-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U8eR4elpTn2Ej88FN+PP454xiLySF7CQ9aZXLvLbelxzmnGv7vgwBIx53aWr8rmy rM5C2rgtceJfGcWdfBlNAQ== 0001206774-03-000120.txt : 20030306 0001206774-03-000120.hdr.sgml : 20030306 20030306105928 ACCESSION NUMBER: 0001206774-03-000120 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030306 EFFECTIVENESS DATE: 20030306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CDC NVEST FUNDS TRUST II CENTRAL INDEX KEY: 0000052136 IRS NUMBER: 041990692 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00242 FILM NUMBER: 03594073 BUSINESS ADDRESS: STREET 1: 399 BOYLSTON ST STREET 2: 4TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 617-449-2840 MAIL ADDRESS: STREET 1: 399 BOYLSTON STREET STREET 2: 6TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: TNE FUNDS TRUST DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENGLAND FUNDS TRUST II DATE OF NAME CHANGE: 19940615 FORMER COMPANY: FORMER CONFORMED NAME: NVEST FUNDS TRUST II DATE OF NAME CHANGE: 20000202 N-30D 1 d12033.txt [LOGO] CDC NVEST =========FUNDS(SM) CDC IXIS Asset Management Distributors - -------------------------------------------------------------------------------- Annual Report December 31, 2002 - -------------------------------------------------------------------------------- CDC Nvest Municipal Income Fund Loomis, Sayles & Company CDC Nvest Massachusetts Tax Free Income Fund Loomis, Sayles & Company CDC Nvest Funds - -------------------------------------------------------------------------------- Annual Report December 31, 2002 Table of contents President's Letter ..................................... 1 Economic Update ......................................... 2 Portfolio Managers' Commentary and Performance CDC Nvest Municipal Income Fund ....................... 4 CDC Nvest Massachusetts Tax Free Income Fund .......... 6 CDC Nvest Tax Free Income Funds Risks ................... 8 Schedules of Investments CDC Nvest Municipal Income Fund ....................... 9 CDC Nvest Massachusetts Tax Free Income Fund .......... 11 Statements of Assets and Liabilities .................... 13 Statements of Operations ................................ 14 Statements of Changes in Net Assets ..................... 15 Financial Highlights .................................... 16 Notes to Financial Statements ........................... 18 Report of Independent Accountants ....................... 24 Trustees' Information ................................... 25 PRESIDENT'S LETTER February 2003 - -------------------------------------------------------------------------------- [PHOTO] John T. Hailer President CDC Nvest Funds "...A professional financial advisor can help you take the emotion out of investing and make sound, rational decisions for the long term." Dear Shareholder: Investors will remember 2002 as a year marked by extremes. The bear market reached into its third year, questions surrounding corporate governance grew, and the threat of war with Iraq intensified. Yet even through these dark clouds, investors found some bright spots and the market delivered seven weeks of positive returns through October and November, making for the longest rally since the first quarter of 2000. It may be impossible to predict where the market will go from here, but there are steps you can take to be prepared. Now is a good time to return to such core investment principles as investing with a long-term outlook, diversifying your portfolio, managing your asset allocation, and looking to your financial advisor for guidance. This fourth principle may be the most important for these times. When you are unnerved by volatility and uncertainty, a professional financial advisor can help you take the emotion out of investing and make sound, rational decisions for the long term. As you plan your future, CDC Nvest Funds will be here for you, giving you access to the depth and strength of CDC IXIS Asset Management, a $312 billion* global money manager. Through its unique multi-manager approach we can bring you a diverse selection of investment disciplines that may help you achieve many goals in the years ahead. We thank you for continuing to place your trust in CDC Nvest Funds and look forward to helping you succeed, whatever the future brings. Sincerely, /s/ John T. Hailer *As of 12/31/02 1 ECONOMIC UPDATE February 2003 THE ECONOMY As 2002 drew to a close, a full economic recovery remained out of reach. Quarterly growth numbers surged to 5.0% in the first quarter and then slowed to a crawl in the fourth quarter, for an average rate for the year of 2.4%, according to the U. Commerce Department's advanced estimate. Layoffs continued among manufacturing companies, the result of continued sluggish demand for industrial equipment, big-ticket consumer items and air travel. The jobless rate rose to 6.0% at the end of December, according to the U.S. Department of Labor. This was an eight-year high, although labor markets actually improved in sectors that are expected to get a boost from higher defense spending. Except for basic areas like medical care and housing, low inflation is helping consumers stretch their dollar. While most retailers were disappointed with holiday sales, car sales were surprisingly strong, and spending on computers and other technology-related equipment finally came to life by the end of the year. Personal savings reached 4.4% of disposable income in the fourth quarter of 2002 - - well above the depressed levels of the past few years, but below levels prior to the stock mar ket boom in the late 1990s. The housing market, which had remained strong all year, began to cool late in the year, only to surge again in December, pushing home building activity for all of 2002 to the highest level in 16 years. Aside from the possibility of war in Iraq, prospects for the year ahead are brighter. Strong productivity growth is expected translate into greater profitability, and the Federal Reserve Board's November interest rate cut, the first in nearly a year, is expected to provide added stimulus for growth. Personal Savings Rate versus Dow Jones Industrial Average Ten years ended December 31, 2002 1993 8.7 3754 1994 6.6 3834 1995 4.8 5117 1996 4.6 6448 1997 4.2 7908 1998 3.9 9181 1999 1.6 11497 2000 2.7 10767 2001 1.3 10022 2002 4.4 8342
Source: Seasonally adjusted personal savings rate, Bureau of Economic Analysis The chart compares the annual personal savings rate of all Americans for each of the past ten years to the closing price on the Dow Jones Industrial Average. As the Dow headed into its steep rise in the late 1990s, the personal savings rate declined. As stock prices began a three-year decline in 2000, the savings rate increased for the first time in ten years. This suggests that investors no longer feel they can rely on double-digit returns on their investments to build for their future. They are reaching deeper into their pockets, setting aside a greater portion of their disposable income. 2 ECONOMIC UPDATE THE EQUITY MARKETS For equity investors, 2002 was a year on the see-saw. Stock prices moved up in the first quarter, down in the second and third quarters, and back up again in the fourth quarter, raising hope that the longest bear market in recent memory could finally be over. But for the year as a whole, the gains were not enough; all major stock market indexes closed December in negative territory, making 2002 the third consecutive losing year for common stocks. Foreign stocks fared as badly as the U.S. market or even worse, as economic problems persisted around the globe. However, the market experienced a change in sentiment in the fourth quarter, as money flowed into stocks that had been hard hit a year ago. U.S.-based investors benefited from the strength of the euro versus the dollar. Asian equities were also mired in red ink, but in general, Asian markets did better than the United States. THE FIXED-INCOME MARKETS Bond investors were on a see-saw of their own, but returns generally moved counter to the stock market. However, the Fed's decision to cut short-term interest rates by a generous 0.5% in November gave the markets renewed strength in December. The yield on the benchmark ten-year U.S. Treasury bond fell from 5.1% to 4.0% by the end of the year and short-term rates dropped from 1.7% to 1.2% - their lowest level in 41 years. In general, higher-quality bonds outperformed lower-quality bonds. Municipal bonds, which had been strong performers throughout the year, were flat in the closing quarter. High-yield bonds generally lost ground during the year, as the bankruptcy rate remained high, especially in the troubled telecommunications and utilities sectors. However, in the final quarter, high-grade bonds lost ground and the high-yield sector came back to life. Historical Interest Rates Quarter-by-quarter, ten years ended December 31, 2002 Dec-92 3.22 6.7 Mar-93 2.96 6.07 Jun-93 3.05 5.79 Sep-93 2.9 5.33 Dec-93 3.06 5.77 Mar-94 3.5 6.72 Jun-94 4.2 7.27 Sep-94 4.79 7.6 Dec-94 5.56 7.81 Mar-95 5.64 7.15 Jun-95 5.35 6.17 Sep-95 5.14 6.26 Dec-95 4.91 5.64 Mar-96 4.99 6.32 Jun-96 5.12 6.85 Sep-96 5.18 6.73 Dec-96 5.08 6.45 Mar-97 5.13 6.9 Jun-97 5.12 6.42 Sep-97 4.93 6.06 Dec-97 5.29 5.75 Mar-98 5.05 5.61 Jun-98 5 5.44 Sep-98 4.43 4.46 Dec-98 4.52 4.7 Mar-99 4.38 5.24 Jun-99 4.75 5.87 Sep-99 4.72 5.92 Dec-99 5.3 6.41 Mar-00 5.72 6.13 Jun-00 5.68 6.08 Sep-00 6.01 5.82 Dec-00 5.7 5.01 Mar-01 4.2 4.95 Jun-01 3.38 5.29 Sep-01 2.32 4.53 Dec-01 1.71 5.15 Mar-02 1.82 5.38 Jun-02 1.69 4.83 Sep-02 1.54 3.69 Dec-02 1.19 3.92
Source: Federal Reserve Board The chart compares interest rates on two market benchmarks over the past decade. In the two years since the Fed began its stimulus program, both ten-year and three-month Treasury rates have been volatile. However, while rates on ten-year Treasuries declined by 20%, from 5.0% to 4.0%, three-month Treasuries fell by almost 80% during the period, from 5.9% to 1.2%. The chart also shows that this pattern is unusual. Historically, interest rates on short-term securities have been less volatile than longer-term rates. 3 CDC NVEST 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 issued by state and local governments - -------------------------------------------------------------------------------- Inception Date: May 9, 1977 - -------------------------------------------------------------------------------- Manager: Kent P. Newmark* Martha A. Strom Loomis, Sayles & Company, L.P. - -------------------------------------------------------------------------------- Symbols: Class A NEFTX Class B NETBX - -------------------------------------------------------------------------------- Net Asset Value Per Share: (December 31, 2002) Class A $7.43 Class B 7.44 ================================================================================ *Effective January 1, 2003, Robert Payne became co-manager. Management Discussion - -------------------------------------------------------------------------------- Although it was a volatile 12 months, bonds in the upper end of the quality spectrum did better in 2002 than lower-quality bonds, as economic and geopolitical uncertainty caused investors to seek relative safety. This bias toward low risk, coupled with extremely low rates on short-term bonds, prompted investors to focus on intermediate-term bonds maturing in the 7- to 12-year range. CDC Nvest Municipal Income Fund held a major portion of assets in intermediate-term bonds rated A or better during most of the year, which was a positive for the fund, but its airline-related bonds were negatives. As a result, for the 12 months ended December 31, 2002, the fund's total return was 7.31% based on the net asset value of Class A shares, including $0.34 in reinvested dividends. By comparison, the total return on Lehman Brothers Municipal Bond Index was 9.60% for the same period, and the average return on the funds in Morningstar's Muni National Long category was 7.96%. As of December 31, 2002, the 30-day SEC yield on Class A shares was 4.07% - equivalent to a taxable yield of 6.63% based on the 38.6% maximum federal tax rate in effect for 2002. ONGOING DESCENT OF AIRLINE BONDS HURT FUND PERFORMANCE Early in 2002 industrial revenue bonds, including bonds issued on behalf of airlines, appeared to be recovering in the wake of the terrorist attacks in September 2001. Municipalities issue revenue bonds to fund projects for corporations that will benefit the public, such as improvements to airport facilities. These bonds are backed by revenues from people using the facilities, but as airline profits fell most airline bonds were downgraded. Although airline-related issues accounted for just 5% of the fund's portfolio, they were responsible for a major portion of the fund's underperformance this year. HIGH-QUALITY BONDS PERFORMED WELL IN 2002 The best performing bonds in the portfolio this year included pre-refunded bonds issued by San Antonio, Texas, for the Electric & Gas Facility; they had a coupon rate of 5.75% and a 2017 maturity date. When a bond is pre-refunded, a new bond is issued to refund an old one and the proceeds typically are invested in U.S. Treasury securities. Between the date the old issue is refunded and the call date, when the principal is due (February 2010 in this case), bondholders receive interest at the old, higher rate, but the bonds are backed by Aaa-rated securities. Massachusetts Water Resource Authority bonds, Aaa-rated bonds with a coupon rate of 4.75% and a 2037 maturity, also performed well, as did insured bonds issued for Washington's Central Puget Sound Regional Transportation Authority, with a coupon rate of 4.75%, maturing in 2028. CURRENT CLIMATE, MARKET CONDITIONS FAVOR MUNICIPAL BOND INVESTORS Today's low interest rates come at an opportune time for municipalities needing to issue new debt to fund budget deficits. This wealth of new issues early in 2003 is likely to increase supply and possibly boost yields for investors. At the same time, yield spreads - the difference in yield between high- and lower-quality bonds - also remain wide by historical standards. This means that investors who are willing to accept higher risks are being well compensated. And until the current climate of uncertainty dissipates, the recovery is likely to remain slow, keeping a lid on interest rates generally. The outlook is especially positive for tax-averse investors because municipal bond rates have been slower to change than rates on taxable bonds. High-quality, 10-year municipal bonds normally pay approximately 80% to 85% of the rate on 10-year Treasury bonds. During October and November, supply in the municipal market swelled, which meant that municipal rates rose faster than comparable taxable bonds, reaching as high as 95% of the Treasury rate. Currently the fund emphasizes longer-term maturities, with nearly one-third of holdings maturing in the 10- to 20-year range. It is also heavily weighted in bonds in the Aaa or Aa categories. Our current expectations are for a strong first quarter in 2003 and a generally positive year once geopolitical tensions subside. 4 CDC NVEST MUNICIPAL INCOME FUND Investment Results through December 31, 2002 - -------------------------------------------------------------------------------- PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest 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 - -------------------------------------------------------------------------------- December 31, 1992 through December 31, 2002
NAV MSC LB Muni Bond 12/31/1992 10000 9550 10000 10083 9629 10116 10475 10004 10482 10359 9893 10371 10478 10007 10476 10528 10054 10535 10707 10225 10711 10719 10237 10725 10944 10452 10948 11049 10552 11073 11075 10577 11094 10964 10471 10996 12/31/1993 11216 10711 11228 11349 10838 11357 11024 10528 11063 10482 10010 10612 10518 10045 10702 10624 10146 10795 10556 10081 10729 10751 10267 10926 10784 10299 10963 10597 10120 10803 10364 9897 10611 10055 9603 10419 12/31/1994 10320 9855 10648 10680 10199 10952 11050 10553 11271 11193 10689 11401 11215 10710 11414 11528 11009 11778 11380 10868 11675 11479 10962 11786 11563 11042 11935 11647 11123 12011 11810 11279 12185 12006 11466 12388 12/31/1995 12098 11553 12507 12193 11645 12601 12120 11574 12516 11982 11443 12356 11956 11418 12321 11946 11409 12316 12083 11539 12451 12171 11624 12563 12161 11614 12560 12366 11810 12736 12505 11943 12880 12695 12124 13116 12/31/1996 12657 12088 13060 12670 12100 13085 12783 12208 13205 12620 12052 13029 12712 12140 13138 12856 12278 13336 13035 12448 13478 13387 12785 13852 13307 12708 13722 13419 12815 13884 13513 12905 13974 13555 12945 14056 12/31/1997 13743 13124 14261 13913 13287 14408 13955 13327 14413 13977 13348 14425 13910 13284 14360 14060 13427 14587 14120 13484 14645 14143 13507 14682 14331 13686 14908 14447 13797 15094 14397 13749 15094 14458 13808 15147 12/31/1998 14475 13824 15185 14617 13959 15366 14587 13931 15299 14593 13936 15320 14636 13977 15358 14585 13929 15269 14419 13770 15049 14463 13812 15104 14315 13671 14983 14321 13677 14989 14114 13479 14827 14246 13605 14985 12/31/1999 14076 13443 14873 14001 13371 14808 14156 13519 14980 14373 13727 15307 14294 13651 15217 14254 13613 15138 14514 13861 15539 14675 14015 15755 14877 14208 15998 14837 14169 15915 14959 14286 16088 15061 14383 16210 12/31/2000 15309 14620 16611 15416 14722 16775 15440 14745 16828 15567 14867 16979 15401 14708 16795 15548 14848 16976 15673 14967 17090 15947 15229 17343 16201 15472 17629 15922 15206 17569 16137 15411 17779 15963 15245 17629 12/31/2001 15768 15059 17462 16027 15305 17765 16243 15512 17979 15977 15258 17627 16238 15507 17971 16321 15587 18080 16473 15732 18272 16579 15833 18507 16708 15956 18729 16974 16211 19139 16544 15799 18822 16517 15774 18744 12/31/2002 16920 16159 19139
Average Annual Total Returns -- December 31, 2002 - -------------------------------------------------------------------------------- Since 1 Year 5 Years 10 Years Inception Class A (Inception 5/9/77) Net Asset Value(1) 7.31% 4.25% 5.40% -- With Maximum Sales Charge(2) 2.50 3.28 4.91 -- Class B (Inception 9/13/93) Net Asset Value(1 6.66 3.50 -- 3.90% With CDSC(4) 1.66 3.16 -- 3.90 - --------------------------------------------------------------------------------
Since Class B Comparative Performance 1 Year 5 Years 10 Years Inception(9) Lehman Muncipal Bond Index(3) 9.60% 6.06% 6.71% 6.10% Morningstar Muni National Long Fund Avg.(5) 7.96 4.39 5.75 4.90 Lipper General Municipal Debt Funds Avg.(6) 8.36 4.62 5.80 4.97
Yields as of December 31, 2002 - -------------------------------------------------------------------------------- Class A Class B SEC 30-day yield(7) 4.07% 3.52% Taxable equivalent yield(8) 6.63 5.73 All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. Portfolio as of December 31, 2002 - -------------------------------------------------------------------------------- Credit Quality Aaa 44.2% Aa 15.8% A 17.2% Baa 9.8% Ba 2.1% B 2.1% Ca and Not rated 8.8%
Average Quality: A Credit quality is based on bond ratings from Moody's Investors Service Effective Maturity Less than 1 year 0.5% 1-5 years 18.8% 6-10 years 40.9% 10+ years 39.8%
Average effective maturity: 11.0 years See page 8 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 38.6%. 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. (9) Class B since-inception comparative performance is calculated from 9/30/93. 5 CDC NVEST MASSACHUSETTS TAX FREE INCOME FUND Portfolio Profile - -------------------------------------------------------------------------------- ================================================================================ Objective: Seeks a high level of current income exempt from federal and Massachusetts personal income taxes - -------------------------------------------------------------------------------- Strategy: Invests primarily in Massachusetts municipal bonds, including general obli- gation bonds and issues secured by specific revenue streams - -------------------------------------------------------------------------------- Inception Date: March 23, 1984 - -------------------------------------------------------------------------------- Manager: Kent P. Newmark* Martha A. Strom Loomis, Sayles & Company, L.P. - -------------------------------------------------------------------------------- Symbols: Class A NEFMX Class B NEMBX - -------------------------------------------------------------------------------- Net Asset Value Per Share: (December 31, 2002) Class A $16.40 Class B 16.36 ================================================================================ *Effective January 1, 2003, Robert Payne became co-manager. Management Discussion - -------------------------------------------------------------------------------- No one seemed able to gauge where the economy was headed in 2002. The effects of this uncertainty on interest rates were most evident on bonds with shorter maturities, which were volatile. By year-end, short-term interest rates were lower than they had been in 41 years. Overall, the best performers for the full year were bonds maturing within the 7- to 10-year range; high-quality bonds generally performed better than lower-quality bonds, both in the taxable and tax-exempt markets. Against this backdrop, the total return on Class A shares of CDC Nvest Massachusetts Tax Free Income Fund was 8.12% for the 12 months ended December 31, 2002, with $0.68 in dividends reinvested during the period. For the same period the fund's benchmark, Lehman Brothers Municipal Bond Index, returned 9.60%. The Lehman Brothers Index includes municipal bonds from all over the U.S., whereas the fund concentrates on bonds issued by municipalities in Massachusetts. The average return for the funds in Morningstar's Muni Single-State Long category was 8.27%. As of December 31, 2002, the fund's 30-day SEC yield for Class A shares was 3.46% - equivalent to a taxable yield of 5.95%, based on the 41.85% combined maximum federal and Massachusetts state income tax rate. HIGH-QUALITY, PRE-REFUNDED, FLOATING-RATE SECURITIES SUPPORTED FUND IN 2002 A prolonged market preference for high-quality bonds in an uncertain economy was a positive for Massachusetts bonds, on average, reflecting the Commonwealth's higher-than-average quality rating. Tax-free bonds issued to fund higher education, water and sewer, and transportation projects in Massachusetts were the best sector performers. Our best-performing individual issues included pre-refunded bonds for Route 3 North Transportation Improvement Association. When a bond is pre-refunded, a new bond is issued to replace an old one and the proceeds are invested typically in U.S. Treasury securities. Between the date the old issue is refunded and the call date, when the principal is due (June 2010 in this case), bondholders continue to receive interest at the old rate, but the bonds are backed by Aaa-rated securities. Another positive for the fund this year was its position in inverse floating-rate securities issued by the Massachusetts Health & Educational Facilities Authority for Beverly Hospital. When interest rates decline, the rate paid by these specialized bonds is adjusted upward. Once interest rates are able to sustain an upward trend, the income advantage these securities provide diminishes. LOWER-RATED BONDS CONTRIBUTED INCOME, NOT PRICE PERFORMANCE The healthcare sector lagged the market this year. Two hospital-related bonds issued by the Massachusetts Health & Educational Facilities Authority detracted from the fund's 2002 results: one for Milton Hospital and the other for Catholic Health East. Also disappointing was a bond issued by the Massachusetts State Development Finance Agency for a Visual and Performing Arts Project. All three of these bonds were lower rated, and although they contributed an attractive level of income, they have yet to recover from sharp price declines in October. MANAGER EXPECTS UNCERTAINTY TO GIVE WAY TO GRADUAL ECONOMIC RECOVERY Near-term, we expect municipal yields to continue their inverse relationship to the stock market, trending up in price when stocks swing down, and vice versa. This may make them a helpful diversifier for investors looking for ways to help smooth the bumpy road we see ahead. Long-term, we believe interest rates will rise as the economy gains momentum later in 2003, and we have structured the portfolio to minimize price volatility. 6 CDC NVEST MASSACHUSETTS TAX FREE INCOME FUND Investment Results through December 31, 2002 - -------------------------------------------------------------------------------- PERFORMANCE IN PERSPECTIVE The charts comparing CDC Nvest Massachusetts Tax Free Income Fund's performance to a benchmark index provide you with a general sense of how the fund performed. To put this information in context, it may be helpful to understand the 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 - -------------------------------------------------------------------------------- December 31, 1992 through December 31, 2002
NAV MSC LB Muni Bond 12/31/1992 10000 9575 10000 10124 9693 10116 10509 10062 10482 10414 9972 10371 10527 10080 10476 10592 10142 10535 10779 10321 10711 10781 10323 10725 11008 10540 10948 11130 10657 11073 11144 10671 11094 11042 10573 10996 12/31/1993 11240 10762 11228 11389 10905 11357 11093 10622 11063 10553 10105 10612 10582 10132 10702 10680 10226 10795 10585 10135 10729 10791 10333 10926 10814 10354 10963 10633 10181 10803 10377 9936 10611 10126 9696 10419 12/31/1994 10416 9973 10648 10771 10313 10952 11122 10649 11271 11202 10726 11401 11219 10743 11414 11574 11082 11778 11394 10910 11675 11474 10986 11786 11611 11118 11935 11692 11195 12011 11887 11382 12185 12120 11605 12388 12/31/1995 12273 11752 12507 12313 11789 12601 12190 11672 12516 12038 11526 12356 12003 11493 12321 12019 11508 12316 12133 11617 12451 12224 11705 12563 12219 11699 12560 12409 11882 12736 12540 12007 12880 12755 12213 13116 12/31/1996 12671 12132 13060 12693 12154 13085 12815 12270 13205 12670 12131 13029 12773 12230 13138 12954 12404 13336 13090 12533 13478 13462 12890 13852 13338 12771 13722 13514 12940 13884 13580 13003 13974 13662 13082 14056 12/31/1997 13851 13263 14261 13963 13370 14408 13944 13351 14413 13905 13314 14425 13856 13267 14360 14069 13471 14587 14119 13519 14645 14127 13526 14682 14352 13742 14908 14510 13894 15094 14452 13837 15094 14477 13862 15147 12/31/1998 14532 13914 15185 14699 14074 15366 14632 14010 15299 14614 13993 15320 14658 14035 15358 14563 13944 15269 14326 13717 15049 14376 13765 15104 14173 13570 14983 14130 13530 14989 13933 13341 14827 14056 13459 14985 12/31/1999 13933 13341 14873 13819 13232 14808 13991 13397 14980 14253 13648 15307 14189 13586 15217 14133 13532 15138 14417 13805 15539 14601 13980 15755 14784 14155 15998 14725 14099 15915 14844 14213 16088 14906 14273 16210 12/31/2000 15223 14576 16611 15276 14627 16775 15330 14678 16828 15325 14674 16979 15167 14523 16795 15314 14664 16976 15424 14768 17090 15658 14993 17343 15952 15274 17629 15863 15189 17569 16011 15330 17779 15893 15217 17629 12/31/2001 15713 15045 17462 15801 15129 17765 15980 15300 17979 15686 15019 17627 15973 15295 17971 16098 15414 18080 16285 15593 18272 16493 15792 18507 16694 15985 18729 17071 16345 19139 16760 16047 18822 16653 15946 18744 12/31/2002 16987 16265 19139
Average Annual Total Returns -- December 31, 2002 - -------------------------------------------------------------------------------- Since 1 Year 5 Years(5) 10 Years(5) Inception(5) Class A (Inception 3/23/84) Net Asset Value1 8.12% 4.17% 5.44% -- With Maximum Sales Charge(2) 3.53 3.27 4.98 -- Class B (Inception 9/13/93) Net Asset Value(1) 7.43 3.50 -- 3.93% With CDSC(4) 2.43 3.16 -- 3.93 - ------------------------------------------------------------------------------------------------- Since Class B Comparative Performance 1 Year 5 Years 10 Years Inception(10) Lehman Municipal Bond Index(3) 9.60% 6.06% 6.71% 6.09% Morningstar Muni Single State Long Fund Avg.(6) 8.27 4.69 5.83 5.00 Lipper MA Municipal Debt Funds Average(7) 8.61 4.86 5.98 5.15
Yields as of December 31, 2002 - -------------------------------------------------------------------------------- Class A Class B SEC 30-day yield(8) 3.46% 2.97% Taxable equivalent yield(9) 5.95 5.11 All returns represent past performance and do not guarantee future results. Share price and return will vary and you may have a gain or loss when you sell your shares. All results include reinvestment of dividends and capital gains. Current returns may be higher or lower than those shown. The table and graph do not reflect taxes shareholders might owe on any fund distributions or when they redeem their shares. Portfolio as of December 31, 2002 - -------------------------------------------------------------------------------- Credit Quality Aaa 47.6% Aa 19.6% A 14.6% Baa 4.8% Caa 1.9% Not rated 11.5%
Average Quality: Aa Credit quality is based on bond ratings from Moody's Investors Service Effective Maturity Less than 1 year 10.6% 1-5 years 5.5% 6-10 years 47.4% 10+ years 36.5%
Average effective maturity: 10.6 years See page 8 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 voluntary expense waivers, without which performance would have been lower. (6) Morningstar Muni Single State Long Fund Average is the average performance without sales charges of funds with similar investment objectives 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 41.85%. 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. (10) Class B since-inception comparative performance is calculated from 9/30/93. 7 CDC NVEST 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 CDC Nvest Municipal Income Fund invests primarily in municipal securities issued by state and local governments. Some income may be subject to federal and state taxes CDC Nvest Massachusetts Tax Free Income Fund is a non-diversified fund, concentrating 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. 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 are not diversified, 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. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- 8 MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002 Tax Exempt Obligations -- 98.1% of Total Net Assets
Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Alaska -- 0.1% $ 190,000 Alaska Housing Finance Corp., (MBIA Insured), 6.500%, 6/01/2034 ............................... Aaa $ 191,889 ------------ California -- 6.8% 500,000 California Department of Water Resources, 5.875%, 5/01/2016 ............................... A3 557,150 2,500,000 California State, 4.250%, 10/01/2026 .............................. Aaa 2,306,300 2,000,000 California State, 5.000%, 10/01/2032 .............................. A1 1,952,060 2,000,000 California State, 5.125%, 6/01/2027 ............................... A1 2,000,580 3,000,000 Sacramento, CA, Power Authority, 6.000%, 7/01/2022 ............................... -- 3,132,150 ------------ 9,948,240 ------------ Colorado-- 1.2% 1,655,000 Denver, CO, City & County Airport, 7.500%, 11/15/2023 .............................. A2 1,790,875 ------------ Florida -- 2.1% 3,000,000 Escambia County, FL, Pollution Control, 6.900%, 8/01/2022 ............................... Baa2 3,118,650 ------------ Georgia-- 2.8% 4,000,000 Atlanta, GA, Water & Wastewater, 5.000%, 11/01/2038 .............................. Aaa 4,034,960 ------------ Illinois -- 10.8% 2,500,000 Chicago, IL, O'Hare International Airport, 6.100%, 11/01/2035 (d) .......................... Ca 347,975 3,250,000 Chicago, IL, O'Hare International Airport, 8.200%, 12/01/2024 .............................. B2 1,364,643 3,000,000 Cook County, IL, 5.000%, 11/15/2028 .............................. Aaa 3,026,970 2,500,000 Illinois Development Finance Authority, Pollution Control, 7.375%, 7/01/2021 ............................... B3 3,007,350 3,000,000 Illinois Educational Facilities Authority, 5.125%, 7/01/2038 ............................... Aa1 3,028,740 1,750,000 Illinois State, 5.400%, 12/01/2020 .............................. Aaa 1,862,070 3,000,000 Metropolitan Pier & Exposition Authority, 5.250%, 6/15/2042 ............................... Aaa 3,104,760 ------------ 15,742,508 ------------ Indiana -- 6.8% 2,000,000 Indiana Transportation Finance Authority, 5.375%, 12/01/2025 .............................. Aa2 2,094,880 2,500,000 Indianapolis, IN, Airport Authority, 7.100%, 1/15/2017 ............................... Baa2 2,656,750 5,000,000 Indianapolis, IN, Local Public Improvement Bond Bank, 5.250%, 7/01/2033 ............................... Aaa 5,169,800 ------------ 9,921,430 ------------ Massachusetts-- 5.8% 1,490,000 Massachusetts Housing Finance Agency, 6.600%, 12/01/2026 .............................. Aa2 1,542,537 2,000,000 Massachusetts Turnpike Authority, 5.000%, 1/01/2039 ............................... Aaa 2,003,480 5,000,000 Massachusetts Water Resources Authority, 4.750%, 8/01/2037 ............................... Aaa 4,851,150 ------------ 8,397,167 ------------ Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Michigan -- 3.5% $ 5,000,000 University of Michigan, 5.250%, 12/01/2020 .............................. Aa2 $ 5,104,300 ------------ Mississippi -- 3.5% 2,000,000 Lowndes County, MS, Solid Waste Disposal & Pollution Control, 6.700%, 4/01/2022 ............................... Baa2 2,234,120 2,500,000 Lowndes County, MS, Solid Waste Disposal & Pollution Control, 6.800%, 4/01/2022 ............................... Baa2 2,821,650 ------------ 5,055,770 ------------ New York-- 13.3% 4,000,000 New York Dormitory Authority, 5.500%, 5/15/2013 ............................... A3 4,555,520 2,740,000 New York Dormitory Authority, 5.750%, 7/01/2013 ............................... A3 3,183,085 3,000,000 New York Medical Care Facilities Finance Agency, 5.250%, 8/15/2014 ............................... A3 3,112,530 1,500,000 New York, NY, 6.000%, 5/15/2030 ............................... A2 1,621,920 1,700,000 Port Authority of New York & New Jersey, 7.000%, 10/01/2007 .............................. -- 1,806,845 5,000,000 Triborough Bridge & Tunnel Authority, 5.000%, 1/01/2032 ............................... Aa3 5,039,550 ------------ 19,319,450 ------------ Ohio -- 1.1% 2,800,000 Cleveland, OH, Airport, 5.700%, 12/01/2019 .............................. B3 1,624,728 ------------ Oregon -- 2.9% 4,000,000 Western Generation Agency, 7.400%, 1/01/2016 ............................... -- 4,167,480 ------------ Pennsylvania -- 7.9% 3,000,000 Pennsylvania Economic Development Financing Authority, 6.600%, 1/01/2019 ............................... -- 3,033,840 3,000,000 Pennsylvania Economic Development Financing Authority, 7.600%, 12/01/2024 .............................. Baa2 3,188,670 2,000,000 Pennsylvania Turnpike Commission, 5.000%, 7/15/2041 ............................... Aaa 2,031,060 3,125,000 Pennsylvania Turnpike Commission, 5.000%, 12/01/2026 .............................. Aaa 3,196,094 ------------ 11,449,664 ------------ Puerto Rico -- 3.6% 3,000,000 Puerto Rico, 4.750%, 7/01/2023 ............................... Aaa 3,043,380 2,000,000 Puerto Rico Infrastructure Financing Authority, 5.500%, 10/01/2040 .............................. Aaa 2,166,660 ------------ 5,210,040 ------------ South Carolina-- 2.2% 3,000,000 Greenville County, SC, School District, 5.500%, 12/01/2028 .............................. A1 3,124,980 ------------ Tennessee -- 1.8% 2,500,000 Maury County, TN, Industrial Development Board, Pollution Control, 6.500%, 9/01/2024 ............................... A3 2,603,425 ------------
See accompanying notes to financial statements. 9 MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS (continued) Investments as of December 31, 2002 Tax Exempt Obligations -- (continued)
Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Texas -- 16.3% $ 5,000,000 Dallas, TX, Independent School District, 5.500%, 2/15/2014 ............................... Aaa $ 5,636,750 1,900,000 Denton County, TX, 5.125%, 7/15/2026 ............................... Aa2 1,941,686 2,000,000 Houston, TX, Independent School District, 4.750%, 2/15/2026 ............................... Aaa 1,961,400 3,000,000 Houston, TX, Water & Sewer System, 5.250%, 12/01/2023 .............................. Aaa 3,099,720 1,435,000 Katy, TX, Independent School District, 5.125%, 2/15/2020 ............................... Aaa 1,501,354 3,250,000 San Antonio, TX, Electric & Gas, 5.750%, 2/01/2017 ............................... Aa1 3,781,700 13,000,000 Texas Turnpike Authority, Central Texas Turnpike System, zero coupon, 8/15/2019 .......................... Aaa 5,733,650 ------------ 23,656,260 ------------ Washington -- 5.6% 3,000,000 Central Puget Sound Regional Transportation Authority, 4.750%, 2/01/2028 ............................... Aaa 2,965,230 2,250,000 Port of Seattle, WA, 5.000%, 4/01/2031 ............................... Aaa 2,267,258 3,000,000 Washington State, Series A, 4.500%, 7/01/2023 ............................... Aaa 2,853,360 ------------ 8,085,848 ------------ Total Tax Exempt Obligations (Identified Cost $136,572,833) .................. 142,547,664 ------------ Short Term Investment -- 0.4% of Total Net Assets Principal Amount Description Value (a) - -------------------------------------------------------------------------------------- $ 651,779 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/02 at 1.00% to be repurchased at $651,815 on 1/02/2003, collateralized by $627,573 Small Business Administration Bond, 5.375%, due 10/25/2016 value at $684,368 ....................................... $ 651,779 ------------ Total Short Term Investment (Cost $651,779) ......................................... 651,779 ------------ Total Investments -- 98.5% (Identified Cost $137,224,612) (b) ...................... 143,199,443 Other assets less liabilities ........................... 2,131,507 ------------ Total Net Assets -- 100.0% .............................. $145,330,950 ============ (a) See Note 2a of Notes to Financial Statements. (b) Federal tax information: At December 31, 2002, the net unrealized appreciation on investments based on cost $136,733,192 for federal income tax purposes was of as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ............... $ 10,198,336 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............... (3,732,085) ------------ Net unrealized appreciation ...................................... $ 6,466,251 ============
At December 31, 2002, the Fund had a capital loss carryover of approximately $2,840,735 of which $25,731 expires on December 31, 2005 and $2,815,004 expires on December 31, 2007. This may be available to offset future realized capital gains, if any, to the extent provided by regulations. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $208,028 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securities are generally rated at the time of issuance. Rating agencies may revise their ratings from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2002. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Non-income producing security. MBIA Municipal Bond Investors Assurance Corp. 10 See accompanying notes to financial statements. MASSACHUSETTS TAX FREE INCOME FUND-- SCHEDULE OF INVESTMENTS Investments as of December 31, 2002 Tax Exempt Obligations -- 97.6% of Total Net Assets
Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Guam Airport Authority-- 1.6% $ 1,500,000 Airport Authority Revenue Bond, Series B, 6.600%, 10/01/2010 .............................. -- $ 1,557,480 ------------ Martha's Vineyard, MA, Land Bank Revenue -- 1.0% 1,000,000 5.000%, 5/01/2032 ............................... -- 1,008,320 ------------ Massachusetts Bay Transportation Authority -- 3.1% 3,000,000 Assessment Series A, 5.250%, 7/01/2030 ............................... Aa1 3,091,650 ------------ Massachusetts State -- 5.1% 4,000,000 State Refunding, Series A, 6.500%, 11/01/2014, (MBIA insured) .............. Aaa 4,981,400 ------------ Massachusetts State Development Finance Agency -- 17.5% 2,500,000 Cambridge Street Development, 5.125%, 2/01/2034 ............................... Aaa 2,538,875 2,505,000 Concord-Assabet Family Services, 5.900%, 11/01/2018 .............................. Caa3 1,803,600 3,000,000 Health Care Facility Alliance, 7.100%, 7/01/2032 ............................... -- 3,013,200 4,000,000 Mount Holyoke College, 5.250%, 7/01/2031 ............................... Aa3 4,129,840 2,800,000 Refunding Springfield Resource Recovery-A, 5.625%, 6/01/2019 ............................... A3 2,872,352 1,100,000 Visual and Performing Arts, 6.000%, 8/01/2021 ............................... A1 1,280,290 1,610,000 WGBH Educational Foundation, 5.375%, 1/01/2042 ............................... Aaa 1,678,538 ------------ 17,316,695 ------------ Massachusetts State Health & Educational Facilities Authority -- 32.7% 1,160,000 Baystate Medical Center, 5.700%, 7/01/2027 ............................... A1 1,188,153 1,500,000 Beverly Hospital Rib, Pre-Refunded, 9.820%, 6/18/2020, (MBIA insured) ............ (d) Aaa 1,737,030 2,200,000 Catholic Health East, 5.500%, 11/15/2032 .............................. A2 2,121,768 3,000,000 Dana Farber, Series G-1, 6.250%, 12/01/2022 .............................. A1 3,122,760 1,000,000 Faulkner Hospital, Series C, Pre-Refunded, 6.000%, 7/01/2013 ............................... Baa1 1,043,330 3,000,000 Harvard Univerity, Series N, 6.250%, 4/01/2020 ............................... Aaa 3,673,620 1,200,000 Harvard University, Series F, 5.125%, 7/15/2037 ............................... Aaa 1,233,216 2,000,000 Harvard University, Series W, 6.000%, 7/01/2035 ............................... Aaa 2,385,940 500,000 Milton Hospital, 5.500%, 7/01/2016 ............................... -- 505,735 1,000,000 New England Medical Center, 5.000%, 5/15/2022 ............................... Aaa 1,014,120 3,000,000 Nichols College, Series C, 6.000%, 10/01/2017 .............................. -- 2,765,340 2,000,000 Partners Healthcare Systems Series B, 5.250%, 7/01/2029 ............................... Aa3 2,006,780 2,500,000 Partners Healthcare Systems Series C, 5.750%, 7/01/2021 ............................... Aa3 2,621,000 Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Massachusetts State Health & Educational Facilities Authority -- continued $ 1,500,000 Tufts University, 5.250%, 2/15/2030 ............................... Aa3 $ 1,546,845 1,000,000 University of Massachusetts Project, Series C, 5.250%, 10/01/2031 .............................. Aaa 1,036,170 2,000,000 University of Massachusetts, Series C, 5.125%, 10/01/2034 .............................. Aaa 2,032,820 2,265,000 Wellesley College Series F, 5.125%, 7/01/2039 ............................... Aa1 2,298,454 ------------ 32,333,081 ------------ Massachusetts State Housing Finance Agency -- 8.2% 1,000,000 Residential Development, Series A, 6.900%, 11/15/2024 .............................. Aaa 1,018,740 2,500,000 Residential Development, Series E, 6.250%, 11/15/2012 .............................. Aaa 2,563,250 1,300,000 Residential Development, Series I, 6.900%, 11/15/2025 .............................. Aaa 1,344,525 2,135,000 Single Family Mortgage, Series 21, 7.125%, 6/01/2025 ............................... Aa2 2,165,210 1,005,000 Single Family Mortgage, Series 89, 5.400%, 12/01/2023 .............................. Aa2 1,019,331 ------------ 8,111,056 ------------ Massachusetts State Industrial Finance Agency -- 2.3% 2,000,000 FHA Briscoe House Assisted Living, 7.125%, 2/01/2036 ............................... -- 2,238,180 ------------ Massachusetts State Port Authority-- 1.8% 1,750,000 Delta Air Lines, Inc Project Series A, 5.500%, 1/01/2019 ............................... Aaa 1,810,147 ------------ Massachusetts State Turnpike Authority -- 3.0% 2,950,000 Metropolitan Highway System, Capital Appreciation Senior Series A, 5.000%, 1/01/2037, (MBIA insured) ............... Aaa 2,956,018 ------------ Massachusetts State Water Resources Authority -- 6.2% 2,000,000 General Series B, 5.125%, 8/01/2027 ............................... Aaa 2,046,660 3,240,000 Series A, 6.500%, 7/15/2019, (FGIC insured) ............... Aaa 4,059,688 ------------ 6,106,348 ------------ New England Education Loan Marketing -- 3.6% 3,000,000 Student Loan Revenue Bond, Sub-Issue H, 6.900%, 11/01/2009 .............................. A3 3,512,610 ------------ Puerto Rico Commonwealth Aqueduct & Sewer Authority -- 4.7% 3,000,000 Aqueduct & Sewer Authority, 6.250%, 7/01/2013 ............................... Baa1 3,599,130 825,000 Aqueduct & Sewer Authority, 10.250%, 7/01/2009 .............................. Aaa 1,057,955 ------------ 4,657,085 ------------ Puerto Rico Commonwealth Infrastructure -- 2.7% 2,500,000 Series A, 5.500%, 10/01/2040 .............................. Aaa 2,708,325 ------------
See accompanying notes to financial statements. 11 MASSACHUSETTS TAX FREE INCOME FUND-- SCHEDULE OF INVESTMENTS (continued) Investments as of December 31, 2002 Tax Exempt Obligations -- continued
Ratings (c) ------------ Principal (unaudited) Amount Description Moody's Value (a) - -------------------------------------------------------------------------------------- Route 3 North Transportation Improvement Association -- 4.1% $ 3,550,000 Lease Revenue Bond, 5.375%, 6/15/2033 ....................................... Aaa $ 4,057,615 ------------ Total Tax Exempt Obligations (Cost $92,157,386) .............................. 96,446,010 ------------ Short Term Investment -- 1.1% of Total Net Assets 1,060,348 Repurchase Agreement with Investors Bank & Trust Co. dated 12/31/2002 at 1.00% to be repurchased at $1,060,407 on 1/02/2003, collateralized by $1,070,976 Federal Home Loan Mortgage Bond, 6.377%, due 7/01/2008 valued at $1,113,366 ................................... 1,060,348 ------------ Total Short Term Investment (Co$t1,060,348) ...................... 1,060,348 ------------ Total Investments - 98.7% (Identified Cost $93,217,734)(b) ................ 97,506,358 Other assets less liabilities ................... 1,289,016 ------------ Total Net Assets - 100.0% ....................... $ 98,795,374 ============ (a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2002, the net unrealized appreciation on investments based on cost of $93,217,173 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost ................................................. $ 5,347,546 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value ............................................... (1,058,361) ------------ Net unrealized appreciation .............................. $ 4,289,185 ============
At December 31, 2002, the Fund had a capital loss carryover of approximately $3,368,271 of which $2,248,331 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. For the year ended December 31, 2002, the Fund has elected to defer $2,266 of capital losses attributable to Post-October losses. At December 31, 2002, the components of distributable earnings, excluding unrealized appreciation/depreciation, disclosed on a tax basis consisted of $42,565 in undistributed ordinary income and $0 in undistributed long-term gains. (c) The ratings shown are believed to be the most recent ratings available at December 31, 2002. Securities are generally rated at the time of issuance. Rating agencies may revise their ratings from time to time. As a result, there can be no assurance that the same ratings would be assigned if the securities were rated at December 31, 2002. The Fund's subadviser independently evaluates the Fund's portfolio securities and in making investment decisions does not rely solely on the ratings of agencies. (d) Inverse floating rate security. FGIC Financial Guarantee Insurance Company MBIA Municipal Bond Investors Assurance Corp. Rib Residual interest bond Holdings By Revenue Source at December 31, 2002 (Unaudited) % of Net Assets University 13.3 Water 10.9 College 9.3 Financial 7.6 Hospital 7.4 Mass Transit 5.9 Multi-family 5.0 Student Loan 3.6 Airport 3.4 Single-Family 3.2 Special Assessment 3.1 Nursing Home 3.1 Turnpike 3.0 Pooled Funds 2.9 Acute Care 2.8 Special Obligation 2.7 Health 2.7 Hospital System Bonds 2.7 Assisted Living 2.3 Other, less than 2% each 3.8 12 See accompanying notes to financial statements. STATEMENTS OF ASSETS & LIABILITIES December 31, 2002
Massachusetts Municipal Income Tax Free Income Fund Fund ---------------- --------------- ASSETS Investments at cost .............................................................. $ 137,224,612 $ 93,217,734 Net unrealized appreciation ...................................................... 5,974,831 4,288,624 ------------- ------------- Investments at value ............................................................. 143,199,443 97,506,358 Receivable for Fund shares sold .................................................. 200,020 9,032 Interest receivable .............................................................. 2,429,871 1,679,158 ------------- ------------- TOTAL ASSETS .................................................................. 145,829,334 99,194,548 ------------- ------------- LIABILITIES Payable for Fund shares redeemed ................................................. 139,132 74,460 Dividends payable ................................................................ 172,792 96,144 Management fees payable .......................................................... 56,390 149,447 Deferred Trustees' fees .......................................................... 56,177 22,347 Transfer agent fees payable ...................................................... 24,554 17,066 Accounting and administrative fees payable ....................................... 8,154 5,569 Other accounts payable and accrued expenses ...................................... 41,185 34,141 ------------- ------------- TOTAL LIABILITIES ............................................................. 498,384 399,174 ------------- ------------- NET ASSETS ........................................................................... $ 145,330,950 $ 98,795,374 ============= ============= NET ASSETS CONSIST OF: Paid in capital .................................................................. $ 142,927,148 $ 98,049,678 Undistributed (overdistributed) net investment income ............................ 146,768 19,970 Accumulated net realized gain (loss) on investments .............................. (3,717,797) (3,562,898) Net unrealized appreciation of investments ....................................... 5,974,831 4,288,624 ------------- ------------- NET ASSETS ........................................................................... $ 145,330,950 $ 98,795,374 ============= ============= COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE: Class A shares: Net assets .................................................................... $ 133,005,437 $ 92,052,923 ============= ============= Shares of beneficial interest ................................................. 17,892,877 5,612,992 ============= ============= Net asset value and redemption price per share ................................ $ 7.43 $ 16.40 ============= ============= Offering price per share ...................................................... $ 7.78 $ 17.13 ============= ============= Class B shares: (redemption price is equal to net asset value less any applicable contingent deferred sales charges) Net assets .................................................................... $ 12,325,513 $ 6,742,451 ============= ============= Shares of beneficial interest ................................................. 1,656,808 412,064 ============= ============= Net asset value and offering price per share .................................. $ 7.44 $ 16.36 ============= =============
See accompanying notes to financial statements. 13 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2002
Massachusetts Municipal Income Tax Free Income Fund Fund ---------------- --------------- INVESTMENT INCOME Interest ........................................................................... $ 8,578,121 $ 5,446,946 ----------- ----------- Expenses Management fees ................................................................. 686,999 590,987 Service and distribution fees - Class A ......................................... 341,958 318,340 Service and distribution fees - Class B ......................................... 130,927 75,554 Trustees' fees and expenses ..................................................... 7,960 10,181 Accounting and administrative ................................................... 85,701 56,477 Custodian ....................................................................... 57,233 52,516 Transfer agent .................................................................. 278,149 189,599 Audit and tax services .......................................................... 37,479 35,479 Legal ........................................................................... 12,852 8,488 Shareholder Reporting ........................................................... 5,525 5,606 Registration .................................................................... 26,963 14,351 Miscellaneous ................................................................... 8,648 6,728 ----------- ----------- Total expenses ..................................................................... 1,680,394 1,364,306 ----------- ----------- Net investment income .............................................................. 6,897,727 4,082,640 ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments - net ............................................................... 2,710,093 (916,633) Change in unrealized appreciation (depreciation) of: Investments - net ............................................................... 872,708 4,433,497 ----------- ----------- Net realized and unrealized gain (loss) on investments ............................. 3,582,801 3,516,864 ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................... $10,480,528 $ 7,599,504 =========== ===========
14 See accompanying notes to financial statements. STATEMENTS OF CHANGES IN NET ASSETS
Massachusetts Municipal Income Tax Free Income Fund Fund --------------------------- --------------------------- Year Ended December 31, Year Ended December 31, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ FROM OPERATIONS Net investment income .............................................. $ 6,897,727 $ 7,609,976 $ 4,082,640 $ 4,627,821 Net realized gain (loss) on investments ............................ 2,710,093 1,576,039 (916,633) 776,917 Net change in unrealized appreciation (depreciation) of investments 872,708 (4,432,914) 4,433,497 (2,286,354) ------------ ------------ ------------ ------------ Increase in net assets resulting from operations ................... 10,480,528 4,753,101 7,599,504 3,118,384 ------------ ------------ ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A ......................................................... (6,303,086) (6,957,695) (3,827,503) (4,279,023) Class B ......................................................... (507,956) (613,563) (276,899) (346,489) ------------ ------------ ------------ ------------ (6,811,042) (7,571,258) (4,104,402) (4,625,512) ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS ......................................... (10,738,646) (1,840,581) (2,388,573) (1,303,920) ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ............................ (7,069,160) (4,658,738) 1,106,529 (2,811,048) NET ASSETS Beginning of period ................................................ 152,400,110 157,058,848 97,688,845 100,499,893 ------------ ------------ ------------ ------------ End of period ...................................................... $145,330,950 $152,400,110 $ 98,795,374 $ 97,688,845 ------------ ------------ ------------ ------------ UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME ................ $ 146,768 $ 172,699 $ 19,970 $ 41,608 ============ ============ ============ ============
See accompanying notes to financial statements. 15 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
Income (loss) from investment operations: Less distributions: -------------------------------------- -------------------------------------------- Net asset value, Net realized Dividends Distributions beginning Net and unrealized Total from from from net of investment gain (loss) on investment net investment realized Total the period income investments operations income capital gains distributions ---------- ---------- -------------- ---------- -------------- ------------- ------------- MUNICIPAL INCOME FUND Class A 12/31/2002 $7.25 $0.34 $0.18 $0.18 (0.34) $ -- $(0.34) 12/31/2001 (d) 7.39 0.36 (0.14) 0.22 (0.36) -- (0.36) 12/31/2000 7.17 0.40 0.21 0.61 (0.39) -- (0.39) 12/31/1999 7.76 0.39 (0.59) (0.20) (0.39) -- (0.39) 12/31/1998 7.75 0.39 0.01 0.40 (0.39) -- (0.39) Class B 12/31/2002 7.25 0.29 0.19 0.48 (0.29) -- (0.29) 12/31/2001 (d) 7.39 0.31 (0.14) 0.17 (0.31) -- (0.31) 12/31/2000 7.17 0.35 0.21 0.56 (0.34) -- (0.34) 12/31/1999 7.76 0.33 (0.59) (0.26) (0.33) -- (0.33) 12/31/1998 7.75 0.33 0.01 0.34 (0.33) -- (0.33) MASSACHUSETTS TAX FREE INCOME FUND Class A 12/31/2002 $15.82 $0.67 $0.59 $1.26 $ (0.68) $ -- $(0.68) 12/31/2001 (d) 16.06 0.75 (0.24) 0.51 (0.75) -- (0.75) 12/31/2000 15.48 0.82 0.57 1.39 (0.81) -- (0.81) 12/31/1999 17.02 0.82 (1.50) (0.68) (0.83) (0.03) (0.86) 12/31/1998 17.13 0.86 (0.04) 0.82 (0.85) (0.08) (0.93) Class B 12/31/2002 15.78 0.57 0.58 1.15 (0.57) -- (0.57) 12/31/2001 (d) 16.03 0.64 (0.24) 0.40 (0.65) -- (0.65) 12/31/2000 15.45 0.71 0.58 1.29 (0.71) -- (0.71) 12/31/1999 16.98 0.71 (1.49) (0.78) (0.72) (0.03) (0.75) 12/31/1998 17.09 0.74 (0.03) 0.71 (0.74) (0.08) (0.82)
Net asset value, Total end of return the period (%) (a) ---------- ------- MUNICIPAL INCOME FUND Class A 12/31/2002 $7.43 7.3 12/31/2001 (d) 7.25 3.0 12/31/2000 7.39 8.8 12/31/1999 7.17 (2.8) 12/31/1998 7.76 5.3 Class B 12/31/2002 7.44 6.7 12/31/2001 (d) 7.25 2.2 12/31/2000 7.39 8.0 12/31/1999 7.17 (3.5) 12/31/1998 7.76 4.5 MASSACHUSETTS TAX FREE INCOME FUND Class A 12/31/2002 16.40 8.10 12/31/2001 (d) 15.82 3.2(b) 12/31/2000 16.06 9.3(b) 12/31/1999 15.48 (4.1)(b) 12/31/1998 17.02 4.9(b) Class B 12/31/2002 16.36 7.4 12/31/2001 (d) 15.78 2.5(b) 12/31/2000 16.03 8.6(b) 12/31/1999 15.45 (4.7)(b) 12/31/1998 16.98 4.2(b) (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 Municipal Income Fund 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. For Massachusetts Tax Free Income Fund, the effect of this change 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. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. 16 See accompanying notes to financial statements. Ratios to average net assets: ----------------------------- Net assets, end of Net investment Portfolio the period Expenses income turnover (000) (%) (%) rate (%) - ----------- -------- -------------- ---------- $133,005 1.06 4.67 33 137,852 1.07 4.89 80 142,539 0.95 5.39 156 152,829 0.93 5.13 137 172,643 0.93 5.03 26 12,326 1.81 3.92 33 14,549 1.82 4.14 80 14,520 1.70 4.64 156 15,644 1.68 4.38 137 15,878 1.68 4.28 26 $ 92,053 1.34 4.19 33 89,376 1.35(c) 4.67 60 91,785 1.13(c) 5.24 68 97,270 1.00(c) 5.02 73 113,910 1.00(c) 4.93 125 6,742 1.99 3.54 33 8,313 2.00(c) 4.03 60 8,715 1.78(c) 4.59 68 8,874 1.65(c) 4.37 73 9,026 1.65(c) 4.28 125 17 NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 2002 1. Organization. CDC Nvest Funds Trust I and CDC Nvest Funds Trust II (the "Trusts" and each a "Trust") are organized as Massachusetts business trusts. Each Trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Each Declaration of Trust permits the Trustees to issue an unlimited number of shares of the Trust in multiple series (individually, a "Fund" and, collectively, the "Funds"). Information presented in these financial statements pertains to the tax free income funds of the Trusts, the financial statements of the other Funds of the Trusts are presented in separate reports. The following table provides a list of the Funds included in this report. CDC Nvest Funds Trust I: CDC Nvest Municipal Income Fund (the "Municipal Income Fund") CDC Nvest Funds Trust II: CDC Nvest Massachusetts Tax Free Income Fund (the "Massachusetts Tax Free Income Fund") Each Fund offers Class A and Class B shares. Class A shares of Municipal Income Fund are sold with a maximum front end sales charge of 4.50%. Class A shares of Massachusetts Tax Free Income Fund are sold with a maximum front end sales charge of 4.25%. Class B shares do not pay a front end sales charge, but pay a higher ongoing distribution fee than Class A shares for eight years (at which point they automatically convert to Class A shares), and are subject to a contingent deferred sales charge ("CDSC") if those shares are redeemed within six years of purchase. 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 Fund's investment adviser and subadviser, under the supervision of the Fund's Trustees. b. Security Transactions and Related Investment Income. Security transactions are accounted for on trade date. Dividend income is recorded on ex-dividend date and interest income is recorded on an accrual basis. Interest 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. Options. Each Fund may use options to hedge against changes in the values of securities the Funds own or expect to purchase. Writing puts and buying calls tends to increase a Fund's exposure to the underlying instrument and writing calls or buying puts tends to decrease a Fund's exposure to the underlying instrument, or hedge other Fund investments. For options purchased to hedge a Fund's investments, the potential risk to the Fund is that the change in the value of option contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty is unable to perform. The maximum loss for purchased options is limited to the premium initially paid for the option. For options written by the Fund, the maximum loss is not limited to the premium initially received for the option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over the counter are valued using prices supplied by the dealers. d. Interest Rate Futures Contracts. Each Fund may purchase or sell interest rate futures contracts to hedge against changes in the values of securities the Funds own or expect to purchase. An interest rate futures contract is an agreement between two parties to buy and sell a security for a set price (or to deliver an amount of cash) on a future date. Upon entering into such a contract, the purchasing Fund is required to pledge to the broker an amount of cash, U.S. government securities or other high quality debt securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. 18 NOTES TO FINANCIAL STATEMENTS (continued) For the Year Ended December 31, 2002 Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The potential risk to the Fund is that the change in value of futures contracts primarily corresponds with the value of underlying instruments which may not correspond to the change in the value of the hedged instruments. In addition, there is a risk that the Fund may not be able to close out its futures positions due to an illiquid secondary market. e. Federal Income Taxes. The 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. f. Dividends and Distributions to Shareholders. Dividends are declared daily to shareholders of record and are paid monthly. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences 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. g. Repurchase Agreements. Each Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is each Fund's policy that the market value of the collateral be at least equal to 100% of the repurchase price, including interest. Each Fund's subadviser is responsible for determining that the value of the collateral is at all times at least equal to the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the coun-terparty including possible delays or restrictions upon a Fund's ability to dispose of the underlying securities. 3. Purchases and Sales of Securities. For the year ended December 31, 2002, purchases and sales of securities (excluding short-term investments) were as follows: Fund Purchases Sales ---- --------- ----- Municipal Income Fund $47,925,970 $59,055,206 Massachusetts Tax Free Income Fund 31,413,343 33,505,614 4. Management Fees and Other Transactions with Affiliates. a. Management Fees. CDC IXIS Asset Management Advisers, L.P. ("CDC IXIS Advisers") is the investment adviser to each of the Funds. Under the terms of the management agreements, each Fund pays a management fee at the following annual rates, calculated daily and payable monthly for Municipal Income Fund and quarterly for Massachusetts Tax Free Income Fund, based on each Fund's average daily net assets: Percentage of Average Daily Net Assets -------------------------------------- First Over Fund $100 million $100 million ---- ------------ ------------ Municipal Income Fund 0.500% 0.375% Massachusetts Tax Free Income Fund 0.600% 0.500% For the year ended December 31, 2002, the management fees for each Fund were as follows: Management Percentage of Average Fund Fee Daily Net Assets ---- ---------- ---------------------- Municipal Income Fund $686,999 0.460% Massachusetts Tax Free Income Fund 590,987 0.600% CDC IXIS Advisers has entered into a subadvisory agreement for each Fund with Loomis, Sayles & Company, L.P. ("Loomis Sayles"). Payments to CDC IXIS Advisers are reduced by payments to the subadvisers. CDC IXIS Advisers and Loomis Sayles are wholly-owned subsidiaries of CDC IXIS Asset Management North America, L.P. Certain officers and directors of CDC IXIS Advisers are also officers or Trustees of the Funds. b. Accounting and Administrative Expense. CDC IXIS Asset Management Services, Inc. ("CIS"), a wholly owned subsidiary of CDC IXIS Asset Management North America, L.P., performs certain accounting and administrative services for the Funds and has subcontracted with Investors Bank and Trust to serve as sub-administrator. Pursuant to an agreement 19 NOTES TO FINANCIAL STATEMENTS (continued) For the Year Ended December 31, 2002 among the Trusts, CDC Nvest Funds Trust III, CDC Nvest Cash Management Trust, CDC Nvest Tax Exempt Money Market Trust, CDC Nvest Companies Trust I and CIS each Fund pays CIS its pro rata portion of a group fee for these services representing the higher amount based on the following calculations: (1) Percentage of Eligible Average Daily Net Assets ----------------------------------------------- First Next Over $5 billion $5 billion $10 billion 0.0350% 0.0325% 0.0300% or (2) Each Trust's pro rata portion, based on eligible assets, of the annual aggregate minimum fee of $2.5 million. Funds that became effective after January 1, 2001, pay an annual fee of $70,000 ($100,000 for multi-manager funds) For the year ended December 31, 2002, fees paid to CIS for accounting and administrative expense were as follows: Accounting And Percentage of Average Fund Administrative Daily Net Assets ---- -------------- --------------------- Municipal Income Fund $85,701 0.057% Massachusetts Tax Free Income Fund 56,477 0.057% Effective January 1, 2003, the annual aggregate fee based on average daily net assets changed to 0.060% on the first $5 billion in average daily net assets, 0.050% on the next $5 billion in average daily net assets and 0.045% on average daily net assets over $10 billion. The annual aggregate minimum fee also changed to $3.4 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 of all non-networked accounts in bond funds offered within the CDC Nvest Family of Funds for which there are exchange privileges among the Funds. First Next Over $1.2 billion $5 billion $6.2 billion ------------ ---------- ------------ 0.142% 0.135% 0.130% or (2) An allocated portion, based on eligible assets, of an annual aggregate minimum fee of $1.7 million. In addition, pursuant to other servicing agreements, 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 year ended December 31, 2002, amounts paid to CIS as compensation for its servic es as transfer agent were as follows: Transfer Agent Fund Fee ---- -------------- Municipal Income Fund $242,523 Massachusetts Tax Free Income Fund 167,287 Effective January 1, 2003, the annual aggregate minimum fee changed to $1.5 million. d. Service and Distribution Fees. Pursuant to Rule 12b-1 under the 1940 Act, the Trusts have adopted a Service Plan relating to each Fund's Class A shares (the "Class A Plan") and 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 Asset Management North America, L.P. ), a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to the Fund's Class 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 the Fund's Class A shares. 20 NOTES TO FINANCIAL STATEMENTS (continued) For the Year Ended December 31, 2002 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 year ended December 31, 2002, the Funds paid the following service and distribution fees: Service Fee Distribution Fee ------------------ ----------------- Class A Class B Class A Class B -------- ------- ------- ------- Municipal Income Fund $341,958 $32,732 $ -- $98,195 Massachusetts Tax Free Income Fund 227,386 18,889 90,954 56,665 Prior to September 13, 1993, for Municipal Income Fund, to the extent that reimbursable expenses of CDC IXIS Distributors in prior years exceeded the maximum amount payable under the Plan for that year, such expenses could be carried forward for reimbursement in future years in which the Class A Plan remains in effect. Unreimbursed expenses carried forward at December 31, 2002 were $1,700,600. Commissions (including contingent deferred sales charges) on Fund shares paid to CDC IXIS Distributors by investors in shares of the Funds during the year ended December 31, 2002 were as follows: Fund - ---- Municipal Income Fund $123,781 Massachusetts Tax Free Income Fund 72,235 e. Trustees Fees and Expenses. The Funds do not pay any compensation directly to their officers or Trustees who are directors, officers or employees of CDC IXIS Advisers, CDC IXIS Distributors, CDC IXIS Asset Management North America L.P., CIS or their affiliates. Each other Trustee receives a retainer fee at the annual rate of $45,000 and meeting attendance fees of $4,500 for each meeting of the Board of Trustees attended. Each committee member receives an additional retainer fee at the annual rate of $7,000 while each committee chairman receives a retainer fee (beyond the $7,000 fee) at the annual rate of $5,000. The retainer fees assume four Board or Committee meetings per year; Trustees are compensated for each additional committee and board meeting, in excess of four meetings per year, at the rate of $1,750 and $4,500, respectively. These fees are allocated to the various CDC Nvest Funds based on a formula that takes into account, among other factors, the relative net assets of each Fund. A deferred compensation plan (the "Plan") is available to the Trustees on a voluntary basis. Each participating Trustee will receive an amount equal to the value that such deferred compensation would have been had it been invested in a designated Fund or certain other CDC Nvest Funds on the normal payment date. Deferred amounts remain in the Funds until distributed in accordance with the Plan. f. Publishing Services. CIS performs certain desktop publishing services for the Funds. Fees for these services are presented in the statements of operations as shareholder reporting. For the year ended December 31, 2002, amounts paid to CIS as compensation for these services were as follows: Publishing Services Fund Fees ---- ------------------- Municipal Income Fund $2,545 Massachusetts Tax Free Income Fund 3,391 5. Capital Shares. Each Fund may issue an unlimited number of shares of beneficial interest. Transactions in capital shares were as follows:
Year Ended Year Ended December 31, 2002 December 31, 2001 ---------------------------- ---------------------------- Municipal Income Fund Shares Amount Shares Amount - --------------------- ------------ ------------ ------------ ------------ Class A Shares sold .................................................... 1,667,649 $ 12,274,988 2,337,838 $ 17,278,030 Shares issued in connection with the reinvestment of: Dividends from net investment income ......................... 576,440 4,253,748 630,423 4,666,919 ------------ ------------ ------------ ------------ 2,244,089 16,528,736 2,968,261 21,944,949 Shares repurchased ............................................. (3,360,408) (24,705,392) (3,251,737) (24,090,858) ------------ ------------ ------------ ------------ Net decrease ................................................... (1,116,319) $ (8,176,656) (283,476) $ (2,145,909) ------------ ------------ ------------ ------------
21 NOTES TO FINANCIAL STATEMENTS (continued) For the Year Ended December 31, 2002
Year Ended Year Ended December 31, 2002 December 31, 2001 ---------------------------- ---------------------------- Municipal Income Fund (continued) Shares Amount Shares Amount - --------------------------------- ------------ ------------ ------------ ------------ Class B Shares sold ...................................................... 360,545 $ 2,668,323 345,205 $ 2,561,560 Shares issued in connection with the reinvestment of: Dividends from net investment income ........................... 37,421 276,214 45,127 334,174 ------------ ------------ ------------ ------------ 397,966 2,944,537 390,332 2,895,734 Shares repurchased ............................................... (746,990) (5,506,527) (349,414) ------------ ------------ ------------ ------------ Net increase(decrease) ........................................... (349,024) $ (2,561,990) 40,918 $ 305,328 ------------ ------------ ------------ Decrease derived from capital shares transactions ................ (1,465,343) $(10,738,646) (242,558) $ (1,840,581) ============ ============ ============ ============ Year Ended Year Ended December 31, 2002 December 31, 2001 ---------------------------- ---------------------------- Massachusetts Tax Free Income Fund Shares Amount Shares Amount - ---------------------------------- ------------ ------------ ------------ ------------ Class A Shares sold ...................................................... 456,052 $ 7,320,365 509,197 $ 8,157,232 Shares issued in connection with the reinvestment of: Dividends from net investment income ........................... 166,936 2,687,820 187,505 3,002,608 ------------ ------------ ------------ ------------ 622,988 10,008,185 696,702 11,159,840 Shares repurchased ............................................... (659,550) (10,569,788) (761,186) (12,187,109) ------------ ------------ ------------ ------------ Net decrease ..................................................... (36,562) $ (561,603) (64,484) $ (1,027,269) ------------ ------------ ------------ ------------ Class B Shares sold ...................................................... 40,852 $ 652,539 69,544 $ 1,113,757 Shares issued in connection with the reinvestment of: Dividends from net investment income ........................... 9,320 149,611 11,907 190,203 ------------ ------------ ------------ ------------ 50,172 802,150 81,451 1,303,960 Shares repurchased ............................................... (164,730) (2,629,120) (98,615) (1,580,611) ------------ ------------ ------------ ------------ Net decrease ..................................................... (114,558) $ (1,826,970) (17,164) $ (276,651) ------------ ------------ ------------ ------------ Decrease derived from capital shares transactions ................ (151,120) $ (2,388,573) (81,648) $ (1,303,920) ============ ============ ============ ============
6. Contingent Expense Obligation. CDC IXIS Advisers 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, 2003 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 December 31, 2002, the expense limits as a percentage of average daily net assets and amount subject to possible reimbursement under the expense limitation agreement were as follows:
Expense Limit as a Percentage of Average Daily Net Assets Cumulative Expenses Waived ----------------------------- or Reimbursed Subject Class A Class B to Future Payment ----------- ----------- -------------------------- Massachusetts Tax Free Income Fund 1.40% 2.05% $ --
22 NOTES TO FINANCIAL STATEMENTS (continued) 7. Concentration of Credit. At December 31, 2002, Municipal Income Fund had the following concentrations by revenue source in excess of 10% as a percentage of the Fund's net assets: University 10.9%, Water 11.8%, Improvement 13.9% and Various Purpose 15.6%. The Fund also had more than 10% of its net assets invested in: Illinois 10.8%, New York 13.3%, and Texas 16.3%. 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. 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 December 31, 2002, the Fund had the following concentrations by revenue source in excess of 10% as a percentage of the Fund's net assets: Water 10.9% and University 13.3%. The Fund had investments in securities of issuers insured by Municipal Bond Investors Assurance Corporation (MBIA), and Financial Guaranty Insurance Company (FGIC) which aggregated to 9.79% and 4.11% of its net assets, respectively, at December 31, 2002. 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Shareholders of CDC Nvest Funds Trust I and CDC Nvest Funds Trust II: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of CDC Nvest Municipal Income Fund, a series of CDC Nvest Funds Trust I and CDC Nvest Massachusetts Tax Free Income Fund, a series of CDC Nvest Funds Trust II (the "Funds") at December 31, 2002, and the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 13, 2003 24 TRUSTEES' INFORMATION The Funds are governed by a Board of Trustees, which is responsible for generally overseeing the conduct of Fund business and for protecting the interests of shareholders. The trustees meet periodically throughout the year to oversee the Funds' activities, review contractual arrangements with companies that provide services to the Funds and review the Funds' performance.
Position(s) Held with Number of Portfolios in Funds, Length of Time Principal Occupation(s) Fund Complex Overseen and Name, Age and Address Served and Term of Office(1) During Past 5 Years Other Directorships held - --------------------- ---------------------------- ----------------------- ------------------------- INDEPENDENT TRUSTEES - -------------------- Graham T. Allison, Jr. (63) Trustee (2)(3); Douglas Dillon Professor and 27; Director, Taubman 399 Boylston Street 19 years Director for the Belfer Center Centers, Inc.; Board Boston, MA 02116 of Science and International Member, USEC Inc. Affairs, John F. Kennedy School of Government, Harvard University Daniel M. Cain (58) Trustee, Chairman (1); President and CEO, Cain 27; Trustee, Universal 452 Fifth Avenue 7 years Brothers & Company, Incor- Health Realty Income Trust; New York, NY 10018 porated (investment banking) Director, eBenX, Inc.; Director, PASC Kenneth J. Cowan (71) Trustee, Chairman (2)(3); Retired 27; 399 Boylston Street 28 years None Boston, MA 02116 Richard Darman (59) Trustee (2)(3); Partner, The Carlyle Group 27; Director and Vice 399 Boylston Street 7 years (investments); Professor, Chairman, AES Corporation Boston, MA 02116 John F. Kennedy School of Government, Harvard University Sandra O. Moose (61) Trustee (1); Senior Vice President and 27; Director, Verizon One Exchange Place 21 years Director, The Boston Communications; Director, Boston, MA 02109 Consulting Group, Inc. Rohm and Haas Company (management consulting) John A. Shane (70) Trustee (1); President, Palmer Service 27; Director, Eastern Bank 200 Unicorn Park Drive 21 years Corporation (venture capital Corporation; Director, Gensym Woburn, MA 01801 organization) Corporation; Director, Overland Storage, Inc.; Director, ABT Associates Inc. Pendleton P. White (72) Trustee (2)(3); Retired 27; 6 Breckenridge Lane 22 years None Savannah, GA 31411 INTERESTED TRUSTEES - ------------------- John T. Hailer (42) President and Chief President and Chief Executive 27; 399 Boylston Street Executive Officer, Trustee; Officer, CDC IXIS Asset None(2) Boston, MA 02116 3 years Management Distributors, L.P.; Senior Vice President, Fidelity Investments
25 TRUSTEES' INFORMATION
Position(s) Held with Number of Portfolios in Funds, Length of Time Principal Occupation(s) Fund Complex Overseen and Name, Age and Address Served and Term of Office(1) During Past 5 Years Other Directorships held - --------------------- ---------------------------- ----------------------- ------------------------- INDEPENDENT TRUSTEES held - -------------------- ---- (continued) Peter S. Voss (56) Chairman of the Board, Director, President and Chief 27; 399 Boylston Street Trustee; Executive Officer, CDC IXIS Trustee of Harris Boston, MA 02116 11 years Asset Management North Associates Investment America, L.P. Trust(3) OFFICERS - -------- Mark E. Bradley (43) Treasurer; Senior Vice President, CDC 27; 399 Boylston Street Not Applicable IXIS Asset Management None Boston, MA 02116 Services; Senior Vice President, CDC IXIS Asset Management Advisers; Vice President and Assistant Treasurer, MFS Investment Management John E. Pelletier (38) Secretary and Clerk; Senior Vice President, 27; 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 Committee. (3) Member of Governance Committee. 1 All Trustees serve until retirement, resignation or removal from the Board. The current retirement age is 72. 2 Mr. Hailer is an "interested person" of the CDC Nvest Funds because he holds the following positions with affiliated persons of the CDC Nvest Funds Trusts: Director and Executive Vice President of CDC IXIS Asset Management Distribution Corporation; President and Chief Executive Officer of CDC IXIS Asset Management Advisers, L.P. 3 Mr. Voss is an "interested person" of the CDC Nvest Funds because he holds the following positions with affiliated persons of the CDC Nvest Funds Trusts: Director of CDC IXIS Asset Management Services; Director of CDC IXIS Asset Management Distribution Corporation; Director and Chairman of CDC IXIS Asset Management Associates, Inc. Director of AEW Capital Management, Inc; Director of Harris Associates, Inc; Director of Jurika & Voyles, Inc.; Director of Loomis, Sayles & Company, Inc.; Director of Reich & Tang Asset Management Inc.; Director of Westpeak Global Advisors, Inc.; Director of Vaughan, Nelson, Scarborough & McCullough, Inc. 26 REGULAR INVESTING PAYS Five Good Reasons to Invest Regularly - -------------------------------------------------------------------------------- 1. It's an easy way to build assets. 2. It's convenient and effortless. 3. It requires a low minimum to get started. 4. It can help you reach important long-term goals like financing retirement or college funding. 5. It can help you benefit from the ups and downs of the market. With Investment Builder, CDC Nvest Funds' automatic investment program, you can invest as little as $100 a month in your CDC Nvest fund automatically -- without even writing a check. And, as you can see from the chart below, your monthly investments can really add up over time. The Power of Monthly Investing [CHART]
25 YEARS $100 $ 95,837 $200 $191,673 $500 $479,183
Assumes an 8% fixed rate of return compounded monthly and does not allow for taxes. Results are not indicative of the past or future results of any CDC Nvest Funds. The value and return on CDC Nvest Funds fluctuate with changing market conditions. This program cannot assure a profit nor protect against a loss in a declining market. It does, however, ensure that you buy more shares when the price is low and fewer shares when the price is high. Because this program involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases during periods of high or low prices. You can start an Investment Builder program with your current CDC Nvest Funds account. To add Investment Builder to your account today, call your financial adviser or CDC Nvest Funds at 800-225-5478. Please call CDC Nvest Funds for a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 27 SAVING FOR RETIREMENT An Early Start Can Make a Big Difference - -------------------------------------------------------------------------------- With today's life spans, you may be retired for 20 years or more after you complete your working career. Living these retirement years the way you've dreamed of will require considerable financial resources. While it's never too late to start a retirement savings program, it's certainly never too early: The sooner you begin, the longer the time your money has to grow. The chart below illustrates this point dramatically. One investor starts at age 30, saves for just 10 years, then leaves the investment to grow. The second investor starts 10 years later but saves much longer --for 25 years, in fact. Can you guess which investor accumulated the greater retirement nest egg? For the answer, look at the chart. Two Hypothetical Investments [The following table was depicted as a line graph in the printed material.] Investor Age 30 Age 40 Age 65 -------- ------ ------ ------ A $0 -- $214,295 B -- $0 $157,909 Assumes an 8% fixed rate of return. This illustration does not reflect the effect of any taxes. Results are not indicative of the past or future results of any CDC Nvest Fund. The value and returns on CDC Nvest funds will fluctuate with changing market conditions. Investor A invested $20,000, less than half of Investor B's commitment -- and for less than half the time. Yet Investor A wound up with a much greater retirement nest egg. The reason? It's all thanks to an early start and the power of compounding. CDC Nvest Funds has prepared a number of informative retirement planning guides. Call your financial representative or CDC Nvest Funds today at 800-225-5478, and ask for the guide that best fits your personal needs. We will include a prospectus, which contains more information, including charges and other ongoing expenses. Please read the prospectus carefully before you invest. 28 CDC NVEST FUNDS CDC Nvest AEW Real Estate Fund CDC Nvest Balanced Fund CDC Nvest Bond Income Fund CDC Nvest Capital Growth Fund CDC Nvest Cash Management Trust -- Money Market Series* CDC Nvest Government Securities Fund CDC Nvest Growth and Income Fund CDC Nvest High Income Fund CDC Nvest International Equity Fund CDC Nvest Jurika & Voyles Relative Value Fund CDC Nvest Jurika & Voyles Small Cap Growth Fund CDC Nvest Large Cap Growth Fund CDC Nvest Large Cap Value Fund CDC Nvest Limited Term U.S. Government Fund CDC Nvest Massachusetts Tax Free Income Fund CDC Nvest Municipal Income Fund CDC Nvest Select Fund CDC Nvest Short Term Bond Fund CDC Nvest Star Advisers Fund CDC Nvest Star Growth Fund CDC Nvest Star Small Cap Fund CDC Nvest Star Value Fund CDC Nvest Star Worldwide Fund CDC Nvest Strategic Income Fund CDC Nvest Targeted Equity Fund CDC Nvest Tax Exempt Money Market Trust* *Investments in money market funds are not insured or guaranteed by the FDIC or any government agency. - -------------------------------------------------------------------------------- INVESTMENT MANAGERS AEW Management and Advisors Miller Anderson Capital Growth Management Reich & Tang Asset Management Hansberger Global Investors RS Investment Management Harris Associates/Oakmark Funds Salomon Brothers Asset Management Jurika & Voyles Vaughan, Nelson, Scarborough Loomis, Sayles & Company & McCullough Mercury Advisors Westpeak Global Advisors - -------------------------------------------------------------------------------- For current fund performance, ask your financial representative, access the CDC Nvest Funds website at www.cdcnvestfunds.com, or call CDC Nvest Funds at 800-225-5478 for the current edition of Fund Facts. This material is authorized for distribution to prospective investors when it is preceded or accompanied by the Fund's current prospectus, which contains information about sales charges, management and other items of interest. Investors are advised to read the prospectus carefully before investing. CDC IXIS Asset Management Distributors, L.P., and other firms selling shares of CDC Nvest Funds are members of the National Association of Securities Dealers, Inc. (NASD). As a service to investors, the NASD has asked that we inform you of the availability of a brochure on its Public Disclosure Program. The program provides access to information about securities firms and their representatives. Investors may obtain a copy by contacting the NASD at 800-289-9999 or by visiting their website at www.NASD.com. ------------------ [LOGO] CDC NVEST PRESORT STANDARD =========FUNDS(SM) U.S. POSTAGE CDC IXIS Asset Management Distributors PAID BROCKTON, MA PERMIT NO. 770 ----------------- --------------------- P.O. Box 8851 Boston, Massachusetts 02266-8551 --------------------- www.cdcnvestfunds.com To the household of: Are you drowning in paper [GRAPHIC] Let E-delivery come to your rescue! Get your next CDC Nvest Funds report or statement online instead of through the mail. Sign up at www.cdcnvestfunds.com. TF58-1202 -----END PRIVACY-ENHANCED MESSAGE-----