .............. $1,152 $1,718 $2,154 $2,724 $3,073
(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 (%) ......... 2.54 2.63 2.68 2.59 2.58
(b) A contingent deferred sales charge is
not reflected in total return
calculations.
</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 as high a level of current income exempt from federal
income tax and New York personal income tax. The Declaration of Trust permits
the trustees to issue an unlimited number of shares of the Trust in multiple
series (each series of shares is a "Fund").
The Fund offers both Class A and Class B shares. Class A shares are sold with
a maximum front end sales charge of 4.25%. Class B shares do not pay a front
end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before
May 1, 1997). Expenses of the Fund are borne pro rata by the holders of both
classes of shares, except that each class bears expenses unique to that class
(including the Rule 12b-1 service and distribution fees applicable to such
class), and votes as a class only with respect to its own Rule 12b-1 Plan.
Shares of each class would receive their pro rata share of the net assets of
the Fund, if the Fund were liquidated. In addition, the trustees approve
separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. Debt securities (other than short-term obligations
with a remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service selected by the fund's subadviser,
authorized by the Board of Trustees, which service determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term obligations with a remaining maturity of less than sixty days are
stated at amortized cost, which approximates value. All other securities and
assets are valued at their fair value as determined in good faith by the
Fund's adviser and subadviser, under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are
accounted for on the trade date (the date the buy or sell is executed).
Interest income is recorded on the accrual basis. Interest income is increased
by the accretion of original issue discount. Interest income is reduced by the
amortization of premium. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. OPTIONS. The Fund uses options to hedge against changes in the values of
securities the Fund owns or expects to purchase. Writing puts and buying calls
tends to increase the Fund's exposure to the underlying instrument and writing
calls or buying puts tends to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
For options purchased to hedge the Fund's investments, the potential risk to
the Fund is that the change in value of options contracts may not correspond
to the change in value of the hedged instruments. In addition, losses may
arise from changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty is unable
to perform. The maximum loss for purchased options is limited to premium
initially paid for the option. For options written by the Fund, the maximum
loss is not limited to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may enter into interest rate
futures contracts to hedge against changes in the values of tax exempt
municipal securities the Fund owns or expects to purchase. An interest rate
futures contract is an agreement between two parties to buy and sell a
security for a set price (or to deliver an amount of cash) on a future date.
Upon entering into such a contract, the purchasing Fund is required to pledge
to the broker an amount of cash, U.S. Government securities or other high
quality debt securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin," and are
recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.
The potential risk to the Fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the fund may not be able to close out its
futures positions due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record and are paid monthly. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. These differences relate to
differing treatments for trustee fees. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price including interest. The subadviser is responsible
for determining that the value of the collateral is at all times at least
equal to the repurchase price. Repurchase agreements could involve certain
risks in the event of default or insolvency of the other party including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
H. ORGANIZATION EXPENSE. Costs incurred in 1993 in connection with the Fund's
organization and initial registration amounted to $27,000 and were paid and
were amortized over 60 months.
2. PURCHASE AND SALES OF SECURITIES. For the year ended December 31, 1998
purchases and sales of securities (excluding short-term investments) were
$38,828,526 and $35,587,490, respectively.
Transactions 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 (375) (171,447)
Contracts closed 375 171,447
--- --------
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 Fund Management, L.P.
("NEFM") at the annual rate of 0.525% of the first $200 million of the Fund's
average daily net assets, 0.50% of the next $300 million and 0.475% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors, L.P. ("Back Bay Advisors") at the rate of 0.2625% of the
first $200 million of the Fund's average daily net assets, 0.25% of the next
$300 million and 0.2375% of such assets in excess of $500 million. Certain
officers and directors of NEFM are also officers or trustees of the Fund. NEFM
and Back Bay Advisors are wholly owned subsidiaries of Nvest Companies, L.P.
("Nvest"), 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
- ----------
$59,786(a) NEFM
$59,786(a) 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 $19,015 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 $50,031 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 $222,162.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal
services to investors in Class B shares and/or the maintenance of shareholder
accounts. For the year ended December 31, 1998, the Fund paid New England
Funds $6,908 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 $20,724 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 $42,239.
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 $28,734 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $481 in transfer agent credits. The transfer agent expense in the
Statement of Operations is net of these credits.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEFSCO, Nvest or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $137
Meeting Fee 152/meeting
Annual Committee Member Retainer 21
Annual Committee Chairman Retainer 14
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. EXPENSE LIMITATIONS. Effective September 1, 1996 until further notice to
the Fund, Back Bay Advisors and NEFM have voluntarily agreed to reduce
management fees in order to limit the Fund's expenses to an annual rate of
0.85% of the Fund's Class A average daily net assets and 1.60% of Class B
average daily net assets. Prior to September 1, 1996 Back Bay Advisors and
NEFM voluntarily agreed to reduce management fees in order to limit the Fund's
expenses to an annual rate of 0.70% of the Fund's Class A average daily net
assets and effective September 13, 1993, 1.45% of Class B average daily net
assets. As a result of the Fund's expenses exceeding the foregoing voluntary
limitation during the year ended December 31, 1998 Back Bay Advisors waived
its entire management fee of $59,786 and NEFM waived its entire management fee
of $59,786. In addition NEFM reimbursed the Fund $103,141 for expenses which
exceeded the management fee waiver.
5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations
issued by the State of New York and its political subdivisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is
more susceptible to factors adversely affecting issuers of New York municipal
securities than is a comparable municipal bond fund that is not as
concentrated. Uncertain economic and fiscal conditions may affect the ability
of issuers of New York municipal securities to meet their financial
obligations. The Fund had the following industry concentrations in excess of
10% on December 31, 1998 as a percentage of the Fund's total net assets:
Airport, Bridges and Tunnels (16 0%.), Pre-Refunded/Escrows (10.7%), Utilities
(10.5%) and General Obligations (10.1%).
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 ................................ 454,808 $3,505,929 631,516 $4,983,346
Shares issued in connection with the reinvestment of:
Distributions from net investment income . 93,317 722,397 88,941 699,634
--------- ---------- -------- ----------
548,125 4,228,326 720,457 5,682,980
Shares repurchased ......................... (415,593) (3,192,971) (433,512) (3,403,567)
--------- ---------- -------- ----------
Net increase ............................... 132,532 $1,035,355 286,945 $2,279,413
--------- ---------- -------- ----------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------ ------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ------------ -------------- ------------ --------------
Shares sold ................................ 115,852 $ 891,524 129,606 $1,015,042
Shares issued in connection with the reinvestment of:
Distributions from net investment income . 9,940 76,802 9,504 74,568
--------- ---------- -------- ----------
125,792 968,326 139,110 1,089,610
Shares repurchased ......................... (62,625) (488,097) (94,462) (739,129)
--------- ---------- -------- ----------
Net increase ............................... 63,167 $ 480,229 44,648 $ 350,481
--------- ---------- -------- ----------
Increase derived from capital shares
transactions ............................. 195,699 $1,515,584 331,593 $2,629,894
--------- ---------- -------- ----------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of New England Funds Trust II and the Shareholders of
NEW ENGLAND TAX FREE INCOME FUND OF NEW YORK
In our opinion, the accompanying statement of assets and 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 the New England Tax Free
Income Fund of New York (formerly Intermediate Term Tax Free Fund of New York,
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, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<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 potfolio.
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.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<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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NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
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Permit No. 770
------------------
---------------------
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---------------------
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