-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M76cHKcFaQMONXjeU2p7D1Yky1MSW2lA82qkklpHt9yPMYCG/KpDsSRu0TLwGCZC V/vNX03HnyTZ6N6/finBxw== /in/edgar/work/20000908/0000770540-00-000113/0000770540-00-000113.txt : 20000922 0000770540-00-000113.hdr.sgml : 20000922 ACCESSION NUMBER: 0000770540-00-000113 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVEST FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00242 FILM NUMBER: 719493 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST II DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: INVESTMENT TRUST OF BOSTON FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WORLD INVESTMENT TRUST DATE OF NAME CHANGE: 19680529 N-30D 1 0001.txt N-30 SEMI ANNUAL REPORT TRUST II SEMIANNUAL REPORT ================================================================================ [LOGO] NvestFunds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest High Income Fund Where The Best Minds Meet(R) - ------------- June 30, 2000 - ------------- PRESIDENT'S MESSAGE ================================================================================ August 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes." In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months -- three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. Your choice of investment tools Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Nvest Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. Nvest is poised for global growth As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST HIGH INCOME FUND ================================================================================ Investment Results Through June 30, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest High Income 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] June 1990 through June 2000 NAV MSC High Yield ----------------------------------------------------- 6/00 21,891 20,898 26,678 6/99 22,716 21,694 27,043 6/98 22,944 21,911 27,054 6/97 20,607 19,679 24,294 6/96 17,679 16,884 21,331 6/95 16,200 15,471 19,448 6/94 15,370 14,678 17,084 6/93 14,752 14,088 16,499 6/92 12,728 12,155 14,229 6/91 10,176 9,718 11,432 6/90 10,000 9,550 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees, and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST HIGH INCOME FUND ================================================================================ Average Annual Total Returns -- 6/30/00 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- Class A (Inception 2/22/84) 6 Months 1 Year 5 Years (4) 10 Years (4) Net Asset Value(1) -3.57% -3.47% 6.24% 8.15% With Maximum Sales Charge(2) -7.90 -7.78 5.27 7.65 - ------------------------------------------------------------------------------------------------- Class B (Inception 9/20/93) 6 Months 1 Year 5 Years (4) Since Inception (4) Net Asset Value(1) -3.79% -4.08% 5.53% 5.20% With CDSC(3) -8.36 -8.40 5.26 5.20 - ------------------------------------------------------------------------------------------------- Class C (Inception 3/2/98) 6 Months 1 Year Since Inception Net Asset Value(1) -3.79% -4.07% -1.96% With CDSC(3) -4.71 -4.94 -1.96 - -------------------------------------------------------------------------------------------------
Since Since Fund's Fund's Class B Class C Comparative Performance 6 Months 1 Year 5 Years 10 Years Inception Inception Lehman High Yield Composite Index(5) -1.21% -1.03% 6.52% 10.31% 7.05% -0.31% Morningstar High Yield Bond Average(6) -1.74 -0.86 6.35 9.68 6.72 -0.32 Lipper High Current Yield Average(7) -1.66 -0.77 6.42 9.72 6.40 -2.41 - ----------------------------------------------------------------------------------------------------------------
These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. The Fund's current subadviser began managing the Fund on July 1, 1996. Results for earlier periods reflect performance under previous subadvisers. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. Class C share performance assumes a 1.00% CDSC when you sell shares within one year of purchase. (4) This fund waived certain fees and expenses during the period indicated and the Fund's average annual total return would have been lower had these fees not been waived. (5) Lehman High Yield Composite Index is an unmanaged index of fixed rate, coupon bearing, non-investment grade bonds. You may not invest directly in an index. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. (6) Morningstar High Yield Bond Average is the average performance without sales charges of all mutual funds with a similar investment objectives as calculated by Morningstar, Inc.. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. (7) Lipper High Current Yield Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. 2 NVEST HIGH INCOME FUND ================================================================================ Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- On May 22, 2000, Michael Millhouse and Curt Mitchell of Loomis, Sayles & Company became co-managers of Nvest High Income Fund. Mr. Millhouse is Executive Vice President and Chief Investment Officer and Director, and Mr. Mitchell is a Vice President, Portfolio Manager and Manager of Fixed Income Trading at Loomis Sayles. Both worked alongside former manager Gary Goodenough and will continue to manage the Fund with the same investment strategy. Q. How did the Fund perform during the first half of 2000? For the six months ended June 30, 2000, Nvest High Income Fund's Class A shares at net asset value had a total return of -3.57%. This return includes reinvested distributions of $0.45 per share. The Fund underperformed the -1.21% return of its benchmark, Lehman Brothers High Yield Composite Index, primarily as a result of disappointing results from the Fund's telecommunications holdings. Q. What was the investment environment like, especially as it related to the Fund? The markets for most corporate bonds were relatively illiquid throughout the period; it was difficult either to buy or sell securities and prices fell as a result. In particular, high-yield bonds reflected the volatility of the equity markets, as investors in both areas expressed indecision by retreating to the sidelines. Higher short-term interest rates also played an important role in Nvest High Income Fund's performance. Investors were concerned that if the Federal Reserve Board succeeds in slowing the economy through repeated rate increases, companies that issue high-yield bonds might suffer more than better-financed enterprises. This concern over credit quality was heightened as the number of defaults among high-yield bonds began to rise. However, most recent defaults trace back to 1996-1998, a period when even marginal companies were able to find buyers for their securities. Our research-intensive approach to bond selection is designed to help us avoid weaker issuers. Other trends affecting the high-yield market included buybacks and merger and acquisition activity. When a company uses cash or adds debt to purchase its own stock or to acquire another business, its ability to pay interest and redeem its bonds when they mature may come into question. Such companies risk having their bonds downgraded by the major rating agencies. 3 NVEST HIGH INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Q. Given that environment, what strategies did you pursue? We added to sectors where we found improving conditions and increased the Fund's commitment to defensive holdings -- those that enjoy relatively steady revenue flows despite the ups and downs of the economy. The energy industry is recovering from 1999's depressed levels, thanks to the tripling of oil prices in the past 18 months. Gas prices are also rising quickly and economic recovery overseas has added to demand. These industry trends and an aggressive program of building its natural gas reserves is enabling Swift Energy Company, an independent oil and gas company, to accelerate its capital expenditure program while increasing its cash reserves. Cable television has evolved from novelty to utility, producing steady cash flows and solid earnings growth. Charter Communications and Adelphia Business Solutions, the nation's fourth and fifth largest cable operators, respectively, offer attractive upside potential as well as generous current yields. Some leading waste management companies are strengthening their balance sheets by paying down debt. We are taking advantage of the industry's strong defensive characteristics to add to such holdings as Allied Waste. We eliminated holdings in sectors that may be vulnerable in an economic slowdown. For example, retailing, textiles and clothing and leisure activity could all be hurt if consumer confidence slows significantly. In the Philippines and in Mexico we purchased corporate and government bonds payable in U.S. dollars. These nations' economies have been recovering smartly from the international market upheavals of 1998. Portfolio Mix -- 6/30/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] BBB 2.8% BB 16.8% B 72.2% CCC 6.8% Portfolio holdings and asset allocation will vary. 4 NVEST HIGH INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What factors hurt performance the most in the past six months? The Fund's underperformance during the first half of 2000 is tied to its objective of seeking high current income. Since we emphasize high yields, Nvest High Income Fund's holdings emphasize lower quality bonds. Throughout the period, the markets were quality-conscious. The best returns came from higher quality securities. Performance in the telecommunications sector was lackluster, at best, as companies were unable to attract adequate capital. Individual selections in the auto parts, heavy equipment leasing and manufacturing industries also fell short of our expectations during the first half of 2000. Country Mix -- 6/30/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] United States 81.6% Mexico 10.7% United Kingdom 4.0% Philippines 1.2% Mauritius 2.5% Portfolio holdings and asset allocation will vary. Q. What is your current outlook? We believe that higher interest rates will serve the Fed's intended purpose over the next few quarters, and that economic growth will slow but we see little near-term prospect of a recession. In our opinion, high-yield bond prices already reflect the prospect of a slowing economy. Furthermore, as investors compare the volatile stock market to the generous yields currently available on lower-quality bonds, we believe more investors will turn to the high-yield sector. Indeed, an improvement in investor confidence became apparent late in the period. As always, sector and issue selection will be keys to Nvest High Income Fund's performance. This 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. Nvest High Income Fund may invest in lower rated bonds, which may offer higher yields in return for more risk. It may also invest a portion of assets in foreign and emerging market securities, which have special risks. The Fund may also invest in U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. These risks effect your investment's value. See a prospectus for details. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- 90.3% of Total Net Assets
Ratings (c) ----------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------ Auto -- Parts 5.3% $ 3,800,000 Advance Holding Corp., 0/12.875%, 4/15/2009 (d) ............... B- B- $ 1,615,000 2,200,000 Advance Stores Co., Inc., 10.250%, 4/15/2008 ................. Caa1 B- 1,826,000 4,000,000 CSK Auto, Inc., 11.000%, 11/01/2006 .......................... B2 B 3,580,000 ------------ 7,021,000 ------------ Broadcasting -- 8.3% 9,000,000 Charter Communications Holdings, 0/9.920%, 4/01/2011 (d) ...... B2 B+ 5,130,000 9,390,000 Fox Family Worldwide, Inc., 0/10.25%, 11/01/2007 (d) .......... B1 B 5,892,225 ------------ 11,022,225 ------------ Chemicals -- 3.0% 4,000,000 Lyondell Chemical Co., 10.875%, 5/01/2009 .................... B2 B+ 3,990,000 ------------ Electrical Equipment -- 2.0% 2,750,000 Motors & Gears, Inc., 10.750%, 11/15/2006 .................... B3 B 2,660,625 ------------ Energy -- 2.8% 3,700,000 Swift Energy Co., 10.250%, 8/01/2009 ......................... B2 B- 3,764,750 ------------ Entertainment -- 0.9% 6,000,000 AMF Bowling Worldwide, Inc., 0/12.250%, 3/15/2006 (d) ......... B3 CCC+ 1,245,000 ------------ Equipment Leasing -- 3.2% 2,700,000 United Rentals, Inc., 9.000%, 4/01/2009 ...................... B1 BB- 2,403,000 2,000,000 United Rentals, Inc., 9.250%, 1/15/2009 ...................... B1 BB- 1,815,000 ------------ 4,218,000 ------------ Finance & Banking -- 0.9% 1,250,000 Finova Capital Corp. Medium Term Note, 6.824%, 3/09/2001 ..... Baa2 BBB+ 1,200,813 ------------ Foreign Issues -- 18.3% 1,500,000 Alestra SA de CV, 144A, 12.125%, 5/15/2006 ................... B2 BB- 1,410,000 5,000,000 Alestra SA de CV, 144A, 12.625%, 5/15/2009 ................... B2 BB- 4,531,250 3,250,000 Altos Hornos de Mexico SA de CV, 11.875%, 4/30/2004 (e) (f) .. B3 D 1,308,125 5,000,000 Dolphin Telecom PLC, 0/14.000%, 5/15/2009 (d) ................. Caa2 CCC+ 1,775,000 3,700,000 Euramax International PLC, 11.250%, 10/01/2006 ............... B3 B 3,533,500 1,750,000 Philippine Long Distance Telephone Co., 10.500%, 4/15/2009 ... Ba2 BB+ 1,565,084 4,500,000 Pindo Deli Finance Mauritius Ltd., 10.250%, 10/01/2002 ....... B3 CCC+ 3,251,250 6,500,000 TFM SA, 0/11.750%, 6/15/2009 (d) .............................. B2 B+ 4,468,750 2,000,000 United Mexican States, 11.500%, 5/15/2026 .................... Baa3 BB+ 2,410,000 ------------ 24,252,959 ------------
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- continued
Ratings (c) ----------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------ Industrials -- 12.8% $ 5,330,000 Continental Global Group, Inc., 11.000%, 4/01/2007 ........... B2 B- $ 1,559,025 3,000,000 Formica Corp., 10.875%, 3/01/2009 ............................ B3 B- 2,355,000 11,000,000 Huntsman ICI Chemicals, 144A, Zero Coupon, 12/31/2009 ......... B3 B+ 3,685,000 2,750,000 RBF Finance Co., 11.375%, 3/15/2009 .......................... Ba3 BB- 2,997,500 6,315,000 Stone Container Corp., 12.250%, 4/01/2002 ..................... B3 B- 6,346,575 ------------ 16,943,100 ------------ Publishing -- 1.7% 4,000,000 Liberty Group Publishing, Inc., 0/11.625%, 2/01/2009 (d) ...... Caa2 CCC+ 2,240,000 ------------ Restaurants -- 3.5% 4,750,000 Dominos, Inc., 10.375%, 1/15/2009 ............................ B3 B- 4,429,375 ------------ Telecommunications -- 22.2% 6,500,000 Intermedia Communications, Inc., 0/12.250%, 3/01/2009 (d) ..... B3 CCC+ 3,981,250 4,250,000 Nextel International, Inc., 0/12.125%, 4/15/2008 (d) .......... Caa1 B- 2,783,750 2,600,000 Nextel Partners, Inc., 0/14.000%, 2/01/2009 (d) ............... B3 CCC+ 1,807,000 6,960,000 Nextlink Communications, Inc., 0/12.250%, 6/01/2009 (d) ....... B2 B 4,315,200 1,500,000 Nextlink Communications, Inc., 10.750%, 11/15/2008 ........... B2 B 1,485,000 3,500,000 NTL Communications Corp., 11.500%, 10/01/2008 ................ B3 B- 3,500,000 3,000,000 NTL, Inc., 0/9.750%, 4/01/2008 (d) ............................ B3 B- 1,882,500 4,715,000 RCN Corp., 0/11.250%, 10/15/2007 (d) .......................... B3 B- 2,946,875 4,615,000 RCN Corp., 0/9.800%, 2/15/2008 (d) ............................ B3 B- 2,549,787 2,400,000 Williams Communications Group, Inc., 10.700%, 10/01/2007 ..... B2 BB- 2,394,000 1,775,000 Williams Communications Group, Inc., 10.875%, 10/01/2009 ..... B2 BB- 1,743,938 ------------ 29,389,300 ------------ Utilities -- 2.2% 2,957,679 Panda Funding Corp., 11.625%, 8/20/2012 ...................... Ba3 BB- 2,913,314 ------------ Waste Management -- 3.2% 5,000,000 Allied Waste Industries, Inc., 10.000%, 8/01/2009 ............ B2 B+ 4,200,000 ------------ Total Bonds and Notes (Identified Cost $141,143,133) .......... 119,490,461 ------------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of June 30, 2000 (unaudited)
Common Stock 0.0% Shares Description Value (a) - ------------------------------------------------------------------------------------------------------------ 1,750 Ameriking, Inc. (f) ..................................................... $ 17,500 1,237 Mothers Work, Inc. (f) .................................................. 13,916 ------------ Total Common Stock (Identified Cost $81,073) ............................ 31,416 ------------ Preferred Stock -- 7.0% - ------------------------------------------------------------------------------------------------------------ 3,463 Adelphia Business Solutions, Inc. 12.875%, 10/15/2007, (pay-in-kind) .... 3,185,576 114,043 Ameriking, Inc. 13.000%, 12/01/2008, (pay-in-kind) ...................... 940,855 35,400 CSC Holdings, Inc. 11.125%, 04/01/2001, (pay-in-kind) ................... 3,734,700 55,476 Liberty Group Publishing, Inc. 14.750%, 02/01/2010, (pay-in-kind) ....... 1,206,598 30,737 Nebco Evans Holding Co. 11.250%, 03/01/2008, (pay-in-kind) .............. 11,527 15,000 Superior National Capital Trust, 144A, 10.75%, 12/1/2017, ............... 153,750 ------------ Total Preferred Stock (Identified Cost $13,051,407) ..................... 9,233,006 ------------ Total Investments 97.3% (Identified Cost $154,275,613) (b) .............. 128,754,883 Other assets less liabilities ........................................... 3,559,597 ------------ Total Net Assets 100% ................................................... $132,314,480 ============ (a) See Note 1a of Notes to the Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation on investments based on cost for federal income tax purposes of $154,275,613 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ................................ $ 855,872 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .................................... (26,376,602) ------------ Net unrealized depreciation ........................................................ $(25,520,730) ============
At December 31, 1999 the fund had a net tax basis capital loss carryover of $1,938,176 of which $1,019,386 expires on December 31, 2004 and $918,790 expires on December 31, 2007. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at June 30, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating 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, 2000. 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) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. (e) Issuer filed petition under Chapter 11 of Federal Bankruptcy Code. (f) Non-income producing security. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $9,780,000 or 7.4% of net assets. 8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES ================================================================================ June 30, 2000 (unaudited) ASSETS Investments at value (Identified cost $154,275,613) ........................ $ 128,754,883 Cash ....................................................................... 20,604 Investment held as collateral for loaned securities ........................ 22,278,180 Receivable for: Fund shares sold ......................................................... 182,635 Securities sold .......................................................... 3,057,604 Dividends and interest ................................................... 2,570,994 ------------- 156,864,900 LIABILITIES Payable for: Collateral on securities loaned, at value ................................ $ 22,278,180 Securities purchased ..................................................... 1,202,959 Fund shares redeemed ..................................................... 337,706 Dividends declared ....................................................... 639,452 Accrued expenses: Management fees .......................................................... 7,477 Deferred trustees' fees .................................................. 12,940 Accounting and administrative ............................................ 3,981 Other .................................................................... 67,725 ------------- 24,550,420 ------------- NET ASSETS ................................................................... $ 132,314,480 ============= Net Assets consist of: Paid in capital .......................................................... $ 168,995,461 Overdistributed net investment income .................................... (551,851) Accumulated net realized gains (losses) .................................. (10,608,400) Unrealized appreciation (depreciation) on investments .................... (25,520,730) ------------- NET ASSETS ................................................................... $ 132,314,480 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($63,109,558 / 8,333,243 shares of beneficial interest) ................... $ 7.57 ========== Offering price per share (100 / 95.50 of $7.57) .............................. $ 7.93* ========== Net asset value and offering price of Class B shares ($61,820,305 / 8,157,261 shares of beneficial interest) ................... $ 7.58** ========== Net asset value and offering price of Class C shares ($7,384,617 / 974,721 shares of beneficial interest) ....................... $ 7.58** ==========
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited) INVESTMENT INCOME Dividends .............................................................. $ 689,856 Interest ............................................................... 7,719,631 Securities lending income .............................................. 29,575 ------------ 8,439,062 Expenses Management fees ...................................................... $ 486,395 Service fees - Class A ............................................... 82,749 Service and distribution fees - Class B .............................. 323,087 Service and distribution fees - Class C .............................. 40,773 Trustees' fees and expenses .......................................... 6,073 Accounting and administrative ........................................ 21,885 Custodian ............................................................ 40,451 Transfer agent ....................................................... 124,197 Audit and tax services ............................................... 22,889 Legal ................................................................ 3,180 Printing ............................................................. 14,815 Registration ......................................................... 24,482 Miscellaneous ........................................................ 6,325 ------------ Total expenses ......................................................... 1,197,301 ------------ Net investment income .................................................. 7,241,761 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net .............................. (4,081,713) Unrealized appreciation (depreciation) on investments - net ............ (8,645,164) ------------ Net gain (loss) on investment transactions ............................. (12,726,877) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .................... $ (5,485,116) ============
10 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS ================================================================================ June 30, 2000 (unaudited)
Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income .......................................................... $ 15,253,382 $ 7,241,761 Net realized gain (loss) on investments ........................................ (5,350,213) (4,081,713) Net unrealized appreciation (depreciation) on investments ...................... (4,841,831) (8,645,164) ------------- ------------- Increase (decrease) in net assets from operations .............................. 5,061,338 (5,485,116) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ...................................................................... (7,920,629) (3,675,174) Class B ...................................................................... (6,647,632) (3,351,792) Class C ...................................................................... (921,961) (422,229) In excess of net investment income Class A ...................................................................... (68,380) 0 Class B ...................................................................... (57,390) 0 Class C ...................................................................... (7,960) 0 ------------- ------------- (15,623,952) (7,449,195) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ........................................ 23,429,833 (8,695,836) ------------- ------------- Total increase (decrease) in net assets .......................................... 12,867,219 (21,630,147) NET ASSETS Beginning of the period ........................................................ 141,077,408 153,944,627 ------------- ------------- End of the period .............................................................. $ 153,944,627 $ 132,314,480 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the period .............................................................. $ (344,417) $ (551,851) ============= =============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class A --------------------------------------------------------------------- Six Months Year Ended December 31, Ended -------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- -------- Net Asset Value, Beginning of the Period ................ $ 8.89 $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30 -------- -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ................................... 0.88 0.84 0.87 0.92 0.89 0.43 Net Realized and Unrealized Gain (Loss) on Investments ........................................... 0.13 0.44 0.52 (1.08) (0.54) (0.71) -------- -------- -------- -------- -------- -------- Total From Investment Operations ........................ 1.01 1.28 1.39 (0.16) 0.35 (0.28) -------- -------- -------- -------- -------- -------- Less Distributions Dividends From Net Investment Income .................... (0.88) (0.83) (0.87) (0.92) (0.90) (0.45) Distributions in Excess of Net Investment Income ........ (0.04) (0.01) 0.00 0.00 (0.01) 0.00 -------- -------- -------- -------- -------- -------- Total Distributions ..................................... (0.92) (0.84) (0.87) (0.92) (0.91) (0.45) -------- -------- -------- -------- -------- -------- Net Asset Value, End of the Period ...................... $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30 $ 7.57 ======== ======== ======== ======== ======== ======== Total Return (%) (a) .................................... 11.8 14.9 15.4 (1.8) 4.0 (3.6) Ratio of Operating Expenses to Average Net Assets (%) (b) 1.60 1.53 1.36 1.32 1.28 1.33(c) Ratio of Net Investment Income to Average Net Assets (%) 9.71 9.32 9.03 9.81 10.22 10.81(c) Portfolio Turnover Rate ................................. 30 134 99 75 89 33 Net Assets, End of the Period (000) ..................... $ 39,148 $ 42,992 $ 62,739 $ 73,023 $ 74,589 $ 63,110 The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A sales charge is not reflected in total return calculations. (b) The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations in effect in 1995 and 1996 would have been (%) ................................................ 1.72 1.69 -- -- -- -- (c) Computed on an annualized basis.
12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class B --------------------------------------------------------------------- Six Months Year Ended December 31, Ended -------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- -------- Net Asset Value, Beginning of the Period ................ $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.30 -------- -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ................................... 0.83 0.79 0.80 0.85 0.82 0.40 Net Realized and Unrealized Gain (Loss) on Investments ........................................... 0.13 0.42 0.51 (1.08) (0.53) (0.70) -------- -------- -------- -------- -------- -------- Total From Investment Operations ........................ 0.96 1.21 1.31 (0.23) 0.29 (0.30) -------- -------- -------- -------- -------- -------- Less Distributions Dividends From Net Investment Income .................... (0.81) (0.76) (0.80) (0.85) (0.83) (0.42) Distributions in Excess of Net Investment Income ........ (0.05) (0.01) 0.00 0.00 (0.01) 0.00 -------- -------- -------- -------- -------- -------- Total Distributions ..................................... (0.86) (0.77) (0.80) (0.85) (0.84) (0.42) -------- -------- -------- -------- -------- -------- Net Asset Value, End of the Period ...................... $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.30 $ 7.58 ======== ======== ======== ======== ======== ======== Total Return (%) (a) .................................... 11.2 14.1 14.4 (2.5) 3.3 (3.8) Ratio of Operating Expenses to Average Net Assets (%) (b) 2.25 2.19 2.11 2.07 2.03 2.08(c) Ratio of Net Investment Income to Average Net Assets (%) 8.96 8.33 8.28 9.06 9.47 10.07(c) Portfolio Turnover Rate ................................. 30 134 99 75 89 33 Net Assets, End of the Period (000) ..................... $ 10,625 $ 17,767 $ 42,401 $ 60,322 $ 70,218 $ 61,820 The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A contingent deferred sales charge is not reflected in total return calculations. (b) The ratio of operating expenses to average net assets without giving effect to voluntary expense limitations in effect in 1995 and 1996 would have been (%) ................................................ 2.37 2.35 -- -- -- -- (c) Computed on an annualized basis.
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class C -------------------------------------------------- March 2(a) Year Six Months through Ended Ended December 31, December 31, June 30, --------- --------- --------- 1998 1999 2000 --------- --------- --------- Net Asset Value, Beginning of the Period ....................... $ 9.96 $ 8.85 $ 8.30 --------- --------- --------- Income From Investment Operations Net Investment Income .......................................... 0.69 0.82 0.40 Net Realized and Unrealized Gain (Loss) on Investments ......... (1.08) (0.53) (0.70) --------- --------- --------- Total From Investment Operations ............................... (0.39) 0.29 (0.30) --------- --------- --------- Less Distributions Distributions From Net Investment Income ....................... (0.72) (0.83) (0.42) Distributions in Excess of Net Investment Income ............... 0.00 (0.01) 0.00 --------- --------- --------- Total Distributions ............................................ (0.72) (0.84) (0.42) --------- --------- --------- Net Asset Value, End of the Period ............................. $ 8.85 $ 8.30 $ 7.58 ========= ========= ========= Total Return (%) (b) ........................................... (4.1) 3.3 (3.8) Ratio of Operating Expenses to Average Net Assets (%) .......... 2.07(c) 2.03 2.08(c) Ratio of Net Investment Income to Average Net Assets (%) ....... 9.06(c) 9.47 10.07(c) Portfolio Turnover Rate ........................................ 75 89 33 Net Assets, End of the Period (000) ............................ $ 7,732 $ 9,138 $ 7,385
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) Commencement of operations. (b) A contingent deferred sales charge is not reflected in total return calculations. (c) Computed on an annualized basis. 14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 1. Significant Accounting Policies. The Fund is a series of Nvest 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 high current income plus the opportunity for capital appreciation to produce a high total return. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class C shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares do not pay a front end sales charge and do not convert to any other class of shares, but they do pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge if those shares are redeemed within one year. Expenses of the Fund are borne pro rata by the holders of each class 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 accounting principles generally accepted in the United States 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. Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. 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 Investment Income. Security transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Interest income is increased by the accretion of original issue discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. 15 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) c. 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. d. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences primarily relate to capital loss carryforwards and post October losses. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price. The 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, 2000 purchases and sales of securities (excluding short-term investments) were $44,703,739 and $44,173,771, respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.70% of the first $200 million of the Fund's average daily net assets and 0.65% of such assets in excess of $200 million, reduced by the payment to the Fund's investment subadviser Loomis, Sayles & Company L.P. ("Loomis Sayles") at the rate of 0.35% of the first $200 million of the Fund's average daily net assets and 0.30% of such assets in excess of $200 million of the Fund's average daily net assets. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance Company (see Note 9). Fees earned by Nvest Management and Loomis Sayles under the management agreements in effect during the six months ended June 30, 2000 are as follows: Fees Earned ----------- Nvest Management $ 243,198 Loomis Sayles 243,197 --------- $ 486,395 ========= The effective annualized management fee for the six months ended June 30, 2000 was 0.70%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a 16 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $21,885, and are shown separately in the financial statements as accounting and administrative. The effective annualized accounting and administrative expense for the six months ended June 30, 2000 was 0.034%. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plan relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest) a monthly service fee at the annual rate of up to 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 Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $82,749 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest Funds a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $80,772 and $10,193 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds a monthly distribution fee at the annual rate of up to 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class B and Class C shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $242,315 and $30,580 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the six months ended June 30, 2000 amounted to $334,719. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as a sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the six months ended June 30, 2000, the Fund paid NSC $91,713 as compensation for its services as transfer agent. 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 Nvest Management, Nvest Funds, Nvest, NSC or their affiliates. Each other 17 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 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 Nvest 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 been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Concentration of Credit; Lower Rated Securities. The Fund invests in securities offering high current income which generally will be rated below investment grade by recognized rating agencies. Certain of these lower rated securities are regarded as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations and generally involve more credit risk than securities in higher rating categories. In addition, the trading market for lower rated securities may be less liquid than the market for higher-rated securities. 5. Capital Shares. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended Six Months December 31, 1999 Ended June 30, 2000 --------------------------- --------------------------- Class A Shares Amount Shares Amount - ------- --------- ------------ --------- ------------ Shares sold ................................................ 2,776,755 $ 24,331,756 1,189,844 $ 9,412,267 Shares issued in connection with the reinvestment of: Dividends from net investment income ..................... 596,642 5,169,476 296,550 2,309,474 --------- ------------ --------- ------------ 3,373,397 29,501,232 1,486,394 11,721,741 Shares repurchased ......................................... (2,630,575) (22,779,736) (2,141,599) (17,046,901) --------- ------------ --------- ------------ Net increase (decrease) .................................... 742,822 $ 6,721,496 (655,205) $ (5,325,160) --------- ------------ --------- ------------
Year Ended Six Months December 31, 1999 Ended June 30, 2000 --------------------------- --------------------------- Class B Shares Amount Shares Amount - ------- --------- ------------ --------- ------------ Shares sold ................................................ 3,309,644 $ 29,017,220 1,023,572 $ 8,045,178 Shares issued in connection with the reinvestment of: Dividends from net investment income ..................... 307,591 2,663,895 165,394 1,288,840 --------- ------------ --------- ------------ 3,617,235 31,681,115 1,188,966 9,334,018 Shares repurchased ......................................... (1,975,114) (17,078,385) (1,486,860) (11,715,412) --------- ------------ --------- ------------ Net increase (decrease) .................................... 1,642,121 $ 14,602,730 (297,894) $ (2,381,394) --------- ------------ --------- ------------
18 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Six Months Ended June 30, 2000 (unaudited)
Year Ended Six Months December 31, 1999 Ended June 30, 2000 --------------------------- --------------------------- Class C Shares Amount Shares Amount ------- --------- ------------ --------- ------------ Shares sold ................................................ 490,356 $ 4,353,871 138,382 $ 1,098,304 Shares issued in connection with the reinvestment of: Dividends from net investment income ..................... 62,774 533,304 33,878 264,046 --------- ------------ --------- ------------ 553,130 4,887,175 172,260 1,362,350 Shares repurchased ......................................... (325,690) (2,781,568) (298,401) (2,351,632) --------- ------------ --------- ------------ Net increase (decrease) .................................... 227,440 $ 2,105,607 (126,141) $ (989,282) --------- ------------ --------- ------------ Increase derived from capital shares transactions ............ 2,612,383 $ 23,429,833 (1,079,240) $ (8,695,836) ========= ============ ========== ============
6. Line of Credit. The Fund along with the other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 3, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the six months ended June 30, 2000. 7. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At June 30, 2000 the Fund had on loan securities having a market value of $21,718,629 collateralized by cash in the amount of $22,278,180 which was invested in a short-term instrument. 8. Concentration of Risk. The Fund had the following geographic concentration in excess of 10% of its total net assets at June 30, 2000: Mexico 10.7 % and United States 81.6%. The Fund pursues its objectives by investing in domestic and foreign securities. There are certain risks involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. These risks include those resulting from future adverse political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 9. Subsequent Event. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management is the investment management arm of France's Caisse des Depots et Consignations, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, management and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 19 ================================================================================ NVEST MUNICIPAL INCOME FUND NVEST MASSACHUSETTS TAX FREE INCOME FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Supplement dated August 21, 2000 to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California Prospectuses, each dated May 1, 2000 John Maloney has become co-manager of the Funds, joining James Welch. Mr. Maloney, Vice President at Back Bay Advisors, has been with the company since 1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts and has 17 years of investment experience. 20 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund GOVERNMENT INCOME FUNDS Bullseye Fund Limited Term U.S. Government Fund Equity Income Fund Government Securities Fund SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS* Star Small Cap Fund Cash Management Trust Kobrick Emerging Growth Fund Tax Exempt Money Market Trust * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. Visit our Web site at www.nvestfunds.com Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P, and other firms selling shares of Nvest 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. [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) HP58-0600 [LOGO] Printed On Recycled Paper SEMIANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Short Term Corporate Income Fund Where The Best Minds Meet(R) - ----------------- June 30, 2000 - ----------------- PRESIDENT'S MESSAGE ================================================================================ August 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes." In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months -- three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. Your choice of investment tools Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Nvest Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. Nvest is poised for global growth As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ Investment Results Through June 30, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Short Term Corporate Income 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 has no 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] October 1991 through June 2000 NAV MSC LB Mutual Fd Short ----------------------------------------------------------- 6/00 14,685 14,248 17,517 6/99 14,053 13,631 16,294 6/98 13,724 13,312 15,532 6/97 13,034 12,643 14,427 6/96 12,243 11,876 13,432 6/95 11,588 11,241 12,683 6/94 10,936 10,608 11,528 6/93 10,789 10,465 11,366 6/92 10,282 9,974 10,398 6/91 10,000 9,700 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ Average Annual Total Returns -- 6/30/00 - --------------------------------------------------------------------------------
Class A (Inception 10/18/91) 6 Months 1 Year 5 Years Since Inception Net Asset Value(1,4) 1.93% 3.34% 4.60% 4.52% With Maximum Sales Charge(2,4) -1.17 0.25 3.96 4.15 - --------------------------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 6 Months 1 Year 5 Years Since Inception Net Asset Value(1,4) 1.56% 2.57% 3.83% 3.54% With CDSC(3,4) -3.39 -2.30 3.51 3.54 - --------------------------------------------------------------------------------------------------------------- Class C (Inception 12/7/98) 6 Months 1 Year Since Inception Net Asset Value(1,4) 1.42% 2.42% 1.86% With CDSC(3,4) 0.43 1.45 1.86 - ---------------------------------------------------------------------------------------------------------------
Since Since Since Fund's Fund's Fund's Class A Class B Class C Comparative Performance 6 Months 1 Year 5 Years Inception Inception Inception LB Mutual Fund Short (1-5) Inv. Grade Debt Index(5) 2.71% 4.31% 6.04% 6.65% 5.85% 3.48% Morningstar Short Term Bond Average(6) 2.88 4.32 5.24 5.58 4.86 3.34 Lipper Short Term Investment Grade Avg.(7) 2.67 4.40 5.28 5.59 4.93 3.74 - ----------------------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 3.00%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. Class C share performance assumes a 1.00% CDSC when you sell shares within one year of purchase. (4) This fund waived certain fees and expenses during the period indicated and the Fund's average annual total return would have been lower had these fees not been waived. (5) Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index is an unmanaged index including all publicly issued, fixed-rate, nonconvertible investment-grade domestic corporate debt with maturities of 1 to 5 years. You may not invest directly in an index. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. (6) Morningstar Short Term Bond Average is the average performance without sales charges of all mutual funds with a similar investment objective as calculated by Morningstar, Inc. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. (7) Lipper Short Term Investment Grade Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. 2 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] Scott Nicholson Richard Raczkowski Back Bay Advisors, L.P. Q. How did Nvest Short Term Corporate Income Fund perform during the first half of 2000? For the six months ended June 30, 2000, Nvest Short Term Corporate Income provided a total return of 1.93% based on the net asset value of Class A shares. The Fund's return included $0.21 per share in dividends reinvested during the period. For the same period the Fund's benchmark, Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index, returned 2.71%. The Fund lagged its benchmark primarily as a result of reversals experienced by two of its financial holdings, both of which remain in the portfolio because we believe turnarounds are likely. The 30-Day yield on Class A shares of Nvest Short Term Corporate Income Fund was 6.27% as of June 30, 2000. Your yield depends on when you bought your shares and what you paid for them. Q. What was the investment environment like during the period? The fixed-income markets continued to languish during the first quarter of 2000, as investors remained focused on the stock market, extending last year's trend. During the second quarter, strong turbulence in the equity markets drove many investors back to fixed-income securities, but their primary target was the top-rated government sector. Thanks to a booming economy, the government has been issuing relatively little new debt and using budget surpluses to buy back old issues with longer maturities. But while renewed demand and diminished supply combined to boost prices of Treasury securities, demand on the corporate side remained weak despite an influx of new issues. The net result was a widening "spread" -- the difference in yield -- between government and corporate bonds. Yield spreads that existed at the end of June typically only occur during harsh economic times, not during a booming economy. Meanwhile, in May the Federal Reserve Board raised rates for the third time this year -- the sixth time in the past 12 months. The May hike raised nominal yields on corporate bonds to levels not seen for several years, sending bond prices down. This effect was greatest in the lower rated sector. 3 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What strategies did you use to manage the portfolio in this environment? We raised the portfolio's credit rating from an average of A at the end of 1999 (as measured by Standard & Poor's) to A+ as of June 30, 2000. Corporate securities accounted for 71.6% of assets at the end of June, down from 82.7% at the beginning of the year, while AAA-rated government and government agency securities and cash equivalents rose to 28.4% of the Fund's total assets. In an effort to reduce Nvest Short Term Corporate Income Fund's sensitivity to declining interest rates, we also shortened the Fund's duration to 1.73 years at the end of June, compared with 2.12 years at the beginning of the year. Duration is an estimate of how much a bond's price is likely to fluctuate in response to changing interest rates. The shorter the duration, the lower the volatility and vice versa. Q. You said that some holdings had a negative impact on my Fund's performance. Which were these and which securities performed well? In addition to the broad trends affecting the market as a whole, Nvest Short Term Corporate Income Fund's performance was impacted when a few of our holdings were downgraded. Finova Capital, a commercial lender, reported large loan write-offs as its chairman was retiring, and the giant insurance company, Conseco, stumbled badly when it diversified into consumer lending. Prices of these companies' bonds dropped sharply and finance companies as a group went under a cloud. The Fund's Kansas Gas & Electric bonds were also downgraded when its holding company split in two, leaving the majority of its debt with the entity in which the Fund was an investor. We believe that turnarounds are likely in each case, and continue to hold these securities. Positive performance came from the Fund's mortgage-backed securities, as well as from our holdings in Lockheed Martin and Raytheon, two defense industry companies that are in a recovery mode. 4 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Portfolio Mix -- 6/30/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Corporate & Other Bonds & Notes 71.6% Federal Agencies 16.3% U.S. Government 6.0% Short Term & Other 6.1% Portfolio holdings and asset allocation will vary. Q. What's your current outlook? We look for a price recovery in the corporate sector. Yield spreads are still very wide, historically, and the economic data released in June was comparatively weak. The prospect of renewed inflation -- always a concern for the Fed as well as for bondholders -- is heightened when the economy is running at high speed. However, we are waiting for further evidence of a slowdown before significantly extending your Fund's duration or increasing its corporate exposure. And even then, we will maintain your Fund's emphasis on bonds with strong credit quality and liquidity, because slower growth is likely to adversely effect corporate profits. There is substantial money on the sidelines, much of which may be poised to re-enter the fixed-income markets. We are optimistic that, once the economy's future direction becomes clearer, corporate bonds will recover, providing attractive total returns for Nvest Short Term Corporate Income Fund shareholders. This portfolio managers' 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. Nvest Short Term Corporate Income Fund invests primarily in short-term corporate securities, including lower rated bonds that may offer higher yields in return for more risk and mortgage securities that are subject to prepayment risk. The Fund may also invest in foreign and emerging market securities which have special risks. It may also invest in securities issued by the U.S. government and Treasury securities; although the U.S. government guarantees such securities if held to maturity, mutual funds that invest in these securities are not guaranteed. These risks affect your investment's value. See a prospectus for details. Frequent portfolio turnover may increase your risk of greater tax liability, which could lower your return from this Fund. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- 93.9% of Total Net Assets
Ratings (c) --------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------- Asset Backed -- 6.6% $ 1,500,000 Americredit Automobile, 7.150%, 8/12/2004.................. Aaa AAA $ 1,495,785 1,000,000 Green Tree Financial Corp. 6.670%, 7/15/2030 .............. NA AAA 989,680 2,000,000 WFS Financial Owner Trust 7.750%, 11/20/2004 .............. Aaa AAA 2,013,120 ------------ 4,498,585 ------------ Banks -- 5.1% 1,500,000 Bank of America, 7.875%, 5/16/2005......................... Aa2 A+ 1,519,683 2,000,000 Wells Fargo & Co., 6.625%, 7/15/2004....................... Aa2 A+ 1,952,546 ------------ 3,472,229 ------------ Broadcast Media -- 1.5% 1,000,000 Continental Cablevision, Inc., 8.500%, 9/15/2001........... A2 AA- 1,013,944 ------------ Computer Software & Services -- 1.5% 1,000,000 Sun Microsystems, Inc., 7.000%, 8/15/2002.................. Baa1 BBB+ 994,995 ------------ Consumer Goods & Services -- 2.9% 2,000,000 Black & Decker Corp., 6.625%, 11/15/2000................... Baa2 BBB 1,996,718 ------------ Electric Utilities -- 6.1% 2,500,000 Houston Lighting & Power Co., 8.150%, 5/01/2002............ A3 BBB- 2,532,358 1,675,672 Kansas Gas & Electric Co., 6.760%, 9/29/2003............... Ba2 BB- 1,606,684 ------------ 4,139,042 ------------ Federal Agencies -- 16.3% 480,735 Federal Home Loan Mortgage Corp., 7.290%, 3/1/2025 (d)...... Aaa AAA 494,330 1,500,000 Federal Home Loan Mortgage Corp., 7.350%, 2/28/2003........ Aaa AAA 1,505,490 1,371,016 Federal Home Loan Mortgage Corp., 7.370%, 10/15/2023 (d).... Aaa AAA 1,374,444 185,215 Federal Home Loan Mortgage Corp., 7.480%, 12/1/2025 (d)..... Aaa AAA 188,514 1,974,564 Federal Home Loan Mortgage Corp., 7.500%, 8/1/2009......... Aaa AAA 1,980,329 426,318 Federal Home Loan Mortgage Corp., 7.600%, 12/1/2022 (d)..... Aaa AAA 433,578 305,469 Federal National Mortgage Association, 6.000%, 9/1/2023(d).. Aaa AAA 292,297 656,322 Federal National Mortgage Association, 6.470%, 1/1/2020(d).. Aaa AAA 643,708 222,039 Federal National Mortgage Association, 6.540%, 6/1/2019(d).. Aaa AAA 217,772 296,898 Federal National Mortgage Association, 7.020%, 7/1/2023(d).. Aaa AAA 302,836 219,506 Federal National Mortgage Association, 7.090%, 5/1/2020(d).. Aaa AAA 222,113 154,169 Federal National Mortgage Association, 7.140%, 8/1/2017(d).. Aaa AAA 155,736 2,080,372 Federal National Mortgage Association, 7.500%, 8/1/2013.... Aaa AAA 2,083,638 368,295 Federal National Mortgage Association, 7.540%, 5/1/2025(d).. Aaa AAA 375,373 818,332 Federal National Mortgage Association, 7.940%, 1/1/2024(d).. Aaa AAA 841,990 ------------ 11,112,148 ------------ Finance -- 14.7% 1,000,000 Conseco, Inc., 7.600%, 6/21/2001........................... Ba1 BB- 780,000 2,000,000 Conseco, Inc., 7.875%, 12/15/2000.......................... Ba1 BB- 1,770,000 1,000,000 Daimler Chrysler North America Holding, 7.125%, 4/10/2003.. A1 A+ 995,876 1,500,000 Finova Capital Corp., 7.250%, 11/08/2004................... Baa2 BBB+ 1,322,478
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- continued
Ratings (c) ------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - -------------------------------------------------------------------------------------------------------------- Finance -- continued $ 1,000,000 Ford Motor Credit Co., 7.500%, 6/15/2003................. A2A -- $ 996,209 1,200,000 Ford Motor Credit Co., 6.541%, 7/16/2002................. A2 A 1,201,733 1,500,000 General Motors Acceptance Corp., 7.625%, 6/15/2004....... A2 -- 1,503,165 1,500,000 Lehman Brothers Holdings, Inc. 7.750%, 1/15/2005......... A3 A 1,487,161 ------------ 10,056,622 ------------ Food & Beverages -- 3.5% 2,500,000 Aramark Services, Inc., 6.750%, 8/01/2004................ Baa3 BBB- 2,371,505 ------------ Industrials -- 9.7% 1,500,000 International Paper Co., 7.670%, 7/08/2002............... Baa1 BBB+ 1,499,644 1,000,000 Lockheed Martin Corp., 6.850%, 5/15/2001................. Baa3 BBB- 995,629 2,150,000 Norfolk Southern Corp., 6.950%, 5/01/2002................ Baa1 BBB 2,133,497 2,000,000 Raytheon Co., 7.900%, 3/01/2003.......................... Baa2 BBB- 2,010,698 ------------ 6,639,468 ------------ Machinery -- 2.9% 2,000,000 John Deere Capital Corp., 7.000%, 10/15/2002 ............ A2 A+ 1,983,538 ------------ Retail-Department Store -- 5.8% 2,000,000 Dayton Hudson Corp., 6.400%, 2/15/2003 .................. A2 A- 1,959,094 2,000,000 Federated Department Stores, Inc., 8.500%, 6/15/2003 .... Baa1 BBB+ 2,034,608 ------------ 3,993,702 ------------ Retail-Food & Drug -- 5.4% 2,700,000 Dole Foods, Inc., 6.750%, 7/15/2000 ..................... Baa3 BBB- 2,697,724 1,000,000 Rite Aid Corp., 144A, 6.000%, 12/15/2000 ................ B3 B- 972,500 ------------ 3,670,224 ------------ Telecommunications -- 5.9% 1,300,000 Deutsche Telekom International Finance BV, 7.750%, 6/15/2005 ..................................... Aa2 AA- 1,311,037 1,000,000 Sprint Capital Corp., 7.625%, 6/10/2002 ................. Baa1 BBB+ 999,290 1,700,000 Vodafone Airtouch PLC, 144A, 6.962%, 12/19/2001 ......... A2 A- 1,698,407 ------------ 4,008,734 ------------ U.S. Government -- 6.0% 1,500,000 United States Treasury Notes 6.750%, 5/15/2005 .......... Aaa AAA 1,534,920 2,500,000 United States Treasury Notes 8.000%, 5/15/2001 .......... Aaa AAA 2,530,850 ------------ 4,065,770 ------------ Total Bonds and Notes (Identified Cost $65,355,348)............... 64,017,224 ------------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) Short Term Investments -- 3.9%
Principal Amount Description Value (a) - -------------------------------------------------------------------------------------------------------------- $ 2,700,000 Household Finance Corp. 6.880%, 7/03/2000..................... $ 2,698,968 ------------ Total Short Term Investments (Identified Cost $2,698,968)..... 2,698,968 ------------ Total Investments -- 97.8% (Identified Cost $68,054,316) (b).. 66,716,192 Other assets less liabilities................................. 1,467,434 ------------ Total Net Assets -- 100%...................................... $ 68,183,626 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation on investments based on cost for federal income tax purposes of $68,054,316 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost......................................... $ 118,748 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value...................................... (1,456,872) ------------ Net unrealized depreciation ............................................. $ (1,338,124) ============ At December 31, 1999 the Fund had a capital loss carryover of approximately $17,601,473 of which $5,625,994 expires on December 31, 2002, $6,075,626 expires on December 31, 2003, $2,134,629 expires on December 31, 2004, $455,288 expires on December 31, 2005, $1,444,376 expires on December 31, 2006, and $1,865,560 expires on December 31, 2007. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at June 30, 2000. 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, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Variable rate mortgage backed securities. The interest rates change on these instruments monthly based on changes in a designated base rate. The rates shown were those in effect at June 30, 2000. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $2,670,907 or 3.92% of the net assets.
8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES ================================================================================ June 30, 2000 (unaudited) ASSETS Investments at value (Identified cost $68,054,316) ................... $ 66,716,192 Cash ............................................................... 44,004 Receivable for: Fund shares sold ................................................... 28,367 Securities sold .................................................... 2,132,833 Dividends and interest ............................................. 821,359 ------------ 69,742,755 LIABILITIES Payable for: Securities purchased ............................................... $ 1,297,738 Fund shares redeemed ............................................... 54,101 Dividends declared ................................................. 110,652 Accrued expenses: Management fees .................................................... 30,671 Deferred trustees' fees ............................................ 16,469 Transfer agent ..................................................... 10,460 Accounting and administrative ...................................... 3,966 Other ........................................................... 35,072 ------------ 1,559,129 ------------ NET ASSETS ............................................................ $ 68,183,626 ============ Net Assets consist of: Paid in capital .................................................... $ 88,771,706 Undistributed net investment income ................................ 117,403 Accumulated net realized gains (losses) ............................ (19,367,359) Unrealized appreciation (depreciation) on investments .............. (1,338,124) ------------ NET ASSETS ............................................................ $ 68,183,626 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($64,330,082/9,273,004 shares of beneficial interest) .............. $ 6.94 ============ Offering price per share (100/97 of $6.94) ........................... $ 7.15* ============ Net asset value and offering price of Class B shares ($3,401,183/491,011 shares of beneficial interest) ................. $ 6.93** ============ Net asset value and offering price of Class C shares ($452,361/65,331 shares of beneficial interest) .................... $ 6.92** ============
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited) INVESTMENT INCOME Interest .................................................... $ 2,575,489 Expenses Management fees .......................................... $ 196,987 Service fees - Class A ................................... 84,644 Service and distribution fees - Class B .................. 17,382 Service and distribution fees - Class C .................. 2,199 Trustees' fees and expenses .............................. 4,635 Accounting and administrative ............................ 10,713 Custodian ................................................ 34,770 Transfer agent ........................................... 50,878 Audit and tax services ................................... 15,189 Legal .................................................... 1,474 Printing ................................................. 7,058 Registration ............................................. 19,550 Miscellaneous ............................................ 6,704 ----------- Total expenses .............................................. 452,183 Less expenses waived by the investment adviser and subadviser (163,960) 288,223 ----------- ----------- Net investment income ....................................... 2,287,266 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on Investments - net ................... (1,422,890) Unrealized appreciation (depreciation) on Investments - net . 423,298 ----------- Net gain (loss) on investment transactions .................. (999,592) ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......... $ 1,287,674 ===========
10 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS ================================================================================ (unaudited)
Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------ ------------ FROM OPERATIONS Net investment income ............................... $ 5,027,620 $ 2,287,266 Net realized gain (loss) on investments ............. (1,915,031) (1,422,890) Unrealized appreciation (depreciation) on investments (1,507,524) 423,298 ------------ ------------ Increase (decrease) in net assets from operations ... 1,605,065 1,287,674 ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ......................................... (4,845,836) (1,984,901) Class B ......................................... (188,779) (89,075) Class C ......................................... (22,276) (11,354) ------------ ------------ (5,056,891) (2,085,330) ------------ ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ............. (16,246,001) (7,983,643) ------------ ------------ Total increase (decrease) in net assets ................ (19,697,827) (8,781,299) ------------ ------------ NET ASSETS Beginning of the period ............................. 96,662,752 76,964,925 ------------ ------------ End of the period ................................... $ 76,964,925 $ 68,183,626 ============ ============ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the period ................................... $ (84,533) $ 117,403 ============ ============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class A ----------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ---------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Period ... $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income (Loss) ............... 0.47 0.43 0.47(b) 0.38 0.41 0.23 Net Realized and Unrealized Gain (Loss) on Investments ...................... 0.14 (0.01) (0.02) (0.09) (0.28) (0.09) --------- --------- --------- --------- --------- --------- Total From Investment Operations ........... 0.61 0.42 0.45 0.29 0.13 0.14 --------- --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income ....... (0.44) (0.42) (0.43) (0.38) (0.42) (0.21) --------- --------- --------- --------- --------- --------- Total Distributions ........................ (0.44) (0.42) (0.43) (0.38) (0.42) (0.21) --------- --------- --------- --------- --------- --------- Net Asset Value, End of the Period ......... $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01 $ 6.94 ========= ========= ========= ========= ========= ========= Total Return (%)(a) ........................ 8.6 5.8 6.2 4.0 1.9 1.9 Ratio of Operating Expenses to Average Net Assets (%) .................... 0.89 0.94 0.98 1.05 1.22 1.22(c) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) (d) 0.66 0.70 0.70 0.70 0.70 0.76(c) Ratio of Net Investment Income to Average Net Assets (%) .................... 6.29 6.39 6.27 5.93 5.88 6.43(c) Portfolio Turnover Rate (%) ................ 73 54 49 105 139 53 Net Assets, End of the Period (000) ........ $ 331,112 $ 222,809 $ 196,928 $ 92,669 $ 72,680 $ 64,330
(a) A sales charge is not reflected in total return calculations. (b) Per share net investment income does not reflect the periods reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements. (c) Computed on an annualized basis. (d) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Fiancial Statements. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class B -------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of the Period .. $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income (Loss) .............. 0.41 0.37 0.41(b) 0.33 0.36 0.20 Net Realized and Unrealized Gain (Loss) on Investments ..................... 0.14 (0.02) (0.02) (0.09) (0.28) (0.09) --------- --------- --------- --------- --------- --------- Total From Investment Operations .......... 0.55 0.35 0.39 0.24 0.08 0.11 --------- --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income ...... (0.38) (0.36) (0.37) (0.33) (0.37) (0.18) --------- --------- --------- --------- --------- --------- Total Distributions ....................... (0.38) (0.36) (0.37) (0.33) (0.37) (0.18) --------- --------- --------- --------- --------- --------- Net Asset Value, End of the Period ........ $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00 $ 6.93 ========= ========= ========= ========= ========= ========= Total Return (%)(a) ....................... 7.8 4.9 5.4 3.4 1.1 1.6 Ratio of Operating Expenses to Average Net Assets (%) ................... 1.65 1.69 1.73 1.80 1.97 1.97(c) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)(d) 1.41 1.45 1.45 1.45 1.45 1.52(c) Ratio of Net Investment Income to Average Net Assets (%) ................... 5.54 5.64 5.52 5.18 5.13 5.66(c) Portfolio Turnover Rate (%) ............... 73 54 49 105 139 53 Net Assets, End of the Period (000) ....... $ 2,368 $ 2,821 $ 2,961 $ 3,761 $ 3,796 $ 3,401
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income does not reflect the periods reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements. (c) Computed on an annualized basis. (d) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Fiancial Statements. See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class C ----------------------------------------------------------- December 7, 1998(a) through Year Ended Six Months Ended December 31, December 31, June 30, 1998 1999 2000 ----------- ----------- ----------- Net Asset Value, Beginning of the Period ............... $ 7.28 $ 7.29 $ 7.00 ----------- ----------- ----------- Income From Investment Operations Net Investment Income .................................. 0.01 0.36 0.19 Net Realized and Unrealized Gain (Loss) on Investments .......................................... 0.01(b) (0.28) (0.09) ----------- ----------- ----------- Total From Investment Operations ....................... 0.02 0.08 0.10 ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ................... (0.01) (0.37) (0.18) ----------- ----------- ----------- Total Distributions .................................... (0.01) (0.37) (0.18) ----------- ----------- ----------- Net Asset Value, End of the Period ..................... $ 7.29 $ 7.00 $ 6.92 =========== =========== =========== Total Return (%) (c) ................................... 0.3 1.2 1.4 Ratio of Operating Expenses to Average Net Assets (%) .. 1.80(d) 1.97 1.97(d) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) (e) ..................... 1.45(d) 1.45 1.52(d) Ratio of Net Investment Income to Average Net Assets (%) 5.18(d) 5.13 5.70(d) Portfolio turnover rate ................................ 105 139 53 Net Assets, End of the Period (000) .................... $ 233 $ 489 $ 452
(a) Commencement of operations. (b) The amount shown for a share outstanding does not correspond with the aggregate net gain/(loss) on investments for the period ended December 31, 1998, due to the timing of purchases and redemptions of Fund shares in relation to fluctuating values of the investments of the Fund. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) Computed on an annualized basis. (e) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Fiancial Statements. 14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 1. Significant Accounting Policies. The Fund is a series of Nvest 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 consistent with preservation of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class C shares. Class A shares are sold with a maximum front end sales charge of 3.00%. 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). Class C shares do not pay a front end sales charge and do not convert to any class of shares, but they do pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge if those shares are redeemed within one year. Expenses of the Fund are borne pro rata by the holders of each class 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 accounting principles generally accepted in the United States 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 and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. c. 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. 15 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) d. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences primarily relate to differing treatment of mortgage-backed securities for book and tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to the capital account. e. 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. 2. Purchases and Sales of Securities. For the six months ended June 30, 2000 purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ----------------------------------- ------------------------------------- U.S. Government Other U.S. Government Other ----------------- ---------------- ----------------- ----------------- $ 9,572,846 $ 27,056,345 $ 6,689,918 $ 40,921,701 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management"), at the annual rate of 0.55% of the first $200 million of the Fund's average daily net assets, 0.51% of the next $300 million and 0.47% of such assets in excess of $500 million reduced by the payment to the Fund's investment subadviser, Back Bay Advisors L.P. ("Back Bay") at the rate of 0.275% of the first $200 million of the Fund's average daily net assets, 0.255% of the next $300 million and 0.235% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance Company (see Note 7). Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the six months ended June 30, 2000 are as follows: Fees Earned ----------- Nvest Management $ 98,494 Back Bay 98,493 --------- $ 196,987 ========= The effective annualized management fee before the expense limitations for the six months ended June 30, 2000 was 0.55 %. As a result of the expense limitations as described in Note 4, the effective annualized management fee for the six months ended June 30, 2000 was 0.09%. 16 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $10,713 and are shown separately in the financial statements as accounting and administrative. The effective annualized accounting and administrative expense for the six months ended June 30, 2000 was 0.034%. c. Service and Distribution Expense. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor,L.P. ("Nvest 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 shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $84,644 in fees under the Class A Plan. If the expenses of Nvest 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 as of June 30, 2000 is $1,929,283. Under the Class B and Class C Plans, the Fund pays Nvest 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 and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $4,346 and $550 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest 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 and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class B and Class C shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $13,036 and $1,649 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the six months ended June 30, 2000 amounted to $18,914. 17 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed for out-of-pocket expenses. For the six months ended June 30, 2000, the Fund paid NSC $45,963 as compensation for its services as transfer agent. 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 Nvest Management, Nvest Funds, Nvest, NSC or their affiliates. 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 Nvest 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 or other certain Nvest funds on the normal payment date. Deferred amounts remain in the funds until distributed in accordance with the Plan. 4. Expense Limitations. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund to the extent necessary, to limit the Fund's expenses to the annual rates of 0.90%, 1.65% and 1.65% of the average net assets of the Fund's Class A, Class B and Class C shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 0.90%, 1.65% and 1.65% of the average net assets of the Fund's Class A, Class B and Class C shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to this, from May 1, 1999 to April 30, 2000 expenses were limited to 0.70% of Class A average net assets, 1.45% of Class B average net assets, and 1.45% of Class C average net assets. From May 1, 1995 through May 31, 1995 expenses were voluntarily limited to 0.65% of Class A average net assets and 1.40% of Class B average net assets. From April 1, 1992 through April 30, 1995 expenses were voluntarily limited to 0.60% of Class A average net assets and 1.35% of Class B average net assets. As a result of the Fund's expenses exceeding the expense limitations during the six months ended June 30, 2000, Back Bay reduced its management fee of $98,493 by $81,980 and Nvest Management reduced its management fee of $98,494 by $81,980. 18 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 5. Capital Shares. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------------------------ ------------------------------ Class A Shares Amount Shares Amount - ----------- ------------ ------------ ------------ ------------ Shares sold ......................................... 1,454,036 $ 10,417,593 525,403 $ 3,659,891 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 488,060 3,486,240 203,616 1,413,628 ------------ ------------ ------------ ------------ 1,942,096 13,903,833 729,019 5,073,519 Shares repurchased .................................. (4,266,090) (30,605,047) (1,825,561) (12,667,371) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. (2,323,994) $(16,701,214) (1,096,542) $ (7,593,852) ------------ ------------ ------------ ------------ Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------------------------ ------------------------------ Class B Shares Amount Shares Amount - ----------- ------------ ------------ ------------ ------------ Shares sold ......................................... 235,614 $ 1,675,047 103,093 $ 713,084 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 22,872 162,890 11,653 80,787 ------------ ------------ ------------ ------------ 258,486 1,837,937 793,871 114,746 Shares repurchased .................................. (232,265) (1,655,906) (166,008) (1,151,476) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 26,221 $ 182,031 (51,262) $ (357,605) ------------ ------------ ------------ ------------ Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------------------------ ------------------------------ Class C Shares Amount Shares Amount - ----------- ------------ ------------ ------------ ------------ Shares sold ......................................... 111,022 $ 794,662 17,570 $ 122,281 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 2,997 21,311 1,700 11,789 ------------ ------------ ------------ ------------ 114,019 815,973 19,270 134,070 Shares repurchased .................................. (76,113) (542,791) (23,826) (166,256) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 37,906 $ 273,182 (4,556) $ (32,186) ------------ ------------ ------------ ------------ Increase (decrease) derived from capital shares transactions ....................... (2,259,867) $(16,246,001) (1,152,360) $ (7,983,643) ============ ============ ============ ============
6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. For the six months ended June 30, 2000 the Fund did not enter into any securities lending transactions. 7. Subsequent Event. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management 19 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) is the investment management arm of France's Caisse des Depots et Consignations, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, management and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 20 ================================================================================ NVEST MUNICIPAL INCOME FUND NVEST MASSACHUSETTS TAX FREE INCOME FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Supplement dated August 21, 2000 to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California Prospectuses, each dated May 1, 2000 John Maloney has become co-manager of the Funds, joining James Welch. Mr. Maloney, Vice President at Back Bay Advisors, has been with the company since 1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts and has 17 years of investment experience. 21 SAVING FOR RETIREMENT ================================================================================ An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's 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 accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Investor A Investor B Age 65 $214,295 $157,909 Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. 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 and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 22 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, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] 100 $200 $500 25 Years $91,236 $182,472 $456,181 Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds 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, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 23 ================================================================================ Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return -- The change in value of a mutual fund investment over a specific 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, when available. 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 allows you to 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% in value 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. 24 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund GOVERNMENT INCOME FUNDS Bullseye Fund Limited Term U.S. Government Fund Equity Income Fund Government Securities Fund SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS* Star Small Cap Fund Cash Management Trust Kobrick Emerging Growth Fund Tax Exempt Money Market Trust * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. Visit our Web site at www.nvestfunds.com Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P, and other firms selling shares of Nvest 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. [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) SI58-0600 [LOGO] Printed On Recycled Paper SEMIANNUAL REPORT ================================================================================ [LOGO] NvestFunds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Limited Term U.S. Government Fund Where The Best Minds Meet(R) - ------------- June 30, 2000 - ------------- PRESIDENT'S MESSAGE ================================================================================ August 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes." In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months -- three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. Your choice of investment tools Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. Nvest is poised for global growth As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Investment Results Through June 30, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Limited Term U.S. Government 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 has no 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] June 1990 through June 2000 Lehman Intmdt Gov't NAV MSC Int Gov't ---------------------------------------------------- 6/00 18,075 17,537 19,949 6/99 17,322 16,802 19,126 6/98 16,946 16,437 18,314 6/97 15,746 15,273 16,898 6/96 14,839 14,394 15,802 6/95 14,267 13,839 15,036 6/94 13,269 12,871 13,700 6/93 13,334 12,934 13,726 6/92 12,310 11,941 12,473 6/91 10,958 10,629 11,053 6/90 10,000 9,700 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees, and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Average Annual Total Returns -- 6/30/00 - --------------------------------------------------------------------------------
Class A (Inception 1/3/89) 6 Months 1 Year 5 Years 10 Years Net Asset Value1 2.86% 3.47% 4.67% 6.10% With Maximum Sales Charge(2) -0.23 0.34 4.03 5.78 - ------------------------------------------------------------------------------------------------------------ Class B (Inception 9/27/93) 6 Months 1 Year 5 Years Since Inception Net Asset Value(1) 2.54% 2.80% 3.98% 3.42% With CDSC(3) -2.45 -2.07 3.66 3.42 - ------------------------------------------------------------------------------------------------------------ Class C (Inception 12/30/94) 6 Months 1 Year 5 Years Since Inception Net Asset Value(1) 2.54% 2.80% 3.98% 4.76% With CDSC(3) 1.54 1.82 3.98 4.76 - ------------------------------------------------------------------------------------------------------------ Class Y (Inception 3/31/94) 6 Months 1 Year 5 Years Since Inception Net Asset Value(1) 3.32% 4.11% 5.08% 5.24% - ------------------------------------------------------------------------------------------------------------
Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 6 Months 1 Year 5 Years 10 Years Incept. Incept. Incept. Lehman Interm. Gov't. Bond Index(4) 3.49% 4.48% 5.82% 7.15% 5.37% 6.92% 6.11% Morningstar Short Gov't. Average(5) 2.73 4.01 5.02 6.31 4.52 5.83 5.06 Lipper Short Int. U.S. Gov't. Average(6) 2.65 3.70 4.98 6.45 4.44 5.75 5.10 - ------------------------------------------------------------------------------------------------------------
Notes to Chart These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 3.00%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. Class C share performance assumes a 1.00% CDSC when you sell shares within one year of purchase. (4) Lehman Intermediate Government Bond Index is an unmanaged index of bonds issued by the U.S. government and its agencies with maturities of 1 to 10 years. You may not invest directly in an index. Class B since inception return is calculated from 9/30/93. (5) Morningstar Short Government Average is the average performance without sales charges of all mutual funds with similar investment objectives as calculated by Morningstar, Inc. Class B since inception return is calculated from 9/30/93. (6) Lipper Short Intermediate U.S. Government Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class B since inception return is calculated from 9/30/93. 2 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] Scott Nicholson, James Welch Members of subadviser team, Back Bay Advisors, L.P. Q. How did the Fund perform during the first half of 2000? Nvest Limited Term U.S. Government Fund posted a total return of 2.86% at net asset value on Class A shares for the six months ending June 30, 2000. The Fund's return included $0.33 per share in dividends reinvested during this period. By comparison, your Fund's benchmark, the Lehman Intermediate Government Bond Index, had a return of 3.49% for the same period. Although your Fund's return was below its benchmark for the period, bear in mind that the index includes bonds maturing in 1-10 years, whereas Nvest Limited Term U.S. Government Fund's average maturity at the end of June was 5.6 years. Q. What was the investment environment like in the first six months of 2000? The bond market held up well despite the Federal Reserve Board's continued program of short-term interest-rate hikes. Market observers were heartened by the Fed's attempts to slow growth and dampen inflationary pressures. Investors also became more interested in the relative stability offered by bonds after the stock market experienced significant volatility for the first time in several years. Overall, though, the performance of U.S. Treasury securities -- especially longer-maturity Treasuries -- overshadowed other sectors of the fixed-income market. Vibrant economic growth in the U.S. led to a budget surplus, reducing the need for the federal government to issue debt to finance government programs. The U.S. Treasury instituted a series of buybacks of high-yielding, longer-term U.S. Treasury bonds, and trimmed its calendar of new issues. This reduced supply, coupled with strong demand, pushed yields on long-term Treasury bonds lower and prices higher. As yields on long-term government bonds declined and short-term yields rose due to Fed short-term interest-rate hikes, the Treasury yield curve became inverted -- short-term rates rose above long-term rates. 3 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What was your strategy as this transpired? In addition to Treasury securities, Nvest Limited Term U.S. Government Fund can invest in U.S. government agency bonds, mortgage-backed securities, corporate bonds, and asset-backed securities (bonds backed by receipts from auto and other loans). Our emphasis on Treasuries during the period benefited the Fund. In addition, we employed a "barbell" strategy with our Treasury investments. That is, part of the portfolio focused on longer-term Treasuries -- capturing price appreciation as yields fell -- and part was invested in short-term Treasuries -- reaping high yields from short-term notes. We avoided the intermediate-term Treasury bonds that did not perform as well. Our decision to de-emphasize U.S. government agency securities also benefited the Fund. Agency securities came under pressure during the period, as members of Congress and Treasury officials began to question their implied government guarantees. Although securities issued by agencies, such as the Federal National Mortgage Agency (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), are not backed by the full faith and credit of the U.S. government, they do enjoy the implicit backing of the government because they were created by an act of Congress. The Fund's holdings in these agencies had been reduced to zero when they experienced their worst performance. We used the proceeds from the sale of agency securities to add to the Fund's position in mortgage-backed securities. Because rising interest rates resulted in less refinancing of existing mortgages, these securities performed better than other non-Treasury issues. Portfolio Mix -- 6/30/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE GRAPH IN THE PRINTED MATERIAL.] Government Agencies 50.5% Treasuries 26.6% Corporate & Other 3.3% Asset-Backed Securities 15.2% Yankees 4.4% Portfolio holdings and asset allocation will vary. 4 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What is your current outlook? While the stock market has dominated financial headlines in the past few years, we believe that 2000 will witness the re-emergence of the fixed-income market. The Fed continues to raise rates -- causing more stock market uncertainty -- but is doing so prudently. We think the lion's share of the Fed's rate-hike program may be behind us. Once the Fed is done, the bond market in general, and Treasuries in particular, should be poised for a rally. As a result, we plan to continue to emphasize those market sectors that we believe will provide the best combination of current income and high quality for shareholders of Nvest Limited Term U.S. Government Fund. This portfolio managers' 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. Nvest Limited Term U.S. Government Fund may invest primarily in securities issued or backed by the federal government, including Treasury securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. It may also invest a portion of assets in foreign securities, which have special risks and in mortgage securities that are subject to prepayment risk. These risks affect the value of your investment. See a prospectus for details. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- 99.0% of Total Net Assets
Ratings (c) ---------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------- Asset Backed -- 15.2% $ 2,000,000 Americredit Automobile, 7.150%, 8/12/2004 ........................ Aaa AAA $ 1,994,380 5,000,000 Green Tree Financial Corp., 6.670%, 7/15/2030 .................... Aaa AAA 4,948,400 5,500,000 Household Home Equity Loan Trust, 6.950%, 10/20/2023 ............. Aaa AAA 5,450,995 5,000,000 Huntington Auto Trust, 7.330%, 7/15/2004 ......................... Aaa AAA 5,001,550 5,000,000 WFS Financial Owner Trust, 7.220%, 9/20/2004 ..................... Aaa AAA 4,987,500 ------------ 22,382,825 ------------ Banks -- 2.3% 3,300,000 Bank of America, 7.875%, 5/16/2005 ............................... Aa2 A+ 3,343,303 ------------ Government Agencies -- 50.5% 54,518 Federal Home Loan Mortgage Corp., 7.500%, 6/1/2026 ............... Aaa AAA 53,972 21,740 Federal Home Loan Mortgage Corp., 10.000%, 7/1/2019 .............. Aaa AAA 22,891 3,011,938 Federal Home Loan Mortgage Corp., 11.500%, with various maturities to 2020, (d) (e) ......................... Aaa AAA 3,278,061 5,000,000 Federal National Mortgage Association, 6.625%, 1/15/02 ........... Aaa AAA 4,978,100 3,803,756 Federal National Mortgage Association, 7.000%, 12/1/2022 (e) ..... Aaa AAA 3,673,021 12,655,594 Federal National Mortgage Association, 7.500%, 8/1/2013 ......... Aaa AAA 12,671,920 8,670,029 Government National Mortgage Association, 7.000%, 10/15/2028 ..... Aaa AAA 8,431,950 39,865,885 Government National Mortgage Association, 8.000%, with various maturities to 2030 (d) .............................. Aaa AAA 40,317,167 40,622 Government National Mortgage Association, 12.500%, with various maturities to 2015 (d) .............................. Aaa AAA 45,738 672,450 Government National Mortgage Association, 16.000%, with various maturities to 2013 (d) .............................. Aaa AAA 798,044 252,628 Government National Mortgage Association, 17.000%, with various maturities to 2012 (d) .............................. Aaa AAA 300,235 ------------ 74,571,099 ------------ U.S. Government -- 26.6% 5,500,000 United States Treasury Bonds, 9.250%, 2/15/2016 .................. Aaa AAA 7,137,130 4,000,000 United States Treasury Bonds, 12.000%, 8/15/2013 ................. Aaa AAA 5,400,000 5,344,700 United States Treasury Notes, 3.625%, 7/15/2002 (f) .............. Aaa AAA 5,307,929 2,087,760 United States Treasury Notes, 3.875%, 1/15/2009 (f) .............. Aaa AAA 2,055,796 4,000,000 United States Treasury Notes, 7.000%, 7/15/2006 .................. Aaa AAA 4,145,000 15,000,000 United States Treasury Notes, 8.000%, 5/15/2001 .................. Aaa AAA 15,196,875 ------------ 39,242,730 ------------
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) Bonds and Notes -- continued
Ratings (c) ---------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------ Yankee -- 4.4% $ 4,960,000 Inter-American Development Bank Bonds, 12.250%, 12/15/2008 ........ Aaa AAA $ 6,545,930 ------------ Total Bonds and Notes (Identified Cost $147,201,919) ............... 146,085,887 ------------ Total Investments - 99.0% (Identified Cost $147,201,919) (b) ....... 146,085,887 Other assets less liabilities ...................................... 1,445,210 ------------ Total Net Assets - 100% ............................................ $147,531,097 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation on investments based on cost for federal income tax purposes of $147,201,919 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost .......................................... $ 321,157 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ....................................... (1,437,189) ------------ Net unrealized depreciation ..................................................... $ (1,116,032) ============
At December 31, 1999 the Fund had a capital loss carryover of approximately $45,664,662 of which $26,963,634 expires on December 31, 2002, $1,001,296 expires on December 31, 2003, $4,342,078 expires on December 31, 2004, $2,731,339 expires on December 31, 2005 and $10,626,315 expires on December 31, 2007. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at June 30, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating 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, 2000. 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) The Fund's investments in mortgage backed securities of the Federal Home Loan Mortgage Corporation and Government National Mortgage Association are interests in separate pools of mortgages. All separate investment in securities of these issuers which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (e) A portion of this position has been segregated as collateral in connection with the Fund's derivative investments during the period. (f) Variable Rate Securities. The rates shown were those in effect at June 30, 2000. See accompanying notes to financial statements. 7 STATEMENT OF ASSETS & LIABILITIES ================================================================================ June 30, 2000 (unaudited) ASSETS Investments at value (Identified cost $147,201,919) ........................ $ 146,085,887 Cash ....................................................................... 698,168 Investments held as collateral for loaned securities ....................... 23,394,375 Receivable for: Fund shares sold ......................................................... 76,406 Accrued interest ......................................................... 1,608,013 ------------- 171,862,849 LIABILITIES Payable for: Collateral on securities loaned, at value ................................ $ 23,394,375 Securities purchased ..................................................... 673,579 Dividends declared ....................................................... 150,982 Accrued expenses: Management fees .......................................................... 7,858 Deferred trustees' fees .................................................. 21,126 Accounting and administrative ............................................ 8,768 Other .................................................................... 75,064 ------------- 24,331,752 ------------- NET ASSETS .................................................................... $ 147,531,097 ============= Net Assets consist of: Paid in capital .......................................................... $ 198,824,531 Undistributed net investment income ...................................... 468,131 Accumulated net realized gains (losses) .................................. (50,645,533) Unrealized appreciation (depreciation) on investments .................... (1,116,032) ------------- NET ASSETS .................................................................... $ 147,531,097 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($125,737,823 / 11,477,251 shares of beneficial interest) ................... $ 10.96 ========= Offering price per share (100 / 97 of $10.96) ................................. $ 11.30* ========= Net asset value and offering price of Class B shares ($11,678,023 /1,067,626 shares of beneficial interest) ...................... $ 10.94** ========= Net asset value and offering price of Class C shares ($6,659,559 / 608,383 shares of beneficial interest) ........................ $ 10.95** ========= Net asset value, offering and redemption price of Class Y shares ($3,455,692 / 313,688 shares of beneficial interest) ........................ $ 11.02 =========
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 8 See accompanying notes to financial statements. STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited) INVESTMENT INCOME Interest ............................................................................. $ 6,083,986 Securities lending income ............................................................ 27,226 ----------- 6,111,212 Expenses Management fees .................................................................... $ 515,676 Service and distribution fees - Class A ............................................ 235,756 Service and distribution fees - Class B ............................................ 63,853 Service and distribution fees - Class C ............................................ 39,577 Trustees' fees and expenses ........................................................ 6,490 Accounting and administrative ...................................................... 28,184 Custodian .......................................................................... 52,476 Transfer agent - Class A, Class B, Class C ......................................... 135,400 Transfer agent - Class Y ........................................................... 19,933 Audit and tax services ............................................................. 20,715 Legal .............................................................................. 3,934 Printing ........................................................................... 16,162 Registration ....................................................................... 21,812 Miscellaneous ...................................................................... 4,679 ----------- Total expenses ........................................................................ 1,164,647 ----------- Net investment income ................................................................. 4,946,565 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net .................................................................. (3,805,182) Written options - net .............................................................. (30,531) Futures contracts - net ............................................................ (24,675) ----------- Total realized gain (loss) on investments,written options and futures contracts .... (3,860,388) ----------- Unrealized appreciation (depreciation) on: Investments - net .................................................................. 3,177,281 ----------- Net gain (loss) on investment transactions ............................................ (683,107) ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ................................... $ 4,263,458 ===========
See accompanying notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS ================================================================================ (unaudited)
Year Ended Six Months Ended December 31, June 30, 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ................................................................... $ 12,169,938 $ 4,946,565 Net realized gain (loss) on investments, written options and futures contracts .......... (9,210,131) (3,860,388) Unrealized appreciation (depreciation) on investments, written options and futures contracts ................................................................. (4,766,837) 3,177,281 ------------- ------------- Increase (decrease) in net assets from operations ....................................... (1,807,030) 4,263,458 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................................................... (9,933,189) (3,942,056) Class B ............................................................................... (840,673) (333,596) Class C ............................................................................... (573,411) (206,965) Class Y ............................................................................... (460,940) (100,664) ------------- ------------- (11,808,213) (4,583,281) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................................. (40,341,564) (32,646,033) ------------- ------------- Total increase (decrease) in net assets .................................................... (53,956,807) (32,965,856) NET ASSETS Beginning of the period ................................................................. 234,453,760 180,496,953 ------------- ------------- End of the period ....................................................................... $ 180,496,953 $ 147,531,097 ============= ============= UNDISTRIBUTED NET INVESTMENT INCOME End of the period ....................................................................... $ 104,847 $ 468,131 ============= =============
10 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class A -------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of Period ................. $ 11.49 $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................ 0.86 0.81 0.72 0.67 0.66 0.37 Net Realized and Unrealized Gain (Loss) on Investments 0.59 (0.54) 0.09 0.06 (0.74) (0.05) --------- --------- --------- --------- --------- --------- Total From Investment Operations ..................... 1.45 0.27 0.81 0.73 (0.08) 0.32 --------- --------- --------- --------- --------- --------- Less Distributions Distributions From Net Investment Income ............. (0.84) (0.82) (0.72) (0.67) (0.65) (0.33) --------- --------- --------- --------- --------- --------- Total Distributions .................................. (0.84) (0.82) (0.72) (0.67) (0.65) (0.33) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period ....................... $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97 $ 10.96 ========= ========= ========= ========= ========= ========= Total Return (%) (a) ................................. 13.0 2.4 7.3 6.5 (0.7) 2.9 Ratio of Operating Expenses to Average Net Assets (%) ....................................... 1.22 1.25 1.28 1.31 1.33 1.39(c) Ratio of Net Investment Income to Average Net Assets (%) ....................................... 7.18 7.13 6.40 5.81 5.91 6.30(c) Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200 Net Assets, End of Period (000) ...................... $ 361,520 $ 276,178 $ 222,185 $ 194,032 $ 149,756 $ 125,738
Class B -------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of Period ................. $ 11.48 $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................ 0.76 0.73 0.65 0.60 0.59 0.34 Net Realized and Unrealized Gain (Loss) on Investments 0.61 (0.54) 0.08 0.07 (0.75) (0.06) --------- --------- --------- --------- --------- --------- Total From Investment Operations ..................... 1.37 0.19 0.73 0.67 (0.16) 0.28 --------- --------- --------- --------- --------- --------- Less Distributions Distributions From Net Investment Income ............. (0.76) (0.74) (0.65) (0.60) (0.58) (0.29) --------- --------- --------- --------- --------- --------- Total Distributions .................................. (0.76) (0.74) (0.65) (0.60) (0.58) (0.29) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period ....................... $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95 $ 10.94 ========= ========= ========= ========= ========= ========= Total Return (%) (b) ................................. 12.3 1.7 6.5 5.9 (1.4) 2.5 Ratio of Operating Expenses to Average Net Assets (%) ..................................... 1.87 1.90 1.93 1.96 1.98 2.04(c) Ratio of Net Investment Income to Average Net Assets (%) ..................................... 6.53 6.48 5.75 5.16 5.26 5.65(c) Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200 Net Assets, End of Period (000) ...................... $ 18,056 $ 18,503 $ 16,060 $ 18,116 $ 14,601 $ 11,678
(a) A sales charge is not reflected in total return calculations. (b) A contingent deferred sales charge is not reflected in total return calculations. (c) Computed on an annualized basis. See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class C -------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of Period ................. $ 11.48 $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................ 0.64 0.75 0.65 0.60 0.59 0.37 Net Realized and Unrealized Gain (Loss) on Investments 0.64 (0.57) 0.09 0.07 (0.75) (0.09) --------- --------- --------- --------- --------- --------- Total From Investment Operations ..................... 1.28 0.18 0.74 0.67 (0.16) 0.28 --------- --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income ................. (0.65) (0.74) (0.65) (0.60) (0.58) (0.29) Distributions in Excess of Net Investment Income ..... (0.01) 0.00 0.00 0.00 0.00 0.00 --------- --------- --------- --------- --------- --------- Total Distributions .................................. (0.66) (0.74) (0.65) (0.60) (0.58) (0.29) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period ....................... $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96 $ 10.95 ========= ========= ========= ========= ========= ========= Total Return (%) (a) ................................. 11.4 1.6 6.6 5.9 (1.4) 2.5 Ratio of Operating Expenses to Average Net Assets (%) ...................................... 1.87 1.90 1.93 1.96 1.98 2.04(b) Ratio of Net Investment Income to Average Net Assets (%) ........................................... 6.53 6.48 5.75 5.16 5.26 5.65(b) Portfolio Turnover Rate (%) .......................... 247 327 533 1,376 400 200 Net Assets, End of Period (000) ...................... $ 5,936 $ 14,903 $ 15,699 $ 13,962 $ 9,054 $ 6,660
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Computed on an annualized basis. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited)
Class Y -------------------------------------------------------------------------- Six Months Year Ended December 31, Ended ------------------------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- --------- Net Asset Value, Beginning of Period ................. $ 11.51 $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................ 0.86 0.85 0.76 0.72 0.70 0.95 Net Realized and Unrealized Gain (Loss) on Investments 0.63 (0.54) 0.08 0.06 (0.74) (0.58) --------- --------- --------- --------- --------- --------- Total From Investment Operations ..................... 1.49 0.31 0.84 0.78 (0.04) 0.37 --------- --------- --------- --------- --------- --------- Less Distributions Distributions From Net Investment Income ............. (0.87) (0.86) (0.76) (0.71) (0.69) (0.35) --------- --------- --------- --------- --------- --------- Total Distributions .................................. (0.87) (0.86) (0.76) (0.71) (0.69) (0.35) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period ....................... $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00 $ 11.02 ========= ========= ========= ========= ========= ========= Total Return (%) ..................................... 13.3 2.8 7.5 6.9 (0.3) 3.3 Ratio of Operating Expenses to Average Net Assets (%) ..................................... 0.87 0.90 0.93 0.96 0.98 0.94(a) Ratio of Net Investment Income to Average Net Assets (%) ..................................... 7.53 7.48 6.75 6.16 6.26 7.26(a) Portfolio Turnover Rate (%) .......................... 247 327 533 1,351 400 200 Net Assets, End of Period (000) ...................... $ 5,723 $ 5,313 $ 5,262 $ 8,345 $ 7,086 $ 3,456
(a) Computed on an annualized basis. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 1. Significant Accounting Policies. The Fund is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company. The Fund seeks a high current return consistent with preservation of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 3.00%. 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). Class C shares do not pay a front end sales charge and do not convert to any class of shares, but they do pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge if those shares are redeemed within one year. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro rata by the holders of all classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution and transfer agent 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 accounting principles generally accepted in the United States 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 Investment 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 and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. 14 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 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 the 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 or 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 differ- 15 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) ences relate primarily to differing treatments for income recognition for mortgage-backed securities. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification 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, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ----------------------------- ----------------------------- U.S. Government Other U.S. Government Other --------------- ------------ --------------- ------------ $294,561,910 $27,064,467 $316,178,148 $37,806,554 Transactions in written options for the six months ended June 30, 2000 are summarized as follows: Written Options ------------------------- Number of Premiums Contracts Received --------- -------- Open at December 31, 1999 ............ 0 $ 0 Contracts opened ..................... (50) (34,906) Contracts closed ..................... 50 34,906 -------- -------- Open at June 30, 2000 ................ 0 $ 0 ======== ======== 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.65% of the first $200 million of the Fund's average daily net assets, 0.625% of the next $300 million and 0.60% of such assets in excess of $500 million, reduced by the payment to the Fund's investment subadviser, Back Bay Advisors, L.P. ("Back Bay"), at the rate of 0.325% of the first $200 million of the Fund's average daily net assets, 0.3125% of the next $300 million and 0.30% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or trustees of the Fund. Nvest Management and Back Bay Advisors are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance Company (see Note 6). Fees earned by Nvest Management and Back Bay Advisors under the management and subadvisory agreements in effect during the six months ended June 30, 2000 are as follows: Fees Earned ----------- Nvest Management $ 257,838 Back Bay 257,838 --------- $ 515,676 ========= The effective annualized management fee for the six months ended June 30, 2000 was 0.65%. 16 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $28,184, and are shown separately in the financial statements as accounting and administrative. The effective annualized accounting and administrative expense for the six months ended June 30, 2000 was 0.034%. c. Service and Distribuion Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted Service and Distribution Plans relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B shares (the "Class B Plan") and Class C shares (the "Class C Plan"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest 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 shares, as reimbursement for expenses (including certain payments to securities dealers who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. Also under the Class A Plan, the Fund pays Nvest Funds a monthly distribution fee at the annual rate of 0.10% 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 Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class A shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $168,397 in service fees and $67,359 in distribution fees under the Class A Plan. If the expenses of Nvest Funds that are otherwise reimbursable, as service fees or distribution fees, respectively, under the Class A Plan incurred in any year exceed the amounts of such fees payable by the Fund under the Class A Plan, the unreimbursed amounts (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 expense carried forward into 2000 is $2,272,723 (reimbursable as distribution fees). Under the Class B and Class C Plans, the Fund pays Nvest Funds monthly service fees at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $15,963 and $9,894 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest 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 and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers who may be affiliated with Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class B and Class C shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $47,890 and $29,683 in distribution fees under the Class B and Class C Plans, respectively. 17 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the six months ended June 30, 2000 amounted to $71,237. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the six months ended June 30, 2000, the Fund paid NSC $120,504 as compensation for its services as transfer agent. 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 Nvest Management, Nvest Funds, Nvest, NSC or their affiliates. 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 Nvest 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 been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Capital Shares. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ---------------------------- ---------------------------- Class A Shares Amount Shares Amount - ---------- ------------ ------------ ------------ ------------ Shares sold ........................................................ 4,310,455 $ 48,747,149 1,288,804 $ 14,063,513 Shares issued in connection with the reinvestment of: Distributions from net investment income ......................... 711,288 8,028,741 292,044 3,189,938 ------------ ------------ ------------ ------------ 5,021,743 56,775,890 1,580,848 17,253,451 Shares repurchased ................................................. (7,948,175) (89,760,622) (3,757,029) (41,013,075) ------------ ------------ ------------ ------------ Net increase (decrease) ............................................ (2,926,432) $(32,984,732) (2,176,181) $(23,759,624) ------------ ------------ ------------ ------------
18 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited)
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ---------------------------- ---------------------------- Class B Shares Amount Shares Amount - ---------- ------------ ------------ ------------ ------------ Shares sold ........................................................ 470,492 $ 5,337,955 94,290 $ 1,029,699 Shares issued in connection with the reinvestment of: Distributions from net investment income ......................... 63,521 715,455 26,456 288,663 ------------ ------------ ------------ ------------ 534,013 6,053,410 120,746 1,318,362 Shares repurchased ................................................. (751,056) (8,497,037) (386,205) (4,208,937) ------------ ------------ ------------ ------------ Net increase (decrease) ............................................ (217,043) $ (2,443,627) (265,459) $ (2,890,575) ------------ ------------ ------------ ------------
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ---------------------------- ---------------------------- Class C Shares Amount Shares Amount - ---------- ------------ ------------ ------------ ------------ Shares sold ........................................................ 2,004,195 $ 22,667,643 404,455 $ 4,421,615 Shares issued in connection with the reinvestment of: Distributions from net investment income ......................... 39,746 448,945 14,089 153,766 ------------ ------------ ------------ ------------ 2,043,941 23,116,588 418,544 4,575,381 Shares repurchased ................................................. (2,411,539) (27,272,883) (636,280) (6,944,158) ------------ ------------ ------------ ------------ Net increase (decrease) ............................................ (367,598) $ (4,156,295) (217,736) $ (2,368,777) ------------ ------------ ------------ ------------
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ---------------------------- ---------------------------- Class Y Shares Amount Shares Amount - ---------- ------------ ------------ ------------ ------------ Shares sold ........................................................ 131,028 $ 1,487,903 49,530 $ 541,035 Shares issued in connection with the reinvestment of: Distributions from net investment income ......................... 40,672 459,988 9,883 108,316 ------------ ------------ ------------ ------------ 171,700 1,947,891 59,413 649,351 Shares repurchased ................................................. (238,738) (2,704,801) (389,926) (4,276,408) ------------ ------------ ------------ ------------ Net increase (decrease) ............................................ (67,038) $ (756,910) (330,513) $ (3,627,057) ------------ ------------ ------------ ------------ Increase (decrease) derived from capital shares transactions ....... (3,578,111) $(40,341,564) (2,989,889) $(32,646,033) ============ ============ ============ ============
5. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At June 30, 2000 the Fund had on loan securities having a market value of $22,938,551 collateralized by cash in the amount of $23,394,375 which was invested in a short-term instrument. 6. Subsequent Event. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management is the investment management arm of France's Caisse des Depots et Consignations, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, manage- 19 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) ment and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 20 - -------------------------------------------------------------------------------- NVEST MUNICIPAL INCOME FUND NVEST MASSACHUSETTS TAX FREE INCOME FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Supplement dated August 21, 2000 to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California Prospectuses, each dated May 1, 2000 John Maloney has become co-manager of the Funds, joining James Welch. Mr. Maloney, Vice President at Back Bay Advisors, has been with the company since 1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts and has 17 years of investment experience. 21 SAVING FOR RETIREMENT ================================================================================ An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's 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 accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Investor A Investor B Age 65 $214,295 $157,909 Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. 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 and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 22 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, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] 100 $200 $500 25 Years $91,236 $182,472 $456,181 Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds 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, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 23 ================================================================================ Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific 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, when available. 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 allows you to 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% in value 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. 24 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund GOVERNMENT INCOME FUNDS Bullseye Fund Limited Term U.S. Government Fund Equity Income Fund Government Securities Fund SMALL-CAP EQUITY FUNDS MONEY MARKET FUNDS* Star Small Cap Fund Cash Management Trust Kobrick Emerging Growth Fund Tax Exempt Money Market Trust *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency." TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. Visit our Web site at www.nvestfunds.com Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest 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. [LOGO] NvestFunds(SM) Where The Best Minds Meet(R) LT58-0600 [LOGO] Printed On Recycled Paper SEMIANNUAL REPORT ================================================================================ [LOGO] NvestFunds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Massachusetts Tax Free Income Fund Where The Best Minds Meet(R) Please read the prospectus supplement on page 20. - ------------- June 30, 2000 - ------------- PRESIDENTS MESSAGE ================================================================================ AUGUST 2000 - -------------------------------------------------------------------------------- [PICTURE OF JOHN HAILER GOES HERE] John T. Hailer President and Chief Executive Officer Nvest Funds In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months - three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. YOUR CHOICE OF INVESTMENT TOOLS Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Nvest Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. NVEST IS POISED FOR GLOBAL GROWTH As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. [JOHN HAILER'S SIGNATURE APPEARS HERE] "No matter how you react to shifting markets, don't let short-term events derail your long- range program. Consult your financial representative before you make any changes." NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ INVESTMENT RESULTS THROUGH JUNE 30, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Massachusetts Tax Free Income Fund's performance with 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 [Growth of $10,000 chart goes here] NAV MSC Lehman Municipal -------------------------------------------------------- 6/00 18,161 17,389 19,927 6/99 18,045 17,278 19,300 6/98 17,786 17,030 18,781 6/97 16,490 15,789 17,285 6/96 15,284 14,634 15,857 6/95 14,354 13,744 14,870 6/94 13,335 12,768 13,669 6/93 13,583 13,006 13,641 6/92 12,081 11,567 12,184 6/91 10,792 10,333 10,901 6/90 10,000 9,575 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ AVERAGE ANNUAL TOTAL RETURNS -- 6/30/00 - -------------------------------------------------------------------------------- CLASS A (Inception 3/23/84) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS Net Asset Value(1),(4).............. 3.47% 0.64% 4.82% 6.14% With Maximum Sales Charge(2),(4) ... -0.94 -3.66 3.92 5.68 SINCE CLASS B (Inception 9/13/93) 6 MONTHS 1 YEAR 5 YEARS INCEPTION Net Asset Value(1),(4) ............. 3.09% -0.08% 4.12% 3.13% With CDSC(3),(4) ................... -1.91 -4.84 3.79 3.13
SINCE FUND'S CLASS B COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPTION Lehman Municipal Bond Index(5) 4.48% 3.25% 5.88% 7.06% 5.15% Morningstar Muni Single State Long Avg.(6) 3.34 1.78 4.39 6.05 3.90 Lipper MA Municipal Debt Average(7) 3.99 0.87 4.73 6.44 3.99
These returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. YIELDS AS OF 6/30/00 - -------------------------------------------------------------------------------- CLASS A CLASS B SEC 30-day Yield(8) 5.07% 4.66% Taxable Equivalent Yield(9) 8.92 8.20 NOTES TO CHARTS 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.25%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. 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 composite measure of the performance of the municipal bond market. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. 6 Morningstar Muni Single State Long Average is the average performance without sales charges of all mutual funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. 7 Lipper Massachusetts Municipal Debt Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. 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 43.13%. A portion of income may be subject to federal, state or alternative minimum tax. Capital gains, if any, are subject to capital gains tax. 2 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ INTERVIEW WITH YOUR PORTFOLIO MANAGER - -------------------------------------------------------------------------------- [PICTURE OF JAMES WELCH GOES HERE] James Welch Back Bay Advisors, L.P. Q. How did Massachusetts Tax Free Income Fund perform over the past six months? The return on Class A shares of Nvest Massachusetts Tax Free Income Fund was 3.47% at net asset value for the six months ended June 30, 2000, including $0.41 per share in reinvested dividends. For the same period, the Fund's benchmark, Lehman Municipal Bond Index, returned 4.48%. Bear in mind that the Lehman Index reflects municipal bond performance throughout the country, including states with lower ratings than Massachusetts, which pay higher rates to compensate investors for greater risk. Throughout the period, we maintained a relatively conservative portfolio structure as part of our efforts to smooth out the price volatility of the market. This strategy worked well while interest rates were rising, but it detracted from performance as rates fell in June. The 30-Day yield on Class A shares of your Fund was 5.07% as of June 30, 2000, which is equivalent to a taxable yield of 8.92%, based on the maximum combined federal and Massachusetts income tax rate of 43.13%. Q. What was the investment environment for Massachusetts municipal bonds during the period? Continuing in its proactive battle against inflation, the Federal Reserve Board implemented a series of short-term interest rate hikes during the first six months of 2000. Despite these tightening efforts, the environment for fixed-income investments in general was surprisingly positive. The economy continued to grow at a brisk pace while inflation remained relatively dormant. The fixed-income market was also bolstered in the early part of the period by the U.S. Treasury Department's announcement that it was buying back long-term debt. This created a strong demand for long-term Treasuries, driving up prices, and leading to an inverted yield curve -- where yields on short-term bonds rise above long-term bond yields. 3 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ Meanwhile, the Massachusetts municipal bond market benefited from strong state and national economies. Revenues from sales, real estate taxes and other taxes soared, improving the state's fiscal strength. Finally, as yields of long-term Treasuries fell, so too did yields on long-term municipals. This drop in yields (and corresponding increase in prices) meant that long-term municipal bonds outperformed short- and intermediate-term municipal bonds. Q. Did supply and demand impact the Massachusetts municipal market? Yes. During the period, the supply of high-quality, tax-exempt issues fell short of demand, further supporting prices. In contrast to several years ago, state and local governments are enjoying record budget surpluses, reducing the need for municipalities to issue new debt to fund new projects. At the same time, the stock market's intense volatility caused many investors to focus on wealth preservation rather than wealth creation -- increasing demand for quality investments, particularly municipal securities issued in Massachusetts and other states with high bond ratings. Q. What strategies did you use in managing the Fund? Throughout the period, we took advantage of the Commonwealth's healthy fiscal position, emphasizing bonds whose interest payments are derived from general state or municipal revenues, such as taxes. Pre-Refunded securities played an important role. These are securities for which a bond issuer floats a second bond in order to pay off the first bond before the call date, lowering the borrower's costs. Relative price stability made these holdings top contributors to your Fund's performance early in the year, but they worked against us in June. We maintained the Fund's focus on the education and housing sectors, which are continuing to reap the rewards of a booming economy. Health care -- a major industry in the state -- also continued to be well represented in the portfolio. Although the sector has yet to make a complete recovery, it has made a solid improvement from last year's depressed levels. However, we continue to be watchful of the Big Dig highway project in metropolitan Boston. If the Federal government ever withdraws funding, the Commonwealth would face enormous costs. 4 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ CREDIT QUALITY COMPOSITION 6/30/00 [PIE CHART DEPICTING BREAKDOWN OF COMPOSITION] AAA 49.7% AA 3.6% A 17.4% BBB 14.4% BB 6.8% B/NOT RATED 8.1% AVERAGE CREDIT QUALITY = AA AVERAGE PORTFOLIO MATURITY = 18.1 YEARS QUALITY IS BASED ON RATINGS PROVIDED BY STANDARD & POOR'S. PORTFOLIO HOLDINGS AND ASSET ALLOCATION WILL VARY. Q. What is your current outlook? Our overall outlook for Massachusetts municipal bonds -- and for the bond market in general -- remains favorable. We expect the difference between long- and short-term yields to continue to narrow. This would benefit funds with longer average maturities. We also expect continued stock market volatility, which should make investors continue to seek the relative safety -- and superior after-tax yields -- of municipal securities. This should generate steady demand and price support for municipal bonds. This 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. Nvest Massachusetts Tax Free Income Fund may invest a portion of assets in lower-rated bonds that offer higher yields in return for more risk. Some income may be subject to federal and Massachusetts state taxes. Capital gains are fully taxable. Investors may be subject to the alternative minimum tax (AMT). This fund is non-diversified, meaning it concentrates its assets in fewer securities, which can significantly affect your fund's performance and the value of your investment. See a prospectus for details. The portfolio may also include U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) TAX EXEMPT OBLIGATIONS-- 98.5% OF TOTAL NET ASSETS
RATINGS (C) ------------------- PRINCIPAL STANDARD AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A) - ------------------------------------------------------------------------------------------------------- GUAM-- 1.6% $1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/1/2010 -- BBB $1,583,385 --------- MASSACHUSETTS MUNICIPAL -- 8.8% 4,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA insured) Aaa AAA 4,459,960 1,500,000 Wholesale Electric, 6.750%, 7/01/2008 Baa2 BBB+ 1,568,970 2,500,000 Wholesale Electric, 6.750%, 7/01/2011 Baa2 BBB+ 2,603,375 --------- 8,632,305 --------- MASSACHUSETTS STATE DEVELOPMENT FINANCE AGENCY-- 12.9% 2,300,000 Boston University, Series P, 6.000%, 5/15/2029 A3 BBB+ 2,265,684 3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 -- -- 2,757,270 2,000,000 Ogden Haverhill A Rmk, 6.700%, 12/01/2014 -- BBB 2,026,880 3,000,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/1/2019 A2 -- 2,793,870 3,150,000 Revenue Bond, 5.900%, 11/01/2018 Ba2 -- 2,843,001 --------- 12,686,705 ---------- MASSACHUSETTS STATE HEALTH & EDUCATION FACILITY AUTHORITY-- 38.4% 1,500,000 Beverly Hospital Rib, 6.520%, 6/18/2020, (MBIA insured)(d) Aaa AAA 1,475,145 3,000,000 Boston University Rib, Series L, 8.635%, 10/01/2031, (MBIA insured)(d) Aaa AAA 3,191,460 2,000,000 Catholic Health East Series B, 5.000%, 11/15/2018, (AMBAC insured) Aaa AAA 1,805,720 1,750,000 Charlton Memorial Hospital, Series B, Pre-Refunded, 7.250%, 7/01/2013 -- A 1,831,480 3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 A1 A 2,957,130 880,000 Educational Loan Revenue Bond, Issue D-Series A, 7.250%, 1/01/2009, (AMBAC insured) Aaa AAA 902,994 1,000,000 Faulkner Hospital, Series C, Pre-Refunded, 6.000%, 7/1/2013 Baa1 -- 1,052,370 2,500,000 Harvard University Issue Series W, 6.000%, 7/01/2035 Aaa AAA 2,579,125 3,000,000 Harvard University, Series N, 6.250%, 4/01/2020 Aaa AAA 3,264,780 2,400,000 Medical Center of Central Mass., CIass A, Pre-Refunded, 7.000%, 7/1/2012 A3 AAA 2,507,208 1,000,000 New England Baptist Hospital, Series B, Pre-Refunded, 7.300%, 7/01/2011 Baa1 AAA 1,047,040 1,220,000 New England Deaconess Hospital, Series D, Pre-Refunded, 6.875%, 4/01/2022, (AMBAC insured) Aaa AAA 1,288,662 1,190,000 New England Medical Center, Series F, 6.625%, 7/01/2025, (FGIC insured) Aaa AAA 1,223,629 6,000,000 Nichols College Issue, Series C, 6.000%, 10/01/2017 -- BBB- 5,520,000 1,275,000 Saints Memorial Medical Center, Series A, 5.750%, 10/1/2006 Ba2 -- 1,154,678 3,340,000 Saints Memorial Medical Center, Series A, 6.000%, 10/1/2023 Ba2 2,616,189 3,000,000 Student Loan Revenue Bond Sub-Issue H, 6.900%, 11/1/2009 A3 AA 3,275,310 --------- 37,692,920 ----------
See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited)
TAX EXEMPT OBLIGATIONS-- CONTINUED RATINGS (C) ------------------- PRINCIPAL STANDARD AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A) - ----------------------------------------------------------------------------------------------------------- MASSACHUSETTS STATE HOUSING FINANCE AGENCY-- 9.7% $2,000,000 Residential Development, Series A, 6.900%, 11/15/2024, (FNMA insured) Aaa AAA $ 2,083,720 2,500,000 Residential Development, Series E, 6.250%, 11/15/2012, (FNMA insured) Aaa AAA 2,593,125 1,300,000 Residential Development, Series I, 6.900%, 11/15/2025, (FNMA insured) Aaa AAA 1,357,642 2,925,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 Aa A+ 3,022,373 500,000 Single Family Mortgage, Series 32, 6.600%, 12/01/2026 Aa A+ 511,455 --------- 9,568,315 --------- MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY-- 9.3% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 -- AAA 2,144,900 5,000,000 Newton Group Properties LLC Project, 8.000%, 9/01/2027 -- -- 5,110,600 2,000,000 Phillips Academy Issue, 5.375%, 9/01/2023 Aaa AAA 1,892,280 --------- 9,147,780 --------- MASSACHUSETTS STATE TURNPIKE AUTHORITY-- 3.2% 6,000,000 Metropolitan Highway System, Capital Appreciation, Senior Series C, Zero Coupon, 1/01/2016, (MBIA insured) Aaa AAA 2,467,800 1,000,000 Rail Connections, Inc. Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2016 Baa3 BBB 354,150 1,000,000 Rail Connections, Inc. Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2017 Baa3 BBB 328,080 ------- 3,150,030 --------- MASSACHUSETTS STATE WATER RESOURCES AUTHORITY-- 3.7% 3,240,000 Series A (FGIC insured), 6.500%, 7/15/2019 Aaa AAA 3,602,848 --------- PUERTO RICO-- 4.6% 3,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 Baa1 A 3,276,900 1,000,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 Aaa AAA 1,257,660 --------- 4,534,560 --------- PUERTO RICO COMMONWEALTH-- 0.9% 1,000,000 Public Improvement (FSA insured), 5.000%, 7/01/2028 Aaa AAA 896,790 --------- PUERTO RICO COMMONWEALTH HIGHWAY TRANSPORTATION-- 2.1% 2,000,000 Series B, 6.000%, 7/01/2026 Baa1 A 2,024,000 --------- 3,045,000 Public Financial Authority, Series A, Pre-Refunded, 7.250%, 10/01/2018 -- AAA 3,284,215 --------- Total Tax Exempt Obligations (Identified Cost $97,241,226) 96,803,853 ----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) SHORT TERM INVESTMENT-- 0.4%
PRINCIPAL AMOUNT DESCRIPTION VALUE (A) - ------------------------------------------------------------------------------------------------ 335,000 Household Finance Corp., 6.880%, 7/03/2000 $ 334,872 ----------- Total Short Term Investment (Identified Cost $334,872) 334,872 ----------- Total Investments-- 98.9% (Identified Cost $97,576,098) (b) 97,138,725 Other assets less liabilities 1,107,089 --------- Total Net Assets-- 100% $98,245,814 =========== (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized depreciation on investments based on cost of $97,576,098 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 $ 1,970,245 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (2,407,618) ---------- Net unrealized depreciation $ (437,373) ===============
At December 31, 1999, the fund had a capital loss carry forward of $2,588,254 expiring December 31, 2007. (c) The ratings shown are believed to be the most recent ratings available at June 30, 2000. 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, 2000. The Fund's advisor 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. The rate disclosed is as of June 30, 2000. LEGEND OF PORTFOLIO ABBREVIATIONS: AMBAC -- American Municipal Bond Assurance Corp. FGIC -- Financial Guarantee Insurance Company FNMA -- Federal National Mortgage Association FSA -- Financial Security Assurance MBIA -- Municipal Bond Investors Assurance Corp. Rib -- Residual interest bond 8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES ================================================================================ June 30, 2000 (unaudited)
ASSETS Investments at value (Identified Cost $97,576,098) $ 97,138,725 Cash 3,509 Receivable for: Fund shares sold 1,781 Accrued interest 1,629,963 --------- 98,773,978 LIABILITIES Payable for: Fund shares redeemed $ 255,455 Dividends declared 119,099 Accrued expenses: Management fees 89,084 Deferred trustees' fees 15,037 Transfer agent 20,411 Accounting and administrative 5,563 Other expenses 23,515 ------ 528,164 ------- NET ASSETS $ 98,245,814 =============== Net Assets consist of: Paid in capital $ 102,332,858 Undistributed net investment income 107,354 Accumulated net realized gain (loss) (3,757,025) Unrealized appreciation (depreciation) on investments (437,373) -------- NET ASSETS $ 98,245,814 =============== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($89,912,234 / 5,761,011 shares of beneficial interest) $ 15.61 ============ Offering price per share (100 / 95.75 of $15.61) $ 16.30* ============ Net asset value and offering price of Class B shares ($8,333,580 / 535,144 shares of beneficial interest) $ 15.57** ============ * 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. 9 STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited)
INVESTMENT INCOME Interest $ 3,272,008 Expenses Management fees $ 299,529 Service and distribution fees - Class A 160,279 Service and distribution fees - Class B 42,421 Trustees' fees and expenses 5,260 Accounting and administrative 17,105 Custodian 38,722 Transfer agent 112,778 Audit and tax services 24,630 Legal 2,055 Printing 10,340 Registration 3,683 Miscellaneous 2,913 ----- Total expenses 719,715 Less expenses waived by the investment adviser and subadviser (159,193) 560,522 -------- ------- Net investment income 2,711,486 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments-- net 201,950 Written options-- net (48,950) Futures contracts-- net 6,631 ----- Total realized gain (loss) on investments, written options and futures contracts 159,631 ------- Unrealized appreciation (depreciation) on: Investments-- net 480,073 ------- Net gain (loss) on investment transactions 639,704 ------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 3,351,190 ==============
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================ (unaudited)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 ------------------------------------- FROM OPERATIONS Net investment income $ 5,857,566 $ 2,711,486 Net realized gain (loss) on investments, written options and futures contracts (1,501,419) 159,631 Net unrealized appreciation (depreciation) on investments, written options and futures contracts (9,260,469) 480,073 ---------- ------- Increase (decrease) in net assets from operations (4,904,322) 3,351,190 ---------- --------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (5,480,730) (2,379,651) Class B (397,448) (194,102) Net realized gain on investments Class A (216,698) 0 Class B (19,179) 0 In excess of net realized gain on investments Class A (7,135) 0 Class B (631) 0 ---- - (6,121,821) (2,573,753) ---------- ---------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (5,765,846) (8,675,528) ---------- ---------- Total increase (decrease) in net assets (16,791,989) (7,898,091) NET ASSETS Beginning of the period 122,935,894 106,143,905 ----------- ----------- End of the period $ 106,143,905 $ 98,245,814 =============== =============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the period $ (30,379) $ 107,354 ============== ===============
See accompanying notes to financial statements. 11 FINANCIAL HIGNLIGHTS ================================================================================ For a share outstanding throughout the period (unaudited)
CLASS A ------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------- 1995 1996 1997 1998 1999 2000 ------------------------------------------- ------ Net Asset Value, Beginning of Period $ 15.10 $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income ............. 0.88 0.87 0.86 0.86 0.82 0.44 Net Realized and Unrealized Gain (Loss) on Investments .................... 1.76 (0.35) 0.63 (0.04) (1.50) 0.10 ---- ----- ---- ----- ----- ---- Total From Investment Operations .. 2.64 0.52 1.49 0.82 (0.68) 0.54 ---- ---- ---- ---- ----- ---- Less Distributions Dividends From Net Investment Income (0.89) (0.87) (0.86) (0.85) (0.83) (0.41) Distributions From Net Realized Gains 0.00 0.00 0.00 (0.08) (0.03) 0.00 Distributions in Excess of Net Realized Gains .................... 0.00 0.00 0.00 0.00 0.00 (b) 0.00 ---- ---- ---- ---- ---- ---- Total Distributions ............... (0.89) (0.87) (0.86) (0.93) (0.86) (0.41) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period .... $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48 $ 15.61 ======= ========= ======= ======= ======= ======= Total Return (%) (a) .............. 17.8 3.2 9.3 4.9 (4.1) 3.5 Ratio of Operating Expenses to Average Net Assets (%) .................... 1.24 1.27 1.29 1.31 1.31 1.38(c) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) (d) .............. 0.85 0.90 1.00 1.00 1.00 1.07(c) Ratio of Net Investment Income to Average Net Assets (%) ............ 5.46 5.31 5.17 4.93 5.02 5.47(c) Portfolio Turnover Rate (%) ....... 127 140 132 125 73 23 Net Assets, End of Period (000) $120,229 $112,934 $113,869 $113,910 $ 97,270 $ 89,912
(a) A sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. (c) Computed on an annualized basis. (d) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Financial Statements. See accompanying notes to financial statements. 12 FINANCIAL HIGNLIGHTS ================================================================================ For a share outstanding throughout the period (unaudited)
CLASS B ------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------ 1995 1996 1997 1998 1999 2000 --------------------------------------------- ------ Net Asset Value, Beginning of Period $ 15.08 $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income ............. 0.78 0.75 0.76 0.74 0.71 0.38 Net Realized and Unrealized Gain (Loss) on Investments .................... 1.74 (0.34) 0.62 (0.03) (1.49) 0.11 ---- ----- ---- ----- ----- ---- Total From Investment Operations .. 2.52 0.41 1.38 0.71 (0.78) 0.49 ---- ---- ---- ---- ----- ---- Less Distributions Dividends From Net Investment Income (0.78) (0.76) (0.76) (0.74) (0.72) (0.37) Distributions From Net Realized Gains 0.00 0.00 0.00 (0.08) (0.03) 0.00 Distributions in Excess of Net Realized Gains .................... 0.00 0.00 0.00 0.00 0.00 (b) 0.00 ---- ---- ---- ---- ---- ---- Total Distributions ............... (0.78) (0.76) (0.76) (0.82) (0.75) (0.37) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period .... $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45 $ 15.57 ======= ======= ======= ======= ======= ======= Total Return (%) (a) .............. 17.0 2.6 8.6 4.2 (4.7) 3.1 Ratio of Operating Expenses to Average Net Assets (%) .................... 1.89 1.92 1.94 1.96 1.96 2.03(c) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)(d) ................. 1.50 1.55 1.65 1.65 1.65 1.72(c) Ratio of Net Investment Income to Average Net Assets (%) ............ 4.81 4.66 4.52 4.28 4.37 4.82(c) Portfolio Turnover Rate (%) ....... 127 140 132 125 73 23 Net Assets, End of Period (000) ... $ 6,697 $ 7,442 $ 7,399 $ 9,026 $ 8,874 $ 8,334
(a) A contingent deferrred sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. (c) Computed on an annualized basis. (d) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Financial Statements. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For Six Months Ended June 30, 2000 (unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and 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 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 accounting principles generally accepted in the United States 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. 14 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For Six Months Ended June 30, 2000 (unaudited) 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. 15 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For Six Months Ended June 30, 2000 (unaudited) 2. PURCHASES AND SALES OF SECURITIES. For the six months ended June 30, 2000 purchases and sales of securities (excluding short-term investments) were $ 22,922,991 and $ 31,790,519, respectively. Transactions in written options for the six months ended June 30, 2000 are summarized as follows: WRITTEN OPTIONS NUMBER OF PREMIUMS CONTRACTS RECEIVED Open at December 31, 1999 0 $ 0 Contracts opened (300) (40,988) Contracts closed 300 40,988 --- ------ Open at June 30, 2000 0 $ 0 === ==== = ========= 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") 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 Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is a subsidiary of Metropolitan Life Insurance Company (see Note 7). Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the period ended June 30, 2000 are as follows: Fees Earned ----------- Nvest Management $ 149,765 Back Bay 149,764 ------- $ 299,529 ======= The effective annualized management fee before the expense limitation for the six months ended June 30, 2000 was 0.60%. As a result of the expense limitations as described in Note 4, the effective annualized management fee for the six months ended June 30, 2000 was 0.28%. B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $17,105, and are shown separately in the financial statements as accounting and administrative. The effective annualized accounting and administrative expense was 0.034%. 16 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For Six Months Ended June 30, 2000 (unaudited) 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 Nvest Funds Distributor, L.P. ("Nvest 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 Nvest Funds) incurred by Nvest 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, 2000, the Fund paid Nvest Funds $114,485 and $10,605 in service fees for Class A and Class B shares, respectively. Also under the Plans, the Fund pays Nvest 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 Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class A and Class B shares, respectively. For the six months ended June 30, 2000, the Fund paid Nvest Funds $45,794 and $31,816 in distribution fees for Class A and Class B shares, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the six months ended June 30, 2000, amounted to $45,178. D. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the six months ended June 30, 2000, the Fund paid NSC $112,777 as compensation for its services as transfer agent. 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 Nvest Management, Nvest Funds, Nvest, NSC or their affiliates. 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 Nvest 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 been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the funds until distributed in accordance with the Plan. 17 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For Six Months Ended June 30, 2000 (unaudited) 4. EXPENSE LIMITATIONS. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to the extent necessary to limit the Fund's expenses to the annual rates of 1.20% and 1.85% of the average net assets of the Fund's Class A and B shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 1.20% and 1.85% of the average net assets of the Fund's Class A and Class B shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to this from May 1, 1999 to April 30, 2000 expenses were limited to 1.00% of Class A average net assets and 1.65% of Class B average net assets. From September 1, 1996, Back Bay and Nvest Management 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 1.50% of the Fund's Class B average daily net assets. As a result of the Fund's expenses exceeding the expense limitations during the six months ended June 30, 2000, Back Bay reduced its subadvisory fee by $79,597 and Nvest Management reduced its advisory fee by $79,596. 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, excluding Pre-Refunded securities in excess of 10% on June 30, 2000 as a percentage of the Fund's total net assets: Education (20.0%), Housing (13.0%) and Utilities (19.3%). The Fund had investments in securities of issuers insured by Municipal Bond Investors Assurance Corporation (MBIA) which aggregate 13.2% of its total net assets at June 30, 2000. 6. CAPITAL SHARES. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B. Transactions in capital shares were as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 --------------------- ---------------------- CLASS A SHARES AMOUNT SHARES AMOUNT - -------- -------------------------------------------------- Shares sold 663,953 $ 10,865,107 203,345 $ 3,132,721 Shares issued in connection with the reinvestment of: Dividends from net investment income 239,584 3,917,370 113,475 1,755,614 Distributions from net realized gain 11,207 178,976 0 0 ------ ------- - - 914,744 14,961,453 316,820 4,888,335 Shares repurchased (1,324,332) (21,432,568) (839,241) (12,958,578) ---------- ----------- -------- ----------- Net increase (decrease) (409,588) $ (6,471,115) (522,421) $ (8,070,243) -------- ------------ -------- ------------
18 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For Six Months Ended June 30, 2000 (unaudited)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 --------------------- ---------------------- CLASS B SHARES AMOUNT SHARES AMOUNT - -------- -------------------------------------------------- Shares sold 129,045 $ 2,117,061 37,215 $ 575,162 Shares issued in connection with the reinvestment of: Dividends from net investment income 17,640 287,560 8,325 128,495 Distributions from net realized gain 1,005 16,013 0 0 ----- ------ - - 147,690 2,420,634 45,540 703,657 Shares repurchased (104,697) (1,715,365) (84,803) (1,308,942) -------- ---------- ------- ---------- Net increase (decrease) 42,993 $ 705,269 (39,263) $ (605,285) ------ ------------ ------- ------------ Increase (decrease) derived from capital share transactions (366,595) $ (5,765,846) (561,684) $ (8,675,528) ======== ============ ======== ============
7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management is the investment management arm of France's Caisse des Depots et Consignations, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, management and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 19 NVEST MUNICIPAL INCOME FUND NVEST MASSACHUSETTS TAX FREE INCOME FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Supplement dated August 21, 2000 to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California Prospectuses, each dated May 1, 2000 John Maloney has become co-manager of the Funds, joining James Welch. Mr. Maloney, Vice President at Back Bay Advisors, has been with the company since 1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts and has 17 years of investment experience. 20 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund Bullseye Fund GOVERNMENT INCOME FUNDS Equity Income Fund Limited Term U.S. Government Fund Government Securities Fund SMALL-CAP EQUITY FUNDS Star Small Cap Fund MONEY MARKET FUNDS* Kobrick Emerging Growth Fund Cash Management Trust Tax Exempt Money Market Trust *Investments in the money market funds are not insured or gauranteed by the FDIC or any government agency. TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest 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. [Nvest Funds Logo appears here] MA58-0600 Printed On Recycled Paper SEMIANNUAL REPORT [NVEST FUNDS LOGO GOES HERE] NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA [WHERE THE BEST MINDS MEET ARTWORK GOES HERE] JUNE 30, 2000 PLEASE READ THE PROSPECTUS SUPPLEMENT ON PAGE 20. PRESIDENTS MESSAGE ================================================================================ AUGUST 2000 - -------------------------------------------------------------------------------- [PICTURE OF JOHN HAILER GOES HERE] John T. Hailer President and Chief Executive Officer Nvest Funds In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months - three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. YOUR CHOICE OF INVESTMENT TOOLS Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Nvest Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. NVEST IS POISED FOR GLOBAL GROWTH As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. "No matter how you react to shifting markets, don't let short-term events derail your long- range program. Consult your financial representative before you make any changes." NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ INVESTMENT RESULTS THROUGH JUNE 30, 2000 - -------------------------------------------------------------------------------- PUTTING PERFORMANCE IN PERSPECTIVE The charts comparing Nvest Intermediate Term Tax Free Fund of California's performance with 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 [GROWTH AT $10,000 CHART GOES HERE] APRIL 1993 (INCEPTION) THROUGH JUNE 2000 NAV MSC Lehman Municipal -------------------------------------------------------- 6/00 13,862 13,515 14,935 6/99 13,547 13,209 14,465 6/98 13,221 12,890 14,076 6/97 12,397 12,087 12,955 6/96 11,530 11,241 11,885 6/95 10,676 10,410 11,145 6/94 10,160 9,906 10,244 6/93 9,966 9,717 10,224 6/93 10,000 9,750 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ AVERAGE ANNUAL TOTAL RETURNS -- 6/30/00 - -------------------------------------------------------------------------------- CLASS A (INCEPTION 4/23/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value(1),(4) 3.64% 2.32% 5.36% 5.07% With Maximum Sales Charge(2),(4) 1.03 -0.29 4.83 4.71 CLASS B (INCEPTION 9/13/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value(1),(4) 3.14% 1.43% 4.56% 3.41% With CDSC(3),(4) -1.86 -3.43 4.23 3.41 SINCE SINCE FUND'S FUND'S CLASS A CLASS B COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS INCEPTION INCEPTION Lehman Municipal Bond Index(5) 4.48% 3.25% 5.88% 5.66% 5.15% Morningstar Muni CA Interm. Avg.(6) 4.32 3.44 6.24 4.85 4.41 Lipper CA Interm. Municipal Debt Avg.(7) 4.06 3.78 5.10 4.74 4.29
These returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. YIELDS AS OF 6/30/00 - -------------------------------------------------------------------------------- CLASS A CLASS B SEC 30-Day Yield(4),(8) 4.79% 4.19% Taxable Equivalent Yield(4),(9) 8.75 7.65 NOTES TO CHARTS 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 2.50%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. 4 The Fund waived certain fees and expenses during the period indicated and the Fund's average annual total returns and yields would have been lower had these not been waived. 5 Lehman Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. You may not invest directly in an index. Class A since-inception return is calculated from 4/30/93. Class B since-inception return is calculated from 9/30/93. 6 Morningstar Muni CA Intermediate Debt Average is the average performance without sales charges of all mutual funds with a similar investment objective as calculated by Morningstar, Inc. Class A since-inception return is calculated from 4/30/93. Class B since-inception return is calculated from 9/30/93. 7 Lipper California Intermediate Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class A since-inception return is calculated from 4/30/93. 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 California state income tax bracket of 45.22%. A portion of income may be subject to federal, state and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax. 2 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ INTERVIEW WITH YOUR PORTFOLIO MANAGER - -------------------------------------------------------------------------------- [PICTURE OF JAMES WELCH GOES HERE] James Welch Back Bay Advisors, L.P. Q. How did Nvest Intermediate Term Tax Free Fund of California perform over the past six months? The return on Class A shares of Nvest Intermediate Term Tax Free Fund of California was 3.64% at net asset value for the six months ended June 30, 2000, including $0.18 per share in reinvested dividends. For the same period, the Fund's benchmark, Lehman Municipal Bond Index, returned 4.48%. Bear in mind that the Lehman Index reflects municipal bond performance throughout the country, including states with lower ratings than California, which pay higher rates to compensate investors for greater risk. Throughout the period, we maintained a relatively conservative portfolio structure as part of our efforts to smooth out the price volatility of the market. This strategy worked well while interest rates were rising, but it detracted from performance as rates fell in June. The 30-Day yield on Class A shares of your Fund was 4.79% as of June 30, 2000, which is equivalent to a taxable yield of 8.75%, based on the maximum combined federal and California income tax rate of 45.22%. Q. What was the investment environment for California municipal bonds during the period? Continuing in its proactive battle against inflation, the Federal Reserve Board implemented a series of interest-rate hikes during the first six months of 2000. Despite these tightening efforts, the environment for fixed-income investments in general was surprisingly positive. The economy continued to grow at a brisk pace, while inflation remained relatively dormant. The fixed-income market was also bolstered in the early part of the period by the U.S. Treasury Department's announcement that it was buying back long-term debt. This created a huge demand for long-term Treasuries, driving up prices, and leading to an inverted yield curve -- where yields on short-term bonds rise above yields on long-term bonds. Meanwhile, the California economy continued to be one of the healthiest in the nation. From high tech to manufacturing to various service industries, nearly every sector of the economy enjoyed vigorous growth. As a result, tax revenues soared, improving the creditworthiness of municipalities. 3 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ Q. How did supply and demand impact the California municipal market? Over the past six months, the supply of high quality, tax-exempt issues fell dramatically short of demand, driving up prices. In fact, supply ran about 40% lower than the same period last year, for several reasons. In contrast to several years ago, state and local governments are enjoying record budget surpluses, reducing the need for municipalities to issue new debt to finance projects. At the same time, demand for municipal securities increased during the second quarter of 2000, as investors began to shift assets out of the volatile equity market into the relatively stable bond market, particularly municipal securities. Investors were handsomely rewarded. During most of the period, municipal bond yields were at historically high levels compared with U.S. Treasury yields. On an after-tax basis, AAA-rated municipal bonds provided returns far superior to U.S. Treasuries. Q. What strategies did you use in managing the Fund? Throughout the period we took advantage of California's healthy fiscal position, emphasizing general obligation bonds, whose interest payments are derived from state or municipal tax revenues. Prerefunded securities also played a role. These are securities for which a bond issuer floats a second bond in order to pay off the first bond before the call date, lowering the borrowing costs. Relative price stability made these holdings top contributors to your Fund's performance early in the year, but they worked against us in June. We also maintained our emphasis on airport bonds which are benefiting from the booming travel industry, as well as the housing sector, which continues to benefit from a strong economy. Q. What is your outlook for California municipal bonds? We expect California's investment environment to remain attractive. The state's economy is flourishing, which should produce rising tax receipts for municipalities. 4 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ CREDIT QUALITY COMPOSITION 6/30/00 [PIE CHART DEPICTING BREAKDOWN OF COMPOSITION] AAA 47.2% AA 11.3% A 14.6% BBB 17.0% B/NOT RATED 9.9% AVERAGE CREDIT QUALITY = AA AVERAGE PORTFOLIO MATURITY = 10.9 YEARS QUALITY IS BASED ON RATINGS PROVIDED BY STANDARD & POOR'S. PORTFOLIO HOLDINGS AND ASSET ALLOCATION WILL VARY. However, we believe that the Fed may raise interest rates again later in the year. The upcoming election, too, is likely to unsettle the financial markets because investors dislike change. Nonetheless, we expect investors to continue to seek the relative safety -- and superior after-tax yields -- of municipal securities, creating steady demand and price support for Nvest Intermediate Term Tax Free Fund of California. 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. Nvest Intermediate Term Tax Free Fund of California may invest a portion of assets in lower-rated bonds that offer higher yields in return for more risk. Some income may be subject to federal and California state taxes. Capital gains are fully taxable. Investors may be subject to the Alternative Minimum Tax (AMT). This Fund is non-diversified, meaning it concentrates its assets in fewer securities, which can significantly affect your Fund's performance and the value of your investment. See a prospectus for details. The portfolio may also include U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) TAX EXEMPT OBLIGATIONS-- 98.0% OF TOTAL NET ASSETS RATINGS (C) -------------------------------------- PRINCIPAL STANDARD AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A) - ----------------------------------------------------------------------------------------------------------------------- CALIFORNIA--85.2% $ 1,250,000 Anaheim Public Financing Authority, Series C, 6.000%, 9/01/2016, (FSA insured) ........................................ Aaa AAA $1,349,737 945,000 Berkeley Health Facility, Pre-Refunded Revenue Bond, 6.500%, 12/01/2011, (d) ......................................... A2 A+ 992,921 1,000,000 California Health Facilities Finance Authority Revenue Bond, 6.125%, 12/01/2019 ........................................ A2 NA 1,009,500 1,120,000 California Housing Finance Agency Revenue Bond, 6.250%, 8/01/2016 ............................................... Aa2 AA- 1,154,239 1,195,000 California Housing Finance Agency Revenue Bond, 7.050%, 8/01/2027 ............................................... Aa2 AA- 1,224,600 2,000,000 California Pollution Control Finance Authority Revenue Bond, 7.150%, 2/01/2011 ......................................... Ba1 BBB 2,031,180 1,500,000 California Pollution Control Financing Authority, Series A Revenue Bond, 5.900%, 6/01/2014 ........................ A1 A+ 1,596,795 1,000,000 California State, 5.250%, 6/01/2015 ............................. Aa3 AA- 996,880 1,000,000 California State General Obligation Bond, 7.000%, 6/01/2002, (FGIC insured) ....................................... Aaa AAA 1,048,770 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2010 ......................................... Aa3 A+ 1,053,000 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2014, (MBIA insured) ......................... Aaa AAA 1,040,450 1,000,000 California Statewide Community Development Authority Certificate of Participation, 5.375%, 4/01/2017 ................. -- BBB 858,760 1,850,000 California Statewide Community Development Authority Certificate of Participation, 7.125%, 11/01/2016 ................ -- -- 1,895,214 1,540,000 Duarte, California Certificate of Participation, Pre-Refunded Revenue Bond, 6.125%, 4/01/2013 .................... Baa1 AAA 1,638,699 1,000,000 Fresno, California Unified School District, 6.400%, 8/01/2016, (MBIA insured) ....................................... Aaa AAA 1,121,430 2,030,000 Fresno, California Unified School District Certificate of Participation, 7.250%, 3/01/2007 ............................. A3 -- 2,104,907 500,000 Irvine Ranch California Water District, 4.250%, 8/01/2009, (d) .................................................. VMIG1 A1+ 500,000 See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) TAX EXEMPT OBLIGATIONS-- CONTINUED RATINGS (C) -------------------------------------- PRINCIPAL STANDARD AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A) - ----------------------------------------------------------------------------------------------------------------------- CALIFORNIA--CONTINUED $ 1,000,000 Los Angeles, California Department of Water and Power, Revenue Bond, 6.000%, 2/15/2016 ................................. Aa3 A+ $1,026,690 1,050,000 Los Angeles, California State Building Authority, 5.500%, 10/01/2017, (FGIC insured) .............................. Aaa AAA 1,055,145 1,515,000 Pleasanton Financing Authority, 5.600%, 9/02/2000 ............... Baa1 -- 1,517,727 1,000,000 Sacramento Utility District Electric Revenue Bond, 5.145%, 11/15/2006, (FSA insured) (d) ........................... Aaa AAA 1,061,690 1,000,000 Sacramento Utility District Electric Revenue Bond, 5.375%, 11/15/2006, (FSA insured) (d) ........................... Aaa AAA 1,000,000 2,000,000 San Diego California Unified School District, 7/1/2017 .......... Aaa AAA 759,780 2,000,000 San Diego Port Facilities Revenue Bond, 6.600%, 12/1/2002 ....... -- -- 2,045,600 1,000,000 Southern California Rapid Transit District Certificate of Participation, 7.500%, 7/01/2005, (MBIA insured) ............. Aaa AAA 1,041,040 2,000,000 Valley Health Systems, Series A Revenue Bond, 6.500%, 5/15/2015 . -- BBB- 1,852,700 2,000,000 West & Central Basin Financing Authority, Series C Revenue Bond, 5.820%, 8/01/2006, (AMBAC insured) ................ Aaa AAA 2,064,080 --------- 35,041,534 ---------- PUERTO RICO--11.1% 1,000,000 Puerto Rico Commonwealth Aqueduct & Sewer Authority, 6.250%, 7/01/2012 ............................................... Baa1 A 1,098,400 1,000,000 Puerto Rico Commonwealth General Obligation Bond, 5.500%, 7/01/2013, (FSA insured) ................................ Aaa AAA 1,041,500 1,010,000 Puerto Rico Commonwealth General Obligation Bond, 6.500%, 7/01/2015, (FSA insured) ................................ Aaa AAA 1,144,370 1,250,000 Puerto Rico Public Finance Corporation Revenue Bond,, 5.375%, 6/01/2015, (AMBAC insured) .............................. Aaa AAA 1,271,125 --------- 4,555,395 --------- US VIRGIN ISLANDS--1.7% 685,000 U.S. Virgin Islands Public Finance Authority Pre-Refunded Revenue Bond, 7.750%, 10/01/2006 ................... -- -- 712,373 --------- Total Tax Exempt Obligations (Identified Cost $39,604,947) 40,309,302 ----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION - CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) TAX EXEMPT OBLIGATIONS-- CONTINUED PRINCIPAL AMOUNT DESCRIPTION VALUE (A) - ----------------------------------------------------------------------------------------------------------------------- Total Investments--98.0% (Identified Cost $39,604,947)(b) $ 40,309,302 Other assets less liabilities 801,729 ------- Total Net Assets--100% $ 41,111,031 =============== (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized appreciation on investments based on cost of $39,604,947 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 $ 975,005 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (270,650) -------- Net unrealized appreciation $ 704,355 ================
At December 31, 1999, the Fund had a net capital loss carryforward of $1,657,968 of which $522,150 expires on December 31, 2002 and $1,135,818 expires on December 31, 2007. These may be available to offset future realize capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at June 30, 2000. 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, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Variable rate demand note or floating rate security. The rate disclosed is as of June 30, 2000 LEGEND OF PORTFOLIO ABBREVIATIONS: AMBAC American Municipal Bond Assurance Corp. FGIC Financial Guarantee Insurance Company FSA Financial Security Assurance MBIA Municipal Bond Investors Assurance Corp. See accompanying notes to financial statements. 8 STATEMENT OF ASSETS AND LIABILITIES ================================================================================ June 30, 2000 (unaudited) ASSETS Investments at value (Identified cost $39,604,947) ...................... $ 40,309,302 Receivable for: Funds shares sold .................................................. 682 Securities sold .................................................... 299,788 Interest ........................................................... 632,656 ------- 41,242,428 LIABILITIES Payable for: Fund shares redeemed ............................................... $ 8,478 Dividends declared ................................................. 58,464 Custodian bank ..................................................... 1,024 Accrued expenses: Management fees .................................................... 19,866 Deferred trustees' fees ............................................ 14,578 Transfer agent ..................................................... 4,185 Accounting and administrative ...................................... 2,302 Other .............................................................. 22,500 ------ 131,397 ------- NET ASSETS ...................................................................... $ 41,111,031 =============== Net Assets consist of: Paid in capital .................................................... $ 43,074,766 Undistributed net investment income ................................ 49,168 Accumulated net realized gain (loss) ............................... (2,717,258) Unrealized appreciation (depreciation) on investments .............. 704,355 --------------- NET ASSETS $ 41,111,031 =============== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($33,318,804 / 4,486,808 shares of beneficial interest) ................. $ 7.43 ============== Offering price per share (100 / 97.50 of $7.43) ......................... $ 7.62* ============== Net asset value and offering price of Class B shares ($7,792,227 / 1,052,897 shares of beneficial interest) .................. $ 7.40** ==============
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited) INVESTMENT INCOME Interest $ 1,224,890 Expenses Management fees $ 107,901 Service fees - Class A 41,737 Service and distribution fees - Class B 38,578 Trustees' fees and expenses 3,991 Accounting and administrative 6,400 Custodian 32,265 Transfer agent 12,925 Audit and tax services 22,543 Legal 803 Printing 7,868 Registration 4,478 Miscellaneous 2,182 ----- Total expenses 281,671 Less expenses waived by the investment adviser and subadviser (78,037) 203,634 ------- ------- Net investment income 1,021,256 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net (671,692) Written options - net (28,094) Futures contracts - net (7,281) ------ Total realized gain (loss) on investments, written options and futures contracts (707,067) -------- Unrealized appreciation (depreciation) on: Investments - net 1,091,471 Net gain (loss) on investment transactions 384,404 ------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 1,405,660 ===============
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================ (unaudited) YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 --------------------------------------- FROM OPERATIONS Net investment income $ 2,158,692 $ 1,021,256 Net realized gain (loss) on investments, written options and futures contracts (735,270) (707,067) Unrealized appreciation (depreciation) on investments (2,181,742) 1,091,471 ---------- --------- Increase (decrease) in net assets from operations (758,320) 1,405,660 -------- --------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (1,867,844) (794,222) Class B (376,425) (155,890) -------- -------- (2,244,269) (950,112) ---------- -------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS 1,878,106 (2,827,438) --------- ---------- Total increase (decrease) in net assets (1,124,483) (2,371,890) NET ASSETS Beginning of the period 44,607,404 43,482,921 ---------- ---------- End of the period $ 43,482,921 $ 41,111,031 =============== =============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the period $ (21,976) $ 49,168 =============== ===============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited) Class A --------------------------------------------------------------- Year Ended December 31, Six Months Ended ---------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 ---------------------------------------------- ------- Net Asset Value, Beginning of Period $ 7.08 $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income ............. 0.39 0.39 0.39 0.37 0.37 0.19 Net Realized and Unrealized Gain (Loss) On Investments ....................... 0.57 0.00 0.20 (0.03) (0.48) 0.08 ---- ---- ---- ----- ----- ---- Total From Investment Operations .. 0.96 0.39 0.59 0.34 (0.11) 0.27 ---- ---- ---- ---- ----- ---- Less Distributions Dividends From Net Investment Income (0.39) (0.38) (0.38) (0.38) (0.38) (0.18) ----- ----- ----- ----- ----- ----- Total Distributions ............... (0.39) (0.38) (0.38) (0.38) (0.38) (0.18) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period .... $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34 $ 7.43 ======= ======= ======= ======= ======= ======= Total Return (%) (a) .............. 13.9 5.3 8.0 4.5 (1.5) 3.6 Ratio of Operating Expenses to Average Net Assets (%) ........................ 1.31 1.34 1.33 1.35 1.24 1.23(b) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%)(c) 0.70 0.75 0.85 0.85 0.85 0.85(b) Ratio of Net Investment Income to Average Net Assets (%) ........................ 5.24 5.18 5.06 4.79 4.79 5.12(b) Portfolio Turnover Rate (%) ....... 167 161 120 215 140 59 Net Assets, End of Period (000) ... $32,707 $35,972 $32,057 $35,348 $35,593 $33,319
(a) A sales charge is not reflected in total return calculations. (b) Computed on an annualized basis. (c) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Financial Statements. See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period (unaudited) Class B --------------------------------------------------------------- Year Ended December 31, Six Months Ended ---------------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 ---------------------------------------------- ------- Net Asset Value, Beginning of Period $ 7.07 $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income ............. 0.33 0.33 0.34 0.32 0.31 0.16 Net Realized and Unrealized Gain (Loss) On Investments ....................... 0.56 0.01 0.20 (0.03) (0.48) 0.07 ---- ---- ---- ----- ----- ---- Total From Investment Operations .. 0.89 0.34 0.54 0.29 (0.17) 0.23 ---- ---- ---- ---- ----- ---- Less Distributions Dividends From Net Investment Income (0.33) (0.33) (0.33) (0.33) (0.32) (0.15) ----- ----- ----- ----- ----- ----- Total Distributions ............... (0.33) (0.33) (0.33) (0.33) (0.32) (0.15) ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period .... $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32 $ 7.40 ======= ======= ======= ======= ======= ======= Total Return (%) (a) .............. 12.9 4.6 7.2 3.7 (2.2) 3.1 Ratio of Operating Expenses to Average Net Assets (%) ........................ 2.06 2.09 2.08 2.10 1.99 1.97(b) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) 1.45 1.50 1.60 1.60 1.60 1.60(b) Ratio of Net Investment Income to Average Net Assets (%) ........................ 4.49 4.43 4.31 4.04 4.04 4.37(b) Portfolio Turnover Rate (%) ....... 167 161 120 215 140 59 Net Assets, End of Period (000) ... $ 5,617 $ 7,590 $ 8,881 $ 9,259 $ 7,889 $ 7,792
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Computed on an annualized basis. (c) Expense ratios have been adjusted for the expense limitations described in Note 4 to the Financial Statements. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and California personal income tax. The Declaration of Trust permits the trustees to issue an unlimited number of shares of the Trust in multiple series (each such series 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 2.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Expenses of the Fund are borne pro rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States 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 and market discount. Interest income is reduced by the amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. OPTIONS. The Fund uses options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. 14 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 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 primarily to differing treatments of capital loss carryforwards, futures transactions and post October losses. 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. 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 15 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 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, 2000 purchases and sales of securities (excluding short-term investments) were $23,801,812 and $27,097,701, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays a gross management fee to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") 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 reduced by the payment to the Fund's investment subadviser Back Bay Advisors, L.P. ("Back Bay") 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 Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is a subsidiary of Metropolitan Life Insurance Company (see Note 7). Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the six months ended June 30, 2000 are as follows: Fees Earned ----------- Nvest Management $ 53,951 Back Bay 53,950 ------ $ 107,901 ======= The effective annualized management fee before the expense limitation for the six months ended June 30, 2000 was 0.525%. As a result of the expense limitation as described in Note 4, the effective annualized management fee for the six months ended June 30, 2000 was 0.145% B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $6,400, and are shown separately in the financial statements as accounting and administrative. The effective annualized accounting and administrative expense for the six months ended June 30, 2000 was 0.034%. 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 Nvest Funds Distributor, L.P. ("Nvest 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 shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid 16 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) Nvest Funds $41,737 in fees under the Class A Plan. If the expenses of Nvest 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 at June 30, 2000 is $179,456. Under the Class B Plan, the Fund pays Nvest 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 Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $9,644 in service fees under the Class B Plan. Also under the Class B Plan, the Fund pays Nvest 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 Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class B shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $28,934 in distribution fees under the Class B Plan. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors of shares of the Fund during the six months ended June 30, 2000 amounted to $12,175. D. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the six months ended June 30, 2000, the Fund paid NSC $17,069 as compensation for its services as transfer agent. 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 Nvest Management, Nvest Funds, Nvest, NSC or their affiliates. 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 Nvest 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 been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. EXPENSE LIMITATIONS. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to the extent necessary to limit the 17 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) Fund's expenses to the annual rates of 0.85% and 1.60% of the average net assets of the Fund's Class A and B shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 0.85%, and 1.60% of average net assets of the Fund's Class A and Class B shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to September 1, 1996, Back Bay and Nvest Management 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 1.45% of the Fund's Class B average daily net assets. As a result of the Fund's expenses exceeding the expense limitations during the six months ended June 30, 2000, Back Bay reduced its subadvisory fees by $39,018 and Nvest Management reduced its advisory fees by $39,019. 5. CONCENTRATION OF CREDIT. The Fund primarily invests in debt obligations issued by the State of California and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of California municipal securities than is a comparable municipal bond fund that is not as concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of California municipal securities to meet their financial obligations. The Fund had the following industry concentrations in excess of 10% on June 30, 2000 as a percentage of the Fund's total net assets: Finance (13.7%), Healthcare (13.6%), Education (12.2%), and Municipal (11.1%). 6. CAPITAL SHARES. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B. Transactions in capital shares were as follows: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 CLASS A SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 2,383,925 $ 18,347,369 204,108 $ 1,500,704 Shares issued in connection with the reinvestment of: Dividends from net investment income 145,308 1,107,226 70,009 514,778 ------- --------- ------ ------- 2,529,233 19,454,595 274,117 2,015,482 Shares repurchased (2,193,681) (16,773,597) (636,068) (4,659,375) ---------- ----------- -------- ---------- Net increase (decrease) 335,552 $ 2,680,998 (361,951) $ (2,643,893) ------- ------------ -------- -------------
18 NOTES TO FINANCIAL STATEMENTS - CONTINUED ================================================================================ YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 CLASS B SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 202,511 $ 1,524,313 28,593 $ 209,650 Shares issued in connection with the reinvestment of: Dividends from net investment income 28,996 220,717 13,155 96,391 ------ ------- ------ ------ 231,507 1,745,030 41,748 306,041 Shares repurchased (339,124) (2,547,922) (66,951) (489,586) -------- ---------- ------- -------- Net increase (decrease) (107,617) $ (802,892) (25,203) $ (183,545) -------- ------------ ------- ------------ Increase (decrease) derived from capital shares transactions 227,935 $ 1,878,106 (387,154) $ (2,827,438) ======= ================ ======== ============
7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management is the investment management arm of France's Caisse des Depots et Consignations, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, management and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 19 NVEST MUNICIPAL INCOME FUND NVEST MASSACHUSETTS TAX FREE INCOME FUND NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Supplement dated August 21, 2000 to Nvest Bond Funds Prospectus Classes A, B and C and Nvest Massachusetts Tax Free Income Fund and Nvest Intermediate Term Tax Free Fund of California Prospectuses, each dated May 1, 2000 John Maloney has become co-manager of the Funds, joining James Welch. Mr. Maloney, Vice President at Back Bay Advisors, has been with the company since 1989. Mr. Maloney has a B.A. in Economics from the University of Massachusetts and has 17 years of investment experience. 20 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund Bullseye Fund GOVERNMENT INCOME FUNDS Equity Income Fund Limited Term U.S. Government Fund Government Securities Fund SMALL-CAP EQUITY FUNDS Star Small Cap Fund MONEY MARKET FUNDS* Kobrick Emerging Growth Fund Cash Management Trust Tax Exempt Money Market Trust *Investments in the money market funds are not insured or gauranteed by the FDIC or any government agency. TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest 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. [Nvest Funds Logo appears here] CA58-0600 Printed On Recycled Paper SEMIANNUAL REPORT [NVEST FUNDS LOGO GOES HERE] - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND [WHERE THE BEST MINDS MEET ARTWORK GOES HERE] JUNE 30, 2000 PRESIDENTS MESSAGE ================================================================================ AUGUST 2000 - -------------------------------------------------------------------------------- [PICTURE OF JOHN HAILER GOES HERE] John T. Hailer President and Chief Executive Officer Nvest Funds In an effort to protect the U.S. economy from the specter of renewed inflation, the Federal Reserve Board has raised interest rates six times in the past 12 months - three times during the first six months of 2000. Because higher interest rates cut into corporate profits and make financial assets less attractive, the markets have been undergoing a period of heightened volatility. YOUR CHOICE OF INVESTMENT TOOLS Investors react to volatility in different ways. Some seek safer harbors; others define risk as opportunity and add selectively to their portfolios. Regardless of which type of investor you may resemble, remember that Nvest funds cover a wide spectrum of investments, from conservative to aggressive. These include a comprehensive family of equity and fixed-income funds that may complement your current holdings, as well as funds that combine different investment styles in a single portfolio. For example, Nvest Star funds' multi-manager approach can help you through periods of market volatility by offering you greater diversification than single-manager funds. Each Nvest Star fund is composed of four separate segments run by managers with distinct investment disciplines -- a strategy that allows investors to benefit from different investment styles and diversified portfolio holdings, seeking superior long-term results with reduced risk. We search for the strongest candidates to manage each segment, using approaches that complement one another in varying market conditions. No matter how you react to shifting markets, don't let short-term events derail your long-range program. Consult your financial representative before you make any changes. NVEST IS POISED FOR GLOBAL GROWTH As you may know, Nvest Companies is under agreement to be acquired by CDC Asset Management, a leading French institutional money management company and a major global financial institution. CDC's expertise in European stock and bond markets will be a resource for the premier U.S. investment management teams who manage our funds. Nvest Funds will continue to operate independently, but with broader resources to bring you attractive, innovative products and services. Since your vote will be required, you will receive proxy information in September. In the meantime, if you would like more information, you are welcome to call your financial representative or us, or visit our web site, www.nvestfunds.com. "No matter how you react to shifting markets, don't let short-term events derail your long- range program. Consult your financial representative before you make any changes." NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST GROWTH AND INCOME FUND ================================================================================ INVESTMENT RESULTS THROUGH JUNE 30, 2000 - -------------------------------------------------------------------------------- PUTTING PERFORMANCE IN PERSPECTIVE The charts comparing Nvest Growth and Income Fund's performance with 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 JUNE 1990 THROUGH JUNE 2000 [GROWTH OF $10,000 CHART GOES HERE NAV MSC S&P 500 ------------------------------------------------ 6/00 39,820 37,531 51,283 6/99 42,120 39,698 47,821 6/98 36,398 34,305 38,968 6/97 27,479 25,899 29,954 6/96 20,391 19,218 22,249 6/95 17,218 16,228 17,668 6/94 13,932 13,131 14,023 6/93 13,853 13,057 13,826 6/92 12,311 11,603 12,174 6/91 10,749 10,131 10,739 6/90 10,000 9,425 10,000 This illustration represents past performance and does not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST GROWTH AND INCOME FUND ================================================================================ AVERAGE ANNUAL TOTAL RETURNS--6/30/00 - -------------------------------------------------------------------------------- CLASS A (INCEPTION 5/6/31) 6 MONTHS 1 YEAR 5 YEARS 10 YEARS Net Asset Value(1) -4.37% -5.46% 18.26% 14.82% With Maximum Sales Charge(2) -9.90 -10.92 16.87 14.14 CLASS B (INCEPTION 9/13/93) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value(1) -4.79% -6.16% 17.40% 15.52% With CDSC(3) -9.55 -10.13 17.20 15.52 CLASS C (INCEPTION 5/1/95) 6 MONTHS 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value(1) -4.80% -6.17% 17.38% 18.05% With CDSC(3) -5.75 -6.96 17.38 18.05 CLASS Y (INCEPTION 11/18/98) 6 MONTHS 1 YEAR SINCE INCEPTION Net Asset Value(1) -4.23% -5.11% 8.23% SINCE SINCE SINCE FUND'S FUND'S FUND'S CLASS B CLASS C CLASS Y COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS 10 YEARS INCEPT. INCEPT. INCEPT. S&P 500(4) -0.42% 7.24% 23.80% 17.80% 20.88% 24.21% 16.94% Morningstar Large Value Average(5) -1.92 -5.21 15.16 13.36 14.02(5) 16.06 5.01 Lipper Multi-Cap Core Average(6) 2.53 11.54% 19.33% 15.67% 17.47 20.10 18.50
NOTES TO CHARTS Thesereturns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge applied when you sell shares. Class C share performance assumes a 1.00% CDSC when you sell shares within one year of purchase. 4 S&P 500 is an unmanaged index of U.S. common stock performance. You may not invest directly in an index. 5 Morningstar Large Value Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 4/30/95. Class Y since-inception return is calculated from 11/30/98. 6 Lipper Multi-Cap Core Average is the average performance without sales charges of all mutual funds with a similar current investment style or objective as determined by Lipper Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 4/30/95. Class Y since-inception return is calculated from 11/30/98. 2 NVEST GROWTH AND INCOME FUND ================================================================================ [PICTURE OF GERALD SCRIVER GOES HERE] Gerald Scriver Westpeak Investment Advisors, L.P. INTERVIEW WITH YOUR PORTFOLIO MANAGER - -------------------------------------------------------------------------------- Q. HOW DID NVEST GROWTH AND INCOME FUND PERFORM DURING THE FIRST HALF OF 2000? For the six months ended June 30, 2000, the return on Class A shares of Nvest Growth and Income Fund was -4.37%, based on net asset value. The return on the Fund's benchmark, the Standard & Poor's 500 Index, was -0.42% for the same period. Nvest Growth and Income Fund's performance comparison reflects its emphasis on value rather than growth, which we believe will provide the best results for shareholders over the long-term. Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PERIOD? As the new year unfolded, stocks of high-growth technology firms selling at extremely high valuations led the market, as they had for some time. Stocks with strong price momentum had soared to extremely high price/earnings ratios (p/e ratios)--a measure of whether a company's stock is high or low relative to its earnings. The p/e ratios of some of these "hot stocks" reached a hundred times earnings or more, and still continued to rise in price. From early March through May, the technology sector reversed course, as market interest rotated. Many "old economy" stocks with solid earnings and a track record returned to market favor, reaching valuations that more closely reflected the companies' fundamentals. By the latter part of June, however, high-tech growth stocks began a tentative rebound, as investors purchased shares that were off their peaks, even though they were still overvalued, in our opinion. Q. HOW DID YOU POSITION MY FUND IN RESPONSE TO THESE EVENTS? Our policy in managing Nvest Growth and Income Fund is to pursue opportunities in both growth- and value-oriented investments; we believe both sectors offer opportunities at any given time. However, we do give your Fund's portfolio a bias toward value or growth as the market directions shift--a flexible approach that permits us to adapt to changing trends. 3 NVEST GROWTH AND INCOME FUND ================================================================================ That said, our approach in the first half of 2000 reflected our belief that investor enthusiasm toward overvalued technology-company shares was nearing its end. We believe that the return to more traditional, fundamental valuations established in March will characterize the market for some time to come. Consequently, we've structured the portfolio to focus on stocks selling at relatively attractive valuations, which also offer future growth potential. The average p/e ratio of the stocks in Nvest Growth and Income Fund was 17 times earnings at the end of June--well below that of the S&P 500, which had an average p/e of nearly 24 times earnings. Q. WHICH INVESTMENTS AFFECTED PERFORMANCE THE MOST, POSITIVELY OR NEGATIVELY? Nvest Growth and Income Fund's best performers were its investments in traditional, fundamentally sound companies. Some of these benefited from particular trends. For example, Morgan Stanley Dean Witter and Citigroup, two of the country's leading financial-service firms, profited from a good environment for financial stocks. Most of your Fund's best performers shared such characteristics as attractive prices, positive earnings surprises, and below-average volatility. These included financial stocks like Citigroup and our health-care holdings. Pfizer, an established pharmaceutical company, is a good example of the traditional stocks with strong fundamentals that helped bolster performance. Pfizer's product line includes the fast-selling drug, Viagra. Most of our disappointments during the first half of 2000 were in the high-tech area. These included Microsoft, which was hurt by the U.S. government's ongoing antitrust actions, as well as National Semiconductor and KLA-Tenecor--two high-growth stocks that had enjoyed strong price momentum, which were swept along in the downdraft that beset the high-tech sector. National Semiconductor is an established leader in the manufacture of analog and mixed-signal semiconductors that drive PCs and electronic communications equipment. KLA-Tenecor produces control and inspection systems that search for and describe defects in integrated circuits during manufacturing. 4 NVEST GROWTH AND INCOME FUND ================================================================================ TOP 10 PORTFOLIO HOLDINGS - 6/30/00 % OF COMPANY NET ASSETS ------------------------------------------------ 1. General Electric Co. 4.8 2. Pfizer, Inc. 3.6 3. Citigroup, Inc. 3.5 4. PepsiCo, Inc. 2.8 5. Johnson & Johnson, Inc. 2.8 6. International Business Machines Corp. 2.8 7. Intel Corp. 2.7 8. Exxon Mobil Corp. 2.6 9. Colgate-Palmolive 2.6 10. Hewlett-Packard Co. 2.6 Portfolio holdings and asset allocation will vary. Q. WHAT IS YOUR CURRENT OUTLOOK? Overall, we look for a continued trend away from growth and toward value. If interest rates stay at current levels, we believe that the market will turn away from a speculative bias and move toward the more traditional stocks with positive fundamentals and less inflated valuations. Nvest Growth and Income Fund is designed to seek long-term growth of capital and income; our goal is also to manage risk. We believe a portfolio of high-priced stocks--even though the companies may have attractive growth prospects--is likely to be highly volatile and unable to provide consistently high returns over time. Therefore, for the foreseeable future we will favor stocks that appear to be modestly valued, seeking companies with reasonably attractive growth rates and the potential for positive earnings surprises. 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. Nvest Growth and Income Fund invests in growth stocks, which are generally more sensitive to market movements because their stock prices are based on future expectations. It also invests in value stocks, which can fall out of favor with investors and may underperform growth stocks during certain market conditions. It may also invest in foreign and emerging market securities, which have special risks. These risks affect your investment's value. See a prospectus for details. Frequent portfolio turnover may increase your risk of greater tax liability, which could lower your return from this Fund. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of June 30, 2000 (unaudited) COMMON STOCK -- 99.2% OF TOTAL NET ASSETS SHARES DESCRIPTION VALUE (A) - ------------------------------------------------------------------------- AEROSPACE & DEFENSE-- 1.5% 62,200 Boeing Co. ...................... $2,600,737 79,200 Northrop Grumman Corp. .......... 5,247,000 ----------- 7,847,737 ----------- AIRLINES-- 2.5% 88,200 AMR Corp. (c) ................... 2,331,788 102,500 Delta Air Lines, Inc. ........... 5,182,656 98,700 UAL Corp. (c) ................... 5,743,106 ----------- 13,257,550 ----------- AUTOMOTIVE-- 0.1% 25,637 Visteon Corp. ................... 310,845 ----------- AUTO & RELATED-- 3.6% 195,800 Ford Motor Co. .................. 8,419,400 187,100 General Motors Corp. ............ 10,863,494 ----------- 19,282,894 ----------- BANKS-- 6.2% 229,350 Chase Manhattan Corp. ........... 10,564,434 314,700 Citigroup, Inc. ................. 18,960,675 12,400 J.P. Morgan & Co., Inc. ......... 1,365,550 131,800 UnionBanCal Corp. ............... 2,446,538 ----------- 33,337,197 ----------- CHEMICALS-- 0.9% 58,600 Minnesota Mining & Manufacturing Co. 4,834,500 ----------- CHEMICALS-MAJOR-- 1.6% 192,000 Dow Chemical Co. ................ 5,796,000 58,700 E.l. du Pont de Nemours & Co. ... 2,568,125 ----------- 8,364,125 ----------- COMPUTER HARDWARE-- 5.0% 87,000 Apple Computer, Inc. ............ 4,556,625 54,200 Cabletron Systems, Inc. (c) ..... 1,368,550 110,000 Hewlett-Packard Co. ............. 13,736,250 16,600 SanDisk Corp. ................... 1,015,713 67,400 Sun Microsystems, Inc. (c) ...... 6,129,187 ----------- 26,806,325 ----------- COMPUTER NETWORKING-- 1.8% 151,300 Cisco Systems, Inc. (c) ......... 9,617,006 ----------- COMPUTER SOFTWARE-- 5.3% 135,400 International Business Machines Corp.14,834,763 61,700 Microsoft Corp. (c) ............. 4,936,000 101,700 Oracle Corp. (c) ................ 8,549,156 ---------- 28,319,919 ----------- See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - ------------------------------------------------------------------------- CONSTRUCTION-- 0.9% 51,900 Lafarge Corp. ................... $1,089,900 40,000 Southdown, Inc. ................. 2,310,000 42,400 USG Corp. ....................... 1,287,900 ---------- 4,687,800 ----------- CONSUMER DURABLES-- 0.1% 17,700 Whirlpool Corp. ................. 825,263 ----------- DRUGS-- 8.5% 42,600 Allergan, Inc. .................. 3,173,700 155,000 Bristol-Myers Squibb Co. ........ 9,028,750 115,800 Merck & Co. ..................... 8,873,175 402,200 Pfizer, Inc. .................... 19,305,600 109,900 Schering-Plough Corp. ........... 5,549,950 ----------- 45,931,175 ----------- ELECTRIC UTILITIES -- 1.4% 37,700 Public Service Enterprise Group . 1,305,362 209,500 TXU Corp. ....................... 6,180,250 ----------- 7,485,612 ----------- ELECTRICAL EQUIPMENT -- 0.4% 63,600 Rockwell International Corp. .... 2,003,400 ----------- ELECTRONICS-- 5.2% 41,954 Agilent Technologies, Inc. ...... 3,094,108 13,300 Corning, Inc. ................... 3,589,338 115,400 Dover Corp. ..................... 4,680,912 38,800 Eaton Corp. ..................... 2,599,600 9,700 Globespan Semiconductor, Inc. ... 1,184,158 25,300 KLA-Tencor Corp. (c) ............ 1,481,631 155,600 Nortel Networks Corp. ........... 10,619,700 12,900 Teradyne, Inc. .................. 948,150 ----------- 28,197,597 ----------- ENERGY RESERVES-- 4.4% 26,800 Chevron Corp. ................... 2,272,975 180,100 Exxon Mobil Corp. ............... 14,137,850 120,900 Royal Dutch Petroleum Co. 7,442,906 ---------- 23,853,731 ----------- FINANCIAL SERVICES-- 0.8% 87,800 Fannie Mae ...................... 4,582,062 ----------- See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - ------------------------------------------------------------------------- FOOD & BEVERAGES-- 3.9% 340,400 PepsiCo, Inc. ................... $15,126,525 39,700 Quaker Oats Co. ................. 2,982,462 84,400 SUPERVALU, Inc. ................. 1,608,875 34,500 Sysco Corp. ..................... 1,453,313 ---------- 21,171,175 ----------- HEALTH CARE-PRODUCTS-- 3.4% 35,700 Abbott Laboratories ............. 1,590,881 18,900 Bausch & Lomb, Inc. ............. 1,462,388 148,000 Johnson & Johnson, Inc. ......... 15,077,500 ----------- 18,130,769 ----------- HEALTH CARE-SERVICES-- 1.6% 76,300 HCA-The Healthcare Co. .......... 2,317,612 21,700 Pacificare Health Systems (c) ... 1,306,069 60,300 UnitedHealth Group, Inc. ........ 5,170,725 ---------- 8,794,406 ----------- HOUSEHOLD PRODUCTS-- 2.8% 230,500 Colgate-Palmolive ............... 13,801,188 63,500 Ralston-Purina Group ............ 1,266,031 ----------- 15,067,219 ----------- INDUSTRIAL PARTS-- 2.1% 287,000 Caterpillar, Inc. ............... 9,722,125 47,300 Parker-Hannifin Corp. ........... 1,620,025 ----------- 11,342,150 ----------- INDUSTRIAL SERVICES-- 0.2% 31,000 Hertz Corp. ..................... 869,938 ----------- INFORMATION SERVICES-- 2.5% 33,500 First Data Corp. ................ 1,662,438 133,400 Omnicom Group, Inc. ............. 11,880,937 ----------- 13,543,375 ----------- INTERNET CONTENT-- 1.3% 12,400 Ariba, Inc. ..................... 1,215,781 21,700 BroadVision, Inc. ............... 1,102,631 175,200 E*TRADE Group, Inc. ............. 2,890,800 11,000 Juniper Networks, Inc. .......... 1,601,188 ----------- 6,810,400 ----------- LIFE INSURANCE-- 1.0% 24,700 CIGNA Corp. ..................... 2,309,450 92,700 Lincoln National Corp., Inc. .... 3,348,787 ----------- 5,658,237 ----------- MANUFACTURING-DIVERSIFIED-- 4.8% 486,000 General Electric Co. ............ 25,758,000 ----------- See accompanying notes to financial statements. 8 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - ------------------------------------------------------------------------- MEDIA & ENTERTAINMENT-- 1.7% 72,100 Gannett Co. ..................... $4,312,481 127,800 Walt Disney Co. ................. 4,960,238 ----------- 9,272,719 ----------- METALS & MINING-- 0.8% 96,900 Alcan Aluminium Ltd. ............ 3,003,900 53,400 Alcoa, Inc. ..................... 1,548,600 ----------- 4,552,500 ----------- OIL-REFINING & DISTRIBUTION-- 0.3% 28,800 Texaco, Inc. .................... 1,533,600 ----------- PAPER & FOREST PRODUCTS -- 0.4% 48,500 Georgia Pacific Corp., Timber Group 1,273,125 28,700 International Paper Co. ......... 855,619 ----------- 2,128,744 ----------- PROPERTY & CASUALTY INSURANCE-- 1.7% 65,500 MGIC Investment Corp. ........... 2,980,250 84,400 PMI Group, Inc. ................. 4,009,000 40,000 Radian Group, Inc. (c) .......... 2,070,000 ----------- 9,059,250 ----------- PUBLISHING-- 0.4% 41,000 Knight-Ridder, Inc. ............. 2,180,687 ----------- RAILROADS & EQUIPMENT -- 0.8% 82,900 Burlington Northern Santa Fe .... 1,901,519 61,100 Union Pacific Corp. ............. 2,272,156 ----------- 4,173,675 ----------- RETAIL-CLOTHING-- 0.2% 54,200 The Limited, Inc. ............... 1,172,075 ----------- RETAIL-DEPARTMENT STORE -- 1.9% 122,000 Federated Department Stores, Inc. 4,117,500 94,900 Sears, Roebuck & Co. ............ 3,096,112 37,200 Target Corp. .................... 2,157,600 18,100 Wal-Mart Stores, Inc. ........... 1,043,013 ----------- 10,414,225 ----------- RETAIL-SPECIALTY-- 2.2% 42,000 BJ's Wholesale Club (c) ......... 1,386,000 191,250 Home Depot, Inc. ................ 9,550,547 22,500 Lowe's Company., Inc. ........... 923,906 ----------- 11,860,453 ----------- SECURITIES & ASSET MANAGEMENT-- 3.9% 38,200 AXA Financial, Inc. ............. 1,298,800 75,710 Bear Stearns Companies, Inc. .... 3,151,429 See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION-CONTINUED ================================================================================ Investments as of June 30, 2000 (unaudited) COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - ------------------------------------------------------------------------- 55,000 Lehman Brothers Holdings, Inc. .. $5,200,937 37,100 Merrill Lynch & Co., Inc. ....... 4,266,500 82,900 Morgan Stanley Dean Witter & Co. 6,901,425 ----------- 20,819,091 ----------- SEMICONDUCTORS-- 5.9% 20,700 Advanced Micro Devices, Inc. (c) 1,599,075 27,800 Analog Devices, Inc. ............ 2,112,800 33,900 Applied Materials, Inc. (c) ..... 3,072,188 31,200 Cypress Semiconductor Corp. ..... 1,318,200 109,300 Intel Corp. ..................... 14,612,044 16,600 LSI Logic Corp. (c) ............. 898,475 15,300 National Semiconductor Corp. (c) 868,275 107,800 Texas Instruments, Inc. ......... 7,404,512 ----------- 31,885,569 ----------- SEMICONDUCTOR-ELECTRONICS-- 0.6% 39,500 Xilinx, Inc. (c) ................ 3,261,219 ----------- TELECOMMUNICATIONS-- 4.3% 163,300 AT&T Corp. ...................... 5,164,362 84,300 Bell Atlantic Corp. ............. 4,283,494 315,000 BellSouth Corp. ................. 13,426,875 ----------- 22,874,731 ----------- THRIFT-- 0.3% 84,600 Golden State Bancorp, Inc. (c) .. 1,522,800 ----------- Total Common Stock (Identified Cost $531,360,059) .. 533,401,745 ----------- SHORT TERM INVESTMENT--0.6% PRINCIPAL AMOUNT - -------------------------------------------------------------------------------- $ 3,106,000 Repurchase Agreement with State Street Bank and Trust Co. dated 6/30/2000 at 5.25% to be repurchased at $3,107,359 on 7/03/2000, collateralized by $2,785,000 U.S. Treasury Bond 7.125% due 2/15/2023 with a value of $3,171,419 3,106,000 --------- Total Short Term Investment (Identified Cost $3,106,000) .................. 3,106,000 --------- Total Investments--99.8% (Identified Cost $534,466,059) (b) ............. 536,507,745 Other assets less liabilities ................. 872,590 --------- Total Net Assets-- 100% ....................... $ 537,380,335 ============== (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At June 30, 2000 the net unrealized appreciation on investments based on cost of $534,466,059 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 $ 43,008,473 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............................................ (40,966,787) ------------------ Net unrealized appreciation ........................... $ 2,041,686 ================== (c) Non-income producing security. See accompanying notes to financial statements. 10 STATEMENT OF ASSETS & LIABILITIES ================================================================================ June 30, 2000 (unaudited) ASSETS Investments at value (Identified cost $534,466,059) .. $ 536,507,745 Cash ................................................. 3,117 Receivable for: Fund shares sold ................................ 391,919 Securities sold ................................. 5,965,713 Dividends and interest .......................... 427,821 Tax reclaims .................................... 168 --- 543,296,483 LIABILITIES Payable for: Securities purchased ............................ $ 4,696,322 Fund shares redeemed ............................ 961,603 Accrued expenses: Transfer agent .................................. 109,025 Management fees ................................. 29,219 Deferred trustees' fees ......................... 36,164 Accounting and administrative ................... 16,062 Other ........................................... 67,753 ------ 5,916,148 --------- NET ASSETS $ 537,380,335 =================== Net Assets consist of: Paid in capital ................................. $ 519,647,400 Undistributed net investment income (loss) ...... (694,815) Accumulated net realized gain (loss) ............ 16,386,064 Unrealized appreciation (depreciation) on investments 2,041,686 --------- NET ASSETS ................................................... $ 537,380,335 ==================== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($321,980,501 / 21,969,450 shares of beneficial interest) ...... $ 14.66 =============== Offering price per share (100/94.25 of $14.66) ......................... $ 15.55* =============== Net asset value and offering price of Class B shares ($182,563,544 / 12,758,191 shares of beneficial interest) ...... $ 14.31** =============== Net asset value and offering price of Class C shares ($22,113,426 / 1,547,345 shares of beneficial interest) ........ $ 14.29** =============== Net asset value, offering and redemption price of Class Y shares ($10,722,864 / 729,131 shares of beneficial interest) .......... $ 14.71 ===============
* 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. 11 STATEMENT OF OPERATIONS ================================================================================ Six Months Ended June 30, 2000 (unaudited) INVESTMENT INCOME Dividends (net of foreign taxes of $20,177) $ 3,513,275 Interest 87,472 ------ 3,600,747 Expenses Management fees $ 1,865,430 Service fees - Class A 420,942 Service and distribution fees - Class B 980,467 Service and distribution fees - Class C 96,235 Trustees' fees and expenses 14,969 Accounting and administrative 94,310 Custodian 69,971 Transfer agent - Class A, Class B, Class C 705,095 Transfer agent - Class Y 5,862 Audit and tax services 19,425 Legal 13,805 Printing 24,238 Registration 37,001 Miscellaneous 18,572 ------ Total expenses before reductions 4,366,322 Less reductions (92,176) 4,274,146 ------- --------- Net investment income (loss) (673,399) -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on Investments - net 870,429 Unrealized appreciation (depreciation) on investments - net (29,381,071) ----------- Net gain (loss) on investment transactions (28,510,642) ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (29,184,041) ===================
See accompanying notes to financial statements. 12 STATEMENT OF CHANGES IN NET ASSETS ================================================================================ (unaudited) YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 2000 ---------------------------- FROM OPERATIONS Net investment income (loss) ........................................... $ 998,681 $ (673,399) Net realized gain (loss) on investments ................................ 100,407,049 870,429 Unrealized appreciation (depreciation) on investments .................. (52,996,051) (29,381,071) ----------- ----------- Increase (decrease) in net assets from operations ...................... 48,409,679 (29,184,041) ---------- ----------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ........................................................... (1,056,821) 0 Class Y ........................................................... (55,735) 0 In excess of net investment income Class A ........................................................... (49,021) 0 Class Y ........................................................... (2,585) 0 Net realized gain on investments Class A ........................................................... (57,051,170) 0 Class B ........................................................... (33,147,376) 0 Class C ........................................................... (4,191,359) 0 Class Y ........................................................... (2,192,903) 0 ---------- - (97,746,970) 0 ----------- - INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................ 207,032,451 (66,928,135) ----------- ----------- Total increase (decrease) in net assets ........................................ 157,695,160 (96,112,176) NET ASSETS Beginning of the period ........................................... 475,797,351 633,492,511 ----------- ----------- End of the period ................................................. $ 633,492,511 $ 537,380,335 =============== =============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the period ................................................. $ (21,416) $ (694,815) =============== ===============
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period. (unaudited) CLASS A - -------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, - -------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------------- ------ Net Asset Value, Beginning of the Period ..................... $ 12.41 $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income ............. 0.18 0.13 0.07(b) 0.04 0.08 0.00(c) Net Realized and Unrealized Gain (Loss) on Investments ............. 4.01 2.07 4.40 3.29 1.40 (0.67) ------- ------- ------- ------- ------- ------- Total From Investment Operations .. 4.19 2.20 4.47 3.33 1.48 (0.67) ------- ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income (0.18) (0.13) (0.06) (0.01) (0.06) 0.00 Distributions From Net Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00 Distributions in Excess of Net Investment Income .......... 0.00 0.00 0.00 0.00 0.00(c) 0.00 ------- ------- ------- ------- ------- ------- Total Distributions ............... (2.21) (2.72) (2.99) (2.11) (2.72) 0.00 ------- ------- ------- ------- ------- ------- Net Asset Value, End of the Period ................. $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33 $ 14.66 ======= ======= ======= ======= ======= ======= Total Return (%)(a) ............... 35.1 17.2 33.4 23.9 9.5 (4.4) Ratio of Operating Expenses to Average Net Assets (%) ............ 1.38 1.30 1.25 1.23 1.21 1.27(d) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ............ 1.38 1.30 1.25 1.23 1.21 1.24(d)(e) Ratio of Net Investment Income to Average Net Assets (%) ............ 1.31 0.92 0.46 0.33 0.48 0.04(d) Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82 Net Assets, End of the Period (000) $150,693 $166,963 $220,912 $304,139 $375,676 $321,981
(a) A sales charge is not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) Amount is less than $0.01 per share. (d) Computed on an annualized basis. (e) The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. The rebates are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 14 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period. (unaudited) CLASS B - -------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, - -------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------------- ------ Net Asset Value, Beginning of the Period ..................... $ 12.42 $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) ...... 0.10 0.03 (0.05)(b) (0.05) (0.04) 0.00(c) Net Realized and Unrealized Gain (Loss) on Investments ............. 4.01 2.07 4.40 3.24 1.36 (0.72) ------- ------- ------- ------- ------- ------- Total From Investment Operations .. 4.11 2.10 4.35 3.19 1.32 (0.72) ------- ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income (0.10) (0.04) (0.01) 0.00 0.00 0.00 Distributions From Net Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00 Distributions in Excess of Net Investment Income ............. 0.00 0.00 0.00 0.00 0.00(c) 0.00 ------- ------- ------- ------- ------- ------- Total Distributions ............... (2.13) (2.63) (2.94) (2.10) (2.66) 0.00 ------- ------- ------- ------- ------- ------- Net Asset Value, End of the Period $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03 $14.31 ======= ======= ======= ======= ======= ====== Total Return (%)(a) ............... 34.3 16.3 32.4 23.1 8.6 (4.8) Ratio of Operating Expenses to Average Net Assets (%) ............ 2.11 2.05 2.00 1.98 1.96 2.02(d) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ............ 2.11 2.05 2.00 1.98 1.96 1.99(d)(e) Ratio of Net Investment Income to Average Net Assets (%) ............ 0.56 0.17 (0.29) (0.42) (0.27) (0.71)(d) Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82 Net Assets, End of the Period (000) $29,026 $46,856 $81,066 $153,369 $216,457 $182,564
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) Amount is less than $0.01 per share. (d) Computed on an annualized basis. (e) The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. The rebates are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period. (unaudited) CLASS C - -------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, - -------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------------- ------ Net Asset Value, Beginning of the Period ........................ $ 13.84 $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) ...... 0.06 0.04 (0.05)(d (0.04) (0.04) 0.00 Net Realized and Unrealized Gain (Loss) on Investments ........ 2.58 2.05 4.42 3.21 1.36 (0.72) ------- ------- ------- ------- ------- ------- Total From Investment Operations .. 2.64 2.09 4.37 3.17 1.32 (0.72) ------- ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income (0.06) (0.04) (0.01) 0.00 0.00 0.00 Distributions From Net Realized Capital Gains ............ (2.03) (2.59) (2.93) (2.10) (2.66) 0.00 Distributions in Excess of Net Investment Income .......... 0.00 0.00 0.00 0.00 0.00(e) 0.00 ------- ------- ------- ------- ------- ------- Total Distributions ............... (2.09) (2.63) (2.94) (2.10) (2.66) 0.00 ------- ------- ------- ------- ------- ------- Net Asset Value, End of the Period $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01 $ 14.29 ======= ======= ======= ======= ======= ======= Total Return (%)(c) ............... 20.2 16.3 32.6 22.9 8.6 (4.8) Ratio of Operating Expenses to Average Net Assets (%) ......... 2.11(b) 2.05 2.00 1.98 1.96 2.02(b) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ............ 2.11(b) 2.05 2.00 1.98 1.96 1.99(b)(f) Ratio of Net Investment Income to Average Net Assets (%) ......... 0.56(b) 0.17 (0.29) (0.42) (0.27) (0.71)(b) Portfolio Turnover Rate (%) ....... 69 127 103 114 133 82 Net Assets, End of the Period (000) $ 4,707 $ 3,912 $ 6,735 $18,288 $26,983 $22,113
(a) Commencement of operations. (b) Computed on an annualized basis. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (e) Amount is less than $0.01 per share. (f) The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. The rebates are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 16 FINANCIAL HIGHLIGHTS ================================================================================ For a share outstanding throughout each period. (unaudited) CLASS Y ------------------------------------- NOVEMBER 18,(A) YEAR SIX MONTHS THROUGH ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1999 2000 ------------------------------------- Net Asset Value, Beginning of the Period $15.42 $16.57 $15.36 ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) 0.02 0.02 0.00 Net Realized and Unrealized Gain (Loss) on Investments 1.22 1.51 (0.65) ---- ---- ----- Total From Investment Operations 1.24 1.53 (0.65) ---- ---- ----- Less Distributions Dividends From Net Investment Income (0.02) (0.08) 0.00 Distributions From Net Realized Capital Gains (0.07) (2.66) 0.00 Distributions in Excess of Net Investment Income 0.00 0.00(d) 0.00 ---- ---- ---- Total Distributions (0.09) (2.74) 0.00 ----- ----- ---- Net Asset Value, End of the Period $16.57 $15.36 $14.71 ====== ====== ====== Total Return (%)(c) 8.1 9.8 (4.2) Ratio of Operating Expenses to Average Net Assets (%) 0.98(b) 0.96 1.55(b)(e) Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) 0.98(b) 0.96 1.52(b) Ratio of Net Investment Income to Average Net Assets (%) 0.58(b) (0.73) (0.24)(b) Portfolio Turnover Rate (%) 114 133 82 Net Assets, End of the Period (000) $ 1 $14,377 $10,723
(a) Commencement of operations. (b) Computed on an annualized basis. (c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not annualized. (d) Amount is less than $0.01 per share. (e) The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. The rebates are used to reduce operating expenses of the Fund. See accompanying notes to financial statements. 17 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. The Fund is a series of Nvest Funds Trust II (the "Trust"), a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks opportunities for long-term growth of capital and income. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. 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 prior to May 1, 1997). Class C shares do not pay a front end sales charge and do not convert to any other class of shares, but they do pay a higher ongoing distribution fee than Class A shares and may be subject to a contingent deferred sales charge if those shares are redeemed within one year. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro rata by the holders of each class 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 accounting principles generally accepted in the United States 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. Equity securities are valued on the basis of valuations furnished by a pricing service authorized by the Board of Trustees, which service provides the last reported sale price for securities listed on an applicable securities exchange or on the NASDAQ national market system, or, if no sale was reported and in the case of over-the-counter securities not so listed, the last reported bid price. 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 INVESTMENT INCOME. Security transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Interest income is increased by the accretion of discount. In determining net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. C. 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 18 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) gains, at least annually. Accordingly, no provision for federal income tax has been made. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from generally accepted accounting principles. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to capital accounts. E. 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, 2000 purchases and sales of securities (excluding short-term investments) were $465,432,797 and $530,798,402, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross management fees to its investment adviser Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.70% of the first $200 million of the Fund's average daily net assets, 0.65% of the next $300 million and 0.60% of such assets in excess of $500 million, reduced by the payment to the Fund's investment subadviser, Westpeak Investment Advisors, L.P. ("Westpeak") at the rate of 0.50% of the first $25 million of the Fund's average daily net assets, 0.40% of the next $75 million, 0.35% of the next $100 million and 0.30% of such assets in excess of $200 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Westpeak are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is a subsidiary of Metropolitan Life Insurance Company (Note 7). Fees earned by Nvest Management and Westpeak under the management and subadvisory agreements in effect during the six months ended June 30, 2000 are as follows: Fees Earned ----------- Nest Management $ 932,715 Westpeak 932,715 ------- $ 1,865,430 ============= The effective annualized management fee for the six months ended June 30, 2000 was 0.66%. B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the six months ended June 30, 2000, these expenses amounted to $94,310 and are shown separately in the financial statements as accounting and administrative. The effective annu- 19 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) alized accounting and administrative expense for the six months ended June 30, 2000 was 0.034%. c. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the six months ended June 30, 2000, the Fund paid NSC $527,174 as compensation for its services as transfer agent. D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest 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 shares, as reimbursement for expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by the Nvest Funds in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $ 420,942 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest 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 and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the six months ended June 30, 2000, the Fund paid Nvest Funds $245,117 and $24,059 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest 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 and Class C shares, as compensation for services provided and expenses (including certain payments to securities dealers, who may be affiliated with Nvest Funds) incurred by Nvest Funds in connection with the marketing or sale of Class B and Class C shares. For the six months ended June 30, 2000, the Fund paid Nvest Funds $735,350 and $72,176 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the six months ended June 30, 2000 amounted to $732,160. 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 Nvest Manaagement, Nvest Funds, Nvest, NSC or their affiliates. 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 20 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) $4,000. These fees are allocated to the various Nvest 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 been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. CAPITAL SHARES. At June 30, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows: YEAR ENDED SIX MONTHS DECEMBER 31, 1999 ENDED JUNE 30, 2000 CLASS A SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 11,472,939 $197,730,741 1,685,887 $ 24,809,753 Shares issued in connection with the reinvestment of: Dividends from net investment income 53,068 962,663 0 0 Distributions from net realized gain 3,434,246 51,752,162 0 0 --------- ---------- - - 14,960,253 250,445,566 1,685,887 24,809,753 Shares repurchased (8,811,484) (151,367,164) (4,215,529) (61,553,097) ---------- ------------ ---------- ----------- Net increase (decrease) 6,148,769 $ 99,078,402 (2,529,642) $(36,743,344) --------- ------------ ---------- ------------ YEAR ENDED SIX MONTHS DECEMBER 31, 1999 ENDED JUNE 30, 2000 CLASS B SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 5,249,461 $ 88,949,545 1,291,140 $ 18,557,301 Shares issued in connection with the reinvestment of: Distributions from net realized gain 2,070,562 30,607,517 0 0 --------- ---------- - - 7,320,023 119,557,062 1,291,140 18,557,301 Shares repurchased (2,288,012) (38,363,095) (2,936,326) (42,086,028) ---------- ----------- ---------- ----------- Net increase (decrease) 5,032,011 $ 81,193,967 (1,645,186) $(23,528,727) --------- ------------ ---------- ------------ YEAR ENDED SIX MONTHS DECEMBER 31, 1999 ENDED JUNE 30, 2000 CLASS C SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 999,688 $ 16,915,102 253,831 $ 3,633,718 Shares issued in connection with the reinvestment of: Distributions from net realized gain 247,673 3,657,804 0 0 ------- --------- - - 1,247,361 20,572,906 253,831 3,633,718 Shares repurchased (568,351) (9,465,865) (504,210) (7,223,630) -------- ---------- -------- ---------- Net increase (decrease) 679,010 $ 11,107,041 (250,379) $ (3,589,912) ------- ------------ -------- ------------
21 NOTES TO FINANCIAL STATEMENTS -- CONTINUED ================================================================================ For the Six Months Ended June 30, 2000 (unaudited) YEAR ENDED SIX MONTHS DECEMBER 31, 1999 ENDED JUNE 30, 2000 CLASS Y SHARES AMOUNT SHARES AMOUNT - ------- ------ ------ ------ ------ Shares sold 972,875 $ 16,586,441 88,872 $ 1,313,913 Shares issued in connection with the reinvestment of: Dividends from net investment income 3,202 58,080 0 0 ----- ------ - - Distributions from net realized gain 144,486 2,180,268 0 0 1,120,563 18,824,789 88,872 1,313,913 Shares repurchased (184,433) (3,171,748) (295,917) (4,380,065) -------- ---------- -------- ---------- Net increase (decrease) 936,130 $ 15,653,041 (207,045) $ (3,066,152) ------- ------------ -------- ------------ Increase (decrease) derived from capital shares transactions 12,795,920 $207,032,451 (4,632,252) $(66,928,135) ========== ============ ========== ============
5. LINE OF CREDIT. The Fund along with the other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 3, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected from time to time. In addition, the Funds are charged a facility fee equal to 0.08% per annum on the unused portion of the line of credit. The annual cost of maintaining the line of credit and the facility fee is apportioned pro rata among the participating Funds. There were no borrowings as of or during the six months ended June 30, 2000. 6. EXPENSE REDUCTIONS. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the six months ended June 30, 2000, the Fund's expenses were reduced by $ 92,176 under these agreements. 7. SUBSEQUENT EVENT. Nvest, L.P., and its affiliated operating partnership, Nvest Companies, L.P., have entered into an agreement for CDC Asset Management to acquire all of their outstanding partnership units. CDC Asset Management is the investment management arm of France's Caisse des Depots et Consignation, which is a major diversified financial institution. Nvest will be renamed CDC Asset Management-North America and it will continue to use the holding company structure. Nvest affiliates will retain their investment independence, brand names, management and operating autonomy. The transaction will not affect daily operations of the Nvest Funds or the investment management activities of the Funds' investment advisers or subadvisers. Consummation of the transaction with CDC is subject to a number of contingencies, including regulatory approvals and approval of the unitholders of Nvest, L.P. and Nvest Companies L.P. Under the rules for mutual funds the transaction may result in a change of control for the Nvest affiliates. Consequently, it is anticipated that the Nvest affiliates will seek approval of new agreements from the Board of Trustees and shareholders prior to the consummation of the transaction. The transaction is expected to close in the fourth quarter of 2000. 22 NVEST EQUITY INCOME FUND Supplement dated August 21, 2000 to Nvest Stock Funds Prospectus Class A, B and C dated May 1, 2000 Effective August 1, 2000, Margaret Buescher is the sole portfolio manager for the Fund. 23 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, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest 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 CHART THAT SHOWS INVESTMENTS OVER A 20 YEAR SPAN] 100 $200 $500 25 Years $91,236 $182,472 $456,181 Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds 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, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 24 NVEST FUNDS ================================================================================ LARGE-CAP EQUITY FUNDS GLOBAL/INTERNATIONAL EQUITY Capital Growth Fund Star Worldwide Fund Kobrick Growth Fund International Equity Fund Growth Fund Growth and Income Fund CORPORATE INCOME FUNDS Balanced Fund Short Term Corporate Income Fund Star Value Fund Bond Income Fund High Income Fund ALL-CAP EQUITY FUNDS Strategic Income Fund Star Advisers Fund Kobrick Capital Fund Bullseye Fund GOVERNMENT INCOME FUNDS Equity Income Fund Limited Term U.S. Government Fund Government Securities Fund SMALL-CAP EQUITY FUNDS Star Small Cap Fund MONEY MARKET FUNDS* Kobrick Emerging Growth Fund Cash Management Trust Tax Exempt Money Market Trust *Investments in the money market funds are not insured or gauranteed by the FDIC or any government agency. TAX-FREE INCOME FUNDS Municipal Income Fund Intermediate Term Tax Free Fund of California Massachusetts Tax Free Income Fund To learn more, and for a free prospectus, contact your financial representative. VISIT OUR WEB SITE AT WWW.NVESTFUNDS.COM Nvest Funds Distributor, L.P. 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. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest 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. [Nvest Funds Logo appears here] GP58-0600 Printed On Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----