<DOCUMENT>
<TYPE>N-30D
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<FILENAME>d12033.txt
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[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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<TABLE>
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
NAV MSC LB Muni Bond
<S> <C> <C> <C>
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
</TABLE>
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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
Class B
Comparative Performance 1 Year 5 Years 10 Years Inception(9)
<S> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<S> <C>
Aaa 44.2%
Aa 15.8%
A 17.2%
Baa 9.8%
Ba 2.1%
B 2.1%
Ca and Not rated 8.8%
</TABLE>
Average Quality: A
Credit quality is based on bond ratings from Moody's Investors Service
Effective Maturity
<TABLE>
<S> <C>
Less than 1 year 0.5%
1-5 years 18.8%
6-10 years 40.9%
10+ years 39.8%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
NAV MSC LB Muni Bond
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns -- December 31, 2002
--------------------------------------------------------------------------------
Since
1 Year 5 Years(5) 10 Years(5) Inception(5)
<S> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------------------------
<CAPTION>
Since
Class B
Comparative Performance 1 Year 5 Years 10 Years Inception(10)
<S> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<S> <C>
Aaa 47.6%
Aa 19.6%
A 14.6%
Baa 4.8%
Caa 1.9%
Not rated 11.5%
</TABLE>
Average Quality: Aa
Credit quality is based on bond ratings from Moody's Investors Service
Effective Maturity
<TABLE>
<S> <C>
Less than 1 year 10.6%
1-5 years 5.5%
6-10 years 47.4%
10+ years 36.5%
</TABLE>
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
<PAGE>
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
<PAGE>
MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS
Investments as of December 31, 2002
Tax Exempt Obligations -- 98.1% of Total Net Assets
<TABLE>
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------
</TABLE>
See accompanying notes to financial statements. 9
<PAGE>
MUNICIPAL INCOME FUND -- SCHEDULE OF INVESTMENTS (continued)
Investments as of December 31, 2002
Tax Exempt Obligations -- (continued)
<TABLE>
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
<CAPTION>
Principal
Amount Description Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C>
$ 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
============
</TABLE>
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.
<PAGE>
MASSACHUSETTS TAX FREE INCOME FUND-- SCHEDULE OF INVESTMENTS
Investments as of December 31, 2002
Tax Exempt Obligations -- 97.6% of Total Net Assets
<TABLE>
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------
</TABLE>
See accompanying notes to financial statements. 11
<PAGE>
MASSACHUSETTS TAX FREE INCOME FUND-- SCHEDULE OF INVESTMENTS (continued)
Investments as of December 31, 2002
Tax Exempt Obligations -- continued
<TABLE>
<CAPTION>
Ratings (c)
------------
Principal (unaudited)
Amount Description Moody's Value (a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
============
</TABLE>
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.
<PAGE>
STATEMENTS OF ASSETS & LIABILITIES
December 31, 2002
<TABLE>
<CAPTION>
Massachusetts
Municipal Income Tax Free Income
Fund Fund
---------------- ---------------
<S> <C> <C>
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
============= =============
</TABLE>
See accompanying notes to financial statements. 13
<PAGE>
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2002
<TABLE>
<CAPTION>
Massachusetts
Municipal Income Tax Free Income
Fund Fund
---------------- ---------------
<S> <C> <C>
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
=========== ===========
</TABLE>
14 See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Massachusetts
Municipal Income Tax Free Income
Fund Fund
--------------------------- ---------------------------
Year Ended December 31, Year Ended December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements. 15
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
<TABLE>
<CAPTION>
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
---------- ---------- -------------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 2002 December 31, 2001
---------------------------- ----------------------------
Municipal Income Fund Shares Amount Shares Amount
--------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
------------ ------------ ------------ ------------
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
For the Year Ended December 31, 2002
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 2002 December 31, 2001
---------------------------- ----------------------------
Municipal Income Fund (continued) Shares Amount Shares Amount
--------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
============ ============ ============ ============
<CAPTION>
Year Ended Year Ended
December 31, 2002 December 31, 2001
---------------------------- ----------------------------
Massachusetts Tax Free Income Fund Shares Amount Shares Amount
---------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
============ ============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
Expense Limit as a Percentage
of Average Daily Net Assets Cumulative Expenses Waived
----------------------------- or Reimbursed Subject
Class A Class B to Future Payment
----------- ----------- --------------------------
<S> <C> <C> <C>
Massachusetts Tax Free Income Fund 1.40% 2.05% $ --
</TABLE>
22
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
--------------------
<S> <C> <C> <C>
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
</TABLE>
25
<PAGE>
TRUSTEES' INFORMATION
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C>
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.
</TABLE>
(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
<PAGE>
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]
<TABLE>
<CAPTION>
25 YEARS
<S> <C>
$100 $ 95,837
$200 $191,673
$500 $479,183
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
------------------
[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
</TEXT>
</DOCUMENT>