N-CSR 1 dncsr.txt CDC NVEST FUNDS TRUST II UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-242 CDC Nvest Funds II -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 399 Boylston Street, Boston, Massachusetts 02116 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) John E. Pelletier, Esq. CDC IXIS Asset Management Distributors, L.P. 399 Boylston Street Boston, Massachusetts 02116 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (617) 449-2801 Date of fiscal year end: September 30, 2003 Date of reporting period: September 30, 2003 Item 1. Reports to Stockholders. The Registrant's annual reports transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: [LOGO OF CDC NVEST FUNDS (SM)] TAX FREE INCOME FUNDS ANNUAL REPORT September 30, 2003 [LOGO OF LOOMIS SAYLES FUNDS] Loomis Sayles Massachusetts Tax Free Income Fund (formerly CDC Nvest Massachusetts Tax Free Income Fund) Loomis Sayles Municipal Income Fund (formerly CDC Nvest Municipal Income Fund) TABLE OF CONTENTS Management Discussion and Performance..........Page 1 Fund Risks.....................................Page 5 Schedule of Investments........................Page 6 Financial Statements..........................Page 10 LOOMIS SAYLES MASSACHUSETTS TAX FREE INCOME FUND PORTFOLIO PROFILE -------------------------------------------------------------------------------- OBJECTIVE: Seeks to maintain a high level of current income exempt from federal and Massachusetts personal income taxes STRATEGY: Invests primarily in Massachusetts municipal bonds, including general obligation bonds and issues secured by specific revenue streams INCEPTION DATE: March 23, 1984 MANAGER: Martha A. Strom Robert Payne Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFMX Class B NEMBX NET ASSET VALUE PER SHARE: (September 30, 2003) Class A $ 16.41 Class B 16.37 MANAGEMENT DISCUSSION -------------------------------------------------------------------------------- Loomis Sayles Massachusetts Tax Free Income Fund's total return for the nine months ended September 30, 2003* was 3.09% based on the net asset value of Class A shares and $0.49 in dividends reinvested during the period, while the Lehman Brothers Municipal Bond Index returned 3.89%. Morningstar's Muni Massachusetts category had an average return of 3.13% for the same period. As of September 30, 2003, the fund's 30-day SEC yield on Class A shares was 3.66% - equivalent to a taxable yield of 5.95% based on the 38.45% combined maximum federal and Massachusetts state income tax rate. Revenue bonds continue to perform well Fund revenue bonds issued for companies in the education, healthcare and housing sectors experienced solid performance year-to-date. The supply of such issues in Massachusetts has dwindled, while investor demand has increased, improving price performance. The fund's top performers in these sectors included Massachusetts State Health & Education for Nichols College and Massachusetts State Health & Education for Dana Farber Cancer Institute. Bonds issued by Massachusetts State Development Finance Agency for Concord-Assabet Family Services were upgraded in September to Ba2 by Moody's (from Caa3), reflecting improved fundamentals. Tax-backed and shorter maturity bonds had lackluster performance Tax-backed bonds continue to be volatile due to the negative press surrounding state and local budget problems in California and various East Coast localities, including Massachusetts. While the fund's exposure to this sector is of high average credit quality, continued negative news stories, combined with the longer maturity structure of the bonds owned, caused the fund to lag. Shorter maturity bonds, such as pre-refunded and "escrowed to maturity" bonds also experienced lackluster performance. When bonds are either pre-refunded or escrowed to maturity, the issuer typically purchases Treasury securities to replace the original bonds and the "call date" (the earliest date by which the issuer can call in its debt) becomes the new effective maturity date. The dual effect of raising quality and shortening maturity ultimately reduces yield to a level where there is little room for price appreciation. Many of our transactions during the year have been to reduce exposure to these bonds and reinvest proceeds in higher-yielding issues. The fund's insured bonds also lagged because their relatively low yields caused investor demand for these issues to decline. While individual investors typically look for insured bonds garnering at least 5% in yield selling at a discount to par value, the fund has focused on bonds with a coupon of 5% or better priced above par. There has been little demand for this structure from retail investors and performance has lagged as a result. Insured bonds accounted for 32% of the fund's total assets as of the end of September, vs. approximately 48% in the fund's Lehman benchmark. Fund is positioned for a rising interest rate environment in 2004 As of the end of September, the fund's average maturity was about ten years, which is short for this fund, in expectation of rising interest rates in 2004. We believe our emphasis on bonds selling at a premium to their par value will contribute positively to performance longer term, because premium bonds tend to experience less price erosion in a rising interest rate environment. *Effective after the close of business on September 12, 2003, the fund's fiscal year end was changed from December 31 to September 30. 1 LOOMIS SAYLES MASSACHUSETTS TAX FREE INCOME FUND INVESTMENT RESULTS THROUGH SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- Performance in Perspective The charts comparing Loomis Sayles 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 differences between the two. The fund's total return for the period shown below appears with and without sales charges and includes fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES* -------------------------------------------------------------------------------- [CHART APPEARS HERE] SEPTEMBER 30, 1993 THROUGH SEPTEMBER 30, 2003 Lehman Maximum Municipal Month Net Asset Sales Bond End Value (1) Charge (2) Index (3) --- ----------------------------------------------------- 09/30/1993 10,000 9,575 10,000 10/31/1993 10,012 9,587 10,019 11/30/1993 9,921 9,499 9,931 12/31/1993 10,099 9,669 10,140 01/31/1994 10,232 9,797 10,256 02/28/1994 9,966 9,543 9,991 03/31/1994 9,481 9,078 9,584 04/30/1994 9,507 9,103 9,665 05/31/1994 9,595 9,187 9,749 06/30/1994 9,510 9,106 9,689 07/31/1994 9,695 9,283 9,867 08/31/1994 9,715 9,303 9,901 09/30/1994 9,553 9,147 9,756 10/31/1994 9,323 8,927 9,583 11/30/1994 9,098 8,711 9,409 12/31/1994 9,358 8,960 9,616 01/31/1995 9,677 9,265 9,891 02/28/1995 9,992 9,568 10,179 03/31/1995 10,064 9,637 10,296 04/30/1995 10,080 9,652 10,308 05/31/1995 10,399 9,957 10,637 06/30/1995 10,237 9,802 10,544 07/31/1995 10,309 9,871 10,644 08/31/1995 10,432 9,988 10,779 09/30/1995 10,504 10,058 10,847 10/31/1995 10,680 10,226 11,005 11/30/1995 10,889 10,426 11,187 12/31/1995 11,027 10,558 11,295 01/31/1996 11,062 10,592 11,380 02/29/1996 10,952 10,487 11,303 03/31/1996 10,815 10,356 11,159 04/30/1996 10,784 10,325 11,127 05/31/1996 10,799 10,340 11,123 06/30/1996 10,901 10,437 11,244 07/31/1996 10,983 10,516 11,346 08/31/1996 10,978 10,511 11,343 09/30/1996 11,149 10,675 11,502 10/31/1996 11,266 10,787 11,632 11/30/1996 11,460 10,973 11,845 12/31/1996 11,384 10,900 11,795 01/31/1997 11,404 10,919 11,817 02/28/1997 11,513 11,024 11,926 03/31/1997 11,383 10,899 11,767 04/30/1997 11,476 10,988 11,865 05/31/1997 11,639 11,144 12,044 06/30/1997 11,760 11,260 12,172 07/31/1997 12,095 11,581 12,509 08/31/1997 11,983 11,474 12,392 09/30/1997 12,142 11,626 12,539 10/31/1997 12,201 11,683 12,620 11/30/1997 12,275 11,753 12,694 12/31/1997 12,445 11,916 12,879 01/31/1998 12,545 12,012 13,012 02/28/1998 12,528 11,995 13,016 03/31/1998 12,493 11,962 13,028 04/30/1998 12,448 11,919 12,969 05/31/1998 12,640 12,103 13,174 06/30/1998 12,685 12,146 13,226 07/31/1998 12,692 12,153 13,259 08/31/1998 12,894 12,346 13,464 09/30/1998 13,037 12,483 13,632 10/31/1998 12,984 12,432 13,631 11/30/1998 13,007 12,454 13,679 12/31/1998 13,056 12,501 13,714 01/31/1999 13,206 12,645 13,877 02/28/1999 13,146 12,587 13,816 03/31/1999 13,130 12,572 13,835 04/30/1999 13,169 12,609 13,870 05/31/1999 13,084 12,528 13,789 06/30/1999 12,871 12,324 13,591 07/31/1999 12,916 12,367 13,641 08/31/1999 12,733 12,192 13,531 09/30/1999 12,695 12,156 13,537 10/31/1999 12,518 11,986 13,390 11/30/1999 12,629 12,092 13,533 12/31/1999 12,518 11,986 13,432 01/31/2000 12,416 11,888 13,373 02/29/2000 12,570 12,036 13,529 03/31/2000 12,806 12,262 13,824 04/30/2000 12,748 12,206 13,743 05/31/2000 12,698 12,158 13,671 06/30/2000 12,953 12,403 14,033 07/31/2000 13,118 12,561 14,229 08/31/2000 13,282 12,718 14,448 09/30/2000 13,229 12,667 14,373 10/31/2000 13,336 12,769 14,530 11/30/2000 13,392 12,823 14,639 12/31/2000 13,677 13,096 15,001 01/31/2001 13,725 13,141 15,150 02/28/2001 13,773 13,187 15,198 03/31/2001 13,769 13,184 15,334 04/30/2001 13,627 13,048 15,168 05/31/2001 13,759 13,174 15,331 06/30/2001 13,857 13,268 15,434 07/31/2001 14,068 13,470 15,662 08/31/2001 14,332 13,723 15,920 09/30/2001 14,252 13,646 15,867 10/31/2001 14,385 13,773 16,056 11/30/2001 14,279 13,672 15,921 12/31/2001 14,117 13,517 15,770 01/31/2002 14,196 13,593 16,044 02/28/2002 14,357 13,747 16,237 03/31/2002 14,093 13,494 15,919 04/30/2002 14,351 13,741 16,230 05/31/2002 14,463 13,848 16,328 06/30/2002 14,632 14,010 16,501 07/31/2002 14,818 14,188 16,713 08/31/2002 14,999 14,362 16,914 09/30/2002 15,337 14,685 17,285 10/31/2002 15,057 14,418 16,998 11/30/2002 14,962 14,326 16,927 12/31/2002 15,262 14,613 17,285 01/31/2003 15,230 14,583 17,241 02/28/2003 15,470 14,813 17,482 03/31/2003 15,484 14,826 17,492 04/30/2003 15,583 14,920 17,608 05/31/2003 15,981 15,302 18,020 06/30/2003 15,909 15,233 17,944 07/31/2003 15,219 14,572 17,316 08/31/2003 15,318 14,667 17,445 09/30/2003 15,734 15,062 17,958 ----------------------------------- AVERAGE ANNUAL TOTAL RETURNS -- SEPTEMBER 30, 2003 --------------------------------------------------------------------------------
9 MONTHS 1 YEAR 5 YEARS/5/ 10 YEARS/5/ -------- ------ ---------- ----------- Class A (Inception 3/23/84) Net Asset Value/1/ 3.09% 2.58% 3.83% 4.64% With Maximum Sales Charge/2/ -1.31 -1.78 2.93 4.18 Class B (Inception 9/13/93) Net Asset Value/1/ 2.59 1.92 3.15 3.94 With CDSC/4/ -2.41 -3.01 2.82 3.94
COMPARATIVE PERFORMANCE 9 MONTHS 1 YEAR 5 YEARS 10 YEARS ----------------------- -------- ------ ------- -------- Lehman Brothers Municipal Bond Index/3/ 3.89% 3.89% 5.67% 6.03% Morningstar Muni Massachusetts Average/6/ 3.13 2.69 4.45 5.03 Lipper MA Municipal Debt Funds Average/7/ 3.16 2.63 4.46 5.11
YIELDS AS OF SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- CLASS A CLASS B ------- ------- SEC 30-day yield/8/ 3.66% 3.18% Taxable equivalent yield/9/ 5.95 5.17 All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. * Other classes of shares are available for which performance, fees, and expenses will differ. PORTFOLIO AS OF SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- CREDIT QUALITY [CHART APPEARS HERE] Aaa Aa A Baa Caa and Not Rated ---- ---- ---- --- ----------------- 57.8% 11.7% 10.2% 4.1% 16.2% Average quality: Aa Credit quality is based on bond ratings from Moody's Investors Service EFFECTIVE MATURITY [CHART APPEARS HERE] 1 year 1-5 years 5-10 years 10+ years ------ --------- ---------- --------- 9.3% 5.9% 56.8% 28.0% Average effective maturity: 8.7 years See page 5 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS /1/ Does not include a sales charge. /2/ Includes the maximum sales charge of 4.25%. /3/ Lehman Brothers Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. /4/ Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. /5/ Fund performance has been increased by expense waivers, without which performance would have been lower. /6/ Morningstar Muni Massachusetts Average is the average performance without sales charges of funds with similar investment characteristics as calculated by Morningstar, Inc. /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. /8/ SEC yield is based on the fund's net investment income over a 30-day period and is calculated in accordance with SEC guidelines. /9/ Taxable equivalent yield is based on the maximum combined federal and MA income tax bracket of 38.45%. 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 LOOMIS SAYLES MUNICIPAL INCOME FUND PORTFOLIO PROFILE -------------------------------------------------------------------------------- OBJECTIVE: Seeks as high a level of current income exempt from federal income taxes as is consistent with reasonable risk and protection of shareholders' capital STRATEGY: Invests primarily in municipal securities exempt from federal income tax FUND INCEPTION: May 9, 1977 MANAGER: Martha A. Strom Robert Payne Loomis, Sayles & Company, L.P. SYMBOLS: Class A NEFTX Class B NETBX NET ASSET VALUE PER SHARE: (September 30, 2003) Class A $ 7.41 Class B 7.41 MANAGEMENT DISCUSSION -------------------------------------------------------------------------------- Interest rates sank to 45-year lows this spring, but positive economic news contributed to a rebound early in the summer and investors became more aggressive in pursuit of yield. As a result, bond prices first rose and then fell. Municipal bonds have escaped some of that yield volatility, outperforming the Treasury market year-to-date. For the nine months ended September 30, 2003*, Loomis Sayles Municipal Income Fund's total return was 2.88% based on the net asset value of Class A shares and $0.23 in reinvested dividends. The fund's benchmark, Lehman Brothers Municipal Bond Index, returned 3.89% for the period, while the average return on the funds in Morningstar's Muni National Long category was 3.31%. The fund's underperformance can largely be attributed to its longer maturity structure, designed to seek higher income. As of September 30, 2003, the fund's 30-day SEC yield on Class A shares was 3.77% -equivalent to a taxable yield of 5.80% based on the 35% maximum federal income tax rate. Revenue bonds continue to perform well Municipal bonds backed by corporations (revenue bonds) were among the fund's best performers. Two examples include Lowndes County, Mississippi, Solid Waste Disposal & Pollution Control issued for Weyerhaeuser Company and Pennsylvania Economic Development Finance Authority Wastewater Treatment issued for Sun Company. The healthcare sector was also positive, as rising investor demand and lower supply drove prices up. A good example is the fund's position in bonds issued by the University of Michigan for University Hospital. Tax-backed and shorter maturity bonds had lackluster performance Bonds backed by receipts from taxpayers continue to be volatile due to the negative press surrounding state and local budget problems, particularly in California and various East Coast localities. While the fund's tax-backed bonds are of high average credit quality, the continued negative press about municipal debt - combined with the longer maturity structure of the bonds owned - was a negative. Shorter maturity bonds, including pre-refunded and "escrowed to maturity" bonds also experienced lackluster performance. When bonds are either pre-refunded or escrowed to maturity, the issuer typically purchases Treasury securities to replace the original bonds and the call date (the earliest date by which the issuer can call in its debt) becomes the new effective maturity date. The dual effect of raising quality and shortening maturity ultimately reduces yield to a level where there is little room for price appreciation. Many of our transactions over the year have been to reduce exposure to these shorter maturity bonds and reinvest proceeds in bonds with higher yields. The fund's exposure to transportation revenue bonds was also a negative during the period. Mixed economic reports have not convinced consumers that there is a recovery underway. Hence, airports, toll roads and highway bonds, which rely on user fees for revenues, have lagged other sectors. Interest rates expected to rise gradually into 2004 As of the end of September 2003, the fund's average duration was ten years. This is likely to make it more sensitive to changes in bond prices than its benchmark, which has an average duration of eight years. In an effort to offset this, we have emphasized bonds selling at a premium to their par value because they tend to experience less price erosion in a rising interest rate environment. *Effective after the close of business on September 12, 2003, the fund's fiscal year end was changed from December 31 to September 30. 3 LOOMIS SAYLES MUNICIPAL INCOME FUND INVESTMENT RESULTS THROUGH SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- Performance in Perspective The charts comparing Loomis Sayles Municipal Income Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the differences between the two. The fund's total return for the period shown below appears with and without sales charges and includes fund expenses and management fees. A securities index measures the performance of a theoretical portfolio. Unlike a fund, the index is unmanaged and does not have expenses that affect the results. It is not possible to invest directly in an index. In addition, few investors could purchase all of the securities necessary to match the index and would incur transaction costs and other expenses even if they could. GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES* -------------------------------------------------------------------------------- [CHART APPEARS HERE] SEPTEMBER 30, 1993 THROUGH SEPTEMBER 30, 2003 Lehman Maximum Municipal Month Net Asset Sales Bond End Value (1) Charge (2) Index (3) --- -------------------------------------------------- 09/30/1993 10,000 9,550 10,000 10/31/1993 10,024 9,572 10,019 11/30/1993 9,923 9,477 9,931 12/31/1993 10,151 9,695 10,140 01/31/1994 10,271 9,809 10,256 02/28/1994 9,977 9,528 9,991 03/31/1994 9,487 9,060 9,584 04/30/1994 9,520 9,091 9,665 05/31/1994 9,616 9,183 9,749 06/30/1994 9,554 9,124 9,689 07/31/1994 9,730 9,292 9,867 08/31/1994 9,760 9,321 9,901 09/30/1994 9,591 9,159 9,756 10/31/1994 9,380 8,958 9,583 11/30/1994 9,100 8,691 9,409 12/31/1994 9,340 8,920 9,616 01/31/1995 9,666 9,231 9,891 02/28/1995 10,001 9,551 10,179 03/31/1995 10,131 9,675 10,296 04/30/1995 10,150 9,693 10,308 05/31/1995 10,433 9,964 10,637 06/30/1995 10,299 9,836 10,544 07/31/1995 10,389 9,921 10,644 08/31/1995 10,465 9,994 10,779 09/30/1995 10,541 10,067 10,847 10/31/1995 10,689 10,208 11,005 11/30/1995 10,866 10,377 11,187 12/31/1995 10,949 10,456 11,295 01/31/1996 11,036 10,539 11,380 02/29/1996 10,969 10,476 11,303 03/31/1996 10,844 10,356 11,159 04/30/1996 10,821 10,334 11,127 05/31/1996 10,812 10,326 11,123 06/30/1996 10,936 10,444 11,244 07/31/1996 11,016 10,520 11,346 08/31/1996 11,007 10,512 11,343 09/30/1996 11,192 10,688 11,502 10/31/1996 11,318 10,809 11,632 11/30/1996 11,490 10,973 11,845 12/31/1996 11,456 10,940 11,795 01/31/1997 11,468 10,951 11,817 02/28/1997 11,569 11,049 11,926 03/31/1997 11,422 10,908 11,767 04/30/1997 11,505 10,988 11,865 05/31/1997 11,636 11,112 12,044 06/30/1997 11,797 11,266 12,172 07/31/1997 12,116 11,571 12,509 08/31/1997 12,044 11,502 12,392 09/30/1997 12,145 11,598 12,539 10/31/1997 12,230 11,680 12,620 11/30/1997 12,268 11,716 12,694 12/31/1997 12,438 11,878 12,879 01/31/1998 12,592 12,026 13,012 02/28/1998 12,630 12,062 13,016 03/31/1998 12,650 12,081 13,028 04/30/1998 12,590 12,023 12,969 05/31/1998 12,725 12,153 13,174 06/30/1998 12,779 12,204 13,226 07/31/1998 12,801 12,225 13,259 08/31/1998 12,971 12,387 13,464 09/30/1998 13,075 12,487 13,632 10/31/1998 13,030 12,444 13,631 11/30/1998 13,086 12,497 13,679 12/31/1998 13,101 12,511 13,714 01/31/1999 13,229 12,634 13,877 02/28/1999 13,202 12,608 13,816 03/31/1999 13,207 12,613 13,835 04/30/1999 13,247 12,650 13,870 05/31/1999 13,200 12,606 13,789 06/30/1999 13,050 12,463 13,591 07/31/1999 13,090 12,501 13,641 08/31/1999 12,956 12,373 13,531 09/30/1999 12,961 12,378 13,537 10/31/1999 12,774 12,199 13,390 11/30/1999 12,894 12,313 13,533 12/31/1999 12,740 12,166 13,432 01/31/2000 12,672 12,101 13,373 02/29/2000 12,812 12,235 13,529 03/31/2000 13,009 12,423 13,824 04/30/2000 12,937 12,355 13,743 05/31/2000 12,901 12,320 13,671 06/30/2000 13,136 12,545 14,033 07/31/2000 13,282 12,684 14,229 08/31/2000 13,465 12,859 14,448 09/30/2000 13,428 12,824 14,373 10/31/2000 13,539 12,929 14,530 11/30/2000 13,631 13,018 14,639 12/31/2000 13,856 13,232 15,001 01/31/2001 13,952 13,325 15,150 02/28/2001 13,974 13,345 15,198 03/31/2001 14,089 13,455 15,334 04/30/2001 13,939 13,312 15,168 05/31/2001 14,072 13,438 15,331 06/30/2001 14,185 13,546 15,434 07/31/2001 14,433 13,783 15,662 08/31/2001 14,663 14,003 15,920 09/30/2001 14,411 13,762 15,867 10/31/2001 14,605 13,948 16,056 11/30/2001 14,448 13,798 15,921 12/31/2001 14,271 13,629 15,770 01/31/2002 14,505 13,852 16,044 02/28/2002 14,701 14,040 16,237 03/31/2002 14,460 13,809 15,919 04/30/2002 14,696 14,035 16,230 05/31/2002 14,772 14,107 16,328 06/30/2002 14,909 14,238 16,501 07/31/2002 15,005 14,330 16,713 08/31/2002 15,122 14,441 16,914 09/30/2002 15,363 14,672 17,285 10/31/2002 14,973 14,299 16,998 11/30/2002 14,949 14,276 16,927 12/31/2002 15,314 14,625 17,285 01/31/2003 15,122 14,441 17,241 02/28/2003 15,344 14,653 17,482 03/31/2003 15,336 14,646 17,492 04/30/2003 15,472 14,775 17,608 05/31/2003 15,857 15,144 18,020 06/30/2003 15,824 15,112 17,944 07/31/2003 15,138 14,457 17,316 08/31/2003 15,297 14,609 17,445 09/30/2003 15,753 15,038 17,958 ------------------------------- AVERAGE ANNUAL TOTAL RETURNS -- SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- 9 MONTHS 1 YEAR 5 YEARS 10 YEARS -------- ------ ------- -------- Class A (Inception 5/9/77) Net Asset Value/1/ 2.88% 2.55% 3.80% 4.65% With Maximum Sales Charge/2/ -1.75 -2.13 2.85 4.16 Class B (Inception 9/13/93) Net Asset Value/1/ 2.16 1.78 3.03 3.87 With CDSC/4/ -2.82 -3.13 2.69 3.87 COMPARATIVE PERFORMANCE 9 MONTHS 1 YEAR 5 YEARS 10 YEARS ----------------------- -------- ------ ------- -------- Lehman Brothers Muncipal Bond Index/3/ 3.89% 3.89% 5.67% 6.03% Morningstar Muni National Long Fund Avg./5/ 3.31 2.82 4.25 4.98 Lipper General Municipal Debt Funds Avg./6/ 3.31 2.90 4.23 4.94 YIELDS AS OF SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- CLASS A CLASS B ------- ------- SEC 30-day yield/7/ 3.77% 3.22% Taxable equivalent yield/8/ 5.80 4.95 All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. * Other classes of shares are available for which performance, fees, and expenses will differ. PORTFOLIO AS OF SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- CREDIT QUALITY [CHART APPEARS HERE] Aaa Aa A Baa Ca and Not Rated ----- ---- ---- ---- ---------------- 53.6% 17.6% 4.7% 14.6% 9.5% Average quality: Aa Credit quality is based on bond ratings from Moody's Investors Service EFFECTIVE MATURITY [CHART APPEARS HERE] 1 year 1-5 years 5-10 years 10+ years ------ --------- ---------- --------- 7.1% 14.0% 59.0% 19.9% Average effective maturity: 9.7 years See page 5 for information on the possible risks associated with an investment in this fund. NOTES TO CHARTS /1/ Does not include a sales charge. /2/ Includes the maximum sales charge of 4.50%. /3/ Lehman Brothers Municipal Bond Index is an unmanaged composite measure of the performance of the municipal bond market. /4/ Performance for Class B shares assumes a maximum 5.00% contingent deferred sales charge ("CDSC") applied when you sell shares. /5/ Morningstar Muni National Long Fund Average is the average performance without sales charges of funds with similar investment objectives as calculated by Morningstar, Inc. /6/ Lipper General Municipal Debt Funds Average is the average performance without sales charges of funds with similar investment objectives as calculated by Lipper Inc. /7/ SEC yield is based on the fund's net investment income over a 30-day period and is calculated in accordance with SEC guidelines. /8/ Taxable equivalent yield is based on the maximum federal income tax bracket of 35%. A portion of income may be subject to federal, state and/or alternative minimum tax. Capital gains distributions, if any, are subject to the capital gains tax. 4 LOOMIS SAYLES TAX FREE INCOME FUNDS RISKS The views expressed in this report reflect those of the portfolio managers as of the dates indicated. The managers' views are subject to change at any time without notice based on changes in market or other conditions. References to specific securities or industries should not be regarded as investment advice. Because these funds are actively managed, there is no assurance that they will continue to invest in the securities or industries mentioned. Any mutual fund investment involves risk. The following notes describe some of the risks of the CDC Nvest Funds discussed in this report. These risks may affect the value of your investment. See the funds' prospectus for details. THE FUNDS Loomis Sayles Massachusetts Tax Free Income Fund concentrates its assets in municipal bonds issued in Massachusetts. The fund may invest a portion of assets in lower-rated bonds. Some income may be subject to federal and Massachusetts state taxes. Loomis Sayles Municipal Income Fund invests primarily in municipal securities issued by state and local governments. Some income may be subject to federal and state taxes. THE RISKS Lower-quality bonds offer higher yields than high-quality bonds in return for more risks. These risks include a greater risk of default than higher-quality issues and greater risk of loss of principal. U.S. government securities are guaranteed if held to maturity, but mutual funds that invest in these securities are not guaranteed. The value of fund shares will fluctuate and you may have a gain or a loss when you sell your shares. State-specific mutual funds focus investments in a single state, so the fund's income level and/or the value of fund shares may rise or fall to reflect the state's financial strength; a fund that owns securities issued in different states is able to diversify risks. Capital gains distributions, if any, are fully taxable. Alternative Minimum Tax (AMT) may apply to certain shareholders who receive large amounts of income from tax-free investments. Changes in interest rates can affect the value of fund shares. The value of fixed-income securities generally goes down when interest rates rise and goes up when rates decline. Principal and interest payments on insured bonds are backed by an insurance company if held to maturity, but mutual funds that invest in these securities are not insured. The fund's dividend rate and the value of its shares will fluctuate and you may have a gain or a loss when you sell your shares. 5 LOOMIS SAYLES MASSACHUSETTS TAX FREE INCOME FUND SCHEDULE OF INVESTMENTS Investments as of September 30, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE(a) --------------------------------------------------------------------------------------- TAX EXEMPT OBLIGATIONS -- 94.8% OF TOTAL NET ASSETS GUAM AIRPORT AUTHORITY -- 1.7% $ 1,500,000 Airport Authority Revenue Bond Series B, 6.600%, 10/01/2010 .................................. $ 1,538,250 ------------- MARTHA'S VINEYARD, MA, LAND BANK REVENUE -- 1.1% 1,000,000 5.000%, 5/01/2032, (AMBAC insured) .................. 1,010,090 ------------- MASSACHUSETTS BAY TRANSPORTATION AUTHORITY -- 6.1% 3,000,000 Assessment Series A, 5.250%, 7/01/2030 ................................... 3,086,970 2,500,000 Series A, 5.000%, 7/01/2032 ................................... 2,523,150 ------------- 5,610,120 ------------- MASSACHUSETTS STATE -- 5.4% 4,000,000 State Refunding Series A, 6.500%, 11/01/2014, (AMBAC insured) ................ 4,992,760 ------------- MASSACHUSETTS STATE DEVELOPMENT FINANCE AGENCY -- 18.8% 2,500,000 Cambridge Street Development Series A, 5.125%, 2/01/2034, (MBIA insured) ................... 2,541,625 2,505,000 Concord-Assabet Family Services, 5.900%, 11/01/2018 .................................. 1,983,083 3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 ................................... 2,882,010 4,000,000 Mount Holyoke College, 5.250%, 7/01/2031 ................................... 4,115,200 2,800,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/01/2019 ................................... 2,910,264 1,100,000 Visual and Performing Arts, 6.000%, 8/01/2021 ................................... 1,314,434 1,610,000 WGBH Educational Foundation Series A, 5.375%, 1/01/2042, (AMBAC insured) .................. 1,667,574 ------------- 17,414,190 ------------- MASSACHUSETTS STATE HEALTH & EDUCATIONAL FACILITIES AUTHORITY -- 32.6% 1,160,000 Baystate Medical Center Series F, 5.700%, 7/01/2027 ................................... 1,199,811 1,500,000 Beverly Hospital Rib, Pre-Refunded, 10.270%, 6/18/2020, (MBIA insured) (c) .............. 1,728,960 2,200,000 Catholic Health East, 5.500%, 11/15/2032 .................................. 2,206,886 3,000,000 Dana Farber Series G-1, 6.250%, 12/01/2022 .................................. 3,140,940 3,000,000 Harvard Univerity Series N, 6.250%, 4/01/2020 ................................... 3,747,420 1,200,000 Harvard University Series F, 5.125%, 7/15/2037 ................................... 1,229,556 500,000 Milton Hospital Series C, 5.500%, 7/01/2016 ................................... 512,335 1,000,000 New England Medical Center Series H, 5.000%, 5/15/2022, (FGIC insured) ................... 1,033,370 3,000,000 Nichols College Series C, 6.000%, 10/01/2017 .................................. 2,819,250 2,000,000 Partners Healthcare Systems Series B, 5.250%, 7/01/2029 ................................... 2,022,780 2,500,000 Partners Healthcare Systems Series C, 5.750%, 7/01/2021 ................................... 2,665,200 1,500,000 Tufts University Series I, 5.250%, 2/15/2030 ................................... 1,541,385 1,000,000 University of Massachusetts Project Series C, 5.250%, 10/01/2031, (MBIA insured) .................. 1,032,040 2,000,000 University of Massachusetts Series C, 5.125%, 10/01/2034, (FGIC insured) .................. 2,035,740 2,265,000 Wellesley College Series F, 5.125%, 7/01/2039 ................................... 2,300,357 1,000,000 Williams College Series H, 5.000%, 7/01/2033 ................................... 1,009,440 ------------- 30,225,470 ------------- MASSACHUSETTS STATE HOUSING FINANCE AGENCY -- 2.6% 1,455,000 Single Family Mortgage Series 21, 7.125%, 6/01/2025 ................................... 1,465,389 910,000 Single Family Mortgage Series 89, 5.400%, 12/01/2023 .................................. 930,475 ------------- 2,395,864 ------------- MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY -- 2.4% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036, (FHA insured) .................... 2,230,480 ------------- MASSACHUSETTS STATE PORT AUTHORITY -- 3.3% 1,750,000 Delta Air Lines, Inc. Project Series A, 5.500%, 1/01/2019, (AMBAC insured) .................. 1,838,795 1,200,000 Series A, 5.000%, 7/01/2033, (MBIA insured) ................... 1,213,188 ------------- 3,051,983 ------------- MASSACHUSETTS STATE TURNPIKE AUTHORITY -- 3.2% 2,950,000 Metropolitan Highway System, Capital Appreciation Senior Series A, 5.000%, 1/01/2037, (MBIA insured) ................... 2,958,230 ------------- MASSACHUSETTS STATE WATER RESOURCES AUTHORITY -- 6.5% 2,000,000 General Series B, 5.125%, 8/01/2027, (MBIA insured) ................... 2,047,820 3,240,000 Series A, 6.500%, 7/15/2019, (FGIC insured) ................... 4,020,808 ------------- 6,068,628 ------------- NEW ENGLAND EDUCATION LOAN MARKETING -- 3.7% 3,000,000 Student Loan Revenue Bond Sub-Issue H, 6.900%, 11/01/2009 .................................. 3,469,950 ------------- PUERTO RICO COMMONWEALTH AQUEDUCT & SEWER AUTHORITY -- 4.9% 3,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 ................................... 3,579,150 745,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 .................................. 935,176 ------------- 4,514,326 ------------- UNIVERSITY OF MASSACHUSETTS BUILDING AUTHORITY -- 2.5% 2,200,000 SR - Series I 5.250%, 11/01/2028, (AMBAC insured) ................. 2,282,654 ------------- Total Tax Exempt Obligations (Cost $84,325,614) .................................. 87,762,995 -------------
See accompanying notes to financial statements. 6 LOOMIS SAYLES MASSACHUSETTS TAX FREE INCOME FUND SCHEDULE OF INVESTMENTS (continued) Investments as of September 30, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE(a) -------------------------------------------------------------------------------------- SHORT TERM INVESTMENT -- 2.6% OF TOTAL NET ASSETS $ 2,428,204 Repurchase Agreement with Investors Bank & Trust Co. dated 9/30/2003 at 0.75% to be repurchased at $2,428,255 on 10/01/2003, collateralized by $2,463,126 Federal Home Loan Mortgage Bond, 3.77%, due 2/01/2026 valued at $2,549,793 ............................... $ 2,428,204 ------------- Total Short Term Investment (Cost $2,428,204) .................................. 2,428,204 ------------- Total Investments - 97.4% (Identified Cost $86,753,818) (b) .................. 90,191,199 Other assets less liabilities ...................... 2,361,541 ------------- Total Net Assets - 100.0% .......................... $ 92,552,740 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At September 30, 2003, the net unrealized appreciation on investments based on cost of $86,752,908 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ............. $ 4,448,631 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ..................................................... (1,010,340) ------------- Net unrealized appreciation .................................... $ 3,438,291 =============
At September 30, 2003, the Fund had a capital loss carryover of approximately $2,539,647 of which $1,419,707 expires on December 31, 2007, $116,500 expires on December 31, 2008 and $1,003,440 expires on December 31, 2010. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. At September 30, 2003, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $154,869 in undistributed ordinary income and $0 in undistributed long-term gains. (c) Inverse floating rate security. AMBAC American Municipal Bond Assurance Corp. FGIC Financial Guarantee Insurance Company FHA Federal Housing Administration MBIA Municipal Bond Investors Assurance Corp. Rib Residual interest bond HOLDINGS BY REVENUE SOURCE AT SEPTEMBER 30, 2003 (unaudited) % of Net Assets --------------- University 14.2 Water 11.4 College 11.1 Financial 8.1 Hospital 8.0 Mass Transit 4.9 Student Loan 3.8 Airport 3.7 Special Assessment 3.3 Turnpike 3.2 Pooled Funds 3.2 Nursing Home 3.1 Health 2.9 Hospital System Bonds 2.9 Financial Services 2.6 Single-Family 2.6 Assisted Living 2.4 Other, less than 2% each 6.0 See accompanying notes to financial statements. 7 LOOMIS SAYLES MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS Investments as of September 30, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE(a) -------------------------------------------------------------------------------------- TAX EXEMPT OBLIGATIONS -- 96.0% OF TOTAL NET ASSETS CALIFORNIA -- 7.8% $ 500,000 California Department of Water Resources, 5.875%, 5/01/2016 ................................... $ 561,505 2,000,000 California State, 5.000%, 10/01/2032 .................................. 1,929,220 2,500,000 California State, 5.000%, 2/01/2029, (MBIA insured) ................... 2,515,325 2,000,000 California State, 5.125%, 6/01/2027 ................................... 1,990,560 100,000 Golden State Tobacco Securitization Corp., 5.750%, 6/01/2021 ................................... 105,502 250,000 Golden State Tobacco Securitization Corp., 5.750%, 6/01/2022 ................................... 263,215 250,000 Golden State Tobacco Securitization Corp., 5.750%, 6/01/2023 ................................... 262,142 3,000,000 Sacramento, CA, Power Authority, 6.000%, 7/01/2022 ................................... 3,136,050 ------------- 10,763,519 ------------- COLORADO -- 1.5% 2,000,000 Denver, CO, City & County Airport, 5.250%, 11/15/2023, (MBIA insured) .................. 2,071,380 ------------- DISTRICT OF COLUMBIA -- 3.9% 5,280,000 Metropolitan Washington D.C. Airports Authority, 5.125%, 10/01/2029, (FGIC insured) .................. 5,320,656 ------------- FLORIDA -- 2.3% 3,000,000 Escambia County, FL, Pollution Control, 6.900%, 8/01/2022 ................................... 3,129,000 ------------- ILLINOIS -- 11.1% 3,400,000 Chicago, IL, Neighborhoods Alive 21, 5.000%, 1/01/2041, (FGIC insured) ................... 3,432,538 2,500,000 Chicago, IL, O'Hare International Airport, 6.100%, 11/01/2035 (c) .............................. 547,150 2,780,000 Illinois Educational Facilities Authority, University of Chicago, 5.000%, 7/01/2033 ................................... 2,789,091 3,000,000 Illinois Educational Facilities Authority, University of Chicago, 5.125%, 7/01/2038 ................................... 3,018,960 1,750,000 Illinois State, 5.400%, 12/01/2020, (MBIA insured) .................. 1,887,655 3,500,000 Metropolitan Pier & Exposition Authority, 5.250%, 6/15/2042, (MBIA insured) ................... 3,605,420 ------------- 15,280,814 ------------- INDIANA -- 5.3% 2,000,000 Indiana Transportation Finance Authority, 5.375%, 12/01/2025 .................................. 2,088,540 5,000,000 Indianapolis, IN, Local Public Improvement Bond Bank, 5.250%, 7/01/2033, (MBIA insured) ................... 5,174,200 ------------- 7,262,740 ------------- MASSACHUSETTS -- 3.0% 1,145,000 Massachusetts Housing Finance Agency, 6.600%, 12/01/2026 .................................. 1,181,548 1,000,000 Massachusetts Port Authority, 5.000%, 7/01/2033, (MBIA insured) ................... 1,010,990 2,000,000 Massachusetts Turnpike Authority, 5.000%, 1/01/2039, (AMBAC insured) .................. 2,005,860 ------------- 4,198,398 ------------- MICHIGAN -- 5.9% 2,850,000 Michigan Hospital Finance Authority, Henry Ford Health System, 5.500%, 3/01/2014 ................................... 3,054,915 5,000,000 University of Michigan, 5.250%, 12/01/2020 .................................. 5,156,100 ------------- 8,211,015 ------------- MISSISSIPPI -- 3.8% 2,000,000 Lowndes County, MS, Solid Waste Disposal & Pollution Control, 6.700%, 4/01/2022 ................................... 2,299,300 2,500,000 Lowndes County, MS, Solid Waste Disposal & Pollution Control, 6.800%, 4/01/2022 ................................... 2,903,175 ------------- 5,202,475 ------------- NEW JERSEY -- 0.7% 1,000,000 New Jersey Health Care Facilities Financing Authority, Catholic Health East, 5.375%, 11/15/2033 .................................. 1,013,650 ------------- NEW YORK -- 12.5% 1,500,000 New York City, NY, 6.000%, 5/15/2030 ................................... 1,629,555 2,000,000 New York City, NY, 6.000%, 1/15/2020 ................................... 2,224,560 3,000,000 New York Dormitory Authority, 5.500%, 5/15/2013 ................................... 3,408,930 2,740,000 New York Dormitory Authority, 5.750%, 7/01/2013 ................................... 3,160,891 1,700,000 Port Authority of New York & New Jersey, 7.000%, 10/01/2007 .................................. 1,793,874 5,000,000 Triborough Bridge & Tunnel Authority, 5.000%, 1/01/2032 ................................... 5,030,350 ------------- 17,248,160 ------------- NORTH CAROLINA -- 1.0% 1,300,000 North Carolina Eastern Municipal Power Agency, 5.500%, 1/01/2012 ................................... 1,414,088 ------------- OREGON -- 3.0% 4,000,000 Western Generation Agency, 7.400%, 1/01/2016 ................................... 4,078,560 ------------- PENNSYLVANIA -- 12.3% 3,300,000 Lehigh County, PA, General Purpose Authority, Saint Luke's Hospital of Bethlehem, 5.250%, 8/15/2023 ................................... 3,212,022 3,000,000 Pennsylvania Economic Development Financing Authority, 6.600%, 1/01/2019 ................................... 3,027,540 3,000,000 Pennsylvania Economic Development Financing Authority, 7.600%, 12/01/2024 .................................. 3,180,540 5,000,000 Pennsylvania Industrial Development Authority, 5.500%, 7/01/2019, (AMBAC insured) .................. 5,554,150 2,000,000 Pennsylvania Turnpike Commission, 5.000%, 7/15/2041, (AMBAC insured) .................. 2,011,200 ------------- 16,985,452 ------------- PUERTO RICO -- 1.6% 2,000,000 Puerto Rico Infrastructure Financing Authority, 5.500%, 10/01/2040 .................................. 2,178,780 ------------- SOUTH CAROLINA -- 2.3% 3,000,000 Greenville County, SC, School District, 5.500%, 12/01/2028 .................................. 3,137,820 -------------
See accompanying notes to financial statements. 8 LOOMIS SAYLES MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS (continued) Investments as of September 30, 2003 TAX EXEMPT OBLIGATIONS -- (continued)
PRINCIPAL AMOUNT DESCRIPTION VALUE (a) -------------------------------------------------------------------------------------- TENNESSEE -- 1.9% $ 2,500,000 Maury County, TN, Industrial Development Board, Pollution Control, 6.500%, 9/01/2024 ................................... $ 2,588,375 ------------- TEXAS -- 10.6% 5,000,000 Dallas/Fort Worth, TX, International Airport, 5.000%, 11/01/2032, (AMBAC insured) ................. 4,963,200 1,900,000 Denton County, TX, 5.125%, 7/15/2026 ................................... 1,937,962 3,000,000 Houston, TX, Water & Sewer System, 5.250%, 12/01/2023, (FGIC insured) .................. 3,108,330 1,435,000 Katy, TX, Independent School District, 5.125%, 2/15/2020 ................................... 1,515,590 3,000,000 Lewisville, TX, Independent School District, 5.250%, 8/15/2027 ................................... 3,113,370 ------------- 14,638,452 ------------- WASHINGTON -- 5.5% 2,000,000 Energy Northwest, 5.500%, 7/01/2014 ................................... 2,268,540 3,000,000 Grant County, WA, Public Utility District No. 2, Wanapum Hydroelectric, 5.000%, 1/01/2035, (MBIA insured) ................... 3,002,640 2,250,000 Port of Seattle, WA, 5.000%, 4/01/2031, (FGIC insured) ................... 2,264,873 ------------- 7,536,053 ------------- Total Tax Exempt Obligations (Identified Cost $127,917,760) ...................... 132,259,387 ------------- SHORT TERM INVESTMENT -- 6.6% OF TOTAL NET ASSETS 9,114,501 Repurchase Agreement with Investors Bank & Trust Co. dated 9/30/2003 at 0.75% to be repurchased at $9,114,691 on 10/01/2003, collateralized by $9,534,646 Federal National Mortgage Association Bond, 1.62%, due 11/25/2030 valued at $9,573,702 .... 9,114,501 ------------- Total Short Term Investment (Cost $9,114,501) ................................... 9,114,501 ------------- Total Investments -- 102.6% (Identified Cost $137,032,261) (b) .................. 141,373,888 Other assets less liabilities ....................... (3,584,211) ------------- Total Net Assets -- 100.0% .......................... $ 137,789,677 =============
(a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At September 30, 2003, the net unrealized appreciation on investments based on cost of $136,677,988 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 ................................................... $ 6,407,360 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ...................................................... (1,711,460) ------------- Net unrealized appreciation ..................................... $ 4,695,900 =============
At September 30, 2003, the Fund had a capital loss carryover of approximately $1,700,392 of which expires on December 31, 2007. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. At September 30, 2003, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $505,752 in undistributed ordinary income and $0 in undistributed long-term gains. (c) Non-income producing security. AMBAC American Municipal Bond Assurance Corp. FGIC Financial Guarantee Insurance Company MBIA Municipal Bond Investors Assurance Corp. HOLDINGS BY REVENUE SOURCE AT SEPTEMBER 30, 2003 (unaudited) % of Net Assets --------------- Various Purpose 14.0 University 12.7 Improvement 9.5 Financial Services 6.6 Solid Waste Disposal 6.1 Water 6.0 Airport 5.1 Pooled Funds 4.1 Financial 4.0 Insured 3.9 Electric 3.1 Paper/Forest Products 3.0 Turnpike 2.9 Development 2.6 Hospital 2.3 Public Power/Utility 2.3 Hospital System Bonds 2.2 Mining 2.2 Public Utility District 2.2 Other, less than 2% each 7.8 See accompanying notes to financial statements. 9 STATEMENTS OF ASSETS & LIABILITIES September 30, 2003
MASSACHUSETTS TAX FREE INCOME MUNICIPAL INCOME FUND FUND --------------- ---------------- ASSETS Investments at cost ........................................ $ 86,753,818 $ 137,032,261 Net unrealized appreciation ................................ 3,437,381 4,341,627 --------------- ---------------- Investments at value ................................... 90,191,199 141,373,888 Receivable for Fund shares sold ............................ 3,693 24,986 Receivable for securities sold ............................. 1,326,000 -- Interest receivable ........................................ 1,491,135 2,000,596 --------------- ---------------- TOTAL ASSETS ........................................... 93,012,027 143,399,470 --------------- ---------------- LIABILITIES Payable for securities purchased ........................... -- 5,246,021 Payable for Fund shares redeemed ........................... 141,174 70,679 Dividends payable .......................................... 83,120 89,686 Management fees payable .................................... 139,541 52,336 Deferred Trustees' fees .................................... 29,398 70,562 Transfer agent fees payable ................................ 13,707 19,700 Accounting and administrative fees payable ................. 6,004 8,911 Other accounts payable and accrued expenses ................ 46,343 51,898 --------------- ---------------- TOTAL LIABILITIES ...................................... 459,287 5,609,793 --------------- ---------------- NET ASSETS ...................................................... $ 92,552,740 $ 137,789,677 =============== ================ NET ASSETS CONSIST OF: Paid in capital ............................................ $ 91,780,718 $ 135,404,303 Undistributed (overdistributed) net investment income ...... 19,469 147,016 Accumulated net realized gain (loss) on investments ........ (2,684,828) (2,103,269) Net unrealized appreciation (depreciation) of investments .. 3,437,381 4,341,627 --------------- ---------------- NET ASSETS ...................................................... $ 92,552,740 $ 137,789,677 =============== ================ COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE: Class A shares: Net assets ............................................. $ 86,367,598 $ 126,905,761 =============== ================ Shares of beneficial interest .......................... 5,263,294 17,134,007 =============== ================ Net asset value and redemption price per share ......... $ 16.41 $ 7.41 =============== ================ Offering price per share ............................... $ 17.14 $ 7.76 =============== ================ Class B shares: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets ............................................. $ 6,185,142 $ 10,883,916 =============== ================ Shares of beneficial interest .......................... 377,778 1,468,214 =============== ================ Net asset value and offering price per share ........... $ 16.37 $ 7.41 =============== ================
See accompanying notes to financial statements. 10 STATEMENTS OF OPERATIONS
MASSACHUSETTS TAX FREE MUNICIPAL INCOME INCOME FUND FUND ------------------------------ ------------------------------ FOR THE PERIOD FOR THE PERIOD JANUARY 1, 2003 JANUARY 1, 2003 THROUGH YEAR ENDED THROUGH YEAR ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 2003 2002 2003 2002 --------------- ------------ --------------- ------------ INVESTMENT INCOME Interest ................................................... $ 3,800,868 $ 5,446,946 $ 5,533,365 $ 8,578,121 --------------- ------------ --------------- ------------ Expenses Management fees ........................................ 424,577 590,987 488,937 686,999 Service and distribution fees - Class A ................ 230,730 318,340 242,276 341,958 Service and distribution fees - Class B ................ 48,402 75,554 85,415 130,927 Trustees' fees and expenses ............................ 17,668 10,181 27,357 7,960 Accounting and administrative .......................... 57,630 56,477 85,899 85,701 Custodian .............................................. 27,827 52,516 29,161 57,233 Transfer agent ......................................... 121,454 189,599 173,510 278,149 Audit and tax services ................................. 39,318 35,479 34,874 37,479 Legal .................................................. 8,356 8,488 11,227 12,852 Shareholder reporting .................................. 17,188 5,606 21,731 5,525 Registration ........................................... 11,794 14,351 20,528 26,963 Miscellaneous .......................................... 6,582 6,728 8,048 8,648 --------------- ------------ --------------- ------------ Total expenses ............................................. 1,011,526 1,364,306 1,228,963 1,680,394 --------------- ------------ --------------- ------------ Net investment income ...................................... 2,789,342 4,082,640 4,304,402 6,897,727 --------------- ------------ --------------- ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments - net ...................................... 877,919 (916,633) 1,148,331 2,710,093 Change in unrealized appreciation (depreciation) of: Investments - net ...................................... (851,243) 4,433,497 (1,633,204) 872,708 --------------- ------------ --------------- ------------ Net realized and unrealized gain (loss) on investments ..... 26,676 3,516,864 (484,873) 3,582,801 --------------- ------------ --------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS . $ 2,816,018 $ 7,599,504 $ 3,819,529 $ 10,480,528 =============== ============ =============== ============
See accompanying notes to financial statements. 11 STATEMENTS OF CHANGES IN NET ASSETS
MASSACHUSETTS TAX FREE INCOME FUND MUNICIPAL INCOME FUND --------------------------------------------- ---------------------------------------------- FOR THE PERIOD FOR THE PERIOD JANUARY 1, 2003 JANUARY 1, 2003 THROUGH YEAR ENDED YEAR ENDED THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 2003 2002 2001 2003 2002 2001 --------------- ------------ ------------- --------------- -------------- ------------- FROM OPERATIONS: Net investment income ........... $ 2,789,342 $ 4,082,640 $ 4,627,821 $ 4,304,402 $ 6,897,727 $ 7,609,976 Net realized gain (loss) on investments ..................... 877,919 (916,633) 776,917 1,148,331 2,710,093 1,576,039 Net change in unrealized appreciation (depreciation) of investments ..................... (851,243) 4,433,497 (2,286,354) (1,633,204) 872,708 (4,432,914) --------------- ------------ ------------- --------------- -------------- ------------- Increase in net assets resulting from operations ................. 2,816,018 7,599,504 3,118,384 3,819,529 10,480,528 4,753,101 --------------- ------------ ------------- --------------- -------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS: Net investment income Class A ....................... (2,628,195) (3,827,503) (4,279,023) (4,027,619) (6,303,086) (6,957,695) Class B ....................... (161,498) (276,899) (346,489) (290,127) (507,956) (613,563) --------------- ------------ ------------- --------------- -------------- ------------- (2,789,693) (4,104,402) (4,625,512) (4,317,746) (6,811,042) (7,571,258) --------------- ------------ ------------- --------------- -------------- ------------- INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ... (6,268,959) (2,388,573) (1,303,920) (7,043,056) (10,738,646) (1,840,581) --------------- ------------ ------------- --------------- -------------- ------------- Total increase (decrease) in net assets ........................... (6,242,634) 1,106,529 (2,811,048) (7,541,273) (7,069,160) (4,658,738) NET ASSETS Beginning of period ............. 98,795,374 97,688,845 100,499,893 145,330,950 152,400,110 157,058,848 --------------- ------------ ------------- --------------- -------------- ------------- End of period ................... $ 92,552,740 $ 98,795,374 $ 97,688,845 $ 137,789,677 $ 145,330,950 $ 152,400,110 =============== ============ ============= =============== ============== ============= UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME ............. $ 19,469 $ 19,970 $ 41,608 $ 147,016 $ 146,768 $ 172,699 =============== ============ ============= =============== ============== =============
12 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
INCOME (LOSS) FROM INVESTMENT OPERATIONS: LESS DISTRIBUTIONS: ----------------------------------------- ------------------------------- NET ASSET VALUE, NET REALIZED DIVIDENDS DISTRIBUTIONS BEGINNING NET AND UNREALIZED TOTAL FROM FROM FROM NET OF INVESTMENT GAIN (LOSS) ON INVESTMENT NET INVESTMENT REALIZED THE PERIOD INCOME INVESTMENTS OPERATIONS INCOME CAPITAL GAINS ---------- ---------- -------------- ---------- -------------- ------------- MASSACHUSETTS TAX FREE INCOME FUND CLASS A 9/30/2003(e) $ 16.40 $ 0.49 $ 0.01 $ 0.50 $ (0.49) $ -- 12/31/2002 15.82 0.67 0.59 1.26 (0.68) -- 12/31/2001 (d) 16.06 0.75 (0.24) 0.51 (0.75) -- 12/31/2000 15.48 0.82 0.57 1.39 (0.81) -- 12/31/1999 17.02 0.82 (1.50) (0.68) (0.83) (0.03) 12/31/1998 17.13 0.86 (0.04) 0.82 (0.85) (0.08) CLASS B 9/30/2003(e) 16.36 0.41 0.01 0.42 (0.41) -- 12/31/2002 15.78 0.57 0.58 1.15 (0.57) -- 12/31/2001 (d) 16.03 0.64 (0.24) 0.40 (0.65) -- 12/31/2000 15.45 0.71 0.58 1.29 (0.71) -- 12/31/1999 16.98 0.71 (1.49) (0.78) (0.72) (0.03) 12/31/1998 17.09 0.74 (0.03) 0.71 (0.74) (0.08) MUNICIPAL INCOME FUND CLASS A 9/30/2003(e) $ 7.43 $ 0.23 $ (0.02) $ 0.21 $ (0.23) $ -- 12/31/2002 7.25 0.34 0.18 0.52 (0.34) -- 12/31/2001 (d) 7.39 0.36 (0.14) 0.22 (0.36) -- 12/312000 7.17 0.40 0.21 0.61 (0.39) -- 12/31/1999 7.76 0.39 (0.59) (0.20) (0.39) -- 12/31/1998 7.75 0.39 0.01 0.40 (0.39) -- CLASS B 9/30/2003(e) 7.44 0.19 (0.03) 0.16 (0.19) -- 12/31/2002 7.25 0.29 0.19 0.48 (0.29) -- 12/31/2001 (d) 7.39 0.31 (0.14) 0.17 (0.31) -- 12/31/2000 7.17 0.35 0.21 0.56 (0.34) -- 12/31/1999 7.76 0.33 (0.59) (0.26) (0.33) -- 12/31/1998 7.75 0.33 0.01 0.34 (0.33) -- LESS DISTRIBUTIONS: ------------------- NET ASSET VALUE, TOTAL TOTAL END OF RETURN DISTRIBUTIONS THE PERIOD (%) (a) ------------- ---------- --------- MASSACHUSETTS TAX FREE INCOME FUND CLASS A 9/30/2003(e) $ (0.49) $ 16.41 3.1 12/31/2002 (0.68) 16.40 8.1 12/31/2001 (d) (0.75) 15.82 3.2(b) 12/31/2000 (0.81) 16.06 9.3(b) 12/31/1999 (0.86) 15.48 (4.1)(b) 12/31/1998 (0.93) 17.02 4.9(b) CLASS B 9/30/2003(e) (0.41) 16.37 2.6 12/31/2002 (0.57) 16.36 7.4 12/31/2001 (d) (0.65) 15.78 2.5(b) 12/31/2000 (0.71) 16.03 8.6(b) 12/31/1999 (0.75) 15.45 (4.7)(b) 12/31/1998 (0.82) 16.98 4.2(b) MUNICIPAL INCOME FUND CLASS A 9/30/2003(e) $ (0.23) $ 7.41 2.9 12/31/2002 (0.34) 7.43 7.3 12/31/2001 (d) (0.36) 7.25 3.0 12/312000 (0.39) 7.39 8.8 12/31/1999 (0.39) 7.17 (2.8) 12/31/1998 (0.39) 7.76 5.3 CLASS B 9/30/2003(e) (0.19) 7.41 2.2 12/31/2002 (0.29) 7.44 6.7 12/31/2001 (d) (0.31) 7.25 2.2 12/31/2000 (0.34) 7.39 8.0 12/31/1999 (0.33) 7.17 (3.5) 12/31/1998 (0.33) 7.76 4.5
13
RATIOS TO AVERAGE NET ASSETS: ---------------------------------------------------------------- NET ASSETS, END OF NET INVESTMENT PORTFOLIO THE PERIOD EXPENSES INCOME TURNOVER (000) (%)(f) (%)(f) RATE (%) -------------- ---------- -------------- ----------- MASSACHUSETTS TAX FREE INCOME FUND $ 86,368 1.38 3.99 9 CLASS A 92,053 1.34 4.19 33 9/30/2003(e) 89,376 1.35(c) 4.67 60 12/31/2002 91,785 1.13(c) 5.24 68 12/31/2001 (d) 97,270 1.00(c) 5.02 73 12/31/2000 113,910 1.00(c) 4.93 125 12/31/1999 12/31/1998 6,185 2.03 3.34 9 6,742 1.99 3.54 33 CLASS B 8,313 2.00(c) 4.03 60 9/30/2003(e) 8,715 1.78(c) 4.59 68 12/31/2002 8,874 1.65(c) 4.37 73 12/31/2001 (d) 9,026 1.65(c) 4.28 125 12/31/2000 12/31/1999 12/31/1998 MUNICIPAL INCOME FUND CLASS A 9/30/2003(e) 12/31/2002 $ 126,906 1.10 4.14 42 12/31/2001 (d) 133,005 1.06 4.67 33 12/312000 137,852 1.07 4.89 80 12/31/1999 142,539 0.95 5.39 156 12/31/1998 152,829 0.93 5.13 137 172,643 0.93 5.03 26 CLASS B 9/30/2003(e) 10,884 1.85 3.39 42 12/31/2002 12,326 1.81 3.92 33 12/31/2001 (d) 14,549 1.82 4.14 80 12/31/2000 14,520 1.70 4.64 156 12/31/1999 15,644 1.68 4.38 137 12/31/1998 15,878 1.68 4.28 26
(a) A sales charge for Class A shares and a contingent deferred sales charge for Class B shares are not reflected in total return calculations. (b) Had certain expenses not been reduced during the period, total returns would have been lower. (c) The investment adviser agreed to reimburse a portion of the Fund's expenses during the period. Without this reimbursement, expense ratios would have been higher. (d) As required, effective January 1, 2001, the Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount on debt securities. The effect of this change for the year ended December 31, 2001, for Massachusetts Tax Free Income Fund was to increase the ratio of net investment income to average net assets from 4.66% to 4.67% for Class A shares and from 4.02% to 4.03% for Class B shares. For Municipal Income Fund, the effect of this change was to increase net investment income per share by $.01 and decrease net realized and unrealized gains and losses per share by $.01 for Class A shares and Class B shares, and increase the ratio of net investment income to average net assets from 4.84% to 4.89% for Class A shares and from 4.09% to 4.14% for Class B shares. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. (e) For the nine months ended September 30, 2003. (f) Computed on an annualized basis for periods less than one year. See accompanying notes to financial statements. 14 NOTES TO FINANCIAL STATEMENTS For the Period Ended September 30, 2003 1. Organization. CDC Nvest Funds Trust II and Loomis Sayles Funds II (the "Trusts" and each a "Trust") are organized as Massachusetts business trusts. Each Trust is registered under the Investment Company Act of 1940, as amended, as an open-end investment company. Each Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (individually, a "Fund" and, collectively, the "Funds"). Information presented in these financial statements pertains to the tax free income funds of the Trusts, the financial statements of the other Funds of the Trusts are presented in separate reports. CDC Nvest Funds Trust II: Loomis Sayles Massachusetts Tax Free Income Fund (the "Massachusetts Tax Free Income Fund"), formerly CDC Nvest Massachusetts Tax Free Income Fund. Loomis Sayles Funds II: Loomis Sayles Municipal Income Fund (the "Municipal Income Fund"), formerly CDC Nvest Municipal Income Fund. In June, 2003 the Board of Trustees of the CDC Nvest Funds Trust I, CDC Nvest Funds Trust II, CDC Nvest Funds Trust III, CDC Nvest Cash Management Trust, CDC Nvest Tax Exempt Money Market Trust and CDC Nvest Companies Trust I (the "CDC Nvest Funds Trusts") approved new Trustees for the Trusts in connection with the integration of the CDC Nvest Funds Trusts with Loomis Sayles Funds I and Loomis Sayles Funds II (the "Loomis Sayles Funds Trusts"). This approval resulted in a combined Board of Trustees for the CDC Nvest Funds Trusts and Loomis Sayles Funds Trusts. Each Fund offers Class A and Class B shares. Class A shares of Massachusetts Tax Free Income Fund are sold with a maximum front end sales charge of 4.25%. Class A shares of Municipal Income Fund 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 ("CDSC") if those shares are redeemed within six years of purchase. Most expenses of the Trusts can be directly attributed to a Fund. Expenses which can not be directly attributed are apportioned based on the relative net assets of each of the Funds in the Trusts. Expenses of a Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 Plan. Shares of each class would receive their pro rata share of the net assets of a Fund, if the Fund were liquidated. The Trustees approve separate dividends from net investment income on each class of shares. 2. Significant Accounting Policies. The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements. The Funds' financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. a. Security Valuation. Debt securities (other than short-term obligations with a remaining maturity of less than sixty days) are valued on the basis of valuations furnished to the Fund by a pricing service, which has been authorized by the Trustees. The pricing service determines valuations for normal, institutional size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term obligations with a remaining maturity of less than sixty days are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value as determined in good faith by the Funds' investment adviser, under the supervision of the Funds' 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 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 Trusts treat each Fund as a separate entity for Federal income tax purposes. Each Fund intends to meet the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders substantially all of its net investment income and any net realized capital gains, at least annually. Accordingly, no provision for federal income tax has been made. d. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for book and tax purposes of market discount. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital accounts. Distributions from short-term capital gains are considered to be ordinary income for tax purposes. 15 NOTES TO FINANCIAL STATEMENTS (continued) For the Period Ended September 30, 2003 e. Repurchase Agreements. Each Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is each Fund's policy that the market value of the collateral be at least equal to 102% of the repurchase price, including interest. Each Fund's investment adviser is responsible for determining that the value of the collateral is at all times at least equal to 102% of the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon a Fund's ability to dispose of the underlying securities. f. Other. Each Fund changed its fiscal year end from December 31st to September 30th. 3. Purchases and Sales of Securities. For the nine months ended September 30, 2003, purchases and sales of securities (excluding short-term investments) were as follows: Fund Purchases Sales ---------------------------------- -------------- -------------- Massachusetts Tax Free Income Fund $ 8,713,541 $ 17,325,049 Municipal Income Fund 58,430,439 68,310,938 4. Management Fees and Other Transactions with Affiliates. a. Management Fees. Loomis Sayles & Company, L.P. ("Loomis Sayles") serves as the investment adviser to each of the Funds. Prior to September 1, 2003, CDC IXIS Asset Management Advisers, L.P. ("CDC IXIS Advisers") served as each Fund's investment adviser and Loomis Sayles served as each Fund's subadviser. Under the terms of the management agreements, each Fund pays a management fee at the following annual rates, calculated daily and payable quarterly for Massachusetts Tax Free Income Fund and monthly for Municipal Income Fund, based on each Fund's average daily net assets: Percentage of Average Daily Net Assets ---------------------------------- First Over Fund $100 million $100 million ---------------------------------- -------------- -------------- Massachusetts Tax Free Income Fund 0.300% 0.250% Municipal Income Fund 0.500% 0.375% Prior to September 1, 2003, for Massachusetts Tax Free Income Fund, the management fee was 0.600% of the first $100 million of average daily net assets and 0.500% of average daily net assets in excess of $100 million. For the period ended September 30, 2003, the management fees for each Fund were as follows: Management Percentage of Average Fund Fee Daily Net Assets* ---------------------------------- -------------- --------------------- Massachusetts Tax Free Income Fund $ 402,028 0.568% Municipal Income Fund 488,937 0.464% *Annualized CDC IXIS Advisers serves as the advisory administrator to Massachusetts Tax Free Income Fund. Under the terms of the advisory administration agreement, effective September 1, 2003, the Fund pays an advisory administration fee at the following annual rates, calculated daily and payable quarterly based on the Fund's average daily net assets. Prior to September 1, 2003 these services were included in the management fee arrangements: Percentage of Average Daily Net Assets ---------------------------------- First Over Fund $100 million $100 million ---------------------------------- -------------- -------------- Massachusetts Tax Free Income Fund 0.300% 0.250% For the period ended September 30, 2003, the advisory administration fee for the Fund was as follows: Advisory Percentage of Average Fund Administration Fee Daily Net Assets* ---------------------------------- ------------------ --------------------- Massachusetts Tax Free Income Fund $ 22,549 0.032% *Annualized Management and advisory administration fees are combined in the statement of operations as management fees. 16 NOTES TO FINANCIAL STATEMENTS (continued) For the Period Ended September 30, 2003 Loomis Sayles and CDC IXIS Advisers are wholly-owned subsidiaries of CDC IXIS Asset Management North America, L.P. ("CDC IXIS North America"). Certain officers and directors of Loomis Sayles and CDC IXIS Advisers are also Trustees of the Funds. b. Accounting and Administrative Expense. CDC IXIS Asset Management Services, Inc. ("CIS"), a wholly owned subsidiary of CDC IXIS North America, performs certain accounting and administrative services for the Funds and has subcontracted with Investors Bank & Trust Company ("IBT"), to serve as sub-administrator. Pursuant to an agreement between each of the Trusts, CDC Nvest Funds Trust I, CDC Nvest Funds Trust III, CDC Nvest Cash Management Trust, CDC Nvest Tax Exempt Money Market Trust, CDC Nvest Companies Trust I, and CIS each Fund pays CIS its pro rata portion of a group fee for these services representing the higher amount based on the following calculations: (1) Percentage of Eligible Average Daily Net Assets First Next Over $5 billion $5 billion $10 billion 0.0600% 0.0500% 0.0450% or (2) Each Fund's pro rata portion, based on eligible assets, of the annual aggregate minimum fee of $3.4 million. For the period ended September 30, 2003, fees paid to CIS for accounting and administrative expense were as follows: Accounting And Fund Administrative ---------------------- -------------- Massachusetts Tax Free Income Fund $ 57,630 Municipal Income Fund 85,899 Effective October 1, 2003, each Fund pays its pro rata portion of the accounting and administrative fee allocated based on the combined assets of the CDC Nvest Funds Trusts and the Loomis Sayles Funds Trusts. The rates as a percentage of average daily net assets changed to 0.0675% on the first $5 billion in average daily net assets, 0.0625% on the next $5 billion in average daily net assets and 0.0500% on average daily net assets over $10 billion. The annual aggregate minimum fee changed to $5 million. c. Transfer Agent Fees. CIS is the transfer and shareholder servicing agent for each Fund and has subcontracted with Boston Financial Data Services ("BFDS") to serve as sub-transfer agent. Each Fund pays CIS service fees for servicing shareholder accounts. Class A and Class B pay service fees monthly representing the higher amount based on the following calculations: (1) Annual aggregate fee determined by applying an annual fee rate (see schedule below) to the eligible average daily net assets. Eligible assets are the average daily net assets for Classs A, Class B and Class C of all accounts in load bond funds. Load bond funds consist of all bond funds in the CDC Nvest Funds Trusts, Municipal Income Fund, Loomis Sayles High Income Fund, Loomis Sayles Limited Term U.S. Government Fund, Loomis Sayles Strategic Income Fund and Loomis Sayles Investment Grade Bond Fund. First Next Over $1.2 billion $5 billion $6.2 billion ------------ ---------- ------------ 0.142% 0.135% 0.130% or (2) An allocated portion, based on eligible assets for the period September 15, 2003 through December 31, 2003, of an aggregate minimum fee of $382,986 (for the period from January 1 through June 30, the annual aggregate minimum fee was $1.5 million. The annual aggregate minimum fee was reduced to $1.3 million on July 1). Each Class is subject to a monthly Class minimum of $1,500. In addition, pursuant to other servicing agreements, shareholders pay service fees to other firms that provide similar services for their own shareholder accounts. CIS, BFDS and other firms are also reimbursed by the Funds for out-of-pocket expenses. For the period ended September 30, 2003, amounts paid to CIS as compensation for its services as transfer agent were as follows: Transfer Agent Fund Fee ----------------------------------- -------------- Massachusetts Tax Free Income Fund $ 107,952 Municipal Income Fund 151,736 17 NOTES TO FINANCIAL STATEMENTS (continued) For the Period Ended September 30, 2003 d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trusts have adopted a Service Plan relating to each Fund's Class A shares (the "Class A Plan") and a Service and Distribution Plan relating to each Fund's Class B shares (the "Class B Plan"). Under the Class A Plan, each Fund pays CDC IXIS Asset Management Distributors, L.P. ("CDC IXIS Distributors"), the Fund's distributor (a wholly owned subsidiary of CDC IXIS North America), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class A shares, as reimbursement for expenses incurred by CDC IXIS Distributors in providing personal services to investors in Class A shares and/or the maintenance of shareholder accounts. Also under the Class A Plan, Massachusetts Tax Free Income Fund pays CDC IXIS Distributors a monthly distribution fee at the annual rate of 0.10% of the average daily net assets attributable to the Fund's Class A shares as reimbursement for expenses incurred by CDC IXIS Distributors in connection with the marketing or sale of the Fund's Class A shares. Under the Class B Plan, each Fund pays CDC IXIS Distributors a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by CDC IXIS Distributors in providing personal services to investors in Class B shares and/or the maintenance of shareholder accounts. Also under the Class B Plan, each Fund pays CDC IXIS Distributors a monthly distribution fee at the annual rate of 0.75% of the average daily net assets attributable to the Fund's Class B shares, as compensation for services provided and expenses incurred by CDC IXIS Distributors in connection with the marketing or sale of Class B shares. For the period ended September 30, 2003, the Funds paid the following service and distribution fees: Service Fee Distribution Fee --------------------- -------------------- Class A Class B Class A Class B --------- --------- --------- --------- Massachusetts Tax Free Income Fund $ 164,807 $ 12,101 $ 65,923 $ 36,301 Municipal Income Fund 242,276 21,354 -- 64,061 Commissions (including contingent deferred sales charges) on Fund shares paid to CDC IXIS Distributors by investors in shares of the Funds during the period ended September 30, 2003 were as follows: Fund ---------------------------------- Massachusetts Tax Free Income Fund $ 42,637 Municipal Income Fund 76,857 e. Trustees Fees and Expenses. The Funds do not pay any compensation directly to their officers or Trustees who are directors, officers or employees of Loomis Sayles, CDC IXIS Advisers, CDC IXIS Distributors, CDC IXIS North America, CIS or their affiliates. Each other Trustee, who is a trustee of the CDC Nvest Funds Trusts and the Loomis Sayles Funds Trusts, receives a retainer fee at the annual rate of $45,000 and meeting attendance fees of $4,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $7,000 while each committee chairman receives a retainer fee (beyond the $7,000 fee) at the annual rate of $5,000. The retainer fees assume four Board or Committee meetings per year; Trustees are compensated for each additional committee and board meeting, in excess of four meetings per year, at the rate of $1,750 and $4,500, respectively. Trustees who are trustees of the Loomis Sayles Funds Trusts but not the CDC Nvest Funds Trusts receive meeting attendance fees of $5,000 for each meeting of the Board of Trustees attended and receive a retainer fee at the annual rate of $20,000. These fees are allocated to the various CDC Nvest Funds and Loomis Sayles Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. Trustees are reimbursed for travel expenses in connection with attendance at meetings. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in a designated Fund or certain other CDC Nvest Funds or Loomis Sayles Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. 18 NOTES TO FINANCIAL STATEMENTS (continued) For the Period Ended September 30, 2003 f. Publishing Services. CIS performs certain desktop publishing services for the Funds. Fees for these services are presented in the statements of operations as shareholder reporting. For the period ended September 30, 2003, amounts paid to CIS as compensation for these services were as follows: Publishing Services Fund Fees ----------------------------- ------------- Massachusetts Tax Free Income $ 437 Fund Municipal Income Fund 437 5. Capital Shares. Each Fund may issue an unlimited number of shares of beneficial interest. Transactions in capital shares were as follows:
FOR THE PERIOD JANUARY 1, 2003 THROUGH YEAR ENDED SEPTEMBER 30, 2003 DECEMBER 31, 2002 ---------------------------------- ---------------------------------- MASSACHUSETTS TAX FREE INCOME FUND SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- --------------- --------------- --------------- --------------- CLASS A Shares sold ........................................ 119,001 $ 1,949,577 456,052 $ 7,320,365 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 115,722 1,900,796 166,936 2,687,820 --------------- --------------- --------------- --------------- 234,723 3,850,373 622,988 10,008,185 Shares repurchased ................................. (584,421) (9,550,818) (659,550) (10,569,788) --------------- --------------- --------------- --------------- Net increase (decrease) ............................ (349,698) $ (5,700,445) (36,562) $ (561,603) --------------- --------------- --------------- --------------- CLASS B Shares sold ........................................ 22,230 $ 363,317 40,852 $ 652,539 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 5,690 93,253 9,320 149,611 --------------- --------------- --------------- --------------- 27,920 456,570 50,172 802,150 Shares repurchased ................................. (62,206) (1,025,084) (164,730) (2,629,120) --------------- --------------- --------------- --------------- Net increase (decrease) ............................ (34,286) $ (568,514) (114,558) $ (1,826,970) --------------- --------------- --------------- --------------- Increase(decrease) derived from capital shares transactions ...................................... (383,984) $ (6,268,959) (151,120) $ (2,388,573) =============== =============== =============== =============== YEAR ENDED DECEMBER 31, 2001 ---------------------------------- MASSACHUSETTS TAX FREE INCOME FUND SHARES AMOUNT ------------------------------------------------------- --------------- --------------- CLASS A Shares sold ........................................ 509,197 $ 8,157,232 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 187,505 3,002,608 --------------- --------------- 696,702 11,159,840 Shares repurchased ................................. (761,186) (12,187,109) --------------- --------------- Net increase (decrease) ............................ (64,484) $ (1,027,269) --------------- --------------- CLASS B Shares sold ........................................ 69,544 $ 1,113,757 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 11,907 190,203 --------------- --------------- 81,451 1,303,960 Shares repurchased ................................. (98,615) (1,580,611) --------------- --------------- Net increase (decrease) ............................ (17,164) $ (276,651) --------------- --------------- Increase(decrease) derived from capital shares transactions ...................................... (81,648) $ (1,303,920) =============== ===============
FOR THE PERIOD JANUARY 1, 2003 THROUGH YEAR ENDED SEPTEMBER 30, 2003 DECEMBER 31, 2002 ---------------------------------- ---------------------------------- MUNICIPAL INCOME FUND SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- --------------- --------------- --------------- --------------- CLASS A Shares sold ........................................ 1,680,532 $ 12,281,784 1,667,649 $ 12,274,988 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 374,960 2,761,288 576,440 4,253,748 --------------- --------------- --------------- --------------- 2,055,492 15,043,072 2,244,089 16,528,736 Shares repurchased ................................. (2,814,362) (20,686,975) (3,360,408) (24,705,392) --------------- --------------- --------------- --------------- Net increase (decrease) ............................ (758,870) $ (5,643,903) (1,116,319) $ (8,176,656) --------------- --------------- --------------- --------------- CLASS B Shares sold ........................................ 176,974 $ 1,299,640 360,545 $ 2,668,323 Shares issued in connection with the reinvestment of: Dividends from net investment income ............... 21,918 161,634 37,421 276,214 --------------- --------------- --------------- --------------- 198,892 1,461,274 397,966 2,944,537 Shares repurchased ................................. (387,486) (2,860,427) (746,990) (5,506,527) --------------- --------------- --------------- --------------- Net increase (decrease) ............................ (188,594) $ (1,399,153) (349,024) $ (2,561,990) --------------- --------------- --------------- --------------- Increase(decrease) derived from capital shares transactions ...................................... (947,464) $ (7,043,056) (1,465,343) $ (10,738,646) =============== =============== =============== =============== YEAR ENDED DECEMBER 31, 2001 ---------------------------------- MUNICIPAL INCOME FUND SHARES AMOUNT ------------------------------------------------------- --------------- --------------- CLASS A Shares sold ........................................ 2,337,838 $ 17,278,030 Shares issued in connection with the reinvestment of: Dividends from net investment income ............ 630,423 4,666,919 --------------- --------------- 2,968,261 21,944,949 Shares repurchased ................................. (3,251,737) (24,090,858) --------------- --------------- Net increase (decrease) ............................ (283,476) $ (2,145,909) --------------- --------------- CLASS B Shares sold ........................................ 345,205 $ 2,561,560 Shares issued in connection with the reinvestment of: Dividends from net investment income ............... 45,127 334,174 --------------- --------------- 390,332 2,895,734 Shares repurchased ................................. (349,414) (2,590,406) --------------- --------------- Net increase (decrease) ............................ 40,918 $ 305,328 --------------- --------------- Increase(decrease) derived from capital shares transactions ...................................... (242,558) $ (1,840,581) =============== ===============
19 NOTES TO FINANCIAL STATEMENTS (continued) For The Period Ended September 30, 2003 6. Contingent Expense Obligation. Loomis Sayles has given a binding undertaking to Massachusetts Tax Free Income Fund to defer its management fee and, if necessary, bear certain expenses associated with the Fund to limit its operating expenses. This limitation is in effect until April 30, 2004 and will be reevaluated on an annual basis. If in the year following a deferral or reimbursement of expenses the actual operating expenses of the Fund are less than its expense limit, the Fund is required to pay an amount of additional expense that is the lower of the difference between the expense limit and the actual amount of fees previously waived or expenses reimbursed. At September 30, 2003, the expense limits as a percentage of average daily net assets and amount subject to possible reimbursement under the expense limitation agreement were as follows:
Expense Limit as a Percentage of Average Daily Net Assets Cumulative Expenses Waived ---------------------------- Expiration or Reimbursed Subject Class A Class B of Waiver to Future Payment ------------ ----------- -------------- ---------------------------- Massachusetts Tax Free Income Fund 1.40% 2.05% April 30, 2004 $ --
7. Concentration of Credit. Massachusetts Tax Free Income 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. At September 30, 2003, the Fund had the following concentrations by revenue source in excess of 10% of the Fund's net assets: University 14.2%, Water 11.4% and College 11.1%. The Fund had investments in securities of issuers insured by Municipal Bond Investors Assurance Corporation (MBIA), American Municipal Bond Assurance Corporation (AMBAC), Financial Guaranty Insurance Company (FGIC) and Federal Housing Administration (FHA) which aggregated to 12.5%, 12.7%, 7.7% and 2.4% of its net assets, respectively, at September 30, 2003. At September 30, 2003, Municipal Income Fund had the following concentrations by revenue source in excess of 10% as a percentage of the Fund's net assets: Various Purpose 14.0% and University 12.7%. The Fund also had more than 10% of its net assets invested in: New York 12.5%, Pennsylvania 12.3%, Illinois 11.1% and Texas 10.6%. Certain revenue or tax related events in a state may impair the ability of issuers of municipal securities to pay principal and interest on their obligations. 8. Reorganization. After the close of business on September 12, 2003, CDC Nvest Municipal Income Fund was reorganized into Municipal Income Fund, a newly established series of Loomis Sayles Funds II, pursuant to a plan of reorganization approved by its shareholders on August 28, 2003. The financial statements of Municipal Income Fund reflect the historical results of CDC Nvest Municipal Income Fund. 20 REPORT OF INDEPENDENT AUDITORS To the Trustees and Shareholders of CDC Nvest Funds Trust II and Loomis Sayles Funds II: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Loomis Sayles Massachusetts Tax Free Income Fund (formerly CDC Nvest Massachusetts Tax Free Income Fund), a series of CDC Nvest Funds Trust II and Loomis Sayles Municipal Income Fund (formerly CDC Nvest Municipal Income Fund), a series of Loomis Sayles Funds II (collectively the "Funds") at September 30, 2003, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts November 21, 2003 21 ADDITIONAL TAX INFORMATION Federal Income Tax Information (unaudited) During the period ended September 30, 2003, the tax character of distributions paid was as follows:
DISTRIBUTIONS PAID DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM FROM FROM ORDINARY INCOME TAX EXEMPT INCOME LONG-TERM CAPITAL GAINS ------------------ ------------------ ----------------------- Massachusetts Tax Free Income Fund $ 2,370 $ 2,787,323 $ -- Municipal Income Fund 73,861 4,243,885 --
22 TRUSTEES' INFORMATION The Funds are governed by a Board of Trustees, which is responsible for generally overseeing the conduct of Fund business and for protecting the interests of shareholders. The trustees meet periodically throughout the year to oversee the Funds' activities, review contractual arrangements with companies that provide services to the Funds and review the Funds' performance.
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS IN FUND/1/, LENGTH OF TIME PRINCIPAL OCCUPATION(S) FUND COMPLEX OVERSEEN AND NAME, AGE AND ADDRESS SERVED AND TERM OF OFFICE/2/ DURING PAST 5 YEARS OTHER DIRECTORSHIPS HELD --------------------------- ---------------------------- ------------------------------ ------------------------- INDEPENDENT TRUSTEES Joseph Alaimo+(73) Trustee; Chairman, Wayne Hummer 26; 399 Boylston Street 4 years for Loomis Trust Company and Wayne None Boston, MA 02116 Sayles Funds Trusts Hummer Investment Trust Graham T. Allison, Jr. (63) Trustee (2); Douglas Dillon Professor and 44; 399 Boylston Street 19 years for CDC Nvest Director for the Belfer Center Director, Taubman Centers, Boston, MA 02116 Funds Trusts; Less than 1 of Science and International Inc.; Board Member, USEC year for Loomis Sayles Affairs, John F. Kennedy Inc. Funds Trusts School of Government, Harvard University Edward A. Benjamin (65) Trustee (1) Retired; formerly, Partner, 44; 399 Boylston Street Less than 1 year Ropes & Gray (law firm) Director, Coal, Energy Boston, MA 02116 until 1999 Investments & Management; Director, Precision Optics Corporation (optics manufacturer) Daniel M. Cain (58) Trustee, President and CEO, Cain 44; 452 Fifth Avenue Chairman (1); Brothers & Company, Trustee for Universal Health New York, NY 10018 7 years for CDC Nvest Incorporated (investment Realty Income Trust; Funds Trusts; Less than 1 banking) Director, PASC; Director, year for Loomis Sayles Sheridan Healthcorp Funds Trusts Paul G. Chenault (70) Trustee (2) Retired; formerly, Trustee, 44; 5852 Pebble Beach Way Less than 1 year for CDC First Variable Life (variable Director, Mailco Office San Luis Obispo, CA 93401 Nvest Funds Trusts; 4 years life insurance) Products, Inc. for Loomis SaylesFunds Trusts Kenneth J. Cowan (71) Trustee Retired 44; 399 Boylston Street Chairman (2); None Boston, MA 02116 28 years for CDC Nvest Funds Trusts; Less than 1 year for Loomis Sayles Funds Trusts Richard Darman (60) Trustee (2); Partner, The Carlyle Group 44; 399 Boylston Street 7 years for CDC Nvest (investments); Chairman of Director and Chairman, AES Boston, MA 02116 Funds Trusts; Less than 1 the Board of Directors of Corporation year for Loomis Sayles AES Corporation (interna- Funds Trusts tional power company); for- merly, Professor, John F. Kennedy School of Government, Harvard University
23 TRUSTEES' INFORMATION
NUMBER OF PORTFOLIOS IN POSITION(S) HELD WITH FUND COMPLEX OVERSEEN FUNDS, LENGTH OF TIME PRINCIPAL OCCUPATION(S) AND OTHER DIRECTORSHIPS NAME, AGE AND ADDRESS SERVED AND TERM OF OFFICE/1/ DURING PAST 5 YEARS HELD --------------------------- ---------------------------- ------------------------------ ------------------------- INDEPENDENT TRUSTEES (continued) Sandra O. Moose (61) Trustee (1); Senior Vice President and 44; One Exchange Place 21 years for CDC Nvest Director, The Boston Director, Verizon Boston, MA 02109 Funds Trusts; Less than 1 Consulting Group, Inc. Communications year for Loomis Sayles (management consulting) Director, Rohm and Haas Funds Trusts Company John A. Shane (70) Trustee (2); President, Palmer Service 44; 200 Unicorn Park Drive 21 years for CDC Nvest Corporation (venture capital Director, Gensym Woburn, MA 01801 Funds Trusts; Less than 1 organization) Corporation; Director, year for Loomis Sayles Retired Overland Storage, Inc. Funds Trusts Director, ABT Associates Inc. Pendleton P. White (72) Trustee (2); Retired 44; 6 Breckenridge Lane 22 years for CDC Nvest None Savannah, GA 31411 Funds Trusts; Less than 1 year for Loomis Sayles Funds Trusts INTERESTED TRUSTEES Robert J. Blanding/3/ (56) CEO, Loomis Sayles Funds President, Chairman, 44; 555 California Street II, Trustee Director, and Chief None San Francisco, CA 94104 Less than 1 year Executive Officer, Loomis Sayles, Chief Executive Officer - Loomis Sayles Funds II; President and CEO - Loomis Sayles Funds I John T. Hailer/4/ (42) President and Chief President and Chief 44; 399 Boylston Street Executive Officer - CDC Executive Officer, CDC IXIS None Boston, MA 02116 Nvest Funds Trusts, Asset Management President - Loomis Sayles Distributors, L.P.; Executive Funds II, Trustee; Vice President - Loomis 3 years for CDC Nvest Sayles Funds I, formerly, Funds Trusts; Less than 1 Senior Vice President, year for Loomis Sayles Fidelity Investments Funds Trusts Peter S. Voss/5/ (57) Chairman of the Board, Director, President and Chief 44; 399 Boylston Street Trustee; 11 years for CDC Executive Officer, CDC IXIS Trustee of Harris Associates Boston, MA 02116 Nvest Funds Trusts; Less Asset Management North Investment Trust/5/ than 1 year for Loomis America, L.P. Sayles Funds Trusts
24 TRUSTEES' INFORMATION
NUMBER OF PORTFOLIOS IN POSITION(S) HELD WITH FUND COMPLEX OVERSEEN FUNDS, LENGTH OF TIME PRINCIPAL OCCUPATION(S) AND OTHER DIRECTORSHIPS NAME, AGE AND ADDRESS SERVED AND TERM OF OFFICE/1/ DURING PAST 5 YEARS HELD --------------------------- ---------------------------- ------------------------------ ------------------------- OFFICERS Nicholas H. Palmerino (38) Treasurer; Senior Vice President, CDC Not Applicable; 399 Boylston Street Not Applicable IXIS Asset Management None Boston, MA 02116 Services, Inc.; Senior Vice President, CDC IXIS Asset Management Advisers, L.P.; formerly, Vice President, Loomis, Sayles & Company, L.P. John E. Pelletier (39) Secretary and Clerk; Senior Vice President, Not Applicable; 399 Boylston Street Not Applicable General Counsel, Secretary None Boston, MA 02116 and Clerk, CDC IXIS Distribution Corporation; Senior Vice President, General Counsel, Secretary and Clerk, CDC IXIS Asset Management Distributors, L.P.; Senior Vice President, General Counsel, Secretary and Clerk, CDC IXIS Asset Management Advisers, L.P.; Executive Vice President, General Counsel, Secretary, Clerk, and Director, CDC IXIS Asset Management Services, Inc.
(1) Member of Audit Committee. (2) Member of Contract Review and Governance Committee. + Mr. Alaimo is a Trustee of Loomis Sayles Funds I and Loomis Sayles Funds II, but not of the CDC Nvest Funds Trusts. /1/ Except as noted, each Trustee and Officer holds the same positions with CDC Nvest Funds Trust I, CDC Nvest Funds Trust II, CDC Nvest Funds Trust III, CDC Nvest Companies Trust I, AEW Real Estate Income Fund, CDC Nvest Cash Management Trust and CDC Nvest Tax Exempt Money Market Trust (the "CDC Nvest Funds Trusts") and Loomis Sayles Funds I and Loomis Sayles Funds II (the "Loomis Sayles Funds Trusts" and together with the CDC Nvest Funds Trusts, the "Trusts"). /2/ All Trustees serve until retirement, resignation or removal from the Board. The current retirement age is 72. Messrs. Alaimo and White are expected to retire by December 31, 2003. /3/ Mr. Blanding is deemed an "interested person" of the Trusts because he holds the following positions with affiliated persons of the Trusts: President, Chairman, Director and Chief Executive Officer of Loomis, Sayles & Company, L.P. ("Loomis Sayles"). /4/ Mr. Hailer is an "interested person" of the Trusts because he holds the following positions with affiliated persons of the Trusts: Director and Executive Vice President of CDC IXIS Asset Management Distribution Corporation; President and Chief Executive Officer of CDC IXIS Asset Management Distributors, L.P. ("CDC IXIS Distributors"). /5/ Mr. Voss is an "interested person" of the Trusts because he holds the following positions with entities that may be considered to be affiliated persons of the Trusts: Director of CDC IXIS Asset Management Services, Inc.; Director of CDC IXIS Asset Management Distribution Corporation; Director and Chairman of CDC IXIS Asset Management Associates, Inc.; Director of AEW Capital Management, Inc; Director of Harris Associates, Inc; Director of Loomis, Sayles & Company, Inc.; Member of Reich & Tang Asset Management, LLC; Director of Westpeak Global Advisors, Inc.; Director of Vaughan, Nelson, Scarborough & McCullough, Inc.; Director, Hansberger Group, Inc.; Member, Board of Managers, Harris Alternatives L.L.C.; and Director and Member of Executive Board of CDC IXIS Asset Management. /6/ As of September 30, 2003, Harris Associates Investment Trust has seven series that were overseen by its Board of Trustees. 25 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At the special meeting of shareholders held on June 10, 2003, shareholders of Loomis Sayles Funds II (formerly, Loomis Sayles Funds) voted for the following proposal: 1. Election of Trustees FOR WITHHELD * --------------- --------------- (01) Joseph Alaimo 134,298,551 8,672,577 (02) Graham T. Allison, Jr. 134,590,902 8,380,227 (03) Edward A. Benjamin 134,546,833 8,424,296 (04) Robert J. Blanding 134,572,705 8,398,423 (05) Daniel M. Cain 134,593,263 8,377,866 (06) Paul G. Chenault 134,352,172 8,618,957 (07) Kenneth J. Cowan 134,524,153 8,446,976 (08) Richard Darman 134,552,047 8,419,081 (09) John T. Hailer 134,613,039 8,358,089 (10) Sandra O. Moose 134,612,285 8,358,843 (11) John A. Shane 134,332,421 8,638,708 (12) Peter S. Voss 134,622,604 8,348,525 (13) Pendleton P. White 134,300,598 8,670,530 * Includes Broker Non-Votes (if any). 26 ADDITIONAL INFORMATION Shareholder Meeting (unaudited). At a special shareholders' meeting held on August 28, 2003, shareholders of the CDC Nvest Municipal Income Fund* (hereinafter referred to as the "Fund") voted for the following proposals: 1. Approval of a new Investment Advisory Agreement between Loomis, Sayles & Company, L.P. and the Trust on behalf of the Fund.
VOTED FOR VOTED AGAINST ABSTAINED VOTES BROKER NON-VOTES TOTAL VOTES --------- ------------- --------------- ---------------- ----------- 12,154,318.965 199,679.027 502,406.720 0 12,856,404.712
2. Approval of an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Fund to, and the assumption of all of the liabilities of the Fund by, the Loomis Sayles Municipal Income Fund in exchange for shares of the Loomis Sayles Municipal Income Fund and the distribution of such shares to the shareholders of the Fund in complete liquidation of the Fund
VOTED FOR VOTED AGAINST ABSTAINED VOTES BROKER NON-VOTES TOTAL VOTES --------- ------------- --------------- ---------------- ----------- 10,139,160.478 260,332.747 601,953.487 1,854,985.000 12,856,404.712
* The CDC Nvest Municipal Income Fund reorganized into the Loomis Sayles Municipal Income Fund as of the close of business on September 12, 2003. 27 This Page Intentionally Left Blank This Page Intentionally Left Blank This Page Intentionally Left Blank This Page Intentionally Left Blank Item 2. Code of Ethics. The Trust has adopted a code of Ethics that applies to the Trust's principal executive officer, principal financial officer and persons performing similar functions. Item 3. Audit Committee Financial Expert. The Board of Trustees of the Trust have established an audit committee and determined that all members qualify as financial experts. The committee members are Ms. Sandra O. Moose, Messrs. Edward A. Benjamin and Daniel M. Cain. Each of these individuals is also Independent Trustee of the Trust. Item 4. Principal Accountant Fees and Services. Not applicable. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. [Reserved.] Item 9. Controls and Procedures The Trust's principal executive officer and principal financial officer have concluded that the Trust's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Trust's internal controls or in other factors that could significantly affect the Trust's internal controls subsequent to the date of their evaluation. Item 10. Exhibits. (a) Code of Ethics. (b) Certifications of Principal Executive Officer and Principal Financial Officer. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CDC Nvest Funds Trust II By: /s/ John T. Hailer ---------------------------- Name: John Hailer Title: President & Chief Executive Officer Date: November 21, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ John T. Hailer ---------------------------- Name: John Hailer Title: President & Chief Executive Officer Date: November 21, 2003 By: /s/ Nicholas H. Palmerino ---------------------------- Name: Nicholas H. Palmerino Title: Treasurer Date: November 21, 2003 EXHIBIT INDEX (a) Code of Ethics (b)(1) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940 (b)(2) Certifications of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.