-----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, PeYK5TTfS7AsvErgrrmkiSYuxfQE884aFHhWpLcaMPLl0qM6600D7DTPHJEiuIE6 1lK7ZJ5SbJC8BL+VkFw9Ew== 0000891554-00-000654.txt : 20000309 0000891554-00-000654.hdr.sgml : 20000309 ACCESSION NUMBER: 0000891554-00-000654 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000308 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: 563293 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 ANNUAL REPORT ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest High Income Fund Where The Best Minds Meet(R) - ----------------- December 31, 1999 - ----------------- ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST HIGH INCOME FUND ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] December 1989 through December 1999 Net Asset Maximum Sales Lehman High Value(1) Charge(2) Yield Composite(4) -------- --------- ------------------ 12/99 $23,409 $22,365 $27,870 12/98 22,481 21,470 27,219 12/97 22,884 21,854 26,728 12/96 19,839 18,946 23,701 12/95 17,266 16,489 21,135 12/94 15,447 14,752 17,735 12/93 15,975 15,257 17,916 12/92 13,710 13,094 15,299 12/91 11,843 11,310 13,217 12/90 8,678 8,287 9,041 12/89 10,000 9,550 10,000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B and C share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST HIGH INCOME FUND ================================================================================ Annual Total Returns -- 12/31/99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 2/22/84) 1 Year 5 Years 10 Years Net Asset Value(1),(4) 4.00% 8.66% 8.88% With Maximum Sales Charge(2),(4) -0.71 7.66 8.38 - -------------------------------------------------------------------------------- Class B (Inception 9/20/93) 1 Year 5 Years Since Inception Net Asset Value(1),(4) 3.34% 7.91% 6.27% With CDSC(3),(4) -1.35 7.63 6.27 - -------------------------------------------------------------------------------- Class C (Inception 3/2/98) 1 Year Since Inception Net Asset Value(1) 3.34% -0.40% With CDSC(3) 2.40 -0.40 - --------------------------------------------------------------------------------
Since Since Fund's Fund's Class B Class C Comparative Performance 1 Year 5 Years 10 Years Inception Inception Lehman High Yield Composite Index(5) 2.39% 9.31% 10.72% 7.85% 1.01% Morningstar High Yield Bond Average(6) 4.19 8.79 9.98 7.51 0.48 Lipper High Current Yield Average(7) 4.53 8.84 10.03 7.39 0.14
- -------------------------------------------------------------------------------- Notes to Charts These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. The Fund's current subadviser began managing the Fund on July 1, 1996. Results for earlier periods reflect performance under previous subadvisers. (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 4.50% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. With CDSC performance for Class C shares assumes a maximum 1.00% sales charge on redemptions within the first year of purchase. (4) Prior to the year ended December 31, 1997, the Fund waived certain fees and expenses. 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, noninvestment-grade, coupon-bearing bonds with an outstanding par value of at least $100 million. The Index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. (6) Morningstar High Yield Bond Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. (7) Lipper High Current Yield Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. 2 NVEST HIGH INCOME FUND ================================================================================ Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] Gary L. Goodenough Loomis Sayles & Company, L.P. Q. How did High Income Fund perform in 1999? Despite a volatile market environment, High Income Fund was able to outperform its market index and increase the monthly dividend rate. For the year ended December 31, 1999, the return on class A shares was 4.00% based on net asset value, compared with 2.39% for Lehman High Yield Composite Index. The Fund's return assumes dividends totaling $0.91 were reinvested during the year. Q. What was the investment environment like in 1999? The fixed-income markets endured their toughest year since 1994. Continuing inflation fears prompted the Federal Reserve Board to increase short-term interest rates by 0.25% on three separate occasions, causing prices of most types of bonds to fall. Meanwhile, a record flow of new corporate issues came to market, creating an abundance of supply at a time when there was relatively little demand, and putting further downward pressure on bond prices. Q. How did you manage the Fund in this difficult environment? In fact, the strength of the underlying economy has been a positive for your Fund because a climate of healthy corporate profits makes it easier for borrowers to repay debt. Moreover, Loomis Sayles' bond selection process involves careful research into individual issues, regardless of market conditions. Our research team follows a strict, bottom-up process, searching carefully for issues we believe combine high current yields with the potential for ratings upgrades. In the course of 1999, we found many suitable candidates in the broadcasting and telecommunication industries, which are benefiting from new technology and undergoing a period of rapid growth. At nearly 30% of Fund assets, these sectors comprised a significant portion of the portfolio as of the end of December. We believe the intense consolidation pressures at work in these sectors may provide many opportunities for credit upgrades. Two examples currently in your Fund's portfolio are NTL, Inc. and Nextel Partners, Inc. NTL is a British company active in cable TV, the Internet and telephone services. Nextel is a leading international wireless communication services company headquartered in Virginia. 3 NVEST HIGH INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- We also identified some attractive opportunities in the packaging industry. Two examples are Stone Container and Packaging Corporation of America, which performed well in a difficult market environment, benefiting from manufacturing efficiencies and a cyclical recovery in product pricing. Q. What other strategies worked well for the Fund? We maintained our significant exposure to "deferred-pay" securities, including zero coupon bonds and pay-in-kind securities. Together, they accounted for approximately 45% of Fund assets as of December 31, 1999. Offered at steep discounts, deferred-pay bonds do not pay current interest. Although they are strong performers in favorable markets, these issues tend to be less stable in poor markets. However, during 1999 deferred-pay securities outperformed current-pay instruments, primarily because of the heavy concentration of these issues in the rapidly consolidating telecom and cable sectors. In addition, cash reserves accounted for about 10% of the Fund's assets at the end of December -- among its highest levels in the past 3 1/2 years. The number of new high-yield bond issues tends to dwindle toward the close of every year. Conse-quently, the proceeds of portfolio sales over the past several months generated reserves which are ready to be redeployed as we identify promising opportunities in the new year. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Portfolio Mix--12/31/99 Cash 10.0% Ba 6.5% B 68.4% Caa or lower 11.5% Other 3.6% Portfolio holdings and asset allocation will vary. Source: Moody's Investors Service 4 NVEST HIGH INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Country Mix--12/31/99 United States 85.7% Mexico 10.5% United Kingdom 3.8% Q. What about my Fund's foreign investments? Foreign bonds accounted for 14% of the portfolio at the end of December, up slightly from mid year. Although they entail increased risks, foreign bonds often provide higher yields than domestic issues of the same credit risk and rating. We are able to limit risks resulting from currency fluctuations by investing only in dollar-denominated bonds. What's more, when we invest abroad, we apply the same stringent investment criteria as we do domestic issues. Two of our favorite holdings during the year were Grupo Televisa, the world's largest Spanish-language media company, and Alestra, a Mexican long-distance phone company that is 49% owned by AT&T. Q. What is your outlook for the high-yield market? The underlying strength of the U.S. economy leads us to believe that the Federal Reserve Board may continue their upward pressure on interest rates early in the year. However, we don't expect the market environment in the coming year to be as unforgiving to fixed-income investments as it was in 1999. Moreover, we expect the global economic recovery to continue and corporate profits to remain strong. Overall, we believe the generous yields and attractive return potential of high-yield bonds make them a desirable component of well-diversified investment portfolios. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in the manager's opinion may result in strategic and other portfolio changes. High Income Fund invests in high-yielding securities as well as foreign and emerging market securities which involve special risks. The principal value and interest on Treasury securities are guaranteed by the U.S. government if held to maturity. While high-yield bonds may offer higher current income than Treasury securities and high-grade corporate bonds, they are also associated with greater than average risk. These risks may increase share-price volatility. As of December 31, 1999, the Fund also owned zero coupon bonds and pay-in-kind securities, which are issued at a significant discount and pay interest at maturity. The prices of these bonds may be more sensitive to changes in interest rates. Also, since the Fund is required to distribute income on a current basis, the Fund might have to sell other investments to raise cash needed to make distributions. 5 PORTFOLIO COMPOSITION =============================================================================== - -------------------------------------------------------------------------------- Investments as of December 31, 1999 Bonds and Notes -- 78.2% of Total Net Assets
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ Auto Parts--5.2% $ 7,300,000 Advance Holding Corp., 0/12.875%, 4/15/2009 (d) ..................... Caa2 B- $ 3,869,000 4,000,000 CSK Auto, Inc., 11.000%, 11/01/2006 ................................. B2 B 4,080,000 ----------- 7,949,000 ----------- Broadcasting--9.5% 7,000,000 Century Communications Corp., 144A, Zero Coupon, 1/15/2008 .......... B1 BB- 3,106,250 9,000,000 Charter Communications Holdings, 0/9.920% 4/01/2011 (d) ............. B2 B+ 5,321,250 9,390,000 Fox Family Worldwide, Inc., 0/10.25%, 11/01/2007 (d) ................ B1 B 6,173,925 ----------- 14,601,425 ----------- Electrical Equipment--1.8% 2,750,000 Motors & Gears, Inc., 10.750%, 11/15/2006 ........................... B3 B 2,743,125 ----------- Energy--1.8% 2,700,000 Swift Energy Co., 10.250%, 8/01/2009 ................................ B2 B- 2,733,750 ----------- Entertainment--1.3% 6,000,000 AMF Bowling Worldwide, Inc., 0/12.250%, 3/15/2006 (d) ............... Caa2 CCC+ 2,017,500 ----------- Equipment Leasing--2.9% 2,700,000 United Rentals, Inc., 9.000%, 4/01/2009 ............................. B1 BB- 2,565,000 2,000,000 United Rentals, Inc., 9.250%, 1/15/2009 ............................. B1 BB- 1,930,000 ----------- 4,495,000 ----------- Foreign Issues--14.3% 1,500,000 Alestra S.A., 144A, 12.125%, 5/15/2006 .............................. B2 BB- 1,511,250 5,000,000 Alestra S.A., 144A, 12.625%, 5/15/2009 .............................. B2 BB- 5,050,000 3,250,000 Altos Hornos de Mexico S.A., 11.875%, 4/30/2004 (e) (f) ............. Caa3 D 1,340,625 5,000,000 Dolphin Telecom PLC, 0/14.000% 5/15/2009 (d) ........................ Caa1 B- 2,375,000 3,400,000 Euramax International PLC, 11.250%, 10/01/2006 ...................... B3 B 3,502,000 4,500,000 Grupo Televisa S.A., 0/13.250%, 5/15/2008 (d) ....................... Ba2 BB 4,106,250 6,500,000 TFM S.A., 0/11.750%, 6/15/2009 (d) .................................. B2 B+ 4,176,250 ----------- 22,061,375 ----------- Industrials--11.7% 3,000,000 Allied Waste North America, Inc., 144A, 10.000%, 8/01/2009 .......... Caa2 B+ 2,700,000 5,330,000 Continental Global Group, Inc., 11.000%, 4/01/2007 .................. B2 B- 2,811,575 3,000,000 Formica Corporation, 10.875%, 3/01/2009 ............................. B3 B- 2,775,000 11,000,000 Huntsman ICI Chemicals, 144A, Zero Coupon, 12/31/2009 ............... B3 B+ 3,368,750 6,315,000 Stone Container Corp., 12.250%, 4/01/2002 ........................... B3 B- 6,354,469 ----------- 18,009,794 ----------- Publishing--1.5% 4,000,000 Liberty Group Publishing, Inc., 0/11.625%, 2/01/2009 (d) ............ -- CCC+ 2,250,000 -----------
See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ Restaurants--3.4% $ 809,342 Advantica Restaurant Group, Inc., 11.250%, 1/15/2008 ................ B2 B $ 602,960 4,750,000 Dominos, Inc., 10.375%, 1/15/2009 ................................... B3 B- 4,595,625 ----------- 5,198,585 ----------- Retail--2.7% 4,250,000 Mothers Work, Inc., 12.625%, 8/01/2005 .............................. B3 B 4,228,750 ----------- Telecommunication--20.2% 1,500,000 Intermedia Communications, Inc., 0/11.250%, 7/15/2007 (d) ........... B2 B 1,102,500 6,500,000 Intermedia Communications, Inc., 0/12.250%, 3/01/2009 (d) ........... B3 CCC+ 3,900,000 8,000,000 Nextel Partners, Inc., 0/14.000%, 2/01/2009 (d) ..................... B3 CCC+ 5,400,000 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 1,552,500 3,000,000 NTL, Inc., 0/9.750%, 4/01/2008 (d) .................................. B3 B- 2,085,000 3,500,000 NTL, Inc., 11.500%, 10/01/2008 ...................................... B3 B- 3,815,000 1,715,000 RCN Corp., 0/11.250%, 10/15/2007 (d) ................................ B3 B- 1,213,363 7,890,000 RCN Corp., 0/9.800%, 2/15/2008 (d) .................................. B3 B- 5,207,400 2,400,000 Williams Communications Corp., 10.700%, 10/01/2007 .................. B2 BB- 2,529,000 ----------- 31,119,963 ----------- Utilities--1.9% 2,976,066 Panda Funding Corp., 11.625%, 8/20/2012 ............................. Ba3 BB- 2,990,946 ----------- Total Bonds and Notes (Identified Cost $131,650,915) ................ 120,399,213 ----------- Common Stock--0.0% Shares - ------------------------------------------------------------------------------------------------------------------------------- 1,750 Ameriking, Inc. (f) ................................................. 17,500 1,237 Mothers Work, Inc. (f) .............................................. 14,380 ----------- Total Common Stock (Identified Cost $81,073) ........................ 31,880 ----------- Preferred Stock--11.1% - ------------------------------------------------------------------------------------------------------------------------------- 3,355 Adelphia Business Solutions, Inc., 12.875%, 10/15/07 (pay-in-kind) .. 3,354,608 106,977 Ameriking, Inc. 13.000%, 12/01/08 (pay-in-kind) ..................... 1,952,322 150,152 Anvil Holdings, Inc., 13.000%, 3/15/09 (pay-in-kind) ................ 750,762 34,443 CSC Holdings, Inc., 11.125%, 4/01/01 (pay-in-kind) .................. 3,771,511 51,600 Liberty Group Publishing, Inc., 14.750%, 2/01/10 (pay-in-kind) ...... 1,032,002 30,737 Nebco Evans Holding Co., 11.250%, 3/01/08 (pay-in-kind) ............. 345,791 46,556 Packaging Corporation of America., 12.375%, 04/01/10 (pay-in-kind) .. 5,121,175 15,000 Superior National Capital Trust, 10.750%, 12/01/17 .................. 678,750 ----------- Total Preferred Stock (Identified Cost $22,581,592) ................. 17,006,921 -----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Short Term Investment--9.8%
Principal Amount Description Value (a) - --------------------------------------------------------------------------------------------------------- $ 15,127,000 Repurchase Agreement with State Street Bank & Trust Co. dated 12/31/1999 at 2.500% to be repurchased at $15,130,151 on 01/03/2000, collateralized by $14,965,000 U.S. Treasury B at 6.750% due 08/15/2026 with a value of $15,384,955 ........... $ 15,127,000 ------------- Total Short Term Investments (Identified Cost $15,127,000) ....... 15,127,000 ------------- Total Investments--99.1% (Identified Cost $169,440,580) (b) ...... 152,565,014 Other assets less liabilities .................................... 1,379,613 ------------- Total Net Assets--100% ........................................... $ 153,944,627 ============= (a) See Note 1a of Notes to the Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized depreciation on investments based on cost for federal income tax purposes of $169,441,138 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost ................ $ 2,259,586 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............. (19,135,710) ------------- Net unrealized depreciation ...................................... $ (16,876,124) ============= 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 December 31, 1999. 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 December 31, 1999. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) 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 $15,736,250 or 10.2% of net assets.
See accompanying notes to financial statements. 8 STATEMENT OF ASSETS & LIABILITIES ================================================================================ December 31, 1999
ASSETS Investments at value (Identified cost $169,440,580) ................................................ $152,565,014 Cash ............................................................................................... 32 Investment held as collateral for loaned securities ................................................ 12,974,620 Receivable for: Fund shares sold ................................................................................. 146,824 Dividends and interest ........................................................................... 2,259,252 ------------ 167,945,742 LIABILITIES Payable for: Collateral on securities loaned, at value ....................................................... $12,974,620 Securities purchased ............................................................................ 197,812 Fund shares redeemed ............................................................................ 369,050 Dividends declared .............................................................................. 285,390 Accrued expenses: Management fees ................................................................................. 91,995 Deferred trustees' fees ......................................................................... 10,113 Accounting and administrative ................................................................... 7,789 Other ........................................................................................... 64,346 ----------- 14,001,115 ------------ NET ASSETS .......................................................................................... $153,944,627 ============ Net Assets consist of: Capital paid in .................................................................................. 177,691,297 Overdistributed net investment income ............................................................ (344,417) Accumulated net realized gains (losses) .......................................................... (6,526,687) Unrealized appreciation (depreciation) on investments ............................................ (16,875,566) ------------ NET ASSETS .......................................................................................... $153,944,627 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($74,588,969/8,988,448 shares of beneficial interest) ........................................... $ 8.30 ======= Offering price per share (100/95.50 of $8.30) ....................................................... $ 8.69* ======= Net asset value and offering price of Class B shares ($70,217,666/8,455,155 shares of beneficial interest) ........................................... $ 8.30** ======= Net asset value and offering price of Class C shares ($9,137,992/1,100,862 shares of beneficial interest) ............................................. $ 8.30** =======
* 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 ================================================================================ Year Ended December 31, 1999
INVESTMENT INCOME Dividends ........................................................... $ 2,158,257 Interest ............................................................ 15,640,977 Securities lending income ........................................... 21,856 ------------- 17,821,090 Expenses Management fees .................................................. $1,085,124 Service and distribution fees - Class A .......................... 191,143 Service and distribution fees - Class B .......................... 689,945 Service and distribution fees - Class C .......................... 95,684 Trustees' fees and expenses ...................................... 9,378 Accounting and administrative .................................... 50,720 Custodian ........................................................ 83,378 Transfer agent ................................................... 215,159 Audit and tax services ........................................... 38,140 Legal ............................................................ 6,360 Printing ......................................................... 29,629 Registration ..................................................... 54,560 Insurance ........................................................ 1,910 Miscellaneous .................................................... 16,578 --------- Total expenses ...................................................... 2,567,708 ------------- Net investment income ............................................... 15,253,382 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net ............................ (5,350,213) Unrealized appreciation (depreciation) on investments - net .......... (4,841,831) ------------- Net gain (loss) on investment transactions ........................... (10,192,044) ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ................. $5,061,338 =============
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended December 31, --------------------------------------- 1998 1999 ------------- -------------- FROM OPERATIONS Net investment income .......................................................... $ 12,173,210 $ 15,253,382 Net realized gain (loss) on investments ........................................ 335,405 (5,350,213) Net unrealized appreciation (depreciation) on investments ...................... (15,898,625) (4,841,831) ------------- -------------- Increase (decrease) in net assets from operations .............................. (3,390,010) 5,061,338 ------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ...................................................................... (7,027,707) (7,920,629) Class B ...................................................................... (4,862,222) (6,647,632) Class C ...................................................................... (325,721) (921,961) In excess of net investment income Class A ..................................................................... 0 (68,380) Class B ..................................................................... 0 (57,390) Class C ..................................................................... 0 (7,960) ------------- -------------- 12,215,650) (15,623,952) ------------- -------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ......................................... 51,542,773 23,429,833 ------------- -------------- Total increase (decrease) in net assets .......................................... 35,937,113 12,867,219 NET ASSETS Beginning of the year .......................................................... 105,140,295 141,077,408 ------------- -------------- End of the year ................................................................ $ 141,077,408 $ 153,944,627 ============= ============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ............................................................... $ 93,225 $ (344,417) ============= ==============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------------------------------------------------------------------- Net Asset Value, Beginning of the Year $ 8.89 $ 8.98 $ 9.42 $ 9.94 $ 8.86 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income 0.88 0.84 0.87 0.92 0.89 Net Realized and Unrealized Gain (Loss) on Investments 0.13 0.44 0.52 (1.08) (0.54) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations 1.01 1.28 1.39 (0.16) 0.35 ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income (0.88) (0.83) (0.87) (0.92) (0.90) Distributions in Excess of Net Investment Income (0.04) (0.01) 0.00 0.00 (0.01) ---------- ---------- ---------- ---------- ---------- Total Distributions (0.92) (0.84) (0.87) (0.92) (0.91) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30 ========== ========== ========== ========== ========== Total Return (%) (a) 11.8 14.9 15.4 (1.8) 4.0 Ratio of Operating Expenses to Average Net Assets (%) (b) 1.60 1.53 1.36 1.32 1.28 Ratio of Net Investment Income to Average Net Assets (%) 9.71 9.32 9.03 9.81 10.22 Portfolio Turnover Rate 30 134 99 75 89 Net Assets, End of the Year (000) $ 39,148 $ 42,992 $ 62,739 $ 73,023 $ 74,589 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 -- -- --
See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS ================================================================================
Class B -------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------------------------------------------------------------------- Net Asset Value, Beginning of the Year ................. $ 8.88 $ 8.98 $ 9.42 $ 9.93 $ 8.85 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income .................................. 0.83 0.79 0.80 0.85 0.82 Net Realized and Unrealized Gain (Loss) on Investments .......................................... 0.13 0.42 0.51 (1.08) (0.53) ------- ------- ------- ------- ------- Total From Investment Operations ....................... 0.96 1.21 1.31 (0.23) 0.29 ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income ................... (0.81) (0.76) (0.80) (0.85) (0.83) Distributions in Excess of Net Investment Income ....... (0.05) (0.01) 0.00 0.00 (0.01) ------- ------- ------- ------- ------- Total Distributions .................................... (0.86) (0.77) (0.80) (0.85) (0.84) ------- ------- ------- ------- ------- Net Asset Value, End of the Year ....................... $ 8.98 $ 9.42 9.93 $8.85 $ 8.30 ======= ======= ======= ======= ======= Total Return (%) (a) ................................... 11.2 14.1 14.4 (2.5) 3.3 Ratio of Operating Expenses to Average Net Assets (%) (b) ....................................... 2.25 2.19 2.11 2.07 2.03 Ratio of Net Investment Income to Average Net Assets (%) ........................................... 8.96 8.33 8.28 9.06 9.47 Portfolio Turnover Rate ................................ 30 134 99 75 89 Net Assets, End of the Year (000) ...................... $10,625 $17,767 $42,401 $60,322 $70,218 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 -- -- --
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================
Class C ----------------------------- March 2(a) Year through Ended December 31, December 31, 1998 1999 ------------ ------------ Net Asset Value, Beginning of the Period ....................................... $ 9.96 $ 8.85 ------ ------ Income From Investment Operations Net Investment Income .......................................................... 0.69 0.82 Net Realized and Unrealized Gain (Loss) on Investments ......................... (1.08) (0.53) ------ ------ Total From Investment Operations ............................................... (0.39) 0.29 ------ ------ Less Distributions Dividends From Net Investment Income ........................................... (0.72) (0.83) Distributions in Excess of Net Investment Income ............................... 0.00 (0.01) ------ ------ Total Distributions ............................................................ (0.72) (0.84) ------ ------ Net Asset Value, End of the Period ............................................. $ 8.85 $ 8.30 ====== ====== Total Return (%) (b) ........................................................... (4.1) 3.3 Ratio of Operating Expenses to Average Net Assets (%) .......................... 2.07(c) 2.03 Ratio of Net Investment Income to Average Net Assets (%) ....................... 9.06(c) 9.47 Portfolio Turnover Rate ........................................................ 75 89 Net Assets, End of the Period (000) ............................................ $7,732 $9,138
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. See accompanying notes to financial statements. 14 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999. 1. Significant Accounting Policies. The Fund is a series of Nvest Funds Trust II (formerly known as New England Funds Trust II), a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The 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 Year Ended December 31, 1999. 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 reclassification to paid in capital. 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 year ended December 31, 1999 purchases and sales of securities (excluding short-term investments) were $132,495,367 and $125,821,459, 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"), formerly known as Nvest Investment Companies, L.P., which is a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees earned by Nvest Management and Loomis Sayles under the management agreements in effect during the year ended December 31, 1999 are as follows: Fees Earned ----------- Nvest Management $ 542,562 Loomis Sayles 542,562 The effective management fee for the year ended December 31, 1999 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 reimburses NSC for all or part of NSC's expenses of providing these services which include the following: (i) expenses for personnel 16 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999. performing bookkeeping, accounting, and financial reporting functions and related clerical functions relating to the Fund, and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999 these expenses amounted to $50,720 and are shown separately in the financial statements as accounting and administrative. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service 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 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 year ended December 31, 1999, the Fund paid Nvest Funds $191,143 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 year ended December 31, 1999, the Fund paid Nvest Funds $172,486 and $23,921 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 year ended December 31, 1999, the Fund paid Nvest Funds $517,459 and $71,763 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 year ended December 31, 1999 amounted to $713,307. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as a sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $160,652 as compensation for its services in that capacity. 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 Year Ended December 31, 1999. 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 December 31, 1999 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 December 31, ------------------------------------------------------------------ 1998 1999 ------------------------------- ------------------------------- Class A Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ................................................. 4,316,954 $ 41,369,578 2,776,755 $ 24,331,756 Shares issued in connection with the reinvestment of: Distributions from net investment income ................ 489,352 4,590,373 596,642 5,169,476 ------------ ------------ ------------ ------------ 4,806,306 $ 45,959,951 3,373,397 $ 29,501,232 Shares repurchased .......................................... (2,875,199) (27,066,913) (2,630,575) (22,779,736) ------------ ------------ ------------ ------------ Net increase (decrease) ..................................... 1,931,107 $ 18,893,038 742,822 $ 6,721,496 ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------------ 1998 1999 ------------------------------- ------------------------------- Class B Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ................................................. 3,594,978 $ 34,287,485 3,309,644 $ 29,017,220 Shares issued in connection with the reinvestment of: Distributions from net investment income ................ 220,663 2,062,737 307,591 2,663,895 ------------ ------------ ------------ ------------ 3,815,641 $ 36,350,222 3,617,235 $ 31,681,115 Shares repurchased .......................................... (1,271,423) (11,923,785) (1,975,114) (17,078,385) ------------ ------------ ------------ ------------ Net increase (decrease) ..................................... 2,544,218 $ 24,426,437 1,642,121 $ 14,602,730 ------------ ------------ ------------ ------------
18 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999.
For the Period March 2, 1998(a) Year Ended through December 31, 1998 December 31, 1999 ------------------------------- ------------------------------- Class C Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ............................................. 950,221 $ 8,920,617 490,356 $ 4,353,871 Shares issued in connection with the reinvestment of: Distributions from net investment income ............ 20,306 184,670 62,774 533,304 ------------ ------------ ------------ ------------ 970,527 $ 9,105,287 553,130 $ 4,887,175 Shares repurchased ...................................... (97,105) (881,989) (325,690) (2,781,568) ------------ ------------ ------------ ------------ Net increase (decrease) ................................. 873,422 $ 8,223,298 227,440 $ 2,105,607 ------------ ------------ ------------ ------------ Increase derived from capital shares transactions ........... 5,348,747 $ 51,542,773 2,612,383 $ 23,429,833 ============ ============ ============ ============
(a) Commencement of operations. 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 4, 1999. 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 year ended December 31, 1999. 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 December 31, 1999 the Fund had on loan securities having a market value of $12,663,040 collateralized by cash in the amount of $12,974,620 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 December 31, 1999: Mexico 10.5% and United States 85.7%. 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. 19 REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest High Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest High Income Fund (formerly the New England High Income Fund) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 20 NVEST FUND ================================================================================ 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- HP56-1299 [LOGO] Printed on Recycled Paper ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Short Term Corporate Income Fund Where The Best Minds Meet(R) - ----------------- December 31, 1999 - ----------------- ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and 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 (Inception) through December 1999 Lehman Mutual Net Asset Maximum Sales Fund Short (1-5) Value(1) Charge(2) Grade Debt Index(5) -------- --------- ------------------- 1999 $14,407 $13,978 $17,015 1998 14,143 13,719 16,602 1997 13,594 13,186 15,436 1996 12,802 12,418 14,389 1995 12,096 11,734 13,689 1994 11,139 10,804 11,962 1993 11,047 10,716 12,000 1992 10,613 10,294 11,058 1991 10,113 9,809 10,279 10/18/91 10,000 9,700 10,000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B and C share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ Average Annual Total Returns -- 12/31/99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 10/18/91) 1 Year 5 Years Since Inception Net Asset Value(1,4) 1.87% 5.28% 4.55% With Maximum Sales Charge(2,4) -1.24 4.65 4.17 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1,4) 1.12% 4.50% 3.56% With CDSC(3,4) -3.69 4.18 3.56 - -------------------------------------------------------------------------------- Class C (Inception 12/7/98) 1 Year Since Inception Net Asset Value(1,4) 1.20% 1.38% With CDSC(3,4) 0.24 1.38
- ------------------------------------------------------------------------------------------------------------- Since Since Since Fund's Fund's Fund's Class A Class B Class C Comparative Performance 1 Year 5 Years Inception Inception Inception LB Mutual Fund Short (1-5) Inv. Grade Debt Index(5) 2.49% 7.30% 6.72% 5.88% 2.49% Morningstar Short Term Bond Average(6) 2.14 6.09 5.55 4.75 2.13 Lipper Short Term Investment Grade Avg.(7) 2.81 5.95 5.59 4.88 2.81 - -------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 3.00% at the time of purchase of Class A shares. Actual historical performance would have been higher; the Fund's sales charge was increased from 1.00% to 3.00% on December 1, 1998 when its objective and strategy changed. The Fund was formerly Adjustable Rate U.S. Government Fund. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. With CDSC performance for Class C shares assumes a maximum 1.00% sales charge on redemptions within the first 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. The index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. Class 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 an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class 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 an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Inc., an independent mutual fund ranking service. Class 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 Manager - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] Scott Nicholson Richard Raczkowski Back Bay Advisors, L.P. Q. How did the Fund perform during the year ending December 31, 1999? Short Term Corporate Income Fund generated a total return of 1.87% (based on the net asset value of Class A shares) for the 12 months ending December 31, 1999. The Fund's return included $0.42 per share in dividend distributions reinvested during the period. By comparison, your Fund's benchmark, the Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index, had an average return of 2.49% for the same period. Q. What was the investment environment like for the bond market during the period? Very difficult. During the first quarter of 1999, the market rebounded from problems caused by the Asian financial crisis. However, continued strength in the U.S. economy and concerns that the Federal Reserve Board would raise short-term interest rates sent the market reeling, starting in May 1999. As we worked our way into the fall, the corporate bond market staggered because of two Fed rate hikes in June and August, as well as near-historic levels of newly issued corporate bonds. Corporate bonds suffered from the negative effects of higher interest rates, and corporate bond performance relative to Treasury securities was further dampened by this glut of new issuance. In addition, concerns related to potential Y2K computer glitches led to problems for non-Treasury sectors through the first half of the year. Many investors sought the most liquid investments -- Treasuries -- in anticipation of the beginning of the new year. However, starting in late August, non-Treasury securities enjoyed a renaissance. Corporate bonds bounced back relative to Treasuries because new issuance in September was much smaller than anticipated. When the Fed hiked short-term interest rates one more time in November, investors were temporarily heartened that rates might have reached a plateau. However, those hopes were dashed in December, which turned out to be a terrible month for interest rates and the Treasury market. Corporate bonds continued to outperform Treasuries -- and did so for the year -- but also lost value due to rising interest rates. 3 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What strategies did you use during the second half of 1999? With the new millennium on the horizon, Y2K concerns remained a strong influence on the market and our strategy. Due to concerns related to liquidity, or the ease of trading securities, we upgraded the quality of the portfolio in favor of more liquid securities. That included a moderate increase in the Fund's holdings of Treasuries. Corporate bonds remained the Fund's largest sector allocation, but the percentage of investments dedicated to corporate bonds decreased slightly. To improve quality and liquidity we dramatically reduced the Fund's stake in Yankee bonds -- dollar-denominated bonds issued in the U.S. by foreign banks and corporations. In addition, we traded smaller issues that we felt were more difficult to sell for larger issues that we believed would offer enhanced liquidity over the transition to the year 2000. We did not highlight any particular industries within the Fund's corporate holdings, although we moved a portion of assets into asset-backed securities -- bonds backed by payments from credit cards or other debt financing such as vehicle loans. Overall, we invested in industries that would be less adversely affected by rising interest rates because we were concerned that rates may go higher. For the most part, that meant we were less than enthusiastic about finance and bank securities, because the margins the companies earn on their loans have contracted in the rising interest rate environment. In addition, we shortened the Fund's duration -- a measure of its sensitivity to changes in interest rates. By doing so, we hoped to further insulate the Fund from the negative effects of rising interest rates. The percentage of the Fund dedicated to agency and mortgage-backed securities stayed about the same over the latter half of the year. 4 NVEST SHORT TERM CORPORATE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Portfolio Mix -- 12/31/99 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Corporate & Other Bonds and Notes 82.7% Federal Agencies 10.3% U.S. Government 5.7% Short Term and Other 1.3% Portfolio holdings and asset allocation will vary. Q. What is your outlook? We are cautious. Corporate bonds remain attractively valued and seem poised to continue their recovery relative to Treasuries through the first quarter of 2000. At the same time, we are concerned about continued Fed rate hikes. The economy is steaming along, but inflation remains subdued. The corporate bond market would be hurt significantly if the Fed implements an extended series of rate hikes throughout 2000. Corporations took on a substantial amount of debt in 1998 and 1999. As long as the economy remains strong, without a sizable rise in rates, corporate bonds should do well. But if rates rise and the economy slows, some very real credit concerns could arise. That's another reason why we enhanced the credit quality of the portfolio. The 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. The Fund invests in foreign securities. Investing in foreign securities involves special risks. The Fund invests in mortgage- or asset-backed securities, which are subject to pre-payment risk. The principal value and interest on Treasury securities are guaranteed by the U.S. government if held to maturity. While lower rated, higher yielding bonds may offer higher current income than Treasuries, they also are associated with greater than average risk. Government guarantees apply to individual securities only and not to prices and yields of shares in a managed portfolio. Bond funds will fluctuate and shares, when redeemed, may be worth more or less than their original cost. These risks may increase share price volatility. See the Fund's prospectus for details. Note to shareholders: Effective May 1999, Richard Raczkowski joined Scott Nicholson as a portfolio manager on the Fund. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of December 31, 1999 Bonds and Notes -- 98.7% of Total Net Assets
Ratings (c) (unaudited) ------------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------ Asset Backed--6.6% $ 2,150,000 EQCC Home Equity Loan Trust, 6.847%, 1/15/2028 .................. -- AAA $ 2,078,771 1,000,000 Green Tree Financial Corp., 6.670%, 7/15/2030 ................... -- AAA 994,680 2,000,000 WFS Financial Owner Trust, 6.320%, 10/20/2003 ................... Aaa AAA 1,974,501 ----------- 5,047,952 ----------- Banks--6.4% 1,500,000 BankAmerica Corp., 6.625%, 6/15/2004 ............................ Aa2 A+ 1,466,490 1,500,000 First Union Corp., 6.950%, 11/01/2004 ........................... A2 A 1,475,789 2,000,000 Wells Fargo & Co., 6.625%, 7/15/2004 ............................ Aa3 A+ 1,956,918 ----------- 4,899,197 ----------- Computer Software & Services--3.2% 1,500,000 Ceridian Corp., 7.250%, 6/01/2004 ............................... Baa3 BBB 1,451,228 1,000,000 Sun Microsystems, Inc., 7.000%, 8/15/2002 ....................... Baa1 BBB+ 995,909 ----------- 2,447,137 ----------- Consumer Goods & Services--2.6% 2,000,000 Black & Decker Corp., 6.625%, 11/15/2000 ........................ Baa2 BBB 1,996,898 ----------- Electric Utilities--12.7% 2,837,220 East Coast Power LLC, 144A, 6.737%, 3/31/2008 ................... Baa3 BBB- 2,671,521 2,500,000 Houston Lighting & Power Co., 8.150%, 5/01/2002 ................. A3 A- 2,546,358 1,675,672 Kansas Gas & Electric Co., 6.760%, 9/29/2003 .................... Baa1 BBB 1,643,110 3,000,000 Texas Utilities Co., 5.940%, 10/15/2001 ......................... Baa3 BBB 2,950,740 ----------- 9,811,729 ----------- Federal Agencies--10.3% 429,601 Federal Home Loan Mortgage Corp., 6.560%, 12/1/2022 (d) ......... Aaa AAA 430,542 1,377,514 Federal Home Loan Mortgage Corp. Series 1603, Class NA, 7.200%, 10/15/2023 (d) (e) ...................................... Aaa AAA 1,377,514 219,344 Federal Home Loan Mortgage Corp., 7.210%, 12/1/2025 (d) ......... Aaa AAA 223,321 564,253 Federal Home Loan Mortgage Corp., 7.220%, 3/1/2025 (d) .......... Aaa AAA 569,630 320,289 Federal National Mortgage Association, 5.620%, 9/1/2023 (d) ..... Aaa AAA 309,329 232,459 Federal National Mortgage Association, 6.290%, 6/1/2019 (d) ..... Aaa AAA 229,372 716,543 Federal National Mortgage Association, 6.440%, 1/1/2020 (d) ..... Aaa AAA 708,037 224,747 Federal National Mortgage Association, 6.620%, 5/1/2020 (d) ..... Aaa AAA 227,698 159,991 Federal National Mortgage Association, 6.700%, 8/1/2017 (d) ..... Aaa AAA 161,816 302,644 Federal National Mortgage Association, 6.800%, 7/1/2023 (d) ..... Aaa AAA 303,958 430,378 Federal National Mortgage Association, 6.890%, 5/1/2025 (d) ..... Aaa AAA 437,841 927,954 Federal National Mortgage Association, 7.060%, 1/1/2024 (d) ..... Aaa AAA 954,345 2,000,000 Federal National Mortgage Association, 7.100%, 10/18/2004 (d) ... Aaa AAA 1,981,560 ----------- 7,914,963 ----------- Finance--16.2% 1,000,000 CIT Group, Inc., 5.570%, 12/08/2003 ............................. A1 A+ 939,020 1,000,000 Conseco, Inc., 7.600%, 6/21/2001 ................................ Baa3 BBB+ 998,863 2,000,000 Conseco, Inc., 7.875%, 12/15/2000 ............................... Baa3 BBB+ 1,999,761 1,500,000 Finova Capital Corp., 7.250%, 11/08/2004 ........................ Baa1 A- 1,483,598
See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Bonds and Notes -- continued
Ratings (c) (unaudited) ------------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------ $ 2,700,000 Ford Motor Credit Co., 6.446%, 7/16/2002 ........................ A1 A+ $ 2,705,061 1,850,000 General Motors Acceptance Corp., 6.875%, 7/15/2001 .............. A2 A 1,847,964 2,500,000 Lehman Brothers Holdings, Inc., 6.375%, 3/15/2001 ............... A3 A 2,478,697 ----------- 12,452,964 ----------- Food & Beverages--3.1% 2,500,000 Aramark Services, Inc., 6.750%, 8/01/2004 ....................... Baa3 BBB- 2,382,152 ----------- Industrials--3.3% 2,600,000 Lockheed Martin Corp., 6.850%, 5/15/2001 ........................ Baa3 BBB- 2,580,490 ----------- Machinery--2.6% 2,000,000 John Deere Capital Corp., 7.000%, 10/15/2002 .................... A2 A+ 1,993,744 ----------- Pollution Control--3.2% 2,500,000 WMX Technologies, Inc., 6.650%, 5/15/2005 ....................... Ba1 BBB 2,482,318 ----------- Retail - Department Store--4.4% 2,000,000 Dayton Hudson Corp., 6.400%, 2/15/2003 .......................... A3 A- 1,948,344 1,400,000 Federated Department Stores, Inc., 8.500%, 6/15/2003 ............ Baa1 BBB+ 1,444,692 ----------- 3,393,036 ----------- Retail - Food & Drug--9.5% 2,700,000 Dole Foods, Inc., 6.750%, 7/15/2000 ............................. Baa2 BBB- 2,695,242 3,000,000 Nabisco, Inc., 6.125%, 2/01/2033 ................................ Baa2 BBB 2,869,527 2,000,000 Rite Aid Corp., 144A, 5.500%, 12/15/2000 ........................ B1 BB 1,755,000 ----------- 7,319,769 ----------- Telecommunication--6.4% 3,000,000 Sprint Capital Corp., 5.875%, 5/01/2004 ......................... Baa1 BBB+ 2,847,831 2,000,000 Worldcom, Inc., 8.875%, 1/15/2006 ............................... A3 A- 2,085,567 ----------- 4,933,398 ----------- U.S. Government--5.7% 500,000 United States Treasury Notes, 5.875%, 9/30/2002 ................. Aaa AAA 494,920 1,350,000 United States Treasury Notes, 6.250%, 10/31/2001 ................ Aaa AAA 1,350,216 2,500,000 United States Treasury Notes, 6.625%, 6/30/2001 ................. Aaa AAA 2,514,050 ----------- 4,359,186 ----------- Yankee--2.5% 2,000,000 PDVSA Finance, Ltd., 144A, 8.750%, 2/15/2004 .................... A3 -- 1,951,537 ----------- Total Bonds and Notes (Identified Cost $77,727,892) ............. 75,966,470 ----------- Total Investments--98.7% (Identified Cost $ 77,727,892) (b) ..... 75,966,470 Other assets less liabilities ................................... 998,455 ----------- Total Net Assets--100% .......................................... $76,964,925 ===========
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 - -------------------------------------------------------------------------------- (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized depreciation on investments based on cost for federal income tax purposes of $77,730,369 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ....................................... $ 23,342 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ..................................... (1,787,241) ------------ Net unrealized depreciation ........................... $ (1,763,899) ============ 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 December 31, 1999. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 1999. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) 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 December 31, 1999. (e) Collateralized mortgage obligation. 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 $6,378,058 or 8.3% of the net assets. See accompanying notes to financial statements. 8 STATEMENT OF ASSETS & LIABILITIES ================================================================================ December 31, 1999 ASSETS Investments at value (Identified Cost $77,727,892) ................................. $ 75,966,470 Cash ............................................................................... 110,013 Receivable for: Fund shares sold ............................................................... 50,253 Dividends and interest ......................................................... 1,119,646 Due from investment adviser ........................................................ 7,588 ------------ 77,253,970 LIABILITIES Payable for: Fund shares redeemed ........................................................... $ 128,711 Dividends declared ............................................................. 82,344 Accrued expenses: Deferred trustees' fees ........................................................ 14,418 Accounting and administrative .................................................. 6,960 Other expenses ................................................................. 56,612 ------------ 289,045 ------------ NET ASSETS .............................................................................. $ 76,964,925 ============ Net assets consist of: Capital paid in ................................................................ $ 96,755,349 Overdistributed net investment income .......................................... (84,533) Accumulated net realized gains (losses) ........................................ (17,944,469) Unrealized appreciation (depreciation) on investments .......................... (1,761,422) ------------ NET ASSETS .............................................................................. $ 76,964,925 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($72,679,971/10,369,546 shares of beneficial interest) ............................. $ 7.01 ======= Offering price per share (100/97 of $7.01) ......................................... $ 7.23* ======= Net asset value and offering price of Class B shares ($3,795,861/542,273 shares of beneficial interest) ................................. $ 7.00** ======= Net asset value and offering price of Class C shares ($489,093/69,887 shares of beneficial interest) .................................... $ 7.00** =======
* 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 ================================================================================ Year Ended December 31, 1999 INVESTMENT INCOME Interest ....................................................... $ 5,660,167 ----------- Expenses Management fees ............................................ $ 472,893 Service fees - Class A ..................................... 204,810 Service and distribution fees - Class B .................... 36,457 Service and distribution fees - Class C .................... 4,278 Trustees' fees and expenses ................................ 8,894 Accounting and administrative .............................. 34,629 Custodian .................................................. 78,632 Transfer agent ............................................. 132,746 Audit and tax services ..................................... 30,680 Legal ...................................................... 2,572 Printing ................................................... 13,068 Registration ............................................... 44,131 Miscellaneous .............................................. 12,034 ----------- Total expenses ................................................. 1,075,824 Less expenses waived by the investment adviser and subadviser .. (443,277) 632,547 ----------- ----------- Net investment income .......................................... 5,027,620 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments -- net ...................... (1,915,031) Unrealized appreciation (depreciation) on investments -- net .... (1,507,524) ----------- Net gain (loss) on investment transactions ..................... (3,422,555) ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ............... $ 1,605,065 ===========
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended Year Ended December 31, December 31, 1998 1999 ------------- ------------- FROM OPERATIONS Net investment income ....................................................... $ 10,720,940 $ 5,027,620 Net realized gain (loss) on investments ..................................... (2,163,351) (1,915,031) Unrealized appreciation (depreciation) on investments ....................... (1,383,310) (1,507,524) ------------- ------------- Increase (decrease) in net assets from operations ........................... 7,174,279 1,605,065 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................................................. (9,320,304) (4,845,836) Class B ................................................................. (145,098) (188,779) Class C ................................................................. (340) (22,276) ------------- ------------- (9,465,742) (5,056,891) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ......................................... (100,934,285) (16,246,001) ------------- ------------- Total increase (decrease) in net assets .......................................... (103,225,748) (19,697,827) ------------- ------------- NET ASSETS Beginning of the year ....................................................... 199,888,500 96,662,752 ------------- ------------- End of the year ............................................................. $ 96,662,752 $ 76,964,925 ============= ============= UNDISTRIBUTED (0VERDISTRIBUTED) NET INVESTMENT INCOME End of the year ............................................................. $ 15,910 $ (84,533) ============= =============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================
Class A -------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------------------------------------------------------------------------------- Net Asset Value, Beginning of the Year ....... $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss) ................. 0.47 0.43 0.47(c) 0.38 0.41 Net Realized and Unrealized Gain (Loss) on Investments ........................ 0.14 (0.01) (0.02) (0.09) (0.28) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............. 0.61 0.42 0.45 0.29 0.13 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ......... (0.44) (0.42) (0.43) (0.38) (0.42) ----------- ----------- ----------- ----------- ----------- Total Distributions .......................... (0.44) (0.42) (0.43) (0.38) (0.42) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............. $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01 =========== =========== =========== =========== =========== Total Return (%)(a) .......................... 8.6 5.8 6.2 4.0 1.9 Ratio of Operating Expenses to Average Net Assets (%)(b) ................... 0.66 0.70 0.70 0.70 0.70 Ratio of Net Investment Income to Average Net Assets (%) ...................... 6.29 6.39 6.27 5.93 5.88 Portfolio Turnover Rate (%) .................. 73 54 49 105 139 Net Assets, End of the Year (000) ............ $ 331,112 $ 222,809 $ 196,928 $ 92,669 $ 72,680 (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 the expense limitations described in Note 4 to the Financial Statements would have been (%) 0.94 0.89 0.98 1.05 1.22 (c) Per share net investment income does not reflect the period's reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements.
See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS ================================================================================
Class B ---------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------------------------------------------------------------------------- Net Asset Value, Beginning of the Year .......... $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29 --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income (Loss) .................... 0.41 0.37 0.41(c) 0.33 0.36 Net Realized and Unrealized Gain (Loss) on Investments ........................... 0.14 (0.02) (0.02) (0.09) (0.28) --------- --------- --------- --------- --------- Total From Investment Operations ................ 0.55 0.35 0.39 0.24 0.08 --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income ............ (0.38) (0.36) (0.37) (0.33) (0.37) --------- --------- --------- --------- --------- Total Distributions ............................. (0.38) (0.36) (0.37) (0.33) (0.37) --------- --------- --------- --------- --------- Net Asset Value, End of the Year ................ $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00 --------- --------- --------- --------- --------- Total Return (%)(a) ............................. 7.8 4.9 5.4 3.4 1.1 Ratio of Operating Expenses to Average Net Assets (%)(b) ...................... 1.41 1.45 1.45 1.45 1.45 Ratio of Net Investment Income to Average Net Assets (%) ......................... 5.54 5.64 5.52 5.18 5.13 Portfolio Turnover Rate (%) ..................... 73 54 49 105 139 Net Assets, End of the Year (000) ............... $ 2,368 $ 2,821 $ 2,961 $ 3,761 $ 3,796 (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 the expense limitations described in Note 4 to the Financial Statements would have been (%) 1.65 1.69 1.73 1.80 1.97 (c) Per share net investment income does not reflect the period's reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements. See accompanying notes to financial statements.
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================
Class C -------------------------------- December 7, 1998(a) through Year Ended December 31, December 31, 1998 1999 -------------------------------- Net Asset Value, Beginning of the Period ................ $ 7.28 $ 7.29 ------- ------- Income From Investment Operations Net Investment Income ................................... 0.01 0.36 Net Realized and Unrealized Gain (Loss) on Investments ........................................... 0.01(b) (0.28) ------- ------- Total From Investment Operations ........................ 0.02 0.08 ------- ------- Less Distributions Dividends From Net Investment Income .................... (0.01) (0.37) ------- ------- Total Distributions ..................................... (0.01) (0.37) ------- ------- Net Asset Value, End of the Period ...................... $ 7.29 $ 7.00 ======= ======= Total Return (%) (c) .................................... 0.3 1.2 Ratio of Operating Expenses to Average Net Assets (%) (d) 1.45(e) 1.45 Ratio of Net Investment Income to Average Net Assets (%) 5.18(e) 5.13 Portfolio turnover rate ................................. 105 139 Net Assets, End of the Period (000) ..................... $ 233 $ 489 (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) The ratio of operating expenses to average net assets without giving effect to the expense limitations described in Note 4 to the Financial Statements would have been (%) 1.80(e) 1.97 (e) Computed on an annualized basis.
See accompanying notes to financial statements. 14 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999 1. Significant Accounting Policies. The Fund is a series of Nvest Funds (formerly known as New England Funds) Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income 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 Year Ended December 31, 1999 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 year ended December 31, 1999 purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ---------------------------------- --------------------------------- U.S. Government Other U.S. Government Other -------------- -------------- -------------- ------------- $ 14,882,266 $ 100,517,112 $ 20,993,188 $ 107,930,118 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. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 1999 are as follows: Fees Earned (a) --------------- Nvest Management $ 236,447 Back Bay 236,446 (a) Before reduction pursuant to voluntary expense limitations. See Note 4. The effective management fee for the year ended December 31, 1999 was 0.55%. 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 reimburses NSC for all or part of NSC's expenses of providing these services which include the following: (i) expenses for personnel performing bookkeeping, accounting, financial reporting functions and clerical functions relating to the Fund, and (ii) expens- 16 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 es for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999 these expenses amounted to $34,629 and are shown separately in the financial statements as accounting and administrative. 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 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 year ended December 31, 1999, the Fund paid Nvest Funds $204,810 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 December 31, 1999 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 year ended December 31, 1999, the Fund paid Nvest Funds $9,114 and $1,070 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 year ended December 31, 1999, the Fund paid Nvest Funds $27,343 and $3,208 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 year ended December 31, 1999 amounted to $76,110. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as the sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $94,155 as compensation for its services in that capacity. 17 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 waive their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to limit the Fund's expenses to the annual rates of 0.70%, 1.45% and 1.45% of the average net assets of the Fund's Class A, B and C shares, respectively. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to this, 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 year ended December 31, 1999, Back Bay reduced its management fee of $236,446 by $221,639 and Nvest Management reduced its management fee of $236,447 by $221,638. 5. Capital Shares. At December 31, 1999 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 December 31, ------------------------------------------------------------ 1998 1999 ---------------------------- ---------------------------- Class A Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 9,823,863 $ 72,248,743 1,454,036 $ 10,417,593 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 744,999 5,472,019 488,060 3,486,240 ------------ ------------ ------------ ------------ 10,568,862 77,720,762 1,942,096 13,903,833 Shares repurchased .................................. (24,534,160) (179,732,109) (4,266,090) (30,605,047) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. (13,965,298) $(102,011,347) (2,323,994) $(16,701,214) ------------ ------------ ------------ ------------
18 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999
Year Ended December 31, ------------------------------------------------------------ 1998 1999 ---------------------------- ---------------------------- Class B Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 261,970 $ 1,920,476 235,614 $ 1,675,047 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 17,255 126,641 22,872 162,890 ------------ ------------ ------------ ------------ 279,225 2,047,117 258,486 1,837,937 Shares repurchased .................................. (164,137) (1,203,273) (232,265) (1,655,906) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 115,088 $ 843,844 26,221 $ 182,031 ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1998 1999 ---------------------------- ---------------------------- Class C Shares Amount Shares Amount - ------- ------------ ------------ ------------ ------------ Shares sold ......................................... 31,970 $ 233,136 111,022 $ 794,662 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 11 82 2,997 21,311 ------------ ------------ ------------ ------------ 31,981 233,218 114,019 815,973 Shares repurchased .................................. 0 0 (76,113) (542,791) ------------ ------------ ------------ ------------ Net increase (decrease) ............................. 31,981 $ 233,218 37,906 $ 273,182 ------------ ------------ ------------ ------------ Decrease derived from capital shares transactions ... (13,818,229) $(100,934,285) (2,259,867) $(16,246,001) ------------ ------------ ------------ ------------
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 year ended December 31, 1999 the Fund did not enter into any securities lending transactions. 7. 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 4, 1999. 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 year ended December 31, 1999. 19 REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Short Term Corporate Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Short Term Corporate Income Fund (formerly the New England Short Term Corporate Income Fund) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- SI56-1299 [LOGO] Printed on Recycled Paper ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Limited Term U.S. Government Fund Where The Best Minds Meet(R) - ----------------- December 31, 1999 - ----------------- ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and 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 CHART IN THE PRINTED MATERIAL.] December 1989 through December 1999 Lehman Intermediate Net Asset Maximum Sales Government Bond Value(1) Charge(2) Index(4) --------- -------------- ---------------- 12/99 $18,326 $17,773 $19,895 12/98 18,261 17,713 19,798 12/97 17,155 16,640 18,248 12/96 15,995 15,515 16,941 12/95 15,622 15,153 16,255 12/94 13,823 13,409 14,205 12/93 14,146 13,722 14,458 12/92 13,293 12,894 13,366 12/91 12,582 12,204 12,500 12/90 11,054 10,722 10,956 12/89 10,000 9,700 10,000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B, C and Y share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Average Annual Total Returns -- 12/31/99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 1/3/89) 1 Year 5 Years 10 Years Net Asset Value(1) -0.67% 5.59% 6.25% With Maximum Sales Charge(2) -3.64 4.94 5.92 - -------------------------------------------------------------------------------- Class B (Inception 9/27/93) 1 Year 5 Years Since Inception Net Asset Value(1) -1.41% 4.90% 3.28% With CDSC(3) -6.09 4.58 3.28 - -------------------------------------------------------------------------------- Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) -1.40% 4.72% 4.72% With CDSC(3) -2.34 4.72 4.72 - -------------------------------------------------------------------------------- Class Y (Inception 3/31/94) 1 Year 5 years Since Inception Net Asset Value(1) -0.32% 5.94% 5.10% - --------------------------------------------------------------------------------
Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. Lehman Interm. Gov't. Bond Index(4) 0.49% 6.93% 7.10% 5.24% 6.93% 6.02% Morningstar Short Gov't. Average(5) 1.59 5.78 6.29 4.44 5.83 5.00 Lipper Short Int. U.S. Gov't. Average(6) 0.64 6.00 6.47 4.36 6.00 5.07 - ---------------------------------------------------------------------------------------------------------------------------
These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. Class Y shares are available to certain institutional investors only. Notes to Charts These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. Class Y shares are available to certain institutional investors only. (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 3.00% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. With CDSC performance for Class C shares assumes a maximum 1.00% sales charge on redemptions within the first year of purchase. (4) Lehman Intermediate Government Bond Index is an unmanaged index of bonds issued by the U.S. government and its agencies having maturities between one and ten years. The index performance has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. Class B since inception return is calculated from 9/30/93. (5) Morningstar Short Government Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. (6) Lipper Short Intermediate U.S. Government Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. 2 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] Scott Nicholson, James Welch Members of management team, Back Bay Advisors, L.P. Q. How did Limited Term U.S. Government Fund perform during the year ending December 31, 1999? The Fund was negatively affected by dramatic increases in interest rates in 1999. Limited Term U.S. Government Fund generated a return of -0.67% (based on the net asset value of Class A shares) for the 12 months ending December 31, 1999. The Fund's return included $0.65 per share in dividend distributions reinvested during this period. By comparison, your Fund's benchmark, the Lehman Intermediate Government Bond Index, had an average return of 0.49% for the same period. Q. What was the investment environment like in 1999? Very difficult for bond investors. With the U.S. economy continuing to grow at a very robust pace, the Federal Reserve Board stepped in with a series of three interest-rate hikes, in an attempt to slow growth and head off inflation. As interest rates rise, bond prices fall, so all segments of the fixed-income market suffered price declines through much of the year. On top of that, non-Treasury sectors were hit hard in the summer. At that time, issuers came to market with new bonds in order to secure funding well in advance of the year 2000. Simultaneously, investors and money managers wanted to more heavily weight their portfolios in Treasury securities in advance of 2000, because Treasuries are more easily traded and carry the highest credit quality. Too much supply and not enough demand dampened the performance of non-Treasury securities. More recently, we've seen a recovery in the non-Treasury sectors of the bond market. Supply diminished considerably and, because the markets tend to be anticipatory, the closer we got to the turn of the millennium, the more comfortable investors became with non-Treasury bonds. 3 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ - -------------------------------------------------------------------------------- Q. How was the Fund managed in this investment environment? Earlier in the year, the Fund was positioned to take advantage of stable to lower interest rates because we felt that the global financial crisis would linger longer than it did. However, the Fed did an excellent job helping to restore stability to the markets. In addition, at that time the Fund carried a significant stake in corporate bonds. As it turned out, these moves were not helpful, given what transpired with rising interest rates and weakness in the corporate bond market. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Portfolio Mix -- 12/31/99 Government Agencies 51.7% U. S. Government 23.5% Short Term and Other 0.8% Corporate 18.9% Yankee 5.1% Portfolio holdings and asset allocation will vary. In the second half of the year, we reduced the Fund's corporate bond investments. We did so after the Fund realized gains from those investments due to that sector's modest recovery. In turn, we redeployed assets into sectors that tend to perform better on a relative basis when interest rates are rising. That included purchases in higher-coupon, mortgage-backed securities. These are bonds that require the mortgage holders to pay an interest rate that is higher than the current rate they would pay if they shopped for a new mortgage. Our feeling is that rates will continue to rise, and the higher-coupon mortgages -- with lower interest-rate sensitivity than alternatives in the market -- should insulate the Fund from price declines while offering attractive yields. We also reduced the Fund's investments in Treasury and U.S. government agency securities. Presently, the agency investments largely are made up of bonds -- not pools of mortgages -- issued by the Fannie Mae and Freddie Mac agencies. In addition, we initiated investments in an area where we had no exposure six 4 NVEST LIMITED TERM U.S. GOVERNMENT FUND ================================================================================ - -------------------------------------------------------------------------------- months ago, asset-backed securities. These are bonds backed by payments from credit cards or other financing, such as vehicle loans. We initiated this small position because the sector had declined in price, offered attractive yields, and appeared to be relatively immune to the negative effects of rising rates. Q. What is your outlook? We expect the Fed to raise short-term interest rates one or two more times over the next six months. Such a scenario should not catch the market by surprise, because bond yields have been priced as if rate increases are inevitable. With inflation still very much under control and signs that U.S. economic growth is moderating, just one or two more rate hikes could lay the groundwork for an improved environment for bonds in mid to late 2000. That's because real yields - -- stated yields adjusted for inflation -- remain attractive on an historical basis. The Fed remains committed to making sure that inflation doesn't become a problem. The rationale for a limited series of additional rate hikes would be to ensure that the economy slows to a level that is not so strong that it sparks inflation. That's good news for bond investors because inflation reduces the value of bonds' fixed payments. Looking more closely at the Fund, the non-Treasury sectors, despite their recent rebound, remain attractively priced. That's where we anticipate being able to find opportunities to realize total return in the upcoming months. The 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. The Fund invests in mortgage- or asset-backed securities, which are subject to prepayment risk. Treasury bills and U.S. government bonds fluctuate in value but they are guaranteed as to the timely payment of interest and, if held to maturity, provide a guaranteed return of principal. Government guarantees apply to individual securities only and not to prices and yields of shares in a managed portfolio. These risks may increase share price volatility. See the Fund's prospectus for details. Note to shareholders: Effective September 20, 1999, the Fund is managed by a management team from Back Bay Advisors. The management team consists of two or more portfolio managers who jointly manage the Fund's portfolio. Prior to this date, the Fund was managed by Scott Millimet. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of December 31, 1999 Bonds and Notes -- 99.2% of Total Net Assets
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ----------------------------------------------------------------------------------------------------------------------------------- Finance & Banking--16.2% $ 5,000,000 General Motors Acceptance Corp., 9.000%, 10/15/2002 ................ A2 A $ 5,232,208 8,000,000 Green Tree Financial Corp., 6.670%, 7/15/2030 ...................... -- AAA 7,957,440 5,500,000 Household Home Equity Loan Trust, 6.950%, 10/20/2023 ............... Aaa -- 5,478,517 5,000,000 Marsh & Mclennan Companies, Inc., 6.625%, 6/15/2004 ................ A2 AA- 4,888,301 6,000,000 Paine Webber Group, Inc., 6.375%, 5/15/2004 ........................ Baa1 BBB+ 5,726,465 ------------- 29,282,931 ------------- Government Agencies--51.7% 58,273 Federal Home Loan Mortgage Corp., 7.500%, 6/1/2026 ................. Aaa AAA 57,763 24,594 Federal Home Loan Mortgage Corp., 10.000%, 7/1/2019 ................ Aaa AAA 26,214 3,583,668 Federal Home Loan Mortgage Corp., 11.500%, with various maturities to 2020 (d) (e) ........................... Aaa AAA 3,904,533 10,000,000 Federal National Mortgage Association, 6.250%, 11/15/2002 .......... Aaa AAA 9,907,800 7,000,000 Federal National Mortgage Association, 6.500%, 8/15/2004 ........... Aaa AAA 6,912,500 4,179,211 Federal National Mortgage Association, 7.000%, 12/1/2022 ........... Aaa AAA 4,079,495 4,699,942 Federal National Mortgage Association, 7.500%, 6/1/2009 ............ Aaa AAA 4,729,316 4,995,549 Government National Mortgage Association, 6.500%, 3/15/2029 ........ Aaa AAA 4,687,973 40,125,854 Government National Mortgage Association, 7.000%, with various maturities to 2029 (d) ............................... Aaa AAA 38,777,338 18,778,149 Government National Mortgage Association, 8.000%, with various maturities to 2029 (d) ............................... Aaa AAA 18,965,931 64,401 Government National Mortgage Association, 12.500%, with various maturities to 2015 (d) ............................... Aaa AAA 72,804 735,992 Government National Mortgage Association, 16.000%, with various maturities to 2013 (d) ............................... Aaa AAA 868,910 290,528 Government National Mortgage Association, 17.000%, with various maturities to 2012 (d) ............................... Aaa AAA 342,373 ------------- 93,332,950 ------------- U.S. Government--23.5% 10,000,000 United States Treasury Bonds, 11.625%, 11/15/2002 .................. Aaa AAA 11,345,300 4,000,000 United States Treasury Bonds, 12.000%, 8/15/2013 ................... Aaa AAA 5,341,240 10,255,500 United States Treasury Notes, 3.875%, 1/15/2009 .................... Aaa AAA 9,909,377 4,500,000 United States Treasury Notes, 7.250%, 5/15/2004 .................... Aaa AAA 4,635,720 8,500,000 United States Treasury Notes, 8.000%, 5/15/2001 .................... Aaa AAA 8,697,485 7,000,000 United States Treasury Stripped Bond, Zero Coupon, 8/15/2015 ....... Aaa AAA 2,415,703 ------------- 42,344,825 ------------- Utilities--2.7% 5,000,000 West Penn Funding LLC Transition Bond, 6.630%, 12/26/2005 .......... Aaa AAA 4,965,625 -------------
See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION--continued ================================================================================ Investments as of December 31, 1999 Bonds and Notes -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ----------------------------------------------------------------------------------------------------------------------------------- Yankee--5.1% $ 6,960,000 Inter-American Development Bank Bonds,12.250%, 12/15/2008 ............. Aaa AAA $ 9,171,741 ------------- Total Bonds and Notes (Identified Cost $183,391,385) 179,098,072 ------------- Short Term Investment -- 0.1% - ----------------------------------------------------------------------------------------------------------------------------------- 190,000 Household Finance Corp. 4.000%, 1/03/2000 ............................. 189,958 ------------- Total Short Term Investment (Identified Cost $189,958) ................ 189,958 ------------- Total Investments--99.3% (Identified Cost $183,581,343)(b) ............ 179,288,030 Other assets less liabilities ......................................... 1,208,923 ------------- Total Net Assets--100% ................................................ $ 180,496,953 ============= (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized depreciation on investments based on cost for federal income tax purposes of $183,621,528 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost ............................................ $ 4,590 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ......................................... (4,338,088) ------------- Net unrealized depreciation ......................................................... $ (4,333,498) =============
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 December 31, 1999. 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 December 31, 1999. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) The Fund's investments in mortgage backed securities of the Federal Home Loan Mortgage Corporation and Government National Mortgage Association are interest 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 ($449,082 par) has been segregated as collateral in connection with the Fund's derivative investments during the year ended December 31, 1999. See accompanying notes to financial statements. 7 STATEMENT OF ASSETS & LIABILITIES ================================================================================ December 31, 1999 ASSETS Investments at value (Identified cost $183,581,343) ......................................... $179,288,030 Cash ........................................................................................ 3,291 Receivable for: Investments held as collateral for loaned securities .................................... 23,071,252 Fund shares sold ........................................................................ 124,491 Accrued interest ........................................................................ 1,745,024 Paydown receivable ...................................................................... 66,487 ------------ 204,298,575 LIABILITIES Payable for: Collateral on securities loaned, at value ............................................... $ 23,071,252 Fund shares redeemed .................................................................... 348,428 Dividends declared ...................................................................... 180,537 Accrued expenses: Management fees ......................................................................... 103,193 Deferred trustees' fees ................................................................. 18,074 Accounting and administrative ........................................................... 10,252 Other ................................................................................... 69,886 ------------ 23,801,622 ------------ NET ASSETS ....................................................................................... $180,496,953 ============ Net Assets consist of: Capital paid in ......................................................................... 231,470,560 Undistributed net investment income ..................................................... 104,851 Accumulated net realized gains (losses) ................................................. (46,785,145) Unrealized appreciation (depreciation) on investments ................................... (4,293,313) ------------ NET ASSETS ....................................................................................... $180,496,953 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($149,756,348/13,653,432 shares of beneficial interest) ..................................... $ 10.97 ======= Offering price per share (100/97 of $10.97) ...................................................... $ 11.31* ======= Net asset value and offering price of Class B shares ($14,600,943/1,333,085 shares of beneficial interest) ....................................... $ 10.95** ======= Net asset value and offering price of Class C shares ($9,054,063/826,119 shares of beneficial interest) .......................................... $ 10.96** ======= Net asset value, offering and redemption price of Class Y shares ($7,085,599/644,201 shares of beneficial interest) .......................................... $ 11.00 =======
* 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. 8 STATEMENT OF OPERATIONS ================================================================================ Year Ended December 31, 1999 INVESTMENT INCOME Interest .............................................................................. $ 15,057,093 Securities lending income ............................................................. 37,792 ------------ 15,094,885 Expenses Management fees ................................................................... $ 1,351,488 Service and distribution fees - Class A ........................................... 605,537 Service and distribution fees - Class B ........................................... 164,763 Service and distribution fees - Class C ........................................... 112,910 Trustees' fees and expenses ....................................................... 13,871 Accounting and administrative ..................................................... 64,717 Custodian ......................................................................... 119,012 Transfer agent .................................................................... 350,531 Audit and tax services ............................................................ 33,120 Legal ............................................................................. 7,867 Printing .......................................................................... 32,321 Registration ...................................................................... 52,816 Miscellaneous ..................................................................... 15,994 ------------ Total expenses ........................................................................ 2,924,947 ------------ Net investment income ................................................................. 12,169,938 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ................................................................. (10,284,081) Written options - net ............................................................. 1,022,298 Futures contracts - net ........................................................... 51,652 ------------ Total realized gain (loss) on investments,written options and futures contracts ... (9,210,131) ------------ Unrealized appreciation (depreciation) on: Investments - net ................................................................. (4,836,041) Written options - net ............................................................. (14,094) Futures contracts - net ........................................................... 83,298 ------------ Total unrealized appreciation (depreciation) on investments, written options and futures contracts ............................................. (4,766,837) ------------ Net gain (loss) on investment transactions ................................................. (13,976,968) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ...................................... $ (1,807,030) ============
See accompanying notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended December 31, --------------------------------- 1998 1999 ------------- ------------- FROM OPERATIONS Net investment income ................................................................... $ 14,143,473 $ 12,169,938 Net realized gain (loss) on investments, written options and futures contracts .......... 1,363,752 (9,210,131) Unrealized appreciation (depreciation) on investments, written options and futures contracts ............................................................... (153,856) (4,766,837) ------------- ------------- Increase (decrease) in net assets from operations ....................................... 15,353,369 (1,807,030) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................................................. (11,989,233) (9,933,189) Class B ............................................................................. (856,504) (840,673) Class C ............................................................................. (808,596) (573,411) Class Y ............................................................................. (389,906) (460,940) ------------- ------------- (14,044,239) (11,808,213) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................................. (26,061,543) (40,341,564) ------------- ------------- Total increase (decrease) in net assets .................................................... (24,752,413) (53,956,807) NET ASSETS Beginning of the year ................................................................... 259,206,173 234,453,760 ------------- ------------- End of the year ......................................................................... $ 234,453,760 $ 180,496,953 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ......................................................................... $ (158,555) $ 104,847 ============= =============
See accompanying notes to financial statements. 10 FINANCIAL HIGHLIGHTS ================================================================================
Class A ---------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year ................. $ 11.49 $ 12.10 $ 11.55 $ 11.64 $ 11.70 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .............................. 0.86 0.81 0.72 0.67 0.66 Net Realized and Unrealized Gain (Loss) on Investments ........................................ 0.59 (0.54) 0.09 0.06 (0.74) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ................... 1.45 0.27 0.81 0.73 (0.08) ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income ........... (0.84) (0.82) (0.72) (0.67) (0.65) ----------- ----------- ----------- ----------- ----------- Total Distributions ................................ (0.84) (0.82) (0.72) (0.67) (0.65) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ....................... $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97 =========== =========== =========== =========== =========== Total Return (%) (a) ............................... 13.0 2.4 7.3 6.5 (0.7) Ratio of Operating Expenses to Average Net Assets (%) ..................................... 1.22 1.25 1.28 1.31 1.33 Ratio of Net Investment Income to Average Net Assets (%) ..................................... 7.18 7.13 6.40 5.81 5.91 Portfolio Turnover Rate (%) ........................ 247 327 533 1,376 400 Net Assets, End of Year (000) ...................... $ 361,520 $ 276,178 $ 222,185 $ 194,032 $ 149,756
(a) A sales charge is not reflected in total return calculations. See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================
Class B --------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of Year ................. $ 11.48 $ 12.09 $ 11.54 $ 11.62 $ 11.69 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .............................. 0.76 0.73 0.65 0.60 0.59 Net Realized and Unrealized Gain (Loss) on Investments ...................................... 0.61 (0.54) 0.08 0.07 (0.75) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ................... 1.37 0.19 0.73 0.67 (0.16) ---------- ---------- ---------- ---------- ---------- Less Distributions Distributions From Net Investment Income ........... (0.76) (0.74) (0.65) (0.60) (0.58) ---------- ---------- ---------- ---------- ---------- Total Distributions ................................ (0.76) (0.74) (0.65) (0.60) (0.58) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year ....................... $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95 ========== ========== ========== ========== ========== Total Return (%) (a) ............................... 12.3 1.7 6.5 5.9 (1.4) Ratio of Operating Expenses to Average Net Assets (%) ................................... 1.87 1.90 1.93 1.96 1.98 Ratio of Net Investment Income to Average Net Assets (%) ................................... 6.53 6.48 5.75 5.16 5.26 Portfolio Turnover Rate (%) ........................ 247 327 533 1,376 400 Net Assets, End of Year (000) ...................... $ 18,056 $ 18,503 $ 16,060 $ 18,116 $ 14,601
(a) A contingent deferred sales charge is not reflected in total return calculations. See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS ================================================================================
Class C --------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of Year ........................ $ 11.48 $ 12.10 $ 11.54 $ 11.63 $ 11.70 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ..................................... 0.64 0.75 0.65 0.60 0.59 Net Realized and Unrealized Gain (Loss) on Investments ............................................... 0.64 (0.57) 0.09 0.07 (0.75) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations .......................... 1.28 0.18 0.74 0.67 (0.16) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ...................... (0.65) (0.74) (0.65) (0.60) (0.58) Distributions in Excess of Net Investment Income .......... (0.01) 0.00 0.00 0.00 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ....................................... (0.66) (0.74) (0.65) (0.60) (0.58) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year .............................. $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96 ========== ========== ========== ========== ========== Total Return (%) (a) ...................................... 11.4 1.6 5.9 6.6 (1.4) Ratio of Operating Expenses to Average Net Assets (%) ........................................... 1.87 1.90 1.93 1.96 1.98 Ratio of Net Investment Income to Average Net Assets (%) ................................................ 6.53 6.48 5.75 5.16 5.26 Portfolio Turnover Rate (%) ............................... 247 327 533 1,376 400 Net Assets, End of Year (000) ............................. $ 5,936 $ 14,903 $ 15,699 $ 13,962 $ 9,054
(a) A contingent deferred sales charge is not reflected in total return calculations.
Class Y ------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- Net Asset Value, Beginning of Year ................. $ 11.51 $ 12.13 $ 11.58 $ 11.66 $ 11.73 --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income .............................. 0.86 0.85 0.76 0.72 0.70 Net Realized and Unrealized Gain (Loss) on Investments ...................................... 0.63 (0.54) 0.08 0.06 (0.74) --------- --------- --------- --------- --------- Total From Investment Operations ................... 1.49 0.31 0.84 0.78 (0.04) --------- --------- --------- --------- --------- Less Distributions Distributions From Net Investment Income ........... (0.87) (0.86) (0.76) (0.71) (0.69) --------- --------- --------- --------- --------- Total Distributions ................................ (0.87) (0.86) (0.76) (0.71) (0.69) --------- --------- --------- --------- --------- Net Asset Value, End of Year ....................... $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00 ========= ========= ========= ========= ========= Total Return (%) ................................... 13.3 2.8 6.9 6.9 (0.3) Ratio of Operating Expenses to Average Net Assets (%) ................................... 0.87 0.90 0.93 0.96 0.98 Ratio of Net Investment Income to Average Net Assets (%) ................................... 7.53 7.48 6.75 6.16 6.26 Portfolio Turnover Rate (%) ........................ 247 327 533 1,351 400 Net Assets, End of Year (000) ...................... $ 5,723 $ 5,313 $ 5,262 $ 8,345 $ 7,086
See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999 1. Significant Accounting Policies. The Fund is a series of Nvest Funds (formerly known as New England 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 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 discount. 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 14 NOTES TO FINANCIAL STATEMENTS-- continued ================================================================================ For the Year Ended December 31, 1999 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 differences 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 paid in capital. 15 NOTES TO FINANCIAL STATEMENTS-- continued ================================================================================ For the Year Ended December 31, 1999 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 year ended December 31, 1999, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales - ----------------------------------- ------------------------------------ U.S. Government Other U.S. Government Other - --------------- ------------ --------------- ------------ $ 366,690,642 $456,566,667 $409,936,172 $436,787,408 Transactions in written options for the year ended December 31, 1999 are summarized as follows: Written Options ------------------------------- Number of Premiums Contracts Received ----------- ----------- Open at December 31, 1998 .............. (400) $ (214,094) Contracts opened ....................... (13,144) (7,107,574) Contracts closed ....................... 13,544 7,321,668 ----------- ----------- Open at December 31, 1999 .............. 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. Fees earned by Nvest Management and Back Bay Advisors under the management and subadvisory agreements in effect during the year ended December 31, 1999 are as follows: Fees Earned ----------- Nvest Management $ 675,744 Back Bay 675,744 The effective management fee for the year ended December 31, 1999 was 0.65%. 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 reimburses NSC for all or part of NSC's expenses of providing these services which include the following: (i) expenses for personnel performing bookkeeping, accounting, financial reporting functions and clerical functions relating to the Fund, and (ii) expenses 16 NOTES TO FINANCIAL STATEMENTS-- continued ================================================================================ For the Year Ended December 31, 1999 for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999 these expenses amounted to $64,717 and are shown separately in the financial statements as accounting and administrative. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted 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 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 year ended December 31, 1999, the Fund paid Nvest Funds $432,527 in service fees and $173,010 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 year ended December 31, 1999, the Fund paid Nvest Funds $41,191 and $28,228 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 year ended December 31, 1999, the Fund paid Nvest Funds $123,572 and $84,682 in distribution fees under the Class B and Class C Plans, respectively. 17 NOTES TO FINANCIAL STATEMENTS--continued ================================================================================ For the Year Ended December 31, 1999 Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds by investors in shares of the Fund during the year ended December 31, 1999 amounted to $224,696. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as a sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $263,497 as compensation for its services in that capacity. 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 December 31, 1999 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 December 31, ------------------------------------------------------------------- 1998 1999 ------------------------------- ------------------------------- Class A Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ................................................ 4,123,138 $ 48,268,685 4,310,455 $ 48,747,149 Shares issued in connection with the reinvestment of: Distributions from net investment income ................. 840,320 9,821,663 711,288 8,028,741 ------------- ------------- ------------- ------------- 4,963,458 58,090,348 5,021,743 56,775,890 Shares repurchased ......................................... (7,477,042) (87,458,802) (7,948,175) (89,760,622) ------------- ------------- ------------- ------------- Net increase (decrease) .................................... (2,513,584) $ (29,368,454) (2,926,432) $ (32,984,732) ------------- ------------- ------------- ------------- Year Ended December 31, ------------------------------------------------------------------- 1998 1999 ------------------------------- ------------------------------- Class B Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ................................................ 833,639 $ 9,747,616 470,492 $ 5,337,955 Shares issued in connection with the reinvestment of: Distributions from net investment income ................. 62,517 729,951 63,521 715,455 ------------- ------------- ------------- ------------- 896,156 10,477,567 534,013 6,053,410 Shares repurchased ......................................... (728,200) (8,484,510) (751,056) (8,497,037) ------------- ------------- ------------- ------------- Net increase (decrease) .................................... 167,956 $ 1,993,057 (217,043) $ (2,443,627) ------------- ------------- ------------- -------------
18 NOTES TO FINANCIAL STATEMENTS--continued ================================================================================ For the Year Ended December 31, 1999
Year Ended December 31, ------------------------------------------------------------------- 1998 1999 ------------------------------- ------------------------------- Class C Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ............................................. 2,387,115 $ 27,924,776 2,004,195 $ 22,667,643 Shares issued in connection with the reinvestment of: Distributions from net investment income ............. 55,475 647,654 39,746 448,945 ------------- ------------- ------------- ------------- 2,442,590 28,572,430 2,043,941 23,116,588 Shares repurchased ...................................... (2,598,863) (30,335,980) (2,411,539) (27,272,883) ------------- ------------- ------------- ------------- Net increase (decrease) ................................ (156,273) $ (1,763,550) (367,598) $ (4,156,295) ------------- ------------- ------------- ------------- Year Ended December 31, ------------------------------------------------------------------- 1998 1999 ------------------------------- ------------------------------- Class C Shares Amount Shares Amount - ------- ------------- ------------- ------------- ------------- Shares sold ............................................. 331,891 $ 3,916,548 131,028 $ 1,487,903 Shares issued in connection with the reinvestment of: Distributions from net investment income ............. 32,935 386,339 40,672 459,988 ------------- ------------- ------------- ------------- 364,826 4,302,887 171,700 1,947,891 Shares repurchased ...................................... (104,719) (1,225,483) (238,738) (2,704,801) ------------- ------------- ------------- ------------- Net increase (decrease) ................................. 260,107 $ 3,077,404 (67,038) $ (756,910) ------------- ------------- ------------- ------------- Increase (decrease) derived from capital shares transactions (2,241,794) $ (26,061,543) (3,578,111) $ (40,341,564) ============= ============= ============= =============
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 December 31, 1999 the Fund had on loan securities having a market value of $22,610,232 collateralized by cash in the amount of $23,071,252 which was invested in a short-term instrument. 19 REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Limited Term U.S. Government Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Limited Term U.S. Government Fund (formerly the New England Limited Term U.S. Government Fund) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- LT56-1299 [LOGO] Printed on Recycled Paper ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Massachusetts Tax Free Income Fund Where The Best Minds Meet(R) - ----------------- December 31, 1999 - ----------------- ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged, and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A shares December 1989 through December 1999 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Net Asset Maximum Sales Lehman Municipal Value(1) Charge(2) Bond Index(5) --------- ------------- ---------------- 12/99 $ 17,818 $ 17,062 $ 19,472 12/98 18,565 17,776 19,881 12/97 17,698 16,946 18,671 12/96 16,192 15,504 17,100 12/95 15,684 15,017 16,373 12/94 13,310 12,744 13,939 12/93 14,376 13,765 14,699 12/92 12,790 12,247 13,091 12/91 11,727 11,228 12,032 12/90 10,520 10,073 10,729 12/89 10,000 9,575 10,000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ Average Annual Total Returns -- 12/31/99 - -------------------------------------------------------------------------------- Class A (Inception 3/23/84) 1 Year 5 Years 10 Years Net Asset Value (1),(4) -4.12% 5.99% 5.95% With Maximum Sales Charge(2),(4) -8.22 5.08 5.49 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1),(4) -4.70% 5.30% 2.89% With CDSC(3),(4) -9.25 4.98 2.89 - -------------------------------------------------------------------------------- Since Fund's Class B Comparative Performance 1 Year 5 Years 10 Years Inception Lehman Municipal Bond Index(5) -2.06% 6.91% 6.89% 4.83% Morningstar Muni Single State Long Avg.(6) -4.51 5.86 6.16 3.60 Lipper MA Municipal Debt Average(7) -4.57 5.72 6.27 3.66 - -------------------------------------------------------------------------------- These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. Yields as of 12/31/99 - ------------------------------------------------------------------------------- Class A Class B SEC 30-day Yield(8) 5.25% 4.83% Taxable Equivalent Yield(9) 9.24 8.51 - -------------------------------------------------------------------------------- Notes to Charts (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 4.25% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. (4) The Fund waived certain fees and expenses during the period indicated and its average total return would have been lower had these fees not been waived. (5) Lehman Municipal Bond Index is an unmanaged index of bonds issued by states, municipalities and other government entities having maturities of more than one year. The performance of the index has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. Class B since inception return is calculated from 9/30/93. (6) Morningstar Muni Single State Long Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. (7) Lipper Massachusetts Municipal Debt Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. (8) SEC Yield is based on the Fund's net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. (9) Taxable equivalent yield is based on the maximum combined federal and MA income tax of 43.19%. A portion of income may be subject to federal, state or alternative minimum tax. Capital gains, if any, are subject to capital gains tax. 2 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] James Welch Back Bay Advisors, L.P. Q. How did Massachusetts Tax Free Income Fund perform over the past year? The return on shares of Massachusetts Tax Free Income Fund was -4.12% for Class A shares at net asset value for the 12 months ended December 31, 1999, assuming $0.86 per share in distributions reinvested during the year. Your Fund's performance, although disappointing, was in line with the average of its peer group of 56 Massachusetts municipal bond funds in Lipper's Massachusetts Municipal Debt Average, which returned -4.57% for the year. At the end of the period, your Fund's 30-day SEC yield for Class A shares was 5.25%, which is equivalent to a taxable yield of 9.24%, based on the maximum combined federal and Massachusetts state income tax rate of 43.19%. Q. What was the investment environment like for Massachusetts municipal bonds during the period? Rising interest rates continued to impact the fixed-income markets in 1999, as three interest rate hikes by the Federal Reserve Board depressed prices of all types of bonds, including municipals. Robust economic growth in Massachusetts, however, helped offset some of the effects of higher rates by generating higher tax revenues, which, in turn, increased cash flow and improved the fiscal health and creditworthiness of state and local governments. Moreover, municipal bonds continued to provide investors with attractive yields during the period. On an after-tax basis, AAA-rated municipal bonds produced higher yields than Treasuries. There were even times during the year when municipal bond yields exceeded Treasury yields on an absolute, before-tax basis. Q. Did supply and demand impact the Massachusetts municipal market? Supply that exceeded demand contributed to the underperformance of municipal securities, especially during the latter half of the period. 3 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Y2K concerns led many suppliers to accelerate municipal offerings -- bringing bond issues to market in 1999 rather than in the Year 2000 to avoid possible Y2K disruptions. Meanwhile, demand was lackluster as cautious investors stored cash in savings and short-term investments, awaiting the new year. [THE FOLLOWING TABLE IS REPRESENTED BY A PIE CHART IN THE THE PRINTED MATERIAL.] Credit Quality Composition -- 12/31/99 AAA 45.0% AA 9.1% A 17.7% BBB 14.3% BB 6.4% Not Rated 7.5% Quality is based on ratings provided by Standard & Poor's. Portfolio holding and asset allocation will vary. Q. What strategies did you use in managing the Fund? Throughout the period, we remained committed to three strategies. First, we sought to improve the yield profile of the portfolio. As interest rates gradually rose over the past 12 months, we sold lower yielding bonds in favor of higher yielding issues. Improving credit quality was our second, major strategy. As we added new positions to the portfolio, we emphasized higher quality bonds, sacrificing only minimal yield advantage. Finally, we sought to improve the overall call protection of the portfolio. Most municipal securities are "callable" 10 years from issuance. In other words, issuers can "call" a municipal bond 10 years from the date it is first offered, paying back the principal to bond owners. As their call date approaches, the market for these bonds tends to diminish. To boost the Fund's performance potential, we sold bonds nearing their call dates in favor of those with more distant call dates. General obligation bonds, which benefited from Massachusetts' solid economic growth and strong tax revenues, comprised a significant portion of the portfolio over the past six months -- a shift in focus from earlier in the year. 4 NVEST MASSACHUSETTS TAX FREE INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- We also maintained our emphasis on the education and housing sectors. Many of Massachusetts' colleges and universities have seen admissions, tuitions and endowments rise to record levels, while the housing sector continues to benefit from a healthy economy. We also found selected opportunities in the health care sector, although the industry as a whole continues to be volatile. Q. What is your outlook for Massachusetts municipal bonds over the next few months? Going forward, the wild card remains whether the Federal Reserve Board will raise short-term interest rates again in an effort to slow the economy and curb inflation. Higher rates, of course, would have a negative impact on prices of all types of bonds. However, we do not expect a full cycle of tightening from the Fed throughout the year. Rather, we believe any rate hikes will be limited to the first half. In fact, longer term, our outlook for municipal issues is favorable. Yields of tax-exempt bonds remain high compared to taxable securities. Investors who are looking for attractive income free from Massachusetts and federal income tax should continue to benefit from this outperformance. In addition, we expect solid economic growth to continue, helping maintain the fiscal health and creditworthiness of many municipalities. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period. A shift in the manager's opinion may result in strategic and other portfolio changes. Bond funds fluctuate in value and, when redeemed, may be worth more or less than their original cost. Massachusetts Tax Free Income Fund invests in a diversified mix of higher-yielding Massachusetts municipal bonds, including general obligation bonds and issues secured by specific revenue streams. While higher yielding bonds may offer higher current income than Treasury securities and high-grade corporate bonds, they are also associated with greater than average risk. These risks may increase share-price volatility. The principal value and interest on Treasury securities are guaranteed by the U.S. government if held to maturity. Government guarantees apply to individual securities only and not to prices and yields of shares in a managed portfolio. 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. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of December 31, 1999
Tax Exempt Obligations -- 99.8% of Total Net Assets Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ Guam--1.5% $ 1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/01/2010 .............. -- BBB $ 1,575,585 ----------- Massachusetts Municipal--8.1% 4,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA insured) ............. Aaa AAA 4,384,400 1,500,000 Wholesale Electric, 6.750%, 7/01/2008 ..................................... Baa2 BBB+ 1,571,040 2,500,000 Wholesale Electric, 6.750%, 7/01/2011 ..................................... Baa2 BBB+ 2,605,350 ----------- 8,560,790 ----------- Massachusetts State Development Finance Agency--9.9% 2,300,000 Boston University, Series P, 6.000%, 5/15/2029 ............................ A3 BBB+ 2,181,550 3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 .......................... -- -- 2,789,610 3,000,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/01/2019 .............. A2 -- 2,749,740 3,150,000 Revenue Bond, 5.900%, 11/01/2018 .......................................... Ba2 -- 2,844,986 ----------- 10,565,886 ----------- Massachusetts State Health & Education Facility Authority--34.8% 1,500,000 Beverly Hospital Rib, 7.270%, 6/18/2020, (MBIA insured)(d) ................ Aaa AAA 1,401,555 3,000,000 Boston University Rib, Series L, 9.335%, 10/01/2031, (MBIA insured)(d) ......................................................... Aaa AAA 3,214,350 1,750,000 Charlton Memorial Hospital, Series B, Pre-Refunded, 7.250%, 7/01/2013 ......................................................... -- A 1,852,078 3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 ............................... A1 A 2,960,250 945,000 Educational Loan Revenue Bond, Issue D-Series A, 7.250%, 1/01/2009, (AMBAC insured) ................................................ Aaa AAA 975,372 1,000,000 Faulkner Hospital, Series C, Pre-Refunded, 6.000%, 7/01/2013 .............. Baa1 -- 1,057,720 3,000,000 Harvard University, Series N, 6.250%, 4/01/2020 (f) ....................... Aaa AAA 3,170,310 800,000 Massachusetts State Industrial Finance Agency Variable Refunding Showa Womens Institute Inc., 4.500%, 3/15/2004 (e) ........................ Aaa AA+ 800,000 2,400,000 Medical Center of Central Mass., Class A, Pre-Refunded, 7.000%, 7/01/2012 ......................................................... A3 AAA 2,529,672 1,000,000 New England Baptist Hospital, Series B, Pre-Refunded, 7.300%, 7/01/2011 ......................................................... Baa1 AAA 1,059,050 1,220,000 New England Deaconess Hospital, Series D, Pre-Refunded, 6.875%, 4/01/2022, (AMBAC insured) ........................................ Aaa AAA 1,301,142 1,190,000 New England Medical Center, Series F, 6.625%, 7/01/2025, (FGIC insured) ................................................. Aaa AAA 1,218,405 6,000,000 Nichols College Issue, Series C, 6.000%, 10/01/2017 ....................... -- BBB- 5,503,140 1,275,000 Saints Memorial Medical Center, Series A, 5.750%, 10/01/2006 .............. Ba2 -- 1,176,200 3,340,000 Saints Memorial Medical Center, Series A, 6.000%, 10/01/2023 .............. Ba2 -- 2,810,477 3,000,000 Student Loan Revenue Bond Sub-Issue H, 6.900%, 11/01/2009 ................. A3 -- 3,279,420 1,500,000 Valley Regional Health System, Series B, Pre-Refunded, 8.000%, 7/01/2018 ........................................... Aaa -- 1,558,170 1,000,000 Wentworth Institute of Technology, Series A, 7.400%, 4/01/2010, (AMBAC insured) ................................................ Aaa AAA 1,027,920 ----------- 36,895,231 -----------
See accompanying notes to financial statements. 6 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Tax Exempt Obligations -- continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ Massachusetts State Housing Finance Agency--13.0% $ 2,000,000 Residential Development, Series A, 6.900%, 11/15/2024, (FNMA insured) ............................................... Aaa AAA $ 2,108,520 2,500,000 Residential Development, Series E, 6.250%, 11/15/2012, (FNMA insured) ............................................... Aaa AAA 2,603,675 1,300,000 Residential Development, Series I, 6.900%, 11/15/2025, (FNMA insured) ............................................... Aaa AAA 1,355,016 2,925,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 ..................... Aa A+ 3,024,274 4,600,000 Single Family Mortgage, Series 32, 6.600%, 12/01/2026 .................... Aa A+ 4,675,946 ----------- 13,767,431 ----------- Massachusetts State Industrial Finance Agency--8.6% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 ..................... -- AAA 2,127,360 5,000,000 Newton Group Properties LLC Project, 8.000%, 9/01/2027 ................... -- -- 5,147,200 2,000,000 Phillips Academy Issue, 5.375%, 9/01/2023 ................................ Aaa AA+ 1,854,840 ----------- 9,129,400 ----------- Massachusetts State Turnpike Authority--3.5% 6,000,000 Metropolitan Highway System, Capital Appreciation, Senior Series C, Zero Coupon, 1/01/2016, (MBIA insured) .................. Aaa AAA 2,299,200 1,000,000 Metropolitan Subordinated, Series A, 5.000%, 1/01/2039 ................... Aaa AAA 814,460 1,000,000 Rail Connections, Inc. Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2016 ................... Baa3 BBB- 321,380 1,000,000 Rail Connections, Inc. Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2017 ................... Baa3 BBB- 296,480 ----------- 3,731,520 ----------- Massachusetts State Water Resource Authority--7.6% 3,200,000 General Refunding, Series B, 5.000%, 3/01/2022, (MBIA insured) ........... Aaa AAA 2,733,664 2,000,000 Program Subordinated Series A, 5.750%, 8/01/2029 ......................... Aa1 AA 1,899,320 3,240,000 Series A, 6.500%, 7/15/2019 .............................................. A1 A+ 3,439,033 ----------- 8,072,017 ----------- Other Massachusetts Obligations--2.0% 2,000,000 Consolidated Loan, Series A, 7.625%, 6/01/2008 ........................... Aaa AA- 2,125,340 ----------- Puerto Rico--7.7% 4,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 ............................ Baa1 A 4,236,040 1,460,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 ........................... Aaa AAA 1,839,658 2,000,000 Aqueduct & Sewer Authority, Refunding Bond, 6.250%, 7/01/2012 ............ Baa1 A 2,145,440 ----------- 8,221,138 -----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Tax Exempt Obligations - continued
Ratings (c) (unaudited) ----------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ Virgin Islands--3.1% $ 3,045,000 Public Financial Authority, Series A, 7.250%, 10/01/2018 (f) .............. -- AAA $ 3,318,746 ------------ Total Tax Exempt Obligations (Identified Cost $106,880,530) ............... 105,963,084 ------------ Total Investments - 99.8% (Identified Cost $106,880,530) (b) .............. 105,963,084 Other assets less liabilities ............................................. 180,821 Total Net Assets - 100% ................................................... ------------ $106,143,905 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized depreciation on investments based on cost of $106,880,530 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 .................................................... $ 2,026,268 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .................................................... (2,943,714) ------------ Net unrealized depreciation ............................................................. $ (917,446) ============
As of December 31, 1999, the Fund had a capital loss carryforward of $2,588,254 expiring December 31, 2007. (c) The ratings shown are believed to be the most recent ratings available at December 31, 1999. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 1999. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Inverse floating rate security. The rate disclosed is as of December 31, 1999. (e) Variable rate demand note or floating rate security. The rate disclosed is as of December 31, 1999. (f) All or a portion of this security has been segregated as collateral in connection with the Fund's derivative positions during the year ended December 31, 1999. Legend of Portfolio abbreviations: AMBAC -- American Municipal Bond Assurance Corp. FGIC -- Financial Guarantee Insurance Company FNMA -- Federal National Mortgage Association MBIA -- Municipal Bond Investors Assurance Corp. Rib -- Residual interest bond See accompanying notes to financial statements. 8 STATEMENT OF ASSETS & LIABILITIES ================================================================================ December 31, 1999
ASSETS Investments at value (Identified Cost $106,880,530) ......................... $ 105,963,084 Cash ........................................................................ 6,557 Receivable for: Fund shares sold .......................................................... 30,369 Accrued interest .......................................................... 1,864,438 ------------- 107,864,448 ------------- LIABILITIES Payable for: Fund shares redeemed ...................................................... $ 1,493,911 Dividends declared ........................................................ 89,629 Accrued expenses: Management fees ........................................................... 85,053 Deferred trustees' fees ................................................... 12,649 Accounting and administrative ............................................. 6,984 Other expenses ............................................................ 32,317 ------------ 1,720,543 ------------- NET ASSETS ..................................................................... $ 106,143,905 ============= Net Assets consist of: Capital paid in ........................................................... $ 111,008,386 Undistributed (overdistributed) net investment income ..................... (30,379) Accumulated net realized gains (losses) ................................... (3,916,656) Unrealized appreciation (depreciation) on investments ..................... (917,446) ------------- NET ASSETS ..................................................................... $ 106,143,905 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($97,270,311/6,283,432 shares of beneficial interest) ...................... $ 15.48 ============= Offering price per share (100/95.75 of $15.48) ................................. $ 16.17* ============= Net asset value and offering price of Class B shares ($8,873,594/574,407 shares of beneficial interest) ......................... $ 15.45** =============
* 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 ================================================================================ Year Ended December 31, 1999
INVESTMENT INCOME Interest .................................................................... $ 7,094,457 Expenses Management fees ........................................................... $ 690,093 Service and distribution fees - Class A ................................... 380,755 Service and distribution fees - Class B ................................... 90,314 Trustees' fees and expenses ............................................... 9,067 Accounting and administrative ............................................. 41,880 Custodian ................................................................. 83,892 Transfer agent ............................................................ 220,551 Audit and tax services .................................................... 31,243 Legal ..................................................................... 3,585 Printing .................................................................. 20,680 Registration .............................................................. 13,620 Insurance ................................................................. 1,565 Miscellaneous ............................................................. 13,066 ------------ Total expenses .............................................................. 1,600,311 Less expenses waived by the investment adviser and subadviser ............... (363,420) 1,236,891 ------------ ------------ Net investment income ....................................................... 5,857,566 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments--net .......................................................... (1,476,025) Written options--net ...................................................... (99,200) Futures contracts -- net .................................................. 73,806 Total realized gain (loss) on investments, written options and futures contracts ....................................... (1,501,419) ------------ Unrealized appreciation (depreciation) on: Investments--net .......................................................... (9,268,682) Written options--net ...................................................... 8,213 Futures contracts--net .................................................... 0 ------------ Total unrealized appreciation (depreciation) on investments, written options and futures contracts ...................................... (9,260,469) Net gain (loss) on investment transactions .................................... (10,761,888) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ......................... $ (4,904,322) ============
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended December 31, -------------------------------------- 1998 1999 ------------- ------------- FROM OPERATIONS Net investment income ....................................................... $ 5,907,941 $ 5,857,566 Net realized gain (loss) on investments, written options and futures contracts ..................................... 631,480 (1,501,419) Net unrealized appreciation (depreciation) on investments, written options and futures contracts ..................................... (770,037) (9,260,469) ------------- ------------- Increase (decrease) in net assets from operations ........................... 5,769,384 (4,904,322) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................................................... (5,592,703) (5,480,730) Class B ................................................................... (353,477) (397,448) Net realized gain on investments Class A ................................................................... (546,044) (216,698) Class B ................................................................... (43,269) (19,179) In excess of net realized gain on investments Class A ................................................................... 0 (7,135) Class B ................................................................... 0 (631) ------------- ------------- (6,535,493) (6,121,821) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ..................................... 2,433,927 (5,765,846) ------------- ------------- Total increase (decrease) in net assets ........................................ 1,667,818 (16,791,989) NET ASSETS Beginning of the year ....................................................... 121,268,076 122,935,894 ------------- ------------- End of the year ............................................................. $ 122,935,894 $ 106,143,905 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ............................................................... $ 3,547 $ (30,379) ============= =============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS ================================================================================
Class A ------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 --------- --------- --------- --------- -------- Net Asset Value, Beginning of Year .... $ 15.10 $ 16.85 $ 16.50 $ 17.13 $ 17.02 --------- --------- --------- --------- -------- Income From Investment Operations Net Investment Income ................. 0.88 0.87 0.86 0.86 0.82 Net Realized and Unrealized Gain (Loss) on Investments ...................... 1.76 (0.35) 0.63 (0.04) (1.50) --------- --------- --------- --------- -------- Total From Investment Operations ...... 2.64 0.52 1.49 0.82 (0.68) --------- --------- --------- --------- -------- Less Distributions Dividends From Net Investment Income .. (0.89) (0.87) (0.86) (0.85) (0.83) Distributions From Net Realized Gains . 0.00 0.00 0.00 (0.08) (0.03) Distributions in Excess of Net Realized Gains ...................... 0.00 0.00 0.00 0.00 0.00(c) --------- --------- --------- --------- -------- Total Distributions ................... (0.89) (0.87) (0.86) (0.93) (0.86) --------- --------- --------- --------- -------- Net Asset Value, End of Year .......... $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48 ========= ========= ========= ========= ======== Total Return (%)(b) ................... 17.8 3.2 9.3 4.9 (4.1) Ratio of Operating Expenses to Average Net Assets (%) (a) .................. 0.85 0.90 1.00 1.00 1.00 Ratio of Net Investment Income to Average Net Assets (%) .............. 5.46 5.31 5.17 4.93 5.02 Portfolio Turnover Rate (%) ........... 127 140 132 125 73 Net Assets, End of Year (000) ......... $ 120,229 $ 112,934 $ 113,869 $ 113,910 $ 97,270 (a) The ratio of operating expenses to average net assets without giving effect to the expense limitations described in Note 4 to the Financial Statements would have been (%) 1.24 1.27 1.29 1.31 1.31 (b) A sales charge is not reflected in total return calculations. (c) Amount is less than $0.01.
See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS ================================================================================
Class B ------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 --------- --------- -------- --------- --------- Net Asset Value, Beginning of Year .... $ 15.08 $ 16.82 $ 16.47 $ 17.09 $ 16.98 --------- --------- -------- --------- --------- Income From Investment Operations Net Investment Income ................. 0.78 0.75 0.76 0.74 0.71 Net Realized and Unrealized Gain (Loss) on Investments ...................... 1.74 (0.34) 0.62 (0.03) (1.49) --------- --------- -------- --------- --------- Total From Investment Operations ...... 2.52 0.41 1.38 0.71 (0.78) --------- --------- -------- --------- --------- Less Distributions Dividends From Net Investment Income .. (0.78) (0.76) (0.76) (0.74) (0.72) Distributions From Net Realized Gains . 0.00 0.00 0.00 (0.08) (0.03) Distributions in Excess of Net Realized Gains ...................... 0.00 0.00 0.00 0.00 0.00(c) --------- --------- -------- --------- --------- Total Distributions ................... (0.78) (0.76) (0.76) (0.82) (0.75) --------- --------- -------- --------- --------- Net Asset Value, End of Year .......... $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45 ========= ========= ======== ========= ========= Total Return (%)(b) ................... 17.0 2.6 8.6 4.2 (4.7) Ratio of Operating Expenses to Average Net Assets (%) (a) .................. 1.50 1.55 1.65 1.65 1.65 Ratio of Net Investment Income to Average Net Assets (%) .............. 4.81 4.66 4.52 4.28 4.37 Portfolio Turnover Rate (%) ........... 127 140 132 125 73 Net Assets, End of Year (000) ......... $ 6,697 $ 7,442 $ 7,399 $ 9,026 $ 8,874 (a) The ratio of operating expenses to average net assets without giving effect to the expense limitations described in Note 4 to the Financial Statements would have been (%) 1.89 1.92 1.94 1.96 1.96 (b) A contingent deferrred sales charge is not reflected in total return calculations. (c) Amount is less than $0.01.
See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999 1. Significant Accounting Policies. The Fund is a series of Nvest Funds (formerly known as New England Funds) Trust II, a Massachusetts business trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and 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. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of 14 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 the Year Ended December 31, 1999 2. Purchases and Sales of Securities. For the year ended December 31, 1999 purchases and sales of securities (excluding short-term investments) were $84,369,026 and $90,428,369, respectively. Transactions in written options for the year ended December 31, 1999 are summarized as follows: Written Options -------------------- Number of Premiums Contracts Received --------- -------- Open at December 31, 1998....................... (100) $ (38,662) Contracts opened................................ (1,975) (838,541) Contracts closed................................ 2,075 877,203 --------- -------- Open at December 31, 1999....................... 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 ("MetLife"). Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the period ended December 31, 1999 are as follows: Fees Earned (a) --------------- Nvest Management $ 345,047 Back Bay 345,046 (a) Before reduction pursuant to voluntary expense limitations. See note 4. The effective annualized management fee for the year ended December 31, 1999 was 0.59%. b. Accounting and Administrative Expense. Nvest Services Company ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund reimburses NSC for all or part of NSC's expenses for personnel performing bookkeeping, accounting, and financial reporting functions and clerical functions relating to the Fund, and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999 these expenses amounted to $41,880 and are shown separately in the financial statements as accounting and administrative. 16 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 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 year ended December 31, 1999, the Fund paid Nvest Funds $271,973 and $22,579 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 year ended December 31, 1999, the Fund paid Nvest Funds $108,782 and $67,735 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 year ended December 31, 1999, amounted to $149,104. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as the sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $193,404 as compensation for its services. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or trustees who are directors, officers or employees of Nvest Management, Nvest Funds, Nvest, NSC or their affiliates, other than registered investment companies. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various 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 waive their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to limit the Fund's expenses to the annual 17 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 rates of 1.00% and 1.65% of the average net assets of the Fund's Class A and B shares, respectively. 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 0.85% 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 year ended December 31, 1999, Back Bay reduced its subadvisory fee by $181,710 and Nvest Management reduced its advisory fee by $181,710. 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 December 31, 1999 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 aggregates 13.2% of its total net assets at December 31, 1999. 6. Capital Shares. At December 31, 1999 there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B capital shares. Transactions in capital shares were as follows:
Year Ended December 31, ------------------------------------------------------------ 1998 1999 ---------------------------- ---------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ Class A - ------- Shares sold ............................................. 1,003,641 $ 17,141,843 663,953 $ 10,865,107 Shares issued in connection with the reinvestment of: Dividends from net investment income .................. 234,443 3,998,786 239,584 3,917,370 Distributions from net realized gain .................. 25,725 437,073 11,207 178,976 ------------ ------------ ------------ ------------ 1,263,809 21,577,702 914,744 14,961,453 Shares repurchased ...................................... (1,219,436) (20,828,010) (1,324,332) (21,432,568) ------------ ------------ ------------ ------------ Net increase (decrease) ................................. 44,373 $ 749,692 (409,588) $ (6,471,115) ------------ ------------ ------------ ------------ Year Ended December 31, ------------------------------------------------------------ 1998 1999 ---------------------------- ---------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ Class B - ------- Shares sold ............................................. 139,399 $ 2,380,236 129,045 $ 2,117,061 Shares issued in connection with the reinvestment of: Dividends from net investment income .................. 15,918 271,316 17,640 287,560 Distributions from net realized gain .................. 2,236 37,896 1,005 16,013 ------------ ------------ ------------ ------------ 157,553 2,689,448 147,690 2,420,634 Shares repurchased ...................................... (58,973) (1,005,213) (104,697) (1,715,365) ------------ ------------ ------------ ------------ Net increase (decrease) ................................. 98,580 $ 1,684,235 42,993 $ 705,269 ------------ ------------ ------------ ------------ Increase (decrease) derived from capital share transactions 142,953 $ 2,433,927 (366,595) $ (5,765,846) ============ ============ ============ ============
18 REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Massachusetts Tax Free Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Massachusetts Tax Free Income Fund (formerly the New England Massachusetts Tax Free Income Fund) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 19 ================================================================================ 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. 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- MA56-1299 [LOGO] Printed on Recycled Paper ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds (SM) Where The Best Minds Meet (R) - -------------------------------------------------------------------------------- Nvest Intermediate Term Tax Free Fund of California Where The Best Minds Meet (R) - ------------------ December 31, 1999 - ------------------ ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares (THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] April 1993 (Inception) Through December 1999 Net Asset Maximum Sales Lehman Municipal Value (1) Charge (2) Bond Index (5) --------- ------------- ---------------- 1999 $ 13767 $ 13450 $ 14198 1998 13964 13615 14497 1997 13367 13032 13614 1996 12381 12071 12469 1995 11756 11462 11938 1994 10322 10064 10164 1993 10864 10592 10718 4/23/93 10000 9750 10000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ Average Annual Total Returns and Yields -- 12/31/99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 4/23/93) 1 Year 5 Years Since Inception Net Asset Value(1),(4) -1.47% 5.92% 4.89% With Maximum Sales Charge(2),(4) -3.92 5.39 4.50 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1),(4) -2.22% 5.11% 3.17% With CDSC(3),(4) -6.90 4.78 3.17 - -------------------------------------------------------------------------------- Since Since Fund's Fund's Class A Class B Comparative Performance 1 Year 5 Years Inception Inception Lehman Municipal Bond Index(5) -2.06% 6.91% 5.39% 4.83% Morningstar Muni CA Interm. Avg.(6) -2.42 5.78 4.41 3.87 Lipper CA Interm. Municipal Debt Avg.(7)-1.32 5.85 4.50 4.00 - -------------------------------------------------------------------------------- These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost Yields as of 12/31/99 - -------------------------------------------------------------------------------- Class A Class B SEC 30-day Yield(8) 4.93% 4.32% Taxable Equivalent Yield(9) 9.00 7.88 - -------------------------------------------------------------------------------- Notes to Charts (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at the time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 2.50% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. (4) This Fund waived certain fees and expenses during the period indicated and the Fund's average annual total returns and yields would have been lower had these not been waived. (5) Lehman Municipal Bond Index is an unmanaged index of bonds issued by states, municipalities and other government entities having maturities of more than one year. The performance of the index has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. Class 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 an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class 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 an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Lipper Inc., an independent mutual fund ranking service. Class 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 - -------------------------------------------------------------------------------- [photo] James Welch Back Bay Advisor, L.P. Q. How did Intermediate Term Tax Free Fund of California perform over the past year? For the 12 months ended December 31, 1999, Intermediate Term Tax Free Fund of California posted a return of -1.47% for Class A shares at net asset value, including $0.38 per share in reinvested dividends. As interest rates rose and bond prices fell, your Fund held up better than its benchmark, Lehman Municipal Bond Index, with a return of -2.06% for the period. At year-end, your Fund's 30-day SEC yield for Class A shares was 4.93%, which is equivalent to a taxable yield of 9.00%, based on the maximum combined federal and California state income tax rate of 45.22%. Q. What was the investment environment like for California municipal bonds during the period? The investment climate in 1999 was anything but kind to the fixed-income markets. Generally rising interest rates during the period drove the value of most bonds lower. Solid economic growth in California, however, helped temper the blow of higher rates. The economy's strength helped generate higher tax revenues, which in turn, increased the cash flow and improved the fiscal health and creditworthiness of state and local governments. In addition, during much of the year, municipal bond yields were at historically high levels compared to U.S. Treasury yields. On an after-tax basis, AAA-rated municipal bonds produced higher yields than Treasuries. There were even times when municipal bond yields exceeded Treasury yields on an absolute, before-tax basis. Q. Did supply and demand impact the California municipal market? The supply of high quality, tax-exempt issues outpaced demand during the latter half of the year, driving down prices. 3 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ - -------------------------------------------------------------------------------- Y2K concerns led many suppliers to accelerate municipal offerings -- bringing bond issues to market in 1999 rather than in the Year 2000 to avoid possible Y2K disruptions. Meanwhile, demand was lackluster as investors directed cash to short-term investments and savings rather than municipal securities. Q. What strategies did you use in managing the Fund? Throughout the period, we remained committed to three strategies. First, we sought to improve the yield profile of the portfolio. As interest rates gradually rose and lower yielding issues came due, we took the opportunity to lock in higher yields. Our second major strategy was to improve credit quality. As we added new positions to the portfolio, we emphasized higher quality bonds, sacrificing only minimal yield advantage. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Credit Quality Composition -- 12/31/99 AAA 35.2% A 28.7% BBB 15.5% AA 11.6% Not Rated 9.0% Third, we sought to improve the overall call protection of the portfolio. Most municipal securities are "callable" 10 years from issuance. In other words, issuers can "call" a municipal bond 10 years from the date it is first offered, paying back the principal to bond owners. As their call date approaches, the market for these bonds diminishes. To boost the Fund's performance potential, we sold bonds nearing their call dates in favor of longer issues. In addition, general obligation bonds, which benefited from the state's solid economic growth and strong tax revenues, comprised a significant portion of the portfolio over the past six months -- a shift in focus from earlier in the year. 4 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA ================================================================================ - -------------------------------------------------------------------------------- We also maintained our emphasis on the education sector, while finding selected opportunities in health care. Many of California's colleges and universities have seen admissions, tuitions and endowments rise to record levels. The health care industry in general, however, continues to be volatile. Q. What is your outlook for California municipal bonds over the next few months? Should inflation fears heat up, the Fed may increase rates again early in the new year. Higher rates, of course, would have a negative impact on all types of bonds. However, we believe any rate hikes will be limited to the first half of the year. In fact, our longer term outlook for municipal issues is favorable. Yields of tax-exempt bonds remain high compared to taxable securities. Investors who are looking for attractive income free from California and federal income tax should continue to benefit from this outperformance. In addition, we expect solid economic growth to continue, helping maintain the fiscal health and creditworthiness of many municipalities. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period. A shift in the manager's opinion may result in strategic and other portfolio changes. Bond funds fluctuate in value and, when redeemed, may be worth more or less than their original cost. The Intermediate Term Tax Free Fund of California invests in a diversified mix of higher-yielding California municipal bonds, including general obligation bonds and issues secured by specific revenue streams. While higher yielding bonds may offer higher current income than Treasury securities and high-grade corporate bonds, they are also associated with greater than average risk. These risks may increase share-price volatility. The principal value and interest on Treasury securities are guaranteed by the U.S. government if held to maturity. Government guarantees apply to individual securities only and not to prices and yields of shares in a managed portfolio. 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. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of December 31, 1999 Tax Exempt Obligations -- 99.7% of Total Net Assets
Ratings (c) (unaudited) ------------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ California--90.8% $ 945,000 Berkeley Health Facility, Pre-Refunded Revenue Bond, 6.500%, 12/01/2011, (d)(e) ....................................... A2 A+ $ 999,990 1,500,000 California Educational Facilities Authority Revenue Bond, 5.700%, 10/01/2015 ............................................... Aa2 AA 1,504,290 1,370,000 California Health Facilities Finance Authority Revenue Bond, 5.250%, 10/01/2016 ............................................... A3 A 1,223,670 1,000,000 California Health Facilities Finance Authority Revenue Bond, 6.125%, 12/01/2019 ............................................... A2 -- 970,310 1,120,000 California Housing Finance Agency Revenue Bond, 6.250%, 8/01/2016 ................................................ Aa2 AA- 1,136,991 1,335,000 California Housing Finance Agency Revenue Bond, 7.050%, 8/01/2027 ................................................ Aa2 AA- 1,360,525 2,000,000 California Pollution Control Finance Authority Revenue Bond, 7.150%, 2/01/2011 ................................................ Ba1 BBB 2,008,220 2,750,000 California Pollution Control Finance Authority, Series A Revenue Bond, 5.900%, 6/01/2014 ........................................ A1 A+ 2,830,657 1,000,000 California State General Obligation Bond, 7.000%, 6/01/2002, (FGIC insured) ...................................... Aaa AAA 1,056,340 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2010 ................................................ Aa3 A+ 1,027,060 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2014, (MBIA insured) ................................ Aaa AAA 1,000,930 1,500,000 California Statewide Community Development Authority Certificate of Participation, 5.375%, 4/01/2017 ........................ -- BBB 1,273,950 1,000,000 California Statewide Community Development Authority Certificate of Participation, 6.000%, 8/15/2017, (FSA insured) ......... Aaa AAA 1,013,240 1,850,000 California Statewide Community Development Authority Certificate of Participation, 7.125%, 11/01/2016 ....................... -- -- 1,827,467 1,540,000 Duarte, California Certificate of Participation, 6.125%, 4/01/2013 (e).. Baa1 AAA 1,636,373 2,000,000 Foothill/Eastern Transportation Corridor Agency Revenue Bond, Zero Coupon, 1/15/2018 ........................................... Aaa AAA 659,460 2,030,000 Fresno United School District Certificate of Participation, 7.250%, 3/01/2007 ...................................... A3 -- 2,122,345 600,000 Irvine Ranch California Water District General Obligation Revenue Bond, 4.000%, 10/01/09 (d) .................................... -- A1+ 600,000 1,300,000 Los Angeles California Convention & Exhibition Center Revenue Bond, 6.125%, 8/15/2011, (MBIA insured) ....................... Aaa AAA 1,400,217 1,515,000 Pleasanton Financing Authority, 5.600%, 9/02/2000 ..................... Baa1 -- 1,529,423
See accompanying notes to financial statements 6 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Tax Exempt Obligations--continued
Ratings (c) (unaudited) ------------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------------------------------ California--continued $ 1,000,000 Sacramento Utility District Electric Revenue Bond, 3.300%, 11/15/2006, (FSA insured) (d) ............................ Aaa AAA $ 1,000,000 1,000,000 Sacramento Utility District Electric Revenue Bond, 7.320%, 11/15/2006, (FSA insured) ................................ Aaa AAA 1,060,550 2,000,000 San Diego Port Facilities Revenue Bond, 6.600%, 12/01/2002 ............. -- -- 2,055,500 1,000,000 Southern California Rapid Transit District Certificate of Participation, 7.500%, 7/01/2005, (MBIA insured) ...................... Aaa AAA 1,052,220 1,140,000 Stanislaus Solid Waste-to-Energy Financing Agency Revenue Bond, 7.500%, 1/01/2005 ........................................ -- A- 1,163,472 1,960,000 Stanislaus Solid Waste-to-Energy Financing Agency Revenue Bond, 7.625%, 1/01/2010, (d) ................................... -- A- 2,000,533 2,000,000 Valley Health Systems, Series A Revenue Bond, 6.500%, 5/15/2015 ........ BBB- 1,902,960 2,000,000 West & Central Basin Financing Authority, Series C Revenue Bond, 6.320%, 8/01/2006, (AMBAC insured) .............. Aaa AAA 2,057,920 ------------- 39,474,613 ------------- Puerto Rico--7.2% 1,010,000 Puerto Rico Commonwealth General Obligation Bond, 6.500%, 7/01/2015 ................................................ Baa(1) A 1,091,305 1,000,000 Puerto Rico Commonwealth Highway & Transportation Revenue Bond, 5.500%, 7/01/2013 ........................................ Aaa AAA 1,011,400 1,000,000 Puerto Rico Commonwealth Highway & Transportation Revenue Bond, 6.458%, 7/01/2004 ........................................ Baa(1) A1+ 1,039,060 ------------- 3,141,765 ------------- US Virgin Islands--1.7% 685,000 U.S. Virgin Islands Public Finance Authority Pre-Refunded Revenue Bond, 7.750%, 10/01/2006 ....................................... -- -- 722,709 ------------- Total Tax Exempt Obligations (Identified Cost $43,726,203) .......................................... 43,339,087 ============= Total Investments--99.7% (Identified Cost $43,726,203)(b) .............. 43,339,087 Other assets less liabilities .......................................... 143,834 ------------- Total Net Assets--100% .................................................. $ 43,482,921 =============
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 - -------------------------------------------------------------------------------- (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized depreciation on investments based on cost of $43,728,218 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 ................................................ $ 499,125 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ................................................ (888,256) --------- Net unrealized depreciation .................................................... $(389,131) =========
As of 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 realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 1999. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 1999. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Variable rate demand note or floating rate security. The rates disclosed are as of December 31, 1999. (e) All or a portion of these securities have been segregated as collateral in connection with the Fund's derivative investments during the year ended December 31, 1999. 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 & LIABILITIES ================================================================================ December 31, 1999
ASSETS Investments at value (Identified cost $43,726,203) ........................ $ 43,339,087 Cash ...................................................................... 73,235 Receivable for: Securities sold ....................................................... 11,094 Interest .............................................................. 749,414 ------------ 44,172,830 LIABILITIES Payable for: Fund shares redeemed .................................................. $ 589,084 Dividends declared .................................................... 34,029 Accrued expenses: Management fees ....................................................... 11,993 Deferred trustees' fees ............................................... 12,875 Accounting and administrative ......................................... 4,266 Other ................................................................. 37,662 ------ 689,909 ------------ NET ASSETS ..................................................................... $ 43,482,921 ============ Net Assets consist of: Capital paid in ....................................................... $ 45,902,204 Overdistributed net investment income ................................. (21,976) Accumulated net realized gains (losses) ............................... (2,010,191) Unrealized appreciation (depreciation) on investments ................. (387,116) ------------ NET ASSETS ..................................................................... $ 43,482,921 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($35,593,433 / 4,848,759 shares of beneficial interest) .................. $ 7.34 ============ Offering price per share (100 / 97.50 of $7.34) ........................... $ 7.53* ============ Net asset value and offering price of Class B shares ($7,889,488 / 1,078,100 shares of beneficial interest) ................... $ 7.32** ============
* 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 ================================================================================ Year Ended December 31, 1999
INVESTMENT INCOME Interest ................................................................................ $ 2,619,772 --------------- Expenses Management fees ..................................................................... $ 243,679 Service fees - Class A ............................................................. 93,811 Service and distribution fees - Class B ............................................. 88,911 Trustees' fees and expenses ......................................................... 6,284 Accounting and administrative ....................................................... 23,808 Custodian ........................................................................... 67,797 Transfer agent ...................................................................... 42,991 Audit and tax services .............................................................. 31,440 Legal ............................................................................... 1,324 Printing ............................................................................ 15,736 Registration ........................................................................ 14,164 Miscellaneous ....................................................................... 11,881 ----------- Total expenses .......................................................................... 641,826 Less expenses waived by the investment adviser and subadviser ........................... (180,746) 461,080 ----------- --------------- Net investment income ................................................................... 2,158,692 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ................................................................... (873,282) Written options - net ............................................................... 19,813 Futures contracts - net ............................................................. 118,199 ----------- Total realized gain (loss) on investments, written options and futures contracts .... (735,270) ----------- Unrealized appreciation (depreciation) on: Investments - net ................................................................... (2,181,742) ----------- Net gain (loss) on investment transactions .............................................. (2,917,012) --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........................................ $ (758,320) ===============
See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended December 31, -------------------------------- 1998 1999 ------------ ------------- FROM OPERATIONS Net investment income ................................................................... $ 1,968,798 $ 2,158,692 Net realized gain (loss) on investments, written options and futures contracts .......... (20,967) (735,270) Unrealized appreciation (depreciation) on investments ................................... (134,169) (2,181,742) ------------ ------------ Increase (decrease) in net assets from operations ....................................... 1,813,662 (758,320) ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................................................. (1,643,915) (1,867,844) Class B ............................................................................. (390,245) (376,425) ----------- ------------ (2,034,160) (2,244,269) ----------- ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................................. 3,890,260 1,878,106 ----------- ------------ Total increase (decrease) in net assets ...................................................... 3,669,762 (1,124,483) NET ASSETS Beginning of the year ................................................................... 40,937,642 44,607,404 ------------ ----------- End of the year ......................................................................... $ 44,607,404 43,482,921 ============ ============ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ......................................................................... $ 64,250 $ (21,976) ============ ============
See accompanying notes to financial statements 11 FINANCIAL HIGHLIGHTS ================================================================================
Class A ---------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------------------------------------------------------------------- Net Asset Value, Beginning of Year ...................... $ 7.08 $ 7.65 $ 7.66 $ 7.87 $ 7.83 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ................................... 0.39 0.39 0.39 0.37 0.37 Net Realized and Unrealized Gain (Loss) On Investments ........................................... 0.57 0.00 0.20 (0.03) (0.48) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ........................ 0.96 0.39 0.59 0.34 (0.11) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income .................... (0.39) (0.38) (0.38) (0.38) (0.38) ---------- ---------- ---------- ---------- ---------- Total Distributions ..................................... (0.39) (0.38) (0.38) (0.38) (0.38) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year ............................ $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34 ========== ========== ========== ========== ========== Total Return (%) (a) .................................... 13.9 5.3 8.0 4.5 (1.5) Ratio of Operating Expenses to Average Net Assets (%) (b) ........................................ 0.70 0.75 0.85 0.85 0.85 Ratio of Net Investment Income to Average Net Assets (%) ............................................ 5.24 5.18 5.06 4.79 4.79 Portfolio Turnover Rate (%) ............................. 167 161 120 215 140 Net Assets, End of Year (000) ........................... $ 32,707 $ 35,972 $ 32,057 $ 35,348 $ 35,593 (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 the expense limitations described in Note 4 to the Financial Statements would have been (%): 1.31 1.34 1.33 1.35 1.24
See accompanying notes to financial statements 12 FINANCIAL HIGHLIGHTS ================================================================================
Class B --------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- Net Asset Value, Beginning of Year ...................... $ 7.07 $ 7.63 $ 7.64 $ 7.85 $ 7.81 --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................................... 0.33 0.33 0.34 0.32 0.31 Net Realized and Unrealized Gain (Loss) On Investments ........................................... 0.56 0.01 0.20 (0.03) (0.48) --------- --------- --------- --------- --------- Total From Investment Operations ........................ 0.89 0.34 0.54 0.29 (0.17) --------- --------- --------- --------- --------- Less Distributions Dividends From Net Investment Income .................... (0.33) (0.33) (0.33) (0.33) (0.32) --------- --------- --------- --------- --------- Total Distributions ..................................... (0.33) (0.33) (0.33) (0.33) (0.32) --------- --------- --------- --------- --------- Net Asset Value, End of Year ............................ $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32 ========= ========= ========= ========= ========= Total Return (%) (a) .................................... 12.9 4.6 7.2 3.7 (2.2) Ratio of Operating Expenses to Average Net Assets (%) (b) ........................................ 1.45 1.50 1.60 1.60 1.60 Ratio of Net Investment Income to Average Net Assets (%) ............................................ 4.49 4.43 4.31 4.04 4.04 Portfolio Turnover Rate (%) ............................. 167 161 120 215 140 Net Assets, End of Year (000) ........................... $ 5,617 $ 7,590 $ 8,881 $ 9,259 $ 7,889 (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 the expense limitations described in Note 4 to the Financial Statements would have been (%): 2.06 2.09 2.08 2.10 1.99
See accompanying notes to financial statements 13 NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999 1. Significant Accounting Policies. The Fund is a series of Nvest Funds (formerly known as New England Funds) Trust II, a Massachusetts business trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and California personal income tax. The Declaration of Trust permits the trustees to issue an unlimited number of shares of the Trust in multiple series (each 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. 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 14 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 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 the Year Ended December 31, 1999 2. Purchases and Sales of Securities. For the year ended December 31, 1999 purchases and sales of securities (excluding short-term investments) were $64,707,651 and $63,348,716, respectively. Transactions in written options ended December 31, 1999 are summarized as follows: Written Options ---------------------- Number of Premiums Contracts Received --------- -------- Open at December 31, 1998 ............ 0 $ 0 Contracts opened ..................... (50) (39,594) Contracts closed ..................... 50 39,594 --------- -------- Open at December 31, 1999 ............ 0 $ 0 ========= ========= 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. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 1999 are as follows: Fees Earned (a) --------------- Nvest Management $ 121,840 Back Bay 121,839 (a) Before reduction pursuant to voluntary expense limitations. See Note 4. The effective management fee for the year ended December 31, 1999 was 0.525%. 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 reimburses NSC for all or part of NSC's expenses of providing these services which include the following: (i) expenses for personnel performing bookkeeping, accounting and financial reporting functions and related clerical functions relating to the Fund, and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999 these expenses amounted to $23,808 and are shown separately in the financial statements as accounting and administrative. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and a Service and Distribution Plan relating to the Fund's Class B shares (the "Class B Plan"). 16 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 Under the Class A Plan, the Fund pays Nvest Funds, 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 year ended December 31, 1999, the Fund paid Nvest Funds $93,811 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 December 31, 1999 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 year ended December 31, 1999, the Fund paid Nvest Funds $22,228 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 year ended December 31, 1999, the Fund paid Nvest Funds $66,683 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 year ended December 31, 1999 amounted to $100,128. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as the sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $30,192 as compensation for its services. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of 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 the Year Ended December 31, 1999 4. Expense Limitations. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to waive their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to limit the 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. 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 year ended December 31, 1999, Back Bay reduced its subadvisory fees by $90,373 and Nvest Management reduced its advisory fees by $90,373. 5. Concentration of Credit. The Fund primarily invests in debt obligations issued by the State of California and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of California municipal securities than is a comparable municipal bond fund that is not as concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of California municipal securities to meet their financial obligations. The Fund had the following industry concentrations in excess of 10% on December 31, 1999 as a percentage of the Fund's total net assets: Hospitals (11.7%), Pollution (11.1%) and Transportation (13.4%). 6. Capital Shares. At December 31, 1999 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 December 31, --------------------------------------------------------- 1998 1999 ----------------------- -------------------------- Class A Shares Amount Shares Amount - -------- -------- ----------- ---------- ------------ Shares sold .................................................... 827,069 $ 6,499,675 2,383,925 $ 18,347,369 Shares issued in connection with the reinvestment of: Dividends from net investment income ....................... 110,552 867,672 145,308 1,107,226 -------- ------------ --------- ------------ 937,621 7,367,347 2,529,233 19,454,595 Shares repurchased ............................................. (497,875) (3,904,602) (2,193,681) (16,773,597) -------- ------------ --------- ------------ Net increase (decrease) ........................................ 439,746 $ 3,462,745 335,552 $ 2,680,998 -------- ------------ --------- ------------ Year Ended December 31, --------------------------------------------------------- 1998 1999 ----------------------- -------------------------- Class B Shares Amount Shares Amount - ------- -------- ----------- ---------- ------------ Shares sold .................................................... 270,727 $ 2,121,992 202,511 $ 1,524,313 Shares issued in connection with the reinvestment of: Dividends from net investment income ....................... 29,839 233,426 28,996 220,717 -------- ------------ --------- ------------ 300,566 2,355,418 231,507 1,745,030 Shares repurchased ............................................. (246,590) (1,927,903) (339,124) (2,547,922) -------- ------------ --------- ------------ Net increase (decrease) ........................................ 53,976 $ 427,515 (107,617) $ (802,892) -------- ------------ --------- ------------ Increase (decrease) derived from capital shares transactions ... 493,722 $ $3,890,260 227,935 $ 1,878,106 ======== ============ ========= ============
18 REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Trustees of Nvest Funds Trust II and the Shareholders of Nvest Intermediate Term Tax Free Fund of California In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Intermediate Term Tax Free Fund of California (formerly the New England Intermediate Term Tax Free Fund of California) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 19 ================================================================================ 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. 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- CA56-1299 [LOGO] Printed on Recycled Paper ANNUAL REPORT ================================================================================ [LOGO] Nvest Funds(SM) Where The Best Minds Meet(R) - -------------------------------------------------------------------------------- Nvest Growth and Income Fund Where The Best Minds Meet(R) - ----------------- December 31, 1999 - ----------------- ================================================================================ February 2000 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Chief Executive Officer Nvest Funds "We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers." After serving as Executive Vice President for Sales and Marketing since 1998, I became President of Nvest Funds late last year. Bruce Speca, my predecessor, has moved on to head up a new Internet venture affiliated with the parent company of our funds. It's especially exciting for me to be assuming my new responsibilities as we begin a new century and introduce a new identity for our fund family. We expect 2000 to be a year of innovation, as we work on new investment options for you, our shareholders, and your financial advisers. At the same time, our commitment to bringing you funds led by some of the Best Minds in the industry remains our core business principle. A new name, the same Best Minds On February 1, New England Funds became Nvest Funds. We chose this new name primarily to emphasize our affiliation with Nvest Companies, L.P., our corporate parent and a major financial organization with over $133 billion in assets under management (as of 12/31/99) through 18 affiliated companies. The companies that comprise Nvest represent a breadth of investment resources and experience that is difficult to match. As an Nvest affiliate, we call on an impressive roster of Best Minds to manage our funds. The recent addition of the Kobrick Funds to our fund family extends that tradition. 1999 in review Last year, the market focused on technology companies and large-capitalization growth stocks. Value-oriented equity investors are still waiting for a shift in investor sentiment, and bond investors felt the negative price impact of rising interest rates. The following pages discuss how your fund's managers addressed those challenges. Short-term results notwithstanding, I believe most investors would do well to own an array of investment types in a well thought-out asset allocation plan. I look forward to working with you and your financial adviser as you invest toward your personal goals. For our part, we are committed to supporting you with quality investment products and outstanding customer service. /s/ John T. Hailer - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND ================================================================================ Investment Results Through December 31, 1999 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing your Fund's performance to a benchmark index provide you with a general sense of how your Fund performed. To put this information in context, it may be helpful to understand the special differences between the two. Your Fund's total return for the period shown below appears with and without sales charges and includes Fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] December 1989 through December 1999 Net Asset Maximum Sales Value(1) Charge(2) S&P 500 -------- --------- ------- 12/99 $42,698 $40,245 $53,099 12/98 39,005 36,762 43,869 12/97 31,481 29,671 34,134 12/96 23,594 22,237 25,605 12/95 20,129 18,972 20,834 12/94 14,897 14,041 15,159 12/93 14,751 13,903 14,955 12/92 13,665 12,879 13,588 12/91 12,505 11,786 12,627 12/90 9,574 9,023 9,688 12/89 10,000 9,425 10,000 This illustration represents past performance of Class A shares and cannot predict future results. Investment return and principal value may vary, resulting in a gain or loss on the sale of shares. Class B, C and Y share performance will differ from that shown based on differences in inception date, fees and sales charges. All index and Fund performance assumes reinvestment of distributions. 1 NVEST GROWTH AND INCOME FUND ================================================================================ Average Annual Total Returns -- 12/31/99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 5/6/31) 1 Year 5 Years 10 Years Net Asset Value(1) 9.45% 23.44% 15.62% With Maximum Sales Charge(2) 3.16 21.98 14.94 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1) 8.62% 22.58% 17.75% With CDSC(3) 4.03 22.40 17.75 - -------------------------------------------------------------------------------- Class C (Inception 5/1/95) 1 Year Since Inception Net Asset Value(1) 8.63 21.42% With CDSC(3) 7.71 21.42 - -------------------------------------------------------------------------------- Class Y (Inception 11/18/98) 1 Year Since Inception Net Asset Value(1) 9.77 16.51% - --------------------------------------------------------------------------------
Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. S&P 500(4) 21.04% 28.56% 18.21% 22.96% 27.49% 25.69% Morningstar Large Value Average(5) 6.59 19.31 13.95 15.60 18.24 9.05 Lipper Multi-Cap Core Average(6) 22.50 23.07 15.51 18.29 22.31 27.71 - --------------------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance. Investment return and principal value will fluctuate so that shares, upon redemption, may be worth more or less than original cost. Class Y shares are available to certain institutional investors only. (1) Net Asset Value (NAV) performance assumes reinvestment of all distributions and does not reflect the payment of a sales charge at time of purchase. Returns would have been lower had sales charges been reflected. (2) With Maximum Sales Charge performance assumes reinvestment of all distributions and reflects the maximum sales charge of 5.75% at the time of purchase of Class A shares. (3) With Contingent Deferred Sales Charge (CDSC) performance assumes reinvestment of all distributions and, for Class B shares, assumes that a maximum 5.00% sales charge is applied to redemptions. The sales charge will decrease over time, declining to zero six years after the purchase of shares. With CDSC performance for Class C shares assumes a maximum 1.00% sales charge on redemptions within the first year of purchase. (4) The Standard & Poor's Composite Index of 500 Stocks (S&P 500(R)) is a market value-weighted unmanaged index of common stock prices. It is a common measure of stock total return performance. The performance of the S&P 500 has not been adjusted for ongoing management, distribution and operating expenses and sales charges applicable to mutual fund investments. It is not possible to invest directly in an index. (5) Morningstar Large Value Average is an average (calculated on the basis of net asset value) of funds with similar investment objectives as calculated by Morningstar, Inc., an independent mutual fund ranking service. Class B since inception return is calculated from 9/30/93. 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 at net asset value of all mutual funds with a similar current investment style or objective as determined by Lipper Inc., an independent mutual fund ranking service. 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 ================================================================================ Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] Gerald Scriver Westpeak Investment Advisors, L.P. Q. Please tell us about the Growth and Income Fund's performance during 1999. For the year ended December 31, 1999, the return on Class A shares of Growth and Income Fund was 9.45% based on net asset value and reinvested distributions totaling $2.72. The return on the Fund's benchmark, Standard & Poor's 500 Index, was 21.04% for the same period. Q. What was the investment environment like during the period? It seemed for a while that investors were broadening their interests and relaxing their focus on a relatively short list of large-capitalization growth stocks. In the second quarter, as the expanding economy threatened to bring on interest rate hikes, investors concluded that some of the market's performance leaders were priced at unsustainably high levels. Value-oriented stocks, seen as less vulnerable to a downturn because of their more modest valuations, took center stage. But not for long. The value rally that began in April was sharp but short-lived. In early summer, investors took profits in value stocks whose prices had gained the most, and returned to more familiar ground. Despite a rate hike in June, large-cap growth stocks, as well as technology issues of all capitalizations, dominated attention once again. Q. Given that environment, what strategies did you pursue? We do not pursue value or growth investments to the exclusion of either; we believe that there are opportunities to be found in both sectors at any given time. We give Growth and Income Fund's portfolio a bias toward value or toward growth as the market changes direction, a flexible approach that permits us to adapt to changing trends. 3 NVEST GROWTH AND INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- On that basis, we shifted toward a greater value emphasis in the first half of the year, when it appeared that value stocks were at last resuming their traditional prominence in investors' portfolios. In addition, we moved out of some large capitalization stocks into mid-sized issues. This move proved premature when the big growth stocks surged back later in the year. Q. What factors or investments affected performance the most, positively or negatively? The biggest factor affecting performance was more a matter of style than of stocks. The Fund's portfolio is well-diversified with strict attention to risk control, and without heavy sector commitments. We put great emphasis on a company's present earnings and future earning power -- its ability to increase the proverbial bottom line. Top 10 Portfolio Holdings-- 12/31/99 % of Company Net Assets - -------------------------------------------------------------------------------- 1. Cisco Systems 5.0 - -------------------------------------------------------------------------------- 2. Microsoft Corp. 4.1 - -------------------------------------------------------------------------------- 3. Johnson & Johnson 3.0 - -------------------------------------------------------------------------------- 4. Pfizer, Inc. 2.9 - -------------------------------------------------------------------------------- 5. Bristol-Myers Squibb 2.7 - -------------------------------------------------------------------------------- 6. BellSouth Corp. 2.6 - -------------------------------------------------------------------------------- 7. Citigroup, Inc. 2.4 - -------------------------------------------------------------------------------- 8. AT&T Corp. 2.2 - -------------------------------------------------------------------------------- 9. Chase Manhattan 2.2 - -------------------------------------------------------------------------------- 10. Texas Instruments, Inc. 2.1 - -------------------------------------------------------------------------------- Portfolio holdings and asset allocation will vary. Put another way, we do not invest where there are neither earnings nor prospects for earnings. The risk is just too high. We are finding many companies where earnings are solid and growing at above-average rates. But above-average earnings growth has not seemed to matter recently, except in the case of a handful of giant companies. Our overweight position (relative to the benchmark index) in interest-sensitive stocks hurt performance; banks, for example, fell back as interest rates rose. We have recently cut back exposure to this sector. Traditional retailing stocks like K-Mart were disappointing, but Wal-Mart did well, thanks to its expanding presence on the Internet. Our weighting in technology was roughly equal to the index weighting, which also helped performance. Strong performers included U.S. Cellular and Applied Materials. 4 NVEST GROWTH AND INCOME FUND ================================================================================ - -------------------------------------------------------------------------------- Q. What is your outlook for next year? At year-end, the Fund's portfolio was more modestly valued than the Standard & Poor's 500, based on our analysis. Average price/earnings ratios -- a measure of whether a company's stock price is high or low relative to its profits -- were lower for the companies in the Fund, although their earnings growth rate was higher. This positioning reflects our view that there will soon be a shift back to the traditional methods of stock evaluation that are part of our process. We think market leadership will then broaden to include many more stocks than has been the case for the last few years. In terms of the economy, we expect no big changes unless, after three increases in 1999, interest rates rise further to the point where they threaten to hold back corporate earnings. While the Fund's performance over short periods of time has lagged the S&P 500, over the long-term our value/growth approach has served the Fund's shareholders well. We will continue to apply the techniques that helped build our record, in the conviction that tomorrow's markets will be different from today's. 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. The Fund invests in foreign securities. Investing in foreign securities involves special risks. This risk may increase share price volatility. Mid-sized stocks are more volatile than larger more established stocks. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION ================================================================================ Investments as of December 31, 1999 Common Stock -- 99.0% of Total Net Assets Shares Description Value (a) - ----------------------------------------------------------------------------- Airlines--0.6% 74,900 Delta Air Lines ....................... $ 3,730,956 ----------- Automotive--2.3% 139,900 Ford Motor Co. ........................ 7,475,906 93,300 General Motors Corp. .................. 6,781,744 ----------- 14,257,650 ----------- Banks--8.3% 137,000 BB&T Corp. ............................ 3,750,375 64,365 Charter One Financial, Inc. ........... 1,230,981 174,200 Chase Manhattan Corp. ................. 13,533,163 265,800 Citigroup, Inc. ....................... 14,768,512 144,400 FleetBoston Financial Corp. ........... 5,026,925 43,300 Marshall & Ilsley Corp. ............... 2,719,781 35,200 Provident Financial Group, Inc. ....... 1,262,800 253,500 UnionBanCal Corp. ..................... 9,997,406 ----------- 52,289,943 ----------- Banks & Thrifts--1.5% 282,900 Golden West Financial Corp. ........... 9,477,150 ----------- Broadcasting - 1.4% 54,000 AT&T Corp. - Liberty Media Group (c) .. 3,064,500 114,000 Cox Communications, Inc. (c) .......... 5,871,000 ----------- 8,935,500 ----------- Business Services--1.7% 80,700 America Online, Inc. (c) .............. 6,087,806 74,400 Electronic Data Systems Corp. ......... 4,980,150 ----------- 11,067,956 ----------- Chemicals--2.1% 93,400 Dow Chemical Co. ...................... 12,480,575 10,400 Minnesota Mining & Manufacturing Co. .. 1,017,900 ----------- 13,498,475 ----------- Computers & Business Equipment--9.1% 293,400 Cisco Systems (c) ..................... 31,430,475 166,800 Computer Associates International, Inc. 11,665,575 69,600 Diebold, Inc. ......................... 1,635,600 35,100 Electronics For Imaging, Inc. (c) ..... 2,040,187 31,900 Gateway, Inc. (c) ..................... 2,298,794 40,200 Lexmark International Group (c) ....... 3,638,100 52,800 National Instruments Corp. (c) ........ 2,019,600 64,700 Pitney Bowes, Inc. .................... 3,125,819 ----------- 57,854,150 ----------- Computer Software & Services--5.2% 51,600 Adobe Systems, Inc. ................... 3,470,100 225,100 Microsoft Corp. ....................... 26,280,425 6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Common Stock -- continued Shares Description Value (a) - ----------------------------------------------------------------------------- Computer Software & Services--continued 23,800 Sabre Corp. Holdings, Inc. (c) ........ $ 1,219,750 29,400 Zebra Technologies Corp. (c) .......... 1,719,900 ----------- 32,690,175 ----------- Construction--1.1% 51,900 Lafarge Corp. ......................... 1,433,738 118,600 USG Corp. ............................. 5,589,025 ----------- 7,022,763 ----------- Defense & Aerospace--3.1% 107,700 General Dynamics Corp. ................ 5,681,175 54,200 Litton Industries, Inc. (c) ........... 2,703,225 139,900 Northrop Grumman Corp. ................ 7,563,344 81,500 Rockwell International Corp. .......... 3,901,812 ----------- 19,849,556 ----------- Drugs--7.5% 96,100 Abbott Laboratories ................... 3,489,631 78,500 Allergan, Inc. ........................ 3,905,375 262,700 Bristol-Myers Squibb Co. .............. 16,862,056 39,100 Forest Labs, Inc. (c) ................. 2,402,206 104,300 IVAX Corp. (c) ........................ 2,685,725 559,900 Pfizer, Inc. .......................... 18,161,757 ----------- 47,506,750 ----------- Electric Utilities--4.3% 186,500 DTE Energy Co. ........................ 5,851,438 55,200 Energy East Corp. ..................... 1,148,850 258,500 Entergy Corp. ......................... 6,656,375 101,900 GPU, Inc. ............................. 3,050,631 299,000 Public Service Enterprise Group ....... 10,408,937 ----------- 27,116,231 ----------- Electronics--9.1% 52,800 Adaptec, Inc. (c) ..................... 2,633,400 61,500 Applied Materials, Inc. ............... 7,791,281 38,800 Eaton Corp. ........................... 2,817,850 27,700 LSI Logic Corp. (c) ................... 1,869,750 145,400 Lucent Technologies, Inc. ............. 10,877,737 79,800 Motorola, Inc. ........................ 11,750,550 36,600 STMicroelectronics NV ................. 5,542,613 134,500 Texas Instruments, Inc. ............... 13,029,687 34,800 Xilinx, Inc. (c) ...................... 1,582,313 ----------- 57,895,181 ----------- See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Common Stock -- continued Shares Description Value (a) - ----------------------------------------------------------------------------- Energy Reserves--4.4% 40,600 Chevron Corp. ......................... $ 3,516,975 96,200 Exxon Mobil Corp. ..................... 7,750,113 83,000 Phillips Petroleum Co. ................ 3,901,000 183,100 Royal Dutch Petroleum Co. ............. 11,066,106 28,500 Vastar Resources, Inc. ................ 1,681,500 ----------- 27,915,694 ----------- Financial Services--1.8% 121,600 Federal Home Loan Mortgage Corp. ...... 5,722,800 87,800 Federal National Mortgage Association . 5,482,012 ----------- 11,204,812 ----------- Food & Beverages--1.5% 96,500 Hormel Foods Corp. .................... 3,920,312 298,000 IBP, Inc. ............................. 5,364,000 ----------- 9,284,312 ----------- Gas & Pipeline Utilities--0.6% 99,500 El Paso Energy Corp. .................. 3,861,844 ----------- Health Care - Products--5.1% 201,200 Johnson & Johnson, Inc. ............... 18,736,750 41,600 Mallinckrodt, Inc. .................... 1,323,400 307,400 TYCO International, Ltd. .............. 11,950,175 ----------- 32,010,325 ----------- Health Care - Services--0.6% 39,500 Pacificare Health Systems (c) ......... 2,093,500 29,900 United Healthcare Corp. ............... 1,588,438 ----------- 3,681,938 ----------- Industrial Parts & Machinery--1.5% 24,000 Cummins Engine, Inc. .................. 1,159,500 48,200 Dover Corp. ........................... 2,187,075 64,650 Ingersoll-Rand Co. .................... 3,559,791 47,300 Parker-Hannifin Corp. ................. 2,427,081 ----------- 9,333,447 ----------- Insurance--3.2% 64,800 Ambac Financial Group, Inc. ........... 3,381,750 92,700 Lincoln National Corp., Inc. .......... 3,708,000 103,600 Marsh & McLennan Cos., Inc. ........... 9,913,225 96,600 St. Paul Cos .......................... 3,254,212 ----------- 20,257,187 ----------- 8 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Common Stock -- continued Shares Description Value (a) - ----------------------------------------------------------------------------- Metals & Mining--0.8% 128,800 Alcan Aluminum, Ltd. .................. $ 5,304,950 ----------- Oil - Refining & Distribution--1.1% 69,800 Coastal Corp. ......................... 2,473,538 88,000 Texaco, Inc. .......................... 4,779,500 ----------- 7,253,038 ----------- Paper & Forest Products--1.8% 71,800 Kimberly-Clark Corp. .................. 4,684,950 104,400 Temple-Inland, Inc. ................... 6,883,875 ----------- 11,568,825 ----------- Property & Casualty Insurance--1.8% 63,400 Aetna, Inc. ........................... 3,538,512 137,000 Allmerica Financial Corp. ............. 7,620,625 ----------- 11,159,137 ----------- Publishing--2.1% 114,700 Gannett Co. ........................... 9,355,219 40,900 Tribune Co. ........................... 2,252,056 3,600 Washington Post Co., Class B .......... 2,001,150 ----------- 13,608,425 ----------- Railroads & Equipment--0.8% 111,500 Union Pacific Corp. ................... 4,864,188 ----------- Retail - Department Store--2.2% 73,900 Federated Department Stores, Inc.(c) .. 3,736,569 149,300 Wal-Mart Stores, Inc. ................. 10,320,362 ----------- 14,056,931 ----------- Retail - Food & Drug--0.9% 289,500 SUPERVALU, Inc. ....................... 5,790,000 ----------- Retail - Specialty--0.6% 56,850 Home Depot, Inc. ...................... 3,897,778 ----------- Securities & Asset Management--2.7% 235,610 Bear Stearns Cos ...................... 10,072,328 12,100 Morgan Stanley Dean Witter & Co. ...... 1,727,275 142,500 Paine Webber Group, Inc. .............. 5,530,781 ----------- 17,330,384 ----------- See accompanying notes to financial statements. 9 PORTFOLIO COMPOSITION -- continued ================================================================================ Investments as of December 31, 1999 Common Stock -- continued Shares Description Value (a) - ----------------------------------------------------------------------------- Telecommunication--8.2% 35,600 ALLTEL Corp. .......................... $ 2,943,675 273,600 AT&T Corp. ............................ 13,885,200 53,300 Bell Atlantic Corp. ................... 3,281,281 348,400 BellSouth Corp. ....................... 16,309,475 72,150 MCI Worldcom, Inc. (c) ................ 3,828,460 109,900 SBC Communications, Inc. .............. 5,357,625 60,400 U.S. Cellular Corp. (c) ............... 6,096,625 ------------- 51,702,341 ------------- Total Common Stock (Identified Cost $595,855,235)... 627,277,992 ------------- Short Term Investment -- 1.0% Principal Amount - -------------------------------------------------------------------------------- $ 6,339,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/31/1999 at 2.50% to be repurchased at $6,340,321 on 1/03/2000, collateralized by $6,270,000 U.S. Treasury Bond 6.75% due 8/15/2026 with a value of $6,457,120 ................................ 6,339,000 ------------- Total Short Term Investment (Identified Cost $6,339,000) .............. 6,339,000 ------------- Total Investments--100.0% (Identified Cost $602,194,235) (b) ........ 633,616,992 Other assets less liabilities ............. (124,481) ------------- Total Net Assets--100% .................... $ 633,492,511 ============= (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 1999 the net unrealized appreciation on investments based on cost of $602,194,235 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 .................................. $ 68,190,102 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ................................ (36,767,345) ------------- Net unrealized appreciation .................... $ 31,422,757 ============= (c) Non-income producing security. 10 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES ================================================================================ December 31, 1999
ASSETS Investments at value (Identified cost $602,194,235) ............ $ 633,616,992 Cash ........................................................... 706 Receivable for: Fund shares sold ........................................... 892,634 Dividends and interest ..................................... 604,070 ------------- 635,114,402 LIABILITIES Payable for: Fund shares redeemed ....................................... $ 1,098,719 Accrued expenses: Management fees ............................................ 346,717 Deferred trustees' fees .................................... 28,541 Accounting and administrative .............................. 21,098 Other ...................................................... 126,816 ------------- 1,621,891 ------------- NET ASSETS .......................................................... $ 633,492,511 ============= Net assets consist of: Capital paid in ............................................ $ 586,575,535 Undistributed (overdistributed) net investment income (loss) (21,416) Accumulated net realized gain (loss) ....................... 15,515,635 Unrealized appreciation (depreciation) on investments ...... 31,422,757 ------------- NET ASSETS .......................................................... $ 633,492,511 ============= Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($375,676,396/24,499,092 shares of beneficial interest) ........ $ 15.33 ======= Offering price per share (100/94.25 of $15.33) ...................... $ 16.27* ======= Net asset value and offering price of Class B shares ($216,456,707/14,403,377 shares of beneficial interest) ........ $ 15.03** ======= Net asset value and offering price of Class C shares ($26,982,668/1,797,724 shares of beneficial interest) .......... $ 15.01** ======= Net asset value, offering and redemption price of Class Y shares ($14,376,740/936,176 shares of beneficial interest) ............ $ 15.36 =======
* 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 ================================================================================ Year Ended December 31, 1999
INVESTMENT INCOME Dividends (net of foreign taxes of $179,140) .............. $ 9,119,908 Interest .................................................. 559,750 ------------- 9,679,658 Expenses Management fees ....................................... $ 3,843,930 Service fees - Class A ................................ 876,555 Service and distribution fees - Class B ............... 1,953,852 Service and distribution fees - Class C ............... 244,663 Trustees' fees and expenses ........................... 29,545 Accounting and administrative ......................... 153,450 Custodian ............................................. 137,963 Transfer agent ........................................ 1,195,460 Audit and tax services ................................ 28,260 Legal ................................................. 27,611 Printing .............................................. 78,286 Registration .......................................... 73,633 Miscellaneous ......................................... 37,769 ------------- Total expenses ............................................ 8,680,977 ------------- Net investment income ..................................... 998,681 ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments -- net ................ 100,407,049 Unrealized appreciation (depreciation) on investments -- net ................................... (52,996,051) ------------- Net gain (loss) on investment transactions ................ 47,410,998 ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......... $ 48,409,679 =============
12 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS ================================================================================
Year Ended December 31, --------------------------------- 1998 1999 ------------- ------------- FROM OPERATIONS Net investment income ................................... $ 333,505 $ 998,681 Net realized gain (loss) on investments ................. 48,697,181 100,407,049 Net unrealized appreciation (depreciation) on investments ...................................... 31,648,258 (52,996,051) ------------- ------------- Increase (decrease) in net assets from operations ....... 80,678,944 48,409,679 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ............................................. (227,108) (1,056,821) Class B ............................................. 0 0 Class C ............................................. 0 0 Class Y ............................................. (1) (55,735) In excess of net investment income Class A ............................................. 0 (49,021) Class B ............................................. 0 0 Class C ............................................. 0 0 Class Y ............................................. 0 (2,585) Net realized gain on investments Class A ............................................. (32,875,714) (57,051,170) Class B ............................................. (15,243,587) (33,147,376) Class C ............................................. (1,691,556) (4,191,359) Class Y ............................................. (3) (2,192,903) ------------- ------------- (50,037,969) (97,746,970) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................. 136,443,607 207,032,451 ------------- ------------- Total increase (decrease) in net assets ...................... 167,084,582 157,695,160 NET ASSETS Beginning of the year ................................... 308,712,769 475,797,351 ------------- ------------- End of the year ......................................... $ 475,797,351 $ 633,492,511 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year ......................................... $ 101,283 $ (21,416) ============= =============
See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS ================================================================================
Class A ------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------ Net Asset Value, Beginning of the Year ......... $ 12.41 $ 14.39 $ 13.87 $ 15.35 $ 16.57 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .......................... 0.18 0.13 0.07(b) 0.04 0.08 Net Realized and Unrealized Gain (Loss) on Investments ........................ 4.01 2.07 4.40 3.29 1.40 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ............... 4.19 2.20 4.47 3.33 1.48 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ........... (0.18) (0.13) (0.06) (0.01) (0.06) Distributions From Net Realized Capital Gains .. (2.03) (2.59) (2.93) (2.10) (2.66) Distributions in Excess of Net investment Income ........................... 0.00 0.00 0.00 0.00 0.00(c) ----------- ----------- ----------- ----------- ----------- Total Distributions ............................ (2.21) (2.72) (2.99) (2.11) (2.72) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ............... $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33 =========== =========== =========== =========== =========== Total Return (%)(a) ............................ 35.1 17.2 33.4 23.9 9.5 Ratio of Operating Expenses to Average Net Assets (%) ....................... 1.38 1.30 1.25 1.23 1.21 Ratio of Net Investment Income to Average Net Assets (%) ....................... 1.31 0.92 0.46 0.33 0.48 Portfolio Turnover Rate (%) .................... 69 127 103 114 133 Net Assets, End of the Year (000) .............. $ 150,693 $ 166,963 $ 220,912 $ 304,139 $ 375,676
(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 rounds to less than $0.01 per share. 14 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS ================================================================================
Class B --------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------------------------------------------------------------------------- Net Asset Value, Beginning of the Year .......... $ 12.42 $ 14.40 $ 13.87 $ 15.28 $ 16.37 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss) .................... 0.10 0.03 (0.05)(b) (0.05) (0.04) Net Realized and Unrealized Gain (Loss) on Investments ......................... 4.01 2.07 4.40 3.24 1.36 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ................ 4.11 2.10 4.35 3.19 1.32 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ............ (0.10) (0.04) (0.01) 0.00 0.00 Distributions From Net Realized Capital Gains ... (2.03) (2.59) (2.93) (2.10) (2.66) Distributions in Excess of Net investment Income ............................ 0.00 0.00 0.00 0.00 0.00(c) ----------- ----------- ----------- ----------- ----------- Total Distributions ............................. (2.13) (2.63) (2.94) (2.10) (2.66) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ................ $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03 =========== =========== =========== =========== =========== Total Return (%)(a) ............................. 34.3 16.3 32.4 23.1 8.6 Ratio of Operating Expenses to Average Net Assets (%) ........................ 2.11 2.05 2.00 1.98 1.96 Ratio of Net Investment Income (Loss) to Average Net Assets (%) ........................ 0.56 0.17 (0.29) (0.42) (0.27) Portfolio Turnover Rate (%) ..................... 69 127 103 114 133 Net Assets, End of the Year (000) ............... $ 29,026 $ 46,856 $ 81,066 $ 153,369 $ 216,457
(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 rounds to less than $0.01 per share. See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS ================================================================================
Class C Class Y ----------------------------------------------------- ------------------------- November May 1, (a) 18,(a) Year through Year Ended December 31, through Ended December 31, ---------------------------------------------------- December 31, December 31, 1995 1996 1997 1998 1999 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Period ............ $ 13.84 $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.42 $ 16.57 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income (Loss) 0.06 0.04 (0.05)(d) (0.04) (0.04) 0.02 0.02 Net Realized and Unrealized Gain on Investments ...... 2.58 2.05 4.42 3.21 1.36 1.22 1.51 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 2.64 2.09 4.37 3.17 1.32 1.24 1.53 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ........ (0.06) (0.04) (0.01) 0.00 0.00 (0.02) (0.08) Distributions From Net Realized Capital Gains ... (2.03) (2.59) (2.93) (2.10) (2.66) (0.07) (2.66) Distributions in Excess of Net Investment Income .... 0.00 0.00 0.00 0.00 0.00(e) 0.00 0.00(e) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total Distributions ........ (2.09) (2.63) (2.94) (2.10) (2.66) (0.09) (2.74) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Period ................... $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01 $ 16.57 $ 15.36 ========== ========== ========== ========== ========== ========== ========== Total Return (%)(c) ........ 20.2 16.3 32.6 22.9 8.6 8.1 9.8 Ratio of Operating Expenses to Average Net Assets (%) ........... 2.11(b) 2.05 2.00 1.98 1.96 0.98(b) 0.96 Ratio of Net Investment Income (Loss) to Average Net Assets (%) ........... 0.56(b) 0.17 (0.29) (0.42) (0.27) 0.58(b) (0.73) Portfolio Turnover Rate (%) 69 127 103 114 133 114 133 Net Assets, End of the Period (000) ............. $ 4,707 $ 3,912 $ 6,735 $ 18,288 $ 26,983 $ 1 $ 14,377
(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 rounds to less than $0.01 per share. 16 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS ================================================================================ For the Year Ended December 31, 1999 1. Significant Accounting Policies. The Fund is a series of Nvest Funds (formerly known as New England 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. 17 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 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 paid in capital. 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 year ended December 31, 1999 purchases and sales of securities (excluding short-term investments) were $869,940,026 and $754,284,165 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 ("Metlife"). Fees earned by Nvest Management and Westpeak under the management and subadvisory agreements in effect during the year ended December 31, 1999 are as follows: Fees Earned ----------- Nvest Management $1,921,579 Westpeak 1,922,351 The effective management fee for the year ended December 31, 1999 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 reimburses NSC for all or part of NSC's expenses of providing these services which include the following: (i) expenses for personnel performing bookkeeping, accounting and financial reporting functions and clerical functions relating to the Fund and (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to 18 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance. For the year ended December 31, 1999, these expenses amounted to $153,450 and are shown separately in the financial statements as accounting and administrative. c. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services serves as the sub-transfer agent for the Fund. For the year ended December 31, 1999, the Fund paid NSC $884,070 as compensation for its services in that capacity. 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, 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 year ended December 31, 1999, the Fund paid Nvest Funds $876,555 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 year ended December 31, 1999, the Fund paid Nvest Funds $488,463 and $61,166 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 year ended December 31, 1999, the Fund paid Nvest Funds $1,465,389 and $183,497 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 year ended December 31, 1999 amounted to $2,061,585. 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 19 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999 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 December 31, 1999 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y capital shares. Transactions in capital shares were as follows:
Year Ended --------------------------------------------------------------- December 31, 1998 December 31, 1999 --------------------------- --------------------------- Class A Shares Amount Shares Amount ------- --------- ------------- --------- ------------- Shares sold ................................................ 9,065,395 $ 144,572,219 11,472,939 $ 197,730,741 Shares issued in connection with the reinvestment of: Dividends from net investment income ................... 11,442 187,649 53,068 962,663 Distributions from net realized gain ................... 2,031,262 29,158,832 3,434,246 51,752,162 ---------- ------------- ---------- ------------- 11,108,099 173,918,700 14,960,253 250,445,566 Shares repurchased ......................................... (7,145,922) (112,760,204) (8,811,484) (151,367,164) ---------- ------------- ---------- ------------- Net increase (decrease) .................................... 3,962,177 $ 61,158,496 6,148,769 $ 99,078,402 ---------- ------------- ---------- ------------- Year Ended --------------------------------------------------------------- December 31, 1998 December 31, 1999 --------------------------- --------------------------- Class B Shares Amount Shares Amount ------- --------- ------------- --------- ------------- Shares sold ................................................ 4,248,677 $ 69,373,470 5,249,461 $ 88,949,545 Shares issued in connection with the reinvestment of: Distributions from net realized gain ................... 1,005,847 14,281,653 2,070,562 30,607,517 --------- ------------- --------- ------------- 5,254,524 83,655,123 7,320,023 119,557,062 Shares repurchased ......................................... (1,188,079) (19,142,794) (2,288,012) (38,363,095) --------- ------------- --------- ------------- Net increase (decrease) .................................... 4,066,445 $ 64,512,329 5,032,011 $ 81,193,967 --------- ------------- --------- ------------- Year Ended --------------------------------------------------------------- December 31, 1998 December 31, 1999 --------------------------- --------------------------- Class C Shares Amount Shares Amount ------- --------- ------------- --------- ------------- Shares sold ................................................ 1,217,463 $ 19,862,147 999,688 $ 16,915,102 Shares issued in connection with the reinvestment of: Distributions from net realized gain ................... 112,955 1,604,497 247,673 3,657,804 --------- ------------ --------- ------------ 1,330,418 21,466,644 1,247,361 20,572,906 --------- ------------ --------- ------------ Shares repurchased ......................................... (652,475) (10,694,572) (568,351) (9,465,865) --------- ------------ --------- ------------ Net increase (decrease) .................................... 677,943 $ 10,772,072 679,010 $ 11,107,041 --------- ------------ --------- ------------
20 NOTES TO FINANCIAL STATEMENTS -- continued ================================================================================ For the Year Ended December 31, 1999
November 18, 1998 (a) through Year Ended December 31, 1998 December 31, 1999 -------------------------- ---------------------------- Class Y Shares Amount Shares Amount ------- --------- ------------- ---------- ------------- Shares sold .................................................. 46 $ 710 972,875 $ 16,586,441 Shares issued in connection with the reinvestment of: Dividends from net investment income ..................... 0 0 3,202 58,080 Distributions from net realized gain ..................... 0 0 144,486 2,180,268 --------- ------------- ---------- ------------- 46 710 1,120,563 18,824,789 Shares repurchased ........................................... 0 0 (184,433) (3,171,748) --------- ------------- ---------- ------------- Net increase (decrease) ...................................... 46 $ 710 936,130 $ 15,653,041 --------- ------------- ---------- ------------- Increase (decrease) derived from capital shares transactions . 8,706,611 $ 136,443,607 12,795,920 $ 207,032,451 ========= ============= ========== =============
(a) Commencement of operations. 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 4, 1999. 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 year ended December 31, 1999. 21 REPORT OF INDEPENDENT ACCOUNTANTST ================================================================================ To the Trustees Nvest Funds Trust II and the Shareholders of the Nvest Growth & Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Growth & Income Fund (formerly the New England Growth & Income Fund) (the "Fund"), a series of Nvest Funds Trust II, at December 31, 1999, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2000 22 ================================================================================ 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. Market Capitalization - The value of a company's issued and outstanding common stock, as priced by the market: Number of outstanding shares x current market price of a share = market capitalization. Price/Earnings Ratio - Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price/earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different stocks. Growth Investing - An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing. Value Investing - A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets aren't fully reflected in their stock prices. Value stocks tend to have a lower price/earnings ratio than that of growth stocks. Standard & Poor's 500(R) (S&P 500) - Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange. It is not possible to invest directly in an index. 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 FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] The Power of Monthly Investing $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. 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 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 *An investment in the Fund is not insured or guaranteed by the FDIC or any other 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) - --------------------- 399 Boylston Street Boston, Massachusetts 02116 - --------------------- GP56-1299 [LOGO] Printed on Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----