-----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, JiuDln1a+1AjCA2eQ5MOUYoqM/Q6+RXWLLFb2dyya7Y5UIdE+xkaRzQRsxQPygke Q3ehQqc6O1BdT5VnX0PYqg== 0001127563-01-000038.txt : 20010307 0001127563-01-000038.hdr.sgml : 20010307 ACCESSION NUMBER: 0001127563-01-000038 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVEST FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00242 FILM NUMBER: 1560597 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6175781203 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST II DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: INVESTMENT TRUST OF BOSTON FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WORLD INVESTMENT TRUST DATE OF NAME CHANGE: 19680529 N-30D 1 0001.txt NVEST FUNDS TRUST II ANNUAL REPORT 12/31/2000 Nvest Funds(SM) Where The Best Minds Meet(R) Nvest High Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST HIGH INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest High Income Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9550 12/31/91 13655 13040 12/31/92 15811 15100 12/31/93 18423 17594 12/31/94 17829 17027 12/31/95 19929 19032 12/31/96 22894 21864 12/31/97 26414 25225 12/31/98 25965 24796 12/31/99 27004 25788 12/31/00 22654 21634 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST HIGH INCOME FUND Average Annual Total Returns -- 12/31/00 - -------------------------------------------------------------------------------- Class A (Inception 2/22/84) 1 Year 5 Years(7) 10 Years(7) Net Asset Value(1) -16.09% 2.60% 8.51% With Maximum Sales Charge(2) -19.85 1.67 8.01 - -------------------------------------------------------------------------------- Class B (Inception 9/20/93) 1 Year 5 Years(7) Since Inception(7) Net Asset Value(1) -16.59% 1.88% 2.79% With CDSC(3) -20.34 1.62 2.79 - -------------------------------------------------------------------------------- Class C (Inception 3/2/98) 1 Year Since Inception Net Asset Value(1) -16.59% -6.45% With Maximum Sales Charge and CDSC(3) -18.13 -6.77 - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------- Since Since Fund's Fund's Class B Class C Comparative Performance 1 Year 5 Years 10 Years Inception Inception Lehman Brothers High Yield Index(4) -5.86% 4.28% 11.16% 5.84% -1.47% Morningstar High Yield Bond Fund Average(5) -9.12 3.25 9.88 5.12 -2.96 Lipper High Current Yield Average(6) -8.38 3.36 9.99 4.57 -3.33 - -----------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. The Fund's current subadviser began managing the Fund on July 1, 1996. Results for earlier periods reflect performance under previous subadvisers. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("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. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. (4) Lehman Brothers High Yield Composite Index is an unmanaged index of fixed rate, coupon bearing, non-investment grade bonds. You may not invest directly in an index. Class B since inception return is calculated from 9/30/93. Class C since inception return is calculated from 2/28/98. (5) Morningstar High Yield Bond Fund Average is the average performance without sales charges of funds with at least 65% of bond assets rated below BBB, as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 2/28/98. (6) Lipper High Current Yield Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 2/28/98. (7) Fund performance may have been increased by voluntary expense waivers, without which performance would have been lower. 2 NVEST HIGH INCOME FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Curt A. Mitchell Michael J. Millhouse Loomis, Sayles & Company, L.P. Q. How did Nvest High Income Fund perform during 2000? For the 12 months ended December 31, 2000, the total return on Nvest High Income Fund Class A shares was -16.09% at net asset value, including $0.84 in reinvested dividends. The Fund's benchmark, Lehman Brothers High Yield Composite Index, returned -5.86% for the same period. The relatively large portion of the Fund's assets in telecommunications was a major contributor to its disappointing results for the year. As recession fears mounted, weaker credits dragged down many solid companies. The fourth quarter was especially hard on this sector, but we are focusing on deeply discounted bonds issued by companies we believe are likely to hold their own in an economic slowdown and emerge as leaders in time. Q. What was the environment for high-yield bonds during the year? The Federal Reserve Board's repeated rate hikes during the first half of 2000 drove short-term interest rates up, sending bond prices down. Long-term bonds, which are slower to respond to the Fed's policy changes, also succumbed in the course of the year. The high-yield market was affected more than other sectors because it is more sensitive to changes in interest rates, up or down. High-yield bonds are also closely tied to the equity market, so they traced much the same volatile pattern as stock prices. As the cost of corporate borrowing increased during the year, the major bond-rating services downgraded many companies' ratings, fearful that a slowing economy might jeopardize their ability to meet their financial commitments. Indeed, as the year drew to a close, some highly visible companies began to issue warnings that their earnings would fall below projections for the year. As a result, throughout most of the year investors retreated to the sidelines, seeking the relative safety of U.S Treasury bonds. Long-term U.S. Treasury securities were the top-performing asset class in 2000, beating the stock market as well as the high-yield bond market for the year. 3 NVEST HIGH INCOME FUND - -------------------------------------------------------------------------------- Q. What strategies did you use in managing the Fund? Our strategy was two-fold: to raise overall credit quality and to increase the market capitalization of the companies we own, in an effort to reduce portfolio volatility and increase the stability of the Fund's income stream. During the past 12 months, we shifted assets into higher quality credits that were trading at low valuations. Given the potential for continued economic uncertainty, we also focused on industry leaders in strong business sectors. In troubled times, larger companies have much greater financial flexibility than second-tier players. In addition, we looked for potentially rewarding opportunities in out-of-favor sectors, such as retailing. Although the retailing sector was hard hit in recent months, Kmart Financing I (a recent purchase) has a dynamic new leadership team that is instituting a complete restructuring program. And with retailing issues at depressed levels, we were able to purchase Kmart at an attractive price. In the airline industry, USAir caught our attention. With a possible merger with United Airlines on the horizon, the bond has strong upgrade potential. What's more, these bonds are collateralized by aircraft, providing downside credit protection. We also added to Nvest High Income Fund's telecommunications holdings, purchasing Williams Communications Group Inc. and Level 3 Communications, Inc. Despite the many changes in this industry, we remain bullish on the future of the companies represented in the portfolio. The key is selectivity - striving to identify issues that will be the winners in the industry. We depend on Loomis Sayles' research team to help us sort through the abundance of bonds, looking for those that offer the most promise. Q. Which factors hurt the Fund's performance most in 2000? The market favored high-quality issues in 2000, and this was the greatest negative. Nvest High Income Fund's primary objective is to seek high current income, so we focus on lower quality bonds, which offer more generous yields than higher quality issues. Despite the difficult market last year, high-yield bonds historically have provided generous returns through full market cycles. Q. What is your current outlook? As 2000 drew to a close, concerns about inflation were being replaced by concerns about a possible recession, and the Fed began to hint that it might ease monetary policy. Even so, the cut in short-term interest rates, announced just a 4 NVEST HIGH INCOME FUND - -------------------------------------------------------------------------------- few days into 2001, surprised most observers by its size (0.5%) and timing (almost four weeks before the next scheduled Board meeting). We believe that this rate cut should help guide the economy to a soft landing and calm the capital markets. However, the transition from rapid economic growth to a more moderate pace will not be easy. Nonetheless, we believe the outlook for high-yield bonds in the coming year is positive because prices already reflect the prospect of a slower economy. As the transition progresses and interest rates subside, we believe investors will return to the high-yield market in search of higher returns. Quality Allocation -- 12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] BB 22.2% B 56.3% CCC 10.2% Other 11.3% Portfolio holdings and asset allocation will vary. Country Allocation -- 12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] United States 84.9% Mexico 8.8% Phillipines 3.0% Mauritius 2.8% United Kingdom 0.5% Portfolio holdings and asset allocation will vary. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest High Income Fund may invest in lower rated bonds, which may offer higher yields in return for more risk. It may also invest a portion of assets in foreign and emerging market securities, which have special risks. The Fund may also invest in U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. These risks effect your investment's value. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 88.6% of Total Net Assets
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------ Airlines -- 3.1% $ 3,250,000 US Airways, Inc., 10.375%, 3/01/2013 .. Ba3 BB- $3,059,622 ---------- Auto & Related -- 1.7% 2,200,000 Advance Stores Co., Inc., 10.250%, 4/15/2008 ............................. B3 B- 1,661,000 ---------- Cable & Media -- 16.0% 3,000,000 Adelphia Communications Corp., 10.875%, 10/01/2010 ................... B2 B+ 2,880,000 9,000,000 Charter Communications Holdings, 0/9.920%, 4/01/2011 (d) ............... B2 B+ 5,242,500 3,500,000 NTL Communications Corp., 11.500%, 10/01/2008 ............................ B2 B 3,106,250 3,000,000 NTL, Inc., 0/9.750%, 4/01/2008 (d) .... B2 B 1,657,500 4,615,000 RCN Corp., 0/9.800%, 2/15/2008 (d) .... B3 B- 1,476,800 4,715,000 RCN Corp., 0/11.250%, 10/15/2007 (d) .. B3 B- 1,697,400 ---------- 16,060,450 ---------- Chemicals -- 7.3% 11,000,000 Huntsman ICI Chemicals, 144A, Zero Coupon, 12/31/2009 .................... B3 B+ 3,080,000 4,500,000 Lyondell Chemical Co., 10.875%, 5/01/2009 (g) ......................... B2 B+ 4,241,250 ---------- 7,321,250 ---------- Industrial Services -- 3.0% 4,000,000 United Rentals, Inc., 9.250%, 1/15/2009 (g) ......................... B2 BB- 3,035,000 ---------- Media & Entertainment -- 8.8% 7,890,000 Fox Family Worldwide, Inc., 0/10.250%, 11/01/2007 (d) ........................ B2 B+ 6,312,000 4,000,000 Liberty Group Publishing, Inc., 0/11.625%, 2/01/2009 (d) .............. Caa2 CCC+ 2,520,000 ---------- 8,832,000 ---------- Oil & Gas-Drilling & Equipment -- 3.2% 2,750,000 RBF Finance Co., 11.375%, 3/15/2009 ... Ba3 BB- 3,190,000 ---------- Packaging & Containers -- 2.6% 2,556,000 Stone Container Corp., 12.250%, 4/01/2002 ............................. B3 B- 2,578,365 ---------- Paper -- 2.7% 5,136,000 Pindo Deli Finance Mauritius Ltd., 10.250%, 10/01/2002 (yankee) .......... B3 CCC+ 2,734,920 ---------- Railroads & Equipment -- 2.4% 3,250,000 TFM SA de CV, 0/11.750%, 6/15/2009 (yankee) (d) .......................... B1 BB- 2,413,125 ---------- Restaurants -- 2.1% 2,500,000 Dominos, Inc., 10.375%, 1/15/2009 (g) . B3 B- 2,112,500 ---------- Steel -- 1.1% 3,250,000 Altos Hornos de Mexico SA de CV, 11.875%, 4/30/2004 (yankee) (f) ....... Caa3 D 1,080,625 ---------- Telecommunications -- 20.1% 1,500,000 Alestra SA de RL de CV, 144A, 12.125%, 5/15/2006 (yankee) .................... B2 BB- 1,203,750 5,000,000 Alestra SA de RL de CV, 144A, 12.625%, 5/15/2009 (yankee) (g) ................ B2 BB- 4,012,500 6,500,000 Intermedia Communications, Inc., 0/12.250%, 3/01/2009 (d) .............. B3 CCC+ 2,600,000 6,750,000 Level 3 Communications, Inc., 0/12.875%, 3/15/2010 (d) .............. B3 B 3,172,500
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Bonds and Notes -- continued
Ratings (c)(unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------ Telecommunications -- continued $ 3,500,000 Philippine Long Distance Telephone Co., 10.500%, 4/15/2009 (yankee) (g) ....... Ba2 BB+ $2,957,678 3,775,000 Williams Communications Group, Inc., 10.875%, 10/01/2009 ................... B2 B+ 2,831,250 6,960,000 XO Communications, Inc., 0/12.250%, 6/01/2009 (d) ......................... B2 B 3,375,600 ---------- 20,153,278 ---------- Telecommunications-Cellular -- 7.7% 4,000,000 Dolphin Telecom PLC, 0/14.000%, 5/15/2009 (yankee) (d) (g) . Caa2 CCC- 460,000 3,000,000 Grupo Iusacell SA de CV, 14.250%, 12/01/2006 (yankee) (g) ............... B1 B+ 2,962,500 4,250,000 Nextel International, Inc., 0/12.125%, 4/15/2008 (d) ......................... Caa1 B- 2,507,500 2,600,000 Nextel Partners, Inc., 0/14.000%, 2/01/2009 (d) ......................... B3 CCC+ 1,748,500 ---------- 7,678,500 ---------- Utilities -- 2.1% 2,957,679 Panda Funding Corp., 11.625%, 8/20/2012 Ba3 BB- 2,070,375 ---------- Waste Management -- 4.7% 5,000,000 Allied Waste Industries, Inc., 144A, 10.000%, 8/01/2009 .................... B2 B+ 4,737,500 ---------- Total Bonds and Notes (Identified Cost $109,249,932) ......................... 88,718,510 ---------- Common Stock -- 0.0% Shares - ------------------------------------------------------------------------------------------ 1,750 Ameriking, Inc. ....................... 1,750 1,237 Mothers Work, Inc. (f) ................ 12,293 ---------- Total Common Stock (Identified Cost $81,073) ............ 14,043 ---------- Preferred Stock -- 8.7% - ------------------------------------------------------------------------------------------ Cable & Media -- 4.0% 37,395 CSC Holdings, Inc., 11.125%, 04/01/2001 (pay-in-kind) ........................ 3,973,219 ---------- Food & Beverages -- 0.0% 30,737 Nebco Evans Holding Co., 11.250%, 03/01/2008 (pay-in-kind) (e) (f) ............... 11,526 ---------- Insurance -- 0.0% 15,000 Superior National Capital Trust I, 10.75%, 12/01/2017 (f) .............. 1,875 ---------- Media & Entertainment -- 1.5% 59,641 Liberty Group Publishing, Inc. 14.750%, 02/01/2010 (pay-in-kind) ..... 1,476,115 ---------- Retail -- 2.2% 82,000 Kmart Financing I, 7.750%, 06/15/2016 . 2,188,375 ----------
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000
Preferred Stock-- continued Shares Description Value (a) - ------------------------------------------------------------------------------------------ Telecommunications -- 1.0% 3,688 Adelphia Business Solutions, Inc., 12.875%, 10/15/2007 (pay-in-kind) (g) ............................................ $ 1,069,520 ----------- Total Preferred Stock (Identified Cost $14,570,780) .......... 8,720,630 ----------- Short Term Investments -- 1.4% Principal Amount - ------------------------------------------------------------------------------------------ $ 1,374,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.250% to be repurchased at $1,374,802 on 1/02/2001, collateralized by $965,000 U.S. Treasury Bond at 12.000% due 8/15/2013 with a value of $1,405,281 .......... 1,374,000 ------------ Total Short Term Investment (Identified Cost $1,374,000) ..... 1,374,000 ------------ Total Investments - 98.7% (Identified Cost $125,275,785) (b) . 98,827,183 Other assets less liabilities ................................ 1,294,472 ------------ Total Net Assets - 100% ...................................... $100,121,655 ============ (a) See Note 1a of Notes to the Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized depreciation on investments based on cost for federal income tax purposes of $125,275,785 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost............................. $ 1,188,302 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value............................. (27,636,904) ------------ Net unrealized depreciation........................................... $(26,448,602) ============ At December 31, 2000 the Fund had a net tax basis capital loss carryover of $18,552,106 of which $1,019,386 expires on December 31, 2004, $918,790 expires on December 31, 2007 and $16,613,930 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. (e) Issuer filed petition under Chapter 11 of Federal Bankruptcy Code. (f) Non-income producing security. (g) All or a portion of this security was on loan to brokers at December 31, 2000. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $13,033,750 or 13.0 % of net assets.
8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $125,275,785) $ 98,827,183 Cash ............................................... 810 Investments held as collateral for loaned securities 19,721,901 Receivable for: Fund shares sold ................................. 175,544 Dividends and interest ........................... 1,777,428 ------------ 120,502,866 LIABILITIES Payable for: Collateral on securities loaned, at value ........ $ 19,721,901 Fund shares redeemed ............................. 400,426 Dividends declared ............................... 98,931 Accrued expenses: Management fees .................................. 59,253 Deferred trustees' fees .......................... 15,638 Accounting and administrative .................... 3,059 Transfer agent ................................... 21,850 Other ............................................ 60,153 ------------ 20,381,211 ------------ NET ASSETS ............................................ $100,121,655 ============ Net Assets consist of: Paid in capital .................................. $159,541,613 Overdistributed net investment income ............ (62,255) Accumulated net realized gains (losses) .......... (32,909,101) Unrealized appreciation (depreciation) on investments - net ........................... (26,448,602) ------------ NET ASSETS ............................................ $100,121,655 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($46,960,332 / 7,559,892 shares of beneficial interest) ........................................ $ 6.21 ======= Offering price per share (100 / 95.50 of $6.21) ....... $ 6.50* ======= Net asset value and offering price of Class B shares ($47,792,746 / 7,686,822 shares of beneficial interest) .......................................... $ 6.22** ======= Net asset value of Class C shares ($5,368,577 / 863,750 shares of beneficial interest) .......................................... $ 6.22** ======= Offering price per share (100 / 99.00 of $6.22) ....... $ 6.28 =======
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Dividends........................................ $ 1,500,704 Interest......................................... 15,038,834 Securities lending income........................ 76,994 ------------ 16,616,532 Expenses Management fees................................ $ 905,934 Service fees - Class A......................... 153,426 Service and distribution fees - Class B........ 607,186 Service and distribution fees - Class C........ 73,309 Trustees' fees and expenses.................... 10,077 Accounting and administrative.................. 46,176 Custodian...................................... 79,392 Transfer agent ................................ 257,158 Audit and tax services......................... 46,372 Legal.......................................... 2,159 Printing....................................... 50,060 Registration................................... 38,940 Miscellaneous.................................. 5,999 --------- Total expenses................................... 2,276,188 ------------ Net investment income............................ 14,340,344 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on Investments - net........ (26,382,414) Unrealized appreciation (depreciation) on Investments - net.............................. (9,573,036) ------------ Net gain (loss) on investment transactions....... (35,955,450) ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $(21,615,106) ============ 10 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------- 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ............................ $ 15,253,382 $ 14,340,344 Net realized gain (loss) on investments .......... (5,350,213) (26,382,414) Net unrealized appreciation (depreciation) on investments ................................. (4,841,831) (9,573,036) ------------- ------------- Increase (decrease) in net assets from operations 5,061,338 (21,615,106) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ........................................ (7,920,629) (6,907,867) Class B ........................................ (6,647,632) (6,381,249) Class C ........................................ (921,961) (769,066) In excess of net investment income Class A ........................................ (68,380) 0 Class B ........................................ (57,390) 0 Class C ........................................ (7,960) 0 ------------- ------------- (15,623,952) (14,058,182) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS .......... 23,429,833 (18,149,684) ------------- ------------- Total increase (decrease) in net assets ............. 12,867,219 (53,822,972) ------------- ------------- NET ASSETS Beginning of the year ........................... 141,077,408 153,944,627 ------------- ------------- End of the year ................................. $ 153,944,627 $ 100,121,655 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ................................. $ (344,417) $ (62,255) ============= =============
See accompanying notes to financial statement. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ... $ 8.98 $ 9.42 $ 9.94 $ 8.86 $ 8.30 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .................... 0.84 0.87 0.92 0.89 0.86 Net Realized and Unrealized Gain (Loss) on Investments ........................... 0.44 0.52 (1.08) (0.54) (2.11) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ......... 1.28 1.39 (0.16) 0.35 (1.25) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ..... (0.83) (0.87) (0.92) (0.90) (0.84) Distributions in Excess of Net Investment Income .............................. (0.01) 0.00 0.00 (0.01) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ...................... (0.84) (0.87) (0.92) (0.91) (0.84) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ......... $ 9.42 $ 9.94 $ 8.86 $ 8.30 $ 6.21 ========== ========== ========== ========== ========== Total Return (%) (a) ..................... 14.9 15.4 (1.8) 4.0 (16.1) Ratio of Operating Expenses to Average Net Assets (%) .......................... 1.53(b) 1.36 1.32 1.28 1.36 Ratio of Net Investment Income to Average Net Assets (%) ...................... 9.32 9.03 9.81 10.22 11.47 Portfolio Turnover Rate .................. 134 99 75 89 60 Net Assets, End of the Year (000) ........ $ 42,992 $ 62,739 $ 73,023 $ 74,589 $ 46,960
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A sales charge is not reflected in total return calculations. (b) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, the expense ratio would have been higher. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ----------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of the Year ... $ 8.98 $ 9.42 $ 9.93 $ 8.85 $ 8.30 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .................... 0.79 0.80 0.85 0.82 0.81 Net Realized and Unrealized Gain (Loss) on Investments ........................... 0.42 0.51 (1.08) (0.53) (2.11) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ......... 1.21 1.31 (0.23) 0.29 (1.30) ---------- ---------- ---------- ---------- ---------- Less Distributions Dividends From Net Investment Income ..... (0.76) (0.80) (0.85) (0.83) (0.78) Distributions in Excess of Net Investment Income .............................. (0.01) 0.00 0.00 (0.01) 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions ...................... (0.77) (0.80) (0.85) (0.84) (0.78) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of the Year ......... $ 9.42 $ 9.93 $ 8.85 $ 8.30 $ 6.22 ========== ========== ========== ========== ========== Total Return (%) (a) ..................... 14.1 14.4 (2.5) 3.3 (16.6) Ratio of Operating Expenses to Average Net Assets (%) ............................ 2.19(b) 2.11 2.07 2.03 2.11 Ratio of Net Investment Income to Average Net Assets (%) ...................... 8.33 8.28 9.06 9.47 10.72 Portfolio Turnover Rate .................. 134 99 75 89 60 Net Assets, End of the Year (000) ........ $ 17,767 $ 42,401 $ 60,322 $ 70,218 $ 47,793
The subadviser to the Fund prior to July 1, 1996 was Back Bay Advisors, L.P. Effective July 1, 1996 Loomis, Sayles & Company, L.P. became the subadviser to the Fund. (a) A contingent deferred sales charge is not reflected in total return calculations. (b) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, the expense ratio would have been higher. See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period. Class C ----------------------------------- March 2, (a) through Year Ended December 31, December 31, ----------- --------------------- 1998 1999 2000 -------- -------- -------- Net asset value, Beginning of the Period......................... $ 9.96 $ 8.85 $ 8.30 -------- -------- -------- Income From Investment Operations Net Investment Income............... 0.69 0.82 0.81 Net Realized and Unrealized Gain (Loss) on Investments.......... (1.08) (0.53) (2.11) -------- -------- -------- Total From Investment Operations.... (0.39) 0.29 (1.30) -------- -------- -------- Less Distributions Distributions From Net Investment Income......................... (0.72) (0.83) (0.78) Distributions in Excess of Net Investment Income.............. 0.00 (0.01) 0.00 -------- -------- -------- Total Distributions................. (0.72) (0.84) (0.78) -------- -------- -------- Net Asset Value, End of the Period.. $ 8.85 $ 8.30 $ 6.22 ======== ======== ======== Total Return (%) (b)................ (4.1) 3.3 (16.6) Ratio of Operating Expenses to Average Net Assets (%)......... 2.07(c) 2.03 2.11 Ratio of Net Investment Income to Average Net Assets (%)......... 9.06(c) 9.47 10.72 Portfolio Turnover Rate............. 75 89 60 Net Assets, End of the Period (000). $ 7,732 $ 9,138 $ 5,369 (a) Commencement of operations. (b) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. (c) Computed on an annualized basis. 14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest High Income Fund (the "Fund") is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks high current income plus the opportunity for capital appreciation to produce a high total return. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class C shares. Class A shares are sold with a maximum front end sales charge of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares 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 an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Equity securities are valued on the basis of valuations furnished 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. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser, and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date and interest income is recorded on an accrual basis. Interest 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 income is increased by the accretion of original issue discount and/or market 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. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The accumulative effect of adopting this accounting principle will not have an impact on total net assets but will result in a reclassification between cost of securities held and net unrealized appreciation/depreciation. c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. d. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to capital loss carryforwards. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $73,658,989 and $84,810,289, respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.70% of the first $200 million of the Fund's average daily net assets and 0.65% of such assets in excess of $200 million, reduced by the payment to the Fund's investment subadviser Loomis, Sayles & Company L.P. ("Loomis Sayles") at the rate of 0.35% of the first $200 million of the Fund's average daily net assets and 0.30% of such assets in excess of $200 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Loomis Sayles are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Fees earned by Nvest Management and Loomis Sayles under the management agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $452,967 Loomis Sayles 452,967 ---------- $905,934 ========== The effective management fee for the year ended December 31, 2000 was 0.70%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $46,176, and are shown separately in the financial statements as accounting and administrative. The accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plan relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds $153,426 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of up to 0.25% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $151,797 and $18,327 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of up to 0.75% of the average daily net assets attributable to the Fund's Class B and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $455,389 and $54,982 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $476,169. 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as a sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $183,706 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (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 the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Concentration of Credit; Lower Rated Securities. The Fund invests in securities offering high current income which generally will be rated below investment grade by recognized rating agencies. Certain of these lower rated securities are regarded as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations and generally involve more credit risk than securities in higher rating categories. In addition, the trading market for lower rated securities may be less liquid than the market for higher-rated securities. 5. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class A Shares Amount Shares Amount ------- ----------- ------------ ----------- ------------ Shares sold ......................................... 2,776,755 $ 24,331,756 1,717,005 $ 13,101,290 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 596,642 5,169,476 578,375 4,247,799 ----------- ------------ ----------- ------------ 3,373,397 29,501,232 2,295,380 17,349,089 Shares repurchased .................................. (2,630,575) (22,779,736) (3,723,936) (28,123,632) ----------- ------------ ----------- ------------ Net increase (decrease) ............................. 742,822 $ 6,721,496 (1,428,556) $(10,774,543) ----------- ------------ ----------- ------------
18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class B Shares Amount Shares Amount ------- ----------- ------------ ----------- ------------ Shares sold ......................................... 3,309,644 $ 29,017,220 1,757,076 $ 13,136,120 Shares issued in connection with the reinvestment of: Dividends from net investment income .............. 307,591 2,663,895 329,652 2,418,231 ----------- ------------ ----------- ------------ 3,617,235 31,681,115 2,086,728 15,554,351 Shares repurchased ................................. (1,975,114) (17,078,385) (2,855,061) (21,157,055) ----------- ------------ ----------- ------------ Net increase (decrease) ............................ 1,642,121 $14,602,730 (768,333) $ (5,602,704) ----------- ------------ ----------- ------------ Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class C Shares Amount Shares Amount ------- ----------- ------------ ----------- ------------ Shares sold ...................................... 490,356 $ 4,353,871 231,080 $ 1,717,419 Shares issued in connection with the reinvestment of: Dividends from net investment income ........... 62,774 533,304 63,645 468,916 ----------- ------------ ----------- ------------ 553,130 4,887,175 294,725 2,186,335 Shares repurchased ............................... (325,690) (2,781,568) (531,837) (3,958,772) ----------- ------------ ----------- ------------ Net increase (decrease) .......................... 227,440 $ 2,105,607 (237,112) $ (1,772,437) ----------- ------------ ----------- ------------ Increase derived from capital shares transactions ... 2,612,383 $ 23,429,833 (2,434,001) $(18,149,684) =========== ============ =========== ============
6. Line of Credit. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected 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, 2000. 7. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000, the Fund had on loan securities having a market value of $19,840,795 collateralized by cash in the amount of $19,721,901 which was invested in a short-term instrument. The market value of the loaned securities is determined at the close of business on December 31, 2000. Any additional required collateral is requested from the borrower and delivered to the Fund subsequent to year end. 8. Concentration of Risk. The Fund had the following geographic concentrations in excess of 10% of its total net assets at December 31, 2000: United States 85.2%. The Fund pursues its objectives by investing in domestic and foreign securities. There are certain risks involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. These risks include those resulting from future adverse political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest High Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest High Income Fund (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 20 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes -------------- -------------- ---------------- -------------- 11,358,323.295 64,841.981 380,899.305 11,804,064.581 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Loomis, Sayles & Company, L.P. Voted For Voted Against Abstained Votes Total Votes -------------- -------------- ---------------- -------------- 11,368,400.425 81,435.009 354,229.147 11,804,064.581 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------- -------------- Graham T. Allison, Jr. 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer 50,354,056.572 1,888,625.633 52,242,682.205 21 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIALS.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 22 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 23 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. 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. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds 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 distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE - --------------------- PAID P.O. Box 8551 BROCKTON, MA PERMIT NO. 770 Boston, Massachusetts -------------- 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs HP56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Massachusetts Tax Free Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - -- those that appear undervalued relative to their earnings and assets -- revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST MASSACHUSETTS TAX FREE INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Massachusetts Tax Free 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 special 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 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9575 12/31/91 11148 10674 12/31/92 12159 11642 12/31/93 13667 13086 12/31/94 12660 12122 12/31/95 14918 14284 12/31/96 15401 14747 12/31/97 16836 16121 12/31/98 17663 16913 12/31/99 16935 16215 12/31/00 18501 17714 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST MASSACHUSETTS TAX FREE INCOME FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------- Class A (Inception 3/23/84) 1 Year 5 Years 10 Years Net Asset Value(1, 4) 9.27% 4.40% 6.34% With Maximum Sales Charge(2, 4) 4.60 3.50 5.88 - ------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1, 4) 8.59% 3.74% 3.65% With CDSC(3, 4) 3.59 3.41 3.65 - ------------------------------------------------------------------------------------------- Since Fund's Class B Comparative Performance 1 Year 5 Years 10 Years Inception Lehman Brothers Municipal Bond Index(5) 11.68% 5.84% 7.32% 5.75% Morningstar Muni Single State Long Avg.(6) 10.75 4.65 6.63 4.56 Lipper MA Municipal Debt Average(7) 11.53 4.74 6.87 4.69 - -------------------------------------------------------------------------------------------
These returns represent past performance. Share price and returns will vary and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Yields as of 12/31/00 - -------------------------------------------------------------------------------- Class A Class B SEC 30-day Yield8 4.76% 4.34% Taxable Equivalent Yield9 8.37 7.63 - -------------------------------------------------------------------------------- Notes to Charts (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 4.25%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. (4) Fund performance may have been increased by voluntary expense waivers, without which performance would have been lower. (5) Lehman Brothers Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. (6) Morningstar Muni Single State Long Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (7) Lipper Massachusetts Municipal Debt Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. (8) SEC yield is based on the Fund's net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. (9) Taxable equivalent yield is based on the maximum combined federal and MA income tax bracket of 43.13%. A portion of income may be subject to federal, state and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax. 2 NVEST MASSACHUSETTS TAX FREE INCOME FUND Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] James Welch Back Bay Advisors, L.P. Q. How did Nvest Massachusetts Tax Free Income Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Massachusetts Tax Free Income Fund Class A shares had a total return of 9.27% at net asset value, including $0.81 in reinvested dividends. The Fund's benchmark, Lehman Brothers Municipal Bond Index, returned 11.68% for the same period. A state-specific average of comparable municipal bond funds, Lipper Massachusetts Municipal Debt Average, provided a total return of 11.53% during the same period. The Fund lagged both its benchmark and the Lipper Average because its high-yield, lower rated bonds were adversely impacted during the closing months of the year when the national economy showed signs of slowing. The 30-day SEC yield for Nvest Massachusetts Tax Free Income Fund Class A shares was 4.76%, which is equivalent to a taxable yield of 8.37%, based on the maximum combined federal and Massachusetts state income tax rate of 43.13%. Q. What was the environment like for Massachusetts municipal bonds during the year? There were two contrasting periods. During the first six months of 2000, the Federal Reserve Board continued a program of increasing short-term interest rates in an effort to prevent the economy from overheating. Although rising interest rates typically mean falling bond prices, the overall environment for fixed-income investments remained surprisingly favorable. Inflation - a key determinant of bond market performance - remained under control as a result of the Fed's actions. During the second half of the year, however, the economy began to show signs of slowing, concerns about recession began to replace fears of inflation, and the Fed began to hint that it might cut interest rates. Despite these different economic environments, the Massachusetts municipal bond market did well during the year. A generally positive economic climate at the national level contributed to continued economic health in Massachusetts. The state's economic strength generated high tax revenues, increasing cash flows and stabilizing the credit quality of many municipalities. Only lower rated bonds (below BBB) came under pressure, as concerns about a possible recession targeted 3 NVEST MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- weaker credits. specifically, the Fund was hurt when Standard & Poor's downgraded Nichols College bonds to BB+. Q. Did supply and demand impact the tax-exempt market? Throughout the year, the supply of high-quality municipal bonds fell short of demand, supporting prices. Despite market and economic uncertainty at the national level, state and local governments continued to enjoy record budget surpluses. This enabled many municipalities to use cash to finance projects, which reduced the need to issue new debt. At the same time, demand for municipal bonds remained strong, as investors seeking refuge from a volatile stock market turned to high-quality, fixed-income investments. The wealth-creation mentality that dominated the past several years appeared to shift during the year to a concern for wealth preservation, as investors turned to high-quality municipal securities seeking competitive tax-free income, total return potential and relative stability. Q. What strategies did you use in managing the Fund? Early in 2000, when the Federal Reserve was actively raising rates, we adopted a defensive strategy - gradually shortening the Fund's average maturity to make it less sensitive to declining bond prices. In general, the shorter a bond's maturity, the lower the risk of price loss when interest rates rise. Conversely, long-term bonds have greater appreciation potential when interest rates fall. During the latter half of the year, when it appeared that further interest-rate increases were unlikely, we extended the Fund's maturity to lock in higher yields. Throughout the year, we took advantage of the Commonwealth's strong finances, focusing on bonds whose interest payments are derived from general state or municipal revenues, such as taxes. Credit quality played a major role in our strategy. As we added new positions, we emphasized higher quality bonds that we believe offer better relative value due to their high credit ratings and stable yield characteristics. After mid-year, we reduced the Fund's allocation to pre-refunded securities. (These are securities for which a bond issuer floats a second bond in order to pay off the first bond, lowering the borrowing costs.) In a rising interest rate environment, the relative price stability of these securities worked to the Fund's advantage, but as the climate changed, we shifted assets into higher yielding issues. At 4 NVEST MASSACHUSETTS TAX FREE INCOME FUND - -------------------------------------------------------------------------------- Credit Quality Composition -- 12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] AAA 55.0% A 10.9% BBB 8.6% BB 5.4% Not Rated 20.1% Average Credit Quality=A Average Portfolio Maturity=18.9 Quality is based on ratings provided by Standard & Poor's. Portfolio holdings and asset allocation will vary. the same time, we reduced the Fund's position in the healthcare sector, which continues to experience financial stress, and the housing market, which is beginning to feel the effects of an economic slowdown. Q. What is your current outlook? On the national level, we believe inflation will remain low, which would be a positive for fixed-income securities in general. Although Massachusetts cannot help but be touched by the slower national growth rate, we also believe its municipalities are on solid financial ground, in part because of the diversity of the local economy, which should help the Commonwealth maintain its high overall credit rating. On other fronts, we expect continued stock market volatility over the next several months, reflecting uncertainties that always accompany a change of administration in Washington. This should continue to make high-quality municipal bonds attractive to investors. As always, we are mindful of the Fund's primary goal - a high level of tax-free income for Massachusetts residents. This portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Massachusetts Tax Free Income Fund may invest a portion of assets in lower-rated bonds that offer higher yields in return for more risk. Some income may be subject to federal and Massachusetts state taxes. Capital gains are fully taxable. Investors may be subject to the alternative minimum tax (AMT). This Fund is non-diversified, meaning it concentrates its assets in fewer securities, which can significantly affect your fund's performance and the value of your investment. See the Fund's prospectus for details. The portfolio may also include U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Tax Exempt Obligations -- 98.5% of Total Net Assets
Ratings (c) (unaudited) ------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------------- Guam Airport Authority -- 1.6% $ 1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/1/2010 ............................................... -- BBB $ 1,599,990 ------------ Massachusetts Education Loan Authority Revenue -- 0.8% 755,000 Educational Loan Revenue Bond, Issue D, Series A, 7.250%, 1/01/2009, (MBIA insured) ............................... Aaa AAA 776,351 ------------ Massachusetts Municipal Wholesale Electric Co. -- 4.2% 1,500,000 Wholesale Electric, 6.750%, 7/01/2008 ........................... Baa2 BBB+ 1,571,340 2,500,000 Wholesale Electric, 6.750%, 7/01/2011 ........................... Baa2 BBB+ 2,609,300 ------------ 4,180,640 ------------ Massachusetts State -- 4.7% 4,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA insured) ... Aaa AAA 4,716,640 ------------ Massachusetts State Development Finance Agency -- 10.5% 3,055,000 Concord-Assabet Family Services, 5.900%, 11/01/2018 ............. Ba2 -- 2,838,523 3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 ................ -- -- 2,738,700 2,000,000 Ogden Haverhill A Rmk, 6.700%, 12/01/2014 ....................... -- BBB 2,067,060 3,000,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/1/2019 ..... A3 -- 2,944,230 ------------ 10,588,513 ------------ Massachusetts State Health & Education Facility Authority -- 27.9% 1,500,000 Beverly Hospital Rib, 6.370%, 6/18/2020, (MBIA insured)(d) ...... Aaa AAA 1,618,080 3,000,000 Boston University Rib, Series L, 8.199%, 10/01/2031, (MBIA insured)(d) ........................ Aaa AAA 3,201,420 1,250,000 Charlton Memorial Hospital, Series B, Pre-Refunded, 7.250%, 7/01/2013 ............................................ A1 A 1,294,212 3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 ..................... A1 A 3,048,480 1,000,000 Faulkner Hospital, Series C, Pre-Refunded, 6.000%, 7/1/2013 ............................... Baa1 -- 1,061,660 3,000,000 Harvard University, Series N, 6.250%, 4/01/2020 ................. Aaa AAA 3,496,500 2,000,000 Harvard University, Series W, 6.000%, 7/01/2035 ................. Aaa AAA 2,174,840 1,400,000 Medical Center of Central Mass., Class A, Pre-Refunded, 7.000%, 7/01/2012 ............................................ Baa1 AAA 1,448,188 1,000,000 New England Baptist Hospital, Series B, Pre-Refunded, 7.300%, 7/01/2011 ............................................ Baa3 AAA 1,035,610 1,220,000 New England Deaconess Hospital, Series D, Pre-Refunded, 6.875%, 4/01/2022, (AMBAC insured) ........................... Aaa AAA 1,285,209 1,190,000 New England Medical Center, Series F, 6.625%, 7/01/2025, (FGIC insured) ............................... Aaa AAA 1,242,896 6,000,000 Nichols College , Series C, 6.000%, 10/01/2017 .................. -- BB+ 5,385,300 2,350,000 Saints Memorial Medical Center, Series A, 6.000%, 10/1/2023 ..... Ba2 -- 1,781,558 ------------ 28,073,953 ------------ Massachusetts State Housing Finance Agency -- 7.9% 1,000,000 Residential Development, Series A, 6.900%, 11/15/2024, (FNMA collateralized) .................... Aaa AAA 1,042,010
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c) (unaudited) ------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------------- Massachusetts State Housing Finance Agency -- continued $ 2,500,000 Residential Development, Series E, 6.250%, 11/15/2012, (FNMA collateralized) ..................... Aaa AAA $ 2,611,325 1,300,000 Residential Development, Series I, 6.900%, 11/15/2025, (FNMA collateralized) ..................... Aaa AAA 1,372,956 2,815,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 ............ Aa3 A+ 2,909,528 -------------- 7,935,819 -------------- Massachusetts State Industrial Finance Agency -- 7.3% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 ............ -- AAA 2,205,860 5,000,000 Newton Group Properties LLC Project, 8.000%, 9/01/2027 .......... -- -- 5,151,550 -------------- 7,357,410 -------------- Massachusetts State Turnpike Authority -- 6.8% 6,000,000 Metropolitan Highway System, Capital Appreciation, Senior Series C, Zero Coupon, 1/01/2016, (MBIA insured) ....... Aaa AAA 2,820,120 2,300,000 Metropolitan Highway System, Subordinated Series A, 4.750%, 1/01/2034 ............................................. Aaa AAA 2,113,838 2,000,000 Metropolitan Highway System, Subordinated, Series A, 5.000%, 1/01/2039 ............................................. Aaa AAA 1,911,720 -------------- 6,845,678 -------------- Massachusetts State Water Resources Authority -- 8.4% 3,240,000 Series A, (FGIC insured), 6.500%, 7/15/2019 ..................... Aaa AAA 3,853,267 4,700,000 Series B, 5.000%, 12/01/2025 .................................... Aaa AAA 4,562,948 -------------- 8,416,215 -------------- New England Education Loan Marketing -- 3.3% 3,000,000 Student Loan Revenue Bond, Sub-Issue H, 6.900%, 11/1/2009 ....... A3 -- 3,350,250 -------------- Plymouth County, Massachusetts -- 1.4% 1,500,000 Correctional Facility Project, Certificates of Participation, 5.000%, 4/01/2022 ............................................. -- AAA 1,455,945 -------------- Puerto Rico Commonwealth Aqueduct & Sewer Authority -- 4.7% 3,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 ................... Baa1 A 3,481,890 970,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 .................. Aaa AAA 1,219,630 -------------- 4,701,520 -------------- Puerto Rico Commwealth Highway Trust -- 2.0% 2,000,000 Series, 5.000%, 7/01/2028 ....................................... Aaa AAA 1,976,420 -------------- Puerto Rico Electric Power Authority -- 3.0% 3,000,000 Series HH, 5.250%, 7/01/2029 .................................... Aaa AAA 3,038,640 -------------- Rail Connections, Inc. -- 0.7% 850,000 Rail Connections, Inc., Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2016 ....... Baa3 BBB- 322,244
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c) (unaudited) ------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - --------------------------------------------------------------------------------------------------------------------- Rail Connections, Inc. -- continued $ 1,000,000 Rail Connections, Inc., Capital Appreciation, Series B, Mass Revenue Route 128 Parking, Zero Coupon, 7/01/2017 ....... Baa3 BBB- $ 350,460 ------------ 672,704 ------------ US Virgin Islands -- 3.3% 3,045,000 Public Finance Authority, Pre-Refunded Revenue Bond, 7.250%, 10/01/2018 ............................................ -- AAA 3,269,142 ------------ Total Tax Exempt Obligations (Identified Cost $96,798,815) ...... 98,955,830 ------------ Total Investments -- 98.5% (Identified Cost $96,798,815) (b) .... 98,955,830 Other assets less liabilities ................................... 1,544,063 ------------ Total Net Assets -- 100% ........................................ $100,499,893 ============ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost of $96,798,815 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 ...................... $ 3,579,492 ------------ Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ...................... (1,422,477) ------------ Net unrealized appreciation........................................... $ 2,157,015 ============ At December 31, 2000, the fund had a capital loss carry forward of $2,704,754 of which $2,588,254 expires on December 31, 2007 and $116,500 expires on December 31, 2008. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's advisor independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Inverse floating rate security. The rate disclosed is as of December 31, 2000. Legend of Portfolio Abbreviations: AMBAC -- American Municipal Bond Assurance Corp. FGIC -- Financial Guarantee Insurance Company FNMA -- Federal National Mortgage Association MBIA -- Municipal Bond Investors Assurance Corp. Rib -- Residual interest bond
8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified Cost $96,798,815) ........... $ 98,955,830 Receivable for: Fund shares sold .......................................... 90,577 Accrued interest .......................................... 1,735,029 ------------ 100,781,436 LIABILITIES Payable for: Fund shares redeemed ...................................... $ 62,327 Dividends declared ........................................ 31,993 Custodial Bank ............................................ 19,848 Accrued expenses: Transfer agent ............................................ 19,200 Management fees ........................................... 90,800 Deferred trustees' fees ................................... 17,554 Accounting and administrative ............................. 3,045 Other expenses ............................................ 36,776 ------------- 281,543 ------------ NET ASSETS ...................................................... $100,499,893 ============ Net Assets consist of: Paid in capital ........................................... $101,742,171 Undistributed net investment income ....................... 41,608 Accumulated net realized gain (loss) ...................... (3,440,901) Unrealized appreciation (depreciation) on investments - net 2,157,015 ------------ NET ASSETS ...................................................... $100,499,893 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($91,784,565 / 5,714,038 shares of beneficial interest) ...... $ 16.06 ============ Offering price per share (100 / 95.75 of $16.06) ............. $ 16.77* ============ Net asset value and offering price of Class B shares ($8,715,328 / 543,786 shares of beneficial interest) ......... $ 16.03** ============
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Interest .................................................... $6,351,153 ---------- Expenses Management fees .......................................... $ 597,512 Service and distribution fees -- Class A ................. 319,292 Service and distribution fees -- Class B ................. 84,737 Trustees' fees and expenses .............................. 10,313 Accounting and administrative ............................ 34,415 Custodian ................................................ 77,217 Transfer agent ........................................... 228,323 Audit and tax services ................................... 49,590 Legal .................................................... 1,327 Printing ................................................. 24,424 Registration ............................................. 9,860 Miscellaneous ............................................ 3,805 ---------- Total expenses .............................................. 1,440,815 Less expenses waived by the investment adviser and subadviser (256,822) 1,183,993 ---------- ---------- Net investment income ....................................... 5,167,160 ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ........................................ 478,509 Written options - net .................................... 24,062 Futures contracts - net .................................. 6,632 ---------- Net realized gain (loss) on investments, written options and futures contracts .................. 509,203 Unrealized appreciation (depreciation) on: Investments - net ........................................ 3,074,461 ---------- Net gain (loss) on investment transactions .................. 3,583,664 ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......... $8,750,824 ==========
10 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ........................................................ $ 5,857,566 $ 5,167,160 Net realized gain (loss) on investments, written options and futures contracts (1,501,419) 509,203 Net unrealized appreciation (depreciation) on investments, written options and futures contracts ..................................................... (9,260,469) 3,074,461 ------------- ------------- Increase (decrease) in net assets from operations ............................ (4,904,322) 8,750,824 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................................................... (5,480,730) (4,741,935) Class B ................................................................... (397,448) (386,686) Net realized gain on investments Class A ................................................................... (216,698) 0 Class B ................................................................... (19,179) 0 In excess of net realized gain on investments Class A ................................................................... (7,135) 0 Class B ................................................................... (631) 0 ------------- ------------- (6,121,821) (5,128,621) ------------- ------------- Increase (decrease) in net assets derived from capital share transactions ...................................... (5,765,846) (9,266,215) ------------- ------------- Total increase (decrease) in net assets ......................................... (16,791,989) (5,644,012) NET ASSETS Beginning of the year ........................................................ 122,935,894 106,143,905 ------------- ------------- End of the year .............................................................. $ 106,143,905 $ 100,499,893 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year .............................................................. $ (30,379) $ 41,608 ============= =============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ---------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year $ 16.85 $ 16.50 $ 17.13 $ 17.02 $ 15.48 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ................. 0.87 0.86 0.86 0.82 0.82 Net Realized and Unrealized Gain (Loss) on Investments ..................... (0.35) 0.63 (0.04) (1.50) 0.57 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...... 0.52 1.49 0.82 (0.68) 1.39 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income .. (0.87) (0.86) (0.85) (0.83) (0.81) Distributions From Net Realized Gains . 0.00 0.00 (0.08) (0.03) 0.00 Distributions in Excess of Net Realized Gains ..................... 0.00 0.00 0.00 0.00 (b) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions ................... (0.87) (0.86) (0.93) (0.86) (0.81) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ...... $ 16.50 $ 17.13 $ 17.02 $ 15.48 $ 16.06 =========== =========== =========== =========== =========== Total Return (%) (a) .................. 3.2 9.3 4.9 (4.1) 9.3 Ratio of Operating Expenses to Average Net Assets (%) (c) ................. 0.90 1.00 1.00 1.00 1.13 Ratio of Net Investment Income to Average Net Assets (%) ............. 5.31 5.17 4.93 5.02 5.24 Portfolio Turnover Rate (%) ........... 140 132 125 73 68 Net Assets, End of the Year (000) ..... $ 112,934 $ 113,869 $ 113,910 $ 97,270 $ 91,785
(a) A sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ---------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year $ 16.82 $ 16.47 $ 17.09 $ 16.98 $ 15.45 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ................. 0.75 0.76 0.74 0.71 0.71 Net Realized and Unrealized Gain (Loss) on Investments ..................... (0.34) 0.62 (0.03) (1.49) 0.58 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...... 0.41 1.38 0.71 (0.78) 1.29 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income .. (0.76) (0.76) (0.74) (0.72) (0.71) Distributions From Net Realized Gains . 0.00 0.00 (0.08) (0.03) 0.00 Distributions in Excess of Net Realized Gains ..................... 0.00 0.00 0.00 0.00 (b) 0.00 ----------- ----------- ----------- ----------- ----------- Total Distributions ................... (0.76) (0.76) (0.82) (0.75) (0.71) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ...... $ 16.47 $ 17.09 $ 16.98 $ 15.45 $ 16.03 =========== =========== =========== =========== =========== Total Return (%) (a) .................. 2.6 8.6 4.2 (4.7) 8.6 Ratio of Operating Expenses to Average Net Assets (%) (c) ................. 1.55 1.65 1.65 1.65 1.78 Ratio of Net Investment Income to Average Net Assets (%) ............. 4.66 4.52 4.28 4.37 4.59 Portfolio Turnover Rate (%) ........... 140 132 125 73 68 Net Assets, End of the Year (000) ..... $ 7,442 $ 7,399 $ 9,026 $ 8,874 $ 8,715
(a) A contingent deferrred sales charge is not reflected in total return calculations. (b) Amount is less than $0.01. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements expense ratios would have been higher. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Massachusetts Tax Free Income Fund (the "Fund") is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and Massachusetts personal income tax. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers both Class A and Class B shares. Class A shares are sold with a maximum front end sales charge of 4.25%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Expenses of the Fund are borne pro rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund was liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees, which service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser under the supervision of the Fund's Trustees. b. Security Transactions and Related Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income for the Fund is increased by the accretion of original issue 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. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had 14 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not effect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of the adoption of this principle will not be material to the financial statements. c. Options. The Fund uses options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. d. Interest Rate Futures Contracts. The Fund may purchase and sell interest rate futures contracts to hedge against changes in the values of securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The potential risk to the Fund is that the change in value of futures contracts primarily corresponds with the value of underlying instruments which may not correspond to the change in the value of the hedged instruments. In addition, there is a risk that the Fund may not be able to close out its futures positions due to an illiquid secondary market. e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 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 of market discount for book and tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $66,938,247 and $76,646,413, respectively. Transactions in written options for the year ended December 31, 2000 are summarized as follows: Written Options ----------------------------- Number of Premiums Contracts Received ----------- ----------- Open at December 31, 1999 0 $ 0 Contracts opened (300) (40,988) Contracts closed 300 40,988 ----------- ----------- Open at December 31, 2000 0 $ 0 =========== =========== 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.60% of the first $100 million of the Fund's average daily net assets and 0.50% of such assets in excess of $100 million reduced by payments to the Fund's investment subadviser, Back Bay Advisors L.P. ("Back Bay"), at the rate of 0.30% of the first $100 million of the Fund's average daily net assets and 0.25% of such assets in excess of $100 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly-owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ------------ Nvest Management $ 298,756 Back Bay 298,756 ---------------- $ 597,512 ================ 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 The effective management fee before the expense limitation for the year ended December 31, 2000 was 0.60%. As a result of the expense limitations as described in Note 4, the effective management fee for the year ended December 31, 2000 was 0.34%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $34,415, and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted Service and Distribution Plans relating to the Fund's Class A shares and the Fund's Class B shares (the "Plans"). Under the Plans, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A and Class B shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A and Class B shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $228,066 and $21,184 in service fees for Class A and Class B shares, respectively. Also under the Plans, the Fund pays Nvest Funds L.P. 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 and 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and reimbursement for expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class A and Class B shares, respectively. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $91,226 and $63,553 in distribution fees for Class A and Class B shares, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000, amounted to $67,455. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $202,124 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (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 the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Expense Limitations. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to the extent necessary to limit the Fund's expenses to the annual rates of 1.20% and 1.85% of the average net assets of the Fund's Class A and B shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 1.20% and 1.85% of the average net assets of the Fund's Class A and Class B shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. From May 1, 1999 to April 30, 2000 expenses were limited to 1.00% of Class A average net assets and 1.65% of Class B average net assets. From September 1, 1996, Back Bay and Nvest Management voluntarily agreed to reduce management fees in order to limit the Fund's expenses to an annual rate of 0.85% of the Fund's Class A average daily net assets and 1.50% of the Fund's Class B average daily net assets. As a result of the Fund's expenses exceeding the expense limitations during the year ended December 31, 2000, Back Bay reduced its subadvisory fee by $128,411 and Nvest Management reduced its advisory fee by $128,411. 5. Concentration of Credit. The Fund primarily invests in debt obligations issued by the Commonwealth of Massachusetts and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of Massachusetts municipal securities than is a comparable municipal bond fund that is not so concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of Massachusetts municipal securities to meet their financial obligations. The Fund had the following concentrations by revenue source, in excess of 10% on December 31, 2000 as a percentage of the Fund's total net assets: Utilities (20.2%), Health Care (19.3%), Education ( 18.3%), and Industrial Development/Pollution Control (12.3%). The Fund had investments in securities of issuers insured by Municipal Bond Investors Assurance Corporation (MBIA) which aggregate 14.5% of its total net assets at December 31, 2000. 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 6. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B. Transactions in capital shares were as follows:
Year Ended December 31, --------------------------------------------------------- 1999 2000 --------------------------- -------------------------- Class A Shares Amount Shares Amount -------- ----------- ------------ ---------- ------------ Shares sold ......................................... 663,953 $ 10,865,107 408,646 $ 6,382,632 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 239,584 3,917,370 217,950 3,409,985 Distributions from net realized gain ............. 11,207 178,976 0 0 ----------- ------------ ---------- ------------ 914,744 14,961,453 626,596 9,792,617 Shares repurchased .................................. (1,324,332) (21,432,568) (1,195,990) (18,590,931) ----------- ------------ ---------- ------------ Net increase (decrease) ............................. (409,588) $ (6,471,115) (569,394) $ (8,798,314) ----------- ------------ ---------- ------------ Year Ended December 31, --------------------------------------------------------- 1999 2000 --------------------------- -------------------------- Class B Shares Amount Shares Amount -------- ----------- ------------ ---------- ------------ Shares sold ...................................... 129,045 $ 2,117,061 79,931 $ 1,248,728 Shares issued in connection with the reinvestment of: Dividends from net investment income .......... 17,640 287,560 15,136 236,083 Distributions from net realized gain .......... 1,005 16,013 0 0 ----------- ------------ ---------- ------------ 147,690 2,420,634 95,067 1,484,811 Shares repurchased ............................... (104,697) (1,715,365) (125,688) (1,952,712) ----------- ------------ ---------- ------------ Net increase (decrease) .......................... 42,993 $ 705,269 (30,621) $ (467,901) ----------- ------------ ---------- ------------ Increase (decrease) derived from capital share transactions ................................ (366,595) $ (5,765,846) (600,015) $ (9,266,215) =========== ============ ========== ============
19 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Massachusetts Tax Free Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Massachusetts Tax Free Income Fund (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 20 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- ---------------- ------------------ ---------------- 3,820,567.567 22,920.860 128,917.263 3,972,405.690 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- ---------------- ------------------- --------------- 3,797,044.150 46,930.956 128,430.584 3,972,405.690 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------- -------------- Graham T. Allison, Jr 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer 50,354,056.572 1,888,625.633 52,242,682.205 21 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and return on Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 22 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 23 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return -- The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions -- Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions -- Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Yield -- The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission. Maturity -- Refers to the period of time before principal repayment on a bond is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. Duration -- A measure, stated in years, of a bond's sensitivity to interest rates. Duration allows you to compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a bond is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a bond with a duration of 4 years should rise in value 4%. Conversely, the bond should decline 4% in value if interest rates rise 1%. Treasuries -- Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). Municipal Bond -- A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and, in most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. A small portion of income may be subject to federal and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by theFund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE PAID - --------------------- BROCKTON, MA P.O. Box 8551 PERMIT NO. 770 -------------- Boston, Massachusetts 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs MA56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Short Term Corporate Income Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST SHORT TERM CORPORATE INCOME FUND Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Short Term Corporate Income Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special 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 has no expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 10/18/91 10000 9700 12/31/91 10113 9809 12/31/92 10613 10295 12/31/93 11048 10716 12/31/94 11139 10805 12/31/95 12097 11734 12/31/96 12802 12418 12/31/97 13595 13187 12/31/98 14144 13719 12/31/99 14407 13975 12/31/00 15367 14906 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST SHORT TERM CORPORATE INCOME FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Class A (Inception 10/18/91) 1 Year 5 Years Since Inception Net Asset Value(1, 4) 6.68% 4.91% 4.78% With Maximum Sales Charge(2, 4) 3.43 4.26 4.44 - --------------------------------------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1, 4) 5.90% 4.12% 3.88% With CDSC(3, 4) 0.90 3.79 3.88 - --------------------------------------------------------------------------------------------------------------- Class C (Inception 12/7/98) 1 Year Since Inception Net Asset Value(1, 4) 5.90% 3.54% With Maximum Sales Charge and CDSC(3, 4) 3.86 3.07 - --------------------------------------------------------------------------------------------------------------- Since Since Since Fund's Fund's Fund's Class A Class B Class C Comparative Performance 1 Year 5 Years Inception Inception Inception LB Mutual Fund Short (1-5) Inv. Grade Debt Index(5) 8.48% 6.16% 6.92% 6.24% 5.44% Morningstar Short Term Bond Average(6) 8.14 5.43 5.86 5.26 5.11 Lipper Short Term Investment Grade Avg.(7) 7.36 5.38 5.77 5.22 5.12 - ----------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 3.00%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("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. Class C shares for accounts established on or after December 1, 2000, are subject to a 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional sales charge. (4) The adviser and subadviser waived certain fees and expenses during the period indicated and the Fund's average annual total returns and yields would have been lower had these not been waived. (5) Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index is an unmanaged index including all publicly issued, fixed-rate, nonconvertible investment-grade domestic corporate debt with maturities of 1 to 5 years. You may not invest directly in an index. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. (6) Morningstar Short Term Bond Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. (7) Lipper Short Term Investment Grade Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class A since-inception return is calculated from 10/31/91. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 12/31/98. 2 NVEST SHORT TERM CORPORATE INCOME FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Scott Nicholson Richard Raczkowski Back Bay Advisors, L.P. Q. How did Nvest Short Term Corporate Income Fund perform during 2000? Nvest Short Term Corporate Income Fund provided a total return of 6.68% based on the net asset value of Class A shares, including $0.44 in reinvested dividends. For the same period, the Fund's benchmark, Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index, returned 8.48%. The Fund lagged its benchmark for the past year, primarily as a result of reversals experienced by a few of its holdings. Moreover, many of the funds in the Index place a greater emphasis on U.S. government and agency securities than this Fund. Corporate bonds, which Nvest Short Term Corporate Income Fund emphasizes, did not perform as well as government securities during the year. The 30-day SEC yield on Class A shares of Nvest Short Term Corporate Income Fund was 6.07% as of December 31, 2000. Your yield depends on when you bought your shares and what you paid for them. Q. What was the investment environment like during the year? In general, 2000 was a mixed year for bonds. The government used $30 billion in budget surpluses to buy back long-term Treasuries, and had little need to issue new debt. Diminished supply helped keep long-term Treasury rates down and prices up, in spite of three interest-rate increases by the Federal Reserve Board during the first half of the year. The Fed's tight monetary policy pushed short-term interest rates higher in the first half of the year, depressing prices and widening the difference in yield between corporate and Treasury bonds. The Fed's rate increases were designed to slow economic growth and dampen inflationary pressures. Early in 2000, the economy was fairly strong and confidence remained high. Consumers were spending above their means buoyed by a high employment rate and the so-called wealth effect resulting from high stock prices. Although the tech-heavy Nasdaq peaked in March, and the equity market began to fade, stock prices didn't really plunge until the fourth quarter, when companies began to announce earnings that were below analysts' expectations. 3 NVEST SHORT TERM CORPORATE INCOME FUND - -------------------------------------------------------------------------------- A combination of generally rising interest rates and a slower economy also put a premium on credit quality. The intense level of capital spending that improved productivity in 2000 has kept a lid on wage inflation, but many companies used debt rather than equity to finance spending, and not all businesses have been able to raise prices. For example, automobile companies found that customers wait for price incentives before they buy. As a result, some companies that once were financially strong have seen their credit ratings drop. Q. How did you adjust Nvest Short Term Corporate Income Fund's portfolio in light of these events? We made a series of adjustments. We entered the year with an average duration of just over two years, but subsequently reduced it to about 1.7 years during the first half of the year. (Duration is a measure of the sensitivity of a fixed-income security to changing interest rates. Bonds with shorter durations are less sensitive, and vice versa.) As it became apparent that the economy was slowing rapidly in the latter half of the year, we started lengthening the portfolio's duration again, in anticipation of declining interest rates. The Fund ended the year at about where it started, with an average effective duration of just over two years. We also increased the average credit quality of the portfolio in the second half of the year, in anticipation of a slower economy and potential downgrades in credit ratings. In addition to emphasizing U.S. government agencies, mortgage- and asset-backed securities, we shifted the Fund's emphasis to industries we believed would fare better in a recession. These included defense companies like Raytheon, which we expect to benefit from the U.S. government's projected increase in defense spending over the next several years, and utilities, which are relatively untouched by economic slowdowns. Ironically, our utility investments included a small portion in Southern California Edison, a major utility facing financial difficulties as a result of deregulation. Q. Which investments hurt the Fund's performance? The holding that proved most difficult for the Fund last year was FINOVA Capital Corp., a financial services company and one of the Fund's larger holdings. After we purchased the bonds in 1999, the company announced some credit losses and its rating was downgraded. Late in the year we decided it was in the Fund's best interest to sell the bonds at a substantial loss. 4 NVEST SHORT TERM CORPORATE INCOME FUND - -------------------------------------------------------------------------------- Portfolio Mix -- 12/31/00 [THE FOLLOWING TBALE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Corporate & Other Bonds & Notes 73.3% Federal Agencies 21.0% U.S. Government 4.8% Cash 0.9% Portfolio holdings and asset allocation will vary. Q. What is your current outlook? Although the U.S. is now clearly in a period of slower growth, the Federal Reserve Board recently signaled its concern about the rapid pace of the deceleration by announcing a 0.5% cut in short-term rates. The move put Treasury yields below the levels that had existed before the Fed's initial rate increase in June of 1999 and brought buyers back into the bond market. However, the risk going forward is that the economy could slow dramatically. We have a new administration, the stock market seems hesitant, and consumers lack confidence. We are concerned that current bond prices may already anticipate good news to come, and investors could be disappointed in the Fed's future actions. Overall, however, our outlook is positive. We expect interest rates to come down further and the spread (difference in yields) between corporate and government securities to narrow. After last year's difficulties, we look for strong performance for corporate bonds and for Nvest Short Term Corporate Income Fund. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Short Term Corporate Income Fund invests primarily in short-term corporate securities, including lower rated bonds that may offer higher yields in return for more risk and mortgage securities that are subject to prepayment risk. The Fund may also invest in foreign and emerging market securities which have special risks. It may also invest in securities issued by the U.S. government and Treasury securities; although the U.S. government guarantees such securities if held to maturity, mutual funds that invest in these securities are not guaranteed. These risks affect your investment's value. See the Fund's prospectus for details. Frequent portfolio turnover may increase your risk of greater tax liability, which could lower your return from this Fund. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 98.7% of Total Net Assets
Ratings (c) (unaudited) ------------------ Principal Standard Amount Description Moody's & Poor's Value (a) - ----------------------------------------------------------------------------------------------------------------- Aerospace/Defense -- 2.4% $ 500,000 Raytheon Co., 6.300%, 3/15/2005 .............................. Baa2 BBB- $ 495,337 1,000,000 United Technologies Corp., 6.625%, 11/15/2004 ................ A2 A+ 1,020,063 ------------ 1,515,400 ------------ Asset Backed -- 7.3% 1,500,000 AmeriCredit Automobile, 7.150%, 8/5/2014 ..................... Aaa AAA 1,520,625 1,000,000 CIT Equipment Collateral Trust, 6.840%, 6/20/2004 ............ Aaa AAA 1,013,538 2,000,000 WFS Financial Owner Trust, 7.750%, 11/20/2004 ................ Aaa AAA 2,049,300 ------------ 4,583,463 ------------ Banks -- 7.5% 1,500,000 Bank of America Corp., 7.875%, 5/16/2005 ..................... Aa2 A+ 1,584,656 1,000,000 FleetBoston Financial Corp., 7.250%, 9/15/2005 ............... A2 A 1,036,393 2,000,000 Wells Fargo Co., 7.200%, 5/01/2003 ........................... Aa2 A+ 2,049,088 ------------ 4,670,137 ------------ Broadcast Media -- 1.6% 1,000,000 Continental Cablevision, Inc., 8.500%, 9/15/2001 ............. A3 A 1,010,950 ------------ Building & Related -- 1.6% 1,000,000 Cemex SA, 144A, 8.625%, 7/18/2003 ............................ Ba1 BBB- 1,006,250 ------------ Computer Software & Services -- 1.6% 1,000,000 Sun Microsystems, Inc., 7.000%, 8/15/2002 .................... Baa1 BBB+ 1,008,997 ------------ Consumer Products -- 1.6% 1,000,000 Unilever Corp., 6.750%, 11/01/2003 ........................... A1 A+ 1,018,749 ------------ Electric Utilities -- 10.1% 2,500,000 Houston Lighting & Power Co., 8.150%, 5/01/2002 .............. A3 BBB+ 2,560,460 1,329,427 Kansas Gas & Electric Co., 6.760%, 9/29/2003 ................. Ba2 BB- 1,305,037 1,000,000 Keyspan Corp., 7.250%, 11/15/2005 ............................ A3 A 1,040,552 575,000 Sempra Energy, 6.950%, 12/01/2005 ............................ A2 A 563,077 1,000,000 Southern California Edison Co., 7.200%, 11/03/2003 ........... A2 A 858,330 ------------ 6,327,456 ------------ Federal Agencies -- 21.0% 1,500,000 Federal Home Loan Mortgage Corp., 7.350%, 2/28/2003 .......... Aaa AAA 1,502,250 1,000,000 Federal Home Loan Mortgage Corp., 7.375%, 5/15/2003 .......... Aaa AAA 1,038,590 1,806,160 Federal Home Loan Mortgage Corp., 7.500%, 8/1/2009 ........... Aaa AAA 1,850,176 1,371,016 Federal Home Loan Mortgage Corp., 7.605%, 10/15/2023 (e) ...... Aaa AAA 1,374,444 422,923 Federal Home Loan Mortgage Corp., 7.770%, 12/1/2022 (d) ....... Aaa AAA 426,624 410,977 Federal Home Loan Mortgage Corp., 8.320%, 3/1/2025 (d) ........ Aaa AAA 418,748 179,185 Federal Home Loan Mortgage Corp., 8.570%, 12/1/2025 (d) ....... Aaa AAA 182,012 2,540,036 Federal National Mortgage Association, 6.500%, 7/1/14 ......... Aaa AAA 2,539,223 290,293 Federal National Mortgage Association, 6.550%, 9/1/2023 (d) ... Aaa AAA 284,897 591,878 Federal National Mortgage Association, 6.870%, 1/1/2020 (d) ... Aaa AAA 592,618 215,150 Federal National Mortgage Association, 7.000%, 6/1/2019 (d) ... Aaa AAA 215,098 1,000,000 Federal National Mortgage Association, 7.300%, 7/19/05 ........ Aaa AAA 1,022,500
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) ------------------ Principal Standard Amount Description Moody's & Poor's Value (a) - ----------------------------------------------------------------------------------------------------------------- Federal Agencies -- continued $ 186,607 Federal National Mortgage Association, 7.920%, 5/1/2020 (d) ... Aaa AAA $ 187,478 131,517 Federal National Mortgage Association, 8.010%, 8/1/2017 (d) ... Aaa AAA 131,705 732,461 Federal National Mortgage Association, 8.040%, 1/1/2024 (d) ... Aaa AAA 750,545 311,408 Federal National Mortgage Association, 8.070%, 5/1/2025 (d) ... Aaa AAA 313,566 290,043 Federal National Mortgage Association, 8.400%, 7/1/2023 (d) ... Aaa AAA 293,715 ------------ 13,124,189 ------------ Finance -- 13.3% 1,000,000 Boeing Capital Corp., 7.100%, 9/27/2005 ...................... A2 AA- 1,042,386 1,000,000 Conseco, Inc., 7.600%, 6/21/2001 ............................. B1 BB- 970,000 1,000,000 Daimler Chrysler North America Holding, 7.125%, 4/10/2003 .... A2 A 1,002,703 1,200,000 Ford Motor Credit Co., 7.058%, 7/16/2002 (e) ................. A2 A 1,200,642 1,000,000 Ford Motor Credit Co., 7.500%, 6/15/2003 ..................... A2 A 1,021,491 1,500,000 General Motors Acceptance Corp., 7.625%, 6/15/2004 ........... A2 A 1,541,805 1,500,000 Lehman Brothers Holdings, 7.750%, 1/15/2005 .................. A2 A 1,551,163 ------------ 8,330,190 ------------ Financial Services -- 3.3% 1,000,000 General Electric Capital Corp., Medium Term Note, 6.750%, 9/11/2003 ............................................. Aaa AAA 1,019,525 1,000,000 USAA Capital Corp., 144A, 7.410%, 6/30/2003 .................. Aa1 AAA 1,028,620 ------------ 2,048,145 ------------ Food & Beverages -- 1.6% 1,000,000 Aramark Services, Inc., 6.750%, 8/01/2004 .................... Baa3 BBB- 970,119 ------------- Foods -- 0.8% 500,000 Conagra, Inc., 5.500%, 10/15/2002 ............................ Baa1 BBB+ 494,980 ------------- Machinery -- 3.2% 2,000,000 John Deere Capital Corp., 7.000%, 10/15/2002 ................. A2 A+ 2,027,630 ------------- Manufacturing-Diversified -- 1.7% 1,000,000 Honeywell International, Inc., 6.875%, 10/03/2005 ............ A2 A 1,035,236 ------------- Paper & Forest Products -- 2.4% 1,500,000 International Paper Co., 7.603%, 7/08/2002 (e) ............... Baa1 BBB+ 1,502,940 ------------- Retail-Department Store -- 1.7% 1,000,000 Federated Department Stores, Inc., 8.500%, 6/15/2003 ......... Baa1 BBB+ 1,029,566 ------------- Retail-Food & Drug -- 2.0% 1,200,000 Fred Meyer, Inc., 7.375%, 3/01/2005 .......................... Baa3 BBB- 1,239,378 ------------- Telecommunications -- 9.3% 1,000,000 Cox Communications, Inc., 6.875%, 6/15/2005 .................. Baa2 BBB 1,004,413 1,300,000 Deutsche Telekom International Finance BV, 7.750%, 6/15/2005 . A2 A- 1,327,451 1,000,000 Koninklijke KPN NV, 7.500%, 10/01/2005 ....................... A3 A- 974,399
See accompanying notes to financial statements. 7
Ratings (c) (unaudited) ------------------ Principal Standard Amount Description Moody's & Poor's Value (a) - ----------------------------------------------------------------------------------------------------------------- Telecommunications -- continued $ 1,500,000 Verizon Global Fund Corp., 6.750%, 12/01/2005 ................ A1 A+ $ 1,512,015 1,000,000 WorldCom, Inc., 8.000%, 5/15/2006 ............................ A3 A- 1,018,536 ------------ 5,836,814 ------------ U.S. Government -- 4.7% 2,400,000 United States Treasury Notes 6.125%, 8/31/2002 ............... Aaa AAA 2,431,872 500,000 United States Treasury Notes 6.750%, 5/15/2005 ............... Aaa AAA 532,655 ------------ 2,964,527 ------------- Total Bonds and Notes (Identified Cost $61,480,478) ........... 61,745,116 ------------- Short Term Investment -- 0.9% - ----------------------------------------------------------------------------------------------------------------- 550,000 Household Finance Corp. 6.500%, 1/02/2001 549,901 ------------- Total Short Term Investments (Identified Cost $549,901) 549,901 ------------- Total Investments -- 99.6% (Identified Cost $62,030,379) (b) 62,295,017 Other assets less liabilities 259,650 ------------- Total Net Assets -- 100% $ 62,554,667 ============= (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost for federal income tax purposes of $62,030,379 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost ....................... $ 835,643 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .................... (571,005) ------------- Net unrealized appreciation ........................................ $ 264,638 ============= At December 31, 2000 the Fund had a capital loss carryover of approximately $19,538,108 of which $5,625,994 expires on December 31, 2002, $6,075,626 expires on December 31, 2003, $2,134,629 expires on December 31, 2004, $455,288 expires on December 31, 2005, $1,444,376 expires on December 31, 2006, $1,865,560 expires on December 31, 2007 and $1,936,635 expires on December 31, 2008. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Variable rate mortgage backed securities. The interest rates change on these instruments monthly based on changes in a designated base rate. The rates shown were those in effect at December 31, 2000. (e) Variable rate demand note or floating rate security. The rate disclosed is as of December 31, 2000. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $2,034,870 or 3.2% of the net assets.
8 See accompanying notes to financial statements. STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $62,030,379) ........... $62,295,017 Cash ......................................................... 41,037 Receivable for: Fund shares sold .......................................... 76,172 Securities sold ........................................... 620,307 Dividends and interest .................................... 824,142 ----------- 63,856,675 LIABILITIES Payable for: Securities purchased ...................................... $ 1,004,313 Fund shares redeemed ...................................... 169,255 Dividends declared ........................................ 36,954 Accrued expenses: Management fees ........................................... 15,910 Deferred trustees' fees ................................... 18,532 Accounting and administrative ............................. 1,917 Other ..................................................... 55,127 ----------- 1,302,008 ----------- NET ASSETS ...................................................... $62,554,667 =========== Net Assets consist of: Paid in capital ........................................... $82,339,161 Overdistributed net investment income ..................... (9,584) Accumulated net realized gains (losses) ................... (20,039,548) Unrealized appreciation (depreciation) on investments - net 264,638 ----------- NET ASSETS ...................................................... $62,554,667 =========== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($58,540,220 / 8,333,981 shares of beneficial interest) ... $ 7.02 ======= Offering price per share (100 / 97.00 of $7.02) .............. $ 7.24* ======= Net asset value and offering price of Class B shares ($3,553,061 / 506,626 shares of beneficial interest) ...... $ 7.01** ======= Net asset value of Class C shares ($461,386 / 65,858 shares of beneficial interest) ......... $ 7.01** ======= Offering price per share (100 / 99.00 of $7.01) .............. $ 7.08 =======
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS Year Ended Decemebr 31, 2000 INVESTMENT INCOME Interest .................................................. $4,962,809 Expenses Management fees ........................................ $ 375,879 Service fees - Class A ................................. 161,100 Service and distribution fees - Class B ................ 34,524 Service and distribution fees - Class C ................ 4,495 Trustees' fees and expenses ............................ 8,856 Accounting and administrative .......................... 21,965 Custodian .............................................. 71,614 Transfer agent ......................................... 105,420 Audit and tax services ................................. 35,854 Legal .................................................. 899 Printing ............................................... 22,703 Registration ........................................... 40,130 Miscellaneous .......................................... 3,855 ---------- Total expenses before reductions .......................... 887,294 Less waiver/reimbursement ................................. (291,757) 595,537 ---------- ---------- Net investment income ..................................... 4,367,272 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on Investments - net ................. (2,114,099) Unrealized appreciation (depreciation) on investments - net 2,026,060 ---------- Net gain (loss) on investment transactions ................ (88,039) ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ....... $4,279,233 ==========
10 See accompanying notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ---------------------------- 1999 2000 ------------ ------------ FROM OPERATIONS Net investment income ............................... $ 5,027,620 $ 4,367,272 Net realized gain (loss) on investments ............. (1,915,031) (2,114,099) Unrealized appreciation (depreciation) on investments (1,507,524) 2,026,060 ------------ ------------ Increase (decrease) in net assets from operations ... 1,605,065 4,279,233 ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ......................................... (4,845,836) (4,054,995) Class B ......................................... (188,779) (193,059) Class C ......................................... (22,276) (25,252) ------------ ------------ (5,056,891) (4,273,306) ------------ ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ............. (16,246,001) (14,416,185) ------------ ------------ Total increase (decrease) in net assets ................ (19,697,827) (14,410,258) ------------ ------------ NET ASSETS Beginning of the year ............................... 96,662,752 76,964,925 ------------ ------------ End of the year ..................................... $ 76,964,925 $ 62,554,667 ------------ ------------ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year ..................................... $ (84,533) $ (9,584) ============ ============
See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.01 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss) .......... 0.43 0.47(b) 0.38 0.41 0.44 Net Realized and Unrealized Gain (Loss) on Investments ................. (0.01) (0.02) (0.09) (0.28) 0.01(d) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...... 0.42 0.45 0.29 0.13 0.45 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income .. (0.42) (0.43) (0.38) (0.42) (0.44) ----------- ----------- ----------- ----------- ----------- Total Distributions ................... (0.42) (0.43) (0.38) (0.42) (0.44) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ...... $ 7.37 $ 7.39 $ 7.30 $ 7.01 $ 7.02 =========== =========== =========== =========== =========== Total Return (%)(a) ................... 5.8 6.2 4.0 1.9 6.7 Ratio of Operating Expenses to Average Net Assets (%)(c) .......... 0.70 0.70 0.70 0.70 0.83 Ratio of Net Investment Income to Average Net Assets (%) ............. 6.39 6.27 5.93 5.88 6.43 Portfolio Turnover Rate (%) ........... 54 49 105 139 108 Net Assets, End of the Year (000) ..... $ 222,809 $ 196,928 $ 92,669 $ 72,680 $ 58,540
(a) A sales charge is not reflected in total return calculations. (b) Per share net investment income does not reflect the period's reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. (d) The amount shown for a share outstanding does not correspond with the aggergate net gain/(loss) on investments for the period due to the timing of purchases and redemptions of Fund shares in relation to fluctuating values of the investments of the Fund. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the Year $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income (Loss) .......... 0.37 0.41(b) 0.33 0.36 0.39 Net Realized and Unrealized Gain (Loss) on Investments ................. (0.02) (0.02) (0.09) (0.28) 0.01(d) ----------- ----------- ----------- Total From Investment Operations ...... 0.35 0.39 0.24 0.08 0.40 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income .. (0.36) (0.37) (0.33) (0.37) (0.39) ----------- ----------- ----------- ----------- ----------- Total Distributions ................... (0.36) (0.37) (0.33) (0.37) (0.39) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of the Year ...... $ 7.36 $ 7.38 $ 7.29 $ 7.00 $ 7.01 =========== =========== =========== =========== =========== Total Return (%)(a) ................... 4.9 5.4 3.4 1.1 5.9 Ratio of Operating Expenses to Average Net Assets (%)(c) ............ 1.45 1.45 1.45 1.45 1.58 Ratio of Net Investment Income to Average Net Assets (%) ............... 5.64 5.52 5.18 5.13 5.68 Portfolio Turnover Rate (%) ........... 54 49 105 139 108 Net Assets, End of the Year (000) ..... $ 2,821 $ 2,961 $ 3,761 $ 3,796 $ 3,553
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income does not reflect the period's reclassification of permanent differences between book and tax basis net investment income. See Note 1d to the Financial Statements. (c) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. (d) The amount shown for a share outstanding does not correspond with the aggergate net gain/(loss) on investments for the period due to the 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. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C ------------------------------------------------------ December 7, 1998(a) through Year Ended December 31, December 31, ------------------- ------------------------------ 1998 1999 2000 ------------ ------------ ------------ Net Asset Value, Beginning of the Period ................ $ 7.28 $ 7.29 $ 7.00 ------------ ------------ ------------ Income From Investment Operations Net Investment Income ................................... 0.01 0.36 0.39 Net Realized and Unrealized Gain (Loss) on Investments ........................................... 0.01(b) (0.28) 0.01(b) ------------ ------------ ------------ Total From Investment Operations ........................ 0.02 0.08 0.40 ------------ ------------ ------------ Less Distributions Dividends From Net Investment Income .................... (0.01) (0.37) (0.39) ------------ ------------ ------------ Total Distributions ..................................... (0.01) (0.37) (0.39) ------------ ------------ ------------ Net Asset Value, End of the Period ...................... $ 7.29 $ 7.00 $ 7.01 ============ ============ ============ Total Return (%) (c) .................................... 0.3 1.2 5.9 Ratio of Operating Expenses to Average Net Assets (%) (e) 1.45(d) 1.45 1.58 Ratio of Net Investment Income to Average Net Assets (%) 5.18(d) 5.13 5.68 Portfolio turnover rate (%) ............................. 105 139 108 Net Assets, End of the Period (000) ..................... $ 233 $ 489 $ 461
(a) Commencement of operations. (b) The amount shown for a share outstanding does not correspond with the aggregate net gain/(loss) on investments for the period due to the timing of purchases and redemptions of Fund shares in relation to fluctuating values of the investments of the Fund. (c) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. Periods less than one year are not annualized. (d) Computed on an annualized basis. (e) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. 14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Short Term Corporate Income Fund (the "Fund") is a Series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income consistent with preservation of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B and Class C shares. Class A shares are sold with a maximum front end sales charge of 3.00%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares 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 are subject to a contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 are not subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of 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. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income is increased by the accretion of original issue discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not effect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of the adoption of this principle will not be material to the financial statements. c. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. d. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record at the time and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to differing treatment of mortgage-backed securities for book and tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to the capital account. e. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The 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 other party including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales ------------------------------ ------------------------------ U.S. Government Other U.S. Government Other --------------- ------------ --------------- ------------ $20,673,166 $ 50,420,232 $ 17,087,147 $ 68,184,817 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management"), at the annual rate of 0.55% of the first $200 million of the Fund's average daily net assets, 0.51% of the next $300 million and 0.47% of such assets in excess of $500 million reduced by the payment to the Fund's investment subadviser, Back Bay Advisors L.P. ("Back 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Bay") at the rate of 0.275% of the first $200 million of the Fund's average daily net assets, 0.255% of the next $300 million and 0.235% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ------------ Nvest Management $ 187,940 Back Bay 187,939 ---------------- $ 375,879 ================ The effective management fee before the expense limitations for the year ended December 31, 2000 was 0.55 %. As a result of the expense limitations as described in Note 4, the effective management fee for the year ended December 31, 2000 was 0.12%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $21,965 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Service and Distribution Expense. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $161,100 in fees under the Class A Plan. Prior to September 13, 1993, to the extent that Nvest Funds L.P. reimbursable expenses 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. The amount of unreimbursed expenses carried forward at December 31, 2000 is $1,929,283. 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. 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 Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $8,631 and $1,124 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. 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 Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $25,893 and $3,371 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $27,000. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $87,511 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (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 the Fund or other certain Nvest funds on the normal payment date. Deferred amounts remain in the funds until distributed in accordance with the Plan. 4. Expense Limitations. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund to the extent necessary, to limit the Fund's expenses to the annual rates of 0.90%, 1.65% and 1.65% of the average net assets of the Fund's Class A, Class B and Class C shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 0.90%, 1.65% and 1.65% of the average net assets of the Fund's Class A, Class B and Class C shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to May 1, 2000 expenses were limited to the annual rates of 0.70%, 1.45%, and 1.45% of the average net assets of the Fund's Class A, Class B and Class C shares, respectively. As a result of the Fund's expenses exceeding the expense limitations during the year ended December 31, 2000, Back Bay reduced its management fee of $187,939 by $145,878 and Nvest Management reduced its management fee of $187,940 by $145,879. 5. Capital Shares. At December 31, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into three classes, Class A, Class B and Class C. Transactions in capital shares were as follows:
Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ---------------------------- Class A Shares Amount Shares Amount -------- ----------- ------------ ---------- ------------ Shares sold ......................................... 1,454,036 $ 10,417,593 749,039 $ 5,234,440 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 488,060 3,486,240 397,101 2,765,364 ----------- ------------ ---------- ------------ 1,942,096 13,903,833 1,146,140 7,999,804 Shares repurchased .................................. (4,266,090) (30,605,047) (3,181,705) (22,139,392) ----------- ------------ ---------- ------------ Net increase (decrease) ............................. (2,323,994) $(16,701,214) (2,035,565) $(14,139,588) ----------- ------------ ---------- ------------ Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ---------------------------- Class B Shares Amount Shares Amount -------- ----------- ------------ ---------- ------------ Shares sold 235,614 $ 1,675,047 190,107 $ 1,320,535 Shares issued in connection with the reinvestment of: Dividends from net investment income ............. 22,872 162,890 24,494 170,389 ----------- ------------ ---------- ------------ 258,486 1,837,937 214,601 1,490,924 Shares repurchased .................................. (232,265) (1,655,906) (250,248) (1,738,688) ----------- ------------ ---------- ------------ Net increase (decrease) ............................. 26,221 $ 182,031 (35,647) $ (247,764) ----------- ------------ ---------- ------------
19 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, --------------------------------------------------------------- 1999 2000 ----------------------------- ---------------------------- Class B Shares Amount Shares Amount -------- ----------- ------------ ---------- ------------ Shares sold ......................................... 111,022 $ 794,662 17,569 $ 121,940 Shares issued in connection with the reinvestment of: Dividends from net investment income ................ 2,997 21,311 3,664 25,483 ----------- ------------ ---------- ------------ 114,019 815,973 21,233 147,423 Shares repurchased .................................. (76,113) (542,791) (25,262) (176,256) ----------- ------------ ---------- ------------ Net increase (decrease) ............................. 37,906 $ 273,182 (4,029) $ (28,833) ----------- ------------ ---------- ------------ Increase (decrease) derived from capital shares transactions ................................ (2,259,867) $(16,246,001) (2,075,241) $(14,416,185) =========== ============ ========== ============
6. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. For the year ended December 31, 2000, the Fund did not enter into any securities lending transactions. 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Short Term Corporate Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Short Term Corporate Income Fund (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 21 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ---------------- ---------------- ------------------ ---------------- 4,635,336.450 740,666.818 332,200.587 5,708,203.855 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ---------------- ---------------- ------------------ ---------------- 4,626,269.020 744,125.248 337,809.587 5,708,203.855 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------- -------------- Graham T. Allison, Jr. 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer 50,354,056.572 1,888,625.633 52,242,682.205 22 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any Nvest Funds. The value and returns on Nvest Funds will fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 23 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds 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 distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE - --------------------- PAID P.O. Box 8551 BROCKTON, MA PERMIT NO. 770 Boston, Massachusetts -------------- 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs SI56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Intermediate Term Tax Free Fund of California Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Intermediate Term Tax Free Fund of California'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 special 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 April 1993 (inception) through December 2000 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] 4/23/93 10000 9750 12/31/93 10775 10505 12/31/94 10243 9987 12/31/95 11664 11372 12/31/96 12284 11977 12/31/97 13263 12931 12/31/98 13859 13512 12/31/99 13655 13313 12/31/00 14988 14613 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees, and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Average Annual Total Returns and Yields -- 12/31/00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A (Inception 4/23/93) 1 Year 5 Years Since Inception Net Asset Value(1, 4) 9.77% 5.14% 5.52% With Maximum Sales Charge(2, 4) 7.01 4.60 5.17 - -------------------------------------------------------------------------------- Class B (Inception 9/13/93) 1 Year 5 Years Since Inception Net Asset Value(1, 4) 9.00% 4.38% 3.95% With CDSC(3, 4) 4.00 4.04 3.95 - -------------------------------------------------------------------------------- Since Since Fund's Fund's Class A Class B Comparative Performance 1 Year 5 Years Inception Inception Lehman Bros. Municipal Bond Index(5) 11.68% 5.84% 6.20% 5.75% Lipper CA Interm. Muni. Debt Funds Avg.(6) 9.66 4.93 5.15 4.75 Morningstar Muni CA Interm. Debt Avg.(7) 10.43 5.10 5.42 5.00 - -------------------------------------------------------------------------------- These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Yields as of 12/31/00 - -------------------------------------------------------------------------------- Class A Class B SEC 30-day Yield(8) 4.39% 3.77% Taxable Equivalent Yield(9) 8.01 6.88 - -------------------------------------------------------------------------------- Notes to Charts (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 2.50%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. (4) Fund performance may have been increased by voluntary expense waivers, without which performance would have been lower. (5) Lehman Brothers Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. You may not invest directly in an index. Class A since-inception return is calculated from 4/30/93. Class B since-inception return is calculated from 9/30/93. (6) Lipper California Intermediate Municipal Debt Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class A since-inception return is calculated from 4/30/93. Class B since-inception return is calculated from 9/30/93. (7) Morningstar Municipal CA Intermediate Debt Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class A since-inception return is calculated from 4/30/93. Class B since-inception return is calculated from 9/30/93. (8) SEC yield is based on the Fund's net investment income over a 30-day period and is calculated in accordance with Securities and Exchange Commission guidelines. (9) Taxable equivalent yield is based on the maximum combined federal and California state income tax bracket of 45.22%. A portion of income may be subject to federal, state and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax. 2 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [PHOTO] James Welch Back Bay Advisor, L.P. Q. How did Nvest Intermediate Term Tax Free Fund of California perform during 2000? For the 12 months ended December 31, 2000, Nvest Intermediate Term Tax Free Fund of California Class A shares had a total return of 9.77% based on net asset value, including $0.36 in reinvested dividends. The Fund's benchmark, Lehman Brothers Municipal Bond Index, returned 11.68% _for the same period. The benchmark reflects investment performance of municipal bonds all across the U.S. A state-specific average of comparable municipal bond funds, Lipper California Intermediate Municipal Debt Funds Average, provided a total return of 9.66% for the same period. The 30-day SEC yield on the Fund's Class A shares was 4.39%, which is equivalent to a taxable yield of 8.01%, based on the maximum combined federal and California income tax rate of 45.22%. Q. What was the environment like for California municipal bonds during the year? It was an environment of contrasts. During the first six months of 2000, the Federal Reserve Board continued a program of increasing short-term interest rates in an effort to prevent the economy from overheating. Although rising interest rates typically mean falling bond prices, the overall environment for fixed-income investments remained surprisingly favorable. Inflation - a key determinant of bond market performance - remained under control as a result of the Federal Reserve's actions. However, during the second half of the year, the economy began to show clear evidence of slowing. According to figures released in December, the economy grew at just 2.2% in the third quarter of 2000 - the slowest pace in four years and down from 5.6% in the second quarter. Liquidity in both the equity and fixed-income markets plunged, prompting the Fed to hint that it might shift from a tightening to an easing bias to prevent the economy from slowing too abruptly. The California municipal bond market weathered these contrasting periods well. Solid economic growth in the state helped soften the effects of rising rates early in the year and a slowing national economy toward the end of the year. California's 3 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA - -------------------------------------------------------------------------------- economic strength helped generate higher tax revenues, which increased the cash flow and improved the fiscal health and creditworthiness of many municipalities. Q. How did supply and demand impact the tax-exempt market? Throughout the period, the supply of high-quality tax-exempt issues fell short of demand, supporting prices. Despite market and economic uncertainty, state and local governments continued to enjoy record budget surpluses, which enabled many municipalities to finance projects with cash rather than by issuing new debt, reducing the supply of new issues coming into the market. At the same time, demand for municipal bonds remained strong, as investors seeking refuge from a volatile stock market turned to high-quality, fixed-income investments. The wealth-creation mentality that has characterized the past several years appeared to shift during the year to a concern for wealth preservation, as investors turned to high-quality municipal securities seeking competitive, tax-free income, total return potential and relative stability. Q. What strategies did you use in managing the Fund? Early in 2000, when the Federal Reserve was actively raising rates, we adopted a defensive policy - gradually shortening the Fund's average maturity to make it less sensitive to declining bond prices. In general, the shorter a bond's maturity, the lower the risk of price loss when interest rates rise. Conversely, long-term bonds have greater appreciation potential when interest rates fall. During the latter half of the year, when it appeared that further interest-rate increases were unlikely, we extended the Fund's maturity to lock in higher yields. Bear in mind that this Fund is designed to concentrate on intermediate-term bonds, so most shifts in maturities occur within a relatively narrow range. For example, bonds with shorter maturities (less than 5 years to maturity) accounted for 21% of the Fund's assets at mid year, with 47% maturing in the next 5 to 15 years. By the end of December, bonds with shorter maturities accounted for 12% of assets, with 56% in the intermediate range. Credit quality also continued to play a major role in our strategy. As we added new positions during the year, we emphasized high-quality bonds that we believe offer better relative value due to their greater creditworthiness, especially in a slowing economic environment. After mid-year, we reduced our weighting in pre-refunded securities. (These are securities for which a bond issuer floats a second 4 NVEST INTERMEDIATE TERM TAX FREE FUND OF CALIFORNIA - -------------------------------------------------------------------------------- bond in order to pay off the first bond, lowering the borrowing costs.) When interest rates rise, these securities provide relative price stability, but, as the climate changed, we shifted assets into issues that offered potentially higher yields. Credit Quality Composition--12/31/00 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] AAA 39.2% AA 12.5% A 19.5% BBB 7.1% Not Rated 21.7% Average Credit Quality = AA Average Portfolio Maturity = 10.7 Quality is based on ratings provided by Standard & Poor's. Portfolio holdings and asset allocation will vary. Q. What is your current outlook? On the national level, we believe inflation will remain low, which would be a positive for fixed-income securities in general. We also believe California's municipalities are on solid financial ground. Although the recent financial crisis afflicting utilities is a source of concern, it has no direct impact on the state's municipal bonds, which are backed by taxes and revenues from other sectors. However, if a productive and timely resolution is not reached, it could affect California municipalities, so we remain watchful. On other fronts, we expect continued stock market volatility over the next several months, reflecting the slowing economy and the uncertainties that always accompany a new administration in Washington. This should continue to make high-quality municipal bonds attractive to investors. As always, we are mindful of the Fund's primary goal: to generate a high level of current income that is tax free for California residents. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Intermediate Term Tax Free Fund of California may invest a portion of assets in lower-rated bonds that offer higher yields in return for more risk. Some income may be subject to federal and California state taxes. Capital gains are fully taxable. Investors may be subject to the Alternative Minimum Tax (AMT). This Fund is non-diversified, meaning it concentrates its assets in fewer securities, which can significantly affect your Fund's performance and the value of your investment. See the Fund's prospectus for details. The portfolio may also include U.S. government securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Tax Exempt Obligations -- 97.4% of Total Net Assets
Ratings (c) (unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - -------------------------------------------------------------------------------------------------------- California-- 85.0% $ 890,000 Berkeley Health Facility, Pre-Refunded Revenue Bond, 6.500%, 12/01/2011, (d)................................. A2 A+ $ 934,794 1,500,000 California Health Facilities Finance Authority, Revenue Bond, 6.125%, 12/01/2019........................ A2 -- 1,564,965 1,120,000 California Housing Finance Agency, Revenue Bond, 6.250%, 8/01/2016....................................... Aa2 AA- 1,184,187 1,150,000 California Housing Finance Agency, Revenue Bond, 7.050%, 8/01/2027....................................... Aa2 AA- 1,179,336 1,000,000 California Pollution Control Financing Authority, Revenue Bond, 5.000%, 4/01/2008......................... Aa2 AA+ 1,051,360 1,500,000 California Pollution Control Financing Authority, Series A Revenue Bond, 5.900%, 6/01/2014................ A1 A+ 1,656,990 1,500,000 California Pollution Control Financing Authority, Revenue Bond, 7.150%, 2/01/2011......................... Ba1 BBB 1,536,300 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2010................................. Aa2 A+ 1,095,250 1,000,000 California State Public Works Board, Lease Revenue Bond, 5.500%, 6/01/2014, (MBIA insured)................. Aaa AAA 1,103,000 1,000,000 California State, General Obligation Bond, 7.000%, 6/01/2002, (FGIC insured)............................... Aaa AAA 1,042,450 1,850,000 California Statewide Community Development Authority, Certificate of Participation, 7.125%, 11/01/2016........ -- -- 2,001,478 1,000,000 Central California Joint Powers Health Financing, Certificate of Participation, 6.000%, 2/01/2020......... Baa2 A- 1,019,400 1,000,000 Duarte, California Certificate of Participation, Pre-Refunded Revenue Bond, 6.125%, 4/01/2013............ Baa1 AAA 1,066,700 2,030,000 Fresno, California Unified School District, Certificate of Participation, 7.250%, 3/01/2007......... A3 -- 2,081,420 1,000,000 Fresno, California Unified School District, General Obligation Bond, 6.400%, 8/01/2016, (MBIA insured)...... Aaa AAA 1,201,390 1,000,000 Los Angeles California Department of Water and Power, Revenue Bond, 6.000%, 2/15/2016......................... Aa3 A+ 1,071,030 500,000 Rancho California Water District Financing Authority, Revenue Bond, 5.500%, 8/01/2010 (FSA insured) (e)....... Aaa AAA 542,175
6 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Tax Exempt Obligations -- continued
Ratings (c) (unaudited) ---------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - -------------------------------------------------------------------------------------------------------- $ 200,000 Sacramento Utility District Electric, Revenue Bond, 4.375%, 11/15/2006, (FSA insured) (d)................... Aaa AAA $ 200,000 1,000,000 Sacramento Utility District Electric, Revenue Bond, 6.145%, 11/15/2006, (FSA insured) (d)................... Aaa AAA 1,105,090 2,000,000 San Diego California Unified School District, General Obligation Bond, Zero Coupon, 7/01/2014, (FGIC insured) Aaa AAA 1,047,720 2,000,000 San Diego Port Facilities, Revenue Bond, 6.600%, 12/01/2002.............................................. -- -- 2,046,120 1,000,000 Santa Clara Valley California Water District, Revenue Bond, 5.000%, 6/01/2018................................. Aa3 AA 1,005,920 1,000,000 Southern California Rapid Transit District, Certificate of Participation, 7.500%, 7/01/2005, (MBIA insured).......................................... Aaa AAA 1,042,790 1,000,000 Valley Health Systems, Series A Revenue Bond, 6.500%, 5/15/2015......................... -- BBB 988,880 2,000,000 West & Central Basin Financing Authority, Series C Revenue Bond, 5.470%, 8/01/2006, (AMBAC insured)........ Aaa AAA 2,198,900 ----------- 30,967,645 ----------- Puerto Rico-- 12.4% 1,000,000 Puerto Rico Commonwealth Aqueduct & Sewer Authority, Revenue Bond, 6.250%, 7/01/2012......................... Baa1 A 1,156,660 1,000,000 Puerto Rico Commonwealth Highway & Transportation, Revenue Bond, 6.250%, 7/01/2016, (FSA insured).......... Aaa AAA 1,180,150 1,000,000 Puerto Rico Commonwealth, General Obligation Bond, 5.500%, 7/01/2013, (FSA insured)........................ Aaa AAA 1,109,930 1,000,000 Puerto Rico Public Finance Corp., Revenue Bond, 5.375%, 6/01/2015, (AMBAC insured)...................... Aaa AAA 1,087,560 ----------- 4,534,300 ----------- Total Tax Exempt Obligations (Identified Cost $33,740,252)........................... 35,501,945 ----------- Total Investments--97.4% (Identified Cost $33,740,252)(b) 35,501,945 Other assets less liabilities........................... 943,389 ----------- Total Net Assets--100%.................................. $36,445,334 ===========
See accompanying notes to financial statements. 7 PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000, the net unrealized appreciation on investments based on cost of $33,740,252 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................................................. $ 1,809,139 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (47,446) ----------- Net unrealized appreciation................................... $1,761,693 =========== As of December 31, 2000, the Fund had a net capital loss carryforward of $2,234,189 of which $522,150 expires on December 31, 2002, $1,135,818 expires on December 31, 2007 and $576,221 expires on December 31, 2008. These may be available to offset future realized capital gains, if any, to the extent provided by regulations. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their ratings from time to time. As a result there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Variable rate demand note or floating rate security. The rates disclosed are as of December 31, 2000. (e) Delayed delivery security. Legend of Portfolio Abbreviations: AMBAC American Municipal Bond Assurance Corp. FGIC Financial Guarantee Insurance Company FSA Financial Security Assurance MBIA Municipal Bond Investors Assurance Corp. 8 STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $33,740,252) $35,501,945 Due from investment adviser and subadviser....... 14,330 Receivable for: Funds shares sold.............................. 52,036 Securities sold................................ 997,402 Accrued interest............................... 516,182 ----------- 37,081,895 LIABILITIES Payable for: Securities purchased........................... $ 530,825 Fund shares redeemed........................... 19,102 Custodial bank................................. 11,196 Dividends declared............................. 12,479 Accrued expenses: Transfer agent................................. 7,550 Deferred trustees' fees........................ 16,299 Accounting and administrative.................. 1,110 Other.......................................... 38,000 ----------- 636,561 ----------- NET ASSETS.......................................... $36,445,334 =========== Net Assets consist of: Paid in capital................................ $37,098,284 Undistributed net investment income........... 43,089 Accumulated net realized gain (loss)........... (2,457,732) Unrealized appreciation (depreciation) on investments ................................. 1,761,693 ----------- NET ASSETS.......................................... $36,445,334 =========== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($28,887,799 / 3,759,914 shares of beneficial interest)........................... $ 7.68 =========== Offering price per share (100 / 97.50 of $7.68).. $ 7.88* =========== Net asset value and offering price of Class B shares ($7,557,535 / 986,995 shares of beneficial interest)........................... $ 7.66** =========== * Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. See accompanying notes to financial statements. 9 STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Interest......................................... $ 2,338,898 ----------- Expenses Management fees................................ $ 210,961 Service fees - Class A........................ 81,260 Service and distribution fees - Class B........ 76,789 Trustees' fees and expenses.................... 7,585 Accounting and administrative.................. 13,254 Custodian...................................... 64,282 Transfer agent................................. 47,424 Audit and tax services......................... 47,436 Legal.......................................... 567 Printing....................................... 19,825 Registration................................... 10,913 Miscellaneous.................................. 2,748 ----------- Total expenses .................................. 583,044 Less expenses waived by the investment adviser and subadviser................................ (183,891) 399,153 ----------- ----------- Net investment income............................ 1,939,745 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net.............................. (446,763) Futures contracts - net........................ 1,453 ----------- Net realized gain (loss) on investments and futures contracts............................ (445,310) Unrealized appreciation (depreciation) on: Investments - net.............................. 2,148,809 ----------- Net gain (loss) on investment transactions....... 1,703,499 ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 3,643,244 =========== See accompanying notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS Year Ended December 31, ------------------------- 1999 2000 ---------- -------------- FROM OPERATIONS Net investment income............................ $ 2,158,692 $ 1,939,745 Net realized gain (loss) on investments, written options and futures contracts.......... (735,270) (445,310) Net unrealized appreciation (depreciation) on investments................................. (2,181,742) 2,148,809 ----------- ------------ Increase (decrease) in net assets from operations..................................... (758,320) 3,643,244 ----------- ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A........................................ (1,867,844) (1,563,206) Class B........................................ (376,425) (313,733) ----------- ------------ (2,244,269) (1,876,939) ----------- ------------ Increase (decrease) in net assets derived from capital share transactions.......... 1,878,106 (8,803,892) ----------- ------------ Total increase (decrease) in net assets............. (1,124,483) (7,037,587) NET ASSETS Beginning of the year............................ 44,607,404 43,482,921 ----------- ------------ End of the year.................................. $43,482,921 $36,445,334 =========== ============ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year.................................. $ (21,976) $ 43,089 =========== ============ See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A --------------------------------------------------- Year Ended December 31, --------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- Net Asset Value, Beginning of the Year.. $ 7.65 $ 7.66 $ 7.87 $ 7.83 $ 7.34 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income................... 0.39 0.39 0.37 0.37 0.37 Net Realized and Unrealized Gain (Loss) On Investments........................ 0.00 0.20 (0.03) (0.48) 0.33 ------- ------- ------- ------- ------- Total From Investment Operations........ 0.39 0.59 0.34 (0.11) 0.70 ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income.... (0.38) (0.38) (0.38) (0.38) (0.36) ------- ------- ------- ------- ------- Total Distributions..................... (0.38) (0.38) (0.38) (0.38) (0.36) ------- ------- ------- ------- ------- Net Asset Value, End of the Year........ $ 7.66 $ 7.87 $ 7.83 $ 7.34 $ 7.68 ======= ======= ======= ======= ======= Total Return (%) (a).................... 5.3 8.0 4.5 (1.5) 9.8 Ratio of Operating Expenses to Average Net Assets (%) (b).................... 0.75 0.85 0.85 0.85 0.85 Ratio of Net Investment Income to Average Net Assets (%)................ 5.18 5.06 4.79 4.79 4.97 Portfolio Turnover Rate (%)............. 161 120 215 140 111 Net Assets, End of the Year (000)....... $35,972 $32,057 $35,348 $35,593 $28,888
(a) A sales charge is not reflected in total return calculations. (b) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. See accompanying notes to financial statements. 12 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B --------------------------------------------------- Year Ended December 31, --------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- Net Asset Value, Beginning of the Year.. $ 7.63 $ 7.64 $ 7.85 $ 7.81 $ 7.32 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income................... 0.33 0.34 0.32 0.31 0.31 Net Realized and Unrealized Gain (Loss) On Investments....................... 0.01 0.20 (0.03) (0.48) 0.33 ------- ------- ------- ------- ------- Total From Investment Operations........ 0.34 0.54 0.29 (0.17) 0.64 ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income.... (0.33) (0.33) (0.33) (0.32) (0.30) ------- ------- ------- ------- ------- Total Distributions..................... (0.33) (0.33) (0.33) (0.32) (0.30) ------- ------- ------- ------- ------- Net Asset Value, End of the Year........ $ 7.64 $ 7.85 $ 7.81 $ 7.32 $ 7.66 ======= ======= ======= ======= ======= Total Return (%) (a).................... 4.6 7.2 3.7 (2.2) 9.0 Ratio of Operating Expenses to Average Net Assets (%) (b)................... 1.50 1.60 1.60 1.60 1.60 Ratio of Net Investment Income to Average Net Assets (%)............... 4.43 4.31 4.04 4.04 4.22 Portfolio Turnover Rate (%)............. 161 120 215 140 111 Net Assets, End of the Year (000)....... $ 7,590 $ 8,881 $ 9,259 $ 7,889 $ 7,558
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) The adviser and subadviser agreed to reimburse a portion of the Fund's expenses during the period. Without these reimbursements, expense ratios would have been higher. See accompanying notes to financial statements. 13 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Intermediate Term Tax Free Fund of California (the "Fund") is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks a high level of current income exempt from federal income tax and California personal income tax. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers both Class A and Class B shares. Class A shares are sold with a maximum front end sales charge of 2.50%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Expenses of the Fund are borne pro rata by the holders of both classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of 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. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser, and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Income. Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis. Interest income is increased by the accretion of original issue 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. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the 14 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact, if any, resulting from the adoption of this principle will not be material to the financial statements. c. Options. The Fund uses options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. d. Interest Rate Futures Contracts. The Fund may enter into interest rate futures contracts to hedge against changes in the values of securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The potential risk to the Fund is that the change in value of futures contracts primarily corresponds with the value of underlying instruments which may not correspond to the change in the value of the hedged instruments. In addition, there is a risk that the Fund may not be able to close out its futures positions due to an illiquid secondary market. e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 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 accounting principles generally accepted in the United States of America. These differences relate primarily to differing treatments of capital loss carryforwards, futures transactions and post October losses. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $43,016,762 and $51,925,313, respectively. 3a. Management Fees and Other Transactions with Affiliates. The Fund pays a gross management fee to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.525% of the first $200 million of the Fund's average daily net assets, 0.50% of the next $300 million and 0.475% of such assets in excess of $500 million reduced by the payment to the Fund's investment subadviser Back Bay Advisors, L.P. ("Back Bay") at the rate of 0.2625% of the first $200 million of the Fund's average daily net assets, 0.25% of the next $300 million and 0.2375% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay under the management and subadvisory agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ----------- Nvest Management $ 105,481 Back Bay 105,480 --------- $ 210,961 ========= The effective management fee before the expense limitation for the year ended December 31, 2000 was 0.525%. As a result of the expense limitation as described in Note 4, the effective management fee for the year ended December 31, 2000 was 0.067%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 these expenses amounted to $13,254, and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and a Service and Distribution Plan relating to the Fund's Class B shares (the "Class B Plan"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $81,260 in service fees under the Class A Plan. Prior to September 13, 1993, to the extent that Nvest Funds L.P. reimburseable expenses 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. The amount of unreimbursed expenses at December 31, 2000 is $179,456. Under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $19,197 in service fees under the Class B Plan. Also under the Class B Plan, the Fund pays Nvest Funds L.P. a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class B shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $57,592 in distribution fees under the Class B Plan. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors of shares of the Fund during the year ended December 31, 2000 amounted to $21,481. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent for the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. For the year ended December 31, 2000, the Fund paid NSC $35,069 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meet- 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 ing of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (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 the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. Expense Limitations. Nvest Management has given a binding undertaking and Back Bay has voluntarily agreed until further notice to defer their respective management and subadvisory fees and, if necessary, Nvest Management has agreed to bear certain expenses associated with the Fund, to the extent necessary to limit the Fund's expenses to the annual rates of 0.85% and 1.60% of the average net assets of the Fund's Class A and B shares, respectively. The Fund is obligated to pay such deferred fees in later periods to the extent the Fund's expenses fall below the annual rates of 0.85%, and 1.60% of average net assets of the Fund's Class A and Class B shares, respectively, provided however, that the Fund is not obligated to pay any such deferred fees more than one year after the end of the fiscal year in which the fee was deferred. Nvest Management's undertaking will be in effect for the life of the Fund's current prospectus. Prior to September 1, 1996, Back Bay and Nvest Management voluntarily agreed to reduce management fees in order to limit the Fund's expenses to an annual rate of 0.70% of the Fund's Class A average daily net assets and 1.45% of the Fund's Class B average daily net assets. As a result of the Fund's expenses exceeding the expense limitations during the year ended December 31, 2000, Back Bay reduced its subadvisory fees by $91,946 and Nvest Management reduced its advisory fees by $91,945. 5. Concentration of Credit. The Fund primarily invests in debt obligations issued by the State of California and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Fund is more susceptible to factors adversely affecting issuers of California municipal securities than is a comparable municipal bond fund that is not as concentrated. Uncertain economic and fiscal conditions may affect the ability of issuers of California municipal securities to meet their financial obligations. The Fund had the following concentrations by source in excess of 10% on December 31, 2000 as a percentage of the Fund's total net assets: Education (14.9%), Medical Products & Supplies (13.2%), and Health Care (10.8%) 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 6. Capital Shares. At December 31, 2000, there was an unlimited number of shares of beneficial interest authorized, divided into two classes, Class A and Class B. Transactions in capital shares were as follows:
Year Ended December 31, ----------------------------------------------- 1999 2000 ----------------------- -------------------- Class A Shares Amount Shares Amount ------ --------- ----------- -------- --------- Shares sold ........................... 2,383,925 $18,347,369 284,939 $ 2,111,273 Shares issued in connection with the reinvestment of: Dividends from net investment income 145,308 1,107,226 130,722 974,099 ---------- ----------- ---------- ----------- 2,529,233 19,454,595 415,661 3,085,372 Shares repurchased ................... (2,193,681) (16,773,597) (1,504,506) (11,212,197) ---------- ----------- ---------- ----------- Net increase (decrease) .............. 335,552 $ 2,680,998 (1,088,845) $(8,126,825) ---------- ----------- ---------- -----------
Year Ended December 31, ----------------------------------------------- 1999 2000 ----------------------- -------------------- Class B Shares Amount Shares Amount ------ --------- ----------- -------- --------- Shares sold .......................... 202,511 $ 1,524,313 84,370 $ 629,921 Shares issued in connection with the reinvestment of: Dividends from net investment income 28,996 220,717 25,308 188,071 ---------- ----------- ---------- ----------- 231,507 1,745,030 109,678 817,992 Shares repurchased ................... (339,124) (2,547,922) (200,783) (1,495,059) ---------- ----------- ---------- ----------- Net increase (decrease) .............. (107,617) $ (802,892) (91,105) $ (677,067) ---------- ----------- ---------- ----------- Increase (decrease) derived from capital shares transactions......... 227,935 $ 1,878,106 (1,179,950) $(8,803,892) ========== =========== ========== ===========
19 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Intermediate Term Tax Free Fund of California In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Intermediate Term Tax Free Fund of California (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 20 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 3,481,452.053 882.247 50,054.158 3,532,388.458 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- -------------- ---------------- ------------- 3,425,220.053 57,114.247 50,054.158 3,532,388.458 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- ------------- -------------- Graham T. Allison, Jr. 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer 50,354,056.572 1,888,625.633 52,242,682.205 21 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, Nvest Funds' automatic investment program, you can invest as little as $100 a month in your Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any Nvest Fund. The value and returns on Nvest funds will fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current Nvest Funds account. To open an Investment Builder account today, call your financial representative or Nvest Funds at 800-225-5478. Please call Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read prospectus carefully before you invest. 22 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer -- for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 23 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Yield - The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission. Maturity - Refers to the period of time before principal repayment on a bond is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. Duration - A measure, stated in years, of a bond's sensitivity to interest rates. Duration allows you to compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a bond is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a bond with a duration of 4 years should rise in value 4%. Conversely, the bond should decline 4% in value if interest rates rise 1%. Treasuries - Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). Municipal Bond - A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and, in most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. A small portion of income may be subject to federal and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds 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 distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE - --------------------- PAID P.O. Box 8551 BROCKTON, MA PERMIT NO. 770 Boston, Massachusetts -------------- 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs CA56-1200 [RECYCLING LOGO] Printed On Recycled Paper Nvest Funds(SM) Where The Best Minds Meet(R) Nvest Limited Term U.S. Government Fund Where The Best Minds Meet(R) Annual Report December 31, 2000 PRESIDENT'S LETTER February 2001 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President and Trustee Nvest Funds "Do-it-yourself investors who jumped from fund to fund chasing stellar performance in the 1990s did not do as well as those who consulted a professional adviser.*" If ever there was a time when investors needed to adhere to their long-term goals and not focus too closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way to the realization that the nation's long-running economic expansion was slowing. The technology-heavy Nasdaq Index was down sharply, as were many markets overseas. But "old economy" value stocks - - those that appear undervalued relative to their earnings and assets - revived. U.S government bonds also delivered good performance, but most corporate bonds did poorly. Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Investment Results Through December 31, 2000 - -------------------------------------------------------------------------------- Putting Performance in Perspective The charts comparing Nvest Limited Term U.S. Government Fund's performance to a benchmark index provide you with a general sense of how the Fund performed. To put this information in context, it may be helpful to understand the special 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 has no expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. Growth of a $10,000 Investment in Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 12/31/90 10000 9700 12/31/91 11383 11041 12/31/92 12026 11666 12/31/93 12920 12532 12/31/94 12633 12254 12/31/95 14279 13850 12/31/96 14618 14180 12/31/97 15681 15210 12/31/98 16694 16193 12/31/99 16582 16085 12/31/00 17962 17423 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 NVEST LIMITED TERM U.S. GOVERNMENT FUND Average Annual Total Returns -- 12/31/00 - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- Class A (Inception 1/3/89) 1 Year 5 Years 10 Years Net Asset Value(1) 8.34% 4.70% 6.03% With Maximum Sales Charge(2) 5.08 4.07 5.71 - ---------------------------------------------------------------------------------------------------------------- Class B (Inception 9/27/93) 1 Year 5 Years Since Inception Net Asset Value(1) 7.66% 4.01% 3.87% With CDSC(3) 2.66 3.69 3.87 - ---------------------------------------------------------------------------------------------------------------- Class C (Inception 12/30/94) 1 Year 5 Years Since Inception Net Asset Value(1) 7.65% 4.01% 5.20% With Maximum Sales Charge and CDSC(3) 5.59 3.80 5.02 - ---------------------------------------------------------------------------------------------------------------- Class Y (Inception 3/31/94) 1 Year 5 Years Since Inception Net Asset Value(1) 8.82% 5.08% 5.65% - ---------------------------------------------------------------------------------------------------------------- Since Since Since Fund's Fund's Fund's Class B Class C Class Y Comparative Performance 1 Year 5 Years 10 Years Incept. Incept. Incept. Lehman Bros. Int. Gov't. Bond Index(4) 10.47% 6.19% 7.19% 5.94% 7.51% 6.67% Morningstar Short Gov't. Average(5) 7.93 5.22 6.23 4.97 6.32 5.50 Lipper Short Int. U.S. Gov't. Average(6) 8.56 5.16 6.44 4.98 6.45 5.61 - ----------------------------------------------------------------------------------------------------------------
Notes to Charts These returns represent past performance and do not guarantee future results. Share price and returns will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. (1) These results include reinvestment of any dividends and capital gains, but do not include a sales charge. (2) These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 3.00%. (3) These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("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. Class C shares for accounts established on or after December 1, 2000, are subject to a 1.00% sales charge. C share accounts established prior to December 1, 2000, are not subject to the 1.00% sales charge. (4) Lehman Brothers Intermediate Government Bond Index is an unmanaged index of bonds issued by the U.S. government and its agencies with maturities of 1 to 10 years. You may not invest directly in an index. Class B since-inception return is calculated from 9/30/93. (5) Morningstar Short Government Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. (6) Lipper Short Intermediate U.S. Government Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. Class B since-inception return is calculated from 9/30/93. 2 NVEST LIMITED TERM U.S. GOVERNMENT FUND Interview with Your Portfolio Managers - -------------------------------------------------------------------------------- [PHOTOS] Scott Nicholson, James Welch Members of the investment management team, Back Bay Advisors, L.P. Q. How did Nvest Limited Term U.S. Government Fund perform during 2000? For the 12 months ended December 31, 2000, Nvest Limited Term U.S. Government Fund Class A shares had a total return of 8.34% based on net asset value, including $0.70 in reinvested dividends. The Fund's benchmark, the Lehman Brothers Intermediate Government Bond Index, returned 10.47% for the same period. Q. What was the investment environment like during the year? During the first half of the year, the Federal Reserve Board continued a program of raising interest rates in an effort to slow economic growth and avoid potential inflation. In spite of three rate hikes during this period, causing prices of short-term bonds to decline, long-term Treasury bonds did well. In January, the U.S. Treasury announced that it would use $30 billion of the federal budget surplus to buy back long-term debt to pay down the deficit, and demand for these issues rose sharply, sending yields down and prices up in this sector. The combination of rising short-term rates and falling long-term yields caused the Treasury yield curve to invert - short-term rates rose higher than those on the longer end of the yield curve. After the Fed's last increase in short-term interest rates in May, the tide began to turn. It typically takes about six to nine months before the economy starts to feel the effect of the Fed's intervention, so the economic slowdown did not begin to take effect until the summer. As concern about inflation and further Fed rate increases subsided, short-term interest rates began to ease. By the end of the year, as concern about a potential recession began to grow, the Fed began to hint that it might lower rates to avoid too abrupt a slowdown in the economy. 3 NVEST LIMITED TERM U.S. GOVERNMENT FUND - -------------------------------------------------------------------------------- Portfolio Mix -- 12/31/00 Government Agencies 57.1% Yankees 7.2% Treasuries 5.2% Corporate & Other 26.5% Asset-Backed Securities 4.0% Portfolio holdings and asset allocation will vary. Q. What was your strategy with the Fund? In addition to Treasury securities, Nvest Limited Term U.S. Government Fund can invest in U.S. government agency bonds, mortgage-backed securities, corporate bonds and asset-backed securities (bonds backed by receipts from auto and other loans). As fears of a possible recession began to mount, so too did concerns about credit risk. Bank lending standards tightened, default risks increased, and bankruptcies were on the rise. Against this uncertain backdrop, we sought to insulate the Fund from credit risks by concentrating on top-rated bonds, including Treasury bonds and mortgage-backed securities issued by "Ginnie Mae" (GNMA, the Government National Mortgage Association). Like Treasuries, Ginnie Maes are backed by the full faith and credit of the U.S. government, but these mortgage-backed securities offered additional yield as well as good performance during the latter half of the year. We limited the corporate bonds in the portfolio to high-quality issues, and at various times during the year we reduced or entirely eliminated exposure to this market. Even so, corporate bonds detracted from performance at times during 2000. 4 NVEST LIMITED TERM U.S. GOVERNMENT FUND - -------------------------------------------------------------------------------- As for maturity structure, we were able to take advantage of the two different investment environments in the course of the year. During the first half, we maintained what's called a "barbell" structure, investing in long-term Treasuries on one end and very short-term bonds on the other, with little invested in between. In this way, Nvest Limited Term U.S. Government Fund was able to take advantage of falling yields and rising prices on longer-term bonds on the one hand, while reinvesting proceeds from maturing short-term issues to garner more yield while the Fed was raising rates. During the second half of 2000, the portfolio concentrated on those parts of the yield curve where rates were dropping - and prices were rising - as the economy slowed and the yield curve resumed a more normal shape. Q. What is your current outlook? We believe the investment environment for fixed-income securities should be positive going forward, especially in light of continued volatility in the stock market and the Federal Reserve's move early in January to cut rates by 0.5%. Slower economic growth may prompt the Fed to continue to ease rates in 2001, in an effort to stabilize growth at a level that is neither inflationary nor recessionary. With the 2000 election resolved, fixed-income investors are waiting to see how the new administration and the new Congress address the federal budget surplus, and whether or not more of that surplus will be used to pay down debt further. We will continue to focus on economic fundamentals. As 2001 gets underway, conditions generally seem to favor the bond market, and we believe shareholders of Nvest Limited Term U.S. Government Fund should benefit. This portfolio managers' commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Limited Term U.S. Government Fund may invest primarily in securities issued or backed by the federal government, including Treasury securities, which are guaranteed if held to maturity; mutual funds that invest in these securities are not. It may also invest a portion of assets in foreign securities, which have special risks and in mortgage securities that are subject to prepayment risk. These risks affect the value of your investment. See the Fund's prospectus for details. 5 PORTFOLIO COMPOSITION Investments as of December 31, 2000 Bonds and Notes -- 99.1% of Total Net Assets
Ratings (c) (unaudited) -------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------ Asset Backed -- 7.2% $ 5,000,000 Chase Manhattan Auto Owner Trust, 6.210%, 12/15/2004 ..... Aaa AAA $ 5,023,450 5,000,000 Huntington Auto Trust, 7.330%, 7/15/2004 ................. Aaa AAA 5,083,800 ------------- 10,107,250 ------------- Finance & Banking -- 2.9% 4,000,000 General Electric Capital Corp., Medium Term Note, 6.750%, 9/11/2003 ...................................... Aaa AAA 4,078,100 ------------- Government Agencies -- 56.7% 1,250,000 Federal Home Loan Mortgage Corp., 7.000%, 2/15/2003 ...... Aaa AAA 1,284,175 50,905 Federal Home Loan Mortgage Corp., 7.500%, 6/01/2026 ...... Aaa AAA 51,780 20,431 Federal Home Loan Mortgage Corp., 10.000%, 7/01/2019 ..... Aaa AAA 21,746 2,632,206 Federal Home Loan Mortgage Corp., 11.500%, with various maturities to 2020 (d)................................ .. Aaa AAA 2,928,041 4,500,000 Federal National Mortgage Association, 6.000%, 12/15/2005 . Aaa AAA 4,549,230 10,000,000 Federal National Mortgage Association, 6.750%, 8/15/2002 .. Aaa AAA 10,165,600 3,604,941 Federal National Mortgage Association, 7.000%, 12/01/2022 (d)........................................... Aaa AAA 3,609,448 10,000,000 Federal National Mortgage Association, 7.500%, 12/01/2030 ...................................... Aaa AAA 10,146,800 8,315,930 Government National Mortgage Association, 7.000%, 10/15/2028 ...................................... Aaa AAA 8,352,271 36,644,524 Government National Mortgage Association, 8.000%, with various maturities to 2030 (d) ............................ Aaa AAA 37,606,442 39,932 Government National Mortgage Association, 12.500%, with various maturities to 2015 (d) ............................ Aaa AAA 45,699 589,732 Government National Mortgage Association, 16.000%, with various maturities to 2012 (d) ............................ Aaa AAA 704,559 203,421 Government National Mortgage Association, 17.000%, with various maturities to 2012 (d) ............................ Aaa AAA 244,553 ------------- 79,710,344 ------------- Telecommunications -- 1.4% 2,000,000 Koninklijke KPN NV, 7.500%, 10/01/2005 ................... A3 A- 1,948,798 ------------- U.S. Government -- 26.3% 3,000,000 United States Treasury Bonds, 9.125%, 5/15/2018 (e)....... Aaa AAA 4,185,930 10,609,200 United States Treasury Notes, 3.875%, 1/15/2009 (e)....... Aaa AAA 10,695,347 5,500,000 United States Treasury Notes, 5.750%, 8/15/2010 (e)....... Aaa AAA 5,763,835 12,000,000 United States Treasury Notes, 6.750%, 5/15/2005 (e)....... Aaa AAA 12,783,720 3,500,000 United States Treasury Notes, 8.000%, 5/15/2001........... Aaa AAA 3,528,987 ------------- 36,957,819 ------------- Utilities -- 0.7% 1,000,000 Sempra Energy, 6.950%, 12/01/2005 ........................ A2 A 979,264 -------------
6 See accompanying notes to financial statements. PORTFOLIO COMPOSITION -- continued Investments as of December 31, 2000 Bonds and Notes -- continued
Ratings (c) (unaudited) -------------------- Principal Standard Amount Description Moody's & Poor's Value (a) - ------------------------------------------------------------------------------------------------------------ Yankee -- 3.9% $ 3,960,000 Inter-American Development Bank Bonds, 12.250%, 12/15/2008 ..................................... Aaa AAA $ 5,522,073 ------------- Total Bonds and Notes (Identified Cost $138,050,032)....... 139,303,648 ------------- Short Term Investment-- 0.1% Principal Amount Description Value (a) - ------------------------------------------------------------------------------------------------------------ 194,965 Household Finance Corp., 6.500%, 1/02/2001 ................ 194,965 ------------- Total Short Term Investment (Identified Cost $194,965) .... 194,965 ------------- Total Investments -- 99.2% (Identified Cost $138,244,997) (b) ....................................... 139,498,613 Other assets less liabilities ............................. 1,090,112 ------------- Total Net Assets -- 100%................................... $ 140,588,725 ============= (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost for federal income tax purposes of $138,323,035 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess value over tax cost................................................. $ 1,527,437 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value............................................... (351,859) ------------- Net unrealized appreciation ............................. $ 1,175,578 ============= At December 31, 2000 the Fund had a capital loss carryover of approximately $49,830,430 of which $26,963,634 expires on December 31, 2002, $1,001,296 expires on December 31,2003, $4,342,078 expires on December 31, 2004, $2,731,339 expires on December 31, 2005, $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. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2000. Securities are generally rated at the time of issuance. The rating agencies may revise their rating from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2000. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the rating of agencies. (d) The Fund's investments in mortgage backed securities of the Federal Home Loan Mortgage Corporation and Government National Mortgage Association are interest in separate pools of mortgages. All separate investment in securities of these issuers which have the same coupon rate have been aggregated for the purpose of presentation in the schedule of investments. (e) All or a portion of this security was on loan to brokers at December 31, 2000. See accompanying notes to financial statements.
See accompanying notes to financial statements. 7 STATEMENT OF ASSETS & LIABILITIES December 31, 2000 ASSETS Investments at value (Identified cost $138,244,997) ......... $139,498,613 Cash ........................................................ 34,551 Investments held as collateral for loaned securities ........ 29,769,688 Receivable for: Fund shares sold ......................................... 1,408,809 Dividends and interest ................................... 1,475,009 ------------ 172,186,670 LIABILITIES Payable for: Collateral on securities loaned, at value ................ $ 29,769,688 Securities purchased ..................................... 1,586,385 Dividends declared ....................................... 59,375 Accrued expenses: Transfer agent ........................................... 23,775 Management fees .......................................... 77,419 Deferred trustees' fees .................................. 24,214 Accounting and administrative ............................ 4,304 Other .................................................... 52,785 ------------ 31,597,945 ------------ NET ASSETS ..................................................... $140,588,725 ============ Net Assets consist of: Paid in capital .......................................... $189,313,695 Overdistributed net investment income .................... (67,755) Accumulated net realized gains (losses) .................. (49,910,831) Unrealized appreciation (depreciation) on investments ........................................... 1,253,616 ------------ NET ASSETS ..................................................... $140,588,725 ============ Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($118,833,374 / 10,652,117 shares of beneficial interest) .... $ 11.16 ======= Offering price per share (100 / 97 of $11.16) .................. $ 11.51* ======= Net asset value and offering price of Class B shares ($11,883,768 /1,066,942 shares of beneficial interest) ...... $ 11.14** ======= Net asset value of Class C shares ($6,617,233 / 593,641 shares of beneficial interest) ........ $ 11.15** ======= Offering price per share (100 / 99 of $11.15) .................. $ 11.26* ======= Net asset value, offering and redemption price of Class Y shares ($3,254,350 / 290,652 shares of beneficial interest) ........ $ 11.20 =======
* Based upon single purchases of less than $100,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 8 See accompanying notes to financial statements. STATEMENT OF OPERATIONS Year Ended December 31, 2000 INVESTMENT INCOME Interest ......................................................................... $11,441,485 Securities lending income ........................................................ 43,386 ----------- 11,484,871 Expenses Management fees ............................................................... $ 984,627 Service and distribution fees - Class A ....................................... 450,933 Service and distribution fees - Class B ....................................... 121,510 Service and distribution fees - Class C ....................................... 71,993 Trustees' fees and expenses ................................................... 12,588 Accounting and administrative ................................................. 53,070 Custodian ..................................................................... 102,642 Transfer agent - Class A, Class B, Class C .................................... 302,044 Transfer agent - Class Y ...................................................... 3,293 Audit and tax services ........................................................ 41,180 Legal ......................................................................... 1,872 Printing ...................................................................... 42,869 Registration .................................................................. 44,153 Miscellaneous ................................................................. 1,837 ------------ Total expenses ................................................................... 2,234,611 ----------- Net investment income ............................................................ 9,250,260 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on: Investments - net ............................................................. (2,960,330) Written options - net ......................................................... (169,794) Futures contracts - net ....................................................... (36,113) ----------- Total realized gain (loss) on investments, written options and futures contracts ................................................................. (3,166,237) ----------- Unrealized appreciation (depreciation) on: Investments - net ............................................................. 5,546,929 ----------- Net gain (loss) on investment transactions ....................................... 2,380,692 ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ............................... $11,630,952 ===========
See accompanying notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, ------------------------------ 1999 2000 ------------- ------------- FROM OPERATIONS Net investment income ........................................................ $ 12,169,938 $ 9,250,260 Net realized gain (loss) on investments, written options and futures contracts ........................................................ (9,210,131) (3,166,237) Unrealized appreciation (depreciation) on investments, written options and futures contracts .................................................... (4,766,837) 5,546,929 ------------- ------------- Increase (decrease) in net assets from operations ............................ (1,807,030) 11,630,952 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ................................................................... (9,933,189) (8,075,830) Class B ................................................................... (840,673) (685,214) Class C ................................................................... (573,411) (404,716) Class Y ................................................................... (460,940) (218,791) ------------- ------------- (11,808,213) (9,384,551) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ...................................... (40,341,564) (42,154,629) ------------- ------------- Total increase (decrease) in net assets ......................................... (53,956,807) (39,908,228) NET ASSETS Beginning of the year ........................................................ 234,453,760 180,496,953 ------------- ------------- End of the year .............................................................. $ 180,496,953 $ 140,588,725 ============= ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME End of the year .............................................................. $ 104,847 $ (67,755) ============= =============
10 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class A ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year ....... $ 12.10 $ 11.55 $ 11.64 $ 11.70 $ 10.97 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .................... 0.81 0.72 0.67 0.66 0.69 Net Realized and Unrealized Gain (Loss) on Investments ........................... (0.54) 0.09 0.06 (0.74) 0.20 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ......... 0.27 0.81 0.73 (0.08) 0.89 ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income . (0.82) (0.72) (0.67) (0.65) (0.70) ----------- ----------- ----------- ----------- ----------- Total Distributions ...................... (0.82) (0.72) (0.67) (0.65) (0.70) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ............. $ 11.55 $ 11.64 $ 11.70 $ 10.97 $ 11.16 =========== =========== =========== =========== =========== Total Return (%) (a) ..................... 2.4 7.3 6.5 (0.7) 8.3 Ratio of Operating Expenses to Average Net Assets (%) ........................... 1.25 1.28 1.31 1.33 1.40 Ratio of Net Investment Income to Average Net Assets (%) ........................... 7.13 6.40 5.81 5.91 6.18 Portfolio Turnover Rate (%) .............. 327 533 1,376 400 384 Net Assets, End of Year (000) ............ $ 276,178 $ 222,185 $ 194,032 $ 149,756 $ 118,833
(a) A sales charge is not reflected in total return calculations. See accompanying notes to financial statements. 11 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class B ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year ....... $ 12.09 $ 11.54 $ 11.62 $ 11.69 $ 10.95 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .................... 0.73 0.65 0.60 0.59 0.62 Net Realized and Unrealized Gain (Loss) on Investments ............................ (0.54) 0.08 0.07 (0.75) 0.20 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ......... 0.19 0.73 0.67 (0.16) 0.82 ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income . (0.74) (0.65) (0.60) (0.58) (0.63) ----------- ----------- ----------- ----------- ----------- Total Distributions ...................... (0.74) (0.65) (0.60) (0.58) (0.63) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ............. $ 11.54 $ 11.62 $ 11.69 $ 10.95 $ 11.14 =========== =========== =========== =========== =========== Total Return (%) (a) ..................... 1.7 6.5 5.9 (1.4) 7.7 Ratio of Operating Expenses to Average Net Assets (%) ......................... 1.90 1.93 1.96 1.98 2.05 Ratio of Net Investment Income to Average Net Assets (%) ......................... 6.48 5.75 5.16 5.26 5.53 Portfolio Turnover Rate (%) .............. 327 533 1,376 400 384 Net Assets, End of Year (000) ............ $ 18,503 $ 16,060 $ 18,116 $ 14,601 $ 11,884
(a) A contingent deferred sales charge is not reflected in total return calculations. 12 See accompanying notes to financial statements. FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class C ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year ....... $ 12.10 $ 11.54 $ 11.63 $ 11.70 $ 10.96 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .................... 0.75 0.65 0.60 0.59 0.62 Net Realized and Unrealized Gain (Loss) on Investments ............................ (0.57) 0.09 0.07 (0.75) 0.20 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ......... 0.18 0.74 0.67 (0.16) 0.82 ----------- ----------- ----------- ----------- ----------- Less Distributions Dividends From Net Investment Income ..... (0.74) (0.65) (0.60) (0.58) (0.63) ----------- ----------- ----------- ----------- ----------- Total Distributions ...................... (0.74) (0.65) (0.60) (0.58) (0.63) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ............. $ 11.54 $ 11.63 $ 11.70 $ 10.96 $ 11.15 =========== =========== =========== =========== =========== Total Return (%) (a) ..................... 1.6 6.6 5.9 (1.4) 7.7 Ratio of Operating Expenses to Average Net Assets (%) ......................... 1.90 1.93 1.96 1.98 2.05 Ratio of Net Investment Income to Average Net Assets (%) ......................... 6.48 5.75 5.16 5.26 5.53 Portfolio Turnover Rate (%) .............. 327 533 1,376 400 384 Net Assets, End of Year (000) ............ $ 14,903 $ 15,699 $ 13,962 $ 9,054 $ 6,617
(a) A sales charge and a contingent deferred sales charge are not reflected in total return calculations. See accompanying notes to financial statements. 13 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Class Y ----------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of Year ....... $ 12.13 $ 11.58 $ 11.66 $ 11.73 $ 11.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income .................... 0.85 0.76 0.72 0.70 0.75 Net Realized and Unrealized Gain (Loss) on Investments ............................ (0.54) 0.08 0.06 (0.74) 0.19 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ......... 0.31 0.84 0.78 (0.04) 0.94 ----------- ----------- ----------- ----------- ----------- Less Distributions Distributions From Net Investment Income . (0.86) (0.76) (0.71) (0.69) (0.74) ----------- ----------- ----------- ----------- ----------- Total Distributions ...................... (0.86) (0.76) (0.71) (0.69) (0.74) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ............. $ 11.58 $ 11.66 $ 11.73 $ 11.00 $ 11.20 =========== =========== =========== =========== =========== Total Return (%) ......................... 2.8 7.5 6.9 (0.3) 8.8 Ratio of Operating Expenses to Average Net Assets (%) ......................... 0.90 0.93 0.96 0.98 0.95 Ratio of Net Investment Income to Average Net Assets (%) ......................... 7.48 6.75 6.16 6.26 6.63 Portfolio Turnover Rate (%) .............. 327 533 1,351 400 384 Net Assets, End of Year (000) ............ $ 5,313 $ 5,262 $ 8,345 $ 7,086 $ 3,254
14 See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2000 1. Significant Accounting Policies. The Nvest Limited Term U.S. Government Fund (the "Fund") is a series of Nvest Funds Trust II, a Massachusetts business trust (the "Trust"), and is registered under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company. The Fund seeks a high current return consistent with preservation of capital. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 3.00%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased before May 1, 1997). Class C shares are sold with a maximum front end sales charge of 1.00%, do not convert to any class of shares and pay a higher ongoing distribution fee than Class A shares and may be subject to an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject to the 1.00% front-end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or service and distribution fees. They are intended for institutional investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne pro rata by the holders of all classes of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Board of 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. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis. Interest income is increased by the accretion of original issue 15 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 discount and/or market discount. In determining net gain or loss on securities sold, the cost of securities has been determined on an identified cost basis. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of adoption of this principle will not be material to the financial statements. c. Options. The Fund uses options to hedge against changes in the values of securities the Fund owns or expects to purchase. Writing puts and buying calls tends to increase the Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge the Fund's investments, the potential risk to the Fund is that the change in value of options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to the premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by dealers. d. Interest Rate Futures Contracts. The Fund may purchase or sell interest rate futures contracts to hedge against changes in the values of securities the Fund owns or expects to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. Government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin," and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 16 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 The potential risk to the Fund is that the change in value of futures contracts primarily corresponds with the value of underlying instruments which may not correspond to the change in the value of the hedged instruments. In addition, there is a risk that the Fund may not be able to close out its futures positions due to an illiquid secondary market. e. Federal Income Taxes. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences relate primarily to differing treatments for income recognition for mortgage-backed securities. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to capital accounts. g. Repurchase Agreements. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. Purchases and Sales of Securities. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were as follows: Purchases Sales --------------------------------- --------------------------------- U.S. Government Other U.S. Government Other --------------- ------------ --------------- ------------ $541,739,281 $ 41,518,248 $563,436,048 $ 62,231,347 Transactions in written options for the year ended December 31, 2000 are summarized as follows: Written Options ---------------------------- Number of Premiums Contracts Received ------------ ----------- Open at December 31, 1999............... 0 $ 0 Contracts opened........................ (350) (229,875) Contracts closed........................ 350 229,875 ------------ ----------- Open at December 31, 2000............... 0 $ 0 ============ =========== 17 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 3a. Management Fees and Other Transactions with Affiliates. The Fund pays gross management fees to its investment adviser, Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.65% of the first $200 million of the Fund's average daily net assets, 0.625% of the next $300 million of such assets and 0.60% of such assets in excess of $500 million, reduced by the payment to the Fund's investment subadviser, Back Bay Advisors, L.P. ("Back Bay"), at the rate of 0.325% of the first $200 million of the Fund's average daily net assets, 0.3125% of the next $300 million of such assets and 0.30% of such assets in excess of $500 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Back Bay Advisors are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest") which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Back Bay Advisors under the management and subadvisery agreements in effect during the year ended December 31, 2000 are as follows: Fees Earned ------------ Nvest Management $ 492,314 Back Bay 492,313 ---------------- $ 984,627 ================ The effective management fee for the year ended December 31, 2000 was 0.65%. b. Accounting and Administrative Expense. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $53,070, and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. c. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service and Distribution Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B shares (the "Class B Plan") and Class C shares (the "Class C Plan"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. Also under the Class A Plan, the Fund pays Nvest Funds a monthly distribution fee at the annual rate of 0.10% of the average daily net assets attributable to the Fund's Class A shares as reimbursement for expenses incurred by Nvest Funds L.P. in connection with the marketing or sale of Class A shares. For the year ended December 31, 2000, the Fund paid Nvest Funds $322,095 in service fees and $128,838 in distribution fees under the Class A Plan. Prior to September 24, 1993, to the extent that reimburseable expenses of Nvest Funds L.P. in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could 18 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 be carried forward for reimbursement in future years in which the Class A Plan remains in effect. The amount of unreimbursed expense carried forward at December 31, 2000 is $2,272,723 (reimbursable as distribution fees). Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. monthly service fees at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares and Class C shares, as compensation for services provided and expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $30,378 and $17,998 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. 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 Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $91,132 and $53,995 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $108,550. d. Transfer Agent Fees. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $227,092 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asseet based fee agreement for Class A, Class B and Class C. e. Trustees Fees and Expenses. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been, had it been invested in the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 19 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000 4. Capital Shares. At December 31, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class A Shares Amount Shares Amount -------- ----------- ------------ ----------- ------------ Shares sold ......................................... 4,310,455 $ 48,747,149 3,001,259 $ 32,964,633 Shares issued in connection with the reinvestment of: Distributions from net investment income ......... 711,288 8,028,741 579,635 6,371,109 ----------- ------------ ----------- ------------ 5,021,743 56,775,890 3,580,894 39,335,742 Shares repurchased .................................. (7,948,175) (89,760,622) (6,582,209) (72,192,361) ----------- ------------ ----------- ------------ Net increase (decrease) ............................. (2,926,432) $(32,984,732) (3,001,315) $(32,856,619) ----------- ------------ ----------- ------------ Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class B Shares Amount Shares Amount -------- ----------- ------------ ----------- ------------ Shares sold ......................................... 470,492 $ 5,337,955 192,297 $ 2,115,999 Shares issued in connection with the reinvestment of: Distributions from net investment income ......... 63,521 715,455 52,413 575,303 ----------- ------------ ----------- ------------ 534,013 6,053,410 244,710 2,691,302 Shares repurchased .................................. (751,056) (8,497,037) (510,853) (5,580,593) ----------- ------------ ----------- ------------ Net increase (decrease) ............................. (217,043) $ (2,443,627) (266,143) $ (2,889,291) ----------- ------------ ----------- ------------ Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class C Shares Amount Shares Amount -------- ----------- ------------ ----------- ------------ Shares sold ......................................... 2,004,195 $ 22,667,643 468,444 $ 5,129,636 Shares issued in connection with the reinvestment of: Distributions from net investment income ......... 39,746 448,945 27,936 306,813 ----------- ------------ ----------- ------------ 2,043,941 23,116,588 496,380 5,436,449 Shares repurchased .................................. (2,411,539) (27,272,883) (728,858) (7,963,206) ----------- ------------ ----------- ------------ Net increase (decrease) ............................. (367,598) $ (4,156,295) (232,478) $ (2,526,757) ----------- ------------ ----------- ------------
20 NOTES TO FINANCIAL STATEMENTS -- continued For the Year Ended December 31, 2000
Year Ended December 31, ---------------------------------------------------------- 1999 2000 --------------------------- --------------------------- Class Y Shares Amount Shares Amount -------- ----------- ------------ ----------- ------------ Shares sold ......................................... 131,028 $ 1,487,903 60,347 $ 660,534 Shares issued in connection with the reinvestment of: Distributions from net investment income ......... 40,672 459,988 20,417 225,415 ----------- ------------ ----------- ------------ 171,700 1,947,891 80,764 885,949 Shares repurchased .................................. (238,738) (2,704,801) (434,313) (4,767,911) ----------- ------------ ----------- ------------ Net increase (decrease) ............................. (67,038) $ (756,910) (353,549) $ (3,881,962) ----------- ------------ ----------- ------------ Increase (decrease) derived from capital shares transactions ............................... (3,578,111) $(40,341,564) (3,853,485) $(42,154,629) =========== ============ =========== ============
5. Security Lending. The Fund has entered into an agreement with a third party to lend its securities. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The Fund receives fees for lending its securities. At December 31, 2000 the Fund had on loan securities having a market value of $29,145,769 collateralized by cash in the amount of $29,769,688 which was invested in a short-term instrument. 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Limited Term U.S. Government Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Limited Term U.S. Government Fund (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 22 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes -------------- ---------------- ----------------- --------------- 8,550,448.824 75,594.470 152,565.952 8,778,609.246 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Back Bay Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes ------------- --------------- ----------------- -------------- 7,032,641.897 108,052.605 206,731.791 7,347,426.293 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total -------------- -------------- -------------- Graham T. Allison, Jr. 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer 50,354,056.572 1,888,625.633 52,242,682.205 23 Glossary for Mutual Fund Investors - -------------------------------------------------------------------------------- Total Return - The change in value of a mutual fund investment over a specific period, assuming all earnings are reinvested in additional shares of the fund. Expressed as a percentage. Income Distributions - Payments to shareholders resulting from the net interest or dividend income earned by a fund's portfolio. Capital Gains Distributions - Payments to shareholders of profits earned from selling securities in a fund's portfolio. Capital gains distributions are usually paid once a year, when available. Yield - The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission. Maturity - Refers to the period of time before principal repayment on a bond is due. A bond fund's "average maturity" refers to the weighted average of the maturities of all the individual bonds in the portfolio. Duration - A measure, stated in years, of a bond's sensitivity to interest rates. Duration allows you to compare the volatility of different instruments. As a general rule, for every 1% move in interest rates, a bond is expected to fluctuate in value as indicated by its duration. For example, if interest rates fall by 1%, a bond with a duration of 4 years should rise in value 4%. Conversely, the bond should decline 4% in value if interest rates rise 1%. Treasuries - Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years). Municipal Bond - A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and, in most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges. A small portion of income may be subject to federal and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. 24 NVEST FUNDS Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough Janus Capital Corporation & McCullough Jurika & Voyles Westpeak Investment Advisors Kobrick Funds For current fund performance, ask your financial representative, access the Nvest Funds Web site at www.nvestfunds.com, or call Nvest Funds 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 distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. -------------- Nvest Funds(SM) PRESORT Where The Best Minds Meet(R) STANDARD U.S. POSTAGE - --------------------- PAID P.O. Box 8551 BROCKTON, MA PERMIT NO. 770 Boston, Massachusetts -------------- 02266-8551 - --------------------- www.nvestfunds.com To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs LT56-1200 [RECYCLING LOGO] Printed On Recycled Paper [nvest Funds Logo appears here] NVEST GROWTH AND INCOME FUND Where The Best Minds Meet(R) Annual Report December 31, 2000 - -------------------------------------------------------------------------------- President's Letter - -------------------------------------------------------------------------------- FEBRUARY 2001 - -------------------------------------------------------------------------------- [picture of John Hailer goes here] John T. Hailer If ever there was a time when investors needed to President and Trustee adhere to their long-term goals and not focus too Nvest Funds closely on near-term disruptions, it was last year. Excitement over the "new economy" gave way "Do-it-yourself to the realization that the nation's long-running investors who jumped economic expansion was slowing. The from fund to fund technology-heavy Nasdaq Index was down sharply, as chasing stellar were many markets overseas. But "old economy" performance in the value stocks - those that appear undervalued 1990s did not do as relative to their earnings and assets - revived. well as those who U.S government bonds also delivered good consulted a performance, but most corporate bonds did poorly. professional adviser.*" Especially after the market swings that occurred in 2000, a good resolution for 2001 might be to establish a long-term, diversified plan and stick to it. According to a recent study of results achieved in the 1990s, do-it-yourself investors who jumped from fund to fund chasing stellar performance did not do as well as those who consulted a professional adviser*. If you let your investment adviser help you construct a well-diversified portfolio, you may benefit from varied opportunities and reduce the overall impact of substantial declines in one sector or asset class. To help our shareholders build more broadly based portfolios, we expect to enhance our product line in 2001. As a multi-manager fund family, Nvest Funds is affiliated with 12 respected, well-known fund management firms recognized for their varied styles and areas of expertise. By tapping into this specialized knowledge, we can offer an expanded choice of funds to enable investors and their advisers to build comprehensive, diversified personal portfolios. In addition to offering new investment opportunities in 2001, we plan to continue making Nvest Funds a leader in shareholder-friendly investing with such cutting-edge services as e-delivery on our Web site, www.nvestfunds.com. Finally, in 2001, Nvest Funds will evolve as a global organization. When our parent company was acquired last October by CDC IXIS Asset Management, we became part of one of the top 20 financial organizations in the world. Beginning in May 2001, Nvest Funds will be adding the CDC name to our existing brand. This change will affect the names of the funds only, and not their objectives or strategies. As part of a $300 billion (as of 12/31/00) global organization, we look forward to broadening the range of investment disciplines and services we will be able to make available to you. /s/ John T. Hailer ------------------ *Source: "Buy-and-hold strategy is found effective: Study finds investors with advisers do better," by Frederick P. Gabriel Jr., InvestmentNews, January 29, 2001. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- INVESTMENT RESULTS THROUGH DECEMBER 31, 2000 - -------------------------------------------------------------------------------- PUTTING PERFORMANCE IN PERSPECTIVE The charts comparing Nvest Growth and 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 special 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 [A LINE GRAPH DEPICTING GROWTH AT $10,000 APPEARS HERE] 12/31/90 10000 9425 12/31/91 13061 12310 12/31/92 14274 13453 12/31/93 15408 14522 12/31/94 15561 14666 12/31/95 21026 19817 12/31/96 24643 23226 12/31/97 32883 30992 12/31/98 40750 38407 12/31/99 44600 42036 12/31/00 41338 38961 This illustration represents past performance and does not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Other classes of shares are available for which performance, fees and expenses will differ. All results include reinvestment of dividends and capital gains. 1 - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS -- 12/31/00 - -------------------------------------------------------------------------------- CLASS A (Inception 5/6/31) 1 YEAR 5 YEARS 10 YEARS Net Asset Value (1) -7.31% 14.48% 15.25% With Maximum Sales Charge (2) -12.67 13.13 14.57 - -------------------------------------------------------------------------------- CLASS B (Inception 9/13/93) 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value (1) -8.07% 13.62% 13.83% With CDSC(3) -12.53 13.40 13.83 - -------------------------------------------------------------------------------- CLASS C (INCEPTION 5/1/95) 1 YEAR 5 YEARS SINCE INCEPTION Net Asset Value (1) -8.08% 13.61% 15.60% With Maximum Sales Charge and CDSC(3) -9.87 13.38 15.39 - -------------------------------------------------------------------------------- CLASS Y (Inception 11/18/98) 1 YEAR SINCE INCEPTION Net Asset Value (1) -6.97% 4.76% - -------------------------------------------------------------------------------- SINCE SINCE SINCE FUND'S FUND'S FUND'S CLASS B CLASS C CLASS Y COMPARATIVE PERFORMANCE 1 YEAR 5 YEARS 10 YEARS INCEPT. INCEPT. INCEPT. S&P 500 Stock Index (4) -9.10% 18.33% 17.46% 17.94% 20.11% 7.54% Morningstar Large Cap Value Average(5) 5.47 13.91 14.95 14.08 15.99 7.53 Lipper Multi-Cap Core Average(6) 8.86 13.71 15.14 13.92 15.44 8.69 - -------------------------------------------------------------------------------- NOTES TO CHARTS These returns represent past performance and do not guarantee future results. Share price and return will vary, and you may have a gain or loss when you sell your shares. Recent returns may be higher or lower than those shown. Class Y shares are available to certain institutional investors only. 1 These results include reinvestment of any dividends and capital gains, but do not include a sales charge. 2 These results include reinvestment of any dividends and capital gains, and the maximum sales charge of 5.75%. 3 These results include reinvestment of any dividends and capital gains. Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("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. Class C shares for accounts established on or after December 1, 2000, are subject to the 1.00% sales charge. Class C share accounts established prior to December 1, 2000, are not subject to the additional 1.00% sales charge. 4 S&P 500 Stock Index is an unmanaged index of U.S. common stock performance. You may not invest directly in an index. 5 Morningstar Large Cap Value Average is an average performance of funds with similar investment objectives as calculated without sales charges by Morningstar, Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 4/30/95. Class Y since-inception return is calculated from 11/30/98. 6 Lipper Multi-Cap Core Average is the average performance of mutual funds with a similar current investment style or objective as calculated without sales charges by Lipper Inc. Class B since-inception return is calculated from 9/30/93. Class C since-inception return is calculated from 4/30/95. Class Y since-inception return is calculated from 11/30/98. 2 - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- Interview with Your Portfolio Manager - -------------------------------------------------------------------------------- [a picture of Gerald Scriver appears here] Gerald Scriver Westpeak Investment Advisors, L.P. Q. HOW DID NVEST GROWTH AND INCOME FUND PERFORM DURING 2000? For the 12 months ended December 31, 2000, Nvest Growth and Income Fund Class A shares had a total return of -7.31% based on net asset value, including $0.46 in reinvested capital gains. The Fund's benchmark, the Standard & Poor's 500 Index, returned -9.10% for the same period. Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PERIOD? As the year began, market averages soared, but, as was true in 1999, winners were limited to a narrow group of high-growth technology companies, which reached successively higher valuations. These "new economy" stocks commanded investors' attention, despite significant volatility and (in some cases) little or no earnings to justify their price momentum. Price/earnings ratios (P/E ratios) of many technology stocks rose to hundreds of times earnings. (A P/E ratio is a measure of whether a company's stock is priced high or low relative to its earnings.) However, when the technology bubble burst early in March, there was a dramatic shift. The market rotated back to "old economy" stocks that were selling at much lower P/E ratios, as investors focused on current value rather than future promises. During the second half of the year, news indicating a weaker-than-expected economy caused investors to flock toward companies and sectors offering steady, predictable earnings growth. These firms led the market in the latter part of 2000, along with interest-rate sensitive stocks that would benefit if interest rates declined. Q. HOW DID YOU POSITION THE FUND IN RESPONSE TO THESE EVENTS? In managing Nvest Growth and Income Fund, we pursue opportunities in growth- and value-oriented equities because we believe each kind of stock can offer better prospects at different times. We shift the Fund's bias toward value or growth as the market shifts. This flexible approach enables us to adapt to changing trends. At the beginning of the year, we believed that investor preference for overvalued technology stocks would end, and that the market would return to a more traditional, earnings-based approach to analyzing companies. As a result, we focused 3 - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- the portfolio on less volatile stocks with solid growth potential selling at relatively attractive valuations. While the Fund's average P/E ratio has remained well below that of the S&P 500, the average company growth rate has been just about the same. This approach served the Fund well in 2000. Because technology stocks in general continued to be over-valued, we put less emphasis on this sector relative to the Fund's benchmark, the S&P 500, which made it less volatile and improved relative performance. Specifically, we trimmed the Fund's positions in semiconductors, computer hardware, software, and wireless communications. Instead, our search for profitable companies selling at appealing valuations led us to industries sensitive to changes in interest rates - -- thrifts, banks, investment management firms -- as well as consumer staples, such as pharmaceuticals. These sectors tend to enjoy steady earnings growth regardless of broader economic trends. Q. WHICH INVESTMENTS INFLUENCED PERFORMANCE THE MOST, BOTH POSITIVELY AND NEGATIVELY? Fannie Mae (the Federal National Mortgage Association) proved to be one of the Fund's top performers. This stock benefited from low long-term interest rates and subsiding fears that the federal government would rescind or limit the company's implicit government backing. Several pharmaceutical firms also contributed to performance, including Schering-Plough. The defensive nature of utilities stocks helped their performance during this period of economic flux; Nvest Growth and Income Fund's investment in TXU Corporation is a good example of this trend. Defense and aerospace stocks rebounded from depressed levels, and the Fund's investments in Boeing and Northrup Grumman provided healthy gains. On the down side, the Fund's technology stocks hurt performance. Holdings in Yahoo and Advanced Micro Devices -- both of which were swallowed up in the tech downdraft -- declined in value during 2000 and we sold them at a loss. Q. WHAT IS YOUR CURRENT OUTLOOK? The character of the market seems to have changed. Instead of looking for growth at any price, investors appear to have returned to picking stocks based on valuation relative to such fundamentals as earnings history and financial strength. We believe this trend will continue for the next few years. Although we don't 4 - -------------------------------------------------------------------------------- NVEST GROWTH AND INCOME FUND - -------------------------------------------------------------------------------- TOP 10 PORTFOLIO HOLDING - 12/31/00 ----------------------------------- % of Company Net Assets -------------------------------------------- 1. General Electric Co. 4.4 2. Citigroup, Inc. 4.0 3. Pfizer, Inc. 3.8 4. Merck & Co. 3.4 5. Exxon Mobil Corp. 3.3 6. Cisco Systems, Inc. 2.8 7. BellSouth Corp. 2.4 8. Bristol-Myers Squibb Co. 2.4 9. Johnson & Johnson, Inc. 2.3 10. FleetBoston Financial Corp. 2.3 Portfolio holdings and asset allocation will vary. think technology will attract the same level of attention it did at the beginning of last year, we believe that many high-tech companies offer attractive growth prospects. As a result, with prices now down from their peak, we will selectively increase Nvest Growth and Income Fund's weighting in those technology companies with the brightest prospects as opportunities arise. A shift in the Federal Reserve Board's monetary policy was evident in the cut in short-term interest rates, announced just two business days into the new year. The announcement, which surprised most observers by its size (0.5%) and timing (between scheduled meetings), suggests that the Fed has shifted from a concern about potential inflation to the threat of recession if growth slows too precipitously. Consequently, we also plan to maintain our focus on interest-sensitive companies and consumer staples, in anticipation of declining interest rates in 2001 and slower growth than we've experienced in the past several years. The portfolio manager's commentary reflects the conditions and actions taken during the reporting period, which are subject to change. A shift in opinion may result in strategic and other portfolio changes. Nvest Growth and Income Fund invests in growth stocks, which are generally more sensitive to market movements because their stock prices are based on future expectations. It also invests in value stocks, which can fall out of favor with investors and may underperform growth stocks during certain market conditions. It may also invest in foreign and emerging market securities, which have special risks. These risks affect your investment's value. See the Fund's prospectus for details. Frequent portfolio turnover may increase your risk of greater tax liability, which could lower your return from this Fund. 5 - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- Investments as of December 31, 2000 COMMON STOCK -- 99.5% OF TOTAL NET ASSETS SHARES DESCRIPTION VALUE (A) - -------------------------------------------------------------------------------- AEROSPACE-- 2.2% 62,200 Boeing Co. ................................. $ 4,105,200 79,200 Northrop Grumman Corp. ..................... 6,573,600 ----------- 10,678,800 ----------- AIRLINES-- 1.4% 45,400 AMR Corp. (c) .............................. 1,779,112 79,000 Delta Air Lines, Inc. ...................... 3,964,812 35,900 Northwest Airlines Corp. (c) ............... 1,081,488 ----------- 6,825,412 ----------- AUTO PARTS-- 0.3% 50,900 Autozone, Inc. (c) ......................... 1,450,650 ----------- AUTO & RELATED-- 1.8% 171,100 General Motors Corp. ....................... 8,715,406 ----------- BANKS-- 14.5% 97,700 BancWest Corp. ............................. 2,552,413 99,600 Bank of New York Co., Inc. ................. 5,496,675 88,950 Chase Manhattan Corp. ...................... 4,041,666 378,866 Citigroup, Inc. ............................ 19,345,845 126,735 Commerce Bancshares, Inc. ................. 5,386,237 296,500 FleetBoston Financial Corp. ................ 11,137,281 158,600 Golden State Bancorp, Inc. ................. 4,985,987 132,600 Golden West Financial Corp. ................ 8,950,500 12,400 J.P. Morgan & Co., Inc. .................... 2,052,200 62,700 Northern Trust Corp. ....................... 5,113,969 52,300 UnionBanCal Corp. .......................... 1,258,469 ----------- 70,321,242 ----------- BEVERAGES-ALCOHOLIC-- 1.4% 15,600 Adolph Coors Co., Class B .................. 1,252,875 95,800 Anheuser-Busch Co., Inc. ................... 4,358,900 19,900 Brown-Forman Corp., Class B ................ 1,323,350 ----------- 6,935,125 ----------- BUSINESS SERVICES-- 0.2% 76,400 Comdisco, Inc. ............................. 873,825 ----------- CHEMICALS-- 0.7% 26,500 Minnesota Mining & Manufacturing Co. ....... 3,193,250 ----------- CHEMICALS-SPECIALTY-- 1.8% 48,100 Ashland, Inc. .............................. 1,726,309 48,100 Eastman Chemical Co. ....................... 2,344,875 65,300 FMC Corp. (c) .............................. 4,681,194 ----------- 8,752,378 ----------- 6 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - CONTINUED - -------------------------------------------------------------------------------- Investments as of December 31, 2000 COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - -------------------------------------------------------------------------------- COMPUTER HARDWARE-- 4.1% 354,200 Cisco Systems, Inc. (c) .................... $13,548,150 41,300 EMC Corp. (c) .............................. 2,746,450 127,600 Sun Microsystems, Inc. (c) ................. 3,556,850 ----------- 19,851,450 ----------- COMPUTER SOFTWARE & SERVICES-- 2.2% 17,000 Adobe Systems, Inc. ........................ 989,187 191,000 Microsoft Corp. (c) ........................ 8,284,625 18,000 Siebel Systems, Inc. ....................... 1,217,250 ----------- 10,491,062 ----------- DOMESTIC OIL-- 0.3% 59,600 Occidental Petroleum Corp. ................. 1,445,300 ----------- DRUGS--10.4% 155,000 Bristol-Myers Squibb Co. ................... 11,460,313 178,100 Merck & Co. ................................ 16,674,612 402,200 Pfizer, Inc. ............................... 18,501,200 66,700 Schering-Plough Corp. ...................... 3,785,225 ----------- 50,421,350 ----------- ELECTRIC UTILITIES-- 2.8% 27,700 Exelon Corp. ............................... 1,944,817 56,900 Pacific Gas & Electric Corp. ............... 1,138,000 30,300 PPL Corp. .................................. 1,369,181 182,700 Reliant Energy, Inc. ....................... 7,913,194 30,400 TXU Corp. .................................. 1,347,100 ----------- 13,712,292 ----------- ELECTRONIC COMPONENTS-- 1.4% 163,700 STMicroelectronics NV ...................... 7,008,406 ----------- ELECTRONICS-- 4.1% 231,600 AVX Corp. .................................. 3,792,450 115,400 Dover Corp. ................................ 4,680,913 172,800 Molex, Inc. ................................ 6,134,400 115,700 Nortel Networks Corp. ...................... 3,709,631 113,800 Vishay Intertechnology, Inc. ............... 1,721,225 ----------- 20,038,619 ----------- ENERGY RESERVES-- 3.8% 26,800 Chevron Corp. .............................. 2,262,925 185,800 Exxon Mobil Corp. .......................... 16,152,987 ----------- 18,415,912 ----------- 7 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - CONTINUED - -------------------------------------------------------------------------------- Investments as of December 31, 2000 COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - -------------------------------------------------------------------------------- FINANCIAL SERVICES-- 5.5% 63,200 Fannie Mae ............................. $ 5,482,600 443,800 General Electric Co. ................... 21,274,662 ----------- 26,757,262 ----------- FOOD & BEVERAGES-- 4.2% 160,400 Archer-Daniels-Midland Co. ................. 2,406,000 148,100 Pepsi Bottling Group, Inc. ................. 5,914,744 199,200 PepsiCo, Inc. .............................. 9,872,850 69,000 Sysco Corp. ................................ 2,070,000 ----------- 20,263,594 ----------- HEALTH CARE-MANAGED CARE-- 1.5% 120,600 UnitedHealth Group, Inc. ................... 7,401,825 ----------- HEALTH CARE-PRODUCTS-- 3.3% 116,600 DENTSPLY International, Inc. ............... 4,561,975 107,700 Johnson & Johnson, Inc. .................... 11,315,231 ----------- 15,877,206 ----------- HEALTH CARE-SERVICES-- 1.1% 76,300 HCA-The Healthcare Co. ..................... 3,357,963 37,400 Hillenbrand Industries, Inc. ............... 1,926,100 ----------- 5,284,063 ----------- HOME BUILDERS-- 1.5% 23,300 Centex Corp. ............................... 875,206 176,200 Lennar Corp. ............................... 6,387,250 ----------- 7,262,456 ----------- HOUSEHOLD PRODUCTS-- 2.1% 161,600 Colgate-Palmolive Co. ...................... 10,431,280 ----------- INDUSTRIAL MACHINERY-- 0.8% 52,200 Caterpillar, Inc. .......................... 2,469,712 33,900 Deere & Co. ................................ 1,553,044 ----------- 4,022,756 ----------- INFORMATION SERVICES-- 1.4% 52,800 Omnicom Group, Inc. ........................ 4,375,800 57,200 SunGard Data Systems, Inc. (c) ............. 2,695,550 ----------- 7,071,350 ----------- INSURANCE-- 4.8% 24,700 CIGNA Corp. ................................ 3,267,810 40,400 Erie Indemnity Co. ......................... 1,204,425 66,600 Loews Corp. ................................ 6,897,262 52,700 MGIC Investment Corp. ...................... 3,553,956 46,500 PMI Group, Inc. ............................ 3,147,469 29,400 Radian Group, Inc. ......................... 2,206,838 23,200 The MONY Group, Inc. ....................... 1,146,950 6,600 White Mountains Insurance Group Ltd ........ 2,105,400 ----------- 23,530,110 ----------- 8 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - CONTINUED - -------------------------------------------------------------------------------- Investments as of December 31, 2000 COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - -------------------------------------------------------------------------------- INTERNET-- 0.2% 47,600 Inktomi Corp. (c) .......................... $ 850,850 ----------- INTERNET CONTENT-- 0.3% 64,700 CNET Networks, Inc. (c) .................... 1,035,200 87,100 Vitria Technology, Inc. .................... 675,025 ----------- 1,710,225 ----------- LEISURE-- 0.8% 127,800 The Walt Disney Co. ........................ 3,698,213 ----------- MARKETING SERVICES-- 0.2% 14,100 TMP Worldwide, Inc. (c) .................... 775,500 ----------- OFFICE FURNISHINGS & SUPPLIES-- 0.4% 140,700 Steelcase, Inc. ............................ 1,952,213 ----------- OIL & GAS-REFINING/MARKETING-- 1.5% 237,500 Ultramar Diamond Shamrock .................. 7,332,812 ----------- OIL-REFINING & DISTRIBUTION-- 0.4% 28,800 Texaco, Inc. ............................... 1,789,200 ----------- RESTAURANTS-- 0.3% 38,200 Tricon Global Restaurants, Inc. (c) ........ 1,260,600 ----------- RETAIL-CLOTHING-- 0.2% 54,200 The Limited, Inc. .......................... 924,788 ----------- RETAIL-DEPARTMENT STORE-- 3.2% 43,300 Kohl's Corp. (c) ........................... 2,641,300 53,100 Neiman Marcus Group ........................ 1,888,369 292,200 Sears, Roebuck & Co. ....................... 10,153,950 18,100 Wal-Mart Stores, Inc. ...................... 961,562 ----------- 15,645,181 ----------- RETAIL-SPECIALTY-- 1.8% 42,000 BJ's Wholesale Club (c) .................... 1,611,750 83,600 Caremark Rx, Inc. (c) ...................... 1,133,825 67,600 Tiffany & Co. .............................. 2,137,850 234,900 Toys R Us, Inc. (c) ........................ 3,919,894 ----------- 8,803,319 ----------- SECURITIES & ASSET MANAGEMENT-- 2.3% 18,600 A.G. Edwards, Inc. ......................... 882,338 82,300 Merrill Lynch & Co., Inc. .................. 5,611,831 58,100 Morgan Stanley Dean Witter & Co. ........... 4,604,425 ----------- 11,098,594 ----------- SEMICONDUCTORS-- 2.5% 68,800 Advanced Micro Devices, Inc. (c) ........... 950,300 27,800 Analog Devices, Inc. ....................... 1,423,012 260,200 Arrow Electronics, Inc. (c) ................ 7,448,225 25,300 KLA-Tencor Corp. (c) ....................... 852,294 38,800 Micron Technology, Inc. .................... 1,377,400 ----------- 12,051,231 ----------- 9 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- PORTFOLIO COMPOSITION - CONTINUED - -------------------------------------------------------------------------------- Investments as of December 31, 2000 COMMON STOCK -- CONTINUED SHARES DESCRIPTION VALUE (A) - -------------------------------------------------------------------------------- SERVICES-DATA PROCESSING-- 0.5% 38,200 Automatic Data Processing, Inc. ............ $2,418,538 ----------- SOFTWARE--1.3% 44,100 Cadence Design Systems, Inc. (c) ........... 1,212,750 57,100 Jack Henry & Associates, Inc. .............. 3,547,338 92,400 Sybase, Inc. (c) ........................... 1,830,675 ----------- 6,590,763 ----------- TELECOMMUNICATIONS-- 3.6% 289,700 BellSouth Corp. ............................ 11,859,594 55,500 Qwest Communications International, Inc. (c) 2,275,500 56,900 Verizon Communications, Inc. ............... 2,852,112 26,800 West Teleservices Corp. (c) ................ 753,750 ----------- 17,740,956 ----------- TELECOMMUNICATIONS-EQUIPMENT-- 0.4% 39,900 Corning, Inc. .............................. 2,107,219 ----------- Total Common Stock (Identified Cost $468,025,271) 483,782,583 ----------- SHORT TERM INVESTMENT -- 0.8% Principal Amount - -------------------------------------------------------------------------------- $ 3,885,000 Repurchase Agreement with State Street Bank and Trust Co. dated 12/29/2000 at 5.25% to be repurchased at $3,887,266 on 1/02/2001, collateralized by $3,905,000 U.S. Treasury Note 6.250% due 10/31/2001 valued at $3,963,692 3,885,000 ----------- Total Short Term Investment (Identified Cost $3,885,000) .......... 3,885,000 ----------- Total Investments--100.3% (Identified Cost $471,910,271) (b) .... 487,667,583 Other assets less liabilities ............... (1,681,645) ----------- Total Net Assets--100% ...................... $ 485,985,938 ================ (a) See Note 1a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2000 the net unrealized appreciation on investments based on cost of $472,048,686 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 $ 59,262,227 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (43,643,330) ----------- Net unrealized appreciation $ 15,618,897 ============== At December 31, 2000 the Fund had a capital loss carryover of approximately $19,895,206 which expires on December 31, 2008. (c) Non-income producing security. 10 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF ASSETS & LIABILITIES - -------------------------------------------------------------------------------- December 31, 2000
ASSETS Investments at value (Identified cost $471,910,271) .................... $ 487,667,583 Cash ................................................................... 4,324 Receivable for: Fund shares sold .................................................. 573,859 Dividends and interest ............................................ 510,758 -------------- 488,756,524 LIABILITIES Payable for: Fund shares redeemed .............................................. $ 2,229,620 Accrued expenses: Management fees ................................................... 276,493 Transfer agent .................................................... 135,600 Deferred trustees' fees ........................................... 40,184 Accounting and administrative ..................................... 14,900 Other ............................................................. 73,789 --------------- 2,770,586 -------------- NET ASSETS ..................................................................... $ 485,985,938 ============== Net Assets consist of: Paid in capital ................................................... $ 499,302,454 Undistributed (overdistributed) net investment income (loss) ...... (37,026) Accumulated net realized gain (loss) .............................. (29,036,802) Unrealized appreciation (depreciation) on investments - net ....... 15,757,312 -------------- NET ASSETS ..................................................................... $ 485,985,938 ============== Computation of net asset value and offering price: Net asset value and redemption price of Class A shares ($290,714,305 / 21,085,965 shares of beneficial interest) ............. $ 13.79 ========== Offering price per share (100 / 94.25 of $13.79) ...................... $ 14.63* ========== Net asset value and offering price of Class B shares ($165,767,301 / 12,369,929 shares of beneficial interest) ............. $ 13.40** ========== Net asset value of Class C shares ($19,373,014 / 1,447,676 shares of beneficial interest) ............... $ 13.38** ========== Offering price per share (100 / 99.00 of $13.38) ...................... $ 13.52 ========== Net asset value, offering and redemption price of Class Y shares ($10,131,318 / 730,204 shares of beneficial interest) ................. $ 13.87 ==========
* Based upon single purchases of less than $50,000. Reduced sales charges apply for purchases in excess of this amount. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges. 11 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- Year Ended December 31, 2000
INVESTMENT INCOME Dividends (net of foreign taxes of $32,088) ............................ $ 6,967,607 Interest ............................................................... 226,006 --------------- 7,193,613 Expenses Management fees ................................................... $ 3,609,994 Service fees - Class A ............................................ 813,270 Service and distribution fees - Class B ........................... 1,848,153 Service and distribution fees - Class C ........................... 221,750 Trustees' fees and expenses ....................................... 26,077 Accounting and administrative ..................................... 200,274 Custodian ......................................................... 132,186 Transfer agent - Class A, Class B, Class C ........................ 1,546,484 Transfer agent - Class Y .......................................... 11,181 Audit and tax services ............................................ 35,797 Legal ............................................................. 8,860 Printing .......................................................... 97,621 Registration ...................................................... 56,612 Miscellaneous ..................................................... 26,759 --------------- Total expenses before reductions ....................................... 8,635,018 Less reductions ........................................................ (151,939) 8,483,079 --------------- --------------- Net investment income (loss) ........................................... (1,289,466) --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on investments - net .............................. (28,022,955) Unrealized appreciation (depreciation) on investments - net ............ (15,665,445) --------------- Net gain (loss) on investment transactions ............................. (43,688,400) --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......................... $ (44,977,866) ===============
See accompanying notes to financial statements. 12 - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 2000 ---------------- ----------------- FROM OPERATIONS Net investment income (loss) ........................................... $ 998,681 $ (1,289,466) Net realized gain (loss) on investments ................................ 100,407,049 (28,022,955) Net unrealized appreciation (depreciation) on investments ......... (52,996,051) (15,665,445) ----------- ----------- Increase (decrease) in net assets from operations ...................... 48,409,679 (44,977,866) ----------- ----------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ........................................................... (1,056,821) 0 Class Y ........................................................... (55,735) 0 In excess of net investment income Class A ........................................................... (49,021) 0 Class Y ........................................................... (2,585) 0 Net realized gain on investments Class A ........................................................... (57,051,170) (9,846,335) Class B ........................................................... (33,147,376) (5,698,512) Class C ........................................................... (4,191,359) (657,800) Class Y ........................................................... (2,192,903) (324,610) ----------- ----------- (97,746,970) (16,527,257) ----------- ----------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ................................ 207,032,451 (86,001,450) ----------- ----------- Total increase (decrease) in net assets ........................................ 157,695,160 (147,506,573) ----------- ----------- NET ASSETS Beginning of the year .................................................. 475,797,351 633,492,511 ----------- ----------- End of the year ........................................................ $ 633,492,511 $ 485,985,938 =============== =============== UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME (LOSS) End of the year ........................................................ $ (21,416) $ (37,026) =============== ===============
13 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- For a share outstanding throughout each period.
CLASS A ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------------------------------------------------------------------- Net Asset Value, Beginning of the Year .................... $ 14.39 $ 13.87 $ 15.35 $ 16.57 $ 15.33 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) .............................. 0.13 0.07(b) 0.04 0.08 0.01(b) Net Realized and Unrealized Gain (Loss) on Investments ..................................... 2.07 4.40 3.29 1.40 (1.09) ------- ------- ------- ------- ------- Total From Investment Operations .......................... 2.20 4.47 3.33 1.48 (1.08) ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income ...................... (0.13) (0.06) (0.01) (0.06) 0.00 Distributions From Net Realized Capital Gains ............. (2.59) (2.93) (2.10) (2.66) (0.46) Distributions in Excess of Net Investment Income .......... 0.00 0.00 0.00 0.00(c) 0.00 ------- ------- ------- ------- ------- Total Distributions ....................................... (2.72) (2.99) (2.11) (2.72) (0.46) ------- ------- ------- ------- ------- Net Asset Value, End of the Year .......................... $ 13.87 $ 15.35 $ 16.57 $ 15.33 $ 13.79 ======= ======= ======= ======= ======= Total Return (%)(a) ....................................... 17.2 33.4 23.9 9.5 (7.3) Ratio of Operating Expenses to Average Net Assets (%) .................................... 1.30 1.25 1.23 1.21 1.31 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ................... 1.30 1.25 1.23 1.21 1.28(d) Ratio of Net Investment Income to Average Net Assets (%) .................................... 0.92 0.46 0.33 0.48 0.04 Portfolio Turnover Rate (%) ............................... 127 103 114 133 139 Net Assets, End of the Year (000) ......................... $166,963 $220,912 $304,139 $375,676 $290,714
(a) A sales charge is not reflected in total return calculations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) Amount is less than $0.01 per share. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 14 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- For a share outstanding throughout each period.
CLASS B ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------------------------------------------------------------------- Net Asset Value, Beginning of the Year .................... $ 14.40 $ 13.87 $ 15.28 $ 16.37 $ 15.03 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) .............................. 0.03 (0.05)(b) (0.05) (0.04) (0.10)(b) Net Realized and Unrealized Gain (Loss) on Investments ..................................... 2.07 4.40 3.24 1.36 (1.07) ------- ------- ------- ------- ------- Total From Investment Operations .......................... 2.10 4.35 3.19 1.32 (1.17) ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income ...................... (0.04) (0.01) 0.00 0.00 0.00 Distributions From Net Realized Capital Gains ............. (2.59) (2.93) (2.10) (2.66) (0.46) Distributions in Excess of Net Investment Income .......... 0.00 0.00 0.00 0.00(c) 0.00 ------- ------- ------- ------- ------- Total Distributions ....................................... (2.63) (2.94) (2.10) (2.66) (0.46) ------- ------- ------- ------- ------- Net Asset Value, End of the Year .......................... $ 13.87 $ 15.28 $ 16.37 $ 15.03 $ 13.40 ======= ======= ======= ======= ======= Total Return (%)(a) ....................................... 16.3 32.4 23.1 8.6 (8.1) Ratio of Operating Expenses to Average Net Assets (%) .................................... 2.05 2.00 1.98 1.96 2.06 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ........... 2.05 2.00 1.98 1.96 2.03(d) Ratio of Net Investment Income (Loss) to Average Net Assets (%) .................................... 0.17 (0.29) (0.42) (0.27) (0.71) Portfolio Turnover Rate (%) ............................... 127 103 114 133 139 Net Assets, End of the Year (000) ......................... $46,856 $81,066 $153,369 $216,457 $165,767
(a) A contingent deferred sales charge is not reflected in total return calculations. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) Amount is less than $0.01 per share. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 15 See accompanying notes to financial statement. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- For a share outstanding throughout each period.
CLASS C ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------------------------------------------------------------------- Net Asset Value, Beginning of the Year .................... $ 14.39 $ 13.85 $ 15.28 $ 16.35 $ 15.01 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) .............................. 0.04 (0.05)(b) (0.04) (0.04) (0.10)(b) Net Realized and Unrealized Gain (Loss) on Investments ................................ 2.05 4.42 3.21 1.36 (1.07) ------- ------- ------- ------- ------- Total From Investment Operations .......................... 2.09 4.37 3.17 1.32 (1.17) ------- ------- ------- ------- ------- Less Distributions Dividends From Net Investment Income ...................... (0.04) (0.01) 0.00 0.00 0.00 Distributions From Net Realized Capital Gains ............. (2.59) (2.93) (2.10) (2.66) (0.46) Distributions in Excess of Net Investment Income .......... 0.00 0.00 0.00 0.00(c) 0.00 ------- ------- ------- ------- ------- Total Distributions ....................................... (2.63) (2.94) (2.10) (2.66) (0.46) ------- ------- ------- ------- ------- Net Asset Value, End of the Year .......................... $ 13.85 $ 15.28 $ 16.35 $ 15.01 $ 13.38 ======= ======= ======= ======= ======= Total Return (%)(a) ....................................... 16.3 32.6 22.9 8.6 (8.1) Ratio of Operating Expenses to Average Net Assets (%) ................................. 2.05 2.00 1.98 1.96 2.06 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) ........... 2.05 2.00 1.98 1.96 2.03(d) Ratio of Net Investment Income (Loss) to Average Net Assets (%) ................................. 0.17 (0.29) (0.42) (0.27) (0.71) Portfolio Turnover Rate (%) ............................... 127 103 114 133 139 Net Assets, End of the Year (000) ......................... $ 3,912 $ 6,735 $18,288 $26,983 $19,373
(a) A sales charge and a contingent deferred sales charge are not reflected in total return calculations.. (b) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. (c) Amount is less than $0.01 per share. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. 16 See accompany notes to financial statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- For a share outstanding throughout each period.
Class Y November 18,(a) through December 31, Year Ended December 31, 1998 1999 2000 ----------------------------------------------- Net Asset Value, Beginning of the Period ........ $ 15.42 $ 16.57 $ 15.36 --------- --------- --------- Income From Investment Operations Net Investment Income ................ ......... 0.02 0.02 0.07(f) Net Realized and Unrealized Gain (Loss) on Investments ....................... 1.22 1.51 (1.10) --------- --------- --------- Total From Investment Operations ............... 1.24 1.53 (1.03) --------- --------- --------- Less Distributions Dividends From Net Investment Income ........... (0.02) (0.08) 0.00 Distributions From Net Realized Capital Gains .. (0.07) (2.66) (0.46) Distributions in Excess of Net Investment Income ........ 0.00 0.00(c) 0.00 --------- --------- --------- Total Distributions ............................ (0.09) (2.74) (0.46) --------- --------- --------- Net Asset Value, End of the Period ............. $ 16.57 $ 15.36 $ 13.87 ========= ========= ========= Total Return (%) ............................... 8.1(e) 9.8 (7.0) Ratio of Operating Expenses to Average Net Assets (%) .................... 0.98(b) 0.96 0.87 Ratio of Operating Expenses to Average Net Assets After Expense Reductions (%) 0.98(b) 0.96 0.84(d) Ratio of Net Investment Income (Loss) to Average Net Assets (%) .............................. 0.58(b) (0.73) 0.48 Portfolio Turnover Rate (%) .................... 114 133 139 Net Assets, End of the Period (000) ............ $ 1 $ 14,377 $ 10,131
(a) Commencement of operations. (b) Computed on an annualized basis. (c) Amount is less than $0.01 per share. (d) The Fund has entered into agreements with certain brokers to rebate a portion of brokerage commissions. The rebated commissions are used to reduce operating expenses of the Fund. (e) Periods less than one year are not annualized. (f) Per share net investment income (loss) has been calculated using the average shares outstanding during the period. 17 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES. The Nvest Growth and Income Fund (the "Fund") is a series of Nvest Funds Trust II, a Massachusetts business trust ("the Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The Fund seeks opportunities for long-term growth of capital and income. The Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (each such series is a "Fund"). The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold with a maximum front end sales charge of 5.75%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge if those shares are redeemed within six years of purchase (or five years if purchased prior to May 1, 1997). Class C shares 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 an additional contingent deferred sales charge of 1.00% if those shares are redeemed within one year. Accounts established prior to December 1, 2000 will not be subject to the 1.00% front end sales charge for exchange or additional purchases of Class C shares. Class Y shares do not pay a front end sales charge, a contingent deferred sales charge or distribution fees. They are intended for institutional investors with a minimum initial investment of $1,000,000. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees and transfer agent fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro rata share of the net assets of the Fund, if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. SECURITY VALUATION. Equity securities are valued on the basis of valuations furnished 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. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Fund's adviser and subadviser, under the supervision of the Fund's Trustees. B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date and interest income is recorded on an accrual basis. Interest 18 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 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. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders 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. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to net operating losses. Permanent book and tax basis differences relating to shareholder distributions will result in reclassification to capital accounts. E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is the Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. The Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. 2. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 2000, purchases and sales of securities (excluding short-term investments) were $751,698,548 and $851,501,799, respectively. 3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross management fees to its investment adviser Nvest Funds Management, L.P. ("Nvest Management") at the annual rate of 0.70% of the first $200 million of the Fund's average daily net assets, 0.65% of the next $300 million and 0.60% of such assets in excess of $500 million, reduced by the payment to the Fund's investment subadviser, Westpeak Investment Advisors, L.P. ("Westpeak"), at the rate of 0.50% of the first $25 million of the Fund's average daily net assets, 0.40% of the next $75 million, 0.35% of the next $100 million and 0.30% of such assets in excess of $200 million. Certain officers and directors of Nvest Management are also officers or Trustees of the Fund. Nvest Management and Westpeak are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), which is an indirect, wholly owned subsidiary of CDC IXIS Asset Management S.A. Fees earned by Nvest Management and Westpeak under the management and subadvisery agreements in effect during the year ended December 31, 2000 are as follows: FEES EARNED ------------ Nvest Management $ 1,819,201 Westpeak 1,790,793 -------------- $ 3,609,994 ============== The effective management fee for the year ended December 31, 2000 was 0.66%. 19 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC") is a wholly owned subsidiary of Nvest and performs certain accounting and administrative services for the Fund. The Fund pays NSC its pro rata portion of a group fee for these services equal to the annual rate of 0.035% of the first $5 billion of Nvest Funds' average daily net assets, 0.0325% of the next $5 billion of the Nvest Funds' average daily net assets, and 0.03% of the Nvest Funds' average daily net assets in excess of $10 billion. For the year ended December 31, 2000, these expenses amounted to $200,274 and are shown separately in the financial statements as accounting and administrative. The effective accounting and administrative expense for the year ended December 31, 2000 was 0.035%. C. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent to the Fund and Boston Financial Data Services ("BFDS") serves as the sub-transfer agent for the Fund. NSC receives account fees for Class A, Class B and Class C shareholder accounts. NSC and BFDS are also reimbursed by the Fund for out-of-pocket expenses. Class Y shares bear a transfer agent fee of 0.10% of average daily net assets. For the year ended December 31, 2000, the Fund paid NSC $1,091,599 as compensation for its services as transfer agent. Effective January 1, 2001, the Nvest Funds and NSC have entered into an asset based fee agreement for Class A, Class B and Class C. D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a Service Plan relating to the Fund's Class A shares (the "Class A Plan") and Service and Distribution Plans relating to the Fund's Class B and Class C shares (the "Class B and Class C Plans"). Under the Class A Plan, the Fund pays Nvest Funds Distributor, L.P. ("Nvest Funds L.P."), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by Nvest Funds L.P. in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $813,270 in fees under the Class A Plan. Under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. 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 Nvest Funds L.P. in providing personal services to investors in Class B and Class C shares and/or the maintenance of shareholder accounts. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $462,038 and $55,438 in service fees under the Class B and Class C Plans, respectively. Also under the Class B and Class C Plans, the Fund pays Nvest Funds L.P. 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 Nvest Funds L.P. in connection with the marketing or sale of Class B and Class C shares. For the year ended December 31, 2000, the Fund paid Nvest Funds L.P. $1,386,115 and $166,132 in distribution fees under the Class B and Class C Plans, respectively. Commissions (including contingent deferred sales charges) on Fund shares paid to Nvest Funds L.P. by investors in shares of the Fund during the year ended December 31, 2000 amounted to $1,102,440. 20 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly to its officers or Trustees who are directors, officers or employees of Nvest Management, Nvest Funds L.P., Nvest, NSC or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $6,000 while each committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual rate of $4,000. These fees are allocated to the various Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (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 the Fund or certain other Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 4. CAPITAL SHARES. At December 31, 2000 there was an unlimited number of shares of beneficial interest authorized, divided into four classes, Class A, Class B, Class C and Class Y. Transactions in capital shares were as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1999 2000 --------------------------------- CLASS A SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 11,472,939 $197,730,741 2,873,932 $ 42,088,117 Shares issued in connection with t he reinvestment of: Dividends from net investment income 53,068 962,663 0 0 Distributions from net realized gain 3,434,246 51,752,162 563,741 8,467,385 14,960,253 250,445,566 3,437,673 50,555,502 Shares repurchased (8,811,484) (151,367,164) (6,850,800) (99,658,068) Net increase (decrease) 6,148,769 $ 99,078,402 (3,413,127) $(49,102,566) YEAR ENDED DECEMBER 31, ----------------------- 1999 2000 --------------------------------- CLASS B SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 5,249,461 $ 88,949,545 2,001,301 $ 28,452,164 Shares issued in connection with the reinvestment of: Distributions from net realized gain 2,070,562 30,607,517 363,541 5,322,243 7,320,023 119,557,062 2,364,842 33,774,407 Shares repurchased (2,288,012) (38,363,095) (4,398,290) (62,609,963) Net increase (decrease) 5,032,011 $ 81,193,967 (2,033,448) $(28,835,556) 21 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 YEAR ENDED DECEMBER 31, ----------------------- 1999 2000 --------------------------------- CLASS C SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 999,688 $ 16,915,102 351,286 $ 4,982,198 Shares issued in connection with the reinvestment of: Distributions from net realized gain 247,673 3,657,804 38,767 566,773 1,247,361 20,572,906 390,053 5,548,971 Shares repurchased (568,351) (9,465,865) (740,101) (10,572,630) Net increase (decrease) 679,010 $ 11,107,041 (350,048) $ (5,023,659) YEAR ENDED DECEMBER 31, ----------------------- 1999 2000 --------------------------------- CLASS Y SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------------ Shares sold 972,875 $ 16,586,441 156,868 $ 2,289,327 Shares issued in connection with the reinvestment of: Dividends from net investment income 3,202 58,080 0 0 Distributions from net realized gain 144,486 2,180,268 21,472 324,011 1,120,563 18,824,789 178,340 2,613,338 Shares repurchased (184,433) (3,171,748) (384,312) (5,653,007) Net increase (decrease) 936,130 $ 15,653,041 (205,972) $ (3,039,669) Increase (decrease) derived from capital shares transactions 12,795,920 $207,032,451 (6,002,595) $(86,001,450)
5. LINE OF CREDIT. The Fund along with certain other portfolios that comprise the Nvest Funds (the "Funds") participate in a $100,000,000 committed line of credit provided by Citibank, N.A. under a credit agreement (the "Agreement") dated March 2, 2000. Advances under the Agreement are taken primarily for temporary or emergency purposes. Borrowings under the Agreement bear interest at a rate tied to one of several short-term rates that may be selected from time to time by the lender. 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, 2000. 6. EXPENSE REDUCTIONS. The Fund has entered into agreements with brokers whereby the brokers will rebate a portion of brokerage commissions. Amounts earned by the Fund under such agreements are presented as a reduction of expenses in the Statement of Operations. For the year ended December 31, 2000, the Fund's expenses were reduced by $151,939 under these agreements. 22 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Trustees of Nvest Funds Trust II and the Shareholders of the Nvest Growth and Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio composition, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Nvest Growth and Income Fund (the "Fund"), a series of Nvest Funds Trust II, at December 31, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States 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, 2000 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 2001 23 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on October 13, 2000 (the "Meeting") shareholders of the Fund voted for the following proposals: 1. Approval of a new advisory agreement between the Fund and Nvest Management. Voted For Voted Against Abstained Votes Total Votes 18,964,062.337 331,319.111 582,811.880 19,878,193.328 2. Approval of a new subadvisory agreement among Nvest Management, the Fund and Westpeak Investment Advisors, L.P. Voted For Voted Against Abstained Votes Total Votes 18,988,417.145 333,823.167 555,953.016 19,878,193.328 Also at the Meeting, shareholders of all funds that comprise the Trust, including the Fund, voted for the following proposal: 3. Election of Trustees to hold office until their respective successors have been duly elected and qualified or until their earlier resignation or removal. Affirmative Withheld Total Graham T. Allison, Jr ..... 50,351,179.727 1,891,502.478 52,242,682.205 Daniel M. Cain ............ 50,358,991.628 1,883,690.577 52,242,682.205 Kenneth J. Cowan .......... 50,332,652.513 1,910,029.692 52,242,682.205 Richard Darman ............ 50,340,819.239 1,901,862.966 52,242,682.205 Sandra O. Moose ........... 50,337,844.135 1,904,838.070 52,242,682.205 John A. Shane ............. 50,350,695.242 1,891,986.963 52,242,682.205 Peter S. Voss ............. 50,358,652.504 1,884,029.701 52,242,682.205 Pendleton P. White ........ 50,336,723.808 1,905,958.397 52,242,682.205 John T. Hailer ............ 50,354,056.572 1,888,625.633 52,242,682.205 24 - -------------------------------------------------------------------------------- NVEST FUNDS - -------------------------------------------------------------------------------- Nvest AEW Real Estate Fund Nvest Balanced Fund Nvest Bond Income Fund Nvest Bullseye Fund Nvest Capital Growth Fund Nvest Cash Management Trust - Money Market Series* Nvest Government Securities Fund Nvest Growth Fund Nvest Growth and Income Fund Nvest High Income Fund Nvest Intermediate Term Tax Free Fund of California Nvest International Equity Fund Nvest Large Cap Value Fund Nvest Limited Term U.S. Government Fund Nvest Massachusetts Tax Free Income Fund Nvest Municipal Income Fund Nvest Short Term Corporate Income Fund Nvest Star Advisers Fund Nvest Star Small Cap Fund Nvest Star Value Fund Nvest Star Worldwide Fund Nvest Strategic Income Fund Nvest Tax Exempt Money Market Trust* Kobrick Capital Fund Kobrick Emerging Growth Fund Kobrick Growth Fund * Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Loomis, Sayles & Company Back Bay Advisors Montgomery Asset Management Capital Growth Management RS Investment Management Harris Associates/Oakmark Funds Vaughan, Nelson, Scarborough & McCullough Janus Capital Corporation Westpeak Investment Advisors Jurika & Voyles Kobrick Funds - -------------------------------------------------------------------------------- This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about distribution charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. Nvest Funds Distributor, L.P., and other firms selling shares of Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their Web site at www.NASDR.com. [NVEST FUNDS LOGO GOES HERE] - ---------------------- P.O. Box 8551 Boston, Massachusetts 02266-8551 - ---------------------- www.nvestfunds.com ----------------- Presort Standard U.S. Postage PAID Brockton, MA Permit No. 770 ----------------- To the household of: DROWNING IN PAPER? Go to: www.nvestfunds.com Click on: Sign up now for e-delivery* Get your next Nvest Fund report online. *not available for Corporate Retirement Plans and Simple IRAs [RECYCLING LOGO GOES HERE] Printed On Recycled Paper GP56-1200 -----END PRIVACY-ENHANCED MESSAGE-----