-----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, JNtwnnreCB0luWmQON6I5BiRNRKQuUxyupWbNzSP7deSNa5j+DLWa2DvB8buLx3Y 2wTFrsmGKWMWkNHQLcmxdA== 0001047469-03-007268.txt : 20030228 0001047469-03-007268.hdr.sgml : 20030228 20030228131002 ACCESSION NUMBER: 0001047469-03-007268 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030228 EFFECTIVENESS DATE: 20030228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CDC NVEST FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00242 FILM NUMBER: 03585615 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 617-449-2840 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 6TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: TNE FUNDS TRUST DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST II DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: NVEST FUNDS TRUST II DATE OF NAME CHANGE: 20000202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CDC NVEST FUNDS TRUST I CENTRAL INDEX KEY: 0000770540 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04323 FILM NUMBER: 03585616 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 8002831155 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST I DATE OF NAME CHANGE: 19940614 FORMER COMPANY: FORMER CONFORMED NAME: NVEST FUNDS TRUST I DATE OF NAME CHANGE: 20000202 N-30D 1 a2104325zn-30d.txt N-30D [CDC NVEST FUNDS(SM) LOGO] ANNUAL REPORT DECEMBER 31, 2002 CDC NVEST SHORT TERM BOND FUND LOOMIS, SAYLES & COMPANY CDC NVEST BOND INCOME FUND LOOMIS, SAYLES & COMPANY CDC NVEST HIGH INCOME FUND LOOMIS, SAYLES & COMPANY CDC NVEST STRATEGIC INCOME FUND LOOMIS, SAYLES & COMPANY CDC NVEST LIMITED TERM U.S. GOVERNMENT FUND LOOMIS, SAYLES & COMPANY CDC NVEST GOVERNMENT SECURITIES FUND LOOMIS, SAYLES & COMPANY CDC Nvest Funds ANNUAL REPORT DECEMBER 31, 2002 Table of contents PRESIDENT'S LETTER 1 ECONOMIC UPDATE 2 PORTFOLIO MANAGERS' COMMENTARY AND PERFORMANCE CDC Nvest Short Term Bond Fund 4 CDC Nvest Bond Income Fund 6 CDC Nvest High Income Fund 8 CDC Nvest Strategic Income Fund 10 CDC Nvest Limited Term U.S. Government Fund 12 CDC Nvest Government Securities Fund 14 RISKS OF INVESTING IN CDC NVEST INCOME FUNDS 16 SCHEDULES OF INVESTMENTS CDC Nvest Short Term Bond Fund 17 CDC Nvest Bond Income Fund 20 CDC Nvest High Income Fund 23 CDC Nvest Strategic Income Fund 26 CDC Nvest Limited Term U.S. Government Fund 31 CDC Nvest Government Securities Fund 33 STATEMENTS OF ASSETS AND LIABILITIES 34 STATEMENTS OF OPERATIONS 36 STATEMENTS OF CHANGES IN NET ASSETS 38 FINANCIAL HIGHLIGHTS 40 NOTES TO FINANCIAL STATEMENTS 48 REPORT OF INDEPENDENT ACCOUNTANTS 59 TRUSTEES' INFORMATION 60
PRESIDENT'S LETTER FEBRUARY 2003 [PHOTO OF JOHN T. HAILER] John T. Hailer President CDC Nvest Funds "...A PROFESSIONAL FINANCIAL ADVISOR CAN HELP YOU TAKE THE EMOTION OUT OF INVESTING AND MAKE SOUND, RATIONAL DECISIONS FOR THE LONG TERM." Dear Shareholder: Investors will remember 2002 as a year marked by extremes. The bear market reached into its third year, questions surrounding corporate governance grew, and the threat of war with Iraq intensified. Yet even through these dark clouds, investors found some bright spots and the market delivered seven weeks of positive returns through October and November, making for the longest rally since the first quarter of 2000. It may be impossible to predict where the market will go from here, but there are steps you can take to be prepared. Now is a good time to return to such core investment principles as investing with a long-term outlook, diversifying your portfolio, managing your asset allocation, and looking to your financial advisor for guidance. This fourth principle may be the most important for these times. When you are unnerved by volatility and uncertainty, a professional financial advisor can help you take the emotion out of investing and make sound, rational decisions for the long term. As you plan your future, CDC Nvest Funds will be here for you, giving you access to the depth and strength of CDC IXIS Asset Management, a $312 billion* global money manager. Through its unique multi-manager approach we can bring you a diverse selection of investment disciplines that may help you achieve many goals in the years ahead. We thank you for continuing to place your trust in CDC Nvest Funds and look forward to helping you succeed, whatever the future brings. Sincerely, /s/ John T. Hailer * As of 12/31/02 1 ECONOMIC UPDATE FEBRUARY 2003 THE ECONOMY As 2002 drew to a close, a full economic recovery remained out of reach. Quarterly growth numbers surged to 5.0% in the first quarter and then slowed to a crawl in the fourth quarter, for an average rate for the year of 2.4%, according to the U.S. Commerce Department's advanced estimate. Layoffs continued among manufacturing companies, the result of continued sluggish demand for industrial equipment, big-ticket consumer items and air travel. The jobless rate rose to 6.0% at the end of December, according to the U.S. Department of Labor. This was an eight-year high, although labor markets actually improved in sectors that are expected to get a boost from higher defense spending. Except for basic areas like medical care and housing, low inflation is helping consumers stretch their dollar. While most retailers were disappointed with holiday sales, car sales were surprisingly strong, and spending on computers and other technology-related equipment finally came to life by the end of the year. Personal savings reached 4.4% of disposable income in the fourth quarter of 2002 - - well above the depressed levels of the past few years, but below levels prior to the stock market boom in the late 1990s. The housing market, which had remained strong all year, began to cool late in the year, only to surge again in December, pushing home building activity for all of 2002 to the highest level in 16 years. Aside from the possibility of war in Iraq, prospects for the year ahead are brighter. Strong productivity growth is expected to translate into greater profitability, and the Federal Reserve Board's November interest rate cut, the first in nearly a year, is expected to provide added stimulus for growth. PERSONAL SAVINGS RATE VERSUS DOW JONES INDUSTRIAL AVERAGE Ten Years ended December 31, 2002 [CHART]
PERSONAL DOW JONES SAVINGS INDUSTRIAL DATE RATE AVERAGE 1993 8.7 3754 1994 6.6 3834 1995 4.8 5117 1996 4.6 6448 1997 4.2 7908 1998 3.9 9181 1999 1.6 11497 2000 2.7 10787 2001 1.3 10022 2002 4.4 8342
Source: Seasonally adjusted personal savings rate, Bureau of Economic Analysis THE CHART COMPARES THE ANNUAL PERSONAL SAVINGS RATE OF ALL AMERICANS FOR EACH OF THE PAST TEN YEARS TO THE CLOSING PRICE ON THE DOW JONES INDUSTRIAL AVERAGE. AS THE DOW HEADED INTO ITS STEEP RISE IN THE LATE 1990S, THE PERSONAL SAVINGS RATE DECLINED. AS STOCK PRICES BEGAN A THREE-YEAR DECLINE IN 2000, THE SAVINGS RATE INCREASED FOR THE FIRST TIME IN TEN YEARS. THIS SUGGESTS THAT INVESTORS NO LONGER FEEL THEY CAN RELY ON DOUBLE-DIGIT RETURNS ON THEIR INVESTMENTS TO BUILD FOR THEIR FUTURE. THEY ARE REACHING DEEPER INTO THEIR POCKETS, SETTING ASIDE A GREATER PORTION OF THEIR DISPOSABLE INCOME. 2 ECONOMIC UPDATE THE EQUITY MARKETS For equity investors, 2002 was a year on the see-saw. Stock prices moved up in the first quarter, down in the second and third quarters, and back up again in the fourth quarter, raising hope that the longest bear market in recent memory could finally be over. But for the year as a whole, the gains were not enough; all major stock market indexes closed December in negative territory, making 2002 the third consecutive losing year for common stocks. Foreign stocks fared as badly as the U.S. market or even worse, as economic problems persisted around the globe. However, the market experienced a change in sentiment in the fourth quarter, as money flowed into stocks that had been hard hit a year ago. U.S.-based investors benefited from the strength of the euro versus the dollar. Asian equities were also mired in red ink, but in general, Asian markets did better than the United States. THE FIXED-INCOME MARKETS Bond investors were on a see-saw of their own, but returns generally moved counter to the stock market. However, the Fed's decision to cut short-term interest rates by a generous 0.5% in November gave the markets renewed strength in December. The yield on the benchmark ten-year U.S. Treasury bond fell from 5.1% to 4.0% by the end of the year and short-term rates dropped from 1.7% to 1.2% - their lowest level in 41 years. In general, higher-quality bonds outperformed lower-quality bonds. Municipal bonds, which had been strong performers throughout the year, were flat in the closing quarter. High-yield bonds generally lost ground during the year, as the bankruptcy rate remained high, especially in the troubled telecommunications and utilities sectors. However, in the final quarter, high-grade bonds lost ground and the high-yield sector came back to life. HISTORICAL INTEREST RATES Quarter-by-quarter, ten years ended December 31, 2002 [CHART]
3-MONTH 3-YEAR TREASURY TREASURY BILLS BONDS 12/92 3.22 6.7 3/93 2.96 6.07 3.05 5.79 2.9 5.33 12/93 3.06 5.77 3.5 6.72 4.2 7.27 4.79 7.6 12/94 5.56 7.81 5.64 7.15 5.35 6.17 5.14 6.26 12/95 4.91 5.64 4.99 5.32 5.12 6.85 5.18 6.73 12/96 5.08 6.45 5.18 6.9 5.12 6.42 4.93 6.06 12/97 5.29 5.75 5.05 5.61 5 5.44 4.43 4.46 12/98 4.52 4.7 4.38 5.24 4.75 5.87 4.72 5.92 12/99 5.3 6.41 5.72 6.13 5.68 6.08 6.01 5.82 12/00 5.7 5.01 4.2 4.95 3.38 5.29 2.32 4.53 1.71 5.15 12/01 1.82 5.38 1.69 4.83 1.54 3.69 12/02 1.19 3.92
Source: Federal Reserve Board THE CHART COMPARES INTEREST RATES ON TWO MARKET BENCHMARKS OVER THE PAST DECADE. IN THE TWO YEARS SINCE THE FED BEGAN ITS STIMULUS PROGRAM, BOTH TEN-YEAR AND THREE-MONTH TREASURY RATES HAVE BEEN VOLATILE. HOWEVER, WHILE RATES ON TEN-YEAR TREASURIES DECLINED BY 20%, FROM 5.0% TO 4.0%, THREE-MONTH TREASURIES FELL BY ALMOST 80% DURING THE PERIOD, FROM 5.9% TO 1.2%. THE CHART ALSO SHOWS THAT THIS PATTERN IS UNUSUAL. HISTORICALLY, INTEREST RATES ON SHORT-TERM SECURITIES HAVE BEEN LESS VOLATILE THAN LONGER-TERM RATES. 3 CDC NVEST SHORT TERM BOND FUND PORTFOLIO PROFILE OBJECTIVE: Seeks a high level of current income consistent with preservation of capital STRATEGY: Invests primarily in bonds that mature in three years or less. May also consider other income opportunities INCEPTION DATE: October 18, 1991 MANAGERS: Craig Smith Richard G. Raczkowski John Hyll Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFAX Class B NEABX Class C NECSX Class Y NECYX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 6.97 Class B 6.96 Class C 6.95 Class Y 6.97
MANAGEMENT DISCUSSION An anemic economy, together with a series of corporate scandals, the threat of terrorism, and tensions in the Middle East, kept the bond and stock markets on edge in 2002. CDC Nvest Short Term Bond Fund's holdings in the telecommunications, cable/media and energy sectors hurt performance this summer, and even though these sectors rebounded in the fourth quarter, the fund lagged its benchmark for the year. For the 12 months ended December 31, 2002, the total return on the fund's Class A shares was 2.13% at net asset value, including $0.34 per share in reinvested dividends. The fund's benchmark, Lehman Brothers 1-3 Year Government/Credit Index, ended the period with a return of 6.28%, while the average return on the funds in Morningstar's Short Term Bond category was 5.24%. BOND PERFORMANCE IN DIFFERENT SECTORS DIVERGED IN 2002 Performance results for different classes of corporate bonds diverged in 2002. High-quality issues were strong early in the year, as investors sought relative safety and current income in an uncertain economic environment. Meanwhile, lower-quality, more aggressive bonds lagged. The worst performers were bonds issued by high-tech and energy companies, such as WorldCom, AES Corporation and El Paso Corp. Each of these issues was in the portfolio at one time during the year and had a negative effect on the fund's results. Some of these companies were impacted by serious concerns about corporate governance. In other instances, however, companies came under scrutiny simply because the rating agencies began to interpret guidelines on debt levels more strictly, and changed their ratings accordingly. MARKET SENTIMENT SHIFTED IN FOURTH QUARTER Investor confidence began to improve in October, and lower-rated, higher-yielding corporate bonds rallied. Many companies were able to renegotiate loans at lower rates and sell assets to shore up their finances. Investors, too, seemed to regain confidence. Sprint, Comcast and AOL Time-Warner were among the fund's top performers in the closing quarter. As lower-quality bonds returned to favor, the tide went out for the highest-quality bonds in the portfolio - U.S. Treasuries, agencies and top-rated corporate bonds. The hint of a recovery brought with it prospects for rising interest rates, and when interest rates rise, bond prices tend to decline commensurately. Currently, interest rates on Treasury securities are close to 41-year lows. As yields rise, the "spread," or difference in yield between high- and low-quality bonds, diminishes. Especially early in the cycle, higher-quality bonds with lower yields may tend to have greater price sensitivity until quality spreads narrow. Maturity is another factor influencing yields. Long-term bonds typically offer higher yields than short-term issues. Currently the difference in yield between long- and short-term bonds is also wide by historic measures, and short-term bond rates may be more volatile in the coming months than rates on long-term bonds. LOOMIS EXPECTS GRADUAL ECONOMIC RECOVERY IN 2003 Although current economic data is mixed, this is not unusual when the economy is at a turning point. While acknowledging the fragility of any economic forecast, we expect the coming year to be one of slow improvement. Low but rising interest rates and increasing budget deficits should make U.S. Treasuries less attractive than other market sectors. In this environment, the additional yield provided by corporate bonds and mortgage- and asset-backed securities should compensate for declining bond prices as yields continue to rise. 4 CDC NVEST SHORT TERM BOND FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Short Term Bond Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The 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. [CHART] GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
DECEMBER 31, 1992 THROUGH DECEMBER 31, 2002 NAV MSC LB Short LB 1-3 1-5 Inv Govt/Credit 12/31/92 $10,000 $ 9,700 $10,000 $10,000 $10,065 $ 9,764 $10,167 $10,107 $10,119 $ 9,815 $10,306 $10,190 $10,156 $ 9,851 $10,355 $10,222 $10,218 $ 9,912 $10,452 $10,287 $10,227 $ 9,921 $10,437 $10,263 $10,289 $ 9,980 $10,566 $10,341 $10,312 $10,002 $10,596 $10,365 $10,360 $10,049 $10,731 $10,452 $10,394 $10,082 $10,767 $10,486 $10,387 $10,075 $10,807 $10,510 $10,377 $10,065 $10,797 $10,513 12/31/93 $10,410 $10,097 $10,852 $10,556 $10,458 $10,144 $10,968 $10,623 $10,461 $10,147 $10,856 $10,559 $10,424 $10,112 $10,732 $10,504 $10,401 $10,089 $10,668 $10,464 $10,394 $10,082 $10,686 $10,478 $10,429 $10,116 $10,716 $10,506 $10,452 $10,139 $10,856 $10,601 $10,519 $10,203 $10,904 $10,637 $10,499 $10,184 $10,844 $10,614 $10,526 $10,210 $10,857 $10,638 $10,509 $10,194 $10,795 $10,594 12/31/94 $10,496 $10,181 $10,819 $10,614 $10,615 $10,297 $10,998 $10,759 $10,733 $10,411 $11,216 $10,908 $10,847 $10,522 $11,287 $10,970 $10,903 $10,576 $11,421 $11,069 $11,021 $10,691 $11,714 $11,255 $11,049 $10,718 $11,791 $11,324 $11,094 $10,761 $11,822 $11,369 $11,150 $10,816 $11,924 $11,438 $11,220 $10,884 $12,001 $11,494 $11,276 $10,938 $12,119 $11,590 $11,345 $11,004 $12,264 $11,690 12/31/95 $11,398 $11,056 $12,381 $11,778 $11,469 $11,125 $12,510 $11,879 $11,505 $11,160 $12,420 $11,834 $11,544 $11,198 $12,371 $11,825 $11,597 $11,249 $12,360 $11,837 $11,637 $11,288 $12,370 $11,864 $11,674 $11,324 $12,487 $11,951 $11,730 $11,378 $12,534 $11,998 $11,787 $11,434 $12,560 $12,042 $11,859 $11,503 $12,719 $12,152 $11,949 $11,590 $12,916 $12,154 $12,021 $11,661 $13,059 $12,381 12/31/96 $12,063 $11,701 $13,013 $12,383 $12,105 $11,742 $13,080 $12,443 $12,175 $11,810 $13,113 $12,474 $12,218 $11,851 $13,054 $12,464 $12,292 $11,923 $13,190 $12,567 $12,352 $11,982 $13,295 $12,654 $12,427 $12,055 $13,412 $12,743 $12,522 $12,146 $13,645 $12,884 $12,600 $12,222 $13,605 $12,896 $12,660 $12,280 $13,747 $12,992 $12,739 $12,356 $13,844 $13,089 $12,747 $12,365 $13,867 $13,122 12/31/97 $12,809 $12,425 $13,959 $13,209 $12,888 $12,502 $14,127 $13,336 $12,909 $12,522 $14,137 $13,347 $12,954 $12,565 $14,190 $13,399 $12,996 $12,606 $14,269 $13,465 $13,039 $12,648 $14,365 $13,538 $13,080 $12,688 $14,440 $13,608 $13,104 $12,711 $14,498 $13,672 $13,216 $12,820 $14,621 $13,829 $13,234 $12,837 $14,922 $14,015 $13,242 $12,844 $14,895 $14,076 $13,268 $12,870 $14,965 $14,073 12/31/98 $13,327 $12,927 $15,014 $14,128 $13,379 $12,978 $15,125 $14,188 $13,299 $12,900 $14,993 $14,128 $13,400 $12,998 $15,133 $14,228 $13,465 $13,061 $15,205 $14,277 $13,363 $12,962 $15,111 $14,265 $13,391 $12,989 $15,152 $14,308 $13,419 $13,016 $15,132 $14,348 $13,409 $13,007 $15,152 $14,386 $13,514 $13,108 $15,294 $14,483 $13,523 $13,118 $15,354 $14,526 $13,514 $13,108 $15,396 $14,558 12/31/99 $13,575 $13,168 $15,388 $14,573 $13,550 $13,144 $15,355 $14,573 $13,659 $13,249 $15,474 $14,674 $13,708 $13,296 $15,563 $14,757 $13,600 $13,192 $15,525 $14,785 $13,629 $13,220 $15,562 $14,839 $13,838 $13,422 $15,803 $15,003 $13,947 $13,529 $15,935 $15,105 $13,997 $13,577 $16,102 $15,225 $14,189 $13,763 $16,272 $15,350 $14,189 $13,763 $16,288 $15,419 $14,331 $13,901 $16,444 $15,563 12/31/2000 $14,482 $14,047 $16,692 $15,750 $14,618 $14,179 $16,995 $15,974 $14,710 $14,268 $17,153 $16,087 $14,822 $14,377 $17,303 $16,218 $14,851 $14,405 $17,337 $16,269 $14,942 $14,494 $17,468 $16,369 $14,969 $14,520 $17,545 $16,432 $15,230 $14,773 $17,871 $16,639 $15,342 $14,882 $18,033 $16,752 $15,541 $15,075 $18,239 $17,001 $15,696 $15,225 $18,471 $17,171 $15,634 $15,165 $18,373 $17,125 12/31/2001 $15,614 $15,146 $18,317 $17,133 $15,659 $15,189 $18,398 $17,182 $15,659 $15,189 $18,497 $17,257 $15,571 $15,103 $18,319 $17,144 $15,592 $15,124 $18,550 $17,336 $15,721 $15,250 $18,766 $17,427 $15,543 $15,077 $18,871 $17,566 $15,493 $15,028 $18,989 $17,741 $15,664 $15,194 $19,220 $17,837 $15,744 $15,271 $19,504 $17,991 $15,759 $15,286 $19,441 $18,014 $15,772 $15,299 $19,556 $18,013 12/31/2002 $15,946 $15,468 $19,943 $18,209
AVERAGE ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR(6) 5 YEARS(6) 10 YEARS(6) SINCE INCEPTION(6) CLASS A (Inception 10/18/91) Net Asset Value(1) 2.13% 4.48% 4.78% -- With Maximum Sales Charge(2) -0.92 3.84 4.46 -- CLASS B (Inception 9/13/93) Net Asset Value(1) 1.36 3.73 -- 3.94% With CDSC(3) -3.51 3.40 -- 3.94 CLASS C (Inception 12/7/98) Net Asset Value(1) 1.34 -- -- 3.80 With Maximum Sales Charge and CDSC(3) -0.61 -- -- 3.56 CLASS Y (Inception 10/1/01) Net Asset Value(1) 2.39 -- -- 2.24
SINCE SINCE SINCE CLASS B CLASS C CLASS Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION(9) INCEPTION(9) INCEPTION(9) Lehman 1-3 Yr. Govt/Credit Index(4) 6.28% 6.64% 6.18% 6.15% 6.55% 5.16% Lehman 1-5 Yr. Credit Index(5) 8.88 7.40 7.15 6.89 7.36 6.79 Morningstar Short Term Bond Fund Ave.(7) 5.24 5.75 5.78 5.50 5.64 3.72 Lipper Short Term Inv. Grade Funds Ave.(8) 4.37 5.55 5.57 5.36 5.47 3.18
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
CREDIT QUALITY A 46.2% Aa 5.3% Aaa 22.2% Ba 1.3% Baa 20.0% Not Rated 5.0%
Credit quality is based on bond ratings from Moody's Investors Service [CHART]
EFFECTIVE MATURITY Less than 1 year 22.3% 1-5 years 77.7%
Average Effective Maturity: 2.0 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 3.00%. (3) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. (4) Lehman Brothers 1-3 Year Government/Credit Index is an unmanaged index of U.S. government and U.S. and foreign corporate debt securities with maturities of one to three years. (5) Lehman Brothers 1-5 Year Credit Index is an unmanaged index of investment-grade domestic corporate debt securities with maturities of one to five years. (6) The adviser 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. (7) Morningstar Short Term Bond Fund Average is the average performance without sales charges of funds with similar investment objectives, as calculated by Morningstar, Inc. (8) Lipper Short Term Investment Grade Debt Funds Average is the average performance without sales charges of funds with similar investment objectives, as calculated by Lipper Inc. (9) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class B from 9/30/93; Class C from 12/31/98; Class Y from 10/31/01. 5 CDC NVEST BOND INCOME FUND PORTFOLIO PROFILE OBJECTIVE: Seeks a high current income plus the opportunity for capital appreciation to produce a high total return STRATEGY: Invests primarily in quality corporate and U.S. government bonds and some foreign bonds INCEPTION DATE: November 7, 1973 MANAGERS: Peter W. Palfrey Curt A. Mitchell Richard G. Raczkowski Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFRX Class B NERBX Class C NECRX Class Y NERYX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 11.28 Class B 11.28 Class C 11.29 Class Y 11.33
MANAGEMENT DISCUSSION Concerns about sluggish economic growth and a series of corporate scandals caused fixed-income investors to seek the safety of top-rated bonds during most of 2002. Against this backdrop, the fund's emphasis on lower-rated corporate bonds put it at a disadvantage. For the 12 months ended December 31, 2002, CDC Nvest Bond Income Fund's total return was 2.84% for Class A shares, including $0.62 per share in reinvested dividends. For the same period, the fund's benchmark, Lehman Brothers Aggregate Bond Index, returned 10.25%, while the average return on the funds in Morningstar's Intermediate Bond Fund category was 7.88%. The fund's 30-day SEC yield at the end of December 2002 was 4.84%. LOWER-RATED ISSUES HURT PERFORMANCE IN 2002 WorldCom was by far the most damaging of the fund's holdings. Qwest was also negative, but to a lesser degree. Up until shortly before allegations of fraud began to appear, WorldCom was rated A and one of the fund's largest holdings. We sold both WorldCom and Qwest at a loss, and even eliminated positions in such high-grade telecom companies as Sprint. At the same time, we subjected all the fund's high-yielding positions to intense scrutiny, including technology, utility and energy companies, in an effort to assess their vulnerability to a potential loss of liquidity. We also increased the fund's diversification to minimize the potential risks of exposure to any one company. As we sold or trimmed high-yield positions, we increased the fund's weighting in Treasuries and U.S. government agency obligations. In an effort to maintain as high a level of income as possible, we lengthened the fund's maturity structure and added to its position in mortgage-backed securities. In October and November, when renewed prospects for growth began to restore investor confidence, we began looking for opportunities to rebuild the fund's emphasis on corporate bonds, some of which appeared to be attractively priced. SOME CORPORATE BONDS, FOREIGN CURRENCY EXPOSURE, BENEFITED FUND As an asset class, the fund's holdings in Treasuries and U.S. government agency obligations benefited the fund in 2002, but certain high-grade corporate bonds were the best performers. For example, Kappa-Beheer, a paper company with bonds denominated in euros, provided the greatest return in 2002. This reflected rising paper valuations as the global economy improved, as well as the strength of the euro versus the U.S. dollar. TCI and Comcast also contributed to fund performance, as cable valuations rebounded strongly during the latter part of the year. Among the fund's other corporate holdings, the defense, banking, rails and consumer products sectors generated attractive returns in 2002. LOOMIS SEES IMPROVING OUTLOOK FOR CORPORATE BONDS IN 2003 We believe the rash of corporate scandals and downgrades may now be largely behind us. If corporate profits gain momentum later in the new year, this could lead to considerable upside potential for corporate bonds in general, and medium- to lower-rated bonds in particular. Those areas that were the most severely impacted by the market's "flight to quality" in 2002 should reap the rewards. However, if tensions in Iraq and North Korea worsen, investor preference could swing back in favor of relative safety. Consequently, Aaa-rated issues accounted for nearly 50% of the fund's assets as of the end of December, with more than 30% in mortgage-backed securities to provide some income cushion should corporate bonds come under renewed pressure. Non-investment grade bonds account for less than 12% of assets, yet the fund retains a significant yield advantage over the broader market. As issues on the world political and economic front become clearer, we will again increase our allocation to lower-rated, higher-yielding securities. 6 CDC NVEST BOND INCOME FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Bond Income Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The 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 [CHART]
DECEMBER 31, 1992 THROUGH DECEMBER 31, 2002 NAV MSC LB Agg LB US Credit 12/31/92 $10,000 $ 9,550 $10,000 $10,000 $10,235 $ 9,774 $10,192 $10,233 $10,488 $10,016 $10,370 $10,468 $10,508 $10,035 $10,413 $10,504 $10,592 $10,115 $10,486 $10,585 $10,606 $10,129 $10,499 $10,598 $10,834 $10,346 $10,690 $10,855 $10,921 $10,429 $10,750 $10,934 $11,139 $10,638 $10,938 $11,206 $11,145 $10,643 $10,968 $11,232 $11,220 $10,715 $11,009 $11,289 $11,099 $10,600 $10,916 $11,150 12/31/93 $11,186 $10,683 $10,975 $11,216 $11,361 $10,850 $11,123 $11,434 $11,112 $10,612 $10,930 $11,164 $10,815 $10,328 $10,660 $10,821 $10,703 $10,221 $10,575 $10,717 $10,647 $10,168 $10,574 $10,677 $10,581 $10,105 $10,550 $10,651 $10,780 $10,295 $10,760 $10,920 $10,837 $10,349 $10,773 $10,932 $10,722 $10,240 $10,615 $10,729 $10,693 $10,212 $10,605 $10,704 $10,664 $10,184 $10,582 $10,686 12/31/94 $10,719 $10,237 $10,655 $10,775 $10,900 $10,409 $10,866 $11,003 $11,259 $10,752 $11,124 $11,320 $11,262 $10,755 $11,192 $11,413 $11,483 $10,967 $11,349 $11,605 $11,990 $11,450 $11,788 $12,152 $12,096 $11,552 $11,874 $12,262 $12,031 $11,490 $11,848 $12,208 $12,245 $11,694 $11,991 $12,404 $12,398 $11,840 $12,107 $12,551 $12,563 $11,998 $12,265 $12,715 $12,760 $12,185 $12,449 $12,958 12/31/95 $12,945 $12,363 $12,623 $13,172 $13,000 $12,415 $12,707 $13,257 $12,718 $12,145 $12,486 $12,942 $12,654 $12,085 $12,399 $12,832 $12,548 $11,983 $12,330 $12,725 $12,537 $11,973 $12,305 $12,703 $12,720 $12,148 $12,470 $12,889 $12,752 $12,179 $12,504 $12,914 $12,752 $12,179 $12,483 $12,874 $13,049 $12,462 $12,701 $13,147 $13,380 $12,778 $12,982 $13,506 $13,702 $13,085 $13,204 $13,795 12/31/96 $13,542 $12,933 $13,082 $13,604 $13,618 $13,005 $13,122 $13,623 $13,703 $13,087 $13,154 $13,681 $13,499 $12,891 $13,008 $13,468 $13,647 $13,033 $13,203 $13,672 $13,831 $13,209 $13,328 $13,826 $14,074 $13,441 $13,486 $14,022 $14,641 $13,982 $13,850 $14,535 $14,391 $13,744 $13,732 $14,321 $14,677 $14,017 $13,934 $14,571 $14,816 $14,150 $14,136 $14,756 $14,885 $14,215 $14,202 $14,839 12/31/97 $15,039 $14,362 $14,345 $14,996 $15,238 $14,553 $14,529 $15,174 $15,288 $14,600 $14,518 $15,170 $15,382 $14,690 $14,568 $15,226 $15,453 $14,757 $14,644 $15,322 $15,610 $14,907 $14,783 $15,504 $15,668 $14,963 $14,908 $15,618 $15,627 $14,924 $14,940 $15,603 $15,472 $14,776 $15,183 $15,676 $16,070 $15,347 $15,538 $16,184 $15,900 $15,185 $15,456 $15,935 $16,217 $15,487 $15,544 $16,235 12/31/98 $16,242 $15,511 $15,591 $16,282 $16,417 $15,678 $15,702 $16,443 $16,085 $15,361 $15,428 $16,053 $16,307 $15,573 $15,513 $16,166 $16,436 $15,697 $15,562 $16,214 $16,079 $15,355 $15,426 $15,997 $15,976 $15,257 $15,377 $15,914 $15,913 $15,197 $15,311 $15,825 $15,849 $15,136 $15,304 $15,787 $16,118 $15,392 $15,481 $15,958 $16,155 $15,428 $15,538 $16,032 $16,179 $15,451 $15,537 $16,049 12/31/99 $16,187 $15,458 $15,462 $15,964 $16,119 $15,394 $15,412 $15,908 $16,301 $15,567 $15,598 $16,055 $16,524 $15,780 $15,804 $16,192 $16,219 $15,489 $15,758 $16,050 $16,100 $15,375 $15,751 $15,990 $16,587 $15,841 $16,079 $16,391 $16,685 $15,934 $16,225 $16,590 $16,900 $16,139 $16,460 $16,806 $16,925 $16,163 $16,563 $16,894 $16,829 $16,071 $16,673 $16,911 $16,988 $16,224 $16,946 $17,130 12/31/2000 $17,383 $16,601 $17,260 $17,463 $17,814 $17,013 $17,542 $17,940 $17,991 $17,181 $17,695 $18,097 $18,013 $17,202 $17,784 $18,209 $17,911 $17,105 $17,710 $18,143 $18,025 $17,214 $17,817 $18,310 $18,030 $17,219 $17,884 $18,402 $18,485 $17,654 $18,284 $18,883 $18,691 $17,850 $18,494 $19,136 $18,613 $17,775 $18,709 $19,108 $18,979 $18,125 $19,101 $19,582 $18,853 $18,005 $18,837 $19,412 12/31/2001 $18,643 $17,804 $18,718 $19,279 $18,601 $17,764 $18,869 $19,442 $18,529 $17,695 $19,052 $19,589 $18,326 $17,501 $18,735 $19,227 $18,498 $17,666 $19,098 $19,495 $18,653 $17,814 $19,261 $19,753 $18,204 $17,384 $19,427 $19,785 $17,993 $17,183 $19,662 $19,775 $18,403 $17,575 $19,994 $20,287 $18,464 $17,633 $20,317 $20,672 $18,360 $17,533 $20,225 $20,433 $18,709 $17,867 $20,219 $20,698 12/31/2002 $19,172 $18,310 $20,637 $21,308
AVERAGE ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION CLASS A (Inception 11/7/73) Net Asset Value(1) 2.84% 4.98% 6.72% -- With Maximum Sales Charge(2) -1.82 4.02 6.23 -- CLASS B (Inception 9/13/93) Net Asset Value(1) 2.12 4.21 -- 5.12% With CDSC(5) -2.75 3.90 -- 5.12 CLASS C (Inception 12/30/94) Net Asset Value(1) 2.12 4.20 -- 6.56 With Maximum Sales Charge and CDSC(5) 0.11 3.99 -- 6.43 CLASS Y (Inception 12/30/94) Net Asset Value(1) 3.45 5.37 -- 7.82
SINCE SINCE CLASS B CLASS C & Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION(8) INCEPTION(8) Lehman Aggregate Bond Index(3) 10.25% 7.55% 7.51% 7.07% 8.61% Lehman U.S. Credit Index(4) 10.53 7.28 7.86 7.17 8.90 Morningstar Int. Bond Fund Average(6) 7.88 6.20 6.69 6.09 7.53 Lipper Int. Investment Grade Debt Avg.(7) 8.14 6.36 7.97 6.11 7.53
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
CREDIT QUALITY Aaa 47.6% Aa 3.6% A 12.9% Baa 24.7% Ba 7.4% B 2.2% Caa and not rated 1.6%
Credit quality is based on bond ratings from Moody's Investors Service [CHART]
EFFECTIVE MATURITY Less than 1 year 4.2% 1-5 years 52.9% 5-10 years 16.2% 10+ years 26.7%
Average Effective Maturity: 6.5 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 4.50%. (3) Lehman Brothers Aggregate Bond Index is an unmanaged index of investment-grade bonds with one- to ten-year maturities issued by the U.S. government, its agencies and U.S. corporations. (4) Lehman Brothers U.S. Credit Index is an unmanaged index that includes all publicly issued, fixed-rate, nonconvertible, dollar-denominated, SEC-registered, investment-grade corporate debt. (5) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. (6) Morningstar Intermediate Bond Fund Average is the average performance without sales charges of funds with similar investment objectives, as calculated by Morningstar, Inc. (7) Lipper Intermediate Investment Grade Debt Funds Average is the average performance without sales charges of funds with similar investment objectives, as calculated by Lipper Inc. (8) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class B from 9/30/93; Class C from 12/31/94; Class Y from 12/31/94. 7 CDC NVEST HIGH INCOME FUND PORTFOLIO PROFILE OBJECTIVE: Seeks high current income plus the opportunity for capital appreciation to produce a high total return STRATEGY: Invests primarily in fixed-income securities rated Ba or lower by Moody's INCEPTION DATE: February 22, 1984 MANAGERS: Kathleen C. Gaffney Matthew J. Eagan Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFHX Class B NEHBX Class C NEHCX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 4.12 Class B 4.12 Class C 4.12
MANAGEMENT DISCUSSION Late in the year, high-yielding corporate bonds began to recover some of the ground lost during the broad market decline in 2002, but higher-quality bonds and government securities provided the best returns. For the 12 months ended December 31, 2002 the total return on Class A shares of CDC Nvest High Income Fund was -8.86%, including $0.39 per share in reinvested dividends. The fund's benchmark, the Lehman Brothers High Yield Composite Index, returned -1.41% for the same period, and the average return on the funds in Morningstar's High Yield Bond Fund category was -1.89%. FLIGHT TO QUALITY UNDERMINED PRICES OF MOST CORPORATE BONDS For much of the year financial markets had been seeking relative safety by focusing on high-quality fixed-income investments. The telecom, media, technology and utility industries were hurt by high-profile bankruptcies, corporate governance scandals, and persistently weak business conditions. We sold the fund's holdings in WorldCom and Adelphia at a loss before the end of June, but we continue to favor wireless communications companies like AT&T and Sprint, even though they were caught in the telecom downdraft. Market sentiment has also been heavily against airlines, which remain stressed by the decline in air travel, yet we believe in the long-term prospects for well managed airlines like Delta and Northwest. At times, prices of some bonds seemed to anticipate the worst possible outcome for their issuers. Since high-yielding bonds in these sectors are featured in the fund's portfolio, the broad sell-off hurt fund performance for the year, despite the fourth-quarter rally. However, some corporate sectors held up relatively well in 2002, particularly lodging, energy, real estate investments, and financial companies. Bonds of two independent energy exploration companies - Chesapeake Energy and XTO Energy - rose as higher prices boosted production levels. Wireless provider Nextel also made a positive contribution, thanks to a strengthened balance sheet and its leadership position in the business communications market. Bonds issued by foreign governments and consumer products companies were also positive for the fund in 2002. For example, South Korea's growing economy was positive for Hanvit Bank. IMPROVING ECONOMY COULD BENEFIT CORPORATE BONDS The Federal Reserve Board seems unlikely to move rates higher unless a vigorous economic resurgence brings threats of renewed inflation. However, high-yield issues tend to be more sensitive to corporate developments than to interest rate levels; in a stronger economy, we believe corporate bonds in general will do well. If, as we believe, the economy continues to improve at a slow but sustained pace, we think fixed-income investors may return to the corporate sector in pursuit of superior returns. Since last year's market has reduced prices to bargain levels, the prospect for attractive returns may motivate investors. At the same time, yields on short-term Treasury securities have declined to 41-year lows. Since the government is likely to issue more debt to fund the growing federal deficit, there is some risk that rates could rise, causing the price of Treasury securities to decline. On the other hand, a war in Iraq or elsewhere might cause investor sentiment to swing back toward relative safety. ENERGY, TELECOM, TECHNOLOGY LOOK ATTRACTIVE In the current atmosphere of firm energy prices, we remain positive on natural gas pipeline companies. We also favor some telecommunications issues that appear attractively valued. Valuations appear even more compelling among technology companies that provide services to the major regional telephone companies and other large customers. In terms of overall structure, we plan to maintain the fund's current emphasis on bonds in the upper quality range of the high-yield universe, with the bulk of the portfolio tied to the U.S. dollar, whether through domestic issues or by way of foreign bonds that are denominated in U.S. dollars. 8 CDC NVEST HIGH INCOME FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest High Income Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The 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 [CHART]
DECEMBER 31, 1992 THROUGH DECEMBER 31, 2002 NAV MSC LB Hi Yeld 12/31/92 $10,000 $ 9,550 $10,000 $10,249 $ 9,788 $10,291 $10,436 $ 9,966 $10,472 $10,613 $10,136 $10,607 $10,684 $10,203 $10,700 $10,842 $10,354 $10,827 $11,079 $10,580 $11,054 $11,150 $10,649 $11,161 $11,178 $10,675 $11,255 $11,153 $10,652 $11,284 $11,406 $10,893 $11,512 $11,506 $10,988 $11,568 12/31/93 $11,652 $11,128 $11,712 $11,919 $11,382 $11,966 $11,942 $11,404 $11,935 $11,636 $11,113 $11,484 $11,447 $10,932 $11,405 $11,495 $10,978 $11,411 $11,543 $11,023 $11,446 $11,470 $10,954 $11,543 $11,421 $10,907 $11,625 $11,446 $10,931 $11,626 $11,427 $10,913 $11,653 $11,247 $10,741 $11,506 12/31/94 $11,276 $10,769 $11,591 $11,358 $10,847 $11,748 $11,653 $11,128 $12,151 $11,728 $11,200 $12,282 $11,960 $11,422 $12,594 $12,181 $11,633 $12,947 $12,166 $11,619 $13,030 $12,375 $11,818 $13,194 $12,384 $11,826 $13,236 $12,447 $11,887 $13,398 $12,497 $11,934 $13,481 $12,519 $11,956 $13,600 12/31/95 $12,604 $12,037 $13,814 $12,835 $12,257 $14,057 $12,923 $12,341 $14,068 $12,898 $12,318 $14,058 $13,053 $12,465 $14,089 $13,194 $12,600 $14,174 $13,277 $12,680 $14,291 $13,406 $12,803 $14,358 $13,565 $12,955 $14,513 $13,982 $13,353 $14,863 $13,952 $13,324 $14,977 $14,240 $13,599 $15,275 12/31/96 $14,480 $13,828 $15,382 $14,491 $13,839 $15,522 $14,998 $14,323 $15,781 $14,800 $14,134 $15,553 $14,882 $14,212 $15,706 $15,377 $14,685 $16,054 $15,476 $14,780 $16,276 $15,898 $15,183 $16,723 $16,000 $15,280 $16,685 $16,477 $15,735 $17,016 $16,333 $15,598 $17,031 $16,552 $15,807 $17,194 12/31/97 $16,706 $15,954 $17,345 $16,957 $16,194 $17,657 $16,933 $16,171 $17,760 $17,108 $16,338 $17,927 $17,201 $16,427 $17,998 $17,173 $16,400 $18,060 $17,232 $16,457 $18,125 $17,206 $16,432 $18,228 $16,012 $15,292 $17,223 $15,861 $15,147 $17,301 $15,528 $14,830 $16,946 $16,644 $15,895 $17,649 12/31/98 $16,422 $15,683 $17,669 $16,792 $16,036 $17,931 $16,898 $16,138 $17,825 $17,171 $16,398 $17,995 $17,541 $16,752 $18,344 $17,111 $16,341 $18,096 $17,062 $16,295 $18,057 $16,994 $16,230 $18,130 $16,729 $15,977 $17,929 $16,620 $15,873 $17,800 $16,770 $16,016 $17,682 $16,881 $16,121 $17,889 12/31/99 $17,079 $16,310 $18,091 $16,890 $16,130 $18,013 $16,966 $16,203 $18,048 $16,454 $15,713 $17,669 $16,443 $15,703 $17,697 $15,985 $15,265 $17,515 $16,469 $15,728 $17,872 $16,567 $15,822 $18,008 $16,501 $15,759 $18,132 $16,160 $15,433 $17,973 $15,354 $14,663 $17,397 $14,078 $13,445 $16,708 12/31/2000 $14,331 $13,686 $17,031 $15,995 $15,275 $18,307 $15,915 $15,199 $18,551 $15,102 $14,422 $18,114 $14,638 $13,979 $17,889 $14,676 $14,016 $18,211 $13,834 $13,212 $17,700 $14,107 $13,472 $17,960 $13,999 $13,369 $18,172 $12,725 $12,153 $16,951 $12,585 $12,018 $17,370 $12,993 $12,408 $18,004 12/31/2001 $12,805 $12,229 $17,930 $12,884 $12,304 $18,055 $12,492 $11,930 $17,803 $12,828 $12,251 $18,232 $12,724 $12,151 $18,523 $12,538 $11,974 $18,420 $11,641 $11,117 $17,062 $10,856 $10,368 $16,317 $11,237 $10,732 $16,782 $10,820 $10,333 $16,562 $10,814 $10,328 $16,417 $11,534 $11,015 $17,434 12/31/2002 $11,670 $11,145 $17,678
AVERAGE ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR 5 YEARS 10 YEARS(7) SINCE INCEPTION(7) CLASS A (Inception 2/22/84) Net Asset Value(1) -8.86% -6.93% 1.55% -- With Maximum Sales Charge(2) -12.91 -7.78 1.08 -- CLASS B (Inception 9/20/93) Net Asset Value(1) -9.70 -7.60 -- -0.23% With CDSC(4) -13.86 -7.83 -- -0.23 CLASS C (Inception 3/2/98) Net Asset Value(1) -9.53 -- -- -8.15 With Maximum Sales Charge and CDSC(4) -11.26 -- -- -8.34
SINCE SINCE CLASS B CLASS C COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION(8) INCEPTION(8) Lehman High Yield Composite Index(3) -1.41% 0.38% 5.86% -- -2.35% Morningstar High Yield Bond Fund Average(5) -1.89 -1.47 4.63 3.37% -2.19 Lipper High Current Yield Funds Average(6) -1.76 -1.41 4.60 3.26 -2.22
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
CREDIT QUALITY A 0.9% B 27.8% Ba 50.9% Baa 13.5% Caa and lower 6.9%
Credit quality is based on bond ratings from Moody's Investors Service [CHART]
EFFECTIVE MATURITY Less than 1 year 0.7% 1-5 years 17.6% 5-10 years 54.5% 10+ years 27.2%
Average Effective Maturity: 11.5 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 4.50%. (3) Lehman Brothers High Yield Composite Index is a market-weighted, unmanaged index of fixed-rate, non-investment grade debt. (4) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. (5) Morningstar High Yield Bond Fund Average is the average performance without sales charge of funds with similar investment objectives, as calculated by Morningstar, Inc. (6) Lipper High Current Yield Funds Average is the average performance without sales charge of funds with similar investment objectives, as calculated by Lipper Inc. (7) Fund performance has been increased by expense waivers, without which performance would have been lower. (8) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class B from 9/30/93; Class C from 3/31/98. 9 CDC NVEST STRATEGIC INCOME FUND PORTFOLIO PROFILE OBJECTIVE: Seeks high current income; capital growth is a secondary objective STRATEGY: Invests primarily in fixed-income and equity securities in the U.S. and around the world. INCEPTION DATE: May 1, 1995 MANAGERS: Daniel J. Fuss Kathleen C. Gaffney Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFZX Class B NEZBX Class C NECZX Class Y NEZYX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 10.72 Class B 10.71 Class C 10.70 Class Y 10.74
MANAGEMENT DISCUSSION A lethargic economy and low interest rates kept the U.S. dollar on the defensive throughout 2002, and a number of world currencies scored sizeable gains against the dollar. Those gains added value to several of CDC Nvest Strategic Income Fund's overseas holdings and helped it outperform its benchmark and competitor group. For the 12 months ended December 31, 2002, the total return on Class A shares of the fund was 15.47%, including $0.63 per share in reinvested dividends. The fund's benchmark, the Lehman Brothers Aggregate Bond Index, returned 10.25% for the same period, while the average return on the funds in Morningstar's Multi-Sector Bond Fund category was 6.25%. The fund's 30-day SEC yield at the end of December was 6.83%. FOREIGN HOLDINGS WERE KEY TO FUND PERFORMANCE The South African rand increased in value by 35% against the U.S. dollar, contributing to strong performance by rand-denominated bonds. The impact of the Canadian dollar's more modest gain was amplified by the fund's large allocation in Canadian government issues, as well as to bonds of some of the provinces. New Zealand was also a strong positive; its economy has been expanding for three years, pushing its currency to a gain of more than 20% versus the U.S. dollar. Two fund holdings - an issue of the U.S. Federal National Mortgage Corporation (Fannie Mae) and a bond of the International Bank for Reconstruction and Development - are denominated in New Zealand dollars. U.S. dollar-denominated bonds in Brazil, Mexico and Venezuela performed reasonably well, despite country-specific challenges. The fund's major allocations did not change significantly in 2002. Country allocations were split between the U.S. and foreign investments. Government/corporate mix was approximately 53% corporate and 47% domestic and international government issues. TELECOM, RETAIL AND AIRLINE BONDS WERE NEGATIVE K-mart's bankruptcy filing hurt results in the retail sector. Bankruptcies and corporate scandals also undercut bonds of WorldCom, RCN and other telecommunications providers. We sold all of these bonds. All airline industry securities were impacted by United's announcement that it would file for Chapter 11 bankruptcy protection. Financial stresses at AMR, the parent of American Airlines, further weakened sector performance. While each of these positions hurt performance, the fund's broad diversification limited their impact. We eliminated all the fund's airline holdings except Delta and Continental airlines bonds. SELLING PRESSURE IN 2002 CREATED VALUE IN CORPORATE BONDS Investor uncertainty in 2002 caused money to flow out of U.S. corporate bonds into Treasury and other government issues. Prices of Treasury securities rose sharply, resulting in yields as low as they have been in decades. After that run-up, we see little room for further gains in government sectors. At the same time, large-scale selling pressure drove prices of most corporate securities lower, giving us an opportunity to acquire attractive issues at compelling valuations. FUND POSITIONED FOR ECONOMIC UPTURN While the possibility of military conflict in Iraq or North Korea is a concern, it is not our policy to predict political events. Instead, we are positioning the portfolio for the renewal of economic growth that we anticipate. Performance in the corporate bond market is linked to the performance of the economy, and there are signs that conditions are improving. Housing starts surged 5% in December, pushing home-building activity to the highest level in 16 years, and building permits surged by 8.2%, both indicators of future activity. Mortgage refinancings have generated cash for consumers. New orders for capital goods within and beyond the defense arena indicate that the long drought in corporate spending may be nearing an end. We also believe that bonds of selected foreign governments offer attractive potential. 10 CDC NVEST STRATEGIC INCOME FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Strategic Income Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The fund's total return for the period shown below appears with and without sales charges and includes fund expenses and management fees. Securities indexes measure the performance of a theoretical portfolio. Unlike a fund, indexes are unmanaged and do 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 [CHART]
MAY 1, 1995 (INCEPTION) THROUGH DECEMBER 31, 2002 NAV MSC LB Agg Bond LB Universal Bond 5/1/95 $10,000 $ 9,550 $10,000 $10,000 $10,014 $ 9,563 $10,000 $10,000 $10,017 $ 9,566 $10,073 $10,073 $10,096 $ 9,642 $10,051 $10,058 $10,192 $ 9,733 $10,172 $10,176 $10,410 $ 9,942 $10,271 $10,280 $10,355 $ 9,889 $10,405 $10,407 $10,647 $10,168 $10,561 $10,564 12/31/95 $11,038 $10,541 $10,709 $10,724 $11,302 $10,793 $10,780 $10,817 $10,995 $10,500 $10,593 $10,630 $11,073 $10,575 $10,519 $10,564 $11,057 $10,559 $10,460 $10,521 $11,232 $10,727 $10,438 $10,506 $11,383 $10,871 $10,579 $10,647 $11,360 $10,849 $10,608 $10,677 $11,569 $11,048 $10,590 $10,674 $11,974 $11,435 $10,774 $10,869 $12,316 $11,761 $11,013 $11,095 $12,816 $12,239 $11,202 $11,292 12/31/96 $12,638 $12,069 $11,098 $11,201 $12,674 $12,104 $11,132 $11,249 $12,875 $12,295 $11,159 $11,289 $12,735 $12,162 $11,036 $11,157 $12,816 $12,239 $11,201 $11,326 $13,091 $12,502 $11,307 $11,446 $13,388 $12,785 $11,441 $11,585 $13,990 $13,361 $11,749 $11,902 $13,629 $13,016 $11,649 $11,804 $14,110 $13,475 $11,821 $11,986 $13,814 $13,193 $11,992 $12,100 $13,889 $13,264 $12,048 $12,166 12/31/97 $13,818 $13,196 $12,169 $12,296 $14,043 $13,411 $12,325 $12,450 $14,300 $13,657 $12,316 $12,460 $14,607 $13,949 $12,358 $12,517 $14,611 $13,953 $12,423 $12,581 $14,372 $13,726 $12,541 $12,672 $14,143 $13,507 $12,647 $12,755 $13,966 $13,338 $12,674 $12,786 $12,252 $11,700 $12,880 $12,785 $12,648 $12,079 $13,182 $13,088 $12,785 $12,209 $13,112 $13,034 $13,642 $13,028 $13,186 $13,164 12/31/98 $13,579 $12,968 $13,226 $13,194 $13,814 $13,192 $13,320 $13,282 $13,617 $13,004 $13,088 $13,071 $14,336 $13,691 $13,160 $13,171 $15,255 $14,569 $13,202 $13,249 $14,782 $14,117 $13,086 $13,115 $14,825 $14,158 $13,045 $13,092 $14,532 $13,879 $12,989 $13,039 $14,351 $13,705 $12,983 $13,024 $14,443 $13,793 $13,133 $13,165 $14,564 $13,909 $13,182 $13,220 $14,828 $14,160 $13,181 $13,242 12/31/99 $15,231 $14,546 $13,117 $13,216 $15,090 $14,411 $13,074 $13,172 $15,684 $14,978 $13,232 $13,339 $15,843 $15,130 $13,407 $13,495 $15,390 $14,697 $13,368 $13,452 $14,893 $14,223 $13,362 $13,428 $15,461 $14,765 $13,640 $13,717 $15,597 $14,895 $13,764 $13,850 $15,940 $15,223 $13,964 $14,052 $15,519 $14,820 $14,051 $14,123 $14,887 $14,217 $14,144 $14,180 $14,810 $14,143 $14,376 $14,371 12/31/2000 $15,335 $14,645 $14,642 $14,646 $15,822 $15,110 $14,882 $14,933 $15,798 $15,087 $15,011 $15,058 $15,201 $14,517 $15,087 $15,109 $14,953 $14,280 $15,024 $15,042 $15,288 $14,600 $15,115 $15,150 $15,246 $14,560 $15,172 $15,193 $15,258 $14,571 $15,511 $15,492 $15,595 $14,893 $15,689 $15,685 $14,821 $14,154 $15,872 $15,798 $15,170 $14,487 $16,204 $16,116 $15,385 $14,693 $15,980 $15,927 12/31/2001 $15,314 $14,625 $15,879 $15,832 $15,488 $14,791 $16,007 $15,965 $15,674 $14,968 $16,162 $16,114 $15,854 $15,141 $15,894 $15,881 $16,237 $15,507 $16,202 $16,184 $16,581 $15,835 $16,339 $16,306 $16,317 $15,583 $16,481 $16,365 $15,931 $15,214 $16,680 $16,504 $16,376 $15,639 $16,961 $16,808 $16,155 $15,428 $17,236 $17,049 $16,476 $15,735 $17,157 $16,990 $17,093 $16,324 $17,153 $17,036 12/31/2002 $17,667 $16,872 $17,507 $17,389
AVERAGE ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR 5 YEARS SINCE INCEPTION(8) CLASS A (Inception 5/1/95) Net Asset Value(1) 15.47% 5.05% 7.71% With Maximum Sales Charge(2) 10.23 4.09 7.07 CLASS B (Inception 5/1/95) Net Asset Value(1) 14.64 4.28 6.90 With CDSC(5) 9.64 4.01 6.90 CLASS C (Inception 5/1/95) Net Asset Value(1) 14.65 4.28 6.87 With Maximum Sales Charge and CDSC(5) 12.51 4.06 6.72 CLASS Y (Inception 12/1/99) Net Asset Value(1) 15.85 -- 6.25
SINCE CLASS A, SINCE B AND C CLASS Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS INCEPTION(9) INCEPTION(9) Lehman Aggregate Bond Index(3) 10.25% 7.55% 7.66% 7.07% Lehman Universal Bond Index(4) 9.83 7.18 7.57 9.58 Morningstar Multi-Sector Bond Fund Avg.(6) 6.25 3.15 5.58 4.06 Lipper Multi-Sector Income Funds Avg.(7) 6.59 2.84 5.53 3.51
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
CREDIT QUALITY A 4.0% Aa 5.8% Aaa 20.6% B 13.9% Ba 17.2% Baa 10.6% Ca and Caa 17.1% Not Rated 10.8%
Credit quality is based on bond ratings from Moody's Investors Service [CHART]
EFFECTIVE MATURITY Less than 1 year 1.3% 1-5 years 31.5% 5-10 years 7.0% 10+ years 60.2%
Average Effective Maturity: 16.3 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 4.50%. (3) Lehman Brothers Aggregate Bond Index is an unmanaged index of investment-grade bonds with one- to ten-year maturities issued by the U.S. government, its agencies and U.S. corporations. (4) Lehman Brothers Universal Bond Index is an unmanaged index representing a blend of the Lehman Aggregate, High Yield and Emerging Market Indexes. (5) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. (6) Morningstar Multi-Sector Bond Fund Average is the average performance without sales charge of funds with similar investment objectives, as calculated by Morningstar, Inc. (7) Lipper Multi-Sector Income Funds Average is the average performance without sales charges of funds with similar investment objectives, as calculated by Lipper Inc. (8) The adviser waived certain fees and expenses of each class of share except Class Y during the periods indicated, without which performance would have been lower. (9) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class A, B and C from 5/31/95; Class Y from 12/31/99. 11 CDC NVEST LIMITED TERM U.S. GOVERNMENT FUND PORTFOLIO PROFILE OBJECTIVE: Seeks high current return consistent with preservation of capital STRATEGY: Invests primarily in securities issued or guaranteed by the U.S. government or its agencies INCEPTION DATE: January 3, 1989 MANAGERS: Michael F. Harris Clifton V. Rowe Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFLX Class B NELBX Class C NECLX Class Y NELYX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 11.73 Class B 11.71 Class C 11.72 Class Y 11.78
MANAGEMENT DISCUSSION CDC Nvest Limited Term U.S. Government Fund's portfolio began 2002 with an emphasis on securities that offered higher yields than Treasury securities, including mortgage-backed securities and U.S. government agency obligations. Although the fund's price performance was not as strong as the benchmark this year, its income was higher and we retained a healthy lead on Morningstar's competitor group. For the 12 months ended December 31, 2002, total return on Class A fund shares was 8.18%, including $0.54 per share in reinvested dividends. The return on the fund's benchmark, Lehman Brothers Intermediate Government Bond Index, was 9.64% for the year, while the average return on the funds in Morningstar's Short Government category was 6.61%. The fund's 30-day SEC yield as of the end of December was 2.54%. MORTGAGE-BACKED SECURITIES PROVIDED HIGHER YIELDS, LESS APPRECIATION Widespread uncertainty kept the financial markets on edge during most of 2002, and investor demand for safety drove up prices on Treasury securities. Mortgage-backed securities also did well because of their generous income and relative safety, but these securities entail prepayment risks, especially when low interest rates prompt homeowners to refinance, as they did last year. This reduced their appreciation potential in 2002. However, we believe mortgage-backed securities reflected higher prepayment activity than we thought was likely to occur, given the sluggishness of the economy. SLUGGISH GROWTH, FED'S RATE CUT, LEAVE INTEREST RATES AT HISTORIC LOWS The Federal Reserve Board left short-term interest rates untouched for much of the year, waiting for evidence that its easing campaign of 2001 was enough to stimulate business growth. However, faced with continued weakness, the Fed cut rates by an additional 0.5% in early November. This brought the Fed funds rate - the rate the Fed charges member banks - down to 1.25%, the lowest level in more than 40 years. Our portfolio structure worked well early in the year, when interest rates were relatively stable, but rates dropped sharply in July, causing bond prices to rise. Given our outlook for a gradually improving economy, we believed bond prices faced substantial downside risk, so we reduced the average duration of our portfolio. Duration is a measure of price volatility. A fund with a longer duration will fall in price more than one with a shorter duration if interest rates rise. Our move to shorten duration was designed to preserve principal in the rising interest-rate environment we expected. Unfortunately, our shorter duration in the latter part of the year held the fund back. LOOMIS FORECASTS RISING INTEREST RATES, PROVIDED GROWTH CONTINUES The economy began to show signs of improvement late last year. The equity markets may have started to recover as well, yet corporate profits generally remain anemic. However, until we see a rebound in corporate profitability, we believe that interest rates may inch even lower than they are now. Currently we do not expect a significant improvement in business activity or rising interest rates until the outcome of any U.S. military action in Iraq becomes clear. Although market sentiment seems to anticipate a swift resolution, the risk remains for an extended campaign, leading to greater market uncertainty and volatile markets. However, based on historical precedent over the past five decades, if economic growth returns to more than 3% annually, today's low interest rates are not likely to be sustained. As a result, CDC Nvest Limited Term U.S. Government Fund will continue to underweight U.S. Treasuries relative to its benchmark, focusing on mortgage-backed and asset-backed securities because of their relatively high quality and generous income. At the same time, we will continue to favor intermediate-term issues to help reduce the fund's price volatility and secure as much current income as we prudently can. 12 CDC NVEST LIMITED TERM U.S. GOVERNMENT FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Limited Term U.S. Government Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The 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 [CHART]
DECEMBER 31, 1992 THROUGH DECEMBER 31, 2002 NAV MSC LB Int Govt Bond 12/31/92 $10,000 $ 9,700 $10,000 $10,144 $ 9,840 $10,186 $10,248 $ 9,941 $10,336 $10,272 $ 9,964 $10,374 $10,337 $10,027 $10,455 $10,345 $10,035 $10,427 $10,452 $10,138 $10,578 $10,501 $10,186 $10,599 $10,643 $10,323 $10,757 $10,661 $10,341 $10,800 $10,684 $10,364 $10,826 $10,627 $10,308 $10,772 12/31/93 $10,642 $10,323 $10,817 $10,736 $10,414 $10,924 $10,616 $10,298 $10,774 $10,470 $10,156 $10,617 $10,410 $10,097 $10,548 $10,409 $10,097 $10,556 $10,401 $10,089 $10,558 $10,489 $10,174 $10,696 $10,515 $10,199 $10,727 $10,435 $10,122 $10,639 $10,435 $10,122 $10,641 $10,399 $10,087 $10,594 12/31/94 $10,406 $10,094 $10,628 $10,546 $10,229 $10,801 $10,695 $10,374 $11,009 $10,725 $10,403 $11,070 $10,830 $10,506 $11,198 $11,133 $10,799 $11,514 $11,182 $10,847 $11,587 $11,177 $10,841 $11,593 $11,275 $10,936 $11,689 $11,345 $11,004 $11,767 $11,501 $11,156 $11,896 $11,639 $11,290 $12,041 12/31/95 $11,761 $11,409 $12,160 $11,826 $11,471 $12,262 $11,684 $11,334 $12,133 $11,611 $11,262 $12,077 $11,581 $11,233 $12,042 $11,541 $11,195 $12,036 $11,631 $11,282 $12,158 $11,656 $11,307 $12,196 $11,652 $11,302 $12,210 $11,799 $11,445 $12,368 $11,989 $11,629 $12,570 $12,139 $11,774 $12,722 12/31/96 $12,041 $11,680 $12,654 $12,092 $11,729 $12,702 $12,108 $11,744 $12,723 $12,044 $11,683 $12,651 $12,150 $11,786 $12,793 $12,225 $11,858 $12,893 $12,342 $11,972 $13,003 $12,547 $12,170 $13,243 $12,525 $12,149 $13,192 $12,655 $12,276 $13,336 $12,797 $12,413 $13,491 $12,819 $12,435 $13,521 12/31/97 $12,916 $12,529 $13,631 $13,104 $12,711 $13,809 $13,074 $12,682 $13,794 $13,052 $12,660 $13,837 $13,102 $12,709 $13,903 $13,187 $12,791 $13,999 $13,284 $12,885 $14,093 $13,301 $12,902 $14,147 $13,513 $13,108 $14,415 $13,899 $13,482 $14,751 $13,765 $13,352 $14,775 $13,723 $13,311 $14,730 12/31/98 $13,751 $13,339 $14,788 $13,825 $13,410 $14,853 $13,666 $13,256 $14,650 $13,730 $13,318 $14,747 $13,771 $13,357 $14,787 $13,668 $13,258 $14,696 $13,579 $13,171 $14,717 $13,514 $13,108 $14,720 $13,509 $13,104 $14,740 $13,663 $13,253 $14,867 $13,688 $13,278 $14,896 $13,702 $13,291 $14,906 12/31/99 $13,659 $13,249 $14,860 $13,600 $13,192 $14,810 $13,720 $13,309 $14,932 $13,890 $13,473 $15,103 $13,846 $13,430 $15,097 $13,852 $13,436 $15,137 $14,050 $13,628 $15,377 $14,120 $13,697 $15,480 $14,268 $13,840 $15,653 $14,378 $13,947 $15,790 $14,430 $13,998 $15,898 $14,627 $14,188 $16,131 12/31/2000 $14,797 $14,354 $16,416 $14,986 $14,536 $16,634 $15,097 $14,644 $16,787 $15,193 $14,737 $16,909 $15,162 $14,708 $16,855 $15,238 $14,781 $16,925 $15,249 $14,792 $16,979 $15,533 $15,067 $17,296 $15,636 $15,167 $17,450 $15,881 $15,405 $17,822 $16,119 $15,635 $18,100 $15,909 $15,432 $17,884 12/31/2001 $15,813 $15,339 $17,798 $15,897 $15,421 $17,874 $16,055 $15,574 $18,022 $15,825 $15,350 $17,751 $16,114 $15,631 $18,083 $16,223 $15,737 $18,209 $16,386 $15,895 $18,437 $16,621 $16,123 $18,784 $16,785 $16,281 $18,999 $16,936 $16,428 $19,325 $16,973 $16,463 $19,312 $16,894 $16,388 $19,159 12/31/2002 $17,105 $16,592 $19,513
AVERAGE ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION CLASS A (Inception 1/3/89) Net Asset Value(1) 8.18% 5.78% 5.51% -- With Maximum Sales Charge(2) 4.94 5.14 5.19 -- CLASS B (Inception 9/27/93) Net Asset Value(1) 7.49 5.11 -- 4.50% With CDSC(4) 2.49 4.78 -- 4.50 CLASS C (Inception 12/30/94) Net Asset Value(1) 7.48 5.10 -- 5.61 With Maximum Sales Charge and CDSC(4) 5.45 4.88 -- 5.47 CLASS Y (Inception 3/31/94) Net Asset Value(1) 8.62 6.23 -- 6.18
SINCE SINCE SINCE CLASS B CLASS C CLASS Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION(7) INCEPTION(7) INCEPTION(7) Lehman Int. Gov't. Bond Index(3) 9.64% 7.44% 6.91% 6.60% 7.89% 7.20% Morningstar Short Gov't. Fund Avg.(5) 6.61 5.92 5.64 5.43 6.36 5.86 Lipper Short Int. U.S. Gov't. Funds Avg.(6) 7.84 6.31 6.12 5.77 6.86 6.24
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
PORTFOLIO MIX Mortgage-backed 71.0% U.S. Government 2.1% Supranational 20.8% Asset-Backed 2.7% Short Term & Other 3.4%
[CHART]
EFFECTIVE MATURITY Less than 1 year 1.6% 1-5 years 18.3% 5-10 years 80.1%
Average Effective Maturity: 3.4 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 3.00%. (3) Lehman Brothers Intermediate Government Bond Index is an unmanaged index of bonds issued by the U.S. government and its agencies with maturities between one and ten years. (4) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. Class C share performance assumes a 1.00% sales charge and a 1.00% CDSC applied when you sell shares within one year of purchase. (5) Morningstar Short Government Fund Average is the average performance without sales charge of funds with similar investment objectives as calculated by Morningstar, Inc. (6) Lipper Short Intermediate U.S. Government Funds Average is the average performance without sales charge of funds with similar investment objectives as calculated by Lipper Inc. (7) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class B from 9/30/93; Class C from 12/31/94; Class Y from 3/31/94. 13 CDC NVEST GOVERNMENT SECURITIES FUND PORTFOLIO PROFILE OBJECTIVE: Seeks a high level of current income consistent with preservation of principal STRATEGY: Invests primarily in securities issued or guaranteed by the U.S. government or its agencies INCEPTION DATE: September 16, 1985 MANAGERS: Kent P. Newmark* Clifton V. Rowe Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFUX Class B NEUBX Class Y NEUYX NET ASSET VALUE PER SHARE: (DECEMBER 31, 2002) Class A $ 12.12 Class B 12.12 Class Y 12.11
* EFFECTIVE JANUARY 1, 2003, JOHN HYLL BECAME THE FUND'S CO-MANAGER. MANAGEMENT DISCUSSION Investments in Treasury Inflation-Protected Securities (TIPS) and strong returns from longer-maturity Treasury bonds helped CDC Nvest Government Securities Fund outperform its benchmark and get an edge on comparable funds tracked by Morningstar this year. The total return on Class A fund shares for the 12 months ended December 31, 2002 was 13.35% at net asset value, including $0.52 per share in reinvested dividends. For the same period, the fund's benchmark, the Lehman Brothers Government Bond Index, returned 11.50%, while the average return on the funds in Morningstar's Long Government Bond Fund category was 13.15%. The fund's 30-day SEC yield at the end of 2002 was 3.52%. TIPS AND LONG MATURITIES HELPED FUND IN 2002 Our decision to substantially increase the fund's weighting in TIPS during the first part of the year and maintain that position for the balance of 2002 proved to be a successful strategy. The principal value of TIPS rises and falls with the Consumer Price Index, a primary measure of inflation. Demand for TIPS was strong in the first half of the year because of their safety and protection from any future threat of inflation. Our strategy with respect to duration also worked well. A bond portfolio with a longer duration is more sensitive to changes in bond prices, which is a benefit when rates are declining. A shorter duration reduces its price sensitivity, which helps when rising interest rates cause bond prices to decline. Since interest rates generally trended down in 2002, the fund benefited. MARKET CLIMATE CHANGED IN FOURTH QUARTER Treasury securities, which benefited from strong demand in the first nine months of the year, reversed course in October on indications that corporate profits might be improving. In addition, the Federal Reserve Board's decision to cut short-term interest rates by 0.50% in November added to optimism about the future direction of the economy. Republican victories in the mid-term elections may also have contributed to this positive sentiment. When the potential for renewed growth caused interest rates to rise late in the year, Treasury bond prices declined. The fund's stake in TIPS and its long-maturity structure were a detriment in that short time frame, but not enough to undermine its positive results for the year. Our decision to increase the fund's mortgage-backed security allocation also helped late in the year, as higher yields in that sector created a cushion. LOOMIS OUTLOOK IS MIXED FOR 2003 Near term, we expect interest rates to remain stable or decline. Looking out further, we expect rates to move slightly higher by the end of 2003. The main issue clouding the horizon is the effect of a possible war with Iraq. A military conflict could result in additional deficit spending and push interest rates higher. On the other hand, a protracted war could cause investors to again seek refuge in the relative safety offered by U.S. government securities. The resulting increase in demand could cause government bond yields to fall, unless the war drags on for a long time. In that case, the war would eventually become part of the economic backdrop and allow rates to find a level that reflects the growth and inflation outlook. For the time being, we plan to maintain the fund's strong position in TIPS because we believe they offer solid yields and provide a good hedge against inflation. We also currently favor a strong allocation to mortgage-backed securities because of their yield advantage over Treasuries. While our duration stance remains fairly aggressive, we are seeking to counter-balance that by using sector weightings in TIPS and mortgage-backed securities in a more defensive manner. 14 CDC NVEST GOVERNMENT SECURITIES FUND INVESTMENT RESULTS THROUGH DECEMBER 31, 2002 PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Government Securities Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The 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 [CHART]
DECEMBER 31, 1992 THROUGH DECEMBER 31, 2002 NAV MSC LB Govt Bond 12/31/92 $10,000 $ 9,550 $10,000 $10,162 $ 9,705 $10,212 $10,360 $ 9,894 $10,417 $10,343 $ 9,877 $10,452 $10,403 $ 9,935 $10,532 $10,464 $ 9,993 $10,521 $10,640 $10,161 $10,754 $10,702 $10,220 $10,820 $10,943 $10,450 $11,061 $10,998 $10,503 $11,103 $11,029 $10,533 $11,145 $10,896 $10,406 $11,023 12/31/93 $10,900 $10,410 $11,066 $11,012 $10,516 $11,217 $10,751 $10,267 $10,980 $10,554 $10,079 $10,733 $10,473 $10,001 $10,648 $10,467 $ 9,996 $10,635 $10,347 $ 9,882 $10,610 $10,485 $10,013 $10,805 $10,489 $10,017 $10,807 $10,343 $ 9,877 $10,655 $10,342 $ 9,876 $10,647 $10,282 $ 9,820 $10,628 12/31/94 $10,307 $ 9,843 $10,692 $10,467 $ 9,996 $10,891 $10,707 $10,225 $11,126 $10,777 $10,292 $11,196 $10,888 $10,398 $11,342 $11,483 $10,967 $11,799 $11,555 $11,035 $11,890 $11,442 $10,927 $11,846 $11,565 $11,045 $11,985 $11,710 $11,183 $12,101 $11,930 $11,393 $12,285 $12,162 $11,615 $12,477 12/31/95 $12,372 $11,815 $12,653 $12,420 $11,861 $12,731 $12,115 $11,570 $12,472 $11,979 $11,440 $12,368 $11,885 $11,351 $12,289 $11,823 $11,291 $12,268 $11,945 $11,408 $12,426 $11,967 $11,429 $12,457 $11,890 $11,355 $12,429 $12,100 $11,555 $12,636 $12,385 $11,828 $12,914 $12,638 $12,070 $13,138 12/31/96 $12,468 $11,907 $13,004 $12,482 $11,921 $13,019 $12,490 $11,928 $13,036 $12,322 $11,768 $12,898 $12,474 $11,912 $13,085 $12,580 $12,014 $13,197 $12,755 $12,181 $13,346 $13,291 $12,693 $13,724 $12,991 $12,407 $13,589 $13,228 $12,633 $13,793 $13,489 $12,882 $14,032 $13,586 $12,975 $14,103 12/31/97 $13,754 $13,136 $14,251 $13,948 $13,321 $14,464 $13,883 $13,258 $14,425 $13,874 $13,249 $14,466 $13,916 $13,290 $14,531 $14,091 $13,457 $14,680 $14,304 $13,661 $14,847 $14,277 $13,634 $14,870 $14,716 $14,054 $15,257 $15,121 $14,440 $15,668 $14,931 $14,259 $15,615 $15,015 $14,340 $15,620 12/31/98 $14,995 $14,320 $15,655 $15,141 $14,460 $15,746 $14,558 $13,903 $15,371 $14,593 $13,936 $15,432 $14,641 $13,982 $15,467 $14,445 $13,795 $15,331 $14,276 $13,633 $15,300 $14,171 $13,533 $15,278 $14,065 $13,432 $15,277 $14,247 $13,606 $15,401 $14,238 $13,597 $15,426 $14,175 $13,537 $15,405 12/31/99 $14,032 $13,401 $15,305 $14,046 $13,414 $15,327 $14,294 $13,651 $15,545 $14,608 $13,951 $15,818 $14,489 $13,837 $15,774 $14,438 $13,788 $15,784 $14,688 $14,027 $16,066 $14,826 $14,159 $16,221 $15,086 $14,407 $16,461 $15,027 $14,351 $16,508 $15,163 $14,481 $16,666 $15,511 $14,813 $16,993 12/31/2000 $15,842 $15,129 $17,332 $15,949 $15,231 $17,507 $16,151 $15,424 $17,706 $16,163 $15,435 $17,768 $15,929 $15,212 $17,586 $15,984 $15,265 $17,644 $16,010 $15,290 $17,726 $16,487 $15,745 $18,151 $16,670 $15,920 $18,377 $16,894 $16,134 $18,696 $17,472 $16,686 $19,179 $16,872 $16,112 $18,749 12/31/2001 $16,622 $15,874 $18,585 $16,786 $16,031 $18,706 $16,989 $16,225 $18,879 $16,514 $15,771 $18,468 $16,970 $16,206 $18,908 $17,087 $16,318 $19,021 $17,340 $16,560 $19,287 $17,752 $16,953 $19,711 $18,253 $17,432 $20,101 $18,731 $17,888 $20,573 $18,465 $17,634 $20,407 $18,272 $17,449 $20,232 12/31/2002 $18,842 $17,994 $20,722
ANNUAL TOTAL RETURNS -- DECEMBER 31, 2002
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION CLASS A (Inception 9/16/85) Net Asset Value(1) 13.35% 6.50% 6.54% -- With Maximum Sales Charge(2) 8.22 5.53 6.05 -- CLASS B (Inception 9/23/93) Net Asset Value(1) 12.62 5.71 -- 5.20% With CDSC(4) 7.62 5.38 -- 5.20 CLASS Y (Inception 3/31/94) Net Asset Value(1) 13.70 6.84 -- 7.18
SINCE SINCE CLASS B CLASS Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPTION(7) INCEPTION(7) Lehman Government Bond Index(3) 11.50% 7.77% 7.56% 6.98% 7.81% Morningstar Long Government Fund Avg.(5) 13.15 6.92 7.72 6.58 7.57 Lipper General Government Funds Avg.(6) 9.88 6.55 6.54 5.95 6.75
All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. PORTFOLIO AS OF DECEMBER 31, 2002 [CHART]
PORTFOLIO MIX U.S. Government 68.8% Mortgage-Backed 22.9% U.S. Government Agencies 2.4% Short Term & Other 5.9%
[CHART]
EFFECTIVE MATURITY Less than 1 year 1.8% 1-5 years 19.5% 5-10 years 22.3% 10+ years 56.4%
Average Effective Maturity: 11.5 years See page 16 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS (1) Does not include a sales charge. (2) Includes the maximum sales charge of 4.50%. (3) Lehman Brothers Government Bond Index is an unmanaged index of public debt of the U.S. Treasury, government agencies, and their obligations. (4) Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. (5) Morningstar Long Government Fund Average is the average performance without sales charge of funds with similar investment objectives, as calculated by Morningstar, Inc. (6) Lipper General Government Funds Average is the average performance without sales charge of funds with similar investment objectives, as calculated by Lipper Inc. (7) The since-inception comparative performance shown for each Class of fund shares are calculated as follows: Class B from 9/30/93; Class Y from 3/31/94. 15 RISKS OF THE CDC NVEST INCOME FUNDS The views expressed in this report reflect those of the portfolio managers as of the dates indicated. The managers' views are subject to change at any time without notice based on changes in market or other conditions. References to specific securities or industries should not be regarded as investment advice. Because these funds are actively managed, there is no assurance that they will continue to invest in the securities or industries mentioned. Any mutual fund investment involves risk. The following notes describe some of the risks of the CDC Nvest Funds discussed in this report. These risks may affect the value of your investment. See the funds' prospectus for details. THE FUNDS CDC NVEST SHORT TERM BOND FUND invests primarily in bonds, including lower rated bonds and mortgage securities. It may also invest in securities issued by the U.S. Treasury and government agencies. The portfolio may also include foreign and emerging-market securities. CDC NVEST BOND INCOME FUND invests primarily in quality U.S. corporate and government bonds. Other securities that may be in the portfolio from time to time include foreign and emerging market securities and mortgage-related securities. CDC NVEST HIGH INCOME FUND invests primarily in lower-quality bonds. It may also invest a portion of assets in foreign and emerging-market securities or U.S. government securities. CDC NVEST STRATEGIC INCOME FUND may invest in a wide variety of securities, with a focus on U.S. and foreign corporate bonds and convertible securities. The fund may also invest in emerging-market securities and lower-quality bonds CDC NVEST LIMITED TERM U.S. GOVERNMENT FUND invests primarily in securities issued or guaranteed by the U.S. government, including Treasury securities. It may also invest a portion of assets in foreign bonds and mortgage-related securities. CDC NVEST GOVERNMENT SECURITIES FUND invests primarily in U.S. government securities. It may also invest a portion of assets in mortgage-related securities. THE RISKS LOWER-QUALITY BONDS offer higher yields than high-quality bonds in return for more risks. These risks include a greater risk of default than higher-quality issues and greater risk of loss of principal. MORTGAGE SECURITIES are subject to prepayment risks; when mortgages underlying the security are prepayed or refinanced, the fund's income may be interrupted. U.S. GOVERNMENT AND TREASURY SECURITIES are guaranteed if held to maturity, but mutual funds that invest in these securities are not guaranteed. The value of fund shares will fluctuate and you may have a gain or a loss when you sell your shares. CORPORATE BONDS are backed by the financial strength of the issuing company. Economic conditions and other factors may affect the company's credit quality and ability to meet its debt obligations. FOREIGN AND EMERGING-MARKET SECURITIES have special risks, including risks resulting from political unrest, currency fluctuations and different regulatory requirements or accounting standards. Emerging markets may be more subject to these risks than developed markets. CHANGES IN INTEREST RATES can affect the value of fund shares. The value of fixed-income securities generally goes down when interest rates rise and goes up when rates decline. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 16 SHORT TERM BOND FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 96.1% OF TOTAL NET ASSETS AEROSPACE & DEFENSE -- 2.3% $ 275,000 Raytheon Co. 6.300%, 3/15/2005 Baa3 $ 293,411 1,000,000 United Technologies Corp. 6.625%, 11/15/2004 A2 1,082,633 ------------- 1,376,044 ------------- ASSET-BACKED -- 18.5% 273,748 AmeriCredit Automobile Receivables Trust 7.150%, 8/12/2004 Aaa 276,773 750,000 Capital Auto Receivables Asset Trust, Series 2002-3, Class A3 3.580%, 10/16/2006 Aaa 774,037 1,500,000 Chase Manhattan Auto Owner Trust 4.210%, 1/15/2009 Aaa 1,572,450 950,000 Citibank Credit Card Issuance Trust 4.100%, 12/07/2006 Aaa 988,834 750,000 Citibank Credit Card Issuance Trust 4.950%, 2/09/2009 Aaa 804,871 1,000,000 DaimlerChrysler Auto Trust 3.780%, 2/06/2007 Aaa 1,035,460 1,000,000 Ford Credit Auto Owner Trust 3.130%, 11/15/2006 Aaa 1,021,194 250,000 Ford Credit Auto Owner Trust 4.750%, 8/15/2006 Aaa 264,637 175,000 GMAC Mortgage Corp. Loan Trust 5.290%, 6/25/2027 Aaa 181,744 1,000,000 Harley-Davidson Motorcycle Trust 4.040%, 10/15/2009 -- 1,037,686 1,000,000 Honda Auto Receivables Owner Trust 3.960%, 2/19/2007 Aaa 1,033,450 750,000 MBNA Credit Card Master Note Trust, Series 2002-A1, Class A1 4.950%, 6/15/2009 Aaa 807,369 814,099 PSE&G Transition Funding LLC 5.740%, 3/15/2007 -- 851,523 186,516 WFS Financial Owner Trust 7.750%, 11/20/2004 -- 188,118 ------------- 10,838,146 ------------- AUTOMOTIVE -- 6.6% 500,000 Ford Motor Credit Co. 5.750%, 2/23/2004 A3 507,883 1,000,000 Ford Motor Credit Co. 7.500%, 6/15/2003 A3 1,014,914 1,500,000 General Motors Acceptance Corp. 7.625%, 6/15/2004 A2 1,575,075 750,000 Toyota Motor Credit Corp. 5.625%, 11/13/2003 Aa1 775,038 ------------- 3,872,910 ------------- BANKING -- 1.4% 750,000 Wells Fargo & Co. 5.900%, 5/21/2006(d) Aa2 823,201 ------------- BEVERAGES, FOOD & TOBACCO -- 4.6% 1,025,000 ConAgra Foods, Inc. 7.400%, 9/15/2004 Baa2 1,111,123 500,000 Kellogg Co. 6.000%, 4/01/2006 Baa2 542,367 1,000,000 Unilever Capital Corp. 6.750%, 11/01/2003 A1 1,043,075 ------------- 2,696,565 ------------- COMMERCIAL SERVICES -- 1.8% $ 1,000,000 Aramark Services, Inc. 6.750%, 8/01/2004 Baa3 $ 1,040,821 ------------- ELECTRIC UTILITIES -- 4.4% 565,137 Kansas Gas & Electric CO. 6.760%, 9/29/2003 -- 550,848 1,000,000 Niagara Mohawk Power Corp. 5.375%, 10/01/2004 Baa3 1,038,703 1,000,000 Nisource Finance Corp. 5.750%, 4/15/2003 Baa3 997,436 ------------- 2,586,987 ------------- ENVIRONMENTAL CONTROL -- 0.7% 375,000 Waste Management, Inc. 6.375%, 12/01/2003 Ba1 382,166 ------------- FINANCIAL SERVICES -- 11.7% 500,000 CIT Group, Inc. 7.500%, 11/14/2003 A2 519,893 975,000 Countrywide Home Loans, Inc. 6.850%, 6/15/2004 A3 1,037,537 1,000,000 General Electric Capital Corp., Medium Term Note 5.350%, 3/30/2006 Aaa 1,072,018 605,000 Household Finance Corp. 6.500%, 1/24/2006 A2 644,724 1,000,000 International Lease Finance Corp., Medium Term Note 5.500%, 6/07/2004 A1 1,033,182 1,105,000 Lehman Brothers Holdings, Inc. 6.625%, 2/05/2006 A2 1,204,682 500,000 Morgan Stanley 6.875%, 3/01/2003 Aa3 504,168 800,000 Salomon Smith Barney Holdings, Inc. 5.875%, 3/15/2006 Aa1 865,096 ------------- 6,881,300 ------------- FOOD RETAILERS -- 1.3% 750,000 Safeway, Inc. 4.800%, 7/16/2007 Baa2 773,795 ------------- HEAVY MACHINERY -- 3.8% 90,000 Case Corp. 6.250%, 12/01/2003 Ba2 87,300 20,000 Case Corp. 7.250%, 8/01/2005 Ba2 17,000 260,000 Case Credit Corp. 6.125%, 2/15/2003 Ba2 258,319 750,000 Ingersoll-Rand Co. 6.250%, 5/15/2006 A3 815,921 1,000,000 John Deere Capital Corp. 4.125%, 7/15/2005 A3 1,034,817 ------------- 2,213,357 ------------- MEDIA-BROADCASTING & PUBLISHING -- 3.0% 600,000 AOL Time Warner, Inc. 8.110%, 8/15/2006 Baa1 645,820 600,000 Clear Channel Communications, Inc. 7.250%, 9/15/2003 Baa3 612,109 500,000 Comcast Cable Communications, Inc. 6.375%, 1/30/2006 Baa3 523,581 ------------- 1,781,510 -------------
See accompanying notes to financial statements. 17 Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- MORTGAGE-BACKED -- 12.7% $ 174,841 Federal Home Loan Mortgage Corp. 6.488%, 3/01/2025(e) Aaa $ 180,417 110,422 Federal Home Loan Mortgage Corp. 6.829%, 12/01/2025(e) Aaa 113,627 932,416 Federal Home Loan Mortgage Corp. 7.500%, 8/01/2009 Aaa 993,772 1,250,000 Federal National Mortgage Association 5.000%, 1/20/2007 Aaa 1,298,959 1,108,876 Federal National Mortgage Association 5.500%, 1/01/2009 Aaa 1,149,394 197,957 Federal National Mortgage Association 5.629%, 9/01/2023(e) Aaa 204,997 128,935 Federal National Mortgage Association 6.013%, 5/01/2020(e) Aaa 131,691 65,350 Federal National Mortgage Association 6.511%, 8/01/2017(e) Aaa 66,581 140,278 Federal National Mortgage Association 6.781%, 6/01/2019(e) Aaa 144,911 308,245 Federal National Mortgage Association 6.940%, 1/01/2020(e) Aaa 317,578 1,046,819 Federal National Mortgage Association 7.500%, with various maturities to 2016(f) Aaa 1,118,328 249,350 Federal National Mortgage Association 8.408%, 1/01/2024(e) Aaa 258,003 1,250,000 Residential Asset Securitization Trust 5.820%, 1/25/2027 Aaa 1,280,264 184,907 Residential Funding Mortgage Securities I 6.750%, 12/25/2014 -- 189,807 ------------- 7,448,329 ------------- OIL & GAS -- 4.0% 1,000,000 Conoco, Inc. 5.900%, 4/15/2004 A3 1,047,117 700,000 Kerr-McGee Corp. 5.375%, 4/15/2005 Baa2 738,098 565,000 Transocean, Inc. 6.500%, 4/15/2003 Baa2 570,752 ------------- 2,355,967 ------------- REITS-MALLS -- 1.7% 1,000,000 Simon Property Group LP 6.625%, 6/15/2003 Baa2 1,018,493 ------------- RETAILERS -- 1.7% 1,000,000 Federated Department Stores, Inc. 8.500%, 6/15/2003 Baa1 1,025,391 ------------- TELEPHONE SYSTEMS -- 0.6% 345,000 Sprint Capital Corp. 5.875%, 5/01/2004 Baa3 341,550 ------------- U.S. GOVERNMENT -- 12.6% 1,000,000 United States Treasury Notes 4.375%, 5/15/2007(d) Aaa 1,073,828 1,000,000 United States Treasury Notes 4.625%, 5/15/2006(d) Aaa 1,078,516 120,000 United States Treasury Notes 6.125%, 8/15/2007 Aaa 138,028 1,500,000 United States Treasury Notes 6.500%, 8/15/2005(d) Aaa 1,677,774 750,000 United States Treasury Notes 6.500%, 10/15/2006 Aaa 861,446 $ 2,300,000 United States Treasury Notes 6.500%, 5/15/2005(d) Aaa $ 2,553,090 ------------- 7,382,682 ------------- U.S. GOVERNMENT AGENCIES -- 2.7% 500,000 Federal Home Loan Mortgage Corp. 7.000%, 7/15/2005 Aaa 560,899 1,000,000 Federal Home Loan Mortgage Corp. 7.375%, 5/15/2003 Aaa 1,022,404 ------------- 1,583,303 ------------- Total Bonds and Notes (Identified Cost $54,486,027) 56,422,517 ------------- SHORT TERM INVESTMENTS -- 16.1% 2,005,843 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $2,005,954 on 1/02/2003, collateralized by $2,038,912 Federal National Mortgage Bond, 5.994%, due 6/01/2031 valued at $2,106,135 2,005,843 1,552,919 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(g) 1,552,919 149,319 Galaxy Funding, 1.353% due 2/07/2003(g) 149,319 1,493,191 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(g) 1,493,191 150,977 Bank of Montreal, 1.32% due 1/30/2003(g) 150,977 298,638 Comerica Bank, 1.4% due 11/19/2003(g) 298,638 298,638 Goldman Sachs Group Inc., 1.363% due 1/02/2003(g) 298,638 298,638 Liberty Lighthouse Funding, 1.343% due 1/14/2003(g) 298,638 1,493,191 Bnp Paribas, 1.32% due 2/07/2003(g) 1,493,191 895,915 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(g) 895,915 806,324 Royal Bank of Scotland, 1.33% due 1/15/2003(g) 806,324 ------------- Total Short Term Investments (Identified Cost $9,443,593) 9,443,593 -------------
See accompanying notes to financial statements. 18 Investments as of December 31, 2002
PRINCIPAL AMOUNT DESCRIPTION VALUE(a) - -------------------------------------------------------------------------------- Total Investments -- 112.2% (Identified Cost $63,929,620) (b) $ 65,866,110 Other assets less liabilities (7,144,014) ------------- Total Net Assets -- 100% $ 58,722,096 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized appreciation on investments based on cost of $64,259,573 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 1,728,920 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (122,383) ------------- Net unrealized appreciation $ 1,606,537 =============
At December 31, 2002, the Fund had a capital loss carryover of approximately $16,103,353 of which $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, $1,865,560 expires on December 31, 2007, $1,936,635 expires on December 31, 2008, $282,755 expires on December 31, 2009 and $1,908,484 expires on December 31, 2010. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. For the year ended December 31, 2002, the Fund has elected to defer $82,103 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $0 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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) All or a portion of this security was on loan to brokers at December 31, 2002. (e) 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, 2002. (f) The Fund's investment in mortgage-backed securities of the Federal National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of this issuer which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (g) Represents investments of securities lending collateral. REIT Real Estate Investment Trust See accompanying notes to financial statements. 19 BOND INCOME FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 97.1% OF TOTAL NET ASSETS AEROSPACE & DEFENSE -- 1.5% $ 1,400,000 Northrop Grumman Corp. 7.125%, 2/15/2011 Baa3 $ 1,593,726 2,905,000 Raytheon Co. 6.150%, 11/01/2008 Baa3 3,133,998 ------------- 4,727,724 ------------- ASSET-BACKED -- 2.4% 448,947 AmeriCredit Automobile Receivables Trust 7.150%, 8/12/2004 Aaa 453,907 1,900,000 Connecticut RRB Special Purpose Trust 5.360%, 3/30/2007 Aaa 1,989,408 4,925,000 GMAC Mortgage Corp. Loan Trust 5.290%, 6/25/2027 Aaa 5,114,785 ------------- 7,558,100 ------------- AUTOMOTIVE -- 1.0% 3,535,000 Ford Motor Co. 7.450%, 7/16/2031 Baa1 3,074,987 ------------- BANKING -- 4.1% 5,000,000 International Bank for Reconstruction & Development 5.500%, 5/14/2003 (AUD) Aaa 2,824,001 2,975,000 J.P. Morgan Chase & Co. 5.750%, 1/02/2013 A2 3,012,637 2,200,000 State Street Institutional Capital A, 144A 7.940%, 12/30/2026 A1 2,450,239 4,630,000 Washington Mutual, Inc. 4.375%, 1/15/2008 A3 4,717,831 ------------- 13,004,708 ------------- BEVERAGES, FOOD & TOBACCO -- 0.5% 788,000 Dean Foods Co. 6.900%, 10/15/2017 B1 709,200 702,000 Dean Foods Co. 8.150%, 8/01/2007 B1 738,855 ------------- 1,448,055 ------------- CHEMICALS -- 1.8% 2,300,000 Dow Chemical Co. (The) 5.750%, 11/15/2009 A3 2,379,548 1,455,000 IMC Global, Inc. 10.875%, 6/01/2008 Ba2 1,578,675 1,635,000 Lyondell Chemical Co. 9.875%, 5/01/2007 Ba3 1,569,600 ------------- 5,527,823 ------------- COMMERCIAL SERVICES -- 1.9% 5,575,000 Aramark Services, Inc. 7.000%, 7/15/2006 Baa3 5,939,817 ------------- COMMUNICATIONS -- 1.7% 2,135,000 AT&T Wireless Services, Inc. 8.750%, 3/01/2031 Baa2 2,092,300 1,970,000 Citizens Communications Co. 9.250%, 5/15/2011 Baa2 2,350,547 1,045,000 Telus Corp. 8.000%, 6/01/2011 Ba1 1,003,200 ------------- 5,446,047 ------------- ELECTRIC UTILITIES -- 3.4% 1,790,000 BVPS II Funding Corp. 8.680%, 6/01/2017 Baa2 1,914,527 2,380,000 Calpine Canada Energy Finance Ulc 8.500%, 5/01/2008 B1 1,035,300 $ 1,005,000 Constellation Energy Group, Inc. 7.600%, 4/01/2032 Baa1 $ 1,027,219 3,223,000 New Mexico Public Service Corp. 10.250%, 10/01/2012 -- 3,280,716 2,470,000 PSEG Power LLC 7.750%, 4/15/2011 Baa1 2,620,099 830,000 Transelec SA 7.875%, 4/15/2011 Baa1 919,385 ------------- 10,797,246 ------------- ENVIRONMENTAL CONTROL -- 0.5% 1,465,000 Allied Waste North America, Inc. 8.500%, 12/01/2008 Ba3 1,479,650 ------------- FINANCIAL SERVICES -- 12.0% 2,810,000 CIT Group, Inc. 7.750%, 4/02/2012 A2 3,156,063 4,320,000 Citigroup, Inc. 5.000%, 3/06/2007(d) Aa1 4,610,533 3,800,000 General Electric Capital Corp. 5.450%, 1/15/2013 Aaa 3,947,197 1,600,000 General Motors Acceptance Corp. 6.750%, 1/15/2006 A2 1,656,994 1,600,000 General Motors Acceptance Corp. 7.250%, 3/02/2011 A2 1,632,942 2,115,000 Goldman Sachs Group, Inc. 6.600%, 1/15/2012 Aa3 2,337,064 850,000 Goldman Sachs Group, Inc. 7.350%, 10/01/2009(d) Aa3 974,311 982,000 Household Finance Corp. 5.750%, 1/30/2007 A2 1,027,776 2,545,000 Household Finance Corp. 7.000%, 5/15/2012 A2 2,787,511 5,430,000 International Lease Finance Corp. 5.625%, 6/01/2007(d) A1 5,684,705 3,815,000 Lehman Brothers Holdings, Inc. 7.000%, 2/01/2008 A2 4,313,075 3,035,000 Newcourt Credit Group, Inc. 6.875%, 2/16/2005 A2 3,190,073 2,500,000 NiSource Finance Corp. 7.875%, 11/15/2010 Baa3 2,751,637 ------------- 38,069,881 ------------- FOOD RETAILERS -- 1.1% 3,155,000 Delhaize America, Inc. 8.125%, 4/15/2011 Ba1 3,052,459 560,000 Delhaize America, Inc. 9.000%, 4/15/2031 Ba1 515,207 ------------- 3,567,666 ------------- FOREIGN GOVERNMENTS -- 1.5% 2,375,000 Canadian Government 5.750%, 9/01/2006 (CAD) Aaa 1,607,369 5,000,000 Province of British Columbia 7.750%, 6/16/2003 (CAD) Aa2 3,235,657 ------------- 4,843,026 ------------- FOREST PRODUCTS & PAPER -- 1.4% 1,970,000 Georgia-Pacific Corp. 7.500%, 5/15/2006(d) Ba1 1,871,500 480,000 Georgia-Pacific Corp. 8.875%, 5/15/2031 Ba1 412,800
See accompanying notes to financial statements. 20 Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- FOREST PRODUCTS & PAPER -- (CONTINUED) $ 900,000 Kappa Beheer BV 10.625%, 7/15/2009 B2 $ 967,500 1,100,000 Kappa Beheer BV 10.625%, 7/15/2009 (EUR) B2 1,226,303 ------------- 4,478,103 ------------- HEALTH CARE PROVIDERS -- 1.0% 3,050,000 HCA, Inc. 6.950%, 5/01/2012 Ba1 3,214,139 ------------- HEAVY MACHINERY -- 0.5% 1,580,000 Case Credit Corp. 6.125%, 2/15/2003 Ba2 1,569,785 ------------- LODGING -- 0.5% 1,585,000 Host Marriott Corp. 7.875%, 8/01/2005 Ba3 1,561,225 ------------- MEDIA - BROADCASTING & PUBLISHING -- 8.7% 3,550,000 AOL Time Warner, Inc. 6.750%, 4/15/2011 Baa1 3,698,695 1,760,000 Comcast Cable Communications, Inc. 6.750%, 1/30/2011 Baa3 1,831,254 1,200,000 Continental Cablevision, Inc. 9.500%, 8/01/2013 Baa3 1,392,409 2,000,000 CSC Holdings, Inc. 7.625%, 7/15/2018 B1 1,772,500 515,000 CSC Holdings, Inc. 7.875%, 2/15/2018 B1 461,569 3,000,000 News America Holdings, Inc. 7.750%, 2/01/2024 Baa3 3,010,584 2,245,000 News America Holdings, Inc. 8.250%, 8/10/2018 Baa3 2,465,912 2,785,000 TCI Communications, Inc. 9.800%, 2/01/2012 Baa3 3,347,634 9,342,000 Tele-Communications, Inc. 9.250%, 1/15/2023 Baa3 9,590,338 ------------- 27,570,895 ------------- MORTGAGE-BACKED -- 36.9% 14,000,000 Federal Home Loan Mortgage Corp. 3.875%, 2/15/2005 Aaa 14,591,262 4,142,997 Federal Home Loan Mortgage Corp. 6.000%, 5/01/2017 Aaa 4,335,165 2,583,323 Federal Home Loan Mortgage Corp. 6.500%, 11/01/2031 Aaa 2,692,918 6,500,000 Federal National Mortgage Association 5.250%, 1/15/2009 Aaa 7,111,435 11,038,980 Federal National Mortgage Association 5.500%, with various maturities to 2017(e) Aaa 11,461,295 21,230,854 Federal National Mortgage Association 6.000%, with various maturities to 2032(e) Aaa 22,153,538 15,946,707 Federal National Mortgage Association 6.500%, with various maturities to 2031(e) Aaa 16,637,098 940,000 Federal National Mortgage Association 6.625%, 11/15/2010 Aaa 1,103,673 4,028,704 Federal National Mortgage Association 7.000%, with various maturities to 2030(e) Aaa 4,238,684 3,470,971 Federal National Mortgage Association 7.500%, with various maturities to 2032(e) Aaa 3,686,165 9,328,111 Government National Mortgage Association 6.000%, with various maturities to 2032(e) Aaa 9,725,286 $11,291,280 Government National Mortgage Association 6.500%, with various maturities to 2032(e) Aaa $ 11,860,520 3,928,974 Government National Mortgage Association 7.000%, with various maturities to 2029(e) Aaa 4,166,520 980,327 Government National Mortgage Association 7.500%, with various maturities to 2030(e) Aaa 1,046,076 791,496 Government National Mortgage Association 8.000%, 11/15/2029 Aaa 854,227 689,144 Government National Mortgage Association 8.500%, with various maturities to 2023(e) Aaa 747,424 69,902 Government National Mortgage Association 9.000%, with various maturities to 2016(e) Aaa 75,813 115,230 Government National Mortgage Association 11.500%, with various maturities to 2018(e) Aaa 136,857 ------------- 116,623,956 ------------- OIL & GAS -- 5.4% 2,464,000 Kinder Morgan Energy Partners LP 7.125%, 3/15/2012(d) Baa1 2,762,824 3,535,000 Pemex Finance, Ltd. 8.020%, 5/15/2007 Baa1 3,973,729 3,000,000 Pemex Finance, Ltd. 9.150%, 11/15/2018 Baa1 3,505,275 3,265,000 Pemex Project Funding Master Trust Medium Term Note, 144A 7.875%, 2/01/2009 Baa1 3,509,875 1,300,000 Sempra Energy 6.950%, 12/01/2005 Baa1 1,390,961 1,750,000 Transocean, Inc. 6.625%, 4/15/2011 Baa2 1,926,916 ------------- 17,069,580 ------------- RESTAURANTS -- 0.4% 1,075,000 Yum! Brands, Inc. 7.450%, 5/15/2005 Ba1 1,123,375 ------------- RETAILERS -- 0.7% 2,404,000 J.C. Penney Co., Inc. 9.750%, 6/15/2021 Ba3 2,313,595 ------------- TELEPHONE SYSTEMS -- 3.5% 2,715,000 AT&T Corp. 8.500%, 11/15/2031 Baa2 2,992,563 3,200,000 LCI International, Inc. 7.250%, 6/15/2007(d) Caa1 1,568,000 1,480,000 Philippine Long Distance Telephone Co. 11.375%, 5/15/2012 Ba3 1,346,800 1,920,000 Sprint Capital Corp. 7.625%, 1/30/2011 Baa3 1,827,224 1,540,000 Telefonos de Mexico SA de CV 8.250%, 1/26/2006 A3 1,686,300 1,650,000 Verizon Communications 7.900%, 2/01/2027 A3 1,789,428 ------------- 11,210,315 ------------- TRANSPORTATION -- 0.4% 1,155,000 CSX Corp. 4.875%, 11/01/2009 Baa2 1,191,714 -------------
See accompanying notes to financial statements. 21 Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- U.S. GOVERNMENT -- 4.3% $ 4,175,000 United States Treasury Bonds 5.375%, 2/15/2031(d) Aaa $ 4,551,401 635,000 United States Treasury Bonds 6.000%, 2/15/2026 Aaa 727,695 2,575,000 United States Treasury Notes 3.500%, 11/15/2006(d) Aaa 2,679,609 2,370,000 United States Treasury Notes 4.750%, 11/15/2008(d) Aaa 2,587,002 865,000 United States Treasury Notes 5.000%, 2/15/2011 Aaa 950,419 1,945,000 United States Treasury Notes 6.125%, 8/15/2007 Aaa 2,237,207 ------------- 13,733,333 ------------- Total Bonds and Notes (Identified Cost $297,415,736) 307,144,745 ------------- SHORT TERM INVESTMENTS -- 8.9% 5,055,290 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $5,055,571 on 1/02/2003, collateralized by $5,115,211 Government National Mortgage Bond, 6.625%, due 10/20/2023 valued at $5,308,054 5,055,290 470,223 Bank Of Montreal, 1.32% due 1/30/2003(f) 470,223 465,059 Galaxy Funding, 1.353% due 2/07/2003(f) 465,059 4,650,592 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(f) 4,650,592 2,511,319 Royal Bank of Scotland, 1.33% due 1/15/2003(f) 2,511,319 2,790,355 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(f) 2,790,355 4,650,592 BNP Paribas, 1.32% due 2/07/2003(f) 4,650,592 930,118 Liberty Lighthouse Funding, 1.343% due 1/14/2003(f) 930,118 930,118 Comerica Bank, 1.4% due 11/19/2003(f) 930,118 930,118 Goldman Sachs Group Inc., 1.363% due 1/02/2003(f) 930,118 4,836,615 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(f) 4,836,615 ------------- Total Short Term Investments (Identified Cost $28,220,399) 28,220,399 ------------- Total Investments -- 106.0% (Identified Cost $325,636,135)(b) 335,365,144 Other assets less liabilities (19,159,862) ------------- Total Net Assets -- 100% $ 316,205,282 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized appreciation on investments based on cost of $325,995,796 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 $ 15,064,304 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (5,694,956) ------------- Net unrealized appreciation $ 9,369,348 =============
At December 31, 2002, the Fund had a capital loss carryover of approximately $31,935,190 of which $2,299,128 expires on December 31, 2007, $7,872,697 expires on December 31, 2008 and $21,763,365 expires on December 31, 2010. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. For the year ended December 31, 2002, the Fund has elected to defer $1,483,155 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $200,062 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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) All or a portion of this security was on loan to brokers at December 31, 2002. (e) The Fund's investment in mortgage-backed securities of the Federal National Mortgage Association and Government National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of this issuer which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (f) Represents investments of securities lending collateral. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $5,960,114 or 1.9% of net assets. AUD - Australian Dollar CAD - Canadian Dollar EUR - Euro See accompanying notes to financial statements. 22 HIGH INCOME FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 98.1% OF TOTAL NET ASSETS ADVERTISING -- 0.5% $ 225,000 R.H. Donnelley Financial Corp. I,144A 10.875%, 12/15/2012 B2 $ 246,375 ------------- AIRLINES -- 2.6% 250,000 Continental Airlines, Inc. 8.000%, 12/15/2005(d) B3 122,500 1,000,000 Delta Air Lines, Inc. 8.300%, 12/15/2029 Ba3 590,000 800,000 Northwest Airlines, Inc. 7.625%, 3/15/2005(d) B2 544,000 ------------- 1,256,500 ------------- AUTOMOTIVE -- 2.9% 1,000,000 Dana Corp. 9.000%, 8/15/2011 Ba3 970,000 150,000 Ford Motor Credit Co. 6.500%, 1/25/2007 A3 148,288 300,000 Ford Motor Credit Co. 7.250%, 10/25/2011 A3 291,968 ------------- 1,410,256 ------------- BEVERAGES, FOOD & TOBACCO -- 0.6% 300,000 Gruma SA 7.625%, 10/15/2007 (yankee) Ba2 294,000 ------------- BIOTECHNOLOGY -- 0.7% 250,000 Genzyme Corp. 3.000%, 5/15/2021 -- 230,937 200,000 Human Genome Sciences, Inc. 3.750%, 3/15/2007 -- 130,000 ------------- 360,937 ------------- CHEMICALS -- 5.0% 350,000 Borden Chemical, Inc. 7.875%, 2/15/2023 B2 199,500 100,000 Borden Chemical, Inc. 9.200%, 3/15/2021 B2 63,650 100,000 Borden Chemical, Inc. 9.250%, 6/15/2019 B2 63,650 400,000 FMC Corp., 144A 10.250%, 11/01/2009 Ba2 434,000 1,000,000 Huntsman International LLC 10.125%, 7/01/2009(d) Caa1 830,000 750,000 IMC Global, Inc. 11.250%, 6/01/2011 Ba2 806,250 ------------- 2,397,050 ------------- COMMERCIAL SERVICES -- 1.3% 750,000 United Rentals, Inc. 9.250%, 1/15/2009(d) B2 613,125 ------------- COMMUNICATIONS -- 12.6% 300,000 AT&T Wireless Services, Inc. 7.350%, 3/01/2006 Baa2 309,000 350,000 AT&T Wireless Services, Inc. 7.500%, 5/01/2007 Baa2 360,896 450,000 CommScope, Inc. 4.000%, 12/15/2006 Ba3 366,750 110,000 Corning, Inc. 3.500%, 11/01/2008 Ba2 75,762 650,000 Juniper Networks, Inc. 4.750%, 3/15/2007 B2 503,750 $ 1,250,000 Motorola, Inc. 8.000%, 11/01/2011(d) Baa2 $ 1,296,206 1,000,000 Nextel Communications, Inc. 9.500%, 2/01/2011 B3 900,000 350,000 Nextel Communications, Inc. 9.750%, 10/31/2007 B3 323,750 600,000 PTC International Finance II SA 11.250%, 12/01/2009 (yankee) B1 639,000 850,000 Rogers Wireless Communications, Inc. 8.800%, 10/01/2007 B2 714,000 675,000 Triton PCS, Inc. 9.375%, 2/01/2011 B3 560,250 355,000 US Unwired, Inc., Zero Coupon, 11/01/2009 Caa2 21,300 ------------- 6,070,664 ------------- ELECTRIC UTILITIES -- 0.9% 250,000 ESI Tractebel Acquisition Corp. 7.990%, 12/30/2011 Ba1 225,562 60,000 Mirant Americas Generation, Inc. 7.200%, 10/01/2008 Ba3 28,800 100,000 Mirant Americas Generation, Inc. 7.625%, 5/01/2006 Ba3 53,000 300,000 Mirant Americas Generation, Inc. 8.300%, 5/01/2011 Ba3 144,000 ------------- 451,362 ------------- ELECTRONICS -- 1.9% 1,050,000 Celestica, Inc., Zero Coupon, 8/01/2020 Ba2 481,687 200,000 Flextronics International, Ltd. 8.750%, 10/15/2007(d) Ba2 206,500 220,000 Sanmina-SCI Corp. 4.250%, 5/01/2004(d) B1 212,850 ------------- 901,037 ------------- ENTERTAINMENT & LEISURE -- 1.1% 700,000 Royal Caribbean Cruises, Ltd. 7.500%, 10/15/2027 Ba2 518,000 ------------- FINANCIAL SERVICES -- 2.2% 1,402,897 Panda Funding Corp. 11.625%, 8/20/2012 Ba3 771,593 300,000 Salton SEA Funding Corp. 7.840%, 5/30/2010 Ba3 295,317 ------------- 1,066,910 ------------- FOOD RETAILERS -- 0.3% 150,000 Delhaize America, Inc. 9.000%, 4/15/2031 Ba1 138,002 ------------- FOREIGN GOVERNMENT -- 1.5% 1,000,000 Federal Republic of Brazil 9.375%, 4/07/2008 B2 700,000 ------------- FOREST PRODUCTS & PAPER -- 5.5% 250,000 Abitibi-Consolidated, Inc. 8.500%, 8/01/2029 Ba1 259,203 1,000,000 Georgia-Pacific Corp. 9.500%, 12/01/2011(d) Ba1 980,000
See accompanying notes to financial statements. 23 Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- FOREST PRODUCTS & PAPER -- (CONTINUED) $ 1,000,000 Georgia-Pacific Corp. 9.875%, 11/01/2021 Ba1 $ 900,000 500,000 Tembec Industries, Inc. 7.750%, 3/15/2012 Ba1 487,500 ------------- 2,626,703 ------------- HEALTH CARE PROVIDERS -- 1.2% 250,000 HCA, Inc. 6.300%, 10/01/2012 Ba1 252,590 200,000 HCA, Inc., Medium Term Note 7.580%, 9/15/2025 Ba1 194,406 150,000 Healthsouth Corp. 7.625%, 6/01/2012 Ba3 124,500 ------------- 571,496 ------------- HEAVY MACHINERY -- 2.0% 250,000 Case Corp. 7.250%, 8/01/2005 Ba2 212,500 350,000 Case Credit Corp. 6.750%, 10/21/2007 Ba2 268,053 250,000 Cummins, Inc. 7.125%, 3/01/2028 Ba2 205,000 275,000 Grant Prideco Escrow, Inc., 144A 9.000%, 12/15/2009 Ba3 286,000 ------------- 971,553 ------------- HOME CONSTRUCTION, FURNISHINGS & APPLIANCES -- 2.0% 475,000 D.R. Horton, Inc. 7.875%, 8/15/2011 Ba1 465,500 500,000 K. Hovnanian Enterprises, Inc. 8.000%, 4/01/2012 Ba3 487,500 ------------- 953,000 ------------- INDUSTRIAL - DIVERSIFIED -- 0.7% 350,000 Tyco International Group SA 6.750%, 2/15/2011 Ba2 331,354 ------------- LODGING -- 4.2% 300,000 Felcor Lodging LP 8.500%, 6/01/2011 Ba3 297,000 300,000 Hilton Hotels Corp. 5.000%, 5/15/2006 Ba2 287,250 300,000 La Quinta Inns, Inc. Medium Term Note 7.330%, 4/01/2008 Ba3 285,750 475,000 Park Place Entertainment Corp. 8.125%, 5/15/2011(d) Ba2 492,812 650,000 Starwood Hotels & Resorts Worldwide, Inc., 144A 7.875%, 5/01/2012 Ba1 646,750 ------------- 2,009,562 ------------- MEDIA - BROADCASTING & PUBLISHING -- 6.6% 150,000 AOL Time Warner, Inc. 6.625%, 5/15/2029 Baa1 137,914 905,000 Charter Communications Holdings LLC 0/9.920%, 4/01/2011(e) B3 316,750 300,000 Comcast Cable Communications, Inc. 6.750%, 1/30/2011 Baa3 312,146 250,000 Comcast Cable Communications, Inc. 7.125%, 6/15/2013 Baa3 266,066 900,000 CSC Holdings, Inc. 7.875%, 12/15/2007 B1 869,625 150,000 Dex Media East LLC, 144A 12.125%, 11/15/2012 B3 166,125 $ 150,000 Rogers Communications, Inc. 2.000%, 11/26/2005 Ba1 $ 113,250 1,050,000 TCI Communications, Inc. 7.125%, 2/15/2028 Baa3 981,583 ------------- 3,163,459 ------------- METALS -- 2.2% 1,000,000 Phelps Dodge Corp. 9.500%, 6/01/2031 Baa3 1,037,151 ------------- OIL & GAS -- 10.2% 400,000 Chesapeake Energy Corp. 8.125%, 4/01/2011 B1 414,000 100,000 Chesapeake Energy Corp. 8.375%, 11/01/2008 B1 104,000 150,000 Chesapeake Energy Corp. 9.000%, 8/15/2012 B1 159,000 700,000 El Paso CGP Co. 6.500%, 6/01/2008 Ba2 525,000 850,000 Nuevo Energy Co. 9.500%, 6/01/2008 B2 875,500 1,000,000 PDVSA Finance, Ltd. 9.375%, 11/15/2007 Ba1 902,500 1,000,000 Pioneer Natural Resources Co. 7.200%, 1/15/2028 Ba1 963,253 1,000,000 Swift Energy Co. 9.375%, 5/01/2012 B3 975,000 ------------- 4,918,253 ------------- PHARMACEUTICALS -- 0.4% 255,000 IVAX Corp. 4.500%, 5/15/2008 -- 209,419 ------------- REITS - HEALTHCARE -- 1.7% 851,000 La Quinta Corp. 7.000%, 8/15/2007 Ba3 821,215 ------------- REITS - HOTELS -- 1.6% 750,000 Host Marriot LP 9.250%, 10/01/2007 Ba3 757,500 ------------- REITS - OFFICE BUILDINGS -- 2.2% 1,000,000 Crescent Real Estate Equities LP 9.250%, 4/15/2009 Ba3 1,042,500 ------------- RESTAURANTS -- 1.3% 600,000 Yum! Brands, Inc. 7.700%, 7/01/2012 Ba1 624,000 ------------- RETAILERS -- 4.7% 800,000 Foot Locker, Inc. 8.500%, 1/15/2022 Ba3 807,500 425,000 Gap (The), Inc. 10.550%, 12/15/2008(d) Ba3 465,375 1,000,000 J.C. Penney Co., Inc. 8.125%, 4/01/2027 Ba3 870,000 150,000 J.C. Penney Co., Inc. 8.250%, 8/15/2022 Ba3 127,500 ------------- 2,270,375 ------------- SEMICONDUCTORS -- 4.3% 350,000 Analog Devices, Inc. 4.750%, 10/01/2005 Baa1 347,813 875,000 Cypress Semiconductor Corp. 3.750%, 7/01/2005 B3 701,094
See accompanying notes to financial statements. 24 Investments as of December 31, 2002
RATINGS(c) ---------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- SEMICONDUCTORS -- (CONTINUED) $ 380,000 Lam Research Corp. 4.000%, 6/01/2006 -- $ 332,025 525,000 LSI Logic Corp. 4.000%, 11/01/2006(d) -- 427,219 300,000 LSI Logic Corp. 4.000%, 2/15/2005(d) Ba3 268,500 ------------- 2,076,651 ------------- TELEPHONE SYSTEMS -- 6.3% 300,000 Cox Communications, Inc. 6.750%, 3/15/2011 Baa2 323,306 250,000 Cox Communications, Inc. 6.800%, 8/01/2028 Baa2 252,563 700,000 Philippine Long Distance Telephone Co. 10.500%, 4/15/2009 Ba3 638,750 1,890,000 Qwest Capital Funding, Inc. 7.750%, 2/15/2031(d) Caa2 1,058,400 925,000 Sprint Capital Corp. 6.875%, 11/15/2028 Baa3 744,625 ------------- 3,017,644 ------------- TEXTILES, CLOTHING & FABRICS -- 2.4% 905,000 Phillips Van-Heusen Corp. 7.750%, 11/15/2023 Ba2 751,150 400,000 Russell Corp. 9.250%, 5/01/2010 B1 428,000 ------------- 1,179,150 ------------- TOYS/GAMES/HOBBIES -- 1.0% 600,000 Hasbro, Inc. 6.600%, 7/15/2028 Ba3 495,000 ------------- TRANSPORTATION -- 3.5% 850,000 Grupo Transportacion Ferroviaria Mexicana SA de CV 11.750%, 6/15/2009 (yankee) B1 833,000 920,000 Trico Marine Services, Inc. 8.875%, 5/15/2012 B2 855,600 ------------- 1,688,600 ------------- Total Bonds and Notes (Identified Cost $48,318,001) 47,188,803 ------------- SHORT TERM INVESTMENTS -- 12.2% 292,585 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $292,601 on 1/02/2003, collateralized by $298,568 Federal Home Loan Mortgage Bond, 6.00%, due 1/15/2018 valued at $307,214 292,585 1,119,642 BNP Paribas, 1.32% due 2/07/2003(f) 1,119,642 671,785 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(f) 671,785 223,928 Liberty Lighthouse Funding, 1.343% due 1/14/2003(f) 223,928 223,928 Comerica Bank, 1.4% due 11/19/2003(f) 223,928 223,928 Goldman Sachs Group Inc., 1.363% due 1/02/2003(f) 223,928 604,607 Royal Bank of Scotland, 1.33% due 1/15/2003(f) 604,607 111,964 Galaxy Funding, 1.353% due 2/07/2003(f) 111,964 $ 1,164,428 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(f) $ 1,164,428 113,208 Bank Of Montreal, 1.32% due 1/30/2003(f) 113,208 1,119,642 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(f) 1,119,642 ------------- Total Short Term Investments (Identified Cost $5,869,645). 5,869,645 ------------- Total Investments -- 110.3% (Identified Cost $54,187,646) (b) 53,058,448 Other assets less liabilities (4,967,472) ------------- Total Net Assets -- 100% $ 48,090,976 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized depreciation on investments based on cost of $54,220,484 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 $ 2,037,246 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (3,199,282) ------------- Net unrealized depreciation $ (1,162,036) =============
At December 31, 2002, the Fund had a capital loss carryover of approximately $88,753,460 of which $1,019,386 expires on December 31, 2004, $918,790 expires on December 31, 2007, $16,613,930 expires on December 31, 2008, $43,374,721 expires on December 31, 2009 and $26,826,633 expires on December 31, 2010. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. For the year ended December 31, 2002, the Fund has elected to defer $256,493 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $0 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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) All or a portion of this security was on loan to brokers at December 31, 2002. (e) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. (f) Represents investments of securities lending collateral. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these amounted to $1,779,250 or 3.7% of net assets. REIT Real Estate Investment Trust See accompanying notes to financial statements. 25 STRATEGIC INCOME FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ----------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 88.5% OF TOTAL NET ASSETS CONVERTIBLE BOND -- 7.2% CANADA -- 0.4% $ 500,000 Celestica, Inc., Zero Coupon, 8/01/2020 Ba2 $ 229,375 750,000 Rogers Communications, Inc. 2.000%, 11/26/2005 Ba1 566,250 ----------- 795,625 ----------- MEXICO-- 0.2% 565,000 Empresas ICA Sociedad Controladora SA de CV 5.000%, 3/15/2004(d) Ca 367,250 ----------- NETHERLANDS -- 0.2% 450,000 Koninklijke (Royal) KPN NV 3.500%, 11/24/2005, (EUR) -- 439,443 ----------- UNITED KINGDOM -- 0.9% 500,000 Colt Telecom Group PLC 2.000%, 3/29/2006, (EUR) B3 237,413 3,575,000 Colt Telecom Group PLC 2.000%, 12/16/2006, (EUR) B3 1,643,681 ----------- 1,881,094 ----------- UNITED STATES-- 5.5% 475,000 Amkor Technology, Inc. 5.000%, 3/15/2007 B3 231,562 750,000 Analog Devices, Inc. 4.750%, 10/01/2005 Baa1 745,312 1,000,000 Builders Transport, Inc. 8.000%, 8/15/2005(e)(f)(g) B3 1,250 200,000 Builders Transport, Inc. 6.500%, 5/01/2011(e)(f)(g) -- 250 275,000 CML Group, Inc. 5.500%, 1/15/2003(e)(f)(g) -- 42,900 800,000 CommScope, Inc. 4.000%, 12/15/2006 Ba3 652,000 250,000 Corning, Inc. 3.500%, 11/01/2008 Ba2 172,187 231,000 Dixie Group, Inc. 7.000%, 5/15/2012 B3 115,500 500,000 Genzyme Corp. 3.000%, 5/15/2021 -- 461,875 250,000 Hilton Hotels Corp. 5.000%, 5/15/2006 Ba2 239,375 600,000 Human Genome Sciences, Inc. 3.750%, 3/15/2007(d) -- 390,000 1,415,000 IVAX Corp. 4.500%, 5/15/2008 -- 1,162,069 100,000 Juniper Networks, Inc. 4.750%, 3/15/2007 B2 77,500 700,000 Kulicke & Soffa Industries, Inc. 4.750%, 12/15/2006 B3 389,375 1,000,000 Lam Research Corp. 4.000%, 6/01/2006 -- 873,750 2,250,000 Loews Corp. 3.125%, 9/15/2007 A3 2,013,750 140,000 LSI Logic Corp. 4.000%, 11/01/2006(d) -- 113,925 107,000 MascoTech, Inc. 4.500%, 12/15/2003 B3 99,510 1,334,000 Maxtor Corp. 5.750%, 3/01/2012 Caa1 867,100 $ 100,000 Nextel Communications, Inc. 6.000%, 6/01/2011 B3 $ 86,000 3,910,000 Pliant Systems, Inc. 5.000%, 5/15/2049(e)(f)(g) -- 49,344 355,000 Richardson Electronics, Ltd. 7.250%, 12/15/2006 B3 284,000 200,000 Sanmina-SCI Corp. 4.250%, 5/01/2004 B1 193,500 895,000 Sanmina-SCI Corp., Zero Coupon, 9/12/2020 Ba3 364,712 150,000 Thermedics, Inc., Zero Coupon, 6/01/2003 Baa3 147,375 1,625,000 Western Digital Corp., 144A, Zero Coupon, 2/18/2018 Caa1 739,375 1,750,000 Xerox Corp. 0.570%, 4/21/2018 B3 1,102,500 500,000 Yellow Corp. 7.000%, 5/01/2011 B2 413,750 ----------- 12,029,746 ----------- Total Convertible Bonds (Identified Cost $21,320,713) 15,513,158 ----------- NON-CONVERTIBLE BONDS -- 81.3% ARGENTINA -- 0.8% 1,000,000 Cablevision SA 13.750%, 4/30/2007(e) Ca 245,000 1,505,000 Pecom Energia SA, 144A 8.125%, 7/15/2010 Ca 1,008,350 3,500,000 Republic of Argentina 8.875%, 3/01/2029, (ARS)(e)(f) Ca 568,890 ----------- 1,822,240 ----------- BRAZIL -- 4.6% 2,542,858 Federal Republic of Brazil 8.000%, 4/15/2014(h) B1 1,665,798 8,400,000 Federal Republic of Brazil 8.875%, 4/15/2024 B2 4,620,000 6,308,000 Federal Republic of Brazil 10.125%, 5/15/2027 B2 3,784,800 ----------- 10,070,598 ----------- CANADA-- 17.7% 18,505,000 British Columbia Province, Zero Coupon, 9/05/2020, (CAD) Aa2 3,982,114 9,775,000 British Columbia Province, Zero Coupon, 8/19/2022, (CAD) Aa2 1,852,187 35,000,000 British Columbia Province, Zero Coupon, 8/23/2024, (CAD) Aa2 5,848,626 4,275,000 British Columbia Province, Zero Coupon, 11/19/2027, (CAD) Aa2 592,279 8,100,000 Canadian Government 3.500%, 6/01/2004, (CAD) Aaa 5,167,265 1,565,000 Canadian Government 6.000%, 9/01/2005, (CAD) Aaa 1,055,982 17,135,000 Manitoba Province, Zero Coupon, 3/05/2031, (CAD) -- 2,115,042 500,000 New Brunswick FM Project, Inc. 0/6.470%, 11/30/2027, (CAD)(i) -- 325,798 500,000 Nortel Networks, Ltd. 6.125%, 2/15/2006(d) B3 335,000
See accompanying notes to financial statements. 26 Investments as of December 31, 2002
RATINGS(c) ----------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- CANADA -- (CONTINUED) $ 29,550,000 Ontario Hydro Bank, Zero Coupon, 10/15/2021, (CAD) Aa3 $ 6,031,815 12,600,000 Ontario Province, Zero Coupon, 6/02/2027, (CAD) Aa3 1,925,346 750,000 Ontario Province, Zero Coupon, 7/13/2022, (CAD) Aa3 144,975 8,800,000 Ontario Province, Zero Coupon, 3/08/2029, (CAD) Aa3 1,195,010 3,750,000 Saskatchewan Province 5.750%, 3/05/2029, (CAD) Aa3 2,362,937 8,500,000 Saskatchewan Province, Zero Coupon, 4/10/2014, (CAD) Aa3 2,882,583 8,250,000 Saskatchewan Province, Zero Coupon, 2/04/2022, (CAD) Aa3 1,614,946 9,605,000 Saskatchewan Province, Zero Coupon, 5/30/2025, (CAD) Aa3 1,527,665 ----------- 38,959,570 ----------- CAYMAN ISLANDS -- 0.5% 250,000 Enersis SA 6.600%, 12/01/2026 Baa3 236,058 1,405,000 PDVSA Finance, Ltd., (yankee) 7.400%, 8/15/2016 Ba1 955,400 ----------- 1,191,458 ----------- CHILE -- 0.1% 300,000 Empresa Nacional de Electricidad SA 7.875%, 2/01/2027 Baa3 238,483 ----------- COLOMBIA -- 0.3% 856,332 Transgas de Occidente SA, 144A 9.790%, 11/01/2010 Ba2 762,135 ----------- ECUADOR -- 0.8% 4,225,000 Republic of Ecuador, 144A 5.000%, 8/15/2030 Caa2 1,753,375 ----------- HONG KONG -- 3.1% 6,625,000 Bangkok Bank PCL, 144A 9.025%, 3/15/2029 Ba2 6,833,688 ----------- MALAYSIA -- 2.7% 1,750,000 Telekom Malaysia Berhad, 144A 7.875%, 8/01/2025 Baa2 1,801,408 4,300,000 Tenaga Nasional Berhad, 144A 7.500%, 11/01/2025 Baa3 4,118,716 ----------- 5,920,124 ----------- MAURITIUS -- 1.5% 2,700,000 Pindo Deli Finance Mauritius, Ltd., (yankee) 10.750%, 10/01/2007(e) Ca 621,000 2,650,000 Pindo Deli Finance Mauritius, Ltd., (yankee) 11.750%, 10/01/2017(e) Ca 530,000 5,000,000 Pindo Deli Finance Mauritius, Ltd., (yankee) 10.875%, 10/01/2027(e) Ca 1,000,000 4,360,000 Tjiwi Kimia Finance Mauritius, Ltd., (yankee) 10.000%, 8/01/2004(e) Ca 1,068,200 ----------- 3,219,200 ----------- MEXICO -- 7.0% 500,000 Grupo TMM SA de CV, (yankee) 10.250%, 11/15/2006 B2 310,000 5,960,000 Grupo Transportacion Ferroviaria Mexicana SA de CV 0/11.750%, 6/15/2009(i) B1 5,840,800 $ 1,000,000 Petroleos Mexicanos, (yankee) 9.250%, 3/30/2018 Baa1 $ 1,112,500 4,350,000 Petroleos Mexicanos, (yankee) 9.500%, 9/15/2027 Baa1 4,872,000 3,000,000 Petroleos Mexicanos, 144A, (yankee) 8.625%, 12/01/2023 Baa1 3,153,750 ----------- 15,289,050 ----------- NORWAY -- 3.8% 55,575,000 Kingdom of Norway 6.750%, 1/15/2007, (NOK) Aaa 8,384,008 ----------- PHILIPPINES -- 3.3% 5,150,000 Bangko Sentral Ng Philipinas (yankee) 8.600%, 6/15/2027 Ba1 4,171,500 1,750,000 Philippine Long Distance Telephone Co. 8.350%, 3/06/2017 Ba3 1,213,308 2,667,500 Quezon Power (Philippines), Ltd., (yankee) 8.860%, 6/15/2017 Ba3 1,813,900 ----------- 7,198,708 ----------- REPUBLIC OF KOREA -- 0.9% 2,000,000 Samsung Electronics Co., Ltd., 144A 7.700%, 10/01/2027 Baa1 2,007,000 ----------- SOUTH AFRICA -- 2.4% 15,100,000 Republic of South Africa 12.500%, 12/21/2006, (ZAR) A2 1,840,068 10,650,000 Republic of South Africa 13.000%, 8/31/2010, (ZAR) A2 1,400,254 14,890,000 Republic of South Africa 13.500%, 9/15/2015, (ZAR) A2 2,102,710 ----------- 5,343,032 ----------- SUPRANATIONAL -- 4.0% 22,300,000 International Bank for Reconstruction & Development, Zero Coupon, 8/20/2007, (NZD) Aaa 8,712,979 ----------- THAILAND -- 0.8% 1,715,000 Thai Farmers Bank PLC, 144A 8.250%, 8/21/2016 Ba2 1,788,231 ----------- UNITED STATES -- 26.1% 250,000 APL, Ltd. 8.000%, 1/15/2024 -- 145,000 500,000 Bausch & Lomb, Inc. 7.125%, 8/01/2028 Ba1 415,743 2,125,000 Borden Chemical, Inc. 7.875%, 2/15/2023 B2 1,211,250 142,000 Boston Celtics LP 6.000%, 6/30/2038 (d) -- 116,440 500,000 Charter Communications Holdings LLC 9.625%, 11/15/2009 B3 222,500 250,000 Charter Communications Holdings LLC 0/9.920%, 4/01/2011 (i) B3 87,500 250,000 CIT Group, Inc. 5.500%, 5/16/2005, (EUR) A2 261,024 100,000 Coastal Corp. 6.950%, 6/01/2028 Ba2 64,000 250,000 Continental Airlines, Inc. 8.000%, 12/15/2005 (d) B3 122,500 250,000 CSC Holdings, Inc. 8.125%, 7/15/2009 B1 240,313
See accompanying notes to financial statements. 27 Investments as of December 31, 2002
RATINGS(c) -------------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- UNITED STATES -- (CONTINUED) $ 250,000 CSC Holdings, Inc. 8.125%, 8/15/2009 B1 $ 240,313 250,000 Dana Corp. 9.000%, 8/15/2011, (EUR) Ba3 236,102 125,000 Dana Corp. 7.000%, 3/15/2028 Ba3 87,500 1,000,000 Dana Corp. 7.000%, 3/01/2029 Ba3 705,000 250,000 Delta Air Lines, Inc. 10.125%, 5/15/2010 Ba3 175,000 2,075,000 Delta Air Lines, Inc. 8.300%, 12/15/2029 Ba3 1,224,250 150,000 Dillards, Inc. 6.625%, 1/15/2018 Ba3 128,250 1,765,000 El Paso Corp. 5.750%, 3/14/2006, (EUR) Ba2 1,203,857 7,000,000 Federal Home Loan Mortgage Corp. 4.625%, 2/15/2007, (EUR) Aaa 7,658,938 34,000,000 Federal National Mortgage Association, Zero Coupon 10/29/2007, (NZD) Aaa 13,394,308 1,000,000 First Industrial LP 7.600%, 7/15/2028 Baa2 1,055,423 1,000,000 Foot Locker, Inc. 8.500%, 1/15/2022 Ba3 1,009,375 125,000 Ford Motor Credit Co. 7.250%, 2/22/2005, (GBP) A3 195,160 250,000 Ford Motor Credit Co. 6.875%, 2/01/2006 A3 250,438 475,000 Ford Motor Credit Co. 5.800%, 1/12/2009 A3 440,560 500,000 Fort James Corp. 4.750%, 6/29/2004, (EUR) Ba1 493,191 900,000 Georgia-Pacific Corp. 7.375%, 12/01/2025 Ba1 702,000 450,000 Georgia-Pacific Corp. 7.250%, 6/01/2028 Ba1 346,500 1,350,000 Georgia-Pacific Corp. 7.750%, 11/15/2029 Ba1 1,100,250 250,000 Hasbro, Inc. 6.600%, 7/15/2028 Ba3 206,250 500,000 HCA, Inc. 7.500%, 12/15/2023 Ba1 490,154 820,000 HCA, Inc. 7.050%, 12/01/2027 Ba1 753,632 500,000 HCA, Inc., Medium Term Note 7.580%, 9/15/2025 Ba1 486,014 1,000,000 IMC Global, Inc. 6.550%, 1/15/2005 Ba3 960,000 500,000 IMC Global, Inc. 7.625%, 11/01/2005 Ba3 480,000 525,000 IMC Global, Inc. 6.875%, 7/15/2007 Ba3 485,625 125,000 IMC Global, Inc. 7.375%, 8/01/2018 Ba3 99,375 1,600,000 IMC Global, Inc. 7.300%, 1/15/2028 Ba3 1,232,000 350,000 J.C. Penney Co., Inc. 7.950%, 4/01/2017 Ba3 315,000 $ 553,000 J.C. Penney Co., Inc. 8.250%, 8/15/2022 Ba3 $ 470,050 525,000 J.C. Penney Co., Inc. 7.125%, 11/15/2023 Ba3 441,000 250,000 J.C. Penney Co., Inc. Medium Term Note 6.875%, 10/15/2015 Ba3 212,500 690,000 Lucent Technologies, Inc. 7.250%, 7/15/2006(d) Caa1 389,850 2,095,000 Lucent Technologies, Inc. 6.450%, 3/15/2029(d) Caa1 921,800 66,000 Missouri Pacific Railroad Co. 4.250%, 1/01/2005 Ba1 67,968 125,000 Motorola, Inc. 6.500%, 11/15/2028 Baa2 106,250 6,475,000 Nextel Communications, Inc. 9.750%, 10/31/2007 B3 5,989,375 750,000 Nextel Communications, Inc. 9.375%, 11/15/2009(d) B3 678,750 250,000 Phillips Van-Heusen Corp. 7.750%, 11/15/2023 Ba2 207,500 250,000 Pioneer Natural Resources Co. 7.200%, 1/15/2028 Ba1 240,813 775,000 Pioneer-Standard Electronics, Inc. 9.500%, 8/01/2006 Baa3 694,188 1,000,000 ProLogis Trust 7.625%, 7/01/2017 Baa1 1,101,960 500,000 Qwest Capital Funding, Inc. 7.000%, 8/03/2009 Caa2 320,000 250,000 Qwest Capital Funding, Inc. 7.900%, 8/15/2010 Caa2 162,500 500,000 Qwest Capital Funding, Inc. 6.875%, 7/15/2028 Caa2 275,000 1,000,000 Qwest Capital Funding, Inc. 7.750%, 2/15/2031(d) Caa2 560,000 500,000 Qwest Corp. 5.625%, 11/15/2008 Ba3 425,000 250,000 Qwest Corp. 7.500%, 6/15/2023 Ba3 198,750 250,000 Salton SEA Funding Corp. 7.840%, 5/30/2010 Ba3 246,098 250,000 Southern California Edison Co. 6.375%, 1/15/2006 Ba3 232,500 365,000 Sprint Capital Corp. 7.900%, 3/15/2005 Baa3 368,650 600,000 Sprint Capital Corp. 6.125%, 11/15/2008 Baa3 546,000 250,000 Sprint Capital Corp. 6.875%, 11/15/2028 Baa3 201,250 250,000 TCI Communications, Inc. 6.875%, 2/15/2006 Baa3 264,249 650,000 Tennessee Gas Pipeline 7.500%, 4/01/2017 Ba1 542,750 200,000 Tennessee Gas Pipeline Co. 7.000%, 10/15/2028 Ba1 154,000 155,000 Xerox Capital (Europe) PLC 5.875%, 5/15/2004 B1 148,025
See accompanying notes to financial statements. 28 Investments as of December 31, 2002
RATINGS(c) -------------- PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- UNITED STATES -- (CONTINUED) $ 500,000 Xerox Corp. 5.500%, 11/15/2003(d) B1 $ 487,500 1,600,000 Xerox Corp. 3.500%, 2/04/2004, (EUR) B1 1,525,742 ----------- 57,220,753 ----------- VENEZUELA -- 0.9% 500,000 Cerro Negro Finance, Ltd., 144A 7.900%, 12/01/2020 Ba2 280,000 2,550,000 Republic of Venezuela 9.250%, 9/15/2027 B3 1,737,825 ----------- 2,017,825 Total Non-Convertible Bonds (Identified Cost $189,501,686) 178,732,457 Total Bonds and Notes (Identified Cost $210,822,399) 194,245,615 ----------- SHARES - -------------------------------------------------------------------------------- PREFERRED STOCKS -- 1.7% OF TOTAL NET ASSETS PHILIPPINES -- 0.4% 47,800 Philippine Long Distance Telephone Co., Series 3 (GDR) B2 975,120 ----------- UNITED STATES -- 1.3% 35,000 Bethlehem Steel Corp., 144A(e)(f) C 35,000 5,000 Chesapeake Energy Corp. Caa1 305,000 5,045 La Quinta Properties B2 115,026 22,500 Owens Corning Capital LLC, 144A(e)(f) C 1,418 37,500 Pacific Gas & Electric Co.(e)(f) Ca 909,375 9,500 Southern California ED B3 846,094 12,500 Western Gas Resources, Inc B1 660,000 ----------- 2,871,913 ----------- Total Preferred Stocks (Identified Cost $6,405,340). 3,847,033 ----------- COMMON STOCKS -- 7.7% INDONESIA -- 0.1% 6,786,500 PT Indah Kiat Pulp & Paper Corp., (IDR)(e)(j) 109,949 ----------- SOUTH AFRICA -- 3.5% 589,300 Sappi, Ltd. (ADR)(d) 7,790,546 ----------- THAILAND -- 0.1% 894,789 Loxley Co., Ltd 162,783 122,000 Siam Commercial Bank PLC, 144A (THB) 79,873 ----------- 242,656 ----------- UNITED STATES -- 4.0% 162,900 Associated Estates Realty Corp. 1,099,575 177,100 Developers Diversified Realty Corp. (REIT) 3,894,429 111,700 Simon Property Group, Inc 3,805,619 ----------- 8,799,623 ----------- Total Common Stocks (Identified Cost $13,149,705) 16,942,774 ----------- PRINCIPAL AMOUNT DESCRIPTION VALUE (a) - -------------------------------------------------------------------------------- SHORT TERM INVESTMENTS -- 3.1% $ 1,809,392 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $1,809,493 on 1/02/2003, collateralized by $1,877,243 Federal National Mortgage Association Bond, 4.976%, due 7/01/2025 valued at $1,899,939 $ 1,809,392 989,930 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(k) 989,930 197,986 Comerica Bank, 1.4% due 11/19/2003(k) 197,986 989,930 BNP Paribas, 1.32% due 2/07/2003(k) 989,930 197,986 Liberty Lighthouse Funding, 1.343% due 1/14/2003(k) 197,986 1,029,527 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(k) 1,029,527 98,993 Galaxy Funding, 1.353% due 2/07/2003(k) 98,993 593,958 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(k) 593,958 100,092 Bank Of Montreal, 1.32% due 1/30/2003(k) 100,092 534,562 Royal Bank of Scotland, 1.33% due 1/15/2003(k) 534,562 197,986 Goldman Sachs Group Inc., 1.363% due 1/02/2003(k) 197,986 ------------- Total Short Term Investments (Identified Cost $6,740,342) 6,740,342 ------------- Total Investments -- 101.0% (Identified Cost $237,117,786) (b) 221,775,764 Other assets less liabilities (2,206,993) ------------- Total Net Assets -- 100% $ 219,568,771 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized depreciation on investments based on cost of $235,942,015 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 $ 23,205,222 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (37,371,473) ------------- Net unrealized depreciation $ (14,166,251) ==============
At December 31, 2002, the Fund had a capital loss carryover of approximately $52,456,153 of which $13,337,197 expires on December 31, 2007, $6,500,127 expires on December 31, 2008, $10,848,517 expires on December 31, 2009 and $21,770,312 expires on December 31, 2010. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. For the year ended December 31, 2002, the Fund has elected to defer $2,276,305 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $2,488,101 in undistributed ordinary income and $0 in undistributed long-term gains. See accompanying notes to financial statements. 29 Investments as of December 31, 2002 (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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) All or a portion of this security was on loan to brokers at December 31, 2002. (e) Non-income producing security. (f) Issuer filed petition under Chapter 11 of the Federal Bankruptcy Code. (g) Security valued at fair value as determined in good faith by or under the direction of the Board of Trustees. (h) Pay in kind securities. (i) Step Bond: Coupon rate is zero or below market for an initial period and then increases to a higher coupon rate at a specified date and rate. (j) Delisted security. (k) Represents investments of securities lending collateral. REIT Real Estate Investment Trust. ADR/GDR An American Depositary Receipt (ADR) or Global Depositary Receipt (GDR) is a certificate issued by a Custodian Bank representing the right to receive securities of the foreign issuer described. The values of ADRs and GDRs are significantly influenced by trading on exchanges not located in the United States. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registrations, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $24,362,319 or 11.1% of net assets. ARS - Argentine Peso CAD - Canadian Dollar EUR - Euro GBP - British Pound IDR - Indonesian Rupiah NOK - Norwegian Krone NZD - New Zealand Dollars THB - Thai Baht ZAR - South African Rand INDUSTRY HOLDINGS AT DECEMBER 31, 2002 (UNAUDITED) Government 25.0% Oil & Gas 6.7 Banking 6.7 Communications 6.3 U.S. Government Agencies 6.1 Forest Products & Paper 5.4 Miscellaneous 4.3 Supra National 4.0 Electric Utilities 3.8 Mortgage-Backed 3.5 Transportation 3.2 Telephone Systems 2.4 Financial Services 2.2 Chemicals 2.0 Other, less than 2% each 16.3
See accompanying notes to financial statements. 30 LIMITED TERM U.S. GOVERNMENT FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ------------ PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 97.8% OF TOTAL NET ASSETS MORTGAGE-BACKED -- 57.9% $ 1,845,000 EQCC Home Equity Loan Trust 6.134%, 7/20/2028 Aaa $ 1,950,075 2,051,464 Federal Home Loan Mortgage Corp. 7.000%, 2/01/2016 Aaa 2,182,483 19,381 Federal Home Loan Mortgage Corp. 7.500%, 6/01/2026 Aaa 20,717 285,274 Federal Home Loan Mortgage Corp. 8.000%, with various maturities to 2015(d) Aaa 301,735 13,384 Federal Home Loan Mortgage Corp. 10.000%, 7/01/2019 Aaa 15,287 1,561,617 Federal Home Loan Mortgage Corp. 11.500%, with various maturities to 2020(d) Aaa 1,799,364 3,508,387 Federal National Mortgage Association 5.500%, with various maturities to 2017(d) Aaa 3,642,614 33,644,397 Federal National Mortgage Association 6.000%, with various maturities to 2032(d) Aaa 35,170,259 12,449,788 Federal National Mortgage Association 6.500%, with various maturities to 2032(d) Aaa 12,968,742 1,688,946 Federal National Mortgage Association 7.000%, 12/01/2022 Aaa 1,776,449 3,077,789 Federal National Mortgage Association 7.500%, with various maturities to 2015(d) Aaa 3,278,985 643,178 Federal National Mortgage Association 8.000%, with various maturities to 2016(d) Aaa 693,771 8,436,378 Government National Mortgage Association 7.000%, with various maturities to 2031(d) Aaa 8,952,825 3,861,124 Government National Mortgage Association 8.000%, 10/15/2029 Aaa 4,180,331 31,615 Government National Mortgage Association 12.500%, with various maturities to 2015(d) Aaa 37,749 366,353 Government National Mortgage Association 16.000%, with various maturities to 2012(d) Aaa 458,698 144,041 Government National Mortgage Association 17.000%, with various maturities to 2011(d) Aaa 182,609 1,000,000 Residential Asset Securitization Trust 5.820%, 1/25/2027 Aaa 1,024,211 1,675,000 Residential Funding Mortgage Securities II 5.420%, 2/25/2016 Aaa 1,748,070 ------------- 80,384,974 ------------- SUPRANATIONAL -- 3.4% 3,210,000 Inter-American Development Bank Bonds 12.250%, 12/15/2008 Aaa 4,712,363 ------------- U.S. GOVERNMENT-- 20.8% 3,300,000 United States Treasury Bonds 7.875%, 11/15/2004 Aaa 3,685,044 5,800,000 United States Treasury Notes 4.375%, 8/15/2012(e) Aaa 6,062,583 4,000,000 United States Treasury Notes 4.875%, 2/15/2012 Aaa 4,343,592 3,800,000 United States Treasury Notes 5.000%, 8/15/2011 Aaa 4,166,936 $ 2,200,000 .United States Treasury Notes 6.250%, 2/15/2007 Aaa $ 2,524,071 2,500,000 United States Treasury Notes 6.500%, 10/15/2006 Aaa 2,871,485 4,500,000 United States Treasury Notes 7.000%, 7/15/2006 Aaa 5,217,363 ------------- 28,871,074 ------------- U.S. GOVERNMENT AGENCIES-- 15.7% 5,000,000 Federal Home Loan Mortgage Corp. 5.750%, 4/15/2008 Aaa 5,612,340 3,000,000 Federal National Mortgage Association 5.500%, 5/02/2006 Aa2 3,250,578 4,500,000 Federal National Mortgage Association 5.500%, 2/15/2006 Aaa 4,921,241 6,325,000 Federal National Mortgage Association 6.000%, 12/15/2005 Aaa 7,003,635 1,000,000 Federal National Mortgage Association 7.000%, 7/15/2005 Aaa 1,121,130 ------------- 21,908,924 ------------- Total Bonds and Notes (Identified Cost $131,038,066) 135,877,335 ------------- SHORT TERM INVESTMENTS -- 5.9% 2,874,085 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $2,874,244 on 1/02/2003, collateralized by $3,025,868 Federal Home Loan Mortgage Bond, 2.21%, due 7/15/2008 valued at $3,017,789 2,874,085 106,347 Galaxy Funding, 1.353% due 2/07/2003(f) 106,347 212,693 Liberty Lighthouse Funding, 1.343% due 1/14/2003(f) 212,693 1,063,467 BNP Paribas, 1.32% due 2/07/2003(f) 1,063,467 638,080 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(f) 638,080 107,528 Bank Of Montreal, 1.32% due 1/30/2003(f) 107,528 212,693 Goldman Sachs Group Inc., 1.363% due 1/02/2003(f) 212,693 574,272 Royal Bank of Scotland, 1.33% due 1/15/2003(f) 574,272 1,106,005 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(f) 1,106,005 1,063,467 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(f) 1,063,467 212,693 Comerica Bank, 1.4% due 11/19/2003(f) 212,693 ------------- Total Short Term Investments (Identified Cost $8,171,330) 8,171,330 ------------- Total Investments -- 103.7% (Identified Cost $139,209,396) (b) 144,048,665 Other assets less liabilities (5,164,323) ------------- Total Net Assets -- 100% $ 138,884,342 =============
See accompanying notes to financial statements. 31 Investments as of December 31, 2002 (a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized appreciation on investments based on cost of $140,091,509 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 4,047,570 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (90,414) ------------- Net unrealized appreciation $ 3,957,156 =============
At December 31, 2002, the Fund had a capital loss carryover of approximately $22,866,796 of which $1,001,296 expires on December 31, 2003, $4,342,078 expires on December 31, 2004, $2,731,339 expires on December 31, 2005, $10,626,315 expires on December 31, 2007 and $4,165,768 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. At December 31, 2002, there was no undistributed ordinary income or long-term capital gains except for unrealized appreciation/depreciation disclosed on a tax basis. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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 investment in mortgage-backed securities of the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Government National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of this issuer which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (e) All or a portion of this security was on loan to brokers at December 31, 2002. (f) Represents investments of securities lending collateral. See accompanying notes to financial statements. 32 GOVERNMENT SECURITIES FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002
RATINGS(c) ------------ PRINCIPAL (UNAUDITED) AMOUNT DESCRIPTION MOODY'S VALUE(a) - -------------------------------------------------------------------------------- BONDS AND NOTES -- 97.6% OF TOTAL NET ASSETS MORTGAGE-BACKED -- 22.9% $ 765,417 Federal Home Loan Mortgage Corp. 7.500%, 4/01/2012 Aaa $ 816,702 1,412,887 Federal National Mortgage Association 6.500%, 11/01/2031 Aaa 1,471,796 3,000,000 Federal National Mortgage Association 6.625%, 11/15/2010 Aaa 3,522,360 761,897 Federal National Mortgage Association 7.500%, 12/01/2030 Aaa 809,175 5,812,853 Government National Mortgage Association 6.500%, 5/15/2031 Aaa 6,105,112 8,655,349 Government National Mortgage Association 7.000%, with various maturities to 2031(d) Aaa 9,175,518 581,049 Government National Mortgage Association 7.500%, 4/15/2027 Aaa 620,019 65,810 Government National Mortgage Association 8.500%, 2/15/2006 Aaa 70,264 129,570 Government National Mortgage Association 9.000%, with various maturities to 2016(d) Aaa 140,577 49,829 Government National Mortgage Association 9.500%, with various maturities to 2009(d) Aaa 55,129 58,362 Government National Mortgage Association 10.000%, with various maturities to 2016(d) Aaa 66,508 11,662 Government National Mortgage Association 12.500%, with various maturities to 2014(d) Aaa 13,862 ------------- 22,867,022 ------------- U.S. GOVERNMENT -- 68.8% 13,100,000 United States Treasury Bonds 6.000%, 2/15/2026 Aaa 15,012,299 15,000,000 United States Treasury Bonds 7.250%, 5/15/2016(e) Aaa 19,207,035 15,000,000 United States Treasury Bonds 8.750%, with various maturities to 2020(d) Aaa 21,840,620 4,000,000 United States Treasury Bonds, Zero Coupon 11/15/2014 Aaa 3,096,556 8,853,855 United States Treasury Inflation Indexed Bonds 3.500%, 1/15/2011 Aaa 9,718,487 ------------- 68,874,997 ------------- U.S. GOVERNMENT AGENCIES -- 5.9% 5,000,000 Federal National Mortgage Association 6.625%, 9/15/2009 Aaa 5,866,295 ------------- Total Bonds and Notes (Identified Cost $91,468,770) 97,608,314 ------------- SHORT TERM INVESTMENTS -- 21.5% $ 1,744,698 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $1,744,795 on 1/02/2003, collateralized by $1,799,615 Federal National Mortgage Bond, 3.53%, due 3/25/2022 valued at $1,831,933 $ 1,744,698 4,141,848 Merrimac Cash Fund-Premium Class, 1.422% due 1/02/2003(f) 4,141,848 3,982,546 Dreyfus Cash Management Plus Fund, 1.358% due 1/02/2003(f) 3,982,546 398,255 Galaxy Funding, 1.353% due 2/07/2003(f) 398,255 796,509 Goldman Sachs Group Inc., 1.363% due 1/02/2003(f) 796,509 402,676 Bank Of Montreal, 1.32% due 1/30/2003(f) 402,676 796,509 Comerica Bank, 1.4% due 11/19/2003(f) 796,509 2,389,527 Canadian Imperial Bank of Commerce, 1.225% due 5/19/2003(f) 2,389,527 3,982,546 BNP Paribas, 1.32% due 2/07/2003(f) 3,982,546 2,150,575 Royal Bank of Scotland, 1.33% due 1/15/2003(f) 2,150,575 796,509 Liberty Lighthouse Funding, 1.343% due 1/14/2003(f) 796,509 ------------- Total Short Term Investments (Identified Cost $21,582,198) 21,582,198 ------------- Total Investments -- 119.1% (Identified Cost $113,050,968)(b) 119,190,512 Other assets less liabilities (19,152,937) ------------- Total Net Assets -- 100% $ 100,037,575 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized appreciation on investments based on cost of $113,671,663 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 $ 5,518,849 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value -- ------------- Net unrealized appreciation $ 5,518,849 =============
At December 31, 2002, the Fund had a capital loss carryover of approximately $9,880,837 of which $3,530,050 expires on December 31, 2004, $5,687,678 expires on December 31, 2007 and $663,109 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. For the year ended December 31, 2002, the Fund has elected to defer $58,306 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $34,780 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securites are generally rated at the time of issuance. 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, 2002. 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 investment in mortgage-backed securities of the Government National Mortgage Association are interests in separate pools of mortgages. All separate investments in securities of this issuer and for United States Treasury Bonds which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (e) All or a portion of this security was on loan to brokers at December 31, 2002. (f) Represents investments of securities lending collateral. See accompanying notes to financial statements. 33 STATEMENTS OF ASSETS & LIABILITIES December 31, 2002
SHORT TERM BOND BOND INCOME HIGH INCOME FUND FUND FUND --------------- ---------------- --------------- ASSETS Investments at cost $ 63,929,620 $ 325,636,135 $ 54,187,646 Net unrealized appreciation (depreciation) 1,936,490 9,729,009 (1,129,198) --------------- ---------------- --------------- Investments at value 65,866,110 335,365,144 53,058,448 Receivable for Fund shares sold 17,590 1,252,827 20,222 Receivable for securities sold 769 -- -- Dividends and interest receivable 586,325 4,245,638 1,021,323 Tax reclaims receivable -- -- -- Securities lending income receivable 4,417 39,669 5,709 --------------- ---------------- --------------- TOTAL ASSETS 66,475,211 340,903,278 54,105,702 --------------- ---------------- --------------- LIABILITIES Collateral on securities loaned, at value 7,437,750 23,165,109 5,577,060 Payable for securities purchased -- -- -- Payable for Fund shares redeemed 155,483 649,265 160,960 Dividends payable 74,024 378,793 160,835 Management fees payable 8,856 110,098 29,063 Deferred Trustees' fees 21,760 96,133 19,719 Transfer agent fees payable 12,777 211,190 13,493 Accounting and administrative fees payable 3,342 17,721 2,773 Other accounts payable and accrued expenses 39,123 69,687 50,823 --------------- ---------------- --------------- TOTAL LIABILITIES 7,753,115 24,697,996 6,014,726 --------------- ---------------- --------------- NET ASSETS $ 58,722,096 $ 316,205,282 $ 48,090,976 =============== ================ =============== NET ASSETS CONSIST OF: Paid in capital $ 78,968,563 $ 340,126,038 $ 138,391,240 Undistributed (overdistributed) net investment income (41,553) 127,794 (128,268) Accumulated net realized gain (loss) on investments (22,141,404) (33,778,012) (89,042,798) Net unrealized appreciation (depreciation) of investments and foreign currency transactions 1,936,490 9,729,462 (1,129,198) --------------- ---------------- --------------- NET ASSETS $ 58,722,096 $ 316,205,282 $ 48,090,976 =============== ================ =============== COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE: CLASS A SHARES: Net assets $ 48,514,116 $ 147,647,116 $ 22,454,325 =============== ================ =============== Shares of beneficial interest 6,958,162 13,087,729 5,449,275 =============== ================ =============== Net asset value and redemption price per share $ 6.97 $ 11.28 $ 4.12 =============== ================ =============== Offering price per share $ 7.19 $ 11.81 $ 4.31 =============== ================ =============== CLASS B SHARES: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets $ 6,170,250 $ 141,187,561 $ 23,031,311 =============== ================ =============== Shares of beneficial interest 886,205 12,516,403 5,584,512 =============== ================ =============== Net asset value and offering price per share $ 6.96 $ 11.28 $ 4.12 =============== ================ =============== CLASS C SHARES: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets $ 3,501,867 $ 9,024,483 $ 2,605,340 =============== ================ =============== Shares of beneficial interest 503,652 799,527 632,022 =============== ================ =============== Net asset value per share $ 6.95 $ 11.29 $ 4.12 =============== ================ =============== Offering price per share $ 7.02 $ 11.40 $ 4.16 =============== ================ =============== CLASS Y SHARES: Net assets $ 535,863 $ 18,346,122 $ -- =============== =============== =============== Shares of beneficial interest 76,884 1,619,501 -- =============== ================ =============== Net asset value, offering and redemption price per share $ 6.97 $ 11.33 $ -- =============== =============== ===============
See accompanying notes to financial statements. 34
STRATEGIC INCOME LIMITED TERM U.S. GOVERNMENT FUND GOVERNMENT FUND SECURITIES FUND ---------------- ----------------- --------------- ASSETS Investments at cost $ 237,117,786 $ 139,209,396 $ 113,050,968 Net unrealized appreciation (depreciation) (15,342,022) 4,839,269 6,139,544 ---------------- ----------------- --------------- Investments at value 221,775,764 144,048,665 119,190,512 Receivable for Fund shares sold 379,625 149,620 52,629 Receivable for securities sold -- 12,250,756 -- Dividends and interest receivable 3,250,768 1,186,401 1,087,306 Tax reclaims receivable 3,444 -- -- Securities lending income receivable 4,839 2,525 5,108 ---------------- ----------------- --------------- TOTAL ASSETS 225,414,440 157,637,967 120,335,555 ---------------- ----------------- --------------- LIABILITIES Collateral on securities loaned, at value 4,930,950 5,297,245 19,837,500 Payable for securities purchased -- 12,962,443 -- Payable for Fund shares redeemed 357,639 230,474 255,152 Dividends payable 270,373 87,406 43,071 Management fees payable 118,706 67,482 46,151 Deferred Trustees' fees 39,321 29,394 51,026 Transfer agent fees payable 45,817 29,961 20,512 Accounting and administrative fees payable 12,271 7,909 5,605 Other accounts payable and accrued expenses 70,592 41,311 38,963 ---------------- ----------------- --------------- TOTAL LIABILITIES 5,845,669 18,753,625 20,297,980 ---------------- ----------------- --------------- NET ASSETS $ 219,568,771 $ 138,884,342 $ 100,037,575 ================ ================= =============== NET ASSETS CONSIST OF: Paid in capital $ 286,330,639 $ 180,758,162 $ 104,927,332 Undistributed (overdistributed) net investment income 3,205,477 (116,800) (16,246 Accumulated net realized gain (loss) on investments (54,721,416) (46,596,289) (11,013,055 Net unrealized appreciation (depreciation) of investments and foreign (15,245,929) 4,839,269 6,139,544 currency transactions ---------------- ----------------- --------------- NET ASSETS $ 219,568,771 $ 138,884,342 $ 100,037,575 ================ ================= =============== COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE: CLASS A SHARES: Net assets $ 92,302,578 $ 106,013,384 $ 76,337,700 ================ ================= =============== Shares of beneficial interest 8,609,456 9,037,273 6,299,540 ================ ================= =============== Net asset value and redemption price per share $ 10.72 $ 11.73 $ 12.12 ================ ================= =============== Offering price per share $ 11.23 $ 12.09 $ 12.69 ================ ================= =============== CLASS B SHARES: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets $ 98,500,961 $ 16,263,295 $ 16,878,174 ================ ================= =============== Shares of beneficial interest 9,200,140 1,388,734 1,392,808 ================ ================= =============== Net asset value and offering price per share $ 10.71 $ 11.71 $ 12.12 ================ ================= =============== CLASS C SHARES: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets $ 27,726,600 $ 8,079,036 $ -- ================ ================= =============== Shares of beneficial interest 2,591,895 689,391 -- ================ ================= =============== Net asset value per share $ 10.70 $ 11.72 $ -- ================ ================= =============== Offering price per share $ 10.81 $ 11.84 $ -- ================ ================= =============== CLASS Y SHARES: Net assets $ 1,038,632 $ 8,528,627 $ 6,821,701 ================ ================= =============== Shares of beneficial interest 96,712 723,998 563,121 ================ ================= =============== Net asset value, offering and redemption price per share $ 10.74 $ 11.78 $ 12.11 ================ ================= ===============
35 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2002
SHORT TERM BOND BOND INCOME HIGH INCOME FUND FUND FUND ---------------- ----------------- --------------- INVESTMENT INCOME Dividends $ -- $ -- $ 51,272 Interest 3,191,352 21,719,386 5,975,219 Securities lending income 6,592 83,135 41,684 Less net foreign taxes withheld -- -- -- ---------------- ----------------- --------------- 3,197,944 21,802,521 6,068,175 ---------------- ----------------- --------------- Expenses Management fees 333,517 1,317,903 407,408 Service and distribution fees - Class A 131,799 397,181 67,018 Service and distribution fees - Class B 57,419 1,314,367 282,083 Service and distribution fees - Class C 17,644 103,081 31,502 Trustees' fees and expenses 7,395 13,603 7,362 Accounting and administrative 34,654 181,783 32,625 Custodian 64,628 102,256 61,978 Transfer agent fees - Class A, Class B, Class C 146,262 1,054,730 161,543 Transfer agent fees - Class Y 419 17,483 -- Audit and tax services 33,867 41,113 43,680 Legal 5,588 25,405 3,938 Shareholder reporting 7,443 81,741 12,894 Registration 45,291 48,063 34,364 Miscellaneous 5,434 16,071 6,821 ---------------- ----------------- --------------- Total expenses 891,360 4,714,780 1,153,216 Less reimbursement/waiver (290,103) -- -- ---------------- ----------------- --------------- Net expenses 601,257 4,714,780 1,153,216 ---------------- ----------------- --------------- Net investment income 2,596,687 17,087,741 4,914,959 ---------------- ----------------- --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments - net (1,897,753) (18,249,823) (20,594,051) Foreign currency transactions - net -- (474,993) -- Change in unrealized appreciation (depreciation) of: Investments - net 536,963 9,018,685 9,402,597 Foreign currency transactions - net -- 948 -- ---------------- ----------------- --------------- Net realized and unrealized gain (loss) on investments and foreign currency transactions (1,360,790) (9,705,183) (11,191,454) ---------------- ----------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,235,897 $ 7,382,558 $ (6,276,495) ================ ================= ===============
See accompanying notes to financial statements. 36
STRATEGIC INCOME LIMITED TERM U.S. GOVERNMENT FUND GOVERNMENT FUND SECURITIES FUND ---------------- ----------------- --------------- INVESTMENT INCOME Dividends $ 1,095,855 $ -- $ -- Interest 17,835,698 6,797,682 4,694,881 Securities lending income 36,471 21,533 12,645 Less net foreign taxes withheld (34,444) -- -- ---------------- ----------------- --------------- 18,933,580 6,819,215 4,707,526 ---------------- ----------------- --------------- Expenses Management fees 1,404,810 774,861 502,700 Service and distribution fees - Class A 226,621 373,753 177,887 Service and distribution fees - Class B 984,230 144,101 142,039 Service and distribution fees - Class C 277,462 68,615 -- Trustees' fees and expenses 15,683 11,830 4,721 Accounting and administrative 124,140 78,121 52,701 Custodian 119,059 70,017 46,353 Transfer agent fees - Class A, Class B, Class C 512,586 290,059 196,764 Transfer agent fees - Class Y 656 7,891 6,057 Audit and tax services 45,980 33,997 33,910 Legal 19,971 13,532 8,350 Shareholder reporting 33,801 16,188 14,864 Registration 45,767 47,216 35,888 Miscellaneous 16,444 8,232 6,492 ---------------- ----------------- --------------- Total expenses 3,827,210 1,938,413 1,228,726 Less reimbursement/waiver -- -- -- ---------------- ----------------- --------------- Net expenses 3,827,210 1,938,413 1,228,726 ---------------- ----------------- --------------- Net investment income 15,106,370 4,880,802 3,478,800 ---------------- ----------------- --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS Realized gain (loss) on: Investments - net (21,138,332) 2,104,690 1,754,365 Foreign currency transactions - net (109,875) -- -- Change in unrealized appreciation (depreciation) of: Investments - net 36,446,412 3,563,852 6,101,934 Foreign currency transactions - net 114,313 -- -- ---------------- ----------------- --------------- Net realized and unrealized gain (loss) on investments and foreign 15,312,518 5,668,542 7,856,299 currency transactions ---------------- ----------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 30,418,888 $ 10,549,344 $ 11,335,099 ================ ================= ===============
37 STATEMENTS OF CHANGES IN NET ASSETS
SHORT TERM BOND BOND INCOME FUND FUND ------------------------------ ------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- FROM OPERATIONS: Net investment income $ 2,596,687 $ 3,218,140 $ 17,087,741 $ 19,095,393 Net realized gain (loss) on investments and foreign currency transactions (1,897,753) 409,535 (18,724,816) (2,966,830) Net change in unrealized appreciation (depreciation) of investments 536,963 937,524 9,019,633 5,153,817 ------------- ------------- ------------- ------------- Increase (decrease) in net assets resulting from operations 1,235,897 4,565,199 7,382,558 21,282,380 ------------- ------------- ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS NET INVESTMENT INCOME Class A (2,537,672) (3,191,917) (8,791,213) (11,319,336) Class B (231,053) (188,455) (6,316,934) (6,512,472) Class C (68,193) (23,799) (498,081) (697,417) Class Y (20,831) (1,147) (1,050,339) (1,060,888) ------------- ------------- ------------- ------------- (2,857,749) (3,405,318) (16,656,567) (19,590,113) ------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (3,526,409) 155,809 (4,698,171) 26,608,353 ------------- ------------- ------------- ------------- Total increase (decrease) in net assets (5,148,261) 1,315,690 (13,972,180) 28,300,620 ------------- ------------- ------------- ------------- NET ASSETS Beginning of period 63,870,357 62,554,667 330,177,462 301,876,842 ------------- ------------- ------------- ------------- End of period $ 58,722,096 $ 63,870,357 $ 316,205,282 $ 330,177,462 ============= ============= ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ (41,553) $ (30,408) $ 127,794 $ (357,817) ============= ============= ============= ============= HIGH INCOME FUND ----------------------------- YEAR ENDED DECEMBER 31, 2002 2001 ------------- ------------- FROM OPERATIONS: Net investment income $ 4,914,959 $ 9,962,123 Net realized gain (loss) on investments and foreign currency transactions (20,594,051) (35,337,692) Net change in unrealized appreciation (depreciation) of investments 9,402,597 15,823,831 ------------- ------------- Increase (decrease) in net assets resulting from operations (6,276,495) (9,551,738) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS NET INVESTMENT INCOME Class A (2,389,509) (4,869,014) Class B (2,310,655) (4,708,520) Class C (257,610) (516,760) Class Y -- -- ------------- ------------- (4,957,774) (10,094,294) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (13,012,003) (8,138,375) ------------- ------------- Total increase (decrease) in net assets (24,246,272) (27,784,407) ------------- ------------- NET ASSETS Beginning of period 72,337,248 100,121,655 ------------- ------------- End of period $ 48,090,976 $ 72,337,248 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ (128,268) $ (118,997) ============= =============
See accompanying notes to financial statements. 38
STRATEGIC INCOME LIMITED TERM U.S. FUND GOVERNMENT FUND ------------------------------ ------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- FROM OPERATIONS: Net investment income $ 15,106,370 $ 21,144,478 $ 4,880,802 $ 6,144,504 Net realized gain (loss) on investments and foreign currency transactions (21,248,207) (15,296,601) 2,104,690 3,333,647 Net change in unrealized appreciation (depreciation) of investments 36,560,725 (7,360,361) 3,563,852 (296,704) ------------- ------------- ------------- ------------- Increase (decrease) in net assets resulting from operations 30,418,888 (1,512,484) 10,549,344 9,181,447 ------------- ------------- ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS NET INVESTMENT INCOME Class A (5,702,309) (9,377,635) (4,982,529) (5,640,601) Class B (5,565,705) (9,064,495) (580,172) (537,161) Class C (1,567,724) (2,749,603) (272,616) (301,631) Class Y (42,564) (36,701) (402,890) (173,303) ------------- ------------- ------------- ------------- (12,878,302) (21,228,434) (6,238,207) (6,652,696) ------------- ------------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (23,656,108) (26,303,974) 1,774,899 (10,319,170) ------------- ------------- ------------- ------------- Total increase (decrease) in net assets (6,115,522) (49,044,892) 6,086,036 (7,790,419) ------------- ------------- ------------- ------------- NET ASSETS Beginning of period 225,684,293 274,729,185 132,798,306 140,588,725 End of period ------------- ------------- ------------- ------------- $ 219,568,771 $ 225,684,293 $ 138,884,342 $ 132,798,306 UNDISTRIBUTED (OVERDISTRIBUTED) ============= ============= ============= ============= NET INVESTMENT INCOME $ 3,205,477 $ 1,417,755 $ (116,800) $ (105,749) ============= ============= ============= ============= GOVERNMENT SECURITIES FUND ------------------------------ YEAR ENDED DECEMBER 31, 2002 2001 ------------- ------------- FROM OPERATIONS: Net investment income $ 3,478,800 $ 3,808,000 Net realized gain (loss) on investments and foreign currency transactions 1,754,365 2,078,357 Net change in unrealized appreciation (depreciation) of investments 6,101,934 (1,860,288) ------------- ------------- Increase (decrease) in net assets resulting from operations 11,335,099 4,026,069 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS NET INVESTMENT INCOME Class A (3,186,452) (3,439,102) Class B (530,909) (486,651) Class C -- -- Class Y (289,414) (245,868) ------------- ------------- (4,006,775) (4,171,621) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS 4,088,509 2,920,494 ------------- ------------- Total increase (decrease) in net assets 11,416,833 2,774,942 ------------- ------------- NET ASSETS Beginning of period 88,620,742 85,845,800 End of period ------------- ------------- $ 100,037,575 $ 88,620,742 UNDISTRIBUTED (OVERDISTRIBUTED) ============= ============= NET INVESTMENT INCOME $ (16,246) $ 23,904 ============= =============
39 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
INCOME (LOSS) FROM INVESTMENT OPERATIONS: LESS DISTRIBUTIONS: ----------------------------------------- -------------------------------------------- NET ASSET VALUE, NET REALIZED DIVIDENDS DISTRIBUTIONS BEGINNING NET AND UNREALIZED TOTAL FROM FROM FROM NET OF INVESTMENT GAIN (LOSS ON) INVESTMENT NET INVESTMENT REALIZED TOTAL THE PERIOD INCOME INVESTMENTS OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS ---------- ----------- -------------- ------------ -------------- ------------- ------------- SHORT TERM BOND FUND CLASS A 12/31/2002 $ 7.16 $ 0.29(c) $ (0.14) $ 0.15 $ (0.34) $ -- $ (0.34) 12/31/2001(i) 7.02 0.37 0.17 0.54 (0.40) -- (0.40) 12/31/2000 7.01 0.44 0.01(f) 0.45 (0.44) -- (0.44) 12/31/1999 7.30 0.41 (0.28) 0.13 (0.42) -- (0.42) 12/31/1998 7.39 0.38 (0.09) 0.29 (0.38) -- (0.38) CLASS B 12/31/2002 7.15 0.24(c) (0.15) 0.09 (0.28) -- (0.28) 12/31/2001(i) 7.01 0.32 0.17 0.49 (0.35) -- (0.35) 12/31/2000 7.00 0.39 0.01(f) 0.40 (0.39) -- (0.39) 12/31/1999 7.29 0.36 (0.28) 0.08 (0.37) -- (0.37) 12/31/1998 7.38 0.33 (0.09) 0.24 (0.33) -- (0.33) CLASS C 12/31/2002 7.14 0.25(c) (0.16) 0.09 (0.28) -- (0.28) 12/31/2001(i) 7.01 0.32 0.15 0.47 (0.34) -- (0.34) 12/31/2000 7.00 0.39 0.01(f) 0.40 (0.39) -- (0.39) 12/31/1999 7.29 0.36 (0.28) 0.08 (0.37) -- (0.37) 12/31/1998(g) 7.28 0.01 0.01(f) 0.02 (0.01) -- (0.01) CLASS Y 12/31/2002 7.16 0.32(c) (0.16) 0.16 (0.35) -- (0.35) 12/31/2001(h) 7.22 0.09 (0.08) 0.01 (0.07) -- (0.07) BOND INCOME FUND CLASS A 12/31/2002 $ 11.59 $ 0.63(c) $ (0.32) $ 0.31 $ (0.62) $ -- $ (0.62) 12/31/2001(i) 11.52 0.73 0.10 0.83 (0.76) -- (0.76) 12/31/2000 11.51 0.78 0.03 0.81 (0.80) -- (0.80) 12/31/1999 12.36 0.81 (0.86) (0.05) (0.79) (0.01) (0.80) 12/31/1998 12.39 0.81 0.15 0.96 (0.81) (0.18) (0.99) CLASS B 12/31/2002 11.59 0.55(c) (0.32) 0.23 (0.54) -- (0.54) 12/31/2001(i) 11.51 0.64 0.10 0.74 (0.66) -- (0.66) 12/31/2000 11.51 0.70 0.02 0.72 (0.72) -- (0.72) 12/31/1999 12.36 0.72 (0.86) (0.14) (0.70) (0.01) (0.71) 12/31/1998 12.39 0.71 0.15 0.86 (0.71) (0.18) (0.89) CLASS C 12/31/2002 11.60 0.55(c) (0.32) 0.23 (0.54) -- (0.54) 12/31/2001(i) 11.52 0.65 0.09 0.74 (0.66) -- (0.66) 12/31/2000 11.52 0.70 0.02 0.72 (0.72) -- (0.72) 12/31/1999 12.37 0.72 (0.86) (0.14) (0.70) (0.01) (0.71) 12/31/1998 12.40 0.71 0.15 0.86 (0.71) (0.18) (0.89)
(a) A sales charge for Class A and Class C shares and a contingent deferred sales charge for Class B and Class C shares are not reflected in total return calculations. Periods less than one year are not annualized. (b) Computed on an annualized basis for periods less than one year. (c) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (d) The investment adviser agreed to reimburse a portion of the Fund's expenses during the period. Without this reimbursement, expense ratios would have been higher. (e) Had certain expenses not been reduced during the period, total returns would have been lower. (f) The amount shown for a share outstanding does not correspond with the aggregate net gain/(loss) on investments for the period due to timing of purchases and redemptions of Fund shares in relation to fluctuating values of the investments of the Fund. See accompanying notes to financial statements. 40
RATIOS TO AVERAGE NET ASSETS: ----------------------------- NET ASSET NET ASSETS, VALUE, TOTAL END OF NET INVESTMENT PORTFOLIO END OF RETURN THE PERIOD EXPENSES INCOME TURNOVER THE PERIOD (%)(a) (000) (%)(b) (%)(b) RATE(%) ---------- -------- ----------- -------- -------------- --------- SHORT TERM BOND FUND CLASS A 12/31/2002 $ 6.97 2.1(e) $ 48,514 0.90(d) 4.40 49 12/31/2001(i) 7.16 7.8(e) 58,367 0.90(d) 5.27 87 12/31/2000 7.02 6.7(e) 58,540 0.83(d) 6.43 108 12/31/1999 7.01 1.9(e) 72,680 0.70(d) 5.88 139 12/31/1998 7.30 4.0(e) 92,669 0.70(d) 5.93 105 CLASS B 12/31/2002 6.96 1.4(e) 6,170 1.65(d) 3.65 49 12/31/2001(i) 7.15 7.0(e) 4,657 1.65(d) 4.51 87 12/31/2000 7.01 5.9(e) 3,553 1.58(d) 5.68 108 12/31/1999 7.00 1.1(e) 3,796 1.45(d) 5.13 139 12/31/1998 7.29 3.4(e) 3,761 1.45(d) 5.18 105 CLASS C 12/31/2002 6.95 1.3(e) 3,502 1.65(d) 3.65 49 12/31/2001(i) 7.14 6.9(e) 620 1.65(d) 4.48 87 12/31/2000 7.01 5.9(e) 461 1.58(d) 5.68 108 12/31/1999 7.00 1.2(e) 489 1.45(d) 5.13 139 12/31/1998(g) 7.29 0.3(e) 233 1.45(d) 5.18 105 CLASS Y 12/31/2002 6.97 2.4(e) 536 0.65(d) 4.65 49 12/31/2001(h) 7.16 0.4(e) 226 0.60(d) 5.36 87 BOND INCOME FUND CLASS A 12/31/2002 $ 11.28 2.8 $ 147,647 1.18 5.65 65 12/31/2001(i) 11.59 7.2 173,836 1.09 6.26 84 12/31/2000 11.52 7.4 174,969 1.04 7.03 83 12/31/1999 11.51 (0.3) 213,769 0.97 6.87 63 12/31/1998 12.36 8.0 221,799 1.01 6.44 65 CLASS B 12/31/2002 11.28 2.1 141,188 1.93 4.90 65 12/31/2001(i) 11.59 6.5 127,520 1.84 5.49 84 12/31/2000 11.51 6.5 100,353 1.79 6.28 83 12/31/1999 11.51 (1.1) 89,213 1.72 6.12 63 12/31/1998 12.36 7.2 64,240 1.76 5.69 65 CLASS C 12/31/2002 11.29 2.1 9,024 1.93 4.90 65 12/31/2001(i) 11.60 6.5 11,470 1.84 5.52 84 12/31/2000 11.52 6.5 12,541 1.79 6.28 83 12/31/1999 11.52 (1.1) 14,872 1.72 6.12 63 12/31/1998 12.37 7.2 8,969 1.76 5.69 65
(g) For the period December 7, 1998 (inception) through December 31, 1998. (h) For the period October 1, 2001 (inception) through December 31, 2001. (i) As required, effective January 1, 2001, the Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 for Short Term Bond Fund was to decrease net investment income per share by $.03 for Class A and $.02 for both Class B and C share and to decrease the ratio of net investment income to average net assets from 5.57% to 5.27% for Class A, 4.82% to 4.51% for Class B and 4.78% to 4.48% for Class C. For Bond Income Fund, the effect of this change was to decrease net investment income per share by $.01 for Class A and $.02 for Class B and $.01 for Class C and to decrease the ratio of net investment income to average net assets from 6.34% to 6.26% for Class A, 5.57% to 5.49% for Class B and from 5.59% to 5.52% for Class C. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. 41
INCOME (LOSS) FROM INVESTMENT OPERATIONS: LESS DISTRIBUTIONS: ------------------------------------------ --------------------------------------------- NET ASSET VALUE, NET REALIZED DIVIDENDS DISTRIBUTIONS BEGINNING NET AND UNREALIZED TOTAL FROM FROM FROM NET OF INVESTMENT GAIN (LOSS) ON INVESTMENT NET INVESTMENT REALIZED TOTAL THE PERIOD INCOME INVESTMENTS OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS ---------- ---------- -------------- ---------- -------------- ------------- ------------- BOND INCOME FUND (CONTINUED) CLASS Y 12/31/2002 $ 11.63 $ 0.69(c) $ (0.32) $ 0.37 $ (0.67) $ -- $ (0.67) 12/31/2001(d) 11.54 0.79 0.10 0.89 (0.80) -- (0.80) 12/31/2000 11.54 0.83 0.01 0.84 (0.84) -- (0.84) 12/31/1999 12.38 0.85 (0.86) (0.01) (0.82) (0.01) (0.83) 12/31/1998 12.41 0.84 0.15 0.99 (0.84) (0.18) (1.02) HIGH INCOME FUND CLASS A 12/31/2002 $ 4.94 $ 0.39(c) $ (0.82) $ (0.43) $ (0.39) $ -- $ (0.39) 12/31/2001(d) 6.21 0.66 (1.25) (0.59) (0.68) -- (0.68) 12/31/2000 8.30 0.86 (2.11) (1.25) (0.84) -- (0.84) 12/31/1999 8.86 0.89 (0.54) 0.35 (0.91) -- (0.91) 12/31/1998 9.94 0.92 (1.08) (0.16) (0.92) -- (0.92) CLASS B 12/31/2002 4.95 0.36(c) (0.83) (0.47) (0.36) -- (0.36) 12/31/2001(d) 6.22 0.62 (1.26) (0.64) (0.63) -- (0.63) 12/31/2000 8.30 0.81 (2.11) (1.30) (0.78) -- (0.78) 12/31/1999 8.85 0.82 (0.53) 0.29 (0.84) -- (0.84) 12/31/1998 9.93 0.85 (1.08) (0.23) (0.85) -- (0.85) CLASS C 12/31/2002 4.94 0.36(c) (0.82) (0.46) (0.36) -- (0.36) 12/31/2001(d) 6.22 0.61 (1.26) (0.65) (0.63) -- (0.63) 12/31/2000 8.30 0.81 (2.11) (1.30) (0.78) -- (0.78) 12/31/1999 8.85 0.82 (0.53) 0.29 (0.84) -- (0.84) 12/31/1998(f) 9.96 0.69 (1.08) (0.39) (0.72) -- (0.72) STRATEGIC INCOME FUND CLASS A 12/31/2002 $ 9.88 $ 0.75(c) $ 0.72 $ 1.47 $ (0.63) $ -- $ (0.63) 12/31/2001(d) 10.80 0.91(c) (0.92) (0.01) (0.91) -- (0.91) 12/31/2000 11.65 0.99(c) (0.91) 0.08 (0.93) -- (0.93) 12/31/1999 11.37 1.03 0.31 1.34 (1.02) (0.04) (1.06) 12/31/1998 13.42 1.05 (1.30) (0.25) (1.05) (0.75) (1.80) CLASS B 12/31/2002 9.88 0.67(c) 0.73 1.40 (0.57) -- (0.57) 12/31/2001(d) 10.79 0.83(c) (0.90) (0.07) (0.84) -- (0.84) 12/31/2000 11.65 0.90(c) (0.91) (0.01) (0.85) -- (0.85) 12/31/1999 11.37 0.94 0.31 1.25 (0.93) (0.04) (0.97) 12/31/1998 13.42 0.95 (1.30) (0.35) (0.95) (0.75) (1.70)
(a) A sales charge for Class A and Class C shares and a contingent deferred sales charge for Class B and Class C shares are not reflected in total return calculations. Periods less than one year are not annualized. (b) Computed on an annualized basis for periods less than one year. (c) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (d) As required, effective January 1, 2001, the Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 for Bond Income Fund was to decrease the ratio of net investment income to average net assets from 6.75% to 6.68% for Class Y. The effect of this change for the year ended December 31, 2001 for the High Income Fund was to decrease net investment income per share by $.01 for Class A, Class B and Class C and to decrease the ratio of net investment income to average net assets from 11.39% to 11.31% for Class A, 10.64% to 10.56% for Class B and 10.63% to 10.54% for Class C. For Strategic Income Fund, there was no effect on net investment income per share, however, the effect of this change was to decrease the ratio of net investment income to average net assets from 8.78% to 8.77% for Class A and 8.03% to 8.02% for Class B. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. See accompanying notes to financial statements. 42
RATIOS TO AVERAGE NET ASSETS: ----------------------------- NET ASSET NET ASSETS, VALUE, TOTAL END OF NET INVESTMENT PORTFOLIO END OF RETURN THE PERIOD EXPENSES INCOME TURNOVER THE PERIOD (%)(a) (000) (%)(b) (%)(b) RATE (%) ---------- -------- ----------- ---------- ---------------- --------- BOND INCOME FUND (CONTINUED) CLASS Y 12/31/2002 $ 11.33 3.5 $ 18,346 0.67 6.15 65 12/31/2001(d) 11.63 7.8 17,351 0.67 6.68 84 12/31/2000 11.54 7.6 14,013 0.67 7.40 83 12/31/1999 11.54 (0.0)(e) 10,320 0.72 7.12 63 12/31/1998 12.38 8.2 9,289 0.76 6.69 65 HIGH INCOME FUND CLASS A 12/31/2002 $ 4.12 (8.9) $ 22,454 1.58 8.85 114 12/31/2001(d) 4.94 (10.7) 33,471 1.47 11.31 65 12/31/2000 6.21 (16.1) 46,960 1.36 11.47 60 12/31/1999 8.30 4.0 74,589 1.28 10.22 89 12/31/1998 8.86 (1.8) 73,023 1.32 9.81 75 CLASS B 12/31/2002 4.12 (9.7) 23,031 2.33 8.10 114 12/31/2001(d) 4.95 (11.3) 34,713 2.22 10.56 65 12/31/2000 6.22 (16.6) 47,793 2.11 10.72 60 12/31/1999 8.30 3.3 70,218 2.03 9.47 89 12/31/1998 8.85 (2.5) 60,322 2.07 9.06 75 CLASS C 12/31/2002 4.12 (9.5) 2,605 2.33 8.10 114 12/31/2001(d) 4.94 (11.5) 4,153 2.22 10.54 65 12/31/2000 6.22 (16.6) 5,369 2.11 10.72 60 12/31/1999 8.30 3.3 9,138 2.03 9.47 89 12/31/1998(f) 8.85 (4.1) 7,732 2.07 9.06 75 STRATEGIC INCOME FUND CLASS A 12/31/2002 $ 10.72 15.5 $ 92,303 1.33 7.38 30 12/31/2001(d) 9.88 (0.1) 94,156 1.31 8.77 10 12/31/2000 10.80 0.7 116,986 1.24 8.73 13 12/31/1999 11.65 12.2 124,869 1.21 9.09 19 12/31/1998 11.37 (1.7) 127,306 1.19 8.33 33 CLASS B 12/31/2002 10.71 14.6 98,501 2.08 6.63 30 12/31/2001(d) 9.88 (0.8) 102,159 2.06 8.02 10 12/31/2000 10.79 (0.2) 120,200 1.99 7.98 13 12/31/1999 11.65 11.3 127,723 1.96 8.34 19 12/31/1998 11.37 (2.5) 134,049 1.94 7.58 33
(e) Amount is less than one tenth of one percent. (f) For the period March 2, 1998 (inception) to December 31, 1998. 43
INCOME (LOSS) FROM INVESTMENT OPERATIONS: -------------------------------------------------- NET ASSET VALUE, NET REALIZED BEGINNING NET AND UNREALIZED TOTAL FROM OF INVESTMENT GAIN (LOSS) ON INVESTMENT THE PERIOD INCOME INVESTMENTS OPERATIONS ---------- ---------- -------------- ------------- STRATEGIC INCOME FUND (CONTINUED) CLASS C 12/31/2002 $ 9.87 $ 0.67(b) $ 0.73 $ 1.40 12/31/2001(c) 10.78 0.83(b) (0.91) (0.08) 12/31/2000 11.64 0.90(b) (0.91) (0.01) 12/31/1999 11.36 0.94 0.31 1.25 12/31/1998 13.41 0.95 (1.30) (0.35) CLASS Y 12/31/2002 9.90 0.80(b) 0.71 1.51 12/31/2001(c) 10.81 0.94(b) (0.92) 0.02 12/31/2000 11.65 0.96(b) (0.84) 0.12 12/31/1999(d) 11.45 0.86 (0.56) 0.30 LIMITED TERM U.S. GOVERNMENT FUND CLASS A 12/31/2002 $ 11.36 $ 0.42(b) $ 0.49 $ 0.91 12/31/01(c) 11.16 0.51 0.25 0.76 12/31/00 10.97 0.69 0.20 0.89 12/31/99 11.70 0.66 (0.74) (0.08) 12/31/98 11.64 0.67 0.06 0.73 CLASS B 12/31/2002 11.34 0.35(b) 0.48 0.83 12/31/2001(c) 11.14 0.44 0.24 0.68 12/31/2000 10.95 0.62 0.20 0.82 12/31/1999 11.69 0.59 (0.75) (0.16) 12/31/1998 11.62 0.60 0.07 0.67 CLASS C 12/31/2002 11.35 0.35(b) 0.48 0.83 12/31/2001(c) 11.15 0.44 0.24 0.68 12/31/2000 10.96 0.62 0.20 0.82 12/31/1999 11.70 0.59 (0.75) (0.16) 12/31/1998 11.63 0.60 0.07 0.67 CLASS Y 12/31/2002 11.41 0.48(b) 0.48 0.96 12/31/01(c) 11.20 0.56 0.26 0.82 12/31/00 11.00 0.75 0.19 0.94 12/31/99 11.73 0.70 (0.74) (0.04) 12/31/98 11.66 0.72 0.06 0.78 LESS DISTRIBUTIONS: ------------------------------------------------------ DIVIDENDS DISTRIBUTIONS FROM FROM NET NET INVESTMENT REALIZED TOTAL INCOME CAPITAL GAINS DISTRIBUTIONS -------------- ------------- ------------- STRATEGIC INCOME FUND (CONTINUED) CLASS C 12/31/2002 $ (0.57) $ -- $ (0.57) 12/31/2001(c) (0.83) -- (0.83) 12/31/2000 (0.85) -- (0.85) 12/31/1999 (0.93) (0.04) (0.97) 12/31/1998 (0.95) (0.75) (1.70) CLASS Y 12/31/2002 (0.67) -- (0.67) 12/31/2001(c) (0.93) -- (0.93) 12/31/2000 (0.96) -- (0.96) 12/31/1999(d) (0.10) -- (0.10) LIMITED TERM U.S. GOVERNMENT FUND CLASS A 12/31/2002 $ (0.54) $ -- $ (0.54) 12/31/01(c) (0.56) -- (0.56) 12/31/00 (0.70) -- (0.70) 12/31/99 (0.65) -- (0.65) 12/31/98 (0.67) -- (0.67) CLASS B 12/31/2002 (0.46) -- (0.46) 12/31/2001(c) (0.48) -- (0.48) 12/31/2000 (0.63) -- (0.63) 12/31/1999 (0.58) -- (0.58) 12/31/1998 (0.60) -- (0.60) CLASS C 12/31/2002 (0.46) -- (0.46) 12/31/2001(c) (0.48) -- (0.48) 12/31/2000 (0.63) -- (0.63) 12/31/1999 (0.58) -- (0.58) 12/31/1998 (0.60) -- (0.60) CLASS Y 12/31/2002 (0.59) -- (0.59) 12/31/01(c) (0.61) -- (0.61) 12/31/00 (0.74) -- (0.74) 12/31/99 (0.69) -- (0.69) 12/31/98 (0.71) -- (0.71)
(a) A sales charge for Class A and Class C shares and a contingent deferred sales charge for Class B and class C shares are not reflected in total return calculations. Periods less than one year are not annualized. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) As required, effective January 1, 2001, the Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 for Strategic Income Fund was to decrease the ratio of net investment income to average net assets from 8.04% to 8.02% for Class C. For Limited Term U.S. Government Fund, the effect of the change was to decrease net investment income per share by $.04 for Class A, Class B, Class C and Class Y and to decrease the ratio of net investment income to average net assets from 4.88% to 4.52% for Class A, 4.22% to 3.85% for Class B, 4.25% to 3.89% for Class C and 5.34% to 4.98% for Class Y. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. See accompanying notes to financial statements. 44
RATIOS TO AVERAGE NET ASSETS: ----------------------------- NET ASSET NET ASSETS, VALUE, TOTAL END OF NET INVESTMENT PORTFOLIO END OF RETURN THE PERIOD EXPENSES INCOME TURNOVER THE PERIOD (%)(a) (000) (%)(b) (%)(b) RATE (%) ---------- -------- ----------- ---------- ---------------- --------- STRATEGIC INCOME FUND (CONTINUED) CLASS C 12/31/2002 $ 10.70 14.7 $ 27,727 2.08 6.63 30 12/31/2001(c) 9.87 (0.8) 28,925 2.06 8.02 10 12/31/2000 10.78 (0.2) 37,208 1.99 7.98 13 12/31/1999 11.64 11.3 40,265 1.96 8.34 19 12/31/1998 11.36 (2.5) 45,457 1.94 7.58 33 CLASS Y 12/31/2002 10.74 15.9 1,039 0.94 7.77 30 12/31/2001(c) 9.90 0.3 445 0.93 9.10 10 12/31/2000 10.81 1.0 335 0.90 9.07 13 12/31/1999(d) 11.65 2.7 --(e) 0.96 9.34 19 LIMITED TERM U.S. GOVERNMENT FUND CLASS A 12/31/2002 $ 11.73 8.2 $ 106,013 1.35 3.66 88 12/31/01(c) 11.36 6.9 109,189 1.42 4.52 275 12/31/00 11.16 8.3 118,833 1.40 6.18 384 12/31/99 10.97 (0.7) 149,756 1.33 5.91 400 12/31/98 11.70 6.5 194,032 1.31 5.81 1,376 CLASS B 12/31/2002 11.71 7.5 16,263 2.00 3.01 88 12/31/2001(c) 11.34 6.2 14,317 2.07 3.85 275 12/31/2000 11.14 7.7 11,884 2.05 5.53 384 12/31/1999 10.95 (1.4) 14,601 1.98 5.26 400 12/31/1998 11.69 5.9 18,116 1.96 5.16 1,376 CLASS C 12/31/2002 11.72 7.5 8,079 2.00 3.01 88 12/31/2001(c) 11.35 6.2 5,851 2.07 3.89 275 12/31/2000 11.15 7.7 6,617 2.05 5.53 384 12/31/1999 10.96 (1.4) 9,054 1.98 5.26 400 12/31/1998 11.70 5.9 13,962 1.96 5.16 1,376 CLASS Y 12/31/2002 11.78 8.6 8,529 0.88 4.14 88 12/31/01(c) 11.41 7.4 3,441 0.95 4.98 275 12/31/00 11.20 8.8 3,254 0.95 6.63 384 12/31/99 11.00 (0.3) 7,086 0.98 6.26 400 12/31/98 11.73 6.9 8,345 0.96 6.16 1,351
(d) For the period December 1, 1999 (inception) through December 31, 1999. (e) Amount is less than $500. 45
INCOME (LOSS) FROM INVESTMENT OPERATIONS: -------------------------------------------- NET ASSET VALUE, NET REALIZED BEGINNING NET AND UNREALIZED TOTAL FROM OF INVESTMENT GAIN (LOSS) ON INVESTMENT THE PERIOD INCOME INVESTMENTS OPERATIONS ---------- ---------- -------------- ---------- GOVERNMENT SECURITIES FUND CLASS A 12/31/2002 $ 11.18 $ 0.45(b) $ 1.01 $ 1.46 12/31/2001(c) 11.18 0.50 0.05 0.55 12/31/2000 10.47 0.62 0.69 1.31 12/31/1999 11.90 0.67 (1.42) (0.75) 12/31/1998 11.56 0.68 0.33 1.01 CLASS B 12/31/2002 11.17 0.36(b) 1.02 1.38 12/31/2001(c) 11.18 0.42 0.03 0.45 12/31/2000 10.47 0.54 0.69 1.23 12/31/1999 11.90 0.59 (1.42) (0.83) 12/31/1998 11.56 0.58 0.34 0.92 CLASS Y 12/31/2002 11.17 0.49(b) 1.00 1.49 12/31/2001(c) 11.17 0.55 0.04 0.59 12/31/2000 10.44 0.65 0.71 1.36 12/31/1999 11.88 0.70 (1.43) (0.73) 12/31/1998 11.54 0.72 0.32 1.04 LESS DISTRIBUTIONS: ----------------------------------------------- DIVIDENDS DISTRIBUTIONS FROM FROM NET NET INVESTMENT REALIZED TOTAL INCOME CAPITAL GAINS DISTRIBUTIONS -------------- ------------- ------------- GOVERNMENT SECURITIES FUND CLASS A 12/31/2002 $ (0.52) $ -- $ (0.52) 12/31/2001(c) (0.55) -- (0.55) 12/31/2000 (0.60) -- (0.60) 12/31/1999 (0.68) -- (0.68) 12/31/1998 (0.67) -- (0.67) CLASS B 12/31/2002 (0.43) -- (0.43) 12/31/2001(c) (0.46) -- (0.46) 12/31/2000 (0.52) -- (0.52) 12/31/1999 (0.60) -- (0.60) 12/31/1998 (0.58) -- (0.58) CLASS Y 12/31/2002 (0.55) -- (0.55) 12/31/2001(c) (0.59) -- (0.59) 12/31/2000 (0.63) -- (0.63) 12/31/1999 (0.71) -- (0.71) 12/31/1998 (0.70) -- (0.70)
(a) A sales charge for Class A shares and a contingent deferred sales charge for Class B shares are not reflected in total return. (b) Per share net investment income has been calculated using the average shares outstanding during the period. (c) As required, effective January 1, 2001, the Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per share by $.05 for Class A and $.04 for both Class B and Class Y and to decrease the ratio of net investment income to average net assets from 4.85% to 4.46% for Class A, 4.10% to 3.71% for Class B and 5.24% to 4.85% for Class Y. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. See accompanying notes to financial statements. 46
RATIOS TO AVERAGE NET ASSETS: ----------------------------- NET ASSET NET ASSETS, VALUE, TOTAL END OF NET INVESTMENT PORTFOLIO END OF RETURN THE PERIOD EXPENSES INCOME TURNOVER THE PERIOD (%)(a) (000) (%) (%) RATE (%) ---------- -------- ----------- ---------- ---------------- --------- GOVERNMENT SECURITIES FUND CLASS A 12/31/2002 $ 12.12 13.4 $ 76,338 1.25 3.90 52 12/31/2001(c) 11.18 4.9 70,551 1.39 4.46 317 12/31/2000 11.18 12.9 70,909 1.41 5.69 622 12/31/1999 10.47 (6.4) 84,904 1.36 6.00 313 12/31/1998 11.90 9.0 103,032 1.38 5.80 106 CLASS B 12/31/2002 12.12 12.6 16,878 2.00 3.15 52 12/31/2001(c) 11.17 4.1 13,249 2.14 3.71 317 12/31/2000 11.18 12.1 10,343 2.16 4.94 622 12/31/1999 10.47 (7.1) 9,430 2.11 5.25 313 12/31/1998 11.90 8.2 9,657 2.13 5.05 106 CLASS Y 12/31/2002 12.11 13.7 6,822 0.87 4.28 52 12/31/2001(c) 11.17 5.3 4,821 1.00 4.85 317 12/31/2000 11.17 13.5 4,593 1.01 6.09 622 12/31/1999 10.44 (6.3) 2,754 1.11 6.25 313 12/31/1998 11.88 9.3 3,404 1.13 6.05 106
47 NOTES TO FINANCIAL STATEMENTS 48 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2002 1. ORGANIZATION. CDC Nvest Funds Trust I and CDC Nvest Funds Trust II (the "Trusts" and each a "Trust") are organized as Massachusetts business trusts. Each Trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Each Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (individually, a "Fund" and, collectively, the "Funds"). Information presented in these financial statements pertains to the taxable fixed income funds of the Trusts, the financial statements of the other Funds of the Trusts are presented in separate reports. The following table provides a list of the Funds included in this report. CDC NVEST FUNDS TRUST I: CDC Nvest Bond Income Fund (the "Bond Income Fund") CDC Nvest Strategic Income Fund (the "Strategic Income Fund") CDC Nvest Government Securities Fund (the "Government Securities Fund") CDC NVEST FUNDS TRUST II: CDC Nvest Short Term Bond Fund (the "Short Term Bond Fund"), formerly CDC Nvest Short Term Corporate Income Fund CDC Nvest High Income Fund (the "High Income Fund") CDC Nvest Limited Term U.S. Government Fund (the "Limited Term U.S. Government Fund") High Income Fund offers Class A, Class B, and Class C shares. Bond Income Fund, Strategic Income Fund, Short Term Bond Fund and Limited Term U.S. Government Fund each offer Class A, Class B, Class C and Class Y shares. Government Securities Fund offers Class A, Class B and Class Y shares. Class A shares of all Funds except Short Term Bond Fund and Limited Term U.S. Government Fund are sold with a maximum front end sales charge of 4.50%. Class A shares of Short Term Bond and Limited Term U.S. Government Fund 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 ("CDSC") if those shares are redeemed within six years of purchase. Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any other class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to a CDSC of 1.00% if those shares are redeemed within one year. Class Y shares do not pay a front end sales charge, a CDSC or distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of a 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 and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of a Fund, if the Fund were liquidated. The Trustees approve separate dividends from net investment income on each class of shares. 2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements. The Funds' financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates 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 to the Fund by a pricing service, which has been authorized by the Trustees. The pricing 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. Equity securities are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of Trustees. The pricing 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. All other securities and assets are valued at their fair value as determined in good faith by the Fund's investment adviser and subadviser, under the supervision of the Fund's Trustees. Certain securities held by the Funds were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold. b. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date and interest income is recorded on an accrual basis. Interest income is increased by the accretion of discount and decreased by the amortization of premium. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. c. FOREIGN CURRENCY TRANSLATION. The books and records of the Funds are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the period. Purchases and sales of investment securities, income and expenses are translated on the respective dates of such transactions. 49 Since the values of investment securities are presented at the foreign exchange rates prevailing at the end of the period, it is not practical to isolate that portion of the results of operations arising from changes in exchange rates from fluctuations arising from changes in market prices of the investment securities. Such changes are included with the net realized and unrealized gain or loss on investments. Net realized foreign exchange gains or losses arise from: sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities at the end of the fiscal periods, resulting from changes in exchange rates. d. OPTIONS. The Limited Term U.S. Government Fund and Government Securities Fund may use options to hedge against changes in the values of securities each Fund owns or expects to purchase. Writing puts and buying calls tends to increase a Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease a Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge a Fund's investments, the potential risk to the Fund is that the change in the value of option 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 the dealers. e. INTEREST RATE FUTURES CONTRACTS. The Limited Term U.S. Government Fund and Government Securities Fund may purchase or sell interest rate futures contracts to hedge against changes in the values of securities each 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. f. FEDERAL AND FOREIGN INCOME TAXES. The Trusts treat each Fund as a separate entity for federal income tax purposes. Each Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. A Fund may be subject to foreign taxes on income and gains on investments that are accrued based upon the Fund's understanding of the tax rules and regulations that exist in the countries in which the Fund invests. Foreign governments may also impose taxes or other payments on investments with respect to foreign securities, such taxes are accrued as applicable. g. 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 accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for book and tax purposes of items such as distributions from real estate investment trusts, capital loss carryforwards, paydowns on mortgage-backed securities and foreign currency transactions. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. Distributions from net investment income and short-term capital gains are considered to be ordinary income for tax purposes. h. REPURCHASE AGREEMENTS. Each Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is each Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. Each Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon a Fund's ability to dispose of the underlying securities. 50 3. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 2002, purchases and sales of securities (excluding short-term investments) were as follows:
U.S. GOVERNMENT/AGENCY OTHER SECURITIES --------------------------------- --------------------------------- FUND PURCHASES SALES PURCHASES SALES ---- --------------- --------------- --------------- --------------- Short Term Bond Fund $ 11,850,968 $ 6,706,008 $ 16,604,998 $ 24,554,984 Bond Income Fund 95,397,823 85,243,768 118,017,057 113,708,835 High Income Fund 1,505,930 2,135,930 61,339,242 72,550,501 Strategic Income Fund 1,706,621 1,722,666 63,163,448 92,537,837 Limited Term U.S. Government Fund 110,902,427 105,382,806 8,233,301 10,027,256 Government Securities Fund 49,390,308 45,494,512 -- --
4. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. a. MANAGEMENT FEES. CDC IXIS Asset Management Advisers, L.P. ("CDC IXIS Advisers") is the investment adviser to each of the Funds. Under the terms of the management agreements, each Fund pays a management fee at the following annual rates, calculated daily and payable monthly, based on each Fund's average daily net assets:
PERCENTAGE OF AVERAGE DAILY NET ASSETS ------------------------------------------------------------ FIRST NEXT NEXT NEXT FUND $100 MILLION $100 MILLION $300 MILLION $500 MILLION ---- ------------ ------------ ------------ ------------ Short Term Bond Fund 0.550% 0.550% 0.510% 0.470% Bond Income Fund 0.500% 0.375% 0.375% 0.375% High Income Fund 0.700% 0.700% 0.650% 0.650% Strategic Income Fund 0.650% 0.650% 0.600% 0.600% Limited Term U.S. Government Fund 0.570% 0.570% 0.545% 0.520% Government Securities Fund 0.550% 0.550% 0.525% 0.500%
For the year ended December 31, 2002, the management fees and waivers for each Fund were as follows:
GROSS WAIVER OF NET PERCENTAGE OF AVERAGE MANAGEMENT MANAGEMENT MANAGEMENT DAILY NET ASSETS FUND FEE FEE FEE GROSS NET ---- ------------ ---------- ------------ ---------- -------- Short Term Bond Fund $ 333,517 $ 143,422 $ 190,095 0.550% 0.313% Bond Income Fund 1,317,903 -- 1,317,903 0.414% 0.414% High Income Fund 407,408 -- 407,408 0.700% 0.700% Strategic Income Fund 1,404,810 -- 1,404,810 0.646% 0.646% Limited Term U.S. Government Fund 774,861 -- 774,861 0.570% 0.570% Government Securities Fund 502,700 -- 502,700 0.550% 0.550%
b. ACCOUNTING AND ADMINISTRATIVE EXPENSE. CDC IXIS Asset Management Services, Inc. ("CIS"), a wholly owned subsidiary of CDC IXIS Asset Management North America, L.P. ("CDC IXIS North America"), performs certain accounting and administrative services for the Funds and has subcontracted with Investors Bank and Trust to serve as sub-administrator. Pursuant to an agreement among the Trusts, CDC Nvest Funds Trust III, CDC Nvest Cash Management Trust, CDC Nvest Tax Exempt Money Market Trust, CDC Nvest Companies Trust I and CIS each Fund pays CIS its pro rata portion of a group fee for these services representing the higher amount based on the following calculations: (1) PERCENTAGE OF ELIGIBLE AVERAGE DAILY NET ASSETS
FIRST NEXT OVER $5 BILLION $5 BILLION $10 BILLION ---------- ---------- ----------- 0.0350% 0.0325% 0.0300%
or (2) Each Trust's pro rata portion, based on eligible assets, of the annual aggregate minimum fee of $2.5 million. Funds that became effective after January 1, 2001 pay an annual fee of $70,000 ($100,000 for multi-manager funds). For the year ended December 31, 2002, fees paid to CIS for accounting and administrative expense were as follows:
ACCOUNTING AND PERCENTAGE OF AVERAGE FUND ADMINISTRATIVE DAILY NET ASSETS ---- -------------- --------------------- Short Term Bond Fund $ 34,654 0.057% Bond Income Fund 181,783 0.057% High Income Fund 32,625 0.056% Strategic Income Fund 124,140 0.057% Limited Term U.S. Government Fund 78,121 0.057% Government Securities Fund 52,701 0.058%
51 Effective January 1, 2003, the annual aggregate fee based on average daily net assets changed to 0.060% on the first $5 billion in average daily net assets, 0.050% on the next $5 billion in average daily net assets, and 0.045% on average daily net assets over $10 billion. The annual aggregate minimum fee also changed to $3.36 million. c. TRANSFER AGENT FEES. CIS is the transfer and shareholder servicing agent for each Fund and has subcontracted with Boston Financial Data Services ("BFDS") to serve as sub-transfer agent. Each Fund pays CIS service fees for servicing shareholder accounts. Classes A, B and C pay service fees monthly representing the higher amount based on the following calculations: (1) Annual aggregate fee determined by applying an annual fee rate (see schedule below) to the eligible average daily net assets. Eligible assets are the average daily net assets of all non-networked accounts in bond funds offered within the CDC Nvest Family of Funds for which there are exchange privileges among the Funds.
FIRST NEXT OVER $1.2 BILLION NEXT $5 BILLION $6.2 BILLION 0.142% 0.135% 0.130%
Each Class of shares is subject to an annual class minimum of $18,000. or (2) An allocated portion, based on eligible assets, of an annual aggregate minimum fee of $1.7 million. In addition, pursuant to other servicing agreements, Class A, B and C pay service fees to other firms that provide similar services for their own shareholder accounts. Class Y shareholders pay service fees monthly at an annual rate of 0.10% of their average daily net assets. CIS and BFDS and other firms are also reimbursed by the Funds for out-of-pocket expenses. For the year ended December 31, 2002, amounts paid to CIS as compensation for its services as transfer agent were as follows:
TRANSFER AGENT FUND FEE ---- -------------- Short Term Bond Fund $ 122,166 Bond Income Fund 425,926 High Income Fund 103,655 Strategic Income Fund 348,358 Limited Term U.S. Government Fund 224,651 Government Securities Fund 145,812
Effective January 1, 2003, the annual aggregate minimum fee changed to $1.5 million. d. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trusts have adopted a Service Plan relating to each Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to each Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, each Fund pays CDC IXIS Asset Management Distributors, L.P. ("CDC IXIS Distributors"), the Fund's distributor (a wholly owned subsidiary of CDC IXIS North America), 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 incurred by CDC IXIS Distributors in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. Also under the Class A Plan, Limited Term U.S. Government Fund pays CDC IXIS Distributors 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 incurred by CDC IXIS Distributors in connection with the marketing or sale of the Fund's Class A shares. Under the Class B and Class C Plans, each Fund pays CDC IXIS Distributors 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 incurred by CDC IXIS Distributors in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. Also under the Class B and Class C Plans, each Fund pays CDC IXIS Distributors 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 incurred by CDC IXIS Distributors in connection with the marketing or sale of Class B and Class C shares. 52 For the year ended December 31, 2002, the Funds paid the following service and distribution fees:
SERVICE FEE DISTRIBUTION FEE --------------------------------- --------------------------------- CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C --------- --------- --------- --------- --------- --------- Short Term Bond Fund $ 131,799 $ 14,355 $ 4,411 $ -- $ 43,064 $ 13,233 Bond Income Fund 397,181 328,592 25,770 -- 985,775 77,311 High Income Fund 67,018 70,521 7,876 -- 211,562 23,626 Strategic Income Fund 226,621 246,058 69,366 -- 738,172 208,096 Limited Term U.S. Government Fund 266,966 36,025 17,154 106,787 108,076 51,461 Government Securities Fund 177,887 35,510 -- -- 106,529 --
Prior to September 13, 1993 for Short Term Bond Fund and Bond Income Fund and September 24, 1993 for Limited Term U.S. Government Fund and Government Securities Fund, to the extent that reimbursable expenses of CDC IXIS Distributors in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. Unreimbursed expenses carried forward at December 31, 2002 were as follows:
FUND ---- Short Term Bond Fund $ 1,929,283 Bond Income Fund 1,919,349 Limited Term U.S. Government Fund 2,272,723 Government Securities Fund 1,583,658
Commissions (including contingent deferred sales charges) on Fund shares paid to CDC IXIS Distributors by investors in shares of the Funds during the year ended December 31, 2002 were as follows:
FUND ---- Short Term Bond Fund $ 65,898 Bond Income Fund 754,686 High Income Fund 169,306 Strategic Income Fund 407,566 Limited Term U.S. Government Fund 193,028 Government Securities Fund 210,835
e. TRUSTEES FEES AND EXPENSES. The Funds do not pay any compensation directly to their officers or Trustees who are directors, officers or employees of CDC IXIS Advisers, CDC IXIS Asset Management Distributors, L.P., CDC IXIS North America, CIS or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $45,000 and meeting attendance fees of $4,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $7,000 while each committee chairman receives a retainer fee (beyond the $7,000 fee) at the annual rate of $5,000. The retainer fees assume four Board or Committee meetings per year; Trustees are compensated for each additional committee and board meeting, in excess of four meetings per year, at the rate of $1,750 and $4,500, respectively. These fees are allocated to the various CDC Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "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 a designated Fund or certain other CDC Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. f. PUBLISHING SERVICES. CIS Performs certain desktop publishing services for the Funds. Fees for these services are presented in the Statements of Operations as Shareholder Reporting. For the year ended December 31, 2002, amounts paid to CIS as compensation for these services were as follows:
PUBLISHING SERVICES FUND FEES ---- ------------------- Short Term Bond Fund $ 3,217 Bond Income Fund 5,471 High Income Fund 2,941 Strategic Income Fund 2,321 Limited Term U.S. Government Fund 3,217 Government Securities Fund 2,371
53 5. CAPITAL SHARES. Each Fund may issue an unlimited number of shares of beneficial interest. Transactions in capital shares were as follows:
SHORT TERM BOND FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001(a) --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 1,307,521 $ 9,171,480 1,053,451 $ 7,544,528 Shares Issued in connection with the reinvestment of: Dividends from net investment income 244,042 1,710,049 295,720 2,106,444 ---------- -------------- ---------- -------------- 1,551,563 10,881,529 1,349,171 9,650,972 Shares repurchased (2,743,247) (19,285,515) (1,533,306) (10,903,583) ---------- -------------- ---------- -------------- Net increase (decrease) (1,191,684) $ (8,403,986) (184,135) $ (1,252,611) ---------- -------------- ---------- -------------- CLASS B: Shares sold 517,482 $ 3,624,323 256,722 $ 1,835,868 Shares Issued in connection with the reinvestment of: Dividends from net investment income 25,102 175,421 22,658 161,214 ---------- -------------- ---------- -------------- 542,584 3,799,744 279,380 1,997,082 Shares repurchased (307,522) (2,144,677) (134,863) (962,104) ---------- -------------- ---------- -------------- Net increase (decrease) 235,062 $ 1,655,067 144,517 $ 1,034,978 ---------- -------------- ---------- -------------- CLASS C: Shares sold 484,184 $ 3,369,792 73,455 $ 522,600 Shares Issued in connection with the reinvestment of: Dividends from net investment income 3,917 27,312 2,872 20,383 ---------- -------------- ---------- -------------- 488,101 3,397,104 76,327 542,983 Shares repurchased (71,311) (495,107) (55,323) (395,146) ---------- -------------- ---------- -------------- Net increase (decrease) 416,790 $ 2,901,997 21,004 $ 147,837 ---------- -------------- ---------- -------------- CLASS Y: Shares sold 72,211 $ 520,700 34,212 $ 244,904 Shares Issued in connection with the reinvestment of: Dividends from net investment income 2,987 21,005 153 1,096 ---------- -------------- ---------- -------------- 75,198 541,705 34,365 246,000 Shares repurchased (29,873) (221,192) (2,806) (20,395) ---------- -------------- ---------- -------------- Net increase (decrease) 45,325 $ 320,513 31,559 $ 225,605 ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions (494,507) $ (3,526,409) 12,945 $ 155,809 ========== ============== ========== ==============
(a) For the period October 1, 2001 (commencement of operations) through December 31, 2001 for Class Y shares. 54
BOND INCOME FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 2,761,031 $ 30,947,862 3,447,705 $ 40,347,344 Shares Issued in connection with the reinvestment of: Dividends from net investment income 630,044 7,028,137 793,770 9,313,490 ---------- -------------- ---------- -------------- 3,391,075 37,975,999 4,241,475 49,660,834 Shares repurchased (5,298,328) (59,054,703) (4,440,794) (51,917,547) ---------- -------------- ---------- -------------- Net increase (decrease) (1,907,253) $ (21,078,704) (199,319) $ (2,256,713) ---------- -------------- ---------- -------------- CLASS B: Shares sold 5,113,116 $ 57,147,872 3,873,088 $ 45,336,465 Shares Issued in connection with the reinvestment of: Dividends from net investment income 309,169 3,449,629 390,437 4,579,223 ---------- -------------- ---------- -------------- 5,422,285 60,597,501 4,263,525 49,915,688 Shares repurchased (3,908,528) (43,564,808) (1,978,772) (23,154,898) ---------- -------------- ---------- -------------- Net increase (decrease) 1,513,757 $ 17,032,693 2,284,753 $ 26,760,790 ---------- -------------- ---------- -------------- CLASS C: Shares sold 138,295 $ 1,555,372 196,137 $ 2,299,999 Shares Issued in connection with the reinvestment of: Dividends from net investment income 26,871 299,976 38,608 453,189 ---------- -------------- ---------- -------------- 165,166 1,855,348 234,745 2,753,188 Shares repurchased (354,452) (3,952,429) (334,314) (3,927,346) ---------- -------------- ---------- -------------- Net increase (decrease) (189,286) $ (2,097,081) (99,569) $ (1,174,158) ---------- -------------- ---------- -------------- CLASS Y: Shares sold 411,293 $ 4,623,829 567,048 $ 6,671,918 Shares Issued in connection with the reinvestment of: Dividends from net investment income 80,315 898,601 73,368 863,333 ---------- -------------- ---------- -------------- 491,608 5,522,430 640,416 7,535,251 Shares repurchased (363,731) (4,077,509) (362,635) (4,256,817) ---------- -------------- ---------- -------------- Net increase (decrease) 127,877 $ 1,444,921 277,781 $ 3,278,434 ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions (454,905) $ (4,698,171) 2,263,646 $ 26,608,353 ========== ============== ========== ============== HIGH INCOME FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 2,021,612 $ 8,897,208 1,247,804 $ 7,562,671 Shares Issued in connection with the reinvestment of: Dividends from net investment income 317,560 1,396,013 523,610 3,018,437 ---------- -------------- ---------- -------------- 2,339,172 10,293,221 1,771,414 10,581,108 Shares repurchased (3,663,855) (16,220,139) (2,557,348) (14,947,178) ---------- -------------- ---------- -------------- Net increase (decrease) (1,324,683) $ (5,926,918) (785,934) $ (4,366,070) ---------- -------------- ---------- -------------- CLASS B: Shares sold 1,040,581 $ 4,725,693 1,452,751 $ 8,597,030 Shares Issued in connection with the reinvestment of: Dividends from net investment income 201,776 889,901 317,495 1,829,605 ---------- -------------- ---------- -------------- 1,242,357 5,615,594 1,770,246 10,426,635 Shares repurchased (2,675,203) (11,769,699) (2,439,710) (14,006,958) ---------- -------------- ---------- -------------- Net increase (decrease) (1,432,846) $ (6,154,105) (669,464) $ (3,580,323) ---------- -------------- ---------- -------------- CLASS C: Shares sold 90,003 $ 403,036 360,599 $ 2,104,845 Shares Issued in connection with the reinvestment of: Dividends from net investment income 26,503 116,430 43,294 252,141 ---------- -------------- ---------- -------------- 116,506 519,466 403,893 2,356,986 Shares repurchased (324,456) (1,450,446) (427,671) (2,548,968) ---------- -------------- ---------- -------------- Net increase (decrease) (207,950) $ (930,980) (23,778) $ (191,982) ---------- -------------- ---------- -------------- CLASS Y: Shares sold -- $ -- -- $ -- Shares Issued in connection with the reinvestment of: Dividends from net investment income -- -- -- -- ---------- -------------- ---------- -------------- -- -- -- -- Shares repurchased -- -- -- -- ---------- -------------- ---------- -------------- Net increase (decrease) -- $ -- -- $ -- ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions (2,965,479) $ (13,012,003) (1,479,176) $ (8,138,375) ========== ============== ========== ==============
55
STRATEGIC INCOME FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 1,233,640 $ 12,489,877 942,976 $ 9,851,828 Shares Issued in connection with the reinvestment of: Dividends from net investment income 428,477 4,343,680 710,648 7,330,700 ---------- -------------- ---------- -------------- 1,662,117 16,833,557 1,653,624 17,182,528 Shares repurchased (2,583,795) (26,064,953) (2,958,307) (30,455,609) ---------- -------------- ---------- -------------- Net increase (decrease) (921,678) $ (9,231,396) (1,304,683) $ (13,273,081) ---------- -------------- ---------- -------------- CLASS B: Shares sold 996,177 $ 10,066,847 1,049,379 $ 10,945,846 Shares Issued in connection with the reinvestment of: Dividends from net investment income 364,119 3,688,894 592,151 6,108,437 ---------- -------------- ---------- -------------- 1,360,296 13,755,741 1,641,530 17,054,283 Shares repurchased (2,502,784) (25,285,670) (2,433,883) (24,987,009) ---------- -------------- ---------- -------------- Net increase (decrease) (1,142,488) $ (11,529,929) (792,353) $ (7,932,726) ---------- -------------- ---------- -------------- CLASS C: Shares sold 331,088 $ 3,346,746 336,952 $ 3,647,683 Shares Issued in connection with the reinvestment of: Dividends from net investment income 101,770 1,030,223 190,747 1,874,620 ---------- -------------- ---------- -------------- 432,858 4,376,969 527,699 5,522,303 Shares repurchased (771,825) (7,794,721) (1,047,238) (10,766,581) ---------- -------------- ---------- -------------- Net increase (decrease) (338,967) $ (3,417,752) (519,539) $ (5,244,278) ---------- -------------- ---------- -------------- CLASS Y: Shares sold 68,699 $ 692,601 37,158 $ 382,879 Shares Issued in connection with the reinvestment of: Dividends from net investment income 4,144 42,230 3,567 36,701 ---------- -------------- ---------- -------------- 72,843 734,831 40,725 419,580 Shares repurchased (21,066) (211,862) (26,758) (273,469) ---------- -------------- ---------- -------------- Net increase (decrease) 51,777 $ 522,969 13,967 $ 146,111 ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions (2,351,356) $ (23,656,108) (2,602,608) $ (26,303,974) ========== ============== ========== ==============
56
LIMITED TERM U.S. GOVERNMENT FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 2,338,561 $ 26,950,560 2,445,579 $ 27,653,033 Shares Issued in connection with the reinvestment of: Dividends from net investment income 348,652 4,025,182 396,187 4,499,196 ---------- -------------- ---------- -------------- 2,687,213 30,975,742 2,841,766 32,152,229 Shares repurchased (3,260,141) (37,525,210) (3,883,682) (43,935,146) ---------- -------------- ---------- -------------- Net increase (decrease) (572,928) $ (6,549,468) (1,041,916) $ (11,782,917) ---------- -------------- ---------- -------------- CLASS B: Shares sold 706,265 $ 8,186,137 399,797 $ 4,554,320 Shares Issued in connection with the reinvestment of: Dividends from net investment income 40,792 470,419 39,402 446,829 ---------- -------------- ---------- -------------- 747,057 8,656,556 439,199 5,001,149 Shares repurchased (620,421) (7,125,410) (244,043) (2,767,660) ---------- -------------- ---------- -------------- Net increase (decrease) 126,636 $ 1,531,146 195,156 $ 2,233,489 ---------- -------------- ---------- -------------- CLASS C: Shares sold 570,784 $ 6,611,629 256,551 $ 2,890,430 Shares Issued in connection with the reinvestment of: Dividends from net investment income 17,765 205,133 20,583 233,332 ---------- -------------- ---------- -------------- 588,549 6,816,762 277,134 3,123,762 Shares repurchased (414,627) (4,814,349) (355,306) (4,028,016) ---------- -------------- ---------- -------------- Net increase (decrease) 173,922 $ 2,002,413 (78,172) $ (904,254) ---------- -------------- ---------- -------------- CLASS Y: Shares sold 987,271 $ 11,289,831 74,432 $ 855,152 Shares Issued in connection with the reinvestment of: Dividends from net investment income 34,738 402,928 15,149 173,303 ---------- -------------- ---------- -------------- 1,022,009 11,692,759 89,581 1,028,455 Shares repurchased (599,695) (6,901,951) (78,549) (893,943) ---------- -------------- ---------- -------------- Net increase (decrease) 422,314 $ 4,790,808 11,032 $ 134,512 ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions 149,944 $ 1,774,899 (913,900) $ (10,319,170) ========== ============== ========== ============== GOVERNMENT SECURITIES FUND ------------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- CLASS A: Shares sold 1,163,096 $ 13,583,368 1,567,340 $ 17,673,623 Shares Issued in connection with the reinvestment of: Dividends from net investment income 243,169 2,819,415 270,123 3,048,950 ---------- -------------- ---------- -------------- 1,406,265 16,402,783 1,837,463 20,722,573 Shares repurchased (1,419,343) (16,327,594) (1,866,222) (20,982,105) ---------- -------------- ---------- -------------- Net increase (decrease) (13,078) $ 75,189 (28,759) $ (259,532) ---------- -------------- ---------- -------------- CLASS B: Shares sold 712,314 $ 8,363,857 505,361 $ 5,709,885 Shares Issued in connection with the reinvestment of: Dividends from net investment income 36,766 427,149 33,898 382,953 ---------- -------------- ---------- -------------- 749,080 8,791,006 539,259 6,092,838 Shares repurchased (541,866) (6,269,688) (278,665) (3,146,944) ---------- -------------- ---------- -------------- Net increase (decrease) 207,214 $ 2,521,318 260,594 $ 2,945,894 ---------- -------------- ---------- -------------- CLASS C: Shares sold -- $ -- -- $ -- Shares Issued in connection with the reinvestment of: Dividends from net investment income -- -- -- -- ---------- -------------- ---------- -------------- -- -- -- -- Shares repurchased -- -- -- -- ---------- -------------- ---------- -------------- Net increase (decrease) -- $ -- -- $ -- ---------- -------------- ---------- -------------- CLASS Y: Shares sold 220,420 $ 2,524,097 63,952 $ 728,747 Shares Issued in connection with the reinvestment of: Dividends from net investment income 24,957 289,414 21,989 245,868 ---------- -------------- ---------- -------------- 245,377 2,813,511 85,941 974,615 Shares repurchased (114,051) (1,321,509) (65,429) (740,483) ---------- -------------- ---------- -------------- Net increase (decrease) 131,326 $ 1,492,002 20,512 $ 234,132 ---------- -------------- ---------- -------------- Increase (decrease) derived from capital shares transactions 325,462 $ 4,088,509 252,347 $ 2,920,494 ========== ============== ========== ==============
57 6. LINE OF CREDIT. High Income Fund and Strategic Income Fund, along with certain other portfolios that comprise the CDC Nvest Funds Trusts participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2001. 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 by the lender 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, 2002. 7. SECURITY LENDING. The Funds have each entered into an agreement with a third party to lend their 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 Funds receive fees for lending their securities. The market value of securities on loan to third parties and the value of collateral held by the Funds with respect to such loans at December 31, 2002, is as follows:
MARKET VALUE OF VALUE OF COLLATERAL FUND SECURITIES ON LOAN RECEIVED ---- ------------------ ------------------- Short Term Bond Fund $ 7,282,711 $ 7,437,750 Bond Income Fund 22,705,446 23,165,109 High Income Fund 5,441,050 5,577,060 Strategic Income Fund 4,785,589 4,930,950 Limited Term U.S. Government Fund 5,184,547 5,297,245 Government Securities Fund 19,419,641 19,837,500
8. CONTINGENT EXPENSE OBLIGATION. CDC IXIS Advisers has given a binding undertaking to Short Term Corporate Income Fund to defer its management fee and, if necessary, bear certain expenses associated with the Fund to limit its operating expenses. This limitation is in effect until May 1, 2002 and will be reevaluated on an annual basis. If in the following fiscal year the actual operating expenses of a Fund that previously received a deferral or reimbursement are less than the expense limit and the actual amount of fees previously waived or expenses reimbursed. At December 31, 2002, the expense limits as a percentage of average daily net assets and amount subject to possible reimbursement under the expense limitation agreement were as follows:
EXPENSE LIMIT AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS EXPENSES SUBJECT ---------------------------------------- TO POSSIBLE FUND CLASS A CLASS B CLASS C CLASS Y REIMBURSEMENT ---- ------- ------- ------- ------- ---------------- Short Term Bond Fund 0.90% 1.65% 1.65% 0.65% $ 290,103
58 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Shareholders of CDC Nvest Funds Trust I and CDC Nvest Funds Trust II: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, 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 CDC Nvest Short Term Bond Fund, CDC Nvest Bond Income Fund, CDC Nvest High Income Fund, CDC Nvest Strategic Income Fund, CDC Nvest Limited Term U.S. Government Fund, and CDC Nvest Government Securities Fund (series of CDC Nvest Funds Trust I or CDC Nvest Funds Trust II hereafter referred to as the "Funds") at December 31, 2002, and the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' 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 of America, 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 13, 2003 59 TRUSTEES' INFORMATION The Funds are governed by a Board of Trustees, which is responsible for generally overseeing the conduct of Fund business and for protecting the interests of shareholders. The trustees meet periodically throughout the year to oversee the Funds' activities, review contractual arrangements with companies that provide services to the Funds and review the Funds' performance.
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS IN FUNDS, LENGTH OF TIME PRINCIPAL OCCUPATION(S) FUND COMPLEX OVERSEEN AND NAME, AGE AND ADDRESS SERVED AND TERM OF OFFICE(1) DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD - --------------------------- ---------------------------- ----------------------------------- ------------------------------ INDEPENDENT TRUSTEES GRAHAM T. ALLISON, JR. (63) Trustee(2)(3); Douglas Dillon Professor and 27; Director, Taubman Centers, 399 Boylston Street 19 years Director for the Belfer Center of Inc.; Board Member, USEC Inc. Boston, MA 02116 Science and International Affairs, John F. Kennedy School of Government, Harvard University DANIEL M. CAIN (58) Trustee, Chairman(1); President and CEO, Cain Brothers & 27; Trustee, Universal Health 452 Fifth Avenue 7 years Company, Incorporated (investment Realty Income Trust; Director, New York, NY 10018 banking) eBenX, Inc.; Director, PASC KENNETH J. COWAN (71) Trustee, Chairman(2)(3); Retired 27; 399 Boylston Street 28 years None Boston, MA 02116 RICHARD DARMAN (59) Trustee(2)(3); Partner, The Carlyle Group 27; Director and Vice 399 Boylston Street 7 years (investments); Professor, John F. Chairman, AES Corporation Boston, MA 02116 Kennedy School of Government, Harvard University SANDRA O. MOOSE (61) Trustee(1); Senior Vice President and Director, 27; Director, Verizon One Exchange Place 21 years The Boston Consulting Group, Inc. Communications; Director, Rohm Boston, MA 02109 (management consulting) and Haas Company JOHN A. SHANE (70) Trustee(1); President, Palmer Service 27; Director, Eastern Bank 200 Unicorn Park Drive 21 years Corporation (venture capital Corporation; Director, Gensym Woburn, MA 01801 organization) Corporation; Director, Overland Storage, Inc.; Director, ABT Associates Inc. PENDLETON P. WHITE (72) Trustee(2)(3); Retired 27; 6 Breckenridge Lane 22 years None Savannah, GA 31411 INTERESTED TRUSTEES JOHN T. HAILER (42) President and Chief President and Chief Executive 27; 399 Boylston Street Executive Officer, Trustee; Officer, CDC IXIS Asset Management None(2) Boston, MA 02116 3 years Distributors, L.P.; Senior Vice President, Fidelity Investments
60
NUMBER OF PORTFOLIOS IN POSITION(S) HELD WITH FUND COMPLEX OVERSEEN FUNDS, LENGTH OF TIME PRINCIPAL OCCUPATION(S) AND OTHER DIRECTORSHIPS NAME, AGE AND ADDRESS SERVED AND TERM OF OFFICE(1) DURING PAST 5 YEARS HELD - --------------------------- ---------------------------- ----------------------------------- ------------------------------ INTERESTED TRUSTEES (CONTINUED) PETER S. VOSS (56) Chairman of the Board, Director, President and Chief 27; 399 Boylston Street Trustee; Executive Officer, CDC IXIS Asset Trustee of Harris Boston, MA 02116 11 years Management North America, L.P. Associates Investment Trust(3) OFFICERS MARK E. BRADLEY (43) Treasurer; Senior Vice President, CDC IXIS 27; 399 Boylston Street Not Applicable Asset Management Services; Senior None Boston, MA 02116 Vice President, CDC IXIS Asset Management Advisers; Vice President and Assistant Treasurer, MFS Investment Management JOHN E. PELLETIER (38) Secretary and Clerk; Senior Vice President, General 27; 399 Boylston Street Not Applicable Counsel, Secretary and Clerk, CDC None Boston, MA 02116 IXIS Distribution Corporation; Senior Vice President, General Counsel, Secretary and Clerk, CDC IXIS Asset Management Distributors, L.P.; Senior Vice President, General Counsel, Secretary and Clerk, CDC IXIS Asset Management Advisers, L.P.; Executive Vice President, General Counsel, Secretary, Clerk and Director, CDC IXIS Asset Management Services, Inc.
(1) Member of Audit Committee. (2) Member of Contract Review Committee. (3) Member of Governance Committee. (1) All Trustees serve until retirement, resignation or removal from the Board. The current retirement age is 72. (2) Mr. Hailer is an "interested person" of the CDC Nvest Funds because he holds the following positions with affiliated persons of the CDC Nvest Funds Trusts: Director and Executive Vice President of CDC IXIS Asset Management Distribution Corporation; President and Chief Executive Officer of CDC IXIS Asset Management Advisers, L.P. (3) Mr. Voss is an "interested person" of the CDC Nvest Funds because he holds the following positions with affiliated persons of the CDC Nvest Funds Trusts: Director of CDC IXIS Asset Management Services; Director of CDC IXIS Asset Management Distribution Corporation; Director and Chairman of CDC IXIS Asset Management Associates, Inc. Director of AEW Capital Management, Inc; Director of Harris Associates, Inc; Director of Jurika & Voyles, Inc.; Director of Loomis, Sayles & Company, Inc.; Director of Reich & Tang Asset Management Inc.; Director of Westpeak Global Advisors, Inc.; Director of Vaughan, Nelson, Scarborough & McCullough, Inc. 61 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, CDC Nvest Funds' automatic investment program, you can invest as little as $100 a month in your CDC Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. THE POWER OF MONTHLY INVESTING [CHART]
25 YEARS $100 $ 95,837 $200 $191,673 $500 $479,183
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 CDC Nvest Funds. The value and return on CDC 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 CDC Nvest Funds account. To add Investment Builder to your account today, call your financial advisor or CDC Nvest Funds at 800-225-5478. PLEASE CALL CDC NVEST FUNDS FOR A PROSPECTUS, WHICH CONTAINS MORE INFORMATION, INCLUDING CHARGES AND OTHER ONGOING EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. 62 SAVING FOR RETIREMENT AN EARLY START CAN MAKE A BIG DIFFERENCE With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. TWO HYPOTHETICAL INVESTMENTS [CHART]
AGE 30 AGE 40 AGE 65 Investor A 0 $214,295 Investor B 0 $157,909
Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any CDC Nvest Fund. The value and returns on CDC Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. CDC Nvest Funds has prepared a number of informative retirement planning guides. Call your financial advisor or CDC Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 63 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. 30-day SEC yield - a standard yield calculation developed by the Securities and Exchange Commission (SEC) based on the most recent 30-day period covered by the fund's SEC filings. It reflects the dividend and interest earned during the period minus fund expenses. 64 CDC NVEST FUNDS CDC Nvest AEW Real Estate Fund CDC Nvest Balanced Fund CDC Nvest Bond Income Fund CDC Nvest Capital Growth Fund CDC Nvest Cash Management Trust -- Money Market Series* CDC Nvest Government Securities Fund CDC Nvest Growth and Income Fund CDC Nvest High Income Fund CDC Nvest International Equity Fund CDC Nvest Jurika & Voyles Relative Value Fund CDC Nvest Jurika & Voyles Small Cap Growth Fund CDC Nvest Large Cap Growth Fund CDC Nvest Large Cap Value Fund CDC Nvest Limited Term U.S. Government Fund CDC Nvest Massachusetts Tax Free Income Fund CDC Nvest Municipal Income Fund CDC Nvest Select Fund CDC Nvest Short Term Bond Fund CDC Nvest Star Advisers Fund CDC Nvest Star Growth Fund CDC Nvest Star Small Cap Fund CDC Nvest Star Value Fund CDC Nvest Star Worldwide Fund CDC Nvest Strategic Income Fund CDC Nvest Targeted Equity Fund CDC Nvest Tax Exempt Money Market Trust* *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Capital Growth Management Hansberger Global Investors Harris Associates/Oakmark Funds Jurika & Voyles Loomis, Sayles & Company Mercury Advisors Miller Anderson Reich & Tang Asset Management RS Investment Management Salomon Brothers Asset Management Vaughan, Nelson, Scarborough & McCullough Westpeak Global Advisors For current fund performance, ask your financial representative, access the CDC Nvest Funds website at www.cdcnvestfunds.com, or call CDC Nvest Funds at 800-225-5478 for the current edition of FUND FACTS. 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 sales charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. CDC IXIS Asset Management Distributors, L.P., and other firms selling shares of CDC 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 website at www.NASD.com. [CDC NVEST FUNDS(SM) LOGO] P.O. Box 8551 PRSRT STD U.S. POSTAGE Boston, Massachusetts PAID PORTLAND ME 02266-8551 PERMIT NO 7 www.cdcnvestfunds.com TO THE HOUSEHOLD OF: ARE YOU DROWNING IN PAPER? [GRAPHIC] LET E-DELIVERY COME TO YOUR RESCUE! GET YOUR NEXT CDC NVEST FUNDS REPORT OR STATEMENT ONLINE INSTEAD OF THROUGH THE MAIL. SIGN UP AT www.cdcnvestfunds.com. IF58-1202 -----END PRIVACY-ENHANCED MESSAGE-----